Domino’s Also Surprises

Another stock to surprise on the downside was fast food darling, Domino’s Pizza Enterprises, promoters of the pan pizza based eating experience in Australia and in several major markets overseas.

The company yesterday revealed a first half that showed the pan pizza eating experience isn’t luring as many Australians to Dominos as before, but is still proving seductive to pizza eaters in parts of Europe.

As a result the shares shed 12 per cent in value, or around 40c to $3.25, after it reported a 46.2 per cent fall in first half profit.

That’s a big ouch and the confident story about overseas expansion wasn’t enough offset the fact that like Coates, DOM needs to do well in its home base to earn solid profits.

The company did warn in October after the first quarter, that earnings would down by at least “$1.2 million” because of the problems in Australia but they have continued, given the downturn for the full six months.

Those problems involved promotion and the high crust pizza product which seems to have done poorly.

For a company like Domino’s growth can come from converting sales gains in foreign markets into earnings a little down the track but the simple fact is that to maintain its rating among investors, it needs to sell more pizzas in Australia.

And it didn’t do that well enough in the first half of 2007, thanks in part to the high proportion of company-owned stores in Australia as against franchised outlets which generate fees and other income streams..

The company said net profit was $3.5 million for the half year ended December 31, down from $6.5 million in the corresponding period.

Not even an expected second recovery in after tax earnings (a forecast of a 40 per cent rise on the first half) could offset the market’s suspicion.

CEO Don Meij said the result reflected the impact of its expansion into Europe and poor performance in Australia in the first quarter.

He said while Australian same store sales growth had been weak, European same store sales growth was 12.5 per cent, the New Zealand was also solid (compared to Australia).

European operations are “tracking better than planned” and are expected to make its first profit contribution in 2007/08.

But the company said the EBITDA (earnings before interest, tax, depreciation and amortisation) in Australia was off almost 17 per cent because of weaker promotions and start-up costs associated with the new in-house equipment maintenance and supply department.

Mr Meij said the company would begin reducing the proportion of corporate stores over the next 12 months from 30 per cent to around 15-20 per cent.

“This move will refocus our corporate stores into cost-effective geographic locations and reduce administration overheads, while still maintaining the benefits of the hybrid corporate-franchise store model,” he said.

Sounds like franchise speak for ‘we’ll be cutting the influence of earnings from our own stores and get income streams from selling the surplus locations to outsiders’.

That’s a switch in approach from the previous approach of maintaining company owned outlets above what is considered normal in some areas of franchising.

The company’s revenue rose 36.4 per cent to $118.1 million in the first half while network sales increased by 42 per cent to $251 million.

Domino’s is the master franchiser for the Dominos Pizza brand in Australia, New Zealand, France, Belgium and the Netherlands and it and its franchisees operate 645 stores: 457 stores of those are in Australia and New Zealand, so when Australia is offsong, the company is offsong as well.

Domino’s declared a first half dividend of 4.1 cents.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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