Domino’s: not going out

Domino’s Pizza beat forecasts in the final quarter as more people stayed in on Saturday nights in front of the box.  Changing consumer habits which have powered Just Eat to the FTSE 100 are supportive of Domino’s, although it didn’t always look this way. Shares were off sharply at the beginning of 2017 as same-store sales growth seemed to have peaked, while rivals like Just Eat were surging ahead. But like-for-like sales growth is now back in the double digits and the outlook is much healthier with volume growth more than offsetting a squeeze on margins.

Q4 performance was ahead of expectations and with good volume growth offsetting slighter weaker margins, underlying profit before tax is being guided above the current range of market expectations.

Group system sales were up 20.8% to £286.4m thanks to acquisitions and new store openings, but LFL total sales still climbed a very respectable 11.9%. Volume growth will continue with 90 stores planned for launch in the UK this year, a 9% increase in the existing estate that is part of a major expansion targeting 1,600 stores across the UK and Ireland by 2021. Moreover, the FIFA World Cup this year should offer further opportunities for a big sales and marketing push.

We must also note that the franchise operation means Domino’s gets good bang for its investment in new stores quickly so unlike many retail stocks the total system sales growth shouldn’t be overlooked.

Domino’s Pizza is benefitting from the shifting trend in eating habits –eating in not out, ordering online and sitting down in front of the TV. To this effect, the X Factor Final on Dec 2nd was its biggest day of sales for the year – 25% more than the average Saturday night.

Digital sales are accelerating - UK online sales were up 14.5% year-on-year, representing 77% of net sales. This is down not just to the changing habits of consumers, but Domino’s investment in digital and of critical importance, a focus on value. In this market consumers are very price-conscious and therefore efforts in this area are very important. We note the new pricing campaign, Dine for £9.99, which offers customers any pizza for £9.99 when they buy two or more, is fuelling volume growth and helping it stave off competition from Pizza Hut. International sales are also improving with broad-based growth across Switzerland, Iceland and Norway, with the Swedish operation still in its infancy.

Whilst there are structural pressures from the arrival of Just Eat etc, Domino’s appears to have adjusted and sales growth is underpinned by favourable market conditions.

Ryanair: O’Leary bows to pilots

Michael O’Leary has finally caved - Ryanair has at long last agreed to recognise unions. An about turn by O’Leary that could leave employment costs creeping higher, the move is likely to be negative for margins but the company should be able to absorb this fairly easily through greater volume growth. Unionisation may also persuade the market that all is well and labour strife is behind it.

Following the fiasco of last year’s rostering problems and cancellations, the balance of power tilted in favour of pilots. As we noted last September, the fiasco created a window for pilots to assert themselves and they were determined to take full advantage.

Whilst management always denied a shortage of pilots, everyone else could tell something was wrong. The resultant debacle over rostering meant pilot power came to the fore and it was made very clear that they were leaking pilots to rivals and could leak a lot more if they didn’t sort it.

The other factor was the Mons ruling which first raised the prospect of unionisation as well as more expensive direct employment costs from the use of local rather than Irish labour contracts.

In the wake of the Mons ruling and the pilot shortage, rising labour costs were seen as a risk to Ryanair’s model of keeping costs down and now we must suspect there is a prospect for costs to rise further with unionisation now a reality.  Ryanair is already booking at €100m cost from raising pilot pay. After the BALPA deal in the UK, there is every chance unionisation will follow in Ireland, Germany and Italy.

Ryanair has always run a very lean flying machine – far leaner than peers. Costs per available seat kilometre are significantly lower than competitors as are average crew complements. This approach has fuelled its rapid growth and huge profits, but as last year’s problems revealed, has been found wanting.

Nevertheless, Ryanair is very well poised to capitalise on passenger growth and consolidation in the short-haul aviation sector. Three European short haul operators failed last year and more could follow this year. Cheap oil masked problems for some and the rally in Brent could act as a catalyst for further consolidation. As Ryanair said last October, this trend can ‘only be good for Ryanair's yield and traffic growth’. Even with higher labour costs this remains the case.

Shares are barely moved on the news as the effect of higher labour costs seem to have already been priced in. If anything unionisation may help convince the market that Ryanair can manage the growth more sustainably and with staff on side.


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