Posted:22-July-2008
Evidence of Great Franchise Success
Domino’s Pizza, the UK and Ireland's leading pizza delivery company and one of the world’s most successful franchise businesses, today announced positive Interim results and is on track to open its target 50 new store this year.
During the period, Domino's opened 25 new stores ((2007: 20 stores) and none closed. This resulted in a total of 526 stores at the period end (2007: 470 stores)
In addition to new openings, 51 stores have already changed hands in the first half for a total consideration of £17.9 million. This consolidation of the franchise community is part of Domino’s plan to bring the ownership of stores to an average level of five stores per franchisee. At 29th June 2008, the average number of stores per franchisee stood at 3.8.
Total franchisee capital expenditure during the period - on both new store and changes of hands was approximately £23mk, some £10m ahead of the same period last year. Domino’s estimates that £14m of this has been bank financed reflecting the confidence of the main High Street banks on the Domino’s Pizza franchise model.
Chris Moore, chief executive said of its franchisees: “It is their commitment to deliver the best product and service every day that sets the pace in each local market. Their entrepreneurial drive and passion to succeed gives Domino’s a competitive edge that is hard to beat in good times and even harder when the going gets tough.”
DOMINO’S PIZZA
RESULTS FOR THE TWENTY-SIX WEEKS ENDED 29 JUNE 2008
Domino’s Pizza UK & IRL plc (“Domino’s Pizza” or the “Group”), the UK and Ireland leader in pizza delivery, announces its results for the twenty-six weeks ended 29 June 2008.
Highlights
- System sales increased 19.5% to £170.2m (2007: £142.5m)
- Profit before tax* increased 32.7% to £10.9m (2007: £8.2m).
- Statutory profit before tax of £9.7m (2007: £8.3m) increased by 17.2%
- Earnings per share*: Basic earnings per share up 40.8% to 5.18p (2007: 3.68p)
- Diluted earnings per share up 41.0% to 5.12p (2007: 3.63p)
- Interim dividend increased 42.1% to 2.70 pence per share (2007: 1.90p)
- 25 new stores opened in the period (2007: 20 stores). No stores were closed (2007: 1 store) resulting in a total of 526 stores at the period end (2007: 470 stores)
- Like-for-like sales in 450 mature stores up 11.4% (2007:14.9% in 404 stores)
- E-commerce sales up 85.1% to £25.3m (2007: £13.7m). E-commerce now represents 21.8% of our delivered pizza sales in the UK
- £7.7m cash returned to shareholders in the period by way of share buybacks and dividends (2007: £3.6m)
* Before operating and non operating exceptional costs of £1.2m (2007: £0.1m profit) primarily due to the move to the Official List
Stephen Hemsley, Executive Chairman of Domino’s Pizza UK & IRL plc, commented:
“I am pleased to be able to report another set of excellent results in the twenty-six weeks to 29 June 2008 with profits before tax and exceptionals, up 32.7% to £10.9m (2007: £8.2m). System sales reached record levels as did the number of new stores opened in the first half. Like for like sales continue to grow at an impressive 11.4%, on top of the exceptional 2007 comparatives and despite the current more difficult economic environment for consumers. Encouragingly, new stores are trading very strongly on opening.
“The benefits of operational gearing continue to translate into strong cash generation, significant returns for shareholders and yet another record interim dividend payment.
“We are on track to open 50 new stores this year and although we are mindful of the very strong comparatives in the second half of the year, we are confident of further strong growth in system sales and profits and are well placed to exceed market expectations for the year.”
Chairman’s statement
We have made an excellent start to the year with like-for-like sales growing an impressive 11.4% on top of the exceptional 2007 comparatives. We have also achieved a record 25 store openings for the first half of the year. E-commerce has continued to show robust growth with sales rising by 85.1% over the same period last year. E-commerce now represents 21.8% of all our delivered pizza sales in the UK. This all contributed to excellent results in the twenty-six weeks to 29 June 2008 with profits before tax and exceptional items up 32.7% to £10.9m (2007: £8.2m). This has enabled your Board to propose a 42.1% increase in the interim dividend.
These results have been achieved in a significantly tougher trading environment than the comparative period last year and we are pleased that our business has proved to be resilient. Identifying the reasons for this and the likelihood that they will continue is difficult as the previous similar experience is so long ago and our business is now very different. However, the trend that we are witnessing so far is that many consumers are “trading down”, which in our industry means that they are eating out less often and staying at home. Once these consumers have decided to stay at home, Domino’s has the opportunity to serve them and with the combination of a great product, excellent service and effective marketing, we have achieved record levels of system sales in the first half of the year.
A further challenge facing our business, in common with many others, is food and energy price inflation. Whilst the dramatic increases in food costs that we experienced in the second half of last year have not recurred, and those additional costs have now been fully passed on by both us and our franchisees in the form of price increases, pressure still remains. However, this is unlikely to have a material impact in the current year due to the fixed price contracts we have in place on a large number of our food items. Looking forward, we are hopeful that we will be able to manage most of these cost pressures by improvements in our procurement processes, but it is likely that further modest price increases will be necessary early next year.
This will present a challenge in a tightening market but as these pressures will be felt by all food providers from supermarkets to restaurants, such increases will not put us at a competitive disadvantage and we feel that they can be managed across the system.
During the first half of the year your company reached a further milestone in its development with our move from the Alternative Investment Market to the Main Market of the London Stock Exchange.
This was closely followed by the inclusion of the Company in the FTSE 250 index. We are confident that when more normal market conditions return this will improve the liquidity and marketability of our shares.
The current economic climate is likely to continue for a while, but I am confident that we have the team at Domino’s Pizza to continue to thrive and grow in this environment. I would like to thank every member of our corporate team, our franchisees and team members in the stores for the tremendous effort they have put in the first six months of the year. We look forward to the future with confidence.
Chief Executive Officer’s statement
Introduction
In April I celebrated 18 extraordinary years with Domino’s Pizza yet the first six-months of this year as your CEO have been some of the most eventful. We have achieved excellent like-for-like sales increases in tightening economic conditions and we have seen record store openings during the prevailing “credit crunch”. The awareness and stature of the brand rose to new heights with the sponsorship of Britain’s Got Talent, at the same time as we were busy moving to the Official List. And last, but by no means least, we notched up record profits in the period!
Expansion
Perhaps the strongest indication of the confidence in the business comes from our existing franchisees who opened 25 new stores in the period. This followed a record 30 openings in the second half of last year. With this momentum and with sufficient potential sites in the pipeline, we are confident of hitting our target of 50 new stores in the current year. As before, our primary objective is to secure quality locations and in this regard we are very encouraged by the trading of the new stores that have opened so far this year. There were no closures during the period (2007: 1, which re-opened in the second half of 2007). As a result, the store count at 29 June 2008 was 526 (2007: 470).
In addition to new openings, 51 stores have already changed hands in the first half for a total consideration of £17.9 million. This is more than the total consideration paid in 2007. This consolidation of the franchise community is part of our plan to bring the ownership of stores to an average level of 5 stores per franchisee. At 29 June 2008, the average number of stores per franchisee stood at 3.8 (2007:3.2). One of the positive outcomes arising from changes of hands is the increase in sales that normally result. For the 55 stores that changed hands in 2007, like-for-like sales this year are ahead by 15.7%.
As a result of all this activity, total franchisee capital expenditure during the period – on both new stores and changes of hands – was approximately £23m, some £10m ahead of the same period last year. We estimate that £14m of this has been bank financed reflecting the confidence of the main High Street banks in the Domino’s Pizza franchise model.
During the period, we sold our last remaining 100% owned and operated corporate store, enabling us to focus all our attention on the partnership with our franchisees. It is their commitment to deliver the best product and service every day that sets the pace in each local market. Their entrepreneurial drive and passion to succeed gives Domino’s a competitive edge that is hard to beat in good times and even harder when the going gets tough.
Commissary Development
Earnings per share and dividend
Basic earnings per share, before operating exceptional items, were up 40.8% to 5.18 pence (2007: 3.68 pence) and diluted earnings per share, before operating exceptional items, were up 41.0% to 5.12 pence (2007: 3.63 pence).
In line with our strategy of returning cash not required for the growth and expansion of the business to shareholders, we are pleased to declare an increase of 42.1% in the interim dividend to 2.70 pence per share (2007: 1.90 pence per share). This dividend, which is 1.7 times covered by earnings, pre exceptionals (2007: 2.0 times) will be paid on 29 August 2008 to shareholders on the register on 1 August 2008.
Cash flow and balance sheet
Our cash position remains robust with operating activities generating net cash in the period of £4.5m (2007: £7.6m). The lower cash generation compared to last year is primarily due to an increase in debtors which relates to the prepayment for various advertising activities. This will reverse over the second half of the year as franchisee contributions to the National Advertising Fund are made.
In the first twenty-six weeks of the year, options over 503,000 shares were exercised generating a cash inflow of £0.5m (2007: £0.3m). During the period, the Group purchased 1,750,000 shares for cancellation at a cost of £3.8m (2007: 400,000 shares at a cost of £0.8m). Furthermore, 2,000,000 shares were purchased by the Employee Benefit Trust (“EBT”) at a cost of £4.3m (2007: £nil).
The Group continues to provide franchisees with leasing facilities for new equipment and refits through its wholly-owned subsidiary DP Capital Limited. In the first twenty-six weeks of the year, new advances of debt facilities of £0.7m were made available to DP Capital which was matched by similar repayments of £ 0.6m resulting in borrowings of £2.6m (2007: £2.4m) at the half year.
As at 29 June 2008, the Group had cash in hand of £10.2m (2007: £9.9m) and drawn-down revolving credit facilities of £9.0m (2007: £3.5m) which, taken together with the DP Capital borrowings noted above and the EBT loan of £12.0m (2007: £7.7m), gave consolidated net borrowings of £13.5m (2007: £3.7m).
Towards the end of 2007, the Group finalised a £25m five-year term loan facility with its bankers to enable it to finance the expansion of its commissary facilities. By utilising this facility for expansionary capital expenditure, we are free to return cash flows generated by operating activities to shareholders.
Outlook
Domino’s Pizza like-for-like sales grew very strongly in the first half of the year despite the more challenging economic environment.
We are well placed to continue growing, but are mindful of the tougher second half comparatives. New store openings in the first half reached a record level and we expect to once again open 50 stores this year. Overheads in the business are well under control and the resultant operational gearing that our rising income provides, gives us confidence in another year of strong growth and leaves us well placed to exceed consensus market expectations for the year.
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