Dominos Pizza Enterprises Ltd

By Emma Cahill

Domino's Pizza Enterprises Limited (DMP.AX)

DMP Shares as at 16:10 24th Oct 2013
Share Price 52 week range Market Cap P/E (Price/Earnings ratio) EPS (Earnings per Share) 14.38 8.89 14.83 1.01Bil 35.51 0.41

Data from http://au.finance.yahoo.com/

High

Low

Data from http://au.finance.yahoo.com/

Business Overview
Dominos Pizza Enterprises Limited (DMP) is involved in the operation of retail food service outlets and franchise services. DMP holds the master franchise rights for the Dominos brand and network in Australia, New Zealand, France, Belgium, the Netherlands and the Principality of Monaco. In September 2013 they acquired a 75% equity interest in the Dominos brand in Japan. Dominos distinguishes their business as Dominos AU/NZ, Dominos EU and Dominos Japan. Each market is different and a one size fits all approach is not suitable is the business wishes to succeed. 2014 is anticipated to be a year of consolidation. Increasing franchisee stores in AU/NZ and EU is a priority in addition to commencing operations in Japan. Please see below for DMPs financial guidance for FY 2014.

Dominos Key Markets

AU/NZ (FY 2013) June 2013 EBITDA = $49.2mil 501 Franchised stores and 84 Corporate stores 27 new stores opened in FY 2013, this was less than forecast due to council, landlord and conversion delays. 1 store closure (expected to reopen in a new location) The appointment of Nick Knight as Head of Corporate Operations was completed. In the process, DMP acquired 15 stores (franchise to corporate) Online ordering system was fully upgraded using HTML5 technology EU (FY 2013) June 2013 EBITDA = $6.7mil 330 Franchised stores and 55 Corporate stores 40 new stores opened in FY 2013, this was less than forecast due to regulatory challenges impacting the rollout in France. 4 store closures (all are expected to reopen in new locations) The EU business has experienced some margin challenges due to the speed of growth. In an attempt to grow the EU business at an accelerated rate, we have opened a significant number of new corporate stores in the past 18 months, predominately in The Netherlands, growing from 19 to 55. Whilst we achieved healthy top-line sales, the accelerated growth has stretched the management team, thus resulting in sub-optimal food and labour management (Dominos 2013 media presentation) One-off legal costs have also impacted the EU business
Data from http://au.finance.yahoo.com/

Highlights from 2013 Financial Statements

Key Statistic EPS Capex Debt/Equity Value 0.41 (54.0) mil 38.67 Comment EPS up 11.5% (slightly diluted as a result of employee share options being exercised) Increase in Capex due to acquisition (AU franchise stores) and Corporate store rollout in EU Increase borrowings to fund capital return and expenditure

Depreciation & Amortisation

(12.8) mil

Depreciation and Amortisation up 27.6% as a result of the accelerated store rollout in EU and digital investment in AU/NZ and EU

Additional Metrics EBITDA NPAT ROA ROE 44.9 mil 30.4 mil 12.50% 26.10%
Data from http://au.finance.yahoo.com/ and Dominos Annual Report FY 2013

What do Dominos expect in 2014?

DMP financial guidance for 2014.

Data from Dominos Annual Report FY 2013

Investsmart Analyst DMP Forecast

Year to Jun 2013 A 2014 F NPAT (mil) EPS 30.4 45.8 43.0 53.1 EPS Change % 11.5 23.7 P/E 24.0 26.5 DPS 30.9 37.0 Yield % 3.0 2.6

2015 F

51.8

60.1

13.1

23.5

42.0

3.0

Peer Comparison
Company Dominos Pizza Enterprises (DMP) Retail Food Group (RFG) Market Cap EPS Growth 2013 A 2014 F 2015 F 2013 A P/E % 2014 F 2015 F Dividend Yield % 2013 A 2014 F 2015 F

$1,167 mil

0.0739

0.3070

0.1720

34.3964

26.3168

22.4554

0.0222

0.0267

0.0311

$562 mil

(0.0152)

0.0934

0.1741

16.6409

15.2189

12.9624

0.0458

0.0462

0.0557

Analysis from InvestSmart.com.au

SWOT Analysis - Strengths

DMP will be operating across 3 continents in 2014. This will expand growth opportunities while minimising any negative regional events. DMP is an industry leader in the integration of digital technology. AU/NZ websites are using HTML5 technology, an iPad app was introduced in Sept 2012 and DMP is a leader in utilising social media websites to expand its customer base. Strong, consistent management team. The CEO of Dominos Japan will remain in place and has over 25 years experience with Dominos. One of AUs largest franchise owners (Nick Knight) has been added to the AU management team and provides a wealth of experience in franchise operations. With the addition of the Japanese market, DMP has created an extra buffer to risk posed by unfavourable foreign exchange movements. DMP now trades in 4 currencies instead of 3.

SWOT Analysis - Weaknesses

Dominos is competing in a strong fast food market. It also has a number of direct competitors (Pizza Hut and Eagle Boys) that are also represented across the globe. Exposure to costs of manufacturing, in particular rising labour and food costs. Exposure to unfavourable foreign exchange movements. Managing the various legal and regulatory frameworks that come into play when trading in multiple countries. France, in particular, requires a large amount of resources to manage their legal and regulatory conditions.

SWOT Analysis - Opportunities

The potential for growth, particularly in Japan Pizza is a relatively small part of the fast food market and has the potential to increase its share of the market in most countries. DMP prides itself on product differentiation. This is visible across all markets and enables DMP to stand out from the crowd in the eyes of consumers.

SWOT Analysis - Strengths

DMP will be operating across 3 continents in 2014. This will expand growth opportunities while minimising any negative regional events. DMP is an industry leader in the integration of digital technology. AU/NZ websites are using HTML5 technology, an iPad app was introduced in Sept 2012 and DMP is a leader in utilising social media websites to expand its customer base. Strong, consistent management team. The CEO of Dominos Japan will remain in place and has over 25 years experience with Dominos. One of AUs largest franchise owners (Nick Knight) has been added to the AU management team and provides a wealth of experience in franchise operations. With the addition of the Japanese market, DMP has created an extra buffer to risk posed by unfavourable foreign exchange movements. DMP now trades in 4 currencies instead of 3.

Key Drivers to Watch in 2014

1. Japanese Acquisition: In September 2013 DMP acquired a 75% equity interest in the Japanese Dominos business. There are currently 259 Dominos stores in Japan (41 of which are franchised) and the existing management team will remain in place. The aim is to expand the Japanese market to 600 stores within the coming years. The acquisition will be funded through a combination of debt and new equity (a 5 for 23 rights issue). The NPAT of the acquisition is estimated to be $1.345mil, this includes professional fees and other costs directly attributable to the acquisition. Based on how quickly DMP can integrate the Japanese business and how soon the expansion within Japan can begin, DMP stocks should see the benefit of this new market and growth strategy in 2014.

2. Costs of Production: Food and paper expenses account for 33% of all DMP P&L expenses. Following this, staff costs account for 30% of P&L expenses. DMP is very sensitive to movements in these costs and there is particular concern in 2014 that food costs will increase at a greater rate than was expected.

Labour costs are also a concern for DMP across all markets. A slight increase in labour costs will have a massive impact on the profitability of the business.
Key drivers identified by Financial Controller of DMP for 2014