Don't believe the Domino's bounce

One of the clearest examples of irrational exuberance in the Australian equities market today is the recent perverse share price reaction to two unambiguously bad pieces of news for Domino's Pizza Enterprises.

The first stinker was a significant Federal Court ruling regarding the underpayment of casual workers and drivers between 2013 and 2018, a ruling now subject to appeal. If the appeal is denied, Domino's is on the hook for payouts to past pizza proles costing, in the worst case scenario, hundreds of millions of dollars. 

The second item of bad news was the announcement, on July 29, of a $300 million write-off of intangibles; falling same-store sales in Australia, Europe and Asia; and the closure of up to 60 loss-making Australian stores. The closure of the 60 company-owned stores – which the market had previously assumed were modestly profitable – was a stark reminder of the long road ahead in rebuilding.

The normal market reaction to such bad news would be a share price fall of 10 percent or more. Instead, Domino's share price is now up $3 a share, or 18 percent, on the pre-disclosure price. While short covering (about 1.1 million shares) explains some of the bounce, most of the post-bad news buying (5.9 million shares) was from funds betting the worst is now over.