Perhaps Australia's best digital retailer Domino's Pizza Enterprises Ltd (ASX: DMP) this morning reported a record net profit of $92 million on network sales of $1,964 million for the full year ending June 30 2016. The profit and sales are up 43.6% and 32.7% respectively over the prior corresponding period.
The group earned 94.4 cents per share over the year and will pay a final dividend of 38.8 cents per share to take the full year total to 73.5 cents per share. Net debt stood at $261.5 million, which is manageable at less than 1.5x full year EBITDA of $180 million.
Overall same-store sales growth was 10.9% greater than the prior year. It's a big beneficiary of the digital shift with orders commonly placed on mobile apps by text message or emoji, with fast delivery times guaranteed.
The pizza maker's value has climbed more than 1,000% over five years as organic growth, an expanding store network, and international expansion fed investors some bottom-line bulging results amidst today's ultra-low growth environment.
Australia and New Zealand
The business works primarily as a franchisor of the eponymous pizza delivery stores and its core ANZ market enjoyed another dominant year with EBITDA up 28% to $91.7 million and margins rising to 34.2%. Over the year 49 new stores were opened to take the total to more than 600.
The highlight of the result being the accelerating same-store sales growth with the second-half of the year delivering a 15.9% uplift, as the group's marketing and technology innovations continue to lure the punters.
The group has also benefited from the feeble performance of budget rivals such as Eagle Pizza and Pizza Hut, while pizza as a product also remains reasonably immune to any downturns in the local economy thanks to the underlying strength of consumer demand for cheap pizza deliveries.
However, it's worth noting that the group is reportedly yet to negotiate a new enterprise agreement with the fast food workers' union over benefits and entitlements for employees. The new agreement could impact margins for franchisees and Domino's alike, with margins critical to a low-cost pizza business model like Domino's.
Europe
FY16 has largely been a story of European expansion with new license agreements or acquisitions in France, Belgium and the Netherlands alongside a joint venture with Domino's UK to acquire Joey's Pizza in Germany. Joey's is reportedly Germany's largest pizza chain and the group plans to convert all its stores to the Domino's brand by the second half of FY17.
European network sales totaled $260 million for the year, with EBITDA of $40.8 million on a margin of 15.6%.
The continent delivered same-store sales growth of 8.2% with plans to rapidly expand the store network and use the proven ANZ recipe for margin expansion. Overall, it's tough to argue the European outlook is not exciting for growth-hungry investors.
Japan
Unsurprisingly, this market has proven Domino's biggest disappointment so far with same store sales falling 3% over the second half of FY16 as Japanese consumers remain less impressed with the Domino's offering.
Japanese network sales totaled $401.4 million for EBITDA of $47.5 million on a margin of 11.8%.
The group has been relocating some of its 453 stores in the country and medium-term performance is a big risk for investors to consider.
Outlook
The company is offering guidance for net profit to grow more than 30% over FY16 and EBITDA to be up more than 25%. It also stated FY17 has kicked off with "extremely strong" same-store sales growth in Europe, with ANZ continuing to perform well.
The group is also forecasting same-store sales to grow 10-12% in ANZ, 5-7% in Europe, and 0-2% in Japan, with 175-195 new stores also opened over the year. As a franchisor the group also requires little capital investment despite the expansionary business model.
Valuation
If you assume the group grows earnings per share around 30% in FY17 it's trading on around 61x forward earnings per share estimated at around $1.25 for the year ahead. This looks a rich valuation and would place it on a price-to-earnings growth (PEG) ratio of more than two with risks around performance in Japan and the new enterprise workers' agreement to be implemented in Australia.
In my opinion the stock is moderately overvalued on current valuations as the ANZ growth rates are likely to decelerate over time, while significant execution risk remains over its overseas growth plans.
Hungry for growth?
