Fool's Eye View

[ September 4, 2000 ]

PizzaExpress Impresses

By Maynard Paton (TMFMayn)

Carburton Street, London -- PizzaExpress (LSE: PIZ) delivered its annual results this morning. The Qualiport's favourite restaurateur served up slices of good news and bad news. The bad news first -- profits for the year to 30th June 2000 came in slightly below expectations. The good news combines an encouraging sales performance for the current year with upbeat news on the company's expansion plans.

Here are the figures.

Year to June 30th         2000         1999
                          (£m)         (£m)

Turnover                 150.1        126.6
Operating Profit          32.0         29.1

Share of operating
 loss in joint venture    (0.4)        (0.1)

Profit on fixed asset
 disposal                  0.5            -

Interest                   0.1         (0.3)

Pre-tax profit            32.2         29.0
Earnings per share        36.4         33.7

Two issues

As I reported when covering PizzaExpress' first half results in February, there are two real issues when reviewing this company. Firstly, the like-for-like sales growth. That is, the increasing "acceptance" of PizzaExpress restaurants to the public. And secondly, the restaurant roll-out plan. Is the development of extra restaurants still on course, both at home and abroad?

Like-for-like sales

An extra 36 restaurants in the UK and Ireland, to take the company's estate to 256 outlets, mostly fuelled the 18.6% jump in group turnover. Like-for-like sales growth of an average of 3% throughout the twelve months (split 2% in the first half, 4.5% in the second) also helped the top line.

The like-for-like sales growth performance is still rather pedestrian. PizzaExpress has informed investors in the past that a typical new unit should witness 10% annual like-for-like growth in its first five years. Given that two-thirds of the estate is still under five years old, 5-6% group like-for-like sales growth ought to be a minimum. However, it's very reassuring to hear that like-for-like sales for the current year are presently running at an impressive 10% for core pizza dining operation. This accomplishment really needs to be maintained.

Just as in the previous interim results, operating margins slipped from 23% to 21.3%. The rise in operating charges was caused by a mixture of overseas startup costs, one-off reorganisation expenses linked to the embryonic Café Pasta chain and higher wages due to the introduction of new employment legislation. However, margins are said to be improving in the current year.

The end result was that operating profits increased just 10% to £32m and combined with a higher effective rate of tax, earnings per share (EPS) edged 8% higher to 36.4p. Brokers had been expecting pre-tax profits of £34m and EPS of 37.9p.

Expansion plans

The group's expansion plans also appear to be very much on track. The forthcoming year is anticipated to be "less competitive in terms of site acquisition" with another 30 additional pizza outlets expected to open their doors.

Away from the main pizza division, news from the group's 13-outlet strong Café Pasta operation also sounds promising. After "considerable menu revision", restaurant refurbishments and like-for-like sales growth of 18% recorded in late June, the division is now turning a profit. With certain pizza restaurants relocating to larger premises to satisfy demand, so the pasta venues will be developed within "proven" premises.

Overseas

Alongside the Pasta format, PizzaExpress' other potential moneyspinner is its overseas expansion. After the group revealed its first company-owned restaurant had successfully opened in Tokyo at the interim results stage, its a little disappointing to note the subsequent lack of detail surrounding any further Japanese progress. "We have pursued a number of sites but have refrained from investing where the financial model has not been right" was the line on the Far East.

The overseas franchising model continues apace, with eight new franchised restaurants opening during the year. Franchised income is now intended to offset the startup costs from the overseas company-owned outlets. International expansion is "set to accelerate over the coming years" too.

PizzaExpress shares are now at 650p, losing 10p on these results, and now stand on a multiple of 17.9 times today's earnings. Overall, I think the encouraging news for this forthcoming year and the reasonable valuation should offset doubts over the profit achievements announced today. A 10% like-for-like sales growth performance, the emergence of the Café Pasta formula, improving margins and plenty of scope for expansion all firmly keep PizzaExpress as the most attractive operator within the restaurant sector.

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