This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
By
One ratio that is conspicuously absent from every ASK Central results release is the like-for-like sales figure. It can be roughly deduced, but all the same, it's odd that such an important retailing performance measure is never divulged.
Looking at the figures, a new restaurant should be able to generate an average annual compound sales growth rate of 9.5% between years 1 and 5. PizzaExpress have also stressed that two-thirds of their current restaurant estate is under five years old. With all that in mind, and assuming that sales from restaurants greater than five years old remain flat, so recent like-for-like sales growth should amount to about 6% (two-thirds of 9.5%).
At a share price of 730p, PizzaExpress are valued at £503m. The target for the Qualiport is to attain an average investment return of 15%. If we use a five-year time horizon, we would expect PizzaExpress to have a valuation of £1b in 2005. Is that target possible? Having applied a crude valuation to PizzaExpress on these pages before, and declaring that a share price of 650p had a sufficient margin of safety, will a more detailed investigation reveal any change in our "target buy price"?
So, after the final restaurants are opened in 2004, the next year should see profits before tax of £61.7m. PizzaExpress have historically had the benefit of a low tax rate, the effect of ongoing capital allowances generating an effective tax rate of 21% in 1999. If we assume that the tax rate conservatively increases to 25%, UK restaurant earnings of £46.3m are generated in 2005. Put those earnings on a price to earnings ratio (P/E) of 17, bearing in mind PizzaExpress will only have minimal future UK sales growth prospects in 2005, and a valuation of £787m is reached.
At the interim reporting stage in February, PizzaExpress declared that there was "potential for more than 50 restaurants" overseas. I'll assume that the group manages to have 50 foreign profitable restaurants by 2005.
One other factor that the Qualiport has to consider is the Foolish Trading Rules. Unlike normal investors, who can trade online at the drop of a hat, the Qualiport announces any purchase prior to the transaction. And after an announcement is made, the purchase has to be carried out.
In fact, it has to be said that both companies are runaway leaders in the restaurant investment sub-sector. To draw some sort of analogy, PizzaExpress and ASK are to the restaurant investment alternatives as Manchester United (LSE: MNU) and Liverpool are to the teams in the Nationwide League Division 3.
It's the simple fact that running an estate of restaurants, and running it well, just ain't that easy. The recent records of City Centre Restaurants (LSE: CTC) -- chronicled in "Too many cooks..."-- Belgo (LSE: BGO), Groupe Chez Gerard (LSE: GCZ) and Oriental Restaurant Group (LSE: ORR) give many reasons why the restaurant investment game can give plenty shareholder indigestion.
Too many dining brands, complicated menus and premature overseas expansion will all lead to shareholders having upset stomachs in this sub-sector. One or two very small operators do look to have potential -- BGR (LSE: BGR), covered in this feature, and Gioma Restaurants (LSE: GMR), both appear interesting. But with just a handful of outlets each, it's still very early days to declare either as having a "proven dining concept".
Back to the two pizza parlours.
A like-for-like sales worry
Dividing group turnover by the average number of restaurants operated throughout the year, then comparing the resulting sales-per-outlet figure to the corresponding figure of the year before, can give some idea of any trading performance improvements. In ASK's case, 1999 turnover of £41.2m from an average of 60.75 restaurants gives an average of about £678,000 for each site. The equivalent 1998 figures of £23.7m and 37.5 restaurants lead to a comparable figure of about £632,000.
Thus, the 1999 sales-per-outlet figure is a 7.3% increase over the 1998 equivalent. From my experience, this calculation usually understates the actual like-for-like figure. With recently opened restaurants taking time to build up sales, and more sites being opened in 1999 than in 1998, the rough 7.3% figure is likely to be a minimum. My guess is that ASK recorded like-for-like growth of around 10% during 1999.
Compare this performance to that of PizzaExpress. Although like-for-like sales growth will undoubtedly be less than ASK's due to the relative "maturity" of a large part of the PizzaExpress estate, I'm a little concerned.
PizzaExpress kindly informed shareholders last year of the "maturity profile" of a typical new restaurant.
Year Profit before Tax Sales
(£k) (£k)
1 70 500
2 90 540
3 125 595
4 150 655
5 180 720
So, it's disappointing to note that the latest PizzaExpress full year and interim figures showed just 2% like-for-like sales growth. Indeed, the disappointment is compounded by the fact that the "mature" restaurants are expected to show continual sales growth up to ten years after opening, implying that the 6% figure calculated above is a touch on the low side.
At the latest interim stage, PizzaExpress have stated that like-for-like sales growth was currently running at 5%. This performance is more reassuring, yet still leaves a slight question mark hanging over the supplied profit model.
PizzaExpress Valuation
PizzaExpress suggest that UK saturation will be reached after 400 restaurants are in operation. They also have an ambition of opening 30-35 restaurants a year. So, if we assume 35 new pizza sites will be opened a year for the next five years, the group will have 397 UK outlets in 2005 after taking into account the existing 222 pizza venues.
The aforementioned question marks aside, if we use the profit model above, the following figures are derived.
Year of Number of Profit before Total PBT
opening restaurants tax (£k) (£m)
Pre 2000 222 180 40.0
2000 35 180 6.3
2001 35 150 5.3
2002 35 125 4.4
2003 35 90 3.2
2004 35 70 2.5
Total 61.7
Assuming a relatively high dividend payout of 25% throughout the next five years, compared to 16% in 1999, I've calculated that £44.4m of dividends will be collected along the way. All that makes for a total valuation of £831m in 2005, or a 1206p share price.
Thus to reach the magic £1b figure, there is anticipation of success away from the UK pizza chain. With the 14-outlet Café Pasta concept still a loss-making venture at the moment, with no sign of any material contribution in the foreseeable future, it appears the overseas exploits of PizzaExpress are factored into current market expectations.
If we assume a zero value for the Café Pasta chain, then to attain our 15% investment goal, the overseas PizzaExpress venture ought to be valued at £169m (£1b-£831m) five years out.
International Valuation
How about this international scenario? Bearing in mind that just one company-owned restaurant operates at the moment, I'll forecast 15 international company sites are on the go in 2005. Say all 15 make £150,000 after tax, and thus produce annual earnings of £2.25m. At the moment, the sole company-owned international restaurant has annual pre-tax profits of £270,000.
That leaves 35 franchised restaurants. At the moment, the foreign franchisees contribute anything from £8,000 to about £60,000 a year. I'll suppose each contributes £30,000 a year in 2005, resulting in a £1.05m contribution.
Add the £2.25m and £1.05m together and we arrive at £3.3m. If we then assume that investors could be thinking that PizzaExpress is "the next McDonald's (NYSE: MCD)" in 2005, and that anticipated profit growth is reflected in an "international" P/E ratio of 25, then the overseas operation of the group has an implied valuation of £82m.
The UK and international valuations added together come to £913m (£831m+£82m), or a share price of 1325p. To arrive at a 15% investment return over the five-year period, the entry price is around 660p.
At the current 730p share price, I'm in no hurry to top up our PizzaExpress holdings just yet. In fact, I'd really prefer to see the current 5% like-for-like sales performance sustained or improved before making another PizzaExpress purchase.
And Finally...
With this extra investment "hazard", I always prefer to err on the side of caution in terms of valuations. As has happened in the past, we've announced a "buy", only to have paid a significantly higher price as the share price rallied. Exercising prudence in our valuations should help us to minimise this unavoidable danger when undertaking future purchases.
Related Links
• PizzaExpress discussion board
• ASK Central discussion board
• Pizza Battle