Slowing revenue growth

DPP announced this morning that, while EBITDA for 2018 will be broadly in line with expectations, revenue will be lower, due to unseasonally warm weather and competitive marketing activity by delivery aggregators. The company is cautious about the impact of the above issues continuing into 2019, and so we have cut our forecasts for the next few years, effectively pushing back the path to profitability by a year. This means, in our view, that the company is likely to need some additional funding during 2019.

• Strategy: DPP has spent its first few years proving the Domino’s Pizza model in Poland. With the new commissary up and running, it has scope to double the number of operations over the next few years. As the stores mature, the success should show up in reported profits. DPP’s marketing is smarter than that of its competitors – using digital media, rather than expensive display advertising.
• Competitive market: DPP has neither the pizza market nor the food delivery market to itself in Poland. While the Domino’s formula of focusing on high-quality pizza, delivered swiftly, is hard to beat, the new food delivery aggregators have money to spend and are impacting DPP’s above-the-line promotional activity, with aggressive (and possibly unsustainable) marketing activity.
• Valuation: With no reported profits expected for the next few years, we value DPP on a per-store basis. In our initiation research (‘Fully proven model rolls out’, 18 September 2018), we derived a central value of around £80m, to reflect the delay in the maturing of the business; we now discount that for a further year, to £72m, or 47p per share.
• Risks: The biggest short-term risk to DPP is the deep pockets of the new disruptors: the food delivery aggregators. This has already impacted DPP’s growth, as it struggles to get its message across, against competitors spending 20x or even 25x what DPP is spending. With additional financing now required, in our view, current shareholders may get diluted if they do not fully participate.
• Investment summary: The story for DPP is quite simple: it has a powerful retail consumer franchise in a fast-developing economy. The nature of a Domino’s Pizza franchise is that it takes time to get to profitability, which leaves management with a fine line to draw between growth and short-term losses. Disruptive competitive activity pushes the path to profitability further into the future, but also grows the delivery market. The model remains sound, in our view.