Domino's Pizza Enterprises Ltd. (ASX: DMP) ("Domino's Pizza") shareholders have enjoyed tasty returns over the past decade. Over that time, the shares rose from around $3.50 to more than $80, representing a gain of 2,180%.
But if those years were the food equivalent of eating a delicious pizza, then the past six months have been the equivalent of being put through the oven. Indeed, since the shares hit a high of $80.69 in August, they have retreated more than 25% $60.28. They're down 5.9% today, alone.
Stale Pizza?
Under the leadership of CEO Don Meij, Domino's Pizza has produced outstanding growth in Australia while its international push has also been a success to date. As a result, investors have, for a long time, assigned a high valuation to the company's shares. In fact, even today the shares are trading on a price-earnings ratio of roughly 43x estimated earnings for this year, according to figures from Yahoo! Finance.
The company has forecast some pretty strong growth figures as well but, for those who own the shares today (and for those who are considering buying) there is little room for error in the company's progress even after the sharp share price decline since August.
Aside from its somewhat outlandish share price, Domino's Pizza is also facing concerns related to rising expenses associated with higher employee costs. Indeed, there has been much media coverage lately regarding Domino's Pizza's franchise network. Earlier this month, The Australian Financial Review said that the Fair Work Ombudsman is investigating the group's franchisees across the country "over allegations of underpayments and claims of workers forced to do unpaid overtime."
Today, Domino's defended itself against such coverage stating that:
"Domino's believes this coverage did not reflect the strong financial performance of its franchise network, the high ethical standards required of all employees and franchisees, or the healthy levels of collaboration between the Company and franchisees."
Indeed, Domino's noted that it has a dedicated investigative and auditing compliance department which investigates matters such as these, including noncompliance by franchisees with their employment law obligations.
It also took a firm stance against any franchisees that may be doing the wrong thing:
"There is no reason, no excuse, and no tolerance for any Domino's franchise that chooses not to pay its employees correctly or fails to meet expectations around ethics and governance… In the past three years, Domino's has removed four franchisees, operating seven stores, from our system for deliberately underpaying their employees."
At this point, Domino's Pizza confirmed that it has found no evidence of a link between franchisee profitability and breaches of employment obligations. It also said that it has not previously received any complaints on visa fraud, although it is investigating an allegation raised by Fairfax Media today. That is likely one of the reasons why the shares have fallen so sharply today.
Foolish Takeaway
It isn't uncommon for investors to perceive a falling share price of a high-quality business as a perfect buying opportunity. In this case, however, Domino's Pizza's share price still appears very inflated, in my opinion. With the potential headwinds facing the business through rising costs and Fair Work investigations as well, the shares could have further to fall from here.
