Why U.K.'s Domino's Pizza Lags Global Peers 

(Bloomberg) --

A Domino's pizza is pretty much the same in any of the 85-plus countries in which they're sold. The same can't be said of the shares in the publicly traded companies behind the brand.

One of them, London-listed Domino's Pizza Group Plc, stands out: The company, which reports earnings Tuesday, trades at a big discount to peers in the U.S. and Australia. While some of that is because of Brexit hurting consumer sentiment, Domino's also is in a dispute with franchisees that hasn't helped matters. To start closing the gap, it needs to show it's mending that relationship, some analysts say.

Shares in the U.K. company trade at about 14.3 times analysts' forecast profit for the next 12 months, compared to 23.7 times for Domino's Pizza Inc. in the U.S. and 19.7 times for Australian counterpart Domino's Pizza Enterprises Ltd. The London stock has lost more than a third of its value since reaching a record high in July 2016, underperforming the others since the start of last year.

“An update on the dispute with franchisees is required,” Wayne Brown, a Liberum analyst who recommends selling the stock, wrote in a report last week. “The longer this relationship deteriorates with no resolution in sight could bring the shares as well as the Domino's brand into further doubt.”

Looking ahead, analysts are also more bleak about the U.K. company than the other two. Their consensus recommendation -- a proxy for the ratio of buy, hold, and sell ratings, with 1 being all sells and 5 being all buys -- is 2.92, according to data compiled by Bloomberg.

Some franchisees say rising food and business costs aren't being shared equitably by the company, the Sunday Times reported in July 2018. They wrote to the Domino's board threatening to “declare war” if they weren't given a bigger share of company profits, the newspaper said in a follow-up article in December.

The British pizza delivery firm declined to comment when contacted by Bloomberg News. The company said in May it was still in dialogue with its U.K. franchisees, exploring “win-win solutions” to drive growth and new store openings. Domino's this year predicted that the number of store openings for 2019 would probably be lower than 2018 because of the continuing talks with franchisees. The company holds the master franchise for the brand in the U.K. & Ireland.

Not everyone is staying pessimistic on London-listed Domino's. Short sellers have reduced their bets on a stock decline, with short interest dropping to 8.1% of shares outstanding as of Aug. 1 from a 12-month high of about 11% on May 14, according to data compiled by IHS Markit Ltd.

Whether Domino's in the U.K. can keep bearish speculators at bay will depend on whether it can reach a resolution with the franchisees. Cash flow should have improved as the company reduced its capital spending and bought back less stock, Peel Hunt analysts Douglas Jack and Ivor Jones wrote in a note Tuesday.

“If this trend continues, it should leave more firepower to buy out exiting franchisees with a view to selling the stores on to smaller existing franchisees or even new franchisees,” they wrote.

--With assistance from James Cone.

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Phil Serafino, Namitha Jagadeesh

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