A leading analyst has said that he expects next Wednesday’s Q1 IMS from Domino’s Pizza Group to be strong and while like-for-like sales will have slowed from 14.6%, they will still remain impressive.
Douglas Jack at Numis said that increasing franchisee profitability should encourage stronger expansion and marketing, “driving up system sales, which boost the advertising fund, which benefits LFL sales, in a virtuous circle”.
He said: “During the last six weeks to the end of March, the LFL comp is c.12%, so one should expect LFL sales to have slowed from 14.6%, yet still remain impressive. LFL sales are benefiting from improving consumer confidence in the UK (still an immature market), improving product range, increased marketing/advertising scale and successful bundle sales. LFL sales would be c.2% higher if one excludes store splits, accounting for 54% of 2013’s 42 traditional openings and 62% of 2014E’s 40-50 planned traditional openings.”
Jack said that UK margins (up 74bps in 2013) should continue to grow even though management intends to boost franchisee profitability (franchisee EBITDA/store was £107k in 2013) through Domino’s maintaining food gross margins.
He said: “Otherwise, the company’s operational gearing is intact and should benefit store expansion and LFL sales growth. Domino’s has reiterated its 1,200 store target for the UK, from a current position that is immature relative to the US and Australia based on store count and household penetration. Increasing franchisee profitability should encourage stronger expansion and marketing, driving up system sales, which boost the advertising fund, which benefits LFL sales, in a virtuous circle.
“We believe our forecast assumptions are conservative for the UK and Germany, but expect upgrades to be held back until later in the year. Our UK forecasts assume just 3% LFL sales growth (allowing for tougher comps in Q4) and falling margins. Our German forecasts assume losses decline by just £0.5m even though corporate stores are converting to franchise and central costs are being cut.
“Domino’s Pizza is valued on an 11% discount to historical average, excluding Europe, which should be considered as a valuable long-term option. Excluding Europe, and valuing the company in line with the sector’s current 14% EV/EBITDA premium to historical average, would equate to £6.90/share on forecasts that have good upgrade potential, in our view.”