Why investors are tucking into Domino’s Pizza

Competition in the takeaway sector is fierce, but Domino's Pizza (DOM) today signalled that there still looks to be enough junk food to go around.

The delivery franchise business, which is under pressure from rivals such as Just Eat and Deliveroo, said that UK like-for-like sales jumped 6.1% in its crucial fourth quarter trading period, which was much better than the City’s forecast for growth of 4.7%.

With the start of the X Factor final on December 2 the catalyst for the busiest day of the year – sales were up 25% compared with an average Saturday – Domino’s said its profits for 2017 will now be slightly ahead of expectations.

Peel Hunt upgraded its full-year profit forecast by £2 million to £92.1 million, with £1 million relating to the extra volumes generated after Domino’s launched a £3 million discounting campaign in the autumn.

The broker upped its price target by 25p to 425p and said there were plenty of reasons to think the strong performance will continue, particularly with a football World Cup due this summer and the company continuing to make strides with the roll-out of new technology.

UK online sales were up 14.5% year-on-year in the quarter, and now represent 77% of system sales. Its investment in digital included the deployment of GPS order tracking in 244 stores by the year end, which was more than expected.

Another reason for Peel Hunt’s support is the company’s share buy-back programme, which has seen Domino’s acquire 11 million shares for almost £40 million over the last year.

With the company targeting 1.75-2.5 net debt/EBITDA, Peel Hunt estimates Domino’s could buy back another £100-£200 million of equity to reach those ratios over the next two years.

The broker also forecasts 80 new stores in the 2018 financial year, on top of the 95 opened in 2017. It notes that franchisees are expanding in high footfall locations where customer collection rates have the potential to reach 50% of orders. Overseas trading has also been strong, with like-for-like sales up by 10.4% in Ireland and 21.9% in Switzerland.

Despite the better-than-expected Christmas performance, UBS analyst Heidi Richardson is more cautious about Domino’s prospects. She retained a ‘sell’ rating and price target of 260p.

Richardson has previously pointed to the impact of fast growing competition and lower loyalty in the takeaway sector, as well as greater consumer choice.

She has also been concerned that declining franchisee profitability, driven by food cost inflation, could have a knock-on effect on company margins as Domino’s is forced into protecting its value proposition.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Source.