Following the announcement of Domino’s Q4 trading update yesterday (30 January), MCA rounds-up a selection of analyst’s comments on the group’s performance.
Steve Clayton, manager of the Hargreaves Lansdown Select UK fund range:
Domino’s is trading well, right across its estate, with positive like-for-likes everywhere from Iceland to Switzerland and especially back home in the UK. Profit for 2017 is now expected to be a little ahead of the market’s range, suggesting something of the order of £92m is likely.
The company is doing what is has always done; focusing on the consumer and serving them with a great product, straight to the door with the minimum of fuss.
Domino’s dominates the UK pizza sector and can throw more marketing resources behind the brand than any rival can hope to. The group set a new record for store openings last year and looks set to continue opening at pace in the UK and overseas. Normally, Domino’s leads the pack in terms of technology, and much of its success can be put down to being the early mover in takeaway e-commerce. But introducing GPS technology to maximise delivery efficiencies and customer service has been an area where it lagged. So it is good to see Domino’s catching up here, with almost a quarter of the estate adopting GPS in 2017.
Sales growth of 18%, almost half of it organic, was strong, including like-for-like gains of almost 5% in the UK and 11% in Eire. Online sales continue to grow faster, up almost 15% and now over three quarters of the total in the UK. Ninety-five openings took the UK estate up to 1,045 outlets; Eire added one to reach 49 stores; whilst the Norwegian business more than doubled in scale following the acquisition of rival Dolly Dimple’s. Improved pricing in Switzerland saw like-for-likes there surge almost 22%.
It’s a strong end to the year, and the group now needs to show a similarly strong Q1, where it is up against easy comparatives, for last year, Domino’s misread the market and got its seasonal promotion for Q1 all wrong. All the signs are encouraging and there is clearly momentum in the business. With Europe starting to deliver scale benefits as store chains grow and the UK firing on all cylinders, the outlook seems very positive.
David Madden, financial markets commentator, CMC Markets:
Domino’s Pizza stated that fourth-quarter sales at its UK & Ireland division jumped by 10%, and the international business saw a jump in revenue of 23%. Consumers have been cautious about spending, and Domino’s have benefitted from this as staying in has become more popular recently. The share price hit an elven month high today, and if the positive moves continue it could target 400p.
Douglas Jack and Ivor Jones, analysts at Peel Hunt:
Ahead of expectations; 2% forecast upgrade. UK LFL sales rose by 6.1 % in Q4 vs Q1-3’s 4.3% and consensus expectations of 4.7%. Over the full year, LFL sales are up 4.8 % vs a 9.8% comp. Q4 benefited from numerous self-help initiatives (in technology, pricing and advertising) that only started towards the end of Q3. The technology benefits (such as GPS tracker) should continue to build in H118, a period that will be supported by very soft comps (2.4%) and the FIFA World Cup.
Total UK/ROI sales grew by 10% in Q4, with expansion weighted to Q4. LFL sales in Q4 would be +5% if an extra day in the prior year is excluded. This outcome is still ahead of our consensus-in-line 2017E forecast, which we are upgrading by £2m in relation to PBT. This upgrade is split £1m less investment in gross margin (£3m rather than the £4m guidance figure); and £1m extra volume from that investment.
Innovation is technology-focused. GPS Tracker was in 244 stores at yearend, ahead of the 200 store year-end target. Online sales (delivery and collection) rose by 14.5% in Q4 and are now at 77% of UK system sales. Using Similarweb data, we believe Domino’s website activity lead over other pizza delivery companies is continuing to grow.
Ninety-five stores opened in the UK in 2017 (vs 81 in 2016), including 37 in Q4 2017, again ahead of expectations, and contrary to the bears’ theory that franchisees do not want to open stores. We continue to forecast 80 new UK stores in 2018E, with franchisees expanding in high footfall locations, helping to increase collection from 33% towards potentially 50% of orders, which should drive material labour, distribution and marketing efficiencies.
Overseas trading was strong in Q4. LFL sales rose by 10.4% in the Republic of Ireland, 21.9% in Switzerland, 1.9% in Iceland and 16.2% in Norway. Six overseas stores opened in Q4.
Domino’s has bought back 11m shares for almost £40m over the last year. With the company targeting 1.75-2.5 net debt/EBITDA, we estimate the company could buy back another £100m-200m of equity to reach those ratios over the next two years, although: (a) no time frame for leveraging has been set; and (b) it may choose alternative uses of capital. The shares have surged in recent months, helped by strong LFL sales, the share buy-back programme and the stock on loan position falling from 15% to 10%. We believe these trends should continue in H1 2018E, assisted by the company’s improved price positioning, use of technology and favourable LFL trading backdrop
Neil Wilson, analyst, ETX Capital: (as reported by Proactiveinvestors.co.uk)
Domino’s Pizza beat forecasts in the final quarter as more people stayed in on Saturday nights in front of the box.
Changing consumer habits which have powered Just Eat to the FTSE 100 are supportive of Domino’s, although it didn’t always look this way.
Shares were off sharply at the beginning of 2017 as same-store sales growth seemed to have peaked, while rivals like Just Eat were surging ahead.
But like-for-like sales growth is now back in the double digits and the outlook is much healthier with volume growth more than offsetting a squeeze on margins.
Q4 performance was ahead of expectations and with good volume growth offsetting slighter weaker margins.
Anna Barnfather and Wayne Brown, analysts at Liberum:
Q4 trading has supported a better out-turn than what we had expected but it does a represent a slow-down from Q3. We note the positive comments that PBT is likely to be ahead of expectations but note there are many moving parts here which are unclear until we get more disclosure. However we do not expect the long-term trend of the Plc in capturing less of franchisee sales to change, nor the severe decline in franchisee profits to steady.
While the shares will likely react well today, we remain SELL noting the many pressures that could materialise in 2018E. This could be a year when fundamentals vs. share buy-backs and higher debt could divide opinions.
On the chief concerns, the analysts highlighted store openings and pressure on franchisees.
Domino’s management stated that they are on target for 90 this year and should achieve 20 openings in Q1 of next year. Unlike comments at the interims in June which seemed to us anyhow more confident on a target of 80 next year, the company stated “we’re not changing our guidance from an average of 80, but we can confidently say we should do 20 in the first quarter.
Franchisee mature store EBITDA margins are estimated to decline c.200bps to 13.4% in FY2017. A reminder why Domino’s needs volume growth: The Plc is a volume focussed food distributor where the vast majority of profits come from the sale of food & ingredients to franchisees. If LFL order count falls into negative territory, which may have been the case in the period just reported, the impact on Plc gross margins could be painful. The overall incremental volume gains the Plc gets from area splits may now not be enough to offset this pressure - this is the inflection point we are most concerned about.
The shares are trading on 24.3x Dec 2018E for 8% EPS Growth. Sales growth far outweighs that of earnings as the group benefit from M&A in London and corporate ownership in the Nordics and Switzerland. We forecast for profits be flat through the forecast period.
Our concerns on low visibility on store openings, declining franchisee profitability could place the system under meaningful pressure. If our thesis is right then it could be in 2018 we see these pressures materialise in many forms but a slow-down in openings could be one.
