Domino's Pizza's dough not rising fast enough

Profits from pizza delivery firm Domino's Pizza were marginally ahead of market expectations despite its new German operations taking a slice from the pie.

Profit before tax for the 52 weeks to Christmas Day 2011 rose by 14.6% to £43.6m from £38.0m the year before. This figure excludes losses of £1.4m from the group's fledgling German operations; with those losses included, the profit of £42.2m was slightly ahead of market expectations of £42.1m.

Diluted earnings per share rose 14.9% to 19.24p (consensus: 18.89p) from 16.75p the year before, and the full year dividend has been hiked by 20.6% to 12.30p (consensus: 12.01p) from 2010's 10.20p.

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In the Chairman's statement Stephen Hemsley makes clear that strong underlying cash generation will lead to a more aggressive policy of "returning cash". In other words, Domino's may be looking to become a dividend play.

Like-for-like sales at the company's 604 outlets which have been open for two years or more were up 3.0%, although the equivalent figure for 2010 was 11.9% (reported at the beginning of January).

Total "system" sales increased by 9.3% over 2010 to £530.6m with online sales growing by 43% to £183.1m. Online sales now account for 44.3% of all UK deliveries.

Domino's also accelerated its new store openings from 57 in 2010 to 62 in 2011, bringing the total to 726.

The other important opening for the firm was the completion of its new headquarters in Milton Keynes, which formed the bulk of capital expenditure, costing £6.6m.

Looking ahead, Lance Batchelor, Chief Executive Officer of Domino's said: "Trading has continued to be robust during the first seven weeks of 2012 with like-for-like sales for the group increasing by 3.7%...The consumer backdrop remains a tough one, but with record store openings and continuing appetite from our franchisees, we remain confident of the group's ability to drive both sales and profits going forward."

One of the the big questions for Domino's now is whether its German gamble will pay off. The firm currently has six stores in place in Europe's biggest economy and hopes to triple that number by the end of this year, with franchisees sourced both locally and amongst its ambitious UK cohort.

The other main issue is how the company can continue to boost volumes.

Broadly there are two ways: sell more pizzas from existing stores (analysts at Panmure Gordon think this is going to be tough, given increased competition from Pizza Hut) or it can open more stores.

Collins Stewart analysts argue the number of openings needs to rise to around 75 from the current level of 60; clearly Germany could provide some of this growth.

The problem for the stock is that it is expensive, trading at around 23 times forward earnings. It has earned that high rating through consistently delivering growth above market expectations, but the signs are there that it is finding it increasingly hard to meet the expectations of a demanding market.

Initially Domino's fell 2.8%; by 8.35am it had recovered slightly but was still 1.5% down on yesterday's close. Over the past 12 months the stock has fallen 3%,

BS