Domino’s will score with World Cup fans but long-term growth will be harder to find

The pizza com­pany can ex­pect a fil­lip from the foot­ball but the en­vi­ron­ment is getting harsher, says James Ash­ton

The Sunday Telegraph - Money & Business - - Business -

AN ARMY marches on its stom­ach and Eng­land’s “barmy army” will not go hun­gry even if Gareth South­gate’s team head­ing to Rus­sia suf­fer a goals famine.

The World Cup foot­ball tour­na­ment, which kicks off on June 14, rep­re­sents a sure-fire sales boom for Domino’s Pizza and other take­away firms. The cen­tral irony of this sum­mer of sport is that the fur­ther Harry Kane and his col­leagues ad­vance, the more stodge those crowded around the tele­vi­sions back home will con­sume. Domino’s runs out on to the pitch af­ter a pe­riod of strong pre-tour­na­ment prepa­ra­tion. Just like frothy cof­fee, the Bri­tish ap­petite for take­away pizza shows no sign of slow­ing down, and the £1.8bn com­pany is dom­i­nat­ing the sec­tor as it expands. Like-for-like sales growth was 7pc in the first quar­ter of the year.

An­a­lysts at Peel Hunt, the bro­ker, point out that the clo­sure of many mid­priced chain restau­rants, such as Prezzo and Jamie’s Ital­ian, should ben­e­fit Domino’s, whose av­er­age spend per head of a dis­count-driven £7 com­pares favourably with a typ­i­cal £18.43 for eat­ing out just as con­sumers have be­come more cost con­scious. David Wild, Domino’s chief ex­ec­u­tive, be­lieves that Bri­tain has a long way to go un­til it is sated of stuffed crusts and cheesy wedges. He is plot­ting around 80 store open­ings a year, which could grow the Domino’s es­tate from 1,054 out­lets to­day to 1,600 in time. Shares in the com­pany have been a one-way bet since it floated in 1999, six years af­ter a mas­ter fran­chise for the US brand was bought for the UK and Ire­land. Suc­cess has not just been en­joyed by the ex­ec­u­tives. Fran­chised stores have changed hands for as much as £2m each. How­ever, the shares’ strong run halted last year, when slower growth and tougher com­pe­ti­tion hit trad­ing.

Wild’s plan to cut prices and in­vest more in tech­nol­ogy and mar­ket­ing was re­ceived well. The shares have re­built from last sum­mer’s trough, ral­ly­ing by 40pc in the past nine months. But worries per­sist.

Domino’s is not alone in mar­ry­ing na­tional mar­ket­ing cam­paigns with a sin­gle or­der­ing plat­form and lo­cal de­liv­ery. The fa­mil­iar­ity of De­liv­eroo and Ubereats is a sign that Bri­tain’s din­ing habits have changed for­ever.

An­other is Just Eat, the FTSE 100 or­der­ing web­site whose shares have soared by 22pc since they were tipped by this col­umn last July. All are en­gaged in a war of con­ve­nience when the hunger pangs strike. In the US it is notable that the sep­a­rately owned Domino’s is con­sid­er­ing let­ting cus­tomers or­der through third-party web­sites rather than just its own.

Will Domino’s UK for­ever plot its own course or take its chances of grow­ing fur­ther when listed on an app menu next to cur­ries and burg­ers?

For now, the com­pany is try­ing to drive efficiency, split­ting de­liv­ery zones for each store to as few as 14,000 ad­dresses, rea­son­ing that it can re­duce labour costs and that faster de­liv­er­ies mean more sat­is­fied cus­tomers and there­fore re­peat or­ders. But even if the World Cup gives it a sales bump, there is no hid­ing the fact that UK growth has been harder to come by. Last year the growth rate was half that in 2016 and close to a third of the year be­fore.

The busi­ness model is sub­tly chang­ing, says Sahill Shan at N+1 Singer, the bro­ker, from one that is “cap­i­tal light” and cash gen­er­a­tive to one driven by ac­qui­si­tions and share buy­backs. Domino’s has swung from a net cash po­si­tion a cou­ple of years ago to a forecast £150m of net debt at the end of this year. It bought back £21m of shares in the last quar­ter.

More no­tice­able have been the deals, as Domino’s at­tempts to build a Eu­ro­pean net­work from Switzer­land to Sweden. It cur­rently con­trib­utes 8pc of com­pany sales. The op­por­tu­nity is large but it prom­ises to eat up a lot of re­sources and man­age­ment time to de­liver a good re­turn on in­vest­ment.

It has also been spend­ing in the UK, last sum­mer pay­ing £24m for 75pc of a new part­ner­ship with its largest London fran­chisee.

Domino’s shares trade on 21 times next year’s forecast earn­ings. A his­tor­i­cal av­er­age of 24 times sug­gests there is some head­room for buy­ers. But Questor doesn’t think the fu­ture will be as tasty as the past, no mat­ter how many goals the Eng­land team score.

Questor says: hold

Ticker: DOM Share price at close: 379p

Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: telegraph.co.uk/go/ questor­rules; twit­ter.com/dtquestor

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