Domino’s falls short on targets

Don Meij, CEO of Domino’s Pizza, talks about why the French business saw their share price smashed

Introduction: Dominos missed guidance (ASX:DMP)

Ross Greenwood: Welcome back to money news right around Australia. Over the period of time that we’ve done this program, we have documented during that time, the success and the growth of Domino’s Pizza. Now, Domino’s Pizza is without doubt a phenomenon. Because, it is a growth company with a very basic product, the pizza. It’s got to be able to deliver that pizza, that is the promise. In a certain space of time over-wise they’ll give it away free.

That’s one of their ads. The second thing is also it’s a highly competitive market. Anybody can make a pizza, let’s be honest. But the truth is, you’ve got to be able to make a consistent pizza right around the country, and then deliver it. The next thing is, you’ve got to be able to get the pricing right to be able to make the profit and continue to roll out the stores and all that type of thing.

That’s the reason why Domino’s Pizza share price went from around about $9.90 in August 2012, to late last year just under $77. But since then, the Domino’s Pizza share price has fallen, and pretty aggressively. After yesterdays profit came out which was still strong, I’ve got to tell you. As a result sales up by 18%, $2.31 billion dollars. The net profit after tax, $118.5 million dollars, up 28.8%. You’d normally say, “Thumbs up. That looks great.”

No. The share price got spanked by around 16%. Today, the share price recovered a little. Short sellers obviously covering the positions. The share price up by 7% or $3 to $44.50 but that’s still a fair way away from $76.91. The bloke who we have spoken to all the way is one of creator, the chief executive of Domino’s Pizza, Don Meij. Who is on the line right now. Many thanks for your time Don, as always.

Interview: Don Meil Chief Executive, Domino’s Pizza

Don Meij: Thank you Ross. Good evening.

Ross Greenwood: All right. You got spanked yesterday in a big, big way by the stock market. The numbers weren’t so bad. You missed the guidance, that was what it was all about. But, does it make you even scratch your head about it?

Don Meli:  No not at all. Ultimately, we don’t really comment on the share price, but we acknowledge that despite we’re very proud of the solid growth we achieved, as you said of almost 29%. We’re misguided. We’re embarrassed when we don’t meet the targets we set. Therefore, you’d expect some sort of correction over the lot of that.

Ross Greenwood: Doesn’t pure maths mean that as you bigger to hit these growth rates, in the year, after year, it becomes far more difficult. Now, I know you’re growing around the world all that type of thing. But it does become mathematically more difficult.

Don Meli:  Of course, a lot of company numbers will eventually get any business. That’s just the reality. The good news it we’re still quite small. In the bigger scheme of things we are hardly that big. I know as an Australian business we’ve made the 100 now. But, on global scale, for a fast food business we’re still relatively small. There’s still long road of growth. The window of time, there’s a potential that more compelling numbers will get you in a window.

Ross Greenwood: Okay. The issue is also the expansion overseas because so many Australian businesses in the past, I’m thinking about banks, retailers, liquor companies, a range of different companies have gone overseas, and ultimately, scurried back home because times got pretty tough. Your French business didn’t perform as well as you expected. The Japanese business, the growth there relatively flat in comparison with other parts of your business. This is always a temptation when things get a bit ropey overseas to run back home. Why is it you don’t want to come back home to Australia?

Don Meli:  One of the differences here is that we are an Australian company with a global brand. That global brand is Domino’s, it’s founded in the US. It’s not a new concept. It’s not like we’ve invented something in Australia, that it’s something new that we’re taking to rest of the world. This is a brand founded in 1960. A lot more experience and a much more global history in this case. Already, half our profits come from overseas. Whilst we did have a hiccup in France in this last window, which is already repaired, profits are still up 47% in Europe.

In fact, in Europe we’ve gone from $6 million dollars in just three and half years, margins from 6% to 18%. The Japanese business the same. We arrived in Japan only three and a bit years ago. Roughly 20 million we just produced 55 million. While some of these numbers are a little softer than what we were hoping on our upgraded guidance, they’re still big numbers. We’re very proud of those numbers. We’re just disappointing that we had one hiccup in France which cost us 2.9% of the missed guidance .

Ross Greenwood: Okay. Just explain one thing. Do you think really, that Domino’s brand, the Domino’s offering, can crack those markets in Europe the way in which you’ve been able to crack say, Australia. Even Japan, to a certain extend I guess. It really has been such a phenomenon in Australia. Are those markets absolutely right for you to replicate what you have done in Australia?

Don Meli:  Yes. Japan will be different. The Japanese don’t eat as much pizza. The reality there is just a huge economy and getting to 850 stores still produces a pretty incredible economic result and a great return for our shareholders. It won’t look like Australia, but it will still be a very impressive result. Europe on the other hand, well, the French eat five to six tons more pizzas than Australians, it’s the second biggest pizza market in the world. Germany is the fifth biggest pizza market in the world.

We’re already five times bigger than anybody else by sales now in France. Then when you think to look at the Netherlands and Belgium, that’s the same population as Australia and New Zealand, we already made greater margin out of the Dutch business. It’s an extraordinary double digit growing business for four years. All of the indicators say that this Australian business, as a global brand, has been able to become market leader in every country that we’ve arrived now. Excluding Belgium, and we’ll take market leadership in this coming year, in fact in the next few months.

Yes, the reality is, we will definitely create some success. The Australian business specifically, is the most penetrated Domino’s market in the world. Whilst Australians don’t eat as much pizza as say, the Americans or the French or the Germans, we eat a lot of Domino’s Pizza in Australia. That’s a little bit more unique, it’s something we’re replicating in the Netherlands. But that’s a long way to say we could do that in, say France or Germany.

Ross Greenwood: Okay. But surely for you and your team, where many of the innovations that you are now taking to the world, is the model that you have created here on Australia. I’m thinking about the whole logistics of delivering a pizza from where it is cooked to the person’s home in the condition where they still appreciate it and enjoy that pizza experience, at the price point, at which they feel as they can afford it and take it out for kid’s parties or whatever it might be. That must be a fairly cool thing for you and your team to realize that they’re trying to replicate that in many of the far flung places in the world.

Don Meli:  Yes, it is very exciting. Just look at that digital growth in a– just grabbing those sums of numbers. Digital growth in this financial year was up 50% in Germany. These are now big numbers. In the Netherlands, not a new business for us, up 42%. France, little bit of a hiccup but still up 32% in digital penetration. Australia, our oldest market, 30% up. Yes, it’s exciting to watch this happen. As we continue to roll out this new technology and we are at the forefront in the internet of food. We’re 44% of the internet of food in Australia. That’s all takeaway food chosed online.

We won’t end up 44% in 10 years, because it’s just growing that fast. But we are only 2.9% of fast food, so I’m sure we’re going to be bigger than 2.9% of fast food by the time we get to the end of the big cycle as more and more food is consumed through a digital clip and collect door or delivery.

Ross Greenwood: Tell you what, it really is a fascinating story. I should make mention of one thing, and that is through your own personal circumstances, you informed the market that you need to sell some shares in the business. Now, normally when a Chief Executive does this seemed to be, “Oh, now what’s going on? Is it basket. It is for family reasons that you need to do that, and I do understand those.

But then on top of that, the company has announced the $300 million buy back of its own shares. I know that some in the market were concerned that your sell of those shares might coincide with the company buying back shares. Now, the company’s put a clarifying statement today to say that these things will not happen in conjunction. That’s right, isn’t that?

Don Meli:  That’s absolutely right. Ross, it is one thing when you’re a public company CEO, inevitably, and I’m not crying about this excessively, I’ve acquired a lot of shares over recent years, they were all escrow, they just came out of escrow. I have significant tax bills. I’m a very proud Australian. I have plausible tax bills and I’d also am putting out a divorce, though that needs to be coming out of escrow then my ex-wife can get some money from that. Yes, these will not trade at the same time and I’m still a substantial shareholder, and still want to continue to add to my shareholding as more options will come available.

Ross Greenwood: I, was just going to say, and here’s the interesting thing. Family situations due to turn up and that’s the reason why these things occur. Just one final thing, the last time you and I spoke on the program here, we were speaking about the allegations of wage underpayment. Now, this is still important, you said you were conducting a fairly exhaustive searches and to make certain that this did not occur throughout the business. What’s happened there?

Don Meli:  Yes. It’s taking a little longer because we need to make sure we do it right. We had Deloitte audit all of our processes. They said some very positive things about our processes, but gave us some things that we should enhance, though embracing all of the recommendations that they have said. We’re almost all the way through the preliminary investigation. Now we’re just on to the one that showed the red lights, that was going through to make sure that we complete those complete audits.

Ross Greenwood: How much it’s going to cost you when that all up in terms of underpayment?

Don Meli:  Well, what it costs the franchise owners have done the right thing. We still can’t broadcast that, but it’s not going to cost Domino’s because this is an individual franchisee that may have done the wrong thing.

Ross Greenwood: Therefore, if the franchisee’s done the wrong thing, then you would anticipate that that franchisee should also make good?

Don Meli:  Absolutely. Yes.

Ross Greenwood: Don Meij, Chief Executive of Domino’s Pizza. Always great to have you on the program, Don, because it’s such an interesting story from a big global expansion point of view for something as basic as a pizza. I’ve got to say Don, we always appreciate your time here.

Don Meli:  Thank you very much Ross.

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