Leading City analyst Douglas Jack says a predicted weakness in Q2 like-for-likes (LFL) at takeaway pizza business Domino's represents a “buying opportunity” because the downturn is just a “blip”.
It follows a meeting between Jack, of Numis, and Domino's management yesterday. Issuing a Buy recommendation for the company this morning, Jack said: “The share price strongly reflects concerns that LFL sales should be weak in Q2 due to tough comparatives, in our view.
“However, we believe the company’s structural growth is intact, which, combined with a stronger advertising programme, should drive stronger LFL sales in H2 2011E and H1 2012E. We would use current weakness as a buying opportunity.
Jack said Q2 LFL trading is up against a comparative of 17.2% “and should not have been helped by good weather in both April (when rainfall was 47% below average) and May”.
“However, we believe the company is capable of achieving c.15% growth (pre German start up losses) in H1 due to expansion (paid for by franchisees) and margin growth, without much help from LFL sales (Q1 was 4.7%). This should underline the quality of earnings when the company next reports, with its H1 results on 25 July.”
Jack said H2 prospects are “much stronger”, with LFL comparatives easing to near the historic average of 10%. He also said H2 trading should benefit from: advertising, for which unit costs are flat year-on-year, “being significantly H2 weighted”.
H2 will also get the full benefit of the Spanish Sizzler and Reggae Reggae product launches, as well as the new Stuffed Crust option that started this week. There will also e another major product launch in the period.
Jack said: “In addition, the company is growing its ‘day parts’: we believe that both lunch and late-night sales are growing; and off-peak trading should benefit from another major value promotion in H2.
“Online sales, which are in rapid growth, should benefit from the launch of Domino’s Android App, which occurred last week.
“At least 60 stores should open this year, weighted to H2. Financed by franchisees, this expansion should drive c.15% growth, before considering LFL sales, of each 1.0% adds c.1.25% to earnings growth.”
He added: “Although LFL sales must slow, compensated for by stronger cash flow, we view the scale of the likely slowdown in LFL sales in Q2 as a blip.
“A pick up in LFL sales in H2 should continue into H1 2012E, aided by easier comparatives, improving product range, no VAT increase, greater advertising spend and a re-launch of the website.”
Shares in Domino’s UK & Ireland increased 5p (1.32%) to 385p this morning.
