Domino's Pizza Enterprises Ltd (ASX: DMP) shares are under pressure on Thursday morning.
In morning trade, the ASX 200 pizza chain operator's shares are down 9% to a 52-week low of $32.70.
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Why are Domino's shares crashing?
Investors have been selling the company's shares this morning following the release of a business update.
According to the release, Domino's has now completed specific works that were underway in Japan and France to identify improvements for these markets.
In Japan, a comprehensive review of store locations has now been completed and a complete review of marketing and pricing is underway. This will result in the closure of up to 80 low volumes stores across the country.
However, management notes that the majority of delivery customers previously serviced by the closed stores will be able to be serviced by neighbouring stores. This is expected to improve unit economics and minimising the total sales impact for the market.
As the aggregate contribution of these low volume stores is loss-making, the closures will have a positive impact on earnings. This will then be reinvested into additional marketing and advertising to reach more customers and lift order counts in this low-frequency market.
Management expects a return to positive same store sales in Japan in FY 2025, with core margin improvements.
In France, it is targeting a net 10-20 store reduction in FY 2025. Once again, it is expecting the majority of delivery orders from these stores to be serviced by neighbouring stores, resulting in earnings improvements.
Group outlook for FY 2025
With ongoing positive performance from Australia/New Zealand, Germany and Singapore, and recent performance improvement in Belgium, Netherlands and Luxembourg, Domino's Pizza Enterprises anticipates gross store openings will be ~3% of the network.
After the store closures outlined above, and the typical level of store closures year-to-year, store growth is expected to be flat to slightly positive in FY 2025. After which, it is stepping up to 3-4% (net growth) in FY 2026.
Beyond this, management continues to see opportunities to grow its network to 7,100 stores over the long term. This is 1.9x the size of its current network.
Though, it notes that this target could be "conservative" given that it is "modelled on significantly lower store penetration than established markets, even where countries have larger existing pizza markets."
Broker reaction
Analysts at Goldman Sachs have responded relatively positively to the update, saying:
We view this announcement as an incrementally positive step in restoring quality of the store network in the business, without significantly damaging FY25e Group EBIT vs Consensus.
In our European Investor Day preview, we highlighted that a critical pivot in strategy that we would need to turn positive is "re-prioritizing store unit economics over store growth… to improve the payback period attractiveness for Franchisees and ultimately re-stimulate store expansion" and through the emphasized focus on …
1) stepping up on digital investments including loyalty, store kiosks and aggregators in Germany; 2) restoring store profitability through lifting AWUS in France including higher brand marketing and leaning further into aggregators; as well as 3) today's announcement of low-performance store closures in both Japan and France, we are seeing that the company is taking more proactive steps to restore a quality franchise network that will enable healthier sustainable growth.
