Domino's attempts to reassure the market that its franchisees are enjoying, like the company, record profits have failed to allay concerns arising from allegations of wage underpayments and risks to earnings.
The fast food retailer has lifted its full-year earnings forecast, the second time for 2016/17, with net profit and underlying earnings expected to increase by 32.5 per cent after a strong first-half performance.
Domino's sales across its global network, including Europe and Japan, climbed 26.8 per cent to $1.17 billion, helping to drive the group's overall revenue up 21.1 per cent to $539.4 million.
Net profit rose 15.5 per cent to $50 million for the six months to January 1.
Investors ignored the strong result and guidance upgrade, sending Domino's share price to a 12 month low, with the result falling short of some expectations.
Domino's shares dropped $8.98, or 14.4 per cent, to $53.56.
Analysts said concerns surrounding recent allegations of some Domino's franchisees underpaying staff to boost earnings have made investors nervous.
Further allegations in the media of a franchisee exploiting visa arrangements for money have exacerbated concerns.
The Fair Work Ombudsman is investigating the allegations, and Domino's has been conducting its own compliance checks in the past three years.
Chief executive Don Meij said there was no correlation between unprofitable stores and underpaying wages and that "some of the most profitable stores" had done the wrong thing and been "actioned".
"Let's put this in perspective, 0.8 per cent of our wages have had to be repaid to team members by franchisees doing the wrong thing in the past three years - that is 1.7 per cent of franchisees in our business.
"To say it is a systemic problem is just incorrect when the clear majority are doing the right thing."
Mr Meij revealed new details of franchise performance, saying that in the past two years, Australian same-store earnings before interest, taxes, depreciation and amortization (EBITDA) increased by 31.7 per cent.
He said after paying staff and management wages, the average franchisee's EBITDA is forecast to be in the range of $245,000 and $257,000 in the 2017 financial year.
optionsXpress analyst Ben Le Brun said Mr Meij's reassurances had failed to assuage investor fears around "what's happening underneath the bonnet".
CMC Markets chief market analyst Ric Spooner said Domino's transparency around the profitability of franchisees was a positive move.
"However, the real test for markets will be whether the Fair Work Ombudsman uncovers any significant issues over and above these that put pressure on future costs," he said.
Mr Spooner said expectations were high for Domino's and "good as the results were, they may have fallen short of some of the most bullish expectations".
Domino's Australian and New Zealand business recorded same store sales growth, a crucial measure of revenue, of 12.2 per cent during the first half.
The group, which also operates in France, Germany, Netherlands, Belgium and Japan, had same store sales growth of 9.4 per cent across its global network.
DOMINO'S EARNINGS RISE:
* Net profit up 15.5pct to $50m
* Total revenue up 21pct to $539.4m
* Interim dividend of 48.4 cents a share, 50 per cent franked, up from 34.7 cents
