QUALIPORT
PizzaExpress: Growth On A Plate

By Maynard Paton (TMFMayn)
February 5, 2001

Carburton Street, London -- PizzaExpress (LSE: PIZ) unveiled its interim results this morning and I attended a presentation for analysts. Today's Qualiport will highlight the important points from the announcement, plus some interesting titbits divulged at the analysts' meeting. (To get up to speed with PizzaExpress, you may wish to read this interview with David Page, the Chairman of PizzaExpress, which details the background and recent developments at the company.) In short, the numbers and comments contained numerous positives and consolidated the upbeat outlook statement published in the annual results from September. All in all, the Qualiport remains a very happy co-owner of PizzaExpress.

Interim numbers

Here are the numbers:

                       Six months to 
                    31/12/00  31/12/99     Change
                       (£m)     (£m)        (%)
 
Turnover              89.9     70.0         28.4 
Cost of Sales        (62.6)   (49.9)        
Gross Profit          26.9     20.1         33.8 
Operating Costs       (7.4)    (5.1)          
Operating Profit      19.5     15.0         30.0 
 
Profit before tax     19.5     15.0         30.0 
 
Earnings per share    20.7p    16.9p        22.5 
Dividend per share     2.0p     1.6p        25.0  

UK & Ireland Pizza

There were three real positives from today's statement that concerned the domestic pizza operation.

• Like-for-like sales growth remained at a very impressive 10% throughout the six-month period, representing the company's largest increase for five years. What's more, it was very reassuring to hear that the 10% like-for-like performance had continued into January, and that like-for-like improvements were spread across the whole estate and not just the younger restaurants.

• The number of potential pizza outlets had been increased from "at least 450", mentioned at September's full-year stage, to "500 plus". PizzaExpress had 256 company-owned pizza outlets trading at the end of last year.

• An indication of a speedier rollout. After stating that 30 restaurants would be opened in the year to June 2001 in the full-year statement, Chairman David Page remarked this morning that the openings could run in "the high 30s" over the next twelve months. Underpinning this optimism is the subdued demand for PizzaExpress' preferred secondary locations. Another sign of a favourable property market was that, during the interim period under review, property rental payments fell from 6.8% to under 6.5% of turnover.

Café Pasta

There were no real surprises from company's Café Pasta operation during the six months, the embryonic chain performing in line with the upbeat comments made at the annual results stage. Café Pasta remained with 13 outlets during the period and matched the 18% like-for-like sales growth reported at the full-year. The chain also generated a net profit during the first half, again maintaining the profitability stated in September. It's also interesting to compare the potential profitability of the Pasta operation to that of the core pizza chain. At £13.90, Café Pasta's average spend per head is 20% higher than that at the typical pizza outlet.

A little disappointing was the lack of firm news for near-term Café Pasta expansion. "Ideally 4 to 6" was Finance Director Glen Tomlinson's reply when asked about possible new openings this year. The general message was of "careful selection" when it came to new Pasta locations.

International

The most interesting development concerning international expansion was not of new restaurants, but of personnel. Chief Executive Ian Eldridge, who has overseen the expansion of the UK pizza operation, has now taken on the responsibility for the international outlets. Although the company continued to emphasise that foreign expansion was third in importance after UK pizza and Café Pasta, the management move certainly implies increased attention to future efforts overseas.

In terms of additional restaurants, the only development of any real consequence was the construction of the first company-owned outlet in Spain. Overall, international operations still generate a loss and remain immaterial for company valuation purposes.

However, there were management remarks at the briefing concerning possible overseas acquisitions. Page admitted that the company has "looked at one or two small [foreign] chains" and that it was "very possible" that a small acquisition could occur.

Retail

Today's interim results also highlighted the beginnings of a new revenue stream for PizzaExpress -- "retail". Although the company has sold its "house dressing" in several retail chains for a while now, last month saw the introduction of chilled PizzaExpress pizzas in J Sainsbury (LSE: SBRY) supermarkets.

Although PizzaExpress stated that this and other similar initiatives could become a "material contributor to profits" in the future, no numbers were forthcoming about the potential of supermarket pizzas. Tomlinson described the possibilities as "potentially massive" and explained how the first few weeks of the arrangement had seen supermarket pizza sales of twice original expectations.

One point that should be emphasised with the supermarket pizzas is that the process involves little additional effort and expense on behalf of PizzaExpress. A third party purchases the necessary ingredients from PizzaExpress to produce and supply the pizza to the supermarket. PizzaExpress then collects a royalty from the supermarket for each pizza sold. Overall, PizzaExpress receives 10% of the retail price for each supermarket pizza sold, the majority of which falls to the company's bottom line.

City Centre Restaurants

One event that caused a stir amongst Foolish investors (and the Qualiport) last year was the approach by PizzaExpress towards the underperforming restaurant operator City Centre Restaurants (LSE: CTC). Page revealed the rationale behind the move, and was very keen to emphasise the reasoning was "not brand-based". Instead, the move was an opportunity to obtain a number of attractive sites all in one go. Had they bought City Centre, PizzaExpress would have converted 40 sites to new pizza outlets and 80 sites to new Café Pasta outlets. The other 180 City Centre properties would have been sold on.

Summary

Overall, a great set of results from PizzaExpress that beat most pundits' expectations. Upbeat noises on the rollout potential of the pizza chain, plus the continuation of the remarkable like-for-like sales growth, give me the impression that the core operation has never been in better shape.  Throw in a solid performance from Café Pasta and the potential of the "low risk, high reward" supermarket pizzas, and PizzaExpress simply provides investors with growth on a plate.

If I had to express a concern, it would be of PizzaExpress possibly dropping the ball in the UK while pursuing international glory. With management time devoted to overseas activities increasing, so the chance of a UK slip-up increases too. However, this has always been a risk with any investment in PizzaExpress over the past few years and it's one I'm prepared to accept. Should the international developments pay off, it will turn a very good investment into an exceptional one.

Where Next?

PizzaExpress discussion board 
Interview -- David Page, Chairman, Pizza Express
PizzaExpress Impress -- Latest annual results reviewed
PizzaExpress: Very Foolish -- Last year's interim results reviewed
Revaluing PizzaExpress -- Determining the value of PizzaExpress