Domino’s profits fall but Irish stores set to increase

Domino’s Pizza posted falling annual profits and admitted store openings will be hit this year amid an escalating row with its franchisees.

But the pizza delivery company said its performance in the Republic of Ireland was steady, with pace picking up in the second half of the year. It took a 15 per cent stake in its largest franchisee, laying the foundations for further store openings in Ireland.

In other markets, the company’s pipeline of new stores is set to hold firm in 2019, but the actual number of openings is likely to be lower given “ongoing franchisee discussions”.

The news came as it posted a 22 per cent plunge in annual pre-tax profits to £61.9 million after suffering “growing pains” in its international business.

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The group said on an underlying basis pre-tax profits dropped 1.1 per cent to £93.4 million for the year to December 30th.

The company opened one new store to bring its total number in the Republic to 50, with like for like growth at 4 per cent.

"We still see ample opportunity to raise store numbers to 75 over time: the Irish economy has recovered strongly and the casual dining market is booming," the company said. "In November 2018 we reached agreement to invest €12.5m for a 15 per cent stake in Shorecal Limited, the Domino's franchise business owned by the Caldwells, the largest Domino's franchisee in Ireland. This was part of a wider transaction in which we invested alongside a private investor that took a 34 per cent stake. Shorecal will open 10 new stores in Ireland (of which six will be in ROI) over the next four years."

But shares lifted 6 per cent despite the profit fall.

Domino’s is working to resolve a dispute with disgruntled store operators, who have set up a group called Domino’s Franchise Association UK & Ireland, demanding more support from the company in the face of rising costs.

They also say Domino’s has asked them to open stores in existing locations, which they claim is affecting their profits.

Domino’s said it was “conscious” of the price pressures for franchisees and that it was confident of resolving the conflict.

The group added that it recognises the “temporary” impact of new stores close to existing sites and has increased short-term relief offered to franchisees — paying out equivalent to around £75,000 per new store in 2018.

But chief executive David Wild said the group did not want to end the row simply by lowering the price of food it sells to franchisees, which would cut its own profits.

He said: “We’re working with our franchisees to try and resolve their concerns, but we want to resolve their concerns by finding a win-win solution.

“We don’t want to resolve them by finding lose-win solutions.”

He cautioned that new store openings will be particularly impacted in the first half of 2019, but are set to pick up in the final six months amid hopes for the franchisee dispute to be resolved and an end to Brexit uncertainty.

Domino’s opened 59 stores in the UK and Ireland last year and now has a 1,100-strong estate.

The group’s results showed a mixed performance, with the woes in its international arm offsetting an otherwise robust showing from the UK and Ireland, where like-for-like sales rose 4.6 per cent.

Domino's warned in January that profits would be at the lower end of expectations following weaker international sales and business integration challenges in Norway.

But Mr Wild said he expects the international division to break even in 2019, after reporting underlying losses of £4.1 million in 2018, with Switzerland, Norway and Sweden all continuing to be loss-making.

Neil Wilson, chief market analyst for Markets.com, said: "The franchisee strife looks set to weigh on growth prospects as it will impact the store rollout in the UK and Ireland.

“Meanwhile there are also more challenges from competitors than before.

“Nevertheless, Domino’s seems to be holding onto market share and the app in particular is very sticky with customers.” – Additional reporting: PA