Domino’s Pizza limps to Christmas, closing on Friday at $45.99, down 17.4 per cent from $55.68 this time last month.
The market’s confidence was shaken firstly by insider selling. On November 9 and 12, Domino’s co-founder Grant Bourke dumped 150,000 (of his more than 1.6 million) shares for a total consideration of $7.4 million. Bear in mind that Bourke walked away from the 2005 IPO with 3.4 million shares, each of which began trading at just $2.20. Since then, he’s been cashing those chips at ever loftier prices.
Professional director Ross Adler was right behind Bourke, though he sold just 1796 shares (he still owns 197,296), raising $87,016.20.
Then came a change in direction from one of the True Believers, Mark East‘s Bennelong Australian Equity Partners, which disclosed on November 27 that over the past eight months it had been disposing of the hypergrowth stock. Bennelong’s 7.1 million shares (or 8.2 per cent of the register) were down to 5.6 million shares (or 6.6 per cent of the register). Two days later, Bennelong filed again, showing they’d ditched another 1.2 million shares (or 47 per cent of all trading volume), leaving them barely substantial at 5.1 per cent. This left Pinnacle (including the big stake held by its subsidiary fund, Hyperion) as the second largest shareholder (after chairman Hungry Jack Cowin) with 10.6 million shares, or 12.2 per cent of the register.
But in the meantime, Don Meij’s ever faithful Balenciaga Speed Sock-pumper, Thomas Kierath of Morgan Stanley, had issued new research, which he called “Postcard from Japan”.
An apt title, for a postcard it surely was; we might as well have been skimming Condé Nast Traveler for all the commercial insight it contained. From an ageing and declining population, a tight labour market, a consumption tax hike and higher cost of ingredients, Kierath drew the tortured conclusion that “the [long-term] opportunity remains sizeable” because, see, Domino’s Japan “is running its own race”. Oh, and McDonald’s has six times as many stores there. Oh, and because … technology.
Comparing Domino’s to the world’s best quick service restaurant operator (and one the Japanese love) is, of course, laughable. As silly, almost, as pretending that Domino’s still maintains any kind of technological advantage over its peers or the delivery aggregators. Or that robots or drones or even the Millennium Falcon are a substitute for profit growth.
Remember, this is the same analyst who spent month after month force-feeding his clients an ever “greater conviction in the long term growth runway” for Domino’s in Europe (with a $55 price target on the stock). This conviction was arrived at “post the trip” he spent “walking stores [with] local management”. In retail, escorted site visits are the equivalent of parents’ day at boarding school (hint: it skips the dungeon). It reminds us of the Mexican trade delegation visiting Gilead in The Handmaid’s Tale. “I have found happiness, yes,” Offred assures her captors’ visitors.
Remember that by sticking to impossible FY18 guidance, Domino’s implied a stellar 2H in Europe would get it there. Management then failed abysmally, and as predicted, to deliver. Kierath’s response? He upgraded his price target to $65. In a bizarre coincidence, Morgan Stanley’s institutional desk across the hall at Chifley Towers acts as house broker to Domino’s. Work it, Thomas, work it!
And here we go again, just in Tokyo not the Tiergarten. Wouldn’t real equities research demand going to a few stores unannounced? Maybe ordering a few deliveries and stress-testing management’s claims of speed and quality? Aren’t clients being stung for a little more than postcards?
After all, Meij has missed three sets of earnings guidance in a row. Three! A curious mind’s default setting must surely now be some scepticism, at the least. But why, when militant apostledom will do?