QUALIPORT
PizzaExpress: A Recipe For Success

By Maynard Paton (TMFMayn)
September 3, 2001

Carburton Street, London -- PizzaExpress (LSE: PIZ) unveiled its full-year results this morning. Today's Qualiport will highlight the important points from the announcement, plus some titbits divulged at the company's results presentation. (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.) All in all, the numbers and comments consolidated the numerous positives outlined at the group's interim results from February.

Annual numbers

Here are today's numbers: 

                               Year to
                           30/06/01  30/06/00     Change
                              (£m)     (£m)         (%)

 Turnover                    185.6    150.1         23.7
 Cost of Sales              (129.8)  (107.6)        
 Gross Profit                 55.8     42.5         31.3
 Operating Costs             (16.4)   (10.5)         
 Operating Profit             39.4     32.0         23.1   
 Profit before tax            40.0     32.2         24.2  

 Earnings per share           43.0p    36.4p        18.1
 Dividend per share            8.4p     6.7p        25.4  

PizzaExpress can be broken down into four distinct operations: UK & Ireland Pizza, Café Pasta, International and Retail. Here's how each division performed over the full year:

UK & Ireland Pizza

The two points to focus on with the core domestic pizza chain are like-for-like (LFL) sales growth and restaurant numbers.

* In line with the first half, second-half LFL sales growth remained at a very impressive 10%. However, it must be remembered that the preceding year had witnessed LFL sales growth of just 3%. While the year under review did not have a demanding LFL comparison, the year ahead certainly does.

PizzaExpress reported that LFL sales growth for the two months since the financial year-end was 4%. Although it's no real surprise that the LFL sales growth rate has dropped, it has fallen to a somewhat lower level than I'd expected. While the 4% rate appears subdued, if it's maintained for the year, the three-year compound LFL average will come to 5.6%. 

Going on the figures supplied by PizzaExpress, a typical new restaurant should experience annual LFL sales growth of around 7.2% over its first five years of trading. After that, sales growth tends to slow to a lower level. With at least a third of the group's pizza restaurants now over five years old, the above 5.6% figure looks about right at the moment.

* PizzaExpress had 273 domestic pizza restaurants at the end of June and the number of potential pizza outlets still remains at the "at least 500" level. The rate of new restaurant openings remains on track. There were 30 new openings in the year ending June 2001, with 35 planned for the following twelve months.

Café Pasta

The good news continues from the fledgling Café Pasta operation. Although it remained with 18 restaurants during the year, the pasta division reported LFL sales growth of 20% for the period. Indeed, the second half of the year saw an improvement on the first (when LFL sales growth of 18% was witnessed). Café Pasta made a small profit (of £0.2m) during the twelve months, and interestingly, the £14.30 average spend per head at the pasta restaurants is 23% higher than that at a typical pizza outlet.

There was also firm news concerning the expansion potential of Café Pasta. Five more restaurants are planned for the current year, while "at least 100" are pencilled in for the UK as a whole.

International

After UK Pizza and Café Pasta, overseas restaurants continue to be third in overall importance. However, there have been minor, but favourable, international developments since Chief Executive Ian Eldridge took operational responsibility six months ago.

Following a recent shake-up, there have been improvements at the group's two US outlets, while five loss-making franchised restaurants in Egypt have been shut. The upbeat noises surrounding the group's initial step into Spain and prospective moves into France continue to sound promising too.

That said, the overall division still makes a loss. Given the slow and inherently uncertain timetable for overseas profits, the operation continues to be immaterial for company valuation purposes.

Retail

After February's interim results revealed the introduction of chilled PizzaExpress pizzas in J Sainsbury (LSE: SBRY) supermarkets, today's annual numbers put some financial details on the venture.

The operation generated sales of £1.5m and net profits of £0.7m during the year. The important points to note here are i) chilled pizzas only went on sale in January, so the figures really reflect a six-month performance; ii) PizzaExpress supermarket pizzas, garlic bread and so on, generate a juicy near 50% margin, and; iii) manufacturing capacity is expected to double by Christmas to cater for increasing demand.

While there's the possibility of supplying other UK supermarkets, the real opportunity for further expansion is abroad. The company's management are "quite excited" at the prospect of developing international markets through "risk-free" supermarket sales, instead of going diving in via a restaurant opening. It's worth highlighting that supermarkets in Belgium, France and Hong Kong already stock PizzaExpress salad dressing.

Summary

The Qualiport remains a happy PizzaExpress shareholder as.the company remains true to its historic recipe for success. It's a simple, steady and predictable business run by long-standing management who've yet to put a foot wrong. The group still has the potential to double the total number of UK restaurants, while international outlets, supermarket sales and the opening of the first fast-food PizzaExpress To Go unit all offer varying degrees of further profit potential.

Furthermore, with operating margins consistently above the 20% mark, a robust 16% incremental return on equity produced over the last five years, plus free cash being generated over and above planned expansionary expenditure, the accounts are in fine fettle too.

My only quibble with PizzaExpress at the moment would be its valuation. At 901p, the shares stand at 21 times today's earnings per share (EPS) figure. Although I'll be updating this valuation model in the near future, my present feeling is that PizzaExpress shares are far from "good value". Indeed, with some Qualiport watch list members just hovering above attractive valuations too, I'm liable to trim the portfolio's PizzaExpress holding in the near future.

More: PizzaExpress: Growth On A Plate | PizzaExpress Directors: Do They Know Something We Don't | Revaluing PizzaExpress