There's something very romantic about Domino's Pizza Enterprises Ltd. (ASX: DMP). After all, the company's CEO has been with the company for over 25 years after starting out as a pizza delivery boy.
The company has been tremendously successful – the share price has rocketed up 500% over the past five years. Its acquisition of a 75% stake in Domino's Pizza Japan in September 2013 was a masterstroke as it increased FY14 EBITDA by 70%, and management predicts EBITDA will grow in the region of 20% next year.
With the stock over 17% off its record highs, is it time to get in and can its amazing growth last?
A few months ago the company instigated the 'Cheaper Everyday $4.95 deal' to win market share from other pizza chains. This has sparked a price war with Pizza Hut, a subsidiary of Yum! Brands Inc, which has retaliated by matching this offer. This strategy will no doubt place downward pressure on margins.
Also Domino's is set for more intense competition as Little Caesar, a large U.S. pizza chain, is scheduled to open stores Down Under. Throw in the fact that consumers are tightening their belts as wage growth has lagged CPI growth in four of the last six quarters amidst a high unemployment rate, and Domino's might have its work cut out to continue its phenomenal growth.
According to the latest franchise rankings from QSRMedia, Domino's is the fifth-ranked quick service restaurant and the highest ranked pizza chain in Australia. The strength of the Domino's brand should help lessen some of the above effects. The key to this strength is the ability to closely connect with its core demographic.
Based on a recent survey from Enhanced Media Metrics Australia, 60% of those aged 14 to 29 eat fast food at least once a month compared with the national average of 45%. Domino's recognises this and has aggressively grown its social media presence over the years, enabling pizzas to be ordered via Facebook and launching various apps to make placing an order extremely convenient. The Pizza Mogul platform launched in July catches on to the 'me-tailing' revolution, and should continue to drive sales by rewarding customer engagement and innovation through a volume-based commission.
Clearly the market has bought into the blue-sky potential of Domino's innovation, with the company trading at a price-to-book ratio of 8.1x. Although the P/B ratio is not often used for innovative companies, it can be viewed as a proxy for the relative value of a company's brand since all tangible assets would already be captured in the book value.
As a comparison, Apple Inc and Google Inc, two of the most valuable brands and innovative companies in the world, trade at a P/B of 4x and 6x respectively. It would be pretty tough for someone to argue that the Domino's brand is worth more than either of those two brands, let alone being twice as valuable.
What should you do?
The company's dedication to innovation can broaden its customer base and strengthen its grip on existing customers whilst continuing to drive sales growth. However those looking to purchase a stake should wait for the price to ease further.
