FY19 interim results announced

DPP has announced FY19 interim results in line with the trading update given in July. Growth has been restored following tricky comparisons with January/February last year. System sales, like-for-like, were positive in the first three months of 2H, and performance was in line with management expectations. Four new stores have opened, with two more in the pipeline, and three corporate stores have been sold to sub-franchisees. The partnership with the aggregator Pyzszne is said to be positive. The company’s stated growth focus is on splitting territories and finding more sub-franchisees. A new General Manager has been appointed. We are putting through no changes to our forecasts.

• Strategy: DPP has now reached 69 stores and, despite aggressive competition from food delivery aggregators, has proven that the concept works in Poland. It now needs to see immature stores reach profitability, and focus its growth on splitting territories and finding more sub-franchisees.
• Competitive market: The new food delivery aggregators continue to pursue aggressive (and possibly unsustainable) marketing activity. DPP has partnered with takeaway.com (Pyzszne), and has found that its incremental contribution to stores (especially new ones and those outside Warsaw) is positive.
• Valuation: With no reported profits expected for the next few years, we value DPP on a per-store basis, which is explained in our initiation note of 18 September 2018, Fully proven model rolls out. To reflect the delay in the maturing of the business in March this year, we discounted the value further, to £72m, or 29p per share.
• Risks: The biggest short-term risk to DPP is the deep pockets of the new disruptors. This has already impacted DPP’s growth, as it struggles to get its message across, against competitors spending 20x or even 25x what DPP is spending. Food prices and wage inflation are also a constant threat to margins.
• Investment summary: The story for DPP is quite simple: it has a powerful retail consumer franchise in a fast-developing economy. The nature of a Domino’s Pizza franchise is that it takes time to get to profitability, which leaves management with a fine line to draw between growth and short-term losses. Disruptive competitive activity pushes the path to profitability further into the future, but also grows the delivery market. The model remains sound, in our view.