Broker snap: Canaccord concerned as Domino's cuts new-stores target

2nd Oct 2013 11:26

Shares in Domino's Pizza were making gains on Wednesday after the company impressed the market with a third-quarter update; however Canaccord Genuity said the results raise even more concerns and cut its target price from 500p to 480p.Analyst Wayne Brown highlighted that the company is reducing its UK store openings target by 17% for 2013, with just 23 new units having been opened so far this year."In a retail market where new site opportunities should be benefiting the group, and every other retail/leisure company is increasing openings, we are increasingly concerned why DOM is missing its opening targets again," he said.The core markets of the UK and Ireland are seeing like-for-like (LFL) sales growth underpinned by price and mix as opposed to volume at a time when the outlook for the opening programme is shaky. "We believe the pressures on franchisees must be growing along with increasing cost pressures, and the burden of higher levels of promotional activity. Is this impacting the opening programme?"Over in Germany, where LFL growth slowed dramatically in the quarter, Domino's said it is in the process of transitioning the majority of its corporate stores to franchisee management as soon as possible - as announced in the interim results - and is confident that a "good proportion" of these will be transferred by the year end.Brown said that this strategy raises further questions after the German assets were written down at the interim: "The realisable value from the sale of stores to franchisees is likely negligible and whilst the move to a food distribution model is earnings accretive for the Plc, is this not just removing the underlying issues out of the Plc accounts?"Canaccord Genuity retained its 'sell' rating for the stock. Brown said: "A price-to-earnings ratio of 27 for a business that is delivering forecast and balance-sheet downgrades, a worsening cash-flow conversion, seems too rich in our view."Nevertheless, the stock was up 4.16% at 613.5p by late morning on Wednesday.BC