Time to dump Domino's Pizza

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Time to dump Domino's Pizza
Britain loves fast food, so it shouldn't be a great surprise to see that the stockmarket will soon be getting its first blue-chip takeaway company.

Unfortunately for Domino's Pizza (DOM), the rapid transformation of online firm Just Eat (JE.) into a FTSE 100 Index stock worth £5.5 billion serves as a painful reminder about just how severe competition is becoming in the takeaway sector.

With Deliveroo and UberEATS also ramping up their geographic coverage, analysts and investors are questioning whether there's enough junk food to go around to support the ambitions of Domino's and the other major players.

That's reflected in UBS's decision today to downgrade its rating on Domino's to 'sell', with a 15p lower target price of 260p on account of the weaker medium-term growth outlook. UBS analyst Heidi Richardson warned: "We believe that Domino Pizza's market position in the UK looks increasingly challenged."

Richardson highlights the impact of fast growing competition and lower loyalty in the takeaway sector, as well as greater consumer choice.

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She is also concerned that declining franchisee profitability, driven by food cost inflation, could have a knock-on effect on company margins as Domino's is forced into protecting its value proposition.

Richardson forecasts franchisee margins falling from 14.5% to 13.1% in the 2018 financial year without the help of Domino's. This could also threaten store-roll-out targets, with the company having just opened its 1,000th store in the UK.

In order to tempt back cost-conscious consumers after a disappointing summer of trading, the company recently launched a £4 million discounting campaign.

Backed by an advertising drive — the Official Food of Everything — this resulted in a better-than-expected sales update in October, with same-store sales up 8.1% in the 13 weeks to September 24. On one particularly busy Saturday evening, Domino's dealt with a record 200,000 online orders - or 140 a minute.

The update triggered a rebound for shares back above the 300p level, although UBS said this represented the right moment to downgrade the stock to 'sell'.

The cautious stance is shared by Liberum's Wayne Brown, who recently introduced a 'sell' recommendation and target price of 250p.

Domino's chief executive David Wild remains bullish about company prospects, however, although he admits consumers are uncertain and want to focus on value.

He said in October: "Our commitment to growth remains undiminished, as does that of our franchisee partners.

"We expect to launch a record 90 stores in the UK this year, with an encouraging pipeline already in place for openings in early 2018."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.