Recent disputes with franchisees and the possibility of a slowdown in its ambitious store rollout plan have sent the share price of long-term growth star Domino’s Pizza (LSE: DOM) close to 52-week lows. But with its forward valuation down to 17.4 times consensus earnings, contrarian investors may find this an attractive entry point to a fantastic stock that has delivered 3,500%+ returns since the turn of the millennium.
This isn’t to say that Domino’s dispute with franchisees, who are worried that new stores are cannibalising sales at their existing outlets, means nothing.
However to date, Domino’s has delivered fantastic returns not only to shareholders but also to franchise owners who have seen sales skyrocket, thanks to wise investments in mobile technology and crafty marketing campaigns. Given this history of rewarding all major stakeholders, I remain confident Domino’s will work out how to fix its strained relationship with franchisees.
Furthermore, the underlying business continues to perform very well. In the first half of the year, revenue rose 22.6% to £259.1m thanks to 22 new store openings in the UK and strong domestic pre-split like-for-like sales growth of 5.9%. This impressive performance means I’m inclined to believe management’s long-term target for 1,600 UK and Ireland stores remains intact and is a viable goal.
It’s true that the group’s burgeoning international operations are a drag on current performance, with its stores in Switzerland and Scandinavia contributing a £1.8m operating loss in the period. That said, these operations offer significant long-term potential. In the half, they grew sales a whopping 116.4% year-on-year. And as these operations scale up, I’d expect them to begin contributing profits before too long.
So, Domino’s continues to grow at home and overseas despite recent hiccups. Add in the highly profitable franchise business model it runs, and a respectable 3.31% dividend yield, and I think the company’s current share price looks far too cheap for such a high-quality business.
A higher-risk, higher-reward option?
The success of Domino’s Pizza plc hasn’t gone unnoticed by other international holders of the Domino’s brand, which has led the likes of DP Poland (LSE: DPP) to list on the LSE. This Domino’s group in Poland has suffered fits and starts over the years but half-year results released this morning suggest it may finally be on the right path.
During the six months to June, system-wide sales increased 38% to £7.7m in constant currency terms, thanks to five new store openings and a 15% uptick in like-for-like sales. Due to its small scale and investments in a new commissary to support new store openings, the group is loss-making to the tune of £1.1m in H1.
However, with great revenue growth and further franchisee interest, the potential for solid profitability is there. Plus, with £3.8m in net cash at period-end, the company has sufficient room to expand for a while yet before needing to tap debt markets or shareholders for further funds.
All of this makes DP Poland significantly riskier than Domino’s Pizza plc. But for investors with a high-risk tolerance who are seeking potentially very high returns, DP Poland is one to dig into deeper.
