A leading analyst has described Domino’s Pizza Group’s expansion into Germany as a game changer for the delivery firm.
On the back of its H1 update yesterday, Douglas jack at Numis said that Germany was perhaps the area of greatest potential growth for the group, with expansion into the country looking “increasingly exciting”.
He said: “The investment in Germany might originally have been described as a toe in the water, but, emboldened by its initial success, Domino’s is now scaling up the investment. £400k will be invested in a commissary in the East (with capacity for 50 stores) and a further £4.2m in a new facility in the West (with a 200 store capacity).”
Jack said that there were a number of positives to be taken from the chain’s update.
He said: “LFL trading improved in Q2 with strong volume growth; the store roll-out is accelerating; costs are being tightly controlled (with significant food cost hedges in place); margins are rising; cash flow remains very strong; and, the expansion into Germany is looking increasingly exciting. We believe that the ingredients are in place for further excellent EPS, DPS and share price growth.
“The 2012 food basket has been locked in (via hedges) with the exception of cheese (25% of the basket), the price of which is currently stable. Half of the 2013 basket is locked in, with wheat 100% hedged, and Domino’s is likely to benefit from Euro weakness for much of the rest of the basket, with the exception of chicken which is sourced in USD. The non-food cost base is firmly under control.
Jack highlighted that the new product pipeline was stronger than it has been for some time as Domino’s seeks to give the customer new reasons to re-order.
He said: “This is being supported by exciting growth in e-commerce with more 1-to-1 marketing and increased use of social channels such as Facebook and Twitter. In this respect we consider Domino’s to be well ahead of its competitors.”
19 new stores were opened in the UK in H1 vs. 22 in 1H11 but the company is confident of achieving its 2012 full year target of 60 stores.
Jack said: “Management has increased confidence in being able to accelerate the growth in store openings (all funded by franchisees) as more sites with A5 planning become available.
“Domino's has an impressive track record of strong earnings growth and cash generation and we believe that this is set to continue. LFL sales growth will, in our opinion, be driven by further product innovation and e-marketing initiatives in the UK and we also anticipate an acceleration in the store roll-out. Germany has the potential to be a game changer.”
