Domino’s Pizza Group: The Dog that Caught the Bus

Out with the old targets, in with the new…

• It can be uncomfortable when a fast-growing company approaches its long-term targets – if it wants to maintain its rating, it had better find some new ones sharpish.
• Domino’s UK, for example, has just under 1,000 stores and is rapidly approaching its old target of 1,200, and yet it continues to trade on a high growth valuation of 27 times earnings falling to 23.5.
• Luckily it has found some extra space down the back of the sofa and now believes there is room for 2,000 stores, giving it plenty to play for.

Store splitting: lower quality growth

• Domino’s believes there is scope to take UK sites from c950 by the end of this financial year to 1,600.
• This extra capacity will be created by store splitting, reducing average address counts, pushing up items per basket, and increasing frequency of sales.
• Langton might argue that an operator would only turn to engineering growth by splitting stores if the UK market had become pretty saturated.

Step-change in overseas expansion: execution risk

• Domino’s Pizza Group says it can take overseas units in Ireland, Switzerland, Germany, Iceland, Norway, and Sweden from 93 to 405.
• Germany has failed once already, while Switzerland changed hands multiple times as a ‘problem market’ before being snapped up in 2012, highlighting the perils of overseas expansion.
• In four years of ownership Domino’s Pizza Group has managed to open four sites in Switzerland, taking the total to 16. The market is high-cost and bureaucratic, with a 26-canton web of regulation to navigate.
• Yet Domino’s now says it can now open six stores a year here to reach a total of 100.
• Though Domino’s business model remains efficient and profitable, we query whether the risks inherent in its new growth strategy are reflected in its premium valuation.