Domino's has kept on growing, despite the recession.
When baseball legend Yogi Berra was asked by a waitress how many slices he wanted his pizza cut into he replied: "Better make it four. I don't think I could eat eight." Millions of people all over the world are following Yogi's example, if not his arithmetic, by eating pizza and in today's Britain pizza delivery services form a part of many people's lifestyle, particularly for those households which lack the time for food preparation and who rely heavily on takeaway meals as a result.
There's a lot of money in pizza; virtually every town in Britain supports several pizza restaurants and at least one pizza delivery service whilst supermarkets such as Lidl, Morrisons (LSE: MRW) and Tesco (LSE: TSCO) have deep freezes filled with nothing but ready-to-cook pizzas.
A Slice Of The Pizza Market
Domino's Pizza Inc. is a multinational pizza delivery franchise with operations in over 50 countries, with its biggest competitor being Yum! Brands' subsidiary Pizza Hut.
Franchising was first seen in 1850s America, when Singer sewing machines were first distributed by franchisees and has had tremendous success over the years. Some of the best known firms in the world are franchises and many are in the restaurant business. Other examples of franchises that you come across in most towns and cities are Burger King, Kentucky Fried Chicken and Hilton Hotels. Selling franchises enables a business to expand rapidly as local entrepreneurs using their own capital to buy a franchise, thus reducing the demands on the franchise owner's capital.
The British company Domino's Pizza (LSE: DOM) owns the exclusive rights to operate Domino's Pizza stores in Britain and Ireland. Customers who buy pizzas from Domino's stores are buying from independently owned and operated businesses who buy their supplies from Domino's and draw upon Domino's knowledge, brands and marketing, with all Domino's franchisees being required to put 5% of their profits into its advertising fund.
Domino's competition comes from other pizza delivery firms such as Papa Johns, all other takeaway food outlets, restaurant chains such as Pizza Express and, as noted earlier, Pizza Hut and the supermarkets.
A Recession Proof Business
Domino's figures for the third quarter of 2009 showed that its sales had increased by more than 11% compared with the same quarter in 2008. These are good figures in the best of times; that this has happened in the teeth of the biggest recession since the Second World War is a truly excellent performance. The increase in demand for takeaway pizza during a recession is partly due to people cutting back on eating out and eating in instead.
2008 diluted earnings per share (EPS) were 10.7p, up by over 28%, and the dividend of 5.9p puts Domino's shares on a yield of 2%. Looking back to 2004 the EPS figure was 4p, so the growth in Domino's EPS has been 27.9% per annum over the past four years, which is quite phenomenal.
For those who follow Peter Lynch and Jim Slater by using the PEG ratio (price earnings to growth), a company with a P/E ratio which is lower than its growth in earnings per share can be considered to be a bargain, even when its P/E ratio appears to be rather high. Domino's high growth rate explains why its shares are trading at a high price-earnings ratio of 21.
Domino's is continuing to expand and has opened another 30 stores so far in 2009, bringing its total to 583. The company sees room for further expansion and, judging by its track record, is more than capable of managing the risks associated with an expanding business.
A Promising Outlook
A big question is whether Domino's increased sales will hold up as we emerge from the recession or will consumers revert to their previous habits? Given that Domino's pre-recession sales had increased by a similar amount it seems reasonable to assume that Britain's appetite for takeaway pizza will not diminish in the near future and this is supported by Domino's prediction that the takeaway and convenience food sector should experience sales growth of up to 70% in the next 10 years.
Thanks to the recession television advertising rates have fallen substantially which has enabled Domino's to buy much more airtime than it would normally expect. Whilst Domino's has been sponsoring the cartoon series The Simpsons on British Sky Broadcasting (LSE: BSY) for over ten years, Domino's attributed much of its recent growth to its sponsorship of the ITV show Britain's Got Talent. As Domino's Chief executive recently said; "Our tactical marketing campaigns have played a major role in our success during the period, supported by the firepower of the National Advertising Fund and the deflationary media market."
Domino's can expect a one-off boost to sales from the 2010 World Cup thanks to England's qualification which was something which a huge number of businesses, particularly pubs, were hoping for.
To sum up, Domino's offers investors a recession-proof business with good growth prospects which justifies the shares' high rating (providing that the growth can be maintained, of course!).
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