Sales growth of 12.7 per cent from a UK-focused consumer group sounds impressive, even when the comparison is a 53-week trading period in 2012 juxtaposed with 52 weeks in 2011. Indeed, the group that reported that number, Domino's Pizza (DOM) is impressive, but it may no longer be as good as its share rating suggests. Its growth rates are slowing (see table), but its share rating has not cottoned on. That's illustrated in the chart. The shares' price-earnings ratio has stayed high, while earnings growth has tailed off, leaving its so-called PEG factor (PE ratio divided by growth rate) looking worryingly high.
- Long-term potential in Germany
- Producing growth others would envy
- Rating not adjusted for slowing growth
- Germany expected to be loss-making for three years
- Headwinds in 2013
- In danger of 'cannibalising' itself
Domino's Pizza's slowing growth rate
| Year to 31 Dec | System sales | Like-for-like | Diluted EPS pre-exceptionals | Dividend |
|---|---|---|---|---|
| 2005 | 15.1% | 7.1% | 22.1% | 38.1% |
| 2006 | 19.7% | 9.7% | 31.9% | 35.2% |
| 2007 | 23.4% | 14.7% | 39.1% | 43.8% |
| 2008 | 18.4% | 10.0% | 28.6% | 34.1% |
| 2009 | 16.0% | 8.4% | 26.0% | 31.4% |
| 2010 | 19.3% | 11.9% | 24.2% | 31.6% |
| 2011 | 9.3% | 3.0% | 14.9% | 20.6% |
| 2012* | 12.7% | - | 10.5% | 15.7% |
| 2013* | - | - | 14.9% | 14.9% |
Source: Domino's Pizza & N+1 Singer
*N+1 Singer underlying forecasts
Source: Bloomberg
The growth story that has been the foundation of the group's success is built on three planks: sales growth from existing stores; new store openings; and operational gearing (whereby higher sales lead to much higher profits because most costs are fixed). Yet there are reasons to expect slower progress on all three fronts in the coming year and possibly beyond. In fact, the figures in the 'slowing growth rates' table indicate that such a scenario has taken hold.
Like-for-like sales growth at Domino's has been powered by savvy marketing and online sales. Last year, 56 per cent of total sales were made over the internet and product innovations, such as a gluten-free pizza range, should help performance in 2013. However, there is only so much Domino's and its franchisees can expect to get from each store. In 2012, even with the help of an extra week's trading, wet weather and major sports events, which tend to keep people at home ordering pizzas, like-for-like sales only increased 5 per cent in the UK. (True, some eating-out companies would be thrilled with that, but we're talking about Domino's here.) And there was a small fall in like-for-likes in the Republic of Ireland.
| Domino's Pizza (DOM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 520p | MARKET VALUE: | £851m | |
| TOUCH: | 520-521p | 12-MONTH HIGH: | 567p | LOW: 417p |
| DIVIDEND YIELD: | 3.2% | PE RATIO: | 21 | |
| NET ASSET VALUE: | 38p | NET DEBT: | 33% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 155 | 41.0 | 21.5 | 7.8 |
| 2010 | 188 | 35.2 | 15.4 | 10.2 |
| 2011 | 210 | 38.8 | 16.7 | 12.3 |
| 2012* | 233 | 46.0 | 21.4 | 14.2 |
| 2013* | 260 | 52.9 | 24.5 | 16.4 |
| % change | +12 | +15 | +14 | +15 |
Normal market size: 5,000 Matched bargain trading Beta: 0.8 *N+1 Singer forecasts (earnings not comparable with historic figures) | ||||
This year, not only will Domino's be back to a 52-week reporting period, and lack the tailwind of big sporting events, but consumers may have a tougher year. According to Longview Economics, a consultant, 2012 saw real UK disposable incomes rise 1.5 per cent, which was the biggest improvement since 2005. But forecasts are for no growth this year. Meanwhile, stores in the Republic of Ireland are experiencing falling like-for-like sales, with little sign of respite.
In addition, broker Canaccord Genuity thinks Domino's 775-store network in the UK and Ireland is so comprehensive that half of its new openings this year will infringe on areas already covered. In other words, there is a limit to how long Domino's can add outlets at the rate of about 60 a year before the signs of 'cannibalisation' are obvious.
The group also faces a squeeze on profit margins. Usually, its margins widen because sales rise much faster than its costs. But slower growth reverses that effect. In addition, food-price inflation may be 2-3 per cent compared with about 1 per cent last year. The hope is that most cost increases can be passed on to franchisees; and that in Germany losses may ease as Domino's adds to its network of 18 stores.
Certainly, Germany offers long-term potential and signs of like-for-like sales growth are encouraging. Fans of Domino's in the City hope that Germany can take up the baton as the UK falters. Broker N+1 Singer reckons that Germany could support over 2,000 outlets. We can see the logic, but the German operation is in its infancy and it will be some years before it is significant. Broker Canaccord forecasts Germany will be loss-making for the next three years.
