Domino Pizza Group Financial Analysis - Example

DOMINO PIZZA GROUP FINANCIAL ANALYSIS Student’s Name Course Date Professor’s Name Introduction Domino Pizza Group is a United Kingdom-based pizza delivery firm. It possesses franchise rights for the entire Domino’s brand within the UK, Ireland, Switzerland and Luxembourg. At the present moment, the firm operates more than 1,000 stores that are distributed across the entire market (Domino Pizza Group, 2016). In the United Kingdom alone, the firm operates 950 stores with the headquarters being located in west Ashland Milton Keynes. The firm’s shares are traded within the London Stock Exchange. The focus of this paper is on examining the performance of the company in the period between 2015 and 2016 (Domino Pizza Group, 2016). Section A Performance Analysis The firm attained a system store sales growth rate of 14.5% that was entirely driven by UK like-for-like sales figures of 7.5%. The overall new store openings improved to 82 thereby pushing the number past 1,000 within the end of the 2015 financial period (Domino Pizza Group, 2016). Domino Pizza Group earnings grew tremendously by £43.8M and were essentially driven by enormous amounts of sales of food and non-food related products from its supply chain centre; royalties that were payable by franchises as well as existing corporate store sales in Switzerland. The company’s continued growth in revenues and thus overall earnings is set on three fundamental priorities that ensured a crucial success within the United Kingdom market as a whole. These factors include; new stores openings, whose rate of opening increased significantly within the period, with UK opening at least 81 new stores in 2016 that continue to perform extremely well, availing a foundation for extensive future growth while still confirming its long-term opportunities (Domino Pizza Group, 2016). Consequently, the firm witnessed improved digital segment in relation to direct investments made in its offering process; propelling increased number of customer visits as well as triggering imminent conversion rates as well as high order values (Domino Pizza Group, 2016). In addition to this, the firm enjoyed extensive franchise profitability that came about as a result of passing underlying overall cost savings thereby propelling the need for further investments. Domino Pizza Group’s Board recommended a final dividend for the financial operational year 2016 of 4.5p per each share held, which was a 14.8% increase on the final dividend for the previous operational period (Domino Pizza Group, 2016). In addition to the interim dividend of 3.5p per share that was paid on September 2016, the overall dividends for the year will be 8.0p per each of the share held thereby increasing 15.6% on the underlying dividend paid in 2015(Domino Pizza Group, 2016). The chain’s underlying operating profits before tax improved by 17.1%, which is a direct reflection of a higher system sales and the focus made on enhancing efficiencies in the firm’s overall operating model that is needed for driving possible profitability growth (Domino Pizza Group, 2016). In the United Kingdom alone, the level of operating profits increased by 16.2% in comparison to the system sales growth of 13.1%. It is noted that the shares of the profits made within the United Kingdom associates as well as joint ventures further expanded to £2.1M up from £ 1.7M in 2015 (Domino Pizza Group, 2016). In consequence, the chain perceives the level of joint operations as an exceptional value generator that further provides an opportunity to share in the full value chain of the company as a whole (Domino Pizza Group, 2016). On the contrary though, in Switzerland, the existing operating losses was placed at £ (1.3) M. On a positive though, the store in the region launched a website that is focused on providing imminent sales growth in the already established stores within the area. Profitability Analysis Ratios 2015 2016 Return on Equity= net income/ total shareholders’ equity 49,663/97,675*100% = 50.8% 71,816/107,158 *100% = 67.01% Return on assets= total assets/ total shareholder’s equity 185,446/97,675*100% = 189.9% 256,371/107,158*100% =239.2% Dividend per share= total ordinary dividends/ no of common shares held 31,006/768,000 =0.04 36,963/768,000 =0.05 Earnings per share=net income/ no of commons shares 49,663/768,000 =0.06 71,816/768,000 =0.09 Net profit margin= EBIT/revenues 73,543/316,788*100% =23.2% 83,773/360,577*100% =23.2% Analysis The ROE increases within the two-year period from 50.8% to 67.01% in 2015 and 2016 respectively. This is a good indication since it means that Domino Pizza Group’s ability to utilise the existing shareholder’s equity has improved overtime portraying high efficiency amongst the management team. The ROA also increases tremendously within the period from 189.9% to 239.2% (Helfert & Helfert, 2001). This increase in the level of the ratio is an indication that DPG has ensured to utilise the underlying level of asset-based efficiently to bring about enormous net income for the period. This could be highly related to the management’s ability to effectively formulate store management policies that ensure maximum returns for each of the stores in operations. The net profit margin remains the same within the two-year period at 23.2%, which is a positive indication altogether. It means that Domino Pizza Group has devised ways of ensuring that a maximum amount of revenues can be translated to earnings. This can be specially related to the efficient pricing model of the company within its numerous stores across Europe (Nesticò & Pipolo, 2015). The net profit margin remains favourable within the two-operational years as a result of new stores openings, whose rate of opening increased significantly within the period, with UK opening at least 81 new stores in 2016 that continue to perform extremely well, availing a foundation for extensive future growth while still confirming its long-term opportunities. Consequently, the firm witnessed improved digital segment in relation to direct investments made in its offering process; propelling increased number of customer visits as well as triggering imminent conversion rates as well as high order values (Ehiedu, 2014). In addition to this, the firm enjoyed extensive franchise profitability that came about as a result of passing underlying overall cost savings thereby propelling the need for further investments. The dividends per share ratio increase from 0.04 to 0.05 in the period between 2015 and 2016 respectively. The increase in this ratio indicates that the firm’s profitability position is fairly-placed to allow for the provision of dividends for each of the shares held at the present moment. It means that it has devised an efficient way of maximising shareholder’s wealth (Ehiedu, 2014). The earnings per share increase from 0.06 to 0.09 within two-year period. This means that Domino Pizza Group profitability position is fairly positioned to allow for efficient distribution of profits in form of dividends to its existing shareholders. Financial Stability & Liquidity Analysis Ratios 2015 2016 Gearing ratio= total debt/ total equity 988+11,450/97,675 =0.13*100%, =13% 668+56,980/107,158 =0.54*100% 54% Financial leverage= net asset/ total stakeholder’s equity 114,105/97,675 =1.2 171,978/107,158 =1.6 Current ratio= current assets/current liabilities 185,446/71,341 =2.6 256,371/84,393 = 3.03 Liquid ratio= current assets-inventories/current liabilities 185,446-6,208/71,341 = 2.51 256,371-9,240/84,393 =2.92 The company’s gearing ratio increases significantly within the two year period from 13% to 54% in 2015 and 2016 respectively. The increase in this ratio does not stipulate a healthy position given that the level of debt has been catapulted extensively (Ehiedu, 2014). This means that the chain has resorted to using borrowed funds for the purpose of conducting long-term projects as opposed to relying on such equity platforms as payback share program. It is important to note that overreliance on debt funds as a means of funding company’s projects is indeed a risky affair given that it results to possible loss of control and a huge chunk of cash inflows being redirected into paying off interest expense and principal loan amounts as opposed to being reinvested for short-term investment initiatives that in turn would foster company’s overall growth (Ehiedu, 2014). In fact, the degree of new store openings can be associated to the company’s long-term goals of improving its market presence within the region of operation. The financial leverage ratio increases from 1.2 to 1.6 in the period between 2015 and 2016 respectively. This means that the amount of assets funded through equity funds as opposed to borrowed money has improved over the period. Domino Pizza Group’s current ratio increases significantly within the two-year period from 2.6 to 3.03 in 2015 and 2016 respectively. The increase in this ratio is a clear indication that the chain has made sure to maintain a stronger current asset base to effectively meet its short-term obligations as and whenever they fall due (Wahlen, Baginski, & Bradshaw, 2014). In essence, the period saw a significant increase in the amount of trade receivables from $28,747M to $42,392M in 2015 and 2016 respectively. The chain is therefore fairly-positioned in the books of its short-term suppliers and can thus, access credit purchases for its raw materials without these suppliers being worried of possible bad debts. The chain’s liquid ratio increases from 2.51 to 2.92 in the period between 2015 and 2016 respectively. The increase in this ratio is a clear indication that Domino Pizza Group is fairly-positioned to meet its short-term commitments without the need for selling-off inventories at the current moment. Section B According to Chopra(2017, p.1), the level of sales at Domino Pizza Group rose by about 1.5% as opposed to the analysts’ expectations. The level of revenues also did not meet the analyst’s expectations despite the fact that they rose by about 13.8% to stand at £360.6M. The subsequent level of profits before taxation was however; slightly favourable in comparison to the previous period’s postings. Analysts indicated that these short-comings were a direct effect of intense competition from such rivals as Pizza Hut and the poor financial performance of the much anticipated ‘Winter Survival’ promotional marketing campaigns. As a result of all these shortcomings, the level of shares dipped even further by at least 15.9% to 62.9p (Chopra, 2017). In fact, it is interestingly clear that the shares took a downward fall in prices despite the fact that the chain had invested into purchasing the Norwegian pizza chain; ‘Dolly Dimples’. Subsequently, chain is facing stiff level of competition from such notable online players like ‘Just East’ that experienced a tremendous growth of about 42% to $136.4M in 2015. Despite this is rather pertinent issue, the chain’s management remains optimistic of operations going into the future period (Chopra, 2017). The management team indicates that the UK section posted to a strong year-on-year growth as well as the like-for-like sales with the opening of 81 newer stores. The resultant performance was tight control of underlying costs whose outcome would be a significant increase in the level of profits and dividend payments. The chain’s cash conversion remains even stronger while the team has redirected its efforts towards international-based expansion of operations in an effort to redesign cash to shareholders through provision of dividends and share buy-packs. According to Stephens (2017), Dominos remains to be the biggest fallers in the UK share trading platform today. Its currently shares have fallen down by at least 10% since the release of its 2016 financial results. The article note that the digitisation of the business model continues to make effective progress with online presence now representing more than 72% of the overall system sales, which is an indication that the firm’s immediate investment into technological advancement is indeed resulting to positive returns. It is also noted that the level of strong growth was also posted outside the United Kingdom, with the conversion of possessed Joey’s stores in Germany having been completed more than six months ahead of the launching date (Stephens, 2017). In the period between 2017 and 2018, the company is expected to post a tremendous increase in the level of earnings to at least 14% and 11% respectively. Despite the fact that the firm’s shares dropped significantly over the period, its overall growth potential remains to be relatively resilient. In fact, this can be seen with the evidence of the company’s overall track record of growth, with double-digit growth figures having been posted in the last couple of years. In this regard, the company can be seen to be experiencing a rapid growth outlook. This could result to higher investor attraction in the event that the level of uncertainty related to the United Kingdom economic outlook develops as negotiations between the UK and EU commence (Stephens, 2017). On a sectorial perspective, despite the fact that Domino is operating at P/E growth ratio of 2, which is not attractive, its capacity to deliver on its future forecasts remains to be a premium affair as compared to other sector rivals as Just Eat (Stephens, 2017). While there lies the fact that Just Eat will have a brighter future given that it is currently adopting similar business model to Domino especially in relation to making huge investments in technology; customer experiences and acquisition of other businesses. Still, Dominos enjoys a stronger market position especially in developed countries while also having imminent financial capacity to survive possible slowdown in consumer spending (Stephens, 2017). Dominos proves to be a better buy on the basis of its certainly lower risk profile. The company’s corporate governance framework is notably effective and this can be seen with the different set of committees already functioning and conducting different responsibilities; Audit, Nomination, Remuneration (Domino Pizza Group, 2016). The effectiveness of the Board is based on recruiting the right form of personnel, ensuring that the existing directors have the right types of tools, identifying and managing any possible conflicts of interest as well as formally checking on the overall effectiveness of each and every committee at hand. The Board also allows the shareholders to confirm any given appointments in the course of the Annual General Meeting (AGM) (Domino Pizza Group, 2016). As a result of accountability to shareholders and provision of a formal and transparent procedure for formulating policies on executive remuneration and fixing compensation packages, the rate of employee turnover and especially the management level has been low. This has resulted to the firm posting continual growth over the period as the management team devise effective and efficient ways of utilising assets and shareholder’s equity to translate revenues into net income or profits. Asset value per share= total assets minus total liabilities/ no of shares = 256,371-149,213/768,000 = 0.14 Current Market price= 275GBP Taking a look at these figures it can be seen that the firm’s asset value per share remains positive within the 2016 financial period while the current market price stands at 275GBP. This is a positive indication and means that a potential investor can safely invest with the company given that there is a tremendous potential for future growth. References List Chopra, ST. 2017. ‘Domino’s Pizza Group shares drop after UK like-for-like sales for 2017 miss analyst expectations’. CITYA.M. Accessed from http://www.cityam.com/260613/dominos-pizza-group-shares-drop-after-uk-like-like-sales Domino Pizza Group. 2016. 2016 Annual report. Accessed from http://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx?type=sl.ra.full&id=d8510628-3dd1-435f-adde-a30d141c0343&user=hl_website_documents Ehiedu, V.C., 2014. The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90 Helfert, E.A. & Helfert, E.A., 2001. Financial analysis: tools and techniques: a guide for managers (pp. 221-296). New York: McGraw-Hill. Nesticò, A. & Pipolo, O., 2015. A protocol for sustainable building interventions: financial analysis and environmental effects. International Journal of Business Intelligence and Data Mining, 10(3), pp.199-212. Stephens, P. 2017. ‘Is Domino’s Pizza Group plc a falling knife to catch after crashing 15%?’ The Motley Fool. Accessed from http://www.fool.co.uk/investing/2017/03/09/is-dominos-pizza-group-plc-a-falling-knife-to-catch-after-crashing-10/ Wahlen, J., Baginski, S. & Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education. Read More