16th Dec 2021 15:03
(Alliance News) - Domino's Pizza Group PLC on Thursday announced it has struck a deal with franchisees, drawing a line under a long-running squabble, though one analyst warned this may only provide temporary respite.
Domino's Pizza shares surged 25% to 431.00 pence each in London on Thursday afternoon, the best mid-cap performer.
The company is the UK and Ireland's master franchiser for the wider Domino's brand. It supports its franchisees with supply chain management, digital systems and marketing.
Under the terms of the deal, the FTSE 250 company will make a one-off investment of GBP20 million, which will be spread over three years.
This cash will boost digital offerings and up marketing spend, Domino's said. Running for an initial three years from January 3, the measures also include a new store incentive scheme, in the hope of incentivising new site launches.
"One of the strengths of Domino's is its franchise model. This has enabled it to grow rapidly without using lots of capital or taking on big costs. The pandemic has also boosted demand for takeaways, creating a significant market opportunity for the company. However, for several years Domino's has been locked in a battle with its franchisees who effectively refused to open new stores because they felt they were getting a raw deal from the parent company," AJ Bell analyst Russ Mould commented.
Though Mould noted the positive market response to the deal, another disagreement with franchisees could be an issue when the measures end.
"Domino's relationship with its franchisees remains a vulnerability for the group which could rear its ugly head at the end of this three-year agreement," Mould cautioned.
Broker Liberum took heart from the "welcome" agreement. It lifted its recommendation for the FTSE 250 stock to Buy from Sell.
"The franchisee dispute resolution is welcome news for the DPG investment case. We are surprised that franchisees have given up the fight without getting the PLC to commit to permanently lower food costs. Our view is that the high level of general inflation at the moment may have forced the franchisees' hand to come to a deal that drives LFL growth to offset the cost pressures," Liberum explained.
The broker's price target for the stock is now under review, having been at 250p previously.
Liberum added: "Various details of the deal still need more clarity and we note that it is a temporary three year deal, but with the national promotional deals coming back, we believe LfL growth could return to double digits. With the dispute resolved for now, we move our rating to Buy (from Sell) as the risk of an earnings downgrade has been removed."
By Eric Cunha; [email protected]
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