Shares in Domino’s Pizza (LSE: DOM) have soared by 15% today after the company released a very upbeat trading statement. It said that the fast-food delivery company now expects its full-year results to be ahead of previous expectations, with a strong third quarter and good start to the fourth quarter being the key reasons.
For example, sales across the group in the third quarter were 19.4% higher than in the same quarter last year and a key reason for this is Domino’s continued investment in digital. Revenue through digital channels was 35% ahead of the third quarter of last year, with over 75% of delivered sales in the year-to-date having been ordered online. This is highly encouraging for Domino’s since it shows that its marketing spend has been highly worthwhile, with features such as a GPS driver tracker and ‘create your own’ share campaign on social media gaining traction among the company’s customers.
In addition, Domino’s continues to open new stores, with at least 50 planned for the UK in total during 2015. And, while the business is operationally sound in the UK, the company believes there is more work to do in Europe and this could provide a boost to earnings moving forward. So, while Domino’s trades on a historic price to earnings (P/E) ratio of 38.6, its shares look set to continue their recent rise as it offers superb growth potential. Therefore, while somewhat speculative, it remains a strong long term buy.
Similarly, Next (LSE: NXT) also trades on a relatively high rating of 17.3, but it could be argued that the retailer is worth such a premium compared to most of its sector peers. That’s because it offers a superb track record of earnings growth during a highly challenging period for the industry, with Next having increased its bottom line in each of the last five years by at least 15% per annum. This shows that it has excellent customer loyalty and, therefore, its margins are likely to be highly sustainable at current levels.
Furthermore, with the UK economy continuing to go from strength to strength and UK consumers enjoying a real rise in disposable incomes for the first time since the start of the credit crunch, retailers such as Next are likely to gain a boost from rising sales over the medium term.
Meanwhile, Morrisons (LSE: MRW) has, unlike Domino’s and Next, struggled in recent years due to a challenging wider supermarket sector. Its foray into convenience stores has proved unsuccessful and, as such, it is selling them off to focus on core activities. This seems to be a sound move since the stores were unprofitable and were likely to be a drain on Morrisons’ resources which could be better spent elsewhere, such as on improving store appearance and providing higher levels of customer service.
With Morrisons trading on a forward P/E ratio of 15 and having a dividend yield of 3.3% which is well-covered by profit, it appears to be a sound buy. A new strategy has the potential to turn the business around and, with its bottom line set to rise by 17% next year, it could be back on-track a lot sooner than the market is currently anticipating.
