M&C Report takes a closer look at the full-year results to 25 December 2011 from Domino’s Pizza UK & Ireland. Pizza Hut: Lance Batchelor, chief executive told M&C Report that the company was “unlikely” to enter the race to acquire rival Pizza Hut’s 320-strong delivery unit business. He said: “There is a lot of overlapping of estates and the economics of such a move don’t appeal to us. We love our franchisees and to take on a group of franchisees we haven’t chosen would be difficult.” Germany At present, the group only has six stores in Germany, but is looking to treble this figure during the next year. Batchelor said that nothing the group has experienced during the first year in the country has persuaded it to change its forecast of opening up to 400 sites and more in the country. He said that the first franchisees from the UK had been selected in helping to expand the business in Germany. He said: “They will be used as an example to prospective German franchisees to show them the Domino’s DNA, how the chain works and what is expected of a Domino’s franchisee. We have a strong team in place and it is an incredible opportunity to be able to expand across a brand new country. As well as starting to recruit German franchisees, we are delighted that many of our UK franchisees are also showing an interest in expanding their businesses in the German market while continuing to develop in the UK.” Batchelor didn’t rule out the group exploring opening in further European countries going forward. Moto trial The group said that the trial of a site with Moto, the motorway services operator, had now ended, but that it would continue to investigate new formats. Last Fberuary, it announced it had signed a deal with Moto Hospitality Limited, the motorway services operator, to open up to 43 sites on Britain’s motorways. Its first roadside site opened on the M4 at Leigh Delamere East services, in Wiltshire, last June. Batchelor said: “The Moto hadn’t achieved our expectations so we decided to pull out of the trial. We have always been willing to try the unknown - and go into these ventures with an open mind and a willingness to learn, amend and, if necessary, stop a trial and try something else.” Trial concepts The group is also trialling its first store in a Tesco superstore and its food court site in the Eastgate shopping centre in Basildon. Batchelor said the group was also looking a further openings in smaller towns. On the Tesco and food court sites, he said: “It is early days on both and it is very much a learning experiencing at the moment but sales have been building through both concepts and we will continue to monitor their performance before deciding to take them any further. I am a big believer that ongoing innovation and testing is an important part of our heritage - and of our future.” Ireland Like-for-like sales for the year across its UK stores rose 3.7% while sales in Ireland fell 4.1%. It said that trading had continued to be robust during the first seven weeks of 2012 with like-for-like sales for the group up by 3.7%. Sales across the group’s UK stores were up 3.8% while its stores in Ireland returned to positive territory, up 2.3% for the first time in three years. Batchelor admitted that the turnaround in performance in Ireland had been helped to a degree by easier comparables, but was quick to praise the role played by the group’s franchisees in the country, especially in key cities such as Dublin and Cork. He said: “From last year we have seen a turnaround in sales from -10%, to -1% to +2.3%, and although comps are now easier, it also shows the work that the company and our franchisees have put into improving performance in Ireland.” Online Overall, online sales for the year increased by 43.0% (2010: 63.0%) to £183.1m and during the year accounted for 44.3% of UK delivered sales (2010: 35.8%). Batchelor said: “The rise of e-commerce in our business has been breathtaking and we are now regularly taking around 50% of our orders online, with daily sales far in excess of the million pound mark. A growing number of stores take over 75% of their orders online and it is a channel that Domino's continues to dominate in the quick service sector. We believe that generating two-thirds of our sales online is a doable figure going forward. Our online sales drive great customer satisfaction and a slightly higher basket size.” Refinancing At 25 December 2011, Domino’s had a total of £43m of banking facilities of which £3.3m was undrawn. The main facilities are a £25m five-year term facility and a £13m seven-year term facility both of which attract an interest rate of LIBOR plus 50bps. The £25m facility expires on 20 December 2012 and the £13m seven-year term facility on 31 January 2014. The group will be re-financing the £25m five-year term facility during 2012. It said this would give it “additional flexibility to take advantage of further growth opportunities and returning cash to shareholders”. Cashflow and net debt Adjusted EBITDA for the year increased by 13.4% to £45.7m (2010: £40.3m). Net cash generated from operations was £31.5m (2010: £35.6m), a decrease of £4.1m on the prior year. The decrease was primarily due to a £3.1m increase in its National Advertising Fund (NAF) and £3.7m in the earlier settlement of monies collected by Domino's Pizza Group through its e-commerce platforms, which werre collected on behalf of franchisees. This decrease in working capital will not arise in 2012. The group's adjusted net debt increased by £6.7m to £15.3m (2010: £8.6m). This increase was due mainly to the £6.6m expansionary capital expenditure for the building of the its new head office in Milton Keynes. It said that the ratio of net debt to EBITDA remained “exceptionally low” at 0.4 (2010: 0.2) against a covenant of 2.5:1. Analyst reaction Douglas Jack at Numis said: “2011 PBT, at £42.2m, was slightly ahead of our forecast (£42.0m) and consensus (£41.9m). As a result, Domino’s generated 18.6% earnings growth in the UK despite LFL sales rising by just 3.0%. We are holding our forecasts even though LFL sales are ahead, at 3.7%, in early 2012E with easier LFL trading conditions and a strong sporting calendar ahead. 2011 PBT, at £42.2m, was slightly ahead of our forecast (£42.0m) and consensus (£41.9m). As a result, Domino’s generated 18.6% earnings growth in the UK despite LFL sales rising by just 3.0%. We are holding our forecasts even though LFL sales are ahead, at 3.7%, in early 2012E with easier LFL trading conditions and a strong sporting calendar ahead.” Simon French at Panmure Gordon said: “We do not expect any change to consensus forecasts today. The stock trades on a 2012E P/E of 22.8x and an EV/EBITDA of 14.8x, supported by a 2.9% yield. For a stock that we forecast to grow earnings c11% in 2012E, we view this as too expensive. There are plenty of other stocks in the sector, with similar rates of earnings growth trading on much lower multiples, such as The Restaurant Group (Buy, 365p TP). We reiterate our Sell recommendation and 350p TP, implying c27% downside potential.” Wayne Collins of Collins Stewart said: “Domino’s levels of organic growth are commendable when one considers the current consumer environment. However LFL sales have moderated to c.3% from a 5-year average of +10.9%. These are not large enough to drive the necessary volume growth through the group’s centralised commissaries that underpin margin expansion and consequently profit upgrades. We were looking for a signal in today’s announcement that could boost the volume element of the group’s growth rate. There is no short-term plan to increase the rate of store openings above 60. However Domino’s is going to increase investment behind product innovation, E-commerce (which now accounts for >44%of orders) and support to franchisees. These should underpin our 3% LFL sales growth forecast.”