Domino’s Pizza faces £3m hit from the Budget - should you invest?

Domino’s Pizza Group says it is facing a hit of about £3 million a year from recent Budget measures, with the the government’s increase in employer national insurance contributions (NICs) significantly adding to its costs.

Domino’s said in a statement to investors: “Although we have identified specific mitigation plans, we now believe that the annual impact for Domino’s Pizza Group will be circa £3 million per annum from 2024-25 onwards.”

The group also unveiled a new five-year profit and sales target agreement with its franchisees, with the company targeting further store expansion and investments. It currently has more than 1,350 stores in the UK and Ireland.

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Domino’s added that sales have continued to increase in the first nine weeks of its fourth quarter, with total orders up 5.3%.

It comes after 79 UK retailers, including Sainsbury’s and Tesco, wrote to Chancellor Rachel Reeves last month to complain about the Budget.

The letter, which was co-ordinated by lobby group British Retail Consortium and also co-signed by Boots, Next and Marks and Spencer, warned that the employer NIC rise - as well as changes to the national living wage - would lead to £7 billion of additional costs that would trigger job losses and higher prices for customers.

How will the employer NIC rise impact retailers?

A number of companies have voiced their anger about the government's change to NIC contributions since the Budget.

Last month Asda said the tax amendments announced in the Autumn Budget would hit the retailer with £100 million in extra costs. Chairman Lord Stuart Rose told shareholders the increase in employer taxes is “a big burden for business to carry”. He added that the supermarket will do all it can not to pass extra costs on to consumers, but it is likely to result in rising costs at the supermarket in some form.

Sainsbury’s, meanwhile, warned of a £140 million hit, while Marks & Spencer said it would mean £60 million in extra costs.

Sainsbury’s chief executive Simon Roberts said: “I don’t think you can shy away from the fact that, because of the changes in everyone’s cost base, it is going to feed through into higher inflation.

“This barrage of costs coming at us is significant and we’re an industry, a very efficient industry and intensely competitive, and there just isn’t capacity to absorb all of this.”

Should you buy the UK-listed Domino's?

In November Warren Buffett, one of the legends of investing, took a major stake in the US entity of the group Domino’s Pizza. However, while the original company, which is the part that Buffett bought into, has a solid record, the UK-listed Domino’s Pizza Group arguably looks even more attractive.

MoneyWeek’s shares editor Matthew Partridge wrote earlier this month: “Domino’s Pizza Group is a master franchise of the US chain, which means that it has the rights to open stores in the UK and Ireland. It is on track to open its 1,400th store in 2025, with a 7% share of the overall market for takeaways.

“It has successfully invested heavily in all aspects of its digital operations in order to cut costs, stay ahead of its competitors and benefit from the boom in people ordering takeaways, which has continued despite the cost-of-living crisis.

“However, the characteristic that makes the UK franchise more appealing than the original company is its valuation. While the US-listed outfit trades at 26 times estimated 2025 earnings, the UK franchise costs only 15 times next year’s profits. It also has a dividend of 3.45%, compared with the 1.5% yield for the American firm. And if you look at both firms’ records since 2018, the UK franchise has grown its sales slightly faster, with similar expansion in profits.

“In addition to a solid business model and a reasonable valuation, Domino’s Pizza Group is benefiting from favourable market sentiment. The stock is above both its 50-day and 200-day moving averages and has eclipsed the overall market over one, three and six months. I would, therefore, suggest that you go long at £3 per 1p, at the current price of 338p. In this case, I would suggest putting the stop-loss at 208p, which would give you a total downside of £990.”