A leading analyst has said that investors need to take a fresh look at Domino’s Pizza as he believes it is possible for the chain to deliver 12 months of stronger like-for-like sales, despite the business experiencing a slowdown in its second quarter.
Douglas Jack at Numis said: “We believe some commentators’ fixation over Q2E LFL sales comparatives was overdone, ignoring the potential for the next 12 months to be a period of strong growth.
“Domino’s shares have priced in a slowdown in like-for-like sales in H1 2011E, in our opinion. However, the likely weakness in like-for-like sales largely reflects the impact of January’s VAT increase, a 13.7% like-for-like sales comparative and a relatively muted level of advertising spend. We believe the company is capable of generating c.15% earnings growth in H1 with minimal benefit from like-for-like sales, underlining the high quality of Domino’s earnings, after which like-for-like sales should accelerate in H2E.”
The company’s first-half results are due next Monday and Jack forecasts that its pre-tax profit grow by 12% to £19.6m (9% expansion; 2% LFL sales; 1% margin benefit).
He said: “However, we believe the company is capable of exceeding both our and consensus forecasts, leading to upgrades later in H2E. We view the Q2E like-for-like sales slowdown as temporary and believe 12 months of stronger like-for-like sales is now possible, aided by easing comparatives, improving product range, H2E-weighted advertising spend in 2011E and a re-launch of the website (in late 2011E).”
The company’s update should provide updates on: likely costs and benefits from German expansion, potential upside from the ECJ’s ruling in Germany that VAT on hot takeaway food is VAT-exempt and its intentions to buy back shares
It should also provide guidance on cost inflation and Jack said that recent weakness in the wheat price should have reduced the 2012E forward wheat price to the level Domino’s is paying in 2011E.
He said: “Domino’s is capable of generating c.20% average annual earnings growth over the next three years, in our view. This would exceed required targets consistent with our 2020E forecast of £154m PBT, of which just 28% of the growth is reliant on like-for-like sales (forecast at 3% pa versus an historic average of 9.6% pa since 2002).”
