Domino´s Pizza Group: Preliminary Results 2013

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 52 weeks ended 29 December 2013. Financial highlights:

  • System sales increased by 14,0 percent to 668,8 million GBP (20122: 586,5 million GBP)
  • Profit before tax3, including Germany and Switzerland, of 47,6 million GBP, up 1,9 percent (2012: 46,7 million GBP)
  • Profit before tax3, excluding Germany and Switzerland, increased 11,6 percent to 55,2 million GBP (2012: 49,5 million GBP)
  • Adjusted diluted earnings per share, excluding Germany and Switzerland up 10,3 percent to 25,6p (2012: 23,2p)
  • Like-for-like sales4 growth of 7,0 percent in 670 UK mature stores (20122: 5,2 percent in 612 mature stores)
  • Earnings per share (pre-exceptional items):
  • Diluted earnings per share up 8,6 percent to 23,9p (2012: 22,0p)
    • Basic earnings per share up 8,1 percent to 24,0p (2012: 22,2p)
    • Statutory basic earnings per share 10,7p (2012: 19,0p)
  • Pre-tax exceptional costs of 27,5 million GBP of which 26,5 million GBP relates to impairments and other exceptional charges within our German business
  • Final dividend increased by 11,4 percent to 8,80p per share (2012: 7,90p) bringing the total dividend for the year to 15,90p per share up 9,7 percent (2012: 14,50p)
  • 57 new stores opened in the period (2012: 69 stores) with four closures (2012: two) resulting in a total of 858 stores in four countries as at 29 December 2013
  • Online system sales increased by 28,2 percent to 338,0 million GBP (20122: 263,7 million GBP) with online sales accounting for 61,5 percent of UK delivered sales (20122: 56,1 percent). Of this, 30,9 percent of online orders were taken through a mobile device (20122: 19,7 percent)
  • Strong balance sheet with adjusted net debt5 to Ebitda3 of 0,3:1 (2012: 0,5:1)

Current Trading

Like-for-like sales in the first seven weeks of 2014 are as follows:

UK (GBP) 14,6 percent
ROI (EUR) 4,6 percent
Germany (EUR) 3,8 percent
Switzerland (CHF) -0,4 percent

Acquisition of non-controlling interest

On 26 February 2014 the Group entered into an agreement to purchase the minority shareholding in relation to the German business. Please refer to note 9 for more details. Commenting on the results Interim Chief Executive Officer, David Wild, said: «It has been another strong year for Domino´s and I am particularly delighted by the sales performance in our core UK business, which has continued into 2014, confirming the strength of our offer for both new and existing customers. The recovery in the Republic of Ireland is also pleasing. Whilst we have learnt some hard lessons in Germany, we now have a clear way forward and must focus on the delivery of this change in direction. We sold 65,5 million pizzas across the Group during the year and created over 1’500 jobs, which is no mean feat. I´d therefore like to give a big thank you to my colleagues and franchisees who have all been crucial in delivering this result, through their commitment to this great brand. We remain focused on delivering our strategy into 2014 and beyond and I am excited by the numerous initiatives I see in all areas of the business. By working with the franchisees and my colleagues at Domino´s, I look forward to fulfilling my role over the coming months to progress the Group´s exciting growth plans for the future».

Chairman Stephen Hemsley´s Statement

I am pleased to have another strong set of results to share with you. The Group has again delivered very solid profit before tax and exceptional items of 47,6 million GBP, representing excellent growth in the core markets of the UK and Republic of Ireland of 11,6 percent on last year to 55,2 million GBP. This was partially offset by higher than anticipated losses in Germany of 7,0 million GBP.

At the heart of the Group´s story in 2013 is some very powerful growth in our core UK market, where like-for-like sales growth accelerated to 7,0 percent (2012: 5,2 percent), surely one of the strongest growth stories on the UK high street. This strong performance was driven by a broad blend of activities, including: investment into digital sales, smart use of SMS marketing, strong new product development and targeted incentives for franchisees to accelerate their order counts.

The Republic of Ireland (ROI) has at last shown some real recovery and we are delighted that our strategy of working with franchisees to support them through difficult times appears to be bearing fruit. During the sharp recession in Ireland no stores were closed as a result of the franchisees´ skill and determination along with some financial support from us.

The strong volume growth plays well to the Group´s operational gearing. As volume grows, we extract improved returns from our investments in Supply Chain Centre (formerly known as commissary) capacity and procurement. In 2013 we saw the important metric of UK and ROI´s adjusted profit before tax to systems sales grow to 8,5 percent (2012: 8,4 percent).

Germany has been a difficult experience for us during 2013. Our initial strategy of rapid store expansion to achieve critical mass early resulted in unacceptably high losses including large impairments of assets in Germany. This strategy was revised mid-year as we started to transition our corporate stores across to franchisees and slow expansion until solid store level economics have been established. This follows the pattern in the UK, successfully executed in the 1990´s. This process is now well underway and I expect we will see transitioned stores start to pick up sales momentum in the coming months and the corporate losses start to decline.

I remain an optimist on the long-term prospects for our German business. At a local level we have seen that a good store, operated by a strong franchisee, can achieve order levels not far short of the UK levels. Over the coming year we will concentrate on driving more stores up to this critical stage, before accelerating our store opening process.

We have also taken the decision to purchase the remaining 25 percent of the German business from our non-controlling interest partner. This will simplify the operation of this business and is a sensible deal for Domino´s shareholders, giving 100 percent ownership and the Group full control over how we implement our plans for the future.

Our Swiss business, which we purchased in September 2012, is on track to reach profit by late 2014 / early 2015. The team there is making great progress.

It remains for me to say two important goodbyes:

Chief Executive Officer, Lance Batchelor, joined the Domino´s board in July 2010, initially as a Non-Executive Director. In June 2011 he moved across to become deputy Chief Executive Officer, stepping up to Chief Executive Officer in December. He recently announced his resignation, leaving us in March 2014 to take up a new role. Lance´s tenure has been marked by a strong uplift in our UK like-for-likes, a deeper move into web and mobile sales and marketing, and a very strong new product pipeline. I would like to take this chance to thank him for all he has contributed and wish him well. We are currently busy recruiting his successor, and I have no doubt we will attract a top class Chief Executive Officer to run this wonderful Group.

During the interval between Chief Executive Officer´s, our senior Non-Executive Director, David Wild, has agreed to step up and act as Interim Chief Executive. David is an experienced Chief Executive Officer himself and will be a very safe pair of hands. I will be working closely with David to ensure our strategy is delivered without any pause.

Chief Financial Officer Lee Ginsberg joined Domino´s in 2004, and has therefore been part of our story for over a decade. He has now decided to retire and take up a portfolio of roles. Lee has been an integral part of the remarkable Domino´s success story, working with three Chief Executive Officers to take the market capitalisation of the Group from 105 million GBP to today´s 800 million GBP plus. He has a very strong and well-deserved reputation within the investment community, demonstrating an intimate understanding of the business model. I would like to sincerely thank Lee for the huge part he has played in the helping the Group grow.

I am pleased to welcome Sean Wilkins as our new Chief Financial Officer. Sean came to us from Coles in Australia and, before that, Tesco. He joined us in November and is now fully immersed in the business, demonstrating good understanding of our unique business model and rapidly developing strong relationships both within the Domino´s family and with our investors. I am confident Sean will be a major asset to the next stage of Domino´s development.

Finally let me thank our franchisees and staff for all they do to make Domino´s the leading pizza delivery company in the world. Day and night they are out there, focused on product, service and image, always seeking to ensure customers get what they want and I am grateful to them all.

Interim Chief Executive David Wild´s Review

I am delighted to be able to present the Board´s strategy and these results in my role as Interim Chief Executive . Whilst I have been in the business for a relatively short period of time, I have got to know it well. I am excited by what I have seen and opportunities for the future.

Our Strategy

The greatest strength of the Domino´s business is the simplicity and clarity of our strategy: we aim to be the number one pizza delivery business in our markets through a commitment to offering the best product, service and quality to our customers. We have a very strong network of franchisees who execute the strategy locally. At Domino´s we support them with:

  • an efficient, low-cost supply chain to help drive down costs;
  • innovative product development;
  • world-class marketing and e-commerce initiatives;
  • audits which maintain standards; and
  • property management, including new store development.

    We have a highly developed and successful business in the UK and Republic of Ireland. We have the opportunity to develop a strong position in Germany and Switzerland, where, although our operations are very immature, we are rapidly gaining experience.

    As you can see, our focus on these areas in 2013 has led to record adjusted profits in 2013 for Domino´s. In the core UK and Irish markets, profit before tax and exceptional items reached 55,2 million GBP, an increase of 11,6 percent, with Group adjusted diluted EPS growing by a very satisfactory 8,6 percent.

    This excellent result was offset by the higher than anticipated 7,0 million GBP loss in Germany along with significant one-off costs and impairments, which is the one disappointment of the year.

    The group opened 57 new stores in 2013 (2012: 69) and the Group now operates 858 stores in total across four markets: 777 in the UK, 48 in the Republic of Ireland, 23 in Germany, ten in Switzerland.

    United Kingdom

    In 2013 the core UK business has grown at a rapid pace with the strongest growth achieved in Q4. Overall sales hit record levels, with a new highest-ever Domino´s Pizza UK and Northern Ireland sales record week in December of 14,1 million GBP, with mature stores averaging weekly sales of 20’903 GBP. The like-for-like performance across the year was 7,0 percent (20122: 5,2 percent). Excluding the impact of split stores like-for-like sales were up 9,2 percent.

    The strong UK performance cannot be attributed to one single initiative, rather an extensive programme of activity which has made positive contributions.

    The UK has seen a 4,1 percent growth in order count which is especially pleasing. It is a great barometer of positive consumer satisfaction with our offer. An increase of 1,2 percent in the items per order reflects a success in bundling offers to give better value and target family meals more successfully.

    We were particularly pleased to see growth in the dinner segment part of the day, again a reflection of our success in bundling meals for families, to include starters and desserts.

    One of the biggest changes in consumer activity in recent years has been the impact of digital technology and the use of new devices for ordering goods and services. Domino´s has been at the vanguard of these developments and we see consistent growth in electronic orders from customers.

    Improved reliability and stability of our platforms has been the bedrock of this performance and I am delighted that we have seen up to 23 orders per second transacted on our site.

    Building on this bedrock is the ease of use and navigability of our website, as well as the opportunity provided for innovative marketing campaigns, which offer our customers a wider menu of products.

    We now have over 4,2 million permissions to email customers (2012: 3,0 million), allowing us to target them directly with marketing messages. 2013 saw our first foray into the world of high-end digital content with the production of “The Support Group”, a football-themed sitcom that was hosted on our own YouTube channel.

    The programme proved a massive success and has been watched by 1,2 million people to date. Customers who watched the programme were 15 times more likely to go and purchase from us than they were before.

    In 2013 we also launched our first-ever Domino´s Blog, created to house both video and static content, to improve our search performance and provide a hunting ground for customers looking for a deal. We continue to engage, entertain and educate our social media fan base and have done so with more personality than ever before, consequently Domino´s in the UK now has 912k fans on Facebook (2012: 747k) and 173k followers on Twitter (2012: 68k).

    We participated in Global Domino´s Week this year, which offered Domino´s customers across the globe the chance to obtain 50 percent off when they participated in the promotional mechanic on Facebook. We also partnered with Twitter this year to understand how Twitter can be used more effectively to amplify our spend in traditional TV. This has driven out some great insights which will shape our social media strategy going forward.

    Republic of Ireland

    I am delighted with how our Irish business has turned around this year. Like-for-like sales in Euro in 2013 were up 6,0 percent (20122: minus 0,3 percent), which was significantly ahead of our expectations. Encouragingly this growth was driven by like-for-like order count growth of plus 1,5 percent (20122: minus 3,6 percent). I am also encouraged by the fact that growth has been seen across all parts of the country. Dublin stores are outperforming those in the provincial and country areas, but all remain in growth.

    The Irish business continues to migrate to digital, albeit at a slower rate than the UK. E-commerce sales reached record levels in Ireland, now representing 28,2 percent, whilst mobile now represents 28,8 percent of e-commerce sales. E-commerce sales have grown by 24,2 percent (20122: 33,1 percent), whilst mobile sales continue to grow, up 89 percent (2012: 171 percent).

    The success seen across the country has in large part been driven by franchisees´ undiminished commitment, enthusiasm, and investment behind local store marketing. This is when our model really shines, when entrepreneurs passionate about their businesses start to drive ahead. This has been assisted by our long-term commitment to our national promotional strategy.

    2013 saw us return to family entertainment TV sponsorship as we backed the launch of The Hit, a new TV show that set out to find local home grown singer/songwriter talent. The show proved popular with Irish viewers and saw us expand our audience using RTE (Raidió Teilifís Éireann), as we worked to broaden the footprint of the brand. We are proud of how we brought this sponsorship to life on TV, on social media, in store and at the live concert venue. In fact, we won the Best Media Sponsorship award at the prestigious Irish Sponsorship Awards in September. We were also proud to trial a new promotional mechanic in Ireland, where we asked customers to buy one pizza and get another for one Euro, so we could donate that one Euro per pizza to our long-standing Irish charity partner Barratstown.

    On the back of some quantitative product work which vindicated our long-standing belief that we make the tastiest pepperoni pizza we communicated this message as part of our marketing campaign for the period.

    Germany

    The global Domino´s business is the most successful home delivery pizza business in the world, operating nearly 10’900 stores in over 70 international markets. These include a mix of both developed and emerging economies. Germany is the largest consumer market in Europe and the fourth in the world, with established global QSR (Quick Service Restaurant) businesses running successfully in the burger and sandwich segments.

    Our investment into Germany has not been without challenges and teething problems. Initially, the stores were run corporately rather than as a franchise, which is the UK norm. Ambitious expansion plans were established before a full understanding of basic store economics had been determined and the early openings were too large, leading to high rental and utility costs. Overheads are too high given the small number of outlets and we have tested a number of price points during our first few years and concluded that Domino´s quality justifies a premium price, as in the UK.

    A change of management in 2013 gave the Board the opportunity to review and implement a new strategy based on:

  • a move to franchise rather than corporate stores;
  • a more modest 2014 opening programme – likely to be five stores;
  • a standard store format with a 150 square metre template;
  • streamlined Support Centre overhead;
  • a new e-commerce platform; and
  • premium pricing with aggressive promotions.

    The summary of this strategy is to ensure a clear focus on store-level economics. The implementation of this revised strategy has resulted in increased losses in 2013 and significant write-offs which have been taken as exceptional costs. We expect that losses in Germany will continue for several years until we establish sound and replicable store level economics and achieve a critical mass of stores sufficient to support the overhead. Thereafter we hope the growth in contribution from Germany will be significant and replicate the progress made in the UK.

    The Board has decided that in order to ensure that we are able to move forward in Germany without any barrier, we should buy out our minority shareholder at a price linked to business success.

    Switzerland

    Domino´s purchased the Swiss business in September 2012, after a decade in which it had lost money and stalled. All stores are corporate stores. We made good progress in 2013, growing like-for-like sales by 5,4 percent with pre-exceptional losses of 640k GBP, slightly behind where we expected to be.

    We closed two under-performing stores and identified four new store sites which took more time to obtain leases and consents than expected, but which are now being developed. It is our intention to reach break even in Switzerland by the final quarter of 2014/early 2015.

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