When economic armageddon unfolded in 2008, Domino’s Pizza was rolling in dough as well as rolling it out. Cost-conscious Britons looking for a little luxury would order a takeaway — and lots of them: the firm that two Anglo-American brothers brought from the US to the UK 37 years ago was accounting for one in three pizzas delivered in Britain by 2009.
But as we hunker down for another crisis, it looks unlikely to go so well this time for the franchise business.
Many of us had our fill of takeaways in the pandemic; they no longer seem a luxury, but a reminder of time spent eating from cardboard food boxes. Domino’s shares soared by almost 50 per cent between January 2020 and December 2021, hitting a peak of 456p. But today the stock is 285p.
The company delivers in plenty of areas: it had £100 million of free cashflow last year and is a reliable dividend payer. But it has lost its lustre and there are other issues, too, such as wage, fuel and food inflation. (So far, it has hedged against soaring wheat prices due to the war in Ukraine.) Further, customers may trade down to supermarket pizzas to buffer their own soaring bills, while the new mandatory calorie labelling could take another bite out of the business.
No wonder Domino’s chief executive has just made his escape: Dominic Paul is off to run Whitbread in January; a replacement has not yet been named. Sell Domino’s Pizza.
A more appetising prospect in the sector is The Restaurant Group. The owner of Wagamama and Frankie & Benny’s will be taking the same hit from rising costs, but its shares look a bargain after falling almost 70 per cent over the past year (Domino’s has declined by half that). While the City may have lost its appetite, TRG’s meals out for the masses look set to be our new little luxuries. The latest results show its Brunning & Price business comfortably beating the market, while Wagamama’s latest like-for-like sales were up a tasty 11 per cent.
The balance sheet has also materially improved thanks to equity raises during Covid: TRG now has a lower net debt than pre-pandemic. While Domino’s shares are trading at 16 times forecast 2023 earnings, TRG’s are at 13 times. Anna Barnfather at investment bank Liberum believes the share price “more than reflects the current macro uncertainty — but doesn’t give credit for the strong brands, sales outperformance, nor long-term prospects.”
Amid a recession, an affordable(ish) bit of socialising over a Wagamama ramen will beat buying more stuff for our homes. Buy TRG.
