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Following this morning's update, the full year results announcement is delayed at least until 6 April 2020 as per the guidance from the regulator. However, they did say all 69 stores are open and trading. We are dependent on whether takeaway services are continued to be permitted to operate. If people are not going to restaurants and still want something cooked for them, then Domino's Pizza seems reasonably well positioned provided they can continue to operate. Their comments on lower ingredient costs and the labour situation were also encouraging.
The results are due 31 March 2020.
It will be interesting if they have any comment on whether like for like trading volumes have gone up as people order takeaway deliveries (assume you cannot collect). I am not sure what containment measures the Polish government will be taking.
Have colleagues that work in Poland, they definitely have COVID and it’s set to worsen. The beneficiaries will be grocers and take away and especially delivery orientated businesses. I have been buying on the dips. 700k shares so far.
I got spooked by the Coronavirus and bailed out yesterday. Poland seems very unaffected by the virus to date so hopefully it won't impact DPP. There seemed to be very strong support at 6.5p.
Possibly, hopefully.
Are you attending the AGM, Slipperman55?
Hi Peterson,
I'm not on the ground but my understanding is that the Telepizza deal wasn't consummated, bizarrely on competition grounds and their business is in a state of flux. My guess was that there were other reasons why it fell over. I'm not sure that sunk costs are totally irrelevant. There is some step function capex that can't be avoided as the model grows. There is also a cost to support new sites (mostly corporate) in new territories and there is a cost (fixed and variable) to grow a brand. Don't underestimate this. Regardless, negative cash flow is negative cash flow which can't be ignored. I know that Costa has struggled to bed in Coffeeheaven so you can't ignore what it costs to build a brand in Poland and some of the TV adds will be to comfort franchisees. Once they get closer to reducing or stopping negative cash flow they will become a better bet.
Was not going to post again on this share having said my piece but can't resist. It's obviously a form of therapy. So indulge me. Just to caveat that I'm not unsympathetic to many of your sentiments because that's where my perspective was until I had my damascene conversion.
1. Even at 7.5p DPP has a market cap of just under £20m. Share count has grown massively through the fund raisings. Note that that is still 2.5x what Telepizza went for despite having almost double DPP's outlets. Yes, compared to DOM, DPP is cheap on a rev/store basis. But interestingly not to DPEU.
2. The problem for the DPP valuation case is that to state the obvious businesses are only worth the sum of future cash flows. Sunk costs are largely irrelevant. In its latest fiscal year (2018) DPP lost £1.9m at the operating cash flow level partially offset by a (one off) positive working cap movement and pre- investment capex of £1.5m. Total negative cash flow of just under £2.5m. At the latest interim stage operating cash flow inc. working cap was a negative £1.5m. Investment capex added another £0.5m. So negative £2m in all. We know from the latest trading statement that cash balance fell another £1.5m in H2 despite DPP opening only 3 additional stores. So nothing in DPP's recent past suggests a sufficient step change in 2020 to prevent the business from burning at least £3m, even with a reduced stare opening programme. Cash balance was announced to be £3.6m at year end 2019. And presumably at the current burn rate will be largely depleted by end fiscal year 2020
3. Yes. Some of the short term pain could be offset by switching off growth capex and just letting the existing estate mature. That would mean DPP breaking the commitments of its master licence from DOM US to open x stores pa and also forgoing the scale benefits that 'should' come from a larger estate.
4. I say should because the latter have been largely elusive to date. DPP has previously talked about its most mature restaurants making £0.1m in EBITDA. Very crudely that should mean c. £7m in group EBITDA (ignoring the distinction between corporate / franchise) i.e. 69 stores x £0.1m. That would definitely be sufficient to start generating positive cash flow. But as you touch on in your post those new stores in secondary cities / locations must at least reach this level.
5. And here is my biggest concern. It is far from clear that these new stores are or can be equally profitable. Hence the difficultly DPP has in attracting and keeping new franchisees. You would think that DPP had by now reached sufficient scale where they would be lining up. Nope. It remains an entirely 'corporate' led roll out. So yes revenue is growing again. Good. But at what margin. Any business can give away subsidised product (see Uber). But that's not exactly a sustainable foundation
In summary for me the jury is sadly still massively out, even for new investors at 8p. I guess much will be clearer end of March. Best of luck - sincere
Interesting analysis Peterson. It doesn't worry me overly if the news store numbers proceed at a slower pace as long as they are posting positive LFLs and the stores they do open trade well. In theory 2020 should be a good year for pizza sales with the Olympics and football European Champs. I wonder how much DPP can grow delivery sales and if Pizzas have a high enough average spend to offset delivery costs? I'm assuming that they don't need any large non-store capex to sustain the current portfolio. A good question to ask at the AGM in May. Good to see Fidelity piling in, be it at a lower price. The turning point will be when more franchisees run with this. Long term, I like the board composition and am confident that they will get to a position of being cash positive. Anyone who bought at north of 20p will be feeling pretty raw, but buying at 8p looks low risk.
Well said buddy.
Just want to wish everyone who is still long DPP the best of luck. I have reluctantly taken advantage of this year's rally to throw in the towel on what has been my worst ever trade. The final straw was the recent trading statement. A few things that stood out (negatively) for me, in no particular order:
1. 69 stores at end of 2019. Well that's the same number as at the time of the Interim Results announcement at end of September. "69 stores YTD". So no further stores opened to year end. And only 6 for the whole year
2. Cash burn between the interim cash balance figure of £5.1m and year end figure of £3.6m equalled £1.5m. At this rate (c. £3m per annum) they will need to go back to shareholders within the next 12-18 months barring a miracle
3. The problem is that sales growth is just too pedestrian to create the economies of scale that will generate the operating leverage to cover fixed costs and start-up losses
What do I think has gone wrong
1. Overestimating the power of the Domino's brand and model. DOM's terrible experience in Scandi and Germany shows the model does not always translate
2. Under appreciating that the impressive growth in the Polish economy has been a double edged sword: rising incomes / take-out consumption has also caused significant salary / cost pressure
3. Rise of the aggregators / delivery to home competitors. This has doubtless had (is having) a massive negative impact on margins and the uniqueness of the Domino model. You can see it in the UK but luckily the business is much more mature
4. Highly competitive existing Polish pizza market. Ignoring what should have been a massive red flag, which was Amrest's takeover of Telepizza in 2018 for Euro 8m. I noted it but did not draw the right conclusion. If the more mature Telepizza business with a 107 locations was worth 8m why should the smaller / more immature DPP be worth a multiple of that
5. Another red flag should have been the consistent difficult in attracting franchisees. In hindsight (small) business people aren't stupid. I guess they saw the competitiveness of the market and tough economics and balked. Hence DPP management having to drive a much more capex heavy "corporate" store programme
6. And finally comments on message boards that DPP's product was considered expensive by local standards vis-a-vis competitors including one off local stores
All in all I look back now at a share price that was only relatively recently above 35p (and the equivalent market cap at the time) and can't believe what I was thinking in not exiting.
Finally I sincerely hope for all of DPP's long suffering shareholders that I am proved wrong this year: the new CEO snatches victory from the jaws of defeat, sales pick up, a random bid comes in, etc. But I fear that the March results with the associated red ink flowing down the P&L and cash flow will be a wake up call that another funding round is just around the corner. And at what SP then...