Domino's guidance: World Cup bonanza or Don Meij is bust Make or...

Domino's guidance: World Cup bonanza or Don Meij is bust
Make or break: Domino's CEO Don Meij. Louise Kennerley
by Joe Aston
There are fewer than three weeks of the financial year remaining and none of them will be so important for Domino's Pizza and its irrepressible chief executive Don Meij.
Remember that in February last year, the delivery boy made good upgraded guidance for full-year earnings at the company's 1H17 presentation. The market reacted by selling, with Domino's stock closing the session down 14.4 per cent. And the market was right (or at least believed itself). Because then in August, Meij missed both the original and upgraded guidance and shares were again pasted, down 18.9 per cent by close. The same day, Meij forecast FY18 NPAT growth "in the region of 20 per cent" and on September 8 it commenced an $183.5 million buyback of its own shares.
In February this year, Meij missed again, delivering 1H18 NPAT growth of 5.5 per cent (7 per cent when adjusted for the buyback's incremental interest expenses – that's right: Domino's excludes from its profit the interest it pays on money borrowed to buy its own shares for propping up their sagging price. Sick genius!). Still, the stock fell only 6 per cent, and the company resumed the buyback – into which Meij sold another $18.6 million worth of his personal shares (making it $49.7 million since August).
The weak first half left Domino's with the improbable task of delivering NPAT growth of 33 per cent (or around 27 per cent when excluding that buyback interest) in this current six-month period to meet full-year guidance – guidance it has reiterated on numerous occasions.
A pattern has developed and, for the sake of the Don's credibility, if not survival, the showman knows he cannot afford to make it three misses from three starts. Not if he wants to get his last $97.5 million (at Friday's closing price) of DMP scrip out of the oven and into the kingdom of cash.
Domino's also guides for same-store sales growth (basically network revenue growth after excluding the revenue of any new store, any existing store in the same territory as a new one, or any stores that closed), which for FY18 is between 6 per cent and 8 per cent in both Australia-New Zealand and Europe, and between 0 and 2 per cent in Japan. In ANZ, SSS growth was just 3.7 per cent in 1H18. In the first five weeks of 2H18, it was just 5.9 per cent. The market's disappointment with those numbers was key to the company's share price sinking below $40 for the first time since September 2015 (it is now back at $52.91).
Cue the company's charm offensive, squiring equities analysts around Europe, who returned home to publish research vouching for the "long growth runway that Europe provides" (house broker Morgan Stanley) and the "meaningful headroom" of "per-store economics and store count … driving double-digit earnings growth" (wannabe house broker Macquarie). The pancake-flat SSS growth of ANZ (which accounts for 31 per cent of group revenue and 54 per cent of group earnings) was there somewhere in the footnotes.
We happen to have come into some new data. In France (which accounts for 40 per cent of Europe's revenue), all franchisees receive weekly turnover figures for the national network (company-owned stores included). As of June 3 (so 48 weeks into this year), total network sales growth (minus new stores, but not to be confused with SSS) is just 1.7 per cent. We contacted Domino's for comment, which did not deny the authenticity of the numbers, and cited its blackout period as of June 1. Yet the company did write to all French franchisees days after our inquiry to advise that "due to leaks of confidential information that only concern our network, we have no other solution than to stop these urgent reports".
If nothing changes (and statistically, more than eleven-twelfths – or 92 per cent – of the sample period doesn't leave meaningful headroom for change), Germany, Belgium and The Netherlands will need to deliver Bradmanesque growth (or a stunning explosion in EU store splits and closures to pad the number) to get the Europe business to its forecast.
Apparitions being Meij's speciality, the brokers returned from their Grand Tour insisting – in unison – that this current, live month of June will somehow change everything. The French and Germans are going to eat so much Domino's Pizza (paying full freight) in the next three weeks that the World Food Organization will shortly declare a global tinned pineapple shortage.
The FIFA World Cup, Meij and his lieutenant Andrew Rennie have these fiercely cynical and forensic analysts saying, will make this pie rise.
But an estimated three-quarters of Europeans watch their nation play World Cup football in pubs, because they live in shoeboxes. Of Rennie's territories, France doesn't play its first match until June 16 (against Australia), Germany's first game is June 17 and Belgium's is June 18. Holland isn't even playing.
Anyone banking on a handful of soccer games (one-off, yet an implied input for DMP's forward trading multiple) to deliver absurdly stratospheric sales to countermand 50 weeks of calamitous misses on targets management stubbornly wouldn't downgrade, has, frankly, eaten too much bad pizza.
There's no doubt Domino's will announce a result that meets its guidance at the top line. But it will surely require inventive accounting built on store splits, store closures, add-backs and all sorts of exclusions. All in, there will be no getting around the fact that continuing store sales are slowing. Which, for Meij, will make it three from three.