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Cutting our losses on Dominos Pizza and Dignity

Discuss Stock buying Shares, tips and ideas for stock market dealing
TheMotorcycleBoy
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Re: Cutting our losses on Dominos Pizza and Dignity

#220188

Postby TheMotorcycleBoy » May 8th, 2019, 1:36 pm

gbjbaanb wrote:I read the Shares Magazine article on DPEU - apparently the eastern european market is catching up to us in terms of pizza and other food-for-delivery. The biggets problem is gthe traffic and roads, so they were putting pizza places strategically to capture a surrounding area "castles" they called them.

Anyway, it did seem to be doing very well, until Erdogan got in (DPEU for some bizarre reason reports in Turkish lira) and the price converted to sterling collapsed.

Eh? Turkey?

According to page 5 of https://investors.dominos.co.uk/system/ ... s/ar18.pdf they (DOM) are only in Norway, Sweden, Germany and Iceland (and UK and ROI).

gbjbaanb
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Re: Cutting our losses on Dominos Pizza and Dignity

#220189

Postby gbjbaanb » May 8th, 2019, 1:42 pm

DPEU old chap - Domino'a Pizza Eurasia.

Not DOM (or DPP). I thought the conversaton had moved to European stuff, mentioning Switzerland.

TheMotorcycleBoy
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Re: Cutting our losses on Dominos Pizza and Dignity

#220191

Postby TheMotorcycleBoy » May 8th, 2019, 1:48 pm

gbjbaanb wrote:DPEU old chap - Domino'a Pizza Eurasia.

Not DOM (or DPP). I thought the conversaton had moved to European stuff, mentioning Switzerland.

Sorry, my bad!

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Re: Cutting our losses on Dominos Pizza and Dignity

#220216

Postby westmoreland » May 8th, 2019, 4:47 pm

TheMotorcycleBoy wrote:
westmoreland wrote:disappointing update. the UK continues to be an outstanding business, but they are struggling to get the formula right in international markets. it's a small part of the business, but continues to make losses. i can see them exiting switzerland at some point. i think the outlook for the likes of sweden, iceland and germany is more positive.

i thought the dispute with franchisees would be resolved relatively quickly, given the huge returns they make, when compared with rivals. i didn't quite appreciate the clout the major franchisees have now that they have consolidated (2 franchisees control hundreds and hundreds between them).

i'm continuing to hold, but i would like to see the ongoing franchisee dispute solved without conceding too much margin ASAP.

But presumably abroad is the only place that they can grow in?

I mean I ate my first and hopefully my last domino pizza about 25 years ago pulling a late one at work in MK. This country's saturated the pizza market. In my nearest small town/big village there's about 3 or 4 places already that I can dial a pizza from. DOM won't get off the ground here.....nor in many other places.

So I guess that's why the market is fixated on the continental side....what do you reckon?


i think there is still significant opportunities for further growth. mainly from the market expanding, but also winning market share. saturating each local market is an essential part of the domino's strategy, because it means competitors cannot compete with the speed and coverage of delivery. this is backed up by virtually decades of positive like for like store sales.

i think germany will deliver, but this is only a 33% venture. DPE of australia who own the other 67%, have a much better track record of applying their business model to new markets. it's still early days in norway and sweden, which has about 200 store potential. i'm a bit worried about switzerland because they have been trying for many years to make it work there, without success.

TheMotorcycleBoy
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Re: Cutting our losses on Dominos Pizza and Dignity

#220227

Postby TheMotorcycleBoy » May 8th, 2019, 5:45 pm

Well seeing as I'd considered re-opening a new position in DOM, I thought I'd grab their latest AR. I was planning on spending a couple of hours with this and the last few years' ARs and was thinking of doing something in depth.

Instead I just glimpsed at the AR18 this lunch break. I don't think what I saw is very encouraging. Briefly:

Just check out page 31. The latest (in a stream) FCO states:

In 2018 we generated £85.8m in net cash flow from operating activities, a decrease from £104.2m in 2017, largely due to less favourable working capital movements of £15.4m.

But on the same page he summarises how they spent some (actually much more than their net CFO) cash:

Capex £29m
Divs £44m
Acquisitions £60m
Share buybacks £59m

Isn't this insane? Just the divs and buybacks exceed the net CFO. Buybacks at 2x capex?

Then the FCO states:
During the year we invested £59.2m in buying our own shares, at an average price of 323p. We assess the value of share buybacks by reference to the Board’s own view of intrinsic value as well as an internal rate of return calculation.

But for the last half year the market has valued their shares at 220p-280p. Surely they should have not spent any money on buybacks but used it all to help fund their growth abroad, or give their franchisees more favourable terms?

Anyway, before I gave up on this, I had a quick comparision of their cash flow calculation. This is on page 106:

So for 2017 they have £81.5M of EBIT and they generated £104.2M of net cash.
In 2018 they have £64.2M of EBIT and they generated £85.8M of net cash.

But given that they had, to quote, less favourable working capital movements , how did they still manage +120% cash conversion? Compare the impairment charge lines for the 2017 and 2018. £2m and £20m respectively. Looks dodgy to me. I don't like the look of this. What do others think?

Matt

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Re: Cutting our losses on Dominos Pizza and Dignity

#220269

Postby gbjbaanb » May 8th, 2019, 9:50 pm

I think you know the answer.

FWIW, I find I do a lot better going back into companies that did well for me (after selling at a peak, or when I felt market conditions were becoming difficult) than for any that did badly. I guess a good company will do well, even after some setbacks or warnings, whereas bad companies are just plain bad all the time.

TheMotorcycleBoy
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Re: Cutting our losses on Dominos Pizza and Dignity

#220296

Postby TheMotorcycleBoy » May 9th, 2019, 6:38 am

gbjbaanb wrote:I think you know the answer.

FWIW, I find I do a lot better going back into companies that did well for me (after selling at a peak, or when I felt market conditions were becoming difficult) than for any that did badly. I guess a good company will do well, even after some setbacks or warnings, whereas bad companies are just plain bad all the time.

Well I've looked at a few of the other shares we hold (Marshalls MSLH, Spirax-Sarc SPX, Bodycote BOY). Out of those they either don't buyback their own stock, or if they do, they repurchase a much smaller overall % of their Net CFO (DOM bought back about 70% of their net CFO in the last period).

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Re: Cutting our losses on Dominos Pizza and Dignity

#220297

Postby TheMotorcycleBoy » May 9th, 2019, 6:47 am

When you look at their balance sheet (page 104) you can also see that their non-current financial liabilities went from -152.3 to -237.4, i.e. £85M extra debt. So looking back at their net CFO, it's obvious that they've funded the buyback entirely on debt (how else?).

I decided to be generous to them, and looked at page 144 where their interest rates are laid out. This is fairly involved, since there are various additional fees and commissions, and the IR is an offset above 5 year LIBOR (about 1.1% ?). Given that their interest (1.1 + 0.75 + fee?) is inside a tax shield I would guess it is at about 1.6%, and since their average buyback SP was 323p (with a dividend of 10.6p), then the rate they paid on that hypothetical (since the SP is now less) equity was 3.2%. However I'd doubt that they executed this large buyback campaign in order to lower capital costs, I think it was a failed attempt to bolster their SP. If anything the SP rebelled against the buyback campaign.

If was an owner would I be impressed with the financial management of DOM?

So you've probably guessed. I'll be staying away from reopening a DOM position for now!

Matt

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Re: Cutting our losses on Dominos Pizza and Dignity

#220408

Postby simoan » May 9th, 2019, 12:48 pm

TheMotorcycleBoy wrote:If was an owner would I be impressed with the financial management of DOM?
Matt

However, if you were one of the officers of the company and vesting of your zero cost share options and other performance related bonuses depended on achieving certain EPS related targets, share buybacks at any old cost probably seem a great idea. You mentioned further up the thread you don't trust the CEO and that would be enough for me not to invest because quality and integrity of management is key to me investing in any company. Actions speak far louder than words.

You don't have to buy back into something you sold before just because the share price is lower if the reason you originally sold is still valid - move on and don't look back. There are plenty more quality companies to invest in. And even if the share price recovers and goes up 100% (maybe a corporate action occurs?) you have still made the correct decision in not buying based on the facts at hand at the time. Learn not to beat yourself up about it. Have rules which form an investment process and stick to them religiously. If it's a good process you will be right more often than you are wrong and you will make good returns in the long run.

All the best, Si

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Re: Cutting our losses on Dominos Pizza and Dignity

#220439

Postby Pendrainllwyn » May 9th, 2019, 2:18 pm

simoan wrote:You don't have to buy back into something you sold before just because the share price is lower if the reason you originally sold is still valid - move on and don't look back. There are plenty more quality companies to invest in. And even if the share price recovers and goes up 100% (maybe a corporate action occurs?) you have still made the correct decision in not buying based on the facts at hand at the time. Learn not to beat yourself up about it. Have rules which form an investment process and stick to them religiously. If it's a good process you will be right more often than you are wrong and you will make good returns in the long run.
Very good advice in my opinion.
Pendrainllwyn

TheMotorcycleBoy
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Re: Cutting our losses on Dominos Pizza and Dignity

#220443

Postby TheMotorcycleBoy » May 9th, 2019, 2:24 pm

simoan wrote:
TheMotorcycleBoy wrote:If was an owner would I be impressed with the financial management of DOM?
Matt

However, if you were one of the officers of the company and vesting of your zero cost share options and other performance related bonuses depended on achieving certain EPS related targets, share buybacks at any old cost probably seem a great idea. You mentioned further up the thread you don't trust the CEO and that would be enough for me not to invest because quality and integrity of management is key to me investing in any company. Actions speak far louder than words.

Yes, exactly.

simoan wrote:You don't have to buy back into something you sold before just because the share price is lower if the reason you originally sold is still valid - move on and don't look back. There are plenty more quality companies to invest in. And even if the share price recovers and goes up 100% (maybe a corporate action occurs?) you have still made the correct decision in not buying based on the facts at hand at the time. Learn not to beat yourself up about it. Have rules which form an investment process and stick to them religiously. If it's a good process you will be right more often than you are wrong and you will make good returns in the long run.

Indeed. I'm just glad that I took the time to relook at their fundamentals, to convince myself that, for me, staying away is definitely the right thing to do.

Thanks for sharing your views,
Matt


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