If I write about anything that is consumer-facing on this website, you can bet somewhere in the text will be a semi-funny joke about why I have not contributed directly to said company's corporate results because I am almost personally post-consumption. Naturally, that does not apply to the rest of the family and because my excuse about the importance of the global corporate earnings season was wearing a bit thin this school holiday, in lieu of a holiday to the Costa del Horrible, the Domino's Pizza (DOM) online capability has recently acquired a new customer…
Of course I have not gone completely mad and we have only ordered to-date when there is some kind of offer ongoing. Naturally it did not take me long to become a dab hand at getting within a quid of the minimum spend to satisfy some required spending level to open up a 50 per cent discount or whatever. I have to say I have been pretty impressed. And to be fair the underlying operational performance has never been a problem at the UK's number one by market share pizza name. The latest interim results show a 3.9% UK systems like-for-like growth which is far from shabby – and this was a theme of my previous musings on the stock back in early May, where I was moved to conclude: 'Just don't hack off your franchise operators and - just maybe - think about a European business deal or JV with a peer or peers in those markets to bulk up. In the digital/convenience consumer game, either you bulk up or you go home. Domino's is just lucky it is the big dog in the UK/Irish market.'
And the two clearest issues above - hacking off franchise operators and looking to sort out the stuttering European business - are still the key issues today. The big news in the interims is that the embattled CEO David Wild is to 'retire'. Now at previous links there has been plenty of historic discussion about his struggles with franchisees, allegedly because of a heavy-handed attitude sufficient to hack plenty of them off. Maybe this is just the natural tension between a head office and the provinces, but this felt more messy and at the door of the CEO, especially with the company struggling to hold onto CFOs too. Certainly even comments today such as 'new store openings are being delayed' is not good. Anyhow, interesting to juxtapose Mr Wild's 'retirement' and the anticipation of a 2020 date to 'agree a sustainable win-win solution'. Funny that. Otherwise, the European operations - in places such as Germany, Switzerland, Norway and Iceland - saw losses more than triple to just over £6 million. Now with the UK business making over £50 million pre-tax profit at the interim stage, no shocker...but it raises the question implied at the link above as to why it is even bothering. I am sure a new CEO might well think that too.
What would you value Domino's UK/Ireland franchise at? It should make easily over £100 million this year in profit and is a clear market leader, best technology and related. Change the CEO, work out something sensible with the franchisees and a mid-teens multiple seems workable. Deduct all the current corporate net debt at c. £225 million and you have an EV of a little bit over £1 billion...which is where the market cap is today. Now, close/sell the European franchise, walk away from the losses and wait for talk about the (cash flow covered) 4%+ dividend to start to become attractive to those frothing-at-the-mouth private equity boys... Well it is one scenario, another is that this just becomes again an annuity-style investment chucking off cash. Maybe I need to order another pizza online to work it all out but my gut is to buy the stock here. It still makes decent margins even with these 50% off deals, you know.
Filed under: Domino's Pizza, Burford Capital, Carson Block, UK Oil & Gas, MySale, Thomas Cook
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