M&C Report takes a closer look at Domino’s Pizza UK & Ireland’s first half results, which were announced this morning: Growth opportunities Earlier this year, M&C Report revealed that Domino’s was developing a food court concept as it looks at further ways to increase its presence in the UK away from its traditional high street locations. It is thought that the first site under the concept will open in Lakeside, Essex. The company also opened its first sites under a partnership with motorway services operator Moto during the first half of the year and Finance director Lee Ginsberg confirmed that the group was continuing to explore various “non-traditional” avenues to expand the brand. Taking space in transport hubs and supermarkets are also options being considered. Ginsberg said: “We are looking at various opportunities to expand the Domino’s name further and supermarkets and shopping centres are two possibilities we have looked at. I wouldn’t rule out doing something in the supermarket sector.” Ginsberg said that any new sites in food courts or supermarkets would not be included in the figures for traditional store openings. The group remains on target to open 60 new stores this year. Private equity approach Ginsberg was quick to play down reports that the company had received an approach from a private equity player or that a management buyout was in the pipeline. Shares in Domino’s climbed 3% (13.5p) last week to close at 459p, amid rumours that the c.680-strong group could be the target for a takeover. Ginsberg told M&C Report: “There is no validity in these rumours whatsoever, no substance or foundation.” The economy The company said that the first half of 2011 had been one of the toughest starts to the year that it had seen for quite some time. It said that a combination of the economic climate - especially in the Republic of Ireland - hot weather and incredible like-for-like comparatives have proved a “real challenge”. Ginsberg believed the economy in general was faced with a “tough six months ahead” but that Domino’s remained well-placed to weather further instability. He said: “We are in quite good shape, as we were back in 2007-2008 when consumers looked to trade down. Hopefully there will be no further rise in VAT at the start of next year and we will be up against a soft set of comparables, so we have great visibility going into 2012.” Marketing spend The company said that its marketing spend to the year end will be three times the amount for the second half of 2010, which will include new products and a heavyweight brand campaign in the coming months. Chris Moore, chief executive, said: “In a tougher economic climate, it would be easy for our franchisees to reduce their commitment to local store marketing – but the old adage of when the going gets tough, the tough get going is certainly true at Domino’s and our franchisees have seized this opportunity to boost their local marketing spend and gain local market share.” It will begin promoting a new gourmet pizza line on “Red or Black,” a television game show backed by Simon Cowell. The company said it would continue to use short-term price-led tactical promotions. Ginsberg said that full-year marketing expenditure would increase to £45m, up from last year’s £40m. He was quick to play down fears that the increase in marketing spend would see margins squeezed. He said: “There will be no impact on margins as increased investment will come from our national advertising fund, into which our franchisees pay a 5% royalty of their net sales.” Overseas expansion In April, the group acquired a 75% interest in the master franchise for Domino's Pizza in Germany at a cost of £8.6m. It said that the move into the country is “well underway but, although we are learning very quickly about the nuances of our new market, it is early days”. It plans to open at least four more stores in Germany by the year end, bringing the total to six stores. The company plans to open at least 400 outlets in Germany in the next 10 years and Ginsberg said that German demographics suggest the country could support as many as 1,700 outlets. He said that while expansion in Germany will take up much of the group’s focus overseas for the foreseeable future, the company “hadn’t ruled out looking at other opportunities outside the UK”. New products The company is to launch a range of gourmet products as its looks to “broaden its appeal”. In the first half of the year, it launched Domino's Stuffed Crust aimed at attracting those customers who “still use our competitors because they like a stuffed crust pizza”. Moore said: “We are confident that we have a better product and we anticipate the launch of Domino's Stuffed Crust will result in new customers coming to the brand. Our purchasing team has looked at the entire range of our products and there will be some very exciting additions and changes to both our toppings and our pizza range as a whole in the second half of the year.” It is thought that this will include a thin-crust Italian gourmet pizza aimed at more middle-class customers. Analyst reaction Simon French at Panmure Gordon said: “Domino’s has reported H1 results in line with expectations, with 14.8% growth in PBT to £20.1m (9.1p EPS) versus ours and consensus forecasts of £19.9m PBT (8.9p EPS). We estimate LFL sales growth slowed to just +0.6% in Q2, and we make no change to our slightly below consensus 2011E forecast of £41.8m PBT (18.6p EPS). As such, we struggle to reconcile the performance with the group’s 2011E P/E of 24.6x and EV/EBITDA of 16.3x. We, therefore, reiterate our Sell recommendation and 345p target price.” Paul Hickman at Peel Hunt said: “Domino’s has done well to achieve positive LFLs for Q2. We are not upgrading, although there is potential for later upgrades, driven by higher marketing spend and lower comps in H2. Whether these will really lead to much more than mid-teens earnings growth has yet to be seen, but the 25x 2011E PER is currently giving the company the benefit of the doubt.” Shares in Domino’s increased by 6.51% (29.90p) to stand at 489.00p at midday today.