US Edition Domino's Pizza
458.1p -50.4p
Questor says HOLD
Total sales were up 9.8pc to £127m in the 13 weeks to September 25, representing an acceleration. Sales in the year to date are up 9.2pc.
Same-store sales also rose 3.9pc compared with a tough comparator from last year of 9.9pc. Growth in 2010 was very strong and it was always going to be tough to turn in a similar growth performance – but the important fact is that group is still growing.
In the UK, like-for-like sales rose 4.1pc, compared with 11.5pc in the equivalent period last year.
There was a slight hint of brightness in Ireland, where business has been tough because of the large impact the financial crisis had on the country, with like-for-like sales there were up 1.8pc. However, Ireland represents only about 7pc of sales.
When things do start to recover in the Republic, profits should rise significantly as operational gearing is important for this company. This means that when sales increase, profits will increase at a greater rate because of its fixed-cost base.
One startling figure from the results was the growth in online sales. The importance of this should not be understated because it cuts the cost involved in each order. Online sales are now 46.6pc of sales against 39.7pc in the same period last year. The figures have been boosted by the launch of the group's iPad application, which makes up 13pc of e-commerce sales.
The company opened two more stores in Germany – in Bonn and Berlin – which represents a very interesting market for future growth. Domino's said the early signs for the market were "very encouraging, trade is building steadily and, having completed a full review of the market, plans are in place for new menus, a new website and a step-change in marketing activity for the region". By the end of the year, six stores will be operating in the country.
Another positive for the group in the next few years will be its cash flow. Domino's recently completed a significant investment in its Milton Keynes commissary, so the end of this period of investing in its business is going to boost its free cash flow.
The earnings multiple remains quite high, but this is a reflection of its growth prospects. In the year to December, the earnings multiple stands at 25.3, falling to 22.5 next year. This premium rating – and the lower levels of growth – are why the shares fell yesterday after the update.
The shares were first tipped on July 21 2009, when they were trading at 235¼p and they are up 95pc since then. They have been tipped as high as 502p – and they remain slightly below that level. However, the long-term opportunities in Germany, a hoped-for recovery in Ireland and the cash-generating ability are real positives – and the prospects for the business look very rosy indeed.
Analysts expect earnings-per-share growth of 13pc this year and next, which is still pretty impressive – and Questor suspects that the risk to forecasts will be to the upside. However, yesterday's market reaction to a good set of numbers from a quality business showed just how nervous investors are at the moment because of the current market backdrop – and will remain until the turmoil ends. So, for this reason, Questor says hold for now.