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Domino’s Also Surprises

- by Glenn Dyer

Another stock to surprise on the downside was fast food darling, Domino’s Pizza Enterprises, promoters of the pan pizza based eating experience in Australia and in several major markets overseas.


The company yesterday revealed a first half that showed the pan pizza eating experience isn’t luring as many Australians to Dominos as before, but is still proving seductive to pizza eaters in parts of Europe.


As a result the shares shed 12 per cent in value, or around 40c to $3.25, after it reported a 46.2 per cent fall in first half profit.


That’s a big ouch and the confident story about overseas expansion wasn’t enough offset the fact that like Coates, DOM needs to do well in its home base to earn solid profits.


The company did warn in October after the first quarter, that earnings would down by at least “$1.2 million” because of the problems in Australia but they have continued, given the downturn for the full six months.


Those problems involved promotion and the high crust pizza product which seems to have done poorly.


For a company like Domino’s growth can come from converting sales gains in foreign markets into earnings a little down the track but the simple fact is that to maintain its rating among investors, it needs to sell more pizzas in Australia.


And it didn’t do that well enough in the first half of 2007, thanks in part to the high proportion of company-owned stores in Australia as against franchised outlets which generate fees and other income streams..


The company said net profit was $3.5 million for the half year ended December 31, down from $6.5 million in the corresponding period.


Not even an expected second recovery in after tax earnings (a forecast of a 40 per cent rise on the first half) could offset the market’s suspicion.


CEO Don Meij said the result reflected the impact of its expansion into Europe and poor performance in Australia in the first quarter.


He said while Australian same store sales growth had been weak, European same store sales growth was 12.5 per cent, the New Zealand was also solid (compared to Australia).


European operations are “tracking better than planned” and are expected to make its first profit contribution in 2007/08.


But the company said the EBITDA (earnings before interest, tax, depreciation and amortisation) in Australia was off almost 17 per cent because of weaker promotions and start-up costs associated with the new in-house equipment maintenance and supply department.


Mr Meij said the company would begin reducing the proportion of corporate stores over the next 12 months from 30 per cent to around 15-20 per cent.


“This move will refocus our corporate stores into cost-effective geographic locations and reduce administration overheads, while still maintaining the benefits of the hybrid corporate-franchise store model,” he said.


Sounds like franchise speak for ‘we’ll be cutting the influence of earnings from our own stores and get income streams from selling the surplus locations to outsiders’.


That’s a switch in approach from the previous approach of maintaining company owned outlets above what is considered normal in some areas of franchising.


The company’s revenue rose 36.4 per cent to $118.1 million in the first half while network sales increased by 42 per cent to $251 million.


Domino’s is the master franchiser for the Dominos Pizza brand in Australia, New Zealand, France, Belgium and the Netherlands and it and its franchisees operate 645 stores: 457 stores of those are in Australia and New Zealand, so when Australia is offsong, the company is offsong as well.


Domino’s declared a first half dividend of 4.1 cents.

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BHP’s View Of The World

- by Glenn Dyer

Here’s BHP Billiton’s view of the world,over the past half year and looking ahead. It is surprisingly optimistic, especially about the declining influence of the US economy, the sustainability of the China boom and the strength of commodity prices for at the ‘medium term’ as they put (the next three years).

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Hills ‘Satisfactory’ Outlook

- by Glenn Dyer

‘Satisfactory’ I suppose is the way the interim result from Hills Industries should be best described.


It’s what the company said about the result and the outlook for the rest of the 2007 year.


Hills is a more complex beast these days: it’s no longer the maker of the iconic Hills Hoist: That’s still there but no longer the reason for its being.


After tax earnings up 12 per cent, a little faster than the 7.9 per cent rise at the pre-tax level and expectations of “satisfactory results for the full year.”


First half net came to $23.94 million, compared with $21.37 million for the previous interim period of 2006. This was after the rise in pre tax to $36.68 million from $34 million.


The latest result was struck on an 8.2 per cent rise in revenues to $511 million from $472 million. It was the first revenues had risen above half a billion dollars in an interim period.


Directors said the company “remained committed to its current dividend policy and would continue to pay around 100 per cent of it’s after tax profits to shareholders as interim and final dividends.”


To this end, Hills will pay an interim dividend of 13.5 cents per share, fully franked, compared to from 13 cents previously.


Earnings per share rose to 14c a share from 12.9c and the company said that the ration was kept as close to 100 per cent as possible.


CEO David Simmons said “Our policy hasn’t changed – we pay out around 100 per cent of earnings and in the last couple of years we’ve paid a little over 100 percent.


“If we’re within a point or two of 100 percent, plus or minus, we’re happy. It certainly shouldn’t be interpreted as any progressive reduction.”


And he said the company’s dividend re-investment program was being strongly supported by shareholders.


“We’ve had pretty consistent support of about 40 to 45 percent. The main reason is we’ve now got around 22,000 shareholders, whereas in the early days of the plan we had larger institutions, whose decision whether or not to reinvest could change the support level significantly.


“We’re relatively relaxed the plan will continue to get support.”


Hills operates in three areas: home and hardware, electronic security and entertainment and building and industrial products.


Its home, hardware and eco products division was the best performer with a 30 per cent rise in EBIT; the building and industrial products division saw EBIT rise 8.4 per cent; an EBIT in the electronic security and entertainment division rose by 7.6 per cent.


Mr Simmons told the Corporate file briefing on the ASX that in the first half “we experienced more of a cost-margin issue than any direct impact on consumer spending from interest rates.”


“Last year we had a lot of volatility in commodities from steel to oil-based products like plastics, which was very difficult to manage in terms of the short-term recovery of cost increases.


“In the first half, oil prices were actually down in comparison with six months before, albeit not dramatically, so our challenge was to drive down the inputs that have oil as their base. When commodity prices group, the increases come rapidly but when they come down, you’ve got to chase them.


“The other big issue has been transportation costs. We’ve had fuel surcharge levies applied across our businesses, and we’re working to make sure we get them aligned to where fuel prices are.


“Our business isn’t one that’s directly impacted by the vagaries of weather patterns but one potential risk to our earnings would be consumer confidence – it doesn’t take much to shake the level of confidence.


“Another risk is posed by the skills shortage, in that fabrication work associated with many of the major infrastructure projects could be done offshore and shipped in. It’s fabrication in Australia where we see opportunities, particularly in our Building and Industrial Products business.”

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