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And the main points from the six months:
When considering the analysis part of owning and running a portfolio of shares, there are few better companies to hold than PizzaExpress. It's a simple and uncomplicated business. So, when reviewing the performance, this simplicity makes any revaluation straightforward. In terms of PizzaExpress, apart from the ever-present competition, there are just two other issues.
The like-for-like sales growth at PizzaExpress continues to be slightly disappointing, certainly from a historical perspective. Gone are the days of double-digit growth in this respect. Like-for-like sales of 2.1% at the last full year was broadly replicated, at 3%, in this first half.
The pizza restaurant roll-out continues, with a 30-35 additional sites a year expansion, to eventually reach around 400 venues. There's no real problem in finding sites for a new restaurant. Glen Tomlinson, Finance Director, commented this morning that there were "plenty of sites in the pipeline", echoing similar remarks at the full year stage of there being no shortage of suitable locations.
No change on gross margins, but from 23% in the full year, operating margins have declined in the last six months to 21.4%. But there are no long-term pricing pressure concerns though. Staff training costs rose in preparation for future expansion -- the company usually having about 16 managers undergoing training at any one time -- and the abolition of profit-related pay. Property rental costs remain at less than 7% of sales.
Having had a quick run through the financial details, there is nothing unexpected. Apart from the first fully owned international restaurant, nothing has changed at PizzaExpress. To a certain extent, it's "more of the same", with the roll-out schedule on track. Like-for-like sales growth does look disappointing, but others in the same industry have fared worse. Having produced a valuation on PizzaExpress calculated over an assumed five-year roll-out plan, admittedly performed before these results, I still feel that the Qualiport should only buy on a sub-700p share price. Until then, the Qualiport is definitely happy to hold.
First, a quick look at the financial results.
Six Months to Year to
31/12/99 31/12/98 30/06/99
(£m) (£m) (£m)
Turnover 70.0 60.0 126.6
Cost of Sales (49.9) (43.5) (90.0)
Gross Profit 20.1 17.5 36.6
Operating Costs (5.1) (4.1) (7.5)
Operating Profit 15.0 13.4 29.1
Profit before tax 15.0 13.2 28.7
Earnings per share 16.9p 15.2p 33.7p
Dividend per share 1.6p 1.3p 5.4p
Firstly, the restaurant roll-out plan. Is the development of extra restaurants still on course, both home and abroad? And secondly, the like-for-like sales growth. That is the increasing "acceptance" of PizzaExpress restaurants to the public.
Like-For-Like Sales
Sales for the average number of company-owned restaurants during the first half give a similar impression. With a total of 222 pizza restaurants (14 opened in the half year, 6 of which were around Christmas) and 14 pasta restaurants (2 opened in the half year) at the end of December, and with 201 restaurants at the end of December 1998, the sales per outlet comes to around £638,000 -- a 3% increase over the average seen in the twelve months to June 1999.
Although current trading is running at 5% like-for-like, I'm still surprised at the performance over the last twelve to eighteen months. PizzaExpress have said that the typical new unit should witness like-for-like sales growth of up to 10% a year for the first five years of operation. The company also adds that, in years six to ten, sales growth is usually 5%. The embryonic pasta restaurants have impacted on sales slightly this year, but with two-thirds of the restaurant estate still under five years old, 5% like-for-like growth really ought to be the very minimum.
Expansion -- Home And Abroad
The international expansion is a mixed bag. At one extreme, there is the first fully-owned restaurant, in Tokyo. Sales of £35,000 a week at this 160-seater Japanese restaurant generates operating margins of 15% for PizzaExpress. When asked about the future sales prospects at the Japanese restaurant, Chairman David Page understandably replied "we just don't know..."
On the other extreme there is a restaurant in Egypt. This franchised restaurant just delivers £2,500 a week, partly because of the lack of alcohol on sale. With a 6% royalty of sales, PizzaExpress receives under £8,000 Egyptian trading profit a year.
Then there are management concerns over the franchise operation in France, with a rather slow roll-out of restaurants. Certainly my impression from the PizzaExpress management team was that of infuriation. There was a noticeable restrained response to questions over Mark Warner, the franchisee operating in France -- "It's not good... we're in constant dialogue... but we don't want to be too brutal."
PizzaExpress are currently restricted from competing directly against Mark Warner. But given the success of the Paris restaurant, I fully agree with David Page when he remarked that France was a situation he would like "to take advantage of". I'm sure when they can, PizzaExpress will gladly step in to quickly maximise the possible returns in France.
PizzaExpress taking the first step in fully owning a foreign restaurant is somewhat of a landmark, and lays down the real long term potential for an investment in the company. Commendably, PizzaExpress are taking a slow-but-sure route to international success. "We don't want to do too many things at once," David Page reassures. UK restaurateurs do have a nasty habit of finding trouble when they try to do too much by venturing abroad -- Harry Ramsden and Belgo (LSE: BGO), to name but two.
Indeed, the mention of "concentrating on the exciting Japanese market" does put my mind at ease somewhat. Focusing on a promising foreign market alongside the arrangement of several franchise ventures in numerous locations does appear a better strategy. The initial risk-free approach of international franchising, then stepping in with fully-owned restaurants when things go well, should be the international way forward at PizzaExpress. When I asked Ian Eldridge about any planned target international restaurant numbers over the next five years, he cautiously replied that it could be dangerous to look so far forward. Internationally, it's definitely a case of striking the right deals at the right time.
The Financials and Competition
One of the attractions of PizzaExpress has been its ability to convert accounting profit into cash. The reconciliation of operating profits to net cash inflow from operating activities did look concerning at first.
A working capital inflow of £2.6m in the six months to December 1998, and a similar inflow of £2.9m in the year to June 1999, turned into £2.3m outflow in the last half year. Glen Tomlinson comforted investors, remarking that the change to monthly VAT payments had distorted creditors.
The usual questions of competition and ASK Central (LSE: ASC) were raised. "Consistency is key" was the answer to how PizzaExpress was to fend off the competition. PizzaExpress have before mentioned that ASK have been inconsistent in the past. PizzaExpress and ASK are now "head-to-head" in fifty locations.
There was no fear of the big brewers, Bass (LSE: BASS) and Whitbread (LSE: WTB) stepping up a gear in their restaurant expansion plans. "Old-fashioned and employing kids" David Page replied to my question, adding that the larger companies had an out-of-date staff incentive scheme, all-important for the restaurant industry. Mr Page was rather indignant over one of the brewers, suggesting they "wouldn't know the volumes at their sites, let alone where the volumes actually came from."
Summary
And finally, after the presentation, I introduced myself to Ian Eldridge, the PizzaExpress Chief Executive. I'm very pleased to report he is an avid fan of the Motley Fool site, regularly reading the PizzaExpress message board for restaurant feedback. David Page is also a Foolish visitor -- I was completely stunned when he complimented me on my recent feature on Whitbread!
Your comments on this feature can be directed to the Qualiport board.
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