Domino’s Pizza Group: Interim Results H1/2014

Milton Keynes / UK. (dp) Domino´s Pizza Group PLC, the leading pizza delivery company with stores in the United Kingdom, Republic of Ireland, Germany and Switzerland, announced its results for the 26 weeks ended 29 June 2014. Highlights:

  • System sales increased by 14,9 percent to 375,0 million GBP (2013: 326,5 million GBP)
  • Continued strong operating margin, excluding Germany and Switzerland, of 21,7 percent (2013: 21,2 percent)
  • Operating profit, excluding Germany and Switzerland, increased 15,3 percent to 29,8 million GBP (2013: 25,9 million GBP). Operating profit, including Germany and Switzerland, after exceptional items, was 24,3 million GBP (2013: 10,1 million GBP)
  • Group profit before tax increased 10,1 percent to 24,5 million GBP (2013: 22,2 million GBP).
  • Strong growth in like-for-like sales in core UK + Ireland businesses:
    • UK up by 11,3 percent
    • Republic of Ireland (ROI), in EUR, up by 3,2 percent
    • Germany, in EUR, declined by 1,7 percent
    • Switzerland, in CFH, up by 2,9 percent
  • Earnings per share;
    • Basic earnings per share up by 7,4 percent to 11,6 GBPence (2013: 10,8 GBPence)
    • Diluted earnings per share up by 7,5 percent to 11,5 GBPence (2013: 10,7 GBPence)
  • Interim dividend increased by 10,0 percent to 7,81 GBPence per share (2013: 7,10 GBPence)
  • Strong net cash generated from operating activities of 28,7 million GBP (2013: 15,5 million GBP) resulting in net debt of 3,7 million GBP (2013: 27,9 million GBP) and share buyback programme resumed
  • Online system sales increased by 30,6 percent to 204,7 million GBP (2013: 156,7 million GBP) with online sales accounting for 69,7 percent of UK delivered sales (2013: 63,3 percent). Of this, 38,3 percent of online orders were taken through a mobile device (2013: 27,5 percent)
  • Total of eleven new stores opened in the period with one closure resulting in a total of 868 stores as at 29 June 2014 (2013: 825)
  • Created nearly 300 new jobs in stores, expected to rise to over 1’300 by the end of the year

Commenting on the results Chief Executive Officer David Wild said: «I am pleased to report a strong first half performance for Domino´s led by the sales results in our core market. We have now seen three successive quarters of double digit like-for-like sales growth in the UK. I am especially pleased at the continued success of our e- and m- commerce platforms showing how customers enjoy and appreciate the benefit of ordering on-line. We are investing further to drive this even harder. Outside the UK, the ROI has continued its solid recovery and we have seen an improvement in Switzerland after a slow start to the year. Germany continues to be challenging, but we remain committed to our plans. Looking forward, we plan to open 40 to 50 stores in the UK this year as previously reported. I remain very excited by the Domino´s business and I am enjoying working with our franchisees and my team to build on our success».

Chairman´s statement

I am pleased to report the Interim Results for Domino´s Pizza Group for the first half of 2014. This has been a period of management transition and we have delivered a strong result in our core UK market, particularly through the delivery of excellent like-for-like sales growth. This reflects the great work being done in promoting the Domino´s product offering, as well as some more encouraging signs in consumer sentiment.

Within our international operations, we saw a solid outcome in Republic of Ireland, especially in Dublin. In Switzerland, our development programme is beginning to show signs of progress. Germany remains challenging but the Board continues to believe in the opportunity of this market and we are proceeding with our new plans outlined at the start of the year.

Group profit before tax and exceptional charges was 24,5 million GBP, a 10,1 percent improvement on 2013. As we have done historically we are raising the interim dividend, this half in line with Group profit before tax growth to 7,81 GBPence (2013: 7,10 GBPence).

2014 has seen significant management change in the company, with David Wild becoming Chief Executive and Sean Wilkins becoming Chief Financial Officer. Both have settled into their roles quickly and effectively and I am confident that they will successfully lead the Group in its next phase of development in the coming years.

We are announcing several Board changes. After 15 years, Nigel Wray is stepping down as Non-Executive Director with immediate effect following expiry of his fifth term and John Hodson, having completed nine years as an Independent Non Executive Director, is also stepping down from the Board. Syl Saller has informed the Board that she is unable to serve a second three year term, when her first ends in September 2014 due to her other commitments. All three colleagues have provided good service and wise counsel and I wish to place my appreciation for their contributions on record. I shall assume the chairmanship of the Nomination Committee in succession to Syl and we expect to announce shortly the appointment of a new Independent Non Executive Director who will chair the Remuneration Committee. Finally we welcome Paul Waters who joins as interim Company Secretary in place ofMark Millar, who leaves to join the AA.

I want to pay tribute to the ongoing efforts of our franchisee partners who, in this time of change, have risen to the task of providing continuity and embraced our programmes with enthusiasm to serve our consumers and drive sales. They are critical to the ongoing success of the company and I appreciate all that they do. Finally, I would like to thank all the staff both in the Support Centres across the territories and in stores, without whom, we would not be able to run such a successful business.

Chief Executive Officer´s review

Overview: I am very pleased to report on a strong set of Interim Results. The Group had a good first half, driven by an excellent performance from the core UK business. In the Republic of Ireland, we saw positive like-for-like sales with notably better growth in Dublin than in regional stores. In Switzerland, after a slow start to the year in part due to the mild winter, we have seen the benefit of our investments in store refurbishment and relocation. Our business in Germany is challenging, but we believe in the opportunity to build a significant operation in the territory and are proceeding with the strategic plan outlined at the start of 2014.

I am delighted to have been appointed as Chief Executive on 30 April 2014 following a short period in the interim role. I see great opportunity within Domino´s, especially as I look at the brand´s success across the globe. I am looking forward to capitalising on the potential that exists within our territories in the coming years. In particular, I am pleased to be working with our franchisees whose passion, energy and initiative remains critical to our success. They have been welcoming and helpful to me as I settle into the permanent role and I am grateful for their continued enthusiasm for this great business.

United Kingdom: The UK business delivered strong sales growth, building on the double-digit like-for-like figures achieved in Q4 2013. For the first half of 2014, system sales in mature stores grew by 11,3 percent and in total by 16,0 percent.

This performance reflects the continuing impact of our digital investments, our meal-focused promotion campaigns and the local marketing activities of our franchisees. We are also seeing improved consumer confidence in our sector evidenced by increases in discretionary spending as the economy recovers.

E-commerce continues to fuel much of our UK growth as we seek to find new ways to make it as easy as possible for customers to order our pizzas. Sales through these channels now represent 69,7 percent of delivered sales and mobile now makes up 38,3 percent of this, up from 27,5 percent in the first half of 2013. We anticipate that mobile will become our most popular ordering channel in 2015. We are continuing to divert more of our marketing funds to digital, spending 48 percent of our media budget during the half, up from 39 percent in H1 2013, on digital based marketing. We are exploiting the trend of second and third screen viewing by consumers who are watching TV whilst interacting with one or two other devices, and won an award for our sponsorship last year of the X Factor App. Customers are increasingly influenced by social media and in a recent survey 15 percent cited it as their prompt to order. We are exploring novel campaigns that attract attention in this space. Examples have been Melting Man, edi-box April Fool´s spoof and delivering a Pizza to a customer on a train. Each of these reached millions of Twitter followers.

We are also investing in a new website with improved photography, better deal communication, screen size optimisation and easier ordering and payment. We expect this to be live by September this year and will cover all channels including our Apps.

We have had increased success this year by using «bundling» as a promotional mechanic which, as well as communicating value, drives weight of purchase and enhances our appeal to families sharing a meal. The Winter Survival Deal, which ran in January/February (Large Pizza, Garlic Pizza Bread, Wedges and Twisted Dough Balls for 14,99 GBP) was very popular with customers. We have followed this with the Summer Scorcher (19,99 GBP including a drink) and Footyl Fan Feast (24,99 GBP, including two Large Pizzas). We ran these offers for around six to eight weeks alongside other week-long tactical initiatives and franchisee-driven local campaigns.

Our «Greatness» TV Campaign, launched in September 2013, emphasises our quality credentials and has been well-received by consumers. Our regular «Brand Tracking» research shows that since this has been aired, there has been an improvement in the brand affinity metrics most marked within families. We also continue to innovate in product with new toppings regularly added to the menu, for example the Carnivale range of pizzas launched in May to coincide with the World Cup, plus sides of nachos and fajita wedges. We are also enhancing staple products, for example our Chicken Wings, where we have changed the marinade to give better coverage.

The Supply Chain network performed well, giving excellent service to our franchisees. We have invested in the Penrith plant to improve efficiency as we plan our next investment, likely to be in the North West of England, in 2016.

We continue to open new stores in virgin territories and by splitting existing ones to optimise service for customers and maximise sales for each location. In the first half, eight new stores were opened and, as usual, we expect store openings for the year to be strongly second-half weighted. The pipeline is good and we still anticipate 40 to 50 openings for the full year. Our average weekly sales from new outlets is up by 12,4 percent compared to last year.

Republic of Ireland (ROI): System sales in ROI have risen to 25,4 million EUR (2013: 24,6 million EUR) with no new stores opened either this year or last. After the economic crisis, we have now seen six consecutive quarters of sales growth and are encouraged by the progress made in the region. Sales growth has been stronger in Dublin, but we are also seeing positive trends in other areas. Longer opening hours have been of particular benefit in ROI and late-night has been a major contributor to the positive sales trend.

Overall e-commerce penetration is lower in ROI than in the UK, but we are seeing a rise in mobile, which, at 40,3 percent of digital sales, is higher than the equivalent number in our core market. We see this as an area of future opportunity.

ROI benefits from the product development initiatives from the UK, but we are also trialling «Pan Pizza», a deeper crust product which has been very successful in the US. It is early days, but franchisee feedback and customer response is encouraging.

We have not opened any new stores in the ROI since 2011, but we are now looking carefully at whether there are store split opportunities in Dublin, where we have some very high sales units.

Germany: Our German business has had a difficult six months as we change our operating framework and focus on developing a store economic model that is attractive to franchisees. During this transition period, we have reorganised the German Head Office, reduced local marketing spend to more appropriate levels and lowered food costs. We have also focussed on our financial reporting to ensure we have better oversight of business performance. With poor performance in several stores, we have taken a decision to close four outlets and have taken a write-off against accounts receivable.

Like-for-like sales have suffered as management focuses on the necessary structural change. The Board continues to believe in the opportunity for Domino´s in Germany. Organised local pizza delivery businesses are growing like-for-like sales in mid-single digits and expanding their franchised estate steadily. Our new store in Hamburg, where we have a German franchisee, has delivered positive cash flow within six months and we are looking to open more stores in the city.

We are, however, pursuing a cautious approach to expansion and capital deployment in the country and will ensure we have the right platform and metrics in place before increasing the rate of openings.

Switzerland: Switzerland´s like-for-like sales growth in Swiss francs was 2,9 percent including the impact of a store closure for refit. Currency changes meant that overall system sales were flat. We are encouraged by the continued strengthening sales performance as the year progresses. We anticipate stronger growth in the second half of the year as we open four more stores and relocate three existing stores in good locations across the country.

The management in Switzerland has been strengthened by the secondment of a senior UK operator, who previously worked for a franchisee, to support the execution of the projects in the second half.

Having completed the integration of Switzerland into our Group in 2013, the focus now is to improve the store estate, which is both dated and under-developed. In the first half of 2014, one store underwent a major refurbishment that necessitated a four week closure. A second was relocated within the catchment to a superior position with much greater carry-out potential. These projects have performed well and demonstrate the potential of the market.

Conclusion: The first half of 2014 has been a solid period of progress for the Group. Continued strong sales growth has confirmed the significant opportunity that remains for Domino´s in our core UK market and we have a number of ongoing plans to continue maximising this potential.

Equally, the UK performance illustrates the opportunity for the Domino´s brand in other markets, as further evidenced by its success elsewhere in the world. Conditions in Germany have proved to be challenging, but I remain determined that we follow our agreed strategy and develop a viable business model.

The cash generation in the first half has meant that the Board now plan to resume its share buyback programme.

Finally, I would like to add my thanks to our franchisees, store employees and Support Centre staff to those of our Chairman. They demonstrate the benefit of our model and their motivation and drive to succeed fuels the growth in our business.