Leading analyst Douglas Jack has predicted Domino’s will see UK earnings grow by 20% in 2015 and said expansion in Britain is five to ten years behind the US and Australia.
The pizza company was named as Numis’ top small company pick for March with a target price of 850p per share (currently 730p).
Jack said: “Domino’s is moving quickly in the right direction, under a clear strategy to drive up volumes and franchisee profits. In 2014, franchisee profits/store rose by 26% to £129k. This encouraged higher investment in local store marketing and expansion, which, combined with investment and growth in digital sales, has improved the company’s growth prospects.
“Domino’s dominates the UK pizza delivery market, which is growing strongly. It is increasing its already significant competitive advantage over its peers, in: brand, advertising, ecommerce, delivery times, purchasing power and franchisee profitability.”
In the year to 28 December, UK like-for-like sales at Domino’s rose 11.3% in 2014, and were up 9.5% (vs a 13.8% comp) in early 2015E. Jack said sales were supported by growing ecommerce and digital marketing; an increasing advertising budget; product innovation; bundle deals; and the new customer website. He said the company has substantial customer relationship management data, which it intends to better utilise, to drive customer spend and frequency.
He said: “Like-for-like sales growth and expansion is driving profit growth. Domino’s is holding supply chain gross margins, passing the benefits of benign food/fuel costs and increasing scale benefits on to franchisees, which enjoyed a 26% increase in profits/ store in 2014. This has encouraged a 12% increase in local store marketing (in 2014) and a 25% increase in expansion (in 2015E), thereby benefiting Domino’s through volume growth on a relatively fixed cost base.
“The UK is five to ten years of expansion behind the US and Australia in terms of stores per capita. This is reflected in the scale of LFL sales growth and 2014’s immature stores generating average sales that were 28% higher than 2013’s immature stores.
“In Europe, capex is minimal and losses are falling. We are forecasting German losses narrowing from £7.3m in 2014 to £4.9m in 2015E, supporting our 2015E forecast of 15% PBT growth based on cautious assumptions of 3% LFL sales, no margin growth and 50 new stores in the UK.
“Domino’s shares trade on a 2015E PEG of 1.3x (vs the market’s 2.2x), based on cautious forecasts assumptions, in our view, for a fast-growing digital company with a dominant brand, a net cash position, minimal capex and zero net rent.”
