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Tue 7th Aug 2018 - Domino’s reports like-for-like sales up 5.9% in First Half
Domino’s reports like-for-like sales up 5.9% in First Half: Domino’s Pizza has reported group system sales up 12.8% to £616.6m in the 26 weeks to 1 July. UK system sales were up 8.3% with 22 new stores and 5.9% like-for-like growth (Q2: 4.7% like-for-like). Underlying profit before tax was up 2.5% to £45.7m. Around 60 new UK stores are planned for 2018 – and the company reports an unchanged long term target of 1,600p. Chief executive David Wild said: “It’s been another good trading period for Domino’s. In the UK, despite continued consumer uncertainty, we’ve achieved further like-for-like growth by maintaining our clear focus on product, service and value for customers. Our ongoing investments in supply chain infrastructure and our IT platform will support future growth and customer engagement. Domino’s is proud to be one of the most successful franchise businesses in the UK, and we will continue to work with our franchisee partners to promote the brand and the strength of the system. Whilst our international businesses continue to make good progress with customers and sales, it has taken us some time to refine the operating model and cost base at store level, particularly in Norway. We are confident that the changes we have made will result in a better performance in H2, and believe that these businesses offer significant long term growth potential as we export our expertise in digital, supply chain and franchisee management. The board expects that full year underlying profit before tax will be in line with current market expectations. Our confidence in the future is underlined by continued growth in the dividend, and our ongoing investment in our own shares through the buyback programme.” The company added: “We are making a number of changes in senior management team responsibilities, to reflect the growing importance of the International operations and the long term opportunity they represent. Simon Wallis, UK and ROI Chief Operating Officer, will from October 2018 become international managing director, with direct responsibility for Switzerland, Iceland, Norway and Sweden. Tony Holdway, UK and ROI marketing director, will now report directly to David Wild, group chief executive. The UK and ROI team will be enhanced by the appointment of a new operations director, Scott Bush, who has fifteen years’ experience with Domino’s Pizza Enterprises, most recently as general manager of Domino’s New Zealand. We have commenced our search for the new group chief financial officer, and are well advanced in the process to make an interim appointment. We will provide a further update in due course. The UK trading environment continues to be uncertain. Consumers’ disposable incomes are flat, and operators in the casual dining sector continue to experience inflationary pressures from the national living wage, food costs and business rates. Domino’s remains well placed to thrive in this market. The combination of our scale, brand, value proposition and service continues to resonate with customers, translating into sustained growth in sales and profitability. System sales in H1 were up 8.3% year-on-year, with order growth of 8.1% and average ticket growth of 0.1%. Like-for-like growth, excluding the impact of new stores in split territories, was 5.9%. Like-for-like growth in Q2 at 4.7% reflected the prolonged period of hot weather. This was only partially offset by the benefits of the World Cup. Franchisees opened 22 new stores in H1, taking the UK total to 1,067. The lower rate of store openings in H1 reflects the very strong performance in the latter part of 2017. We now expect around 60 openings in the UK this year, including several planned stores for which the timing is less certain. The slowdown in our expected rate of growth reflects an expansion strategy that is increasingly focused on the development of smaller and medium-sized franchisees, where we see strong demand for store openings, as we look to grow the next generation of Domino’s entrepreneurs and broaden our long term growth platform.”

Customer value and experience: The company stated: “We operate in a competitive and rapidly-evolving marketplace. Demand for delivered food continues to grow, driven by the ease and convenience of digital ordering, the quality of home entertainment and the comparative costs of eating out. Despite the increasing breadth of choice provided by marketplace apps and delivery service companies, pizza remains the leading category, because it is a cuisine with universal appeal, is well suited to delivery and generates an attractive margin for operators while still representing excellent value for money for customers. One of our primary areas of focus over the last 12 months has been to improve our value perception with customers, through clearer communication and more relevant offers. We have made excellent progress in this regard: in H1 2018, our customer survey Feed Us Back recorded 33.1% of customers rating us 5/5 for value, compared to 24.0% in the prior period. This has also been reflected in our trading performance: of our like-for-like sales growth of 5.9%, 4.9% was a result of like-for-like order volume growth. We have also held achieved discounts relatively steady, with the average discount on menu prices at 38.5%, compared to 37.9% in H1 2017. We continue to invest in our own digital platforms, making it increasingly easy for customers to find the best deal, place an order and pay for their meal. Online sales in the UK grew 14.0% year-on-year and now represent 78.7% of system sales – and 88.2% of total delivery sales. We have recently taken the decision to invest in new platforms for e-commerce and app development, which will further improve the customer experience while enabling us to introduce enhancements more quickly and flexibly. Collection remains an important growth area for Domino’s: every time our franchisees open a store, they are getting closer to customers and creating a new neighbourhood of potential take-away customers. Those sales incur limited incremental labour cost, meaning they can make a significant difference to the overall profitability of a store. Total collection sales were up 8.8% in H1.”

Brand: The company stated: “The Official Food of Everything’ campaign, launched in September 2017, has gone from strength to strength with increased levels of customer awareness and engagement. The World Cup was a very successful engagement platform for Domino’s. The campaign saw the launch of a new ‘Meatfielder’ pizza which has swiftly become a menu bestseller (mixing at up to 7% of orders), and a broad media plan across digital outdoor (reacting to the match action as it happened), radio, sponsorship of Sky Sports News, and content through social media. Our collaboration with SportsBible saw the Domino’s content viewed and shared over 9.5m times – the most engaging content in the site’s history. In addition to being one of the best performing football related videos globally, one of the executions has been viewed nearly 500,000 times and was the sixth most watched video on YouTube in June. Subsequent to the period end, we announced our multi-year strategic partnership with Gfinity, a leading e-sports solutions provider. This deal, alongside our sponsorship of the ITV Hub, shows how our innovative marketing mix is evolving in line with customer viewing and activity habits.”

Franchisee profitability and alignment: The company stated: “Our franchisees remain some of the best entrepreneurs and operators in the Domino’s system worldwide. Our interests are aligned: we all benefit from increased scale, through the growing value of the brand, greater supply chain efficiency and the shared investment in new innovations to improve the customer experience continuously. One of our key strategic imperatives is to maintain or grow franchisee profitability per store, to allow a rapid payback on new store opening investments, and very strong returns from mature stores. Our franchisees are facing the same inflationary pressures as other operators in the casual dining market, but the enduring popularity of the offer and the strength of store level economics provide significant insulation from these headwinds. In H1, Ebitda per mature store (excluding the short term impact of stores affected by splits) rose 5.3% to approximately £68,000. At this level, franchisees continue to achieve a very attractive return on their investment, whether in a virgin territory or a split territory. Good like-for-like growth, as well as efficiencies achieved through GPS, offset rising food and labour costs. We have now deployed GPS to 588 stores in the UK and a further 15 in ROI, with franchisees typically achieving labour efficiencies of 80-90 basis points of sales against a 30 basis point cost of operation.” 

Corporate stores: The company stated: “After our acquisition of a 75% stake in Sell More Pizza, the largest London franchisee, last year, we now directly operate 25 stores in the London area. Like-for-like sales growth was above the average for London, as we trialled new menu pricing and focused on driving order volume growth. We have also implemented a number of operational changes to reduce employee turnover, enhance efficiency and improve customer service. We will open two new stores in 2018 in these territories, and have also facilitated a further three openings in the pipeline through address swaps with neighbouring franchisees. In addition, we have entered into agreements to sell on three stores to neighbouring franchisees to allow more effective territory development. Just after the period end, we entered into an agreement to buy a portfolio of six stores from another franchisee in London. These stores will be managed as part of Sell More Pizza, and provide us with an opportunity to strengthen our position in London.” 

Supply chain and infrastructure: The company stated: “In May we completed our single biggest ever investment, our new £38m supply chain centre in Warrington in the North West of England. By the end of the period, it was delivering dough and other food and non-food supplies to 130 stores, and this will continue to ramp up in H2. The Warrington facility gives us significant additional capacity and operating efficiencies as we head towards our target of 1,600 stores across the UK. The opening of Warrington and consideration of our longer-term plans resulted in a review of our manufacturing and distribution operations elsewhere in the UK, allowing us to remain streamlined and competitive. Subsequent to the period end, we have closed activities at a third-party distribution centre in Highbridge, and are in consultation with colleagues at our supply chain centre in Penrith, with a proposal to scale down operations from September, potentially closing the site in March 2019. We have also been reviewing our customer IT environment, to make sure that we are making the most effective use of our investment and developing the tools to keep us nimble and innovative in the future. As a result, we plan to build new platforms for the app and for ecommerce, to maintain our lead in digital and further enhance the customer journey. This will not lead to an increase in planned investment, as existing spend will be diverted to the new infrastructure, but it will result in accelerated depreciation, reflected in non-underlying results, of approximately £5.9m over the next two years as the current platforms are replaced.”

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