Wednesday 23 August 2017

Domino's helps itself to a big slice of the action

John Lynch

When the late, great Dean Martin was proclaiming to the world as far back as 1953 that "when the moon hits your eye like a big pizza pie, that's amore," for some it was more than just "amore". It was a spectacular market opportunity.

Fast forward another 60 years or so and there's figures to show that every single day of the year, some 13pc of the entire American population are sitting down to a pizza.

It is also the favourite fast-food for college parties and nights in watching Netflix. Indeed, since 1984, Americans have even set aside a special month (October) to pay homage to the flatbread topped with tomato and cheese. They call it National Pizza Month.

But back in the 1950s, there was one man from the American midwest town of Ann Arbor, Michigan, who may have felt that Deano's popular ditty was inspiration sent straight down from Heaven. He was Tom Monaghan, who in 1960 went on to found the enterprise we know today as Domino's Pizza. He sold the company in the 1990s for over $1bn and has since spent a great part of that fortune on Catholic charities and educational establishments.

Domino's is a truly worldwide enterprise. It is the second-largest pizza chain after Pizza Hut, with over 12,000 outlets and 11,000 employees.

While its branding is global, its international markets vary. For instance, in Japan a squid topping is available, in India it offers spicy cheese and in Brazil the cinnamon dessert pizzas are much requested.

Its founder is, of course, 'one of our own'. More accurately perhaps, he has two Irish grandparents, born in Tipperary and Cork. Having set up the company in 1960, he conceived a clever strategy of building outlets close to military establishments or colleges. It paid off and 20 years later it was a worldwide phenomenon. Mr Monaghan sold out to Bain Capital in 1990.

Now in 80 countries, Domino's has 4,700 outlets in the US and 7,000 internationally.

It generates revenues and profit from royalties from its franchisees, revenues from its own stores and sales of food and equipment in the US and Canada. Franchisees are governed by a master agreement usually restricted to one company per country.

There are exceptions, like the agreement for UK and Ireland, while another expanded master franchise covers Australia, New Zealand, Belgium and the Netherlands.

Last year, Domino's had a record store growth in its international business and grew in the US.

The international business was driven mainly by Australia, Brazil, Turkey and the UK. The US pizza market is estimated to be worth $32bn.

Interestingly, 50pc of this market is online, giving the big players like Domino's a competitive advantage over local pizza operators.

Group revenue last year increased to $2.2bn, driven by higher supply-chain revenues. US revenue, at $640m, shows company-owned stores contributing $380m, the remaining being royalties and fees from its US franchisees. International fees and royalties contributed $164m, up 10pc from the previous year. Operating income at $400m shows a consistent increase each year since 2011.

The shares are not cheap, hovering around $112, below its yearly high of $120, and the stock has doubled in the last five years. The company now has a market value of $6bn. Earnings per share is $3.47, up from $1.90 in 2011.

The business yields strong free cash flow of $180m driven by consistent franchise royalty payments and supply chain revenue.

The company's free cash flow is deployed towards its shareholders and last year $82m was spent on share repurchases or, as some might say, extra topping for the investor pie.

Domino's is a growth stock and worth considering, but its hefty price earnings multiple of 32 is a bit rich. Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned

Irish Independent

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