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
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
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