Compete 3 points

Objective of this report is to assist our client to make an investment decision by comparing the benefits of investing in either Domino’s Pizza or Collins Food Limited (KFC), businesses in the fast food industry. The report will help the client to understand each of the businesses, the industry they operate in and the potential returns and risks when investing money in either of these companies.

This assessment will cover the trend analysis, common size statements, ratio analysis, and the accounting treatments and the methods used. The report will also assess the limitations of financial statement analysis and the relevance of the information provided in the respective annual reports. A recommendation will be provided in the conclusion of the report.

Domino’s Pizza Enterprises Limited was established in 1983 and is the largest franchisee of Domino Pizza restaurants outside of the USA. The company holds the master franchise rights to the Domino’s brand and network in Australia, New Zealand, Belgium, France, The Netherlands, Japan, Germany, Luxembourg and Denmark, with a network of more than 2,450 stores (Domino's Investors, 2019).

Domino’s state that they are driven by a passion to connect people with faster, fresher quality food. In doing this, we’ve become a leader in the food-technology space, achieving industry firsts in drone delivery, app ordering, voice assistants, artificial intelligence and augmented reality. We’re committed to constantly enhancing our customer's lives and continually improving and innovation our product, our people and our technology to make sure our customers receive a world class experience.

Collins Food Limited started in 1969 with the opening of the first Australian KFC franchise in Queensland. In 2011 the company was listed on the Australian Stock Exchange (Collinsfoods.com, 2019).

Collins Food Limited operates food service retail outlets and is based in Australia with operations in Europe and Asia. Collins Food Limited is the biggest franchisee of KFC restaurants in Australia and continues to grow. It operates as a KFC franchisee with 229 KFC restaurants throughout Australia – Queensland (139); New South Wales (11); Victoria (4); South Australia (8); Tasmania (14); Western Australia (48); and Northern Territory (5) as well as 20 restaurants in Netherlands and 17 in Germany, competing in the Quick Service Restaurant market (Collinsfoods.com, 2019). The Group also operates 22 Sizzler restaurants in Australia, plus 73 restaurants across China, Japan and Thailand, these operate in the casual dining restaurant market (Jennifer, 2012) and in 2017 it opened its first Taco Bell restaurant. In 2018 the company negotiated the purchase of 28 franchises, completed five new restaurants builds and closed three restaurants.

The company states in the 2018 Annual Report that their strategy is to continue investing in strategic acquisitions, and focus on ongoing operational excellence, to provide a platform for sustainable long-term earnings growth across the Group. The company states it is focusing on expanding technology and home delivery options to drive sales growth.

Both Domino’s Pizza and Collins Food Ltd operate in the fast food and takeaway food services industry (also called the quick service industry) in Australia. Collins Food Ltd also operates in Europe and Asia. This industry is considered mature and well established, with predicted growth rates less than general economic growth as measured by gross domestic profit (GDP). The forecast growth for this industry is an annualised 2.3% over 10 years through to 2023-24. However, this is a relatively large industry, bringing in revenue of approximately $20 billion annually and employing over 188,000 Australians (Ibisworld.com.au, 2019).

Australians spend about 32 per cent of their food budget on takeaways and eating out (Mitchell, 2018). A recent study by Roy Morgan Research found that 84.5 per cent of Australians eat takeaway fast food. The most popular choice being McDonald’s with 52.7 per cent having eaten McDonald’s within the last six months, followed by KFC with 40.8 per cent. Domino’s was ranked sixth, behind Subway and Hungry Jacks, with 28.3 per cent. The study also found that younger consumers were more likely to eat fast food and that for Generation Z, those born between 1991 and 2005, Domino’s Pizza is the third most popular fast food restaurant (B&T, 2018). However, increasing competition and new entrants to the market has seen market share start to fragment. The Eating Out in Australia report for 2017 showed a 19.5 per cent decline for McDonald’s, and an increase of 14.5 per cent for healthier options including Japanese cuisine (Future Food, 2019).

The consumer trend towards healthier living and greater awareness of the importance of nutrition poses both a risk and opportunity for this industry. Consumers demand healthier options and some fast food service providers have responded by bringing in menu options with less fat, sugar and salt and in many cases charging a premium for them. This change in consumer preferences has also resulted in new operators entering the market with higher quality, healthier options.

Providing information about nutritional value of foods and offering healthier options is also an important public health concern. Recent research was undertaken by Deakin University to score 11 biggest fast food companies in Australia according to their nutritional policies such as marketing to children, disclosure of nutritional information and future plans to reduce sugar and saturated fat in products (Blake, 2018). While none of the companies achieved a pass mark, Domino’s received the lowest score of three out of 100, while KFC scored 41. Subway received the highest mark of 48, followed by McDonald’s at 42 (Mitchell, 2018).

General economic factors also influence the profitability of businesses in this industry. Economic uncertainty and volatile consumer sentiment are likely to negatively impact industry revenue growth. On the flip side, if there is a rise in wages, increasing disposable income, businesses operating in the fast food service industry are likely to benefit as they serve the needs of time-poor consumers.

Other factors important for driving profitability are having a clear position or brand in the market, managing operating costs to maximise profitability and systems that effectively manage stock control to minimise waste (Ibisworld.com.au, 2019).

Domino’s Pizza Enterprises

The company Dominos has performed at a steady rate according to the profit and loss statement. Revenue from sales, other revenue and net profit have all increased from the years 2015-2018 (see table 1). There was substantial growth between sales, between the years 2015 and 2016. Expenses has also increased from the years 2015-2018. The expenses have grown at a rate in which dominos has been able to cope and still grow in important areas.

(Table 1: Sales, COGS, Expenses, Net profit. From P+L statement)

(Chart 1: Dominos P+L statement analysis)

Dominos has doubled its assets since the year 2015 (see table 2). This rise has come from intangible assets and goodwill assets both having substantial rises (goodwill has risen 283 496 000 to 428 904 000) (Intangible assets has risen from 68 740 000 to 365 707 000). These are all non-current assets and will benefit the company in the long run. Due to there being a substantial rise in assets there was also a substantial rise in liabilities. Non-current liabilities rose from 194 413 000 to 793 702 000 over the four-year period. The cause for the increase in liabilities was borrowings as this increased from 122 912 000 to 594 000. Bank loans within this liability went from 276 748 000 to 552 524 000 from 2017 – 2018. The reason in which loans rose so much is due dominos plans to expand in Germany. Equity rose and feel during the four period; it is still at an acceptable rate (see table 2) for the company to be able to grow.

Table 2: Balance sheet analysis

Collins Food Limited

The revenue for 2018 was up by 21.7% to $770.9 million (FY2017: $633.6m) and profit before related income tax expense for 2018 was $48.5 million an increase from $44.0 million in 2017, a change of $4.5 million (Collins Foods Limited, 2018). Net profit after taxes for 2018 was $32.5 million up from $28.0 million in 2017. The trend analysis conducted below show that this growth is consistent with the previous year, following significantly better results in 2016.

Chart 2: CFL Profit and Loss analysis

Chart 3: CFL Trend Analysis

Chart 4: CFL investment return

In 2018 net debt for Collins Food Ltd increased by $94.1 million to $227.2 million, reflecting the acquisition of 16 KFC restaurants in the Netherlands and 28 KFC restaurants in Australia. As a result, the net leverage ratio is up to 2.14, from 1.59 (Collins Foods Limited, 2018).

Domino’s Pizza Enterprises

Dominos has had an increase in sales throughout the four-year period. The main reason for the increase in sales is due to technological advances. Making each employee more efficient with sales. From 2015 – 2018 there was approximately a $7000 increase (see table 4) in efficiency from sales revenue form employees. Dominos has also kept up with modern technology so that is more efficient, for example it introduced voice ordered via google home and Alexa. Although there was no increase with efficiency of sales form 2017 – 2018, it still shows that Dominos are being pro-active with making it easier for customers to access their products.

Dominos is a highly geared financed company, with the company having a large amount of bank loans especially in the year 2018. From an investment point of view the company is riskier to invest in as there is uncertainty with loans. This also means that there is a higher return expected on the investment due to more risk, if events such as the expansion into Germany (which is why there is a high amount of loans) pays off. Dominos has around 60% of their assets come from intangibles. This means the company will have a hard time to measure the full value of these assets, as they are long term, and their future value is unknown. This also means that the company’s name has value, as if there were two pizza shops together and one was family owned and one was Dominos, it is expected Dominos will do better as they have a reputation associated with the brand name.

Collins Food Limited

Please do this section

Ratio analysis

Domino’s Pizza Enterprises

Profitability Ratios

Table 3: Profitability ratios for Dominos

Profitably ratios are used to measure the ability to generate profit through revenue, operating costs and shareholder’s equity. They show how well a company can utilize its assets to produce profit and add value for shareholders. Dominos had the ROSF ratio go down every year apart from the 2017 – 2018 form 25 – 42%. This is an incredibly high return for this ratio and dominos is performing well within this area. The reason there was such an increase for the 2017 – 2018 is because there was a large decrease of issued capital in 2018 compared to 2017

The operating profit margin and gross profit margin are at respectable levels. Due to being a fast food company the operating profit margin is going to be a low rate as dominos has high volume of sales. The gross margin should be above or equal 50% which dominos sustains form 2015-2018, however the if the ratio continues to drop, dominos could be in strife as this ratio is one of the most important for a business.

Efficiency ratios

Table 4: Efficiency Ratios for Dominos

Liquidity ratios

Table 5: Liquidity Ratios for Dominos

These ratios identify how a company can meet with short term commitments or claims against the assets. These ratios also determine how quickly a company can turn their assets into cash. The ratios that are presented are lower than expected as an average current ratio is said to be around 2:1 and acid test ratio 1:1. However due to dominos being a fast food company it is expected that the current ratio will be lower as its stock moves quickly and it generates most of its revenue through goods sold. The acid test ratio should be at the 1:1 mark however this is not met until 2018. The reason for this is because the inventories and prepayments were high throughout 2015-17. However, in 2018 the was no record of inventories or prepayments. Overall these ratios have a negative impact on a decision to invest due to them being low and not having good liquidity protection.

Investment Ratios

Table 6: Investment Ratios for Dominos

Collins Food Limited

Domino’s Pizza Enterprises

Collins Food Limited

The Group utilized a statutory financial record and a balance sheet to determine its current position of business performance. This is a statistical technique that the company uses in determining its aggregate cost and earnings as per the set business year. The above financial information was released on the copy to the director which shows the legitimacy of the information in relation to the business performance. However, it is important to note that the information included the material risks identifiable in the business (Jay, 2002). Such risks show the FSA limitations in the Collins Analysis.

Domino’s Pizza Enterprises

The information that was used for the financial statement analysis came from the;

Statement of cash flows

Statement of profit and loss

Statement of other comprehensive income

Statement of Financial position

Statement of change in equity for the year

The information presented was done so in a methodical manner and was generally easy to get the information required. There were times in which you must use the notes for the statements to get the information required. The financial statements did not present the names of data the same as other reports. For example, the COGS was written as food, equipment and packaging expenses, so I did have to be self-aware that some of the terms were different.

Reading off all the financial statement sheets was easy to do as the data set out in a methodical manner, so reading each data set was easy. It was also helpful that the pervious years data was on the statement so the year to year differences were easy to make.

The information given was easy to use for most of the ratio analysis, however the efficiency ratios such as average inventory turnover period could not be done for the year 2015. This was because you needed the Inventory number for the year 2014, so the average could be calculated. Apart from this the information provided was acceptable so the financial statement analysis could be performed.

The information provided on the statement of financial position was very broad. It had terms such other assets which was hard to determine what the specific asset was. To investigate the specifics of what the assets were, you needed to go into the notes. Assets such as prepayments were in hidden within the reports and you must do through searches to find specific information.

You also had to look deeper to find out what the non-current liabilities were and why there was such a drastic change in borrowings, as this would be a concern, reading off just the balance sheet. There were also large investors hidden away within the notes, this could be useful to investors as it gives them information on who the company has strong investment relationships with.

Collins Food Limited

Please do this section

Domino’s Pizza Enterprises

Financial statements only give people an indication of how well a company has one in the past and does forecast how the company may go in the future. The world is changing rapidly and different food trends within the industry are not put in financial statements event though they could affect the company substantially. Although historical data is usually a good indication of how a company is going to go it does cater for what the future holds and how unpredictable the industry can become due to new world trends.

Financial statements give a good indication of how the company is going. However, it has no information on the share market is going and trends surrounding the market. Due to this being an investment another key factor into making the investment is to look at share market trends as well as industry trends. Financial statements will only give data on the specific company, and if people want a broader knowledge of the market and industry more research abroad will need to be conducted.

The FSA does not mention any risk that the company has. These risks include market risk, liquidity risk, credit risk, foreign exchange risk. To access this information, you must go into the notes section of the report. The FSA does not go in to the specifics of each data set as this information is also in the notes section of the report.

Another limitation within the reports was how CFL financial year ended on the 29th of April and dominos ended on the 1st of July. This meant that making comparisons from year to year was not as exact as we would like as we are not comparing the company’s data at the exact same time as there is discrepancy.

Collins Food Limited

The limitations included a reduction in consumer demand. The company needed to examine the peril by ensuring the update of pecuniary and customer information inquiry. This involved assessing the consumer feedback on the service quality delivered to them. Another possible limitation is the supply chain disruption. The organization should address the risk by utilizing multiple suppliers where necessary.

They need to acquire a varied topographical foundation with numerous dissemination ways. Health procedures and safety may limit the performance of the business. Hygienic matters are a pivotal issue in such an investment. The business should ensure stern interior food security and hygiene practices as well as work-related Net Operating Cash Flow 49.7 million dollars, healthiness and wellbeing observance (Collins, 2012). This includes conducting various audit programs necessary for improving its safety measures.

Domino’s Pizza Enterprises

Collins Food Limited

It is evident that Collins Foods Limited may progressively thrive in its business performance under the above strategy. Nevertheless, it is advisable to address the above-aired problems which will ensure the competitive sustainability of the business. The business also needs to maintain a long-term supplier relationship. Its agreements with the suppliers should be effectively upheld to avoid breaking its credibility to its suppliers. Besides, the group should conclusively adhere to the consumer’s grievances on service delivery. The consumers act as the audit controller of any business. Their say determines how the business is going to propel forward hence their inclusion a sensible requirement in the audit.

Blake, D. (2018). Domino’s, Subway fail to tackle obesity. Inside Retail. [online] Available at: https://www.insideretail.com.au/news/dominos-subway-fail-to-tackle-obesity-201805 [Accessed 25 Apr. 2019].

B&T. (2018). Study: McDonald’s Still Top Fast Food For Aussies (Particularly For The Zs). [online] Available at: https://www.bandt.com.au/marketing/study-mcdonalds-still-australias-favourite-fast-food [Accessed 25 Apr. 2019].

Collinsfoods.com. (2019). Collins Foods Limited. [online] Available at: https://www.collinsfoods.com [Accessed 26 Apr. 2019].

Domino's Investors. (2019). Domino's Investors. [online] Available at: https://investors.dominos.com.au [Accessed 26 Apr. 2019].

Future Food. (2019). Eating Out in Australia: 2017 in Review. [online] Available at: https://futurefood.com.au/blog/2018/1/10/eating-out-in-australia-2017-in-review [Accessed 25 Apr. 2019].

Ibisworld.com.au. (2019). Fast Food and Takeaway Food Services – Australia Industry Report | IBISWorld. [online] Available at: https://www.ibisworld.com.au/industry-trends/market-research-reports/accommodation-food-services/fast-takeaway-food-services.html [Accessed 25 Apr. 2019].

Mitchell, G. (2018). 3/100: The fast-food company with the worst health score. The Sydney Morning Herald. [online] Available at: https://www.smh.com.au/national/nsw/3-100-the-fast-food-company-with-the-worst-health-score-20180527-p4zhrw.html [Accessed 25 Apr. 2019].

Dominos P+L statement analysis 2015-2018 ($M)

Sales 2015 2016 2017 2018 527269 693217 774367 776269 COGS 2015 2016 2017 2018 213059 298477 354127 385675 Expenses 2015 2016 2017 2018 611041 814157 941011 998735 Net Profit 2015 2016 2017 2018 68421 86592 105804 121693

Collins Food Ltd - Profit and loss trend analysis 2015-18 ($m)

Sales $000 $000 $000 $000 2015 2016 2017 2018 571593 574284 633562 770936 Cost of sales $000 $000 $000 $000 20 15 2016 2017 2018 272955 270943 301250 364927 Expenses $000 $000 $000 $000 2015 2016 2017 2018 213330 255640 282847 348307 Net Profit (NPAT) $000 $000 $000 $000 2015 2016 2017 2018 -10360 29115 27988 32489

Collins Food Ltd - Trend Analysis 2015-18 ($m)

Revenue 2015 2016 2017 2018 100 100.47235829251224 110.84674597620715 134.86703988803359 Proft (before tax) 2015 2016 2017 2018 10 0 1688.0000000000002 1760.0000000000002 1939.9999999999998 Assets 2015 2016 2017 2018 100 90.30047443331577 140.64312071692146 175.54032683183976 EBIT 2015 2016 2017 2018 100 747.05882352941182 763.23529411764707 863.23529411764707 NPAT 2015 2016 2017 2018 100 279.80769230769226 269.23076923076923 312.5

Collins Food Ltd - investment return (cents per share)

Earnings per share 2015 2016 2017 2018 -11.14 31.31 28.67 28.28 Dividends 2015 2016 2017 2018 11.5 14 17 17

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