Domino’s Pizza suffers as customers feast on lower margin items, and Boohoo defies the doubters

“Markets continued to rally in most of the UK, Europe and Asia following yesterday’s strong session. However, the sustainability of the rally is uncertain given a second wave of coronavirus in China,” says Russ Mould, Investment Director at AJ Bell.

“Many flights in and out of Beijing have been cancelled following a new Covid-19 outbreak. Any evidence that China can’t get the situation under control would be very negative for markets.

“For now, investors seem to be happy to keep buying equities with the FTSE 100 up 0.4% to 6,265, Germany’s DAX index up 0.2% and Hong Kong’s Hang Seng rising 0.3%.

“The UK market was led by the utilities sector thanks to better than expected results from SSE, itself rising 8.6%. Healthcare and telecoms were also in demand."

Domino's Pizza

“The pizza seller’s trading update didn’t quite contain the news that the market wanted. Investors had been bidding up the shares in April and May in the belief that households stuck in lockdown would turn to well-known brands such as Domino’s for takeaways, partially as a bit of treat to relieve the boredom of being stuck at home and not enjoying restaurants or pubs.

“While its sales have gone up during the lockdown period, the types of products being bought aren’t necessarily the most profitable ones for Domino’s. It says a lot more people have been buying sides and desserts which are lower margin, thus earnings are likely to be lower than analysts had been forecasting.

“Pizza has long been a favourite of restaurant and food operators because the profit margins on a bit of cooked dough with sprinklings of cheese and a dash of tomato sauce on the top are significantly higher than many other popular meals.

“Selling desserts and sides such as chicken wings provide a nice boost to earnings but at the end of the day Domino’s would rather customers spend more money on pizzas because it leaves more money in its pocket after costs.

“Also adding to Domino’s disappointment is a poor showing from its Irish business where it believes consumer spending weakness has been more pronounced. One of the biggest threats to its future sales is a sharp rise in unemployment in both the UK and Ireland as a result of Covid-19.

“Pizzas can be bought for a fraction of the price in supermarkets and so any pressure on people’s wallets could seem them turn their back on Domino’s if times become hard financially.”

Boohoo

“Online clothing retailer Boohoo continues to defy the doubters. Fresh from its battle with short-seller ShadowFall and a backlash over executive pay, the shares hit record highs again this morning on a bumper trading update.

“Any scepticism over demand for its clothes in lockdown, on the premise that its targeted demographic no longer needs to dress up to go out, looks unfounded after a stunning surge in sales.

“The company seems to have adapted to new realities – pitching loungewear and athleisure gear at its customer base to great effect.

“Clearly online retailers have been in a very strong position, with shops having been closed due to lockdown there has basically been nowhere else for people to go.

“Adding insult to injury for physical retail, Boohoo continues to hoover up once proud high street names at knock-down prices.

“Oasis and Warehouse are the latest brands added to the stable for what in relative terms is small change.

“The company still has plenty of cash for bolt-on acquisitions that it can feed into its central operating platform.

“Given the scale of the coronavirus crisis, consumers’ willingness to spend has been impressively resilient, the question for Boohoo is whether this can continue when the full economic fall-out feeds through.”

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