This report recommends selling shares of Domino's Pizza (DPZ) based on a target price of $112.47, representing a 19% downside. This is primarily due to Domino's high debt load of $2.24 billion, which could require refinancing at a higher interest rate. Additionally, same store sales growth may be difficult to maintain at record high levels of 12% in 2015. Changing consumer preferences toward fast casual dining also poses a threat as this trend gains momentum.
1. The University of Texas at Dallas
2016 Spring
Securities Analysis Competition
2. NYSE: DPZ Recommendation: Sell
Industry: QSR – Pizza Current Price: $138.62
Sector: Consumer Discretionary Target Price: $112.47
This report is published for education purposes
only by students competing in the Spring 2016
Security Analysis Competition
*Target share price for the next 6 months
Closing Price: 138.62$
52- Week High-Low: $ 139.42- $ 98.60
Shares Outstanding: 50.32M
EPS (LTM): 3.55$
Market Cap: $ 6.98B
LTMDividend Yield: 1.10%
Short Interest: 7.45%
Beta: 0.80
EV/ EBITDA: 20.6 x
P/E: 39.1 x
Insitutional Holdings: 94.50%
Insider Holdings: 0.40%
Market Profile
Investment Highlights
We initiate our coverage on Domino’s Pizza (DPZ) with a Sell
recommendation derived from a price target of $112.47, representing a
potential downside of 19%. Our recommendation is primarily driven by the
following:
It Started With the Turnaround. In 2010, Domino’s changed their
business model, revamping their recipes and increasing innovative
technology. Although not the first company to have online ordering,
Domino’s has adapted better and more quickly to consumers’ desire
for more easily accessible digital ordering. In addition, Domino’s
continues their innovation with the advent of the Domino’s Ultimate
Delivery Vehicle (DXP) and the Domino’s Robotic Unit (DRU).
The Fleeting Nature of Same Store Sales Growth. Domino’s posted
strong domestic same store sales (SSS) growth of 12% in 2015 versus
SSS growth of 7.5% in 2014. The firm had international SSS growth of
7.8% in 2015 versus 6.9% in 2014. However, SSS growth has been
historically volatile; facing this record-high SSS growth will be
difficult for the company and future expectations of growth.
High Debt Load on Their Shoulders. Since IPO, Domino’s has had a
large amount of debt. The company has refinanced three times in the
last ten years, increasing total debt to $2.24 billion. This is in addition
to their existing negative equity. Furthermore, Domino’s has low cash
flows and cash on hand, making it difficult for the company to pay
back debt without interrupting operations. There is a high probability
that they will have to refinance their debt, and at a higher interest rate.
Key Financials FY 2015 FY 2016E FY 2017E
Revenue: 2,217$ 2,419$ 2,661$
Op. Margin: 405 446 487
Net Margin: 193 207 235
EPS: 3.58 3.87 4.42
ROA: 36.3% 37.3% 37.3%
ROIC: 70.2% 81.2% 81.2%
Valuation Method Weight Price
DCF Valuation 50% 112.51$
P/E Valuation 50% 112.43$
Implied Valuation 112.47$
80
90
100
110
120
130
140
Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16
Historical Share Price
NYSE:DPZ - Share Pricing ^SPX - Share Pricing Price Target
3. 2 | P a g e
Source: Bloomberg
Source: RestaurantNews
Source: Investor Presentation
Top Markets Store Count Potential Store Count % Saturation
U.K./ Ireland 881 1,200 73.4%
Australia/
New Zealand
653 900 72.6%
S. Korea 415 500 83.0%
Japan 384 850 45.2%
Canada 384 650 59.1%
France 250 1,000 25.0%
Netherlands 170 300 56.7%
Spain 153 350 43.7%
Taiwan 130 150 86.7%
Developed Markets
Top Markets Store Count Potential Store Count % Saturation
India 950 1,800 52.8%
Mexico 610 700 87.1%
Turkey 457 700 65.3%
Saudi Arabia 154 250 61.6%
Malaysia 142 350 40.6%
Brazil 129 500 25.8%
Emerging Markets
Source: Bloomberg, Team Research
Business Description
Domino’s Pizza Inc. (DPZ) is the second largest pizza chain in the world,
trailing behind Pizza Hut, but is the leader in pizza deliveries. The company
was established in 1960 by brothers Tom and James Monaghan, and was sold
to Bain Capital in 1998. Subsequently, in 2007, the company went public and
Bain Capital sold their interest in 2010. Domino’s is currently headquartered
near Ann Arbor, Michigan in the Domino’s Farms Office Park. Domino’s
currently has over 12,500 locations in approximately 80 countries worldwide,
with the largest international market being in India. Domestically, Domino’s
biggest revenue driver is their supply chain which accounts for 62% of
consolidated revenues, or $1.38 billion. This business model has allowed them
to oversee the quality, type of equipment, and food they serve on a consistent
basis. The company plans on expanding their international reach by offering
items specialized to the region they are in. In 2012, Domino’s started
incorporating mobile technology into their ordering system by introducing
their app in the Amazon, Apple, and Google online stores.
Company Strategies
Supply Chain – Domino’s supply chain model, which accounts for
62% of consolidated revenues, enables the company to implement a
universal standardized product throughout all its stores, and create an
additional stream of revenue. Additionally, Domino’s incentivizes
franchisees to procure supplies from the company through a profit
sharing agreement of 50%.
Keeping it Simple – Domino’s focuses their efforts on products they
currently serve, rather than spending their resources on launching and
promoting new products. Within the past 3 years, they have only
introduced 2 new items. Domino’s encourages their franchisees to
emphasize on the basics of quality pizza and quick delivery.
Progress in Technology – Domino’s has progressively taken strides to
incorporate various forms of technology on their platforms, ranging
anywhere from apps to voice recognition software. Recently, they
launched AnyWare, a system where customers can order via text,
tweet, or voice on various platforms. Domino’s has capitalized on the
shift in consumer ordering preferences, with over 50% of orders made
digitally.
Renovation of Stores – Domino’s has introduced a new Pizza Theater
design where customers can watch their pizza being made from order
to completion. This goes in line with the marketing concept of
complete transparency. These renovations allow them to
contemporize their image and keep up with changing trends.
4. 3 | P a g e
Source: Proxy Statement
Source: Proxy Statement
Source: Proxy Statement
Source: Proxy Statement
Source: Team Research
Management & Culture
Domino’s executive board consists of the Chairman of the Board of
Directors, CEO, CFO, presidents of U.S. operations, and international
operations followed by nine Executive Vice Presidents, and seven Directors.
The leadership team brings an extensive variety of experiences, which
allows them to lead the company in a positive direction.
Since CEO, J. Patrick Doyle, came in to leadership, shares in Domino’s have
considerably risen in value, as he pushed for rapid international expansion.
He was recognized as the
Number 1 Best CEO of 2011
by CNBC and his approval
ratings remain positive as
he transformed Domino’s from a pizza company to a technology company.
Russell J. Weiner, the Chief Marketing Officer and President of Domino’s
USA, came to Domino’s in 2008 from PepsiCo. Weiner saw a need in
Domino’s for a new marketing strategy when he arrived, and he came up with
an idea that Domino’s should use radical honesty to gain the trust of
consumers. Domino’s released a series of self-critical advertisements that used
this idea and they experienced improved results starting in the first quarter of
2010.
Industry Overview and Competitive Positioning
Threat of New Entrants (Moderate-High)
There is high domestic market saturation. In the previous three years, nearly
3,000 new pizza restaurants were created in the United States, bringing it to a
total of 74,812. There are few barriers to entry due to low capital requirements
and a low interest rate environment that provides easier access to funding.
Also, there is limited amounts of governmental regulations on local pizza
restaurants and small chains. The majority of regulations these restaurants
have to comply with are health and safety concerns, which are numerous but
low-cost.
However, there is still high pricing competition, as the trend in bigger chains
is to offer more discounts and deals. New entrants are forced to respond at
the cost of their revenues, which affects their return on investment and give
new entrants a cost disadvantage. There is a reliability on speedy distribution
channels and high quality ingredients, leading to increases in respect to the
cost-burden on small chain and independent stores. There is high brand
“Smart hustle and results-driven. Demanding and
customer-focused. Passionate and innovative. Fun
with a family feel.” - Domino’s Company Culture
Name Age Position
J. Patrick Doyle 52 President/CEO
Jeffrey D. Lawrence 42 CFO & EVP
Richard E. Allison, Jr 49 President
Scott R. Hinshaw 53 EVP
Russell J. Weiner 47 President
5. 4 | P a g e
Source: Bloomberg, Team Research
Source: WSJ, Team Research
Source: Investor Presentation
Source: Wired
awareness and brand loyalty. The pizza industry is primarily dominated by
established brands, such as Domino’s, Pizza Hut, Papa John’s, and Little
Caesars. These brands claim a large portion of customers due to the brand
recognition that consumers strongly recognize.
Bargaining Powers of Buyers (High)
There is high price sensitivity, especially in the aftermath of the recession.
Buyers want the best pizza for the cheapest price. Since there is low product
differentiation, buyers are willing to sacrifice quality for savings. With the
higher availability of digital ordering, buyers are able to easily assess which
restaurants offer better discounts.
Bargaining Powers of Suppliers (Low)
The switching costs to alternative suppliers is low, and there is a large number
of suppliers, thus putting pressure on them to be competitive in terms of
quality. Some buyers have contracts with fees for early termination, but these
fees are a small cost when compared to the purchased volume. Additionally,
many pizza chains have long-term relationships with suppliers, which brings
down costs for the buyers and also puts pressure on suppliers to keep this
consistent revenue stream. With a large labor supply and very few labor
unions in the pizza industry, the labor force does not have leverage against
their employers, resulting in relatively low labor costs that are reflected in
product prices.
Threat of Substitutes (High)
The pizza segment is a relatively small faction of the entire QSR sector which
results in readily available replacements for consumers. Many restaurants are
offering delivery options which cuts into the competitive edge of pizza
restaurants. There is also a growing trend towards fast-casual restaurants,
which is a disadvantage for most pizza chains, as they are quick-service
restaurants. There is a trend towards a healthier diet, negatively impacting the
pizza industry. In the pizza industry, there is low differentiation in products,
so consumers have a wide variety of choice.
Competitive Rivalry (High)
There is strong market competition between not only major brands, but also
between local chains. Smaller local and family-owned chains minimize the
profit share of the larger brands. In an attempt to grow customer loyalty, the
larger brands are launching loyalty programs to counteract the adverse effects
of the low switching cost. Pizza restaurants have traditionally low margins,
due to a high cost of sales and lower pricing in order to compete with other
restaurants. High concentration of pizza restaurants, up to 3.87 stores per
10,000 people, creates an even more competitive market where consumers
have many choices in their local areas.
6. 5 | P a g e
0
5
10
15
20
25
30
35
1990 1995 2000 2005 2010 2015
Percentage of Obese
Adults
Source: Investor Presentation
7%
5%
6%
7%
8%
4%
3%
5%
8%
12%
2011
2012
2013
2014
2015
Same Store Sales Growth
International Domestic
Source: Bloomberg, Team Research
93%
7%
Revenue by Geographic Segment
Domestic International
Technological Trends
The pizza industry in 2015 had a decrease in total sales by .05%, based off
PMQ 2016 Pizza Power Report, and an average same store sales decrease of
2.34% This negatively impacts Independent chains (with fewer than 10 stores),
which had total sales drop by 5.01% and average sales drop by 3.21%. The
pizza market as a whole has seen a decrease in independent chains market
share from 41% to 39% from 2014 to 2015.
The negative shift in the demand for independent chains is attributable to the
positive shift of consumer spending to digital platforms. Millennials are the
largest share of the consumers of pizza, and they prefer ordering online. These
trends towards digital ordering are lost on independent chains that are slow
to adapt to this electronic environment. This coupled with the value priced
menu has increased Domino’s same store sales by 12%. Approximately half
of Domino’s orders now come through one of its twelve digital platforms,
even by tweeting an emoji of pizza. Domino’s CEO Patrick Doyle told
investors that digital ordering leads to higher volumes and repeat customers.
Digital ordering is growing 300% faster than dine-in traffic, and mobile
ordering is now 23% of all food ordering.
Health Trends
Consumers are also trending towards what they perceive as healthy foods.
This perception is based on the idea that food labels and ingredient lists
should be eligible to the layman. With growing trends towards organic, non-
GMO, and gluten free foods, restaurants that do not follow these trends are
less likely to get repeat customers. The best example of this is Chipotle, which
has created a menu of non-GMO and humanely-raised meat. This allows
consumers to believe that they are eating healthy food, even though the
average calorie count for a burrito is over 900 calories. An example of this
within the industry is with Papa John’s revealing that their vegetables are
freshly cut in restaurants and meats have no fillers. They even go so far as to
disclose the material that the pizza box is made out of. Although the essence
of the product hasn’t changed, the transparent disclosure of ingredient puts
Papa John’s in a good light with the customer. A study by Janet Polvy and
Peter Herman published in Science Direct found that when people perceive
the food as healthier, they eat 35% more than the food they perceive as
unhealthy. Rising health concerns lie primarily within the U.S., which is
where a significant portion of the companies’ revenue is generated.
Source: Bloomberg
Source: Team Research
7. 6 | P a g e
Source: Team Research
Source: Bloomberg
Source: Bloomberg
Valuation Method Weight Price
DCF Valuation 50% 112.51$
P/E Valuation 50% 112.43$
Implied Valuation 112.47$
0
1
2
3
4
5
Opportunties
Strengths
Weaknesses
Threats
SWOT
Source: Team Research
Investment Summary
We initiate our report with a Sell recommendation on Domino’s Pizza with a
target price of $112.47. Our price target came from the use of a Discounted
Cash Flow Analysis and Relative Valuation. Our recommendation is based
upon Domino’s large amount of debt, changing consumer preferences
towards fast-casual, and high valuation multiples.
Adding Debt Through Refinancing – Since Domino’s went public in 2004,
they have had a large amount of debt on their balance sheet. Over time, this
debt has increased approximately 200% through three refinancing deals. This
debt is troublesome because of the lack of strong cash flows that Domino’s
generates. Only recently has the company had a positive net change in cash
over $20 million. Although the likelihood of refinancing remains high in the
future, if the deal were to not go through, Domino’s would be severely
negatively impacted, as it has the potential to decrease the company’s
earning’s power. Furthermore, the company has negative equity, and has had
a history of working with this retained deficit. Taking out additional debt,
while paying extremely high one-time special dividends during two of its
three recapitalization deals, seems to imply that Domino’s is taking needless
risks.
Fast-Casual Upwards Trend – The QSR industry has been growing slower in
the past several quarters because of changing consumer preferences. There
has been, and continues to be, a shift towards fast-casual restaurants. These
restaurants offer slightly higher quality food and no stigma attached to quick-
service, or “fast food.” This shift is based on how consumers perceive the fact
that a slight increase in price offers a better quality of food. Furthermore, these
restaurants offer an atmosphere that is generally not found in quick-service
restaurants, geared towards a more family-friendly environment.
Over-valued – In fiscal year 2015, Domino’s had its best record to date. Their
same-store sales growth for domestic companies reached a new high. Shortly
after the company released its earnings in Q4, the stock price shot up
approximately 30% in just a few days. This led to a higher P/E ratio of about
39x, when Domino’s usual P/E range is between 28x-32x, and their
competitors’ P/E’s are around 29x. In almost all other multiples, Domino’s is
trading at a significant premium relative to its competitors. Domino’s growth
factors seem to have been priced into the stock, but we do not see these factors
as being sustainable.
8. 7 | P a g e
Source: Bloomberg, Team Research
Source: Bloomberg, Team Research
Source: Bloomberg, Team Research
Financial Analysis
The financial analysis table highlights Domino’s net income margin growth
and the EBITDA margin growth. The growth in net income margin stems
from continued Same Store Sales growth on both the domestic and
international fronts, as well as new store expansion. With these large net
income growths over the years, we expect that Domino’s will continue to hit
economies of scale and increase its EBITDA margin by lowering its average
costs. Improvements in SG&A margin is due to higher efficiency, as Domino’s
continues to digitalize their operations through their PULSE point of sale
system and online ordering access points.
We expect that the ROA and ROC will arrive at 37.3% and 89.2%, respectively,
next year. The firm has utilized its assets and capital more effectively over the
year, which, in turn, increased return for their shareholders. We expect these
to gradually improve with increased use of technology.
The low short term liquidity ratios indicates weakness in the company. A
majority of the cash is used to further growth operations, such as new store
creation and restructuring existing stores (Pizza Theater design). This
increases risk due to Domino’s high debt load and subsequent interest
payments. Without enough cash on hand, Domino’s will not be able to pay
back their debt when it all comes due. Thus, this long-term debt, while
financing current operations and reducing credit crunch risk, may negatively
impact future cash flows.
Financial Ratios FY11A FY12A FY13A FY14A FY15A FY16E FY17E FY18E
Profitability Ratios
Return on Assets % 34.5% 36.8% 39.1% 39.2% 36.3% 37.3% 37.3% 37.3%
Return on Capital % 67.2% 75.6% 83.2% 83.3% 70.2% 81.2% 81.2% 81.2%
Efficiency Ratios
Accounts Receivable Turnover 19.7x 18.5x 18.0x 17.8x 17.7x 18.3x 19.1x 18.9x
Accounts Payable Turnover 18.7x 16.0x 15.6x 16.5x 15.9x 17.2x 17.2x 17.2x
Margin Analysis
Gross Margin % 28.5% 29.9% 30.5% 29.8% 30.8% 30.8% 30.8% 30.8%
SG&A Margin % 12.8% 13.0% 13.0% 12.2% 12.5% 12.4% 12.5% 12.6%
EBITDA Margin % 17.1% 18.1% 18.6% 19.1% 19.4% 19.6% 19.5% 19.5%
Net Income Margin % 6.4% 6.7% 7.9% 8.2% 8.7% 18.4% 18.3% 18.5%
Short Term Liquidity
Current Ratio 1.7x 1.3x 1.4x 1.6x 1.6x 1.1x 1.1x 1.1x
Cash Ratio 0.8x 0.8x 0.8x 0.7x 0.8x 0.7x 0.7x 0.7x
Coverage Ratios
Total Debt/EBITDA 5.1x 5.2x 4.6x 3.9x 5.2x 3.0x 3.0x 3.0x
Net Debt/EBITDA 5.0x 5.0x 4.5x 3.9x 4.9x 2.9x 2.9x 2.9x
EBITDA / Interest Exp. 3.1x 3.0x 3.8x 4.4x 4.3x 4.4x 4.4x 4.4x
Leverage Ratios
Total Debt/Capital 600.9% 692.9% 624.0% 532.9% 508.6% 417.9% 417.9% 417.9%
Total Liabilities/Total Assets 351.7% 379.3% 345.6% 304.5% 325.1% 248.6% 248.6% 248.6%
9. 8 | P a g e
Source: Team Research
Source: Team Research
Source: Team Research
Source: Team Research
Perpetuity Growth Method
Terminal Value: 9,004,188
Terminal Growth Rate 2.5%
PV of Terminal Value 6,872,116
Present Value of FCFF: 1,254,319
Implied Enterprise Value 8,126,435
Less: Debt & Capital Leases (2,240,793)
Plus: Cash & Cash Equivalent 321,982
Less: Pension: -
Implied Equity Value 6,207,624
Dilued Share Outstanding 55,172
Implied Share Price 112.51$
Premium/(Discount) to Current -18.8%
One of the biggest risks is Domino’s high debt load, shown through the
historical Net Debt/EBITDA ratios. This multiple over 4x indicates concern for
a company. Our projections have this ratio decreasing to approximately 2.9x
due to an assumption that Domino’s would pay off a significant portion of
their debt in the near future.
Valuation
To value Domino’s, we primarily utilized two valuation methodologies. We
incorporated a Discounted Cash Flow Model, and a Company Comparable
Analysis in order to take advantage of both the intrinsic and relative valuation
methods. As a result, we reached our target share price subsequently.
DCF Model (50%) – Our valuation model projects FCF for the next 5 fiscal
years and assumes a terminal growth rate of 2.5%. As part of the quick-service
restaurant industry, Domino’s has revealed to be less cyclical and volatile
compared to the market. We used an effective tax rate of 37%. Additionally,
we project that Domino’s will grow in line with the expected U.S. GDP of
2.5%.
Weighted Average Cost of Capital (WACC) – For our calculation of WACC,
we used a risk-free rate of 2.2% as stated on the 20-year Treasury bond and a
5.2% market risk premium. The cost of equity is estimated using the CAPM
model using the rates from above. We obtained a beta of 0.8 because of the
less cyclical nature of the company as demonstrated through their historical
performance. Additionally, we based Domino’s cost of equity on their market
value, rather than their book value, as the company has negative common
equity on their balance sheet. To find the cost of debt, we used the BBB-
default spread and added it to the 20-year Treasury rate. By weighting debt
and equity by their market values, we calculated a WACC of 5.55%.
Relative Valuation (50%) – Our set of comparable companies consists of
Domino’s direct competitors in the QSR Pizza industry, as well as high-
growth companies in the overall QSR industry. We removed companies that
were incompatible with Domino’s business model. Our relative valuation
emphasized P/E multiples. We used the 75th percentile P/E for Domino’s due
to their outperformance against the industry average.
Comparable P/E 32.4 x
Diluted EPS (DPZ) 3.47$
Implied Price (DPZ) 112.43$
P/E Valuation
Multiple Turn Price
2016E EBITDA 13.0x 138.21
2017E EBITDA 11.8x 103.69
Comparable Valuation
10. 9 | P a g e
Source: Team Research
Source: Team Research
Source: Capital IQ
Source: Team Research
FR
OR2
MR2 MR1
OR1
Impact
Probability
Sensitivity Valuation Factors
Investment Risks
Financial Risk:
Higher Availability of Liquidity (FR) – Domino’s, as of January 3rd, 2016, had
$2.24 billion dollars’ worth of debt. Without a recapitalization, Domino’s
would be forced to pay off their large debt all at once. However, if credit
availability remains high, and the Federal Reserve does not raise interest rates,
Domino’s can continue to refinance their debt obligations with no significant
negative impact on operations.
Market Risks:
Bullish Global Economic Conditions (MR1) – If the global economy grows
quickly compared to the current sluggishness, people will have more
discretionary income. This could lead to an increase in income allocation
towards eating out, which, in turn, would increase traffic per store and
enhance the overall QSR industry performance.
Independent Chains Continue to Underperform (MR2) – Independent chains are
losing market share, and this market share is being absorbed by major chains.
This contributed to Domino’s stellar same store sales growth in the last year.
Operational Risks
Implementation of Technological Improvements (OR1) – If Domino’s recent
innovations in technology exceed expectations, it could improve operating
efficiency. It would enable them to take cost-cutting measures as human
capital would become less of a necessity.
Success from Pizza Theater Design (OR2) – Successful implementation of the
Pizza Theater Design could increase customer traffic in Domino’s stores,
leading to higher sales volume as well as increased same store sales growth.
Terminal FCF Growth Rate
11251.3% 1.5% 1.8% 2.0% 2.3% 2.5% 2.8% 3.0% 3.3% 3.5%
4.6% 124.47$ 136.96$ 151.91$ 170.10$ 192.72$ 221.64$ 259.88$ 312.82$ 390.98$
4.8% 111.05 121.42 133.65 148.27 166.08 188.22 216.52 253.95 305.77
5.1% 99.56 108.28 118.44 130.41 144.72 162.15 183.82 211.52 248.15
5.3% 89.63 97.05 105.59 115.52 127.24 141.25 158.31 179.52 206.64
5.6% 80.97 87.33 94.59 102.95 112.68 124.14 137.86 154.56 175.32
5.8% 73.35 78.85 85.08 92.19 100.37 109.89 121.12 134.54 150.89
6.1% 66.60 71.39 76.78 82.88 89.84 97.85 107.17 118.16 131.31
6.3% 60.58 64.79 69.48 74.76 80.73 87.54 95.38 104.51 115.27
6.6% 55.19 58.90 63.02 67.62 72.78 78.63 85.30 92.97 101.91
DiscountRate
(WACC)
11. 10 | P a g e
Appendices
Table of Contents
Appendix 1: Management & Governance ........................................................................................................................... 11
Appendix 2: Shares Outstanding Ownership..................................................................................................................... 12
Appendix 3: 2016 Macro Outlook......................................................................................................................................... 13
Appendix 4: Income Statement............................................................................................................................................. 14
Appendix 5: Balance Sheet..................................................................................................................................................... 15
Appendix 6: Statement of Cash Flows ................................................................................................................................. 16
Appendix 7: Debt Schedule ................................................................................................................................................... 17
Appendix 8: Balance Sheet and Cash Flow Statement Drivers ........................................................................................ 10
Appendix 9: Expense Assumptions...................................................................................................................................... 19
Appendix 10: Revenue Assumptions................................................................................................................................... 20
Appendix 11: PULSE Point of Sale System.......................................................................................................................... 21
Appendix 12: Domino’s and Competitors SWOT.............................................................................................................. 22
Appendix 13: WACC.............................................................................................................................................................. 23
Appendix 14: DCF................................................................................................................................................................... 23
Appendix 15: Comparable Companies................................................................................................................................ 24
Appendix 16: Comprehensive Ratio Analysis .................................................................................................................... 25
Appendix 17: Recent Litigation............................................................................................................................................. 26
Appendix 18: Sensitivity Analyses....................................................................................................................................... 27
Works Cited ............................................................................................................................................................................. 28
12. 11 | P a g e
Appendix 1: Management & Governance
Company Executives
Board of Directors
Name Age Position Compensation Role Start Date
David A. Brandon 63 Chairman of the Board of Directors 03/1999
J. Patrick Doyle 52 President, Chief Executive Officer and Director $3,644,550.00 03/2010
Jeffrey D. Lawrence 42 Chief Financial Officer and Executive Vice President $733,283.00 08/2015
Eric B. Anderson 43 Executive Vice President of International Operations 01/2016
Richard E. Allison, Jr 49 President, International $1,302,950.00 10/2014
Troy A. Ellis 50 Executive Vice President, Supply Chain Services 06/2015
Stanley J. Gage 49 Executive Vice President, Team USA 08/2014
Scott R. Hinshaw 53 Executive Vice President, Franchise Operations and Development $806,981.00 01/2008
Lynn M. Liddle 59 Executive Vice President, Communications, Investor Relations and Legislative Affairs 11/2002
Kenneth B. Rollin 49 Executive Vice President, General Counsel 01/2008
James G. Stansik 60 Executive Vice President, Franchise Relations 01/2008
J. Kevin Vasconi 55 Executive Vice President and Chief Information Officer 03/2012
Russell J. Weiner 47 President, Domino’s USA $1,302,950.00 09/2008
Judith L. Werthauser 50 Executive Vice President, PeopleFirst 01/2016
C. Andrew Ballard 43 Director 07/2015
Andrew B. Balson 49 Director 03/2009
Diana F. Cantor 58 Director 10/2005
Richard L. Federico 61 Director 02/2011
James A. Goldman 57 Director 03/2010
Vernon “Bud” O. Hamilton 73 Director 05/2005
Gregory A. Trojan 56 Director 03/2010
13. 12 | P a g e
Appendix 2: Shares Outstanding Ownership
Ownership by shares outstanding held (top 15): Bloomberg
Ownership by country: Bloomberg
Board of Directors Bloomberg
14. 13 | P a g e
Appendix 3: 2016 Macro Outlook
In 2015, global economic activity remained weak, as the U.S. economy increased GDP at a muted 2.4% while global
economies only grew at 3.1%. In the beginning of 2016, many countries were affected by the uncertainty affecting
China’s poor financial services and housing economy. However, according to the IMF, global growth is forecasted
to increase after 2017 and beyond. The macro environment has been impacted by much uncertainty from both
domestic and global factors, which predictably leads to an uncertain outlook.
Fluctuating Energy and Commodity Prices
Commodity prices declined sharply in the second half of 2015. Strong production of output from the members of
OPEC, Russia, and the United States have lowered the price of oil to under $30 per barrel in the last 3 months, and
the price is currently around $40. Energy spending by households that make less than $50,000 was 21% of earnings
in a study by Bank of America/Merrill Lynch in 2012. Households making more than $50,000 spent around 9% of
their earnings. Consumers making a lower income have a higher marginal propensity to consume and are more
likely to spend this extra income as oil prices remain low.
Strong Dollar and Interest Rates
Foreign currency conversion continues to be a major problem for domestic companies with international exposure.
Economies in Asia and Europe are looking to expand monetary policy to stimulate demand, driving a higher
variance between the U.S. dollar and other currencies. Both the Central Bank of Japan and the European Central
Bank implemented negative interest rates. This provides more uncertainty over the next year, as Goldman Sachs
continues its bullish-dollar stance. Domestically, the Federal Reserve System raised the interest rate by 0.25% at the
end of 2015, and had predicted four equal increases over the course of 2016. However, due to the economic
uncertainty in the global environment, the Fed agreed to hold off on increasing the interest rate in the foreseeable
future.
15. 14 | P a g e
Appendix 4: Income StatementIncomeStatement
(Inthousands,exceptpershareamounts)FY06AFY07AFY08AFY09AFY10AFY11AFY12AFY13AFY14AFY15AFY16EFY17EFY18EFY19EFY20E
Revenues:
DomesticCompany-OwnedStores:$393,406$394,585$357,703$335,779$345,636$336,349$323,652$337,414$348,497$396,916402,537$418,709$432,564$450,029$455,357$
DomesticFranchise:157,741158,050153,858157,780173,345187,007195,000212,369230,192272,808292,223313,637335,976358,168379,971
DomesticSupplyChain:762,782783,330771,106763,733875,517927,904942,2191,009,851-------
InternationalFranchise--------152,621163,643192,006221,810257,176298,389349,428
International:123,390126,905142,447146,765176,396200,933217,568242,589-------
SupplyChain:--------1,262,5231,383,1611,532,1681,706,4801,897,4052,101,8922,307,728
TotalRevenue:1,437,3191,462,8701,425,1141,404,0571,570,8941,652,1931,678,4391,802,2231,993,8332,216,5282,418,9342,660,6362,923,1223,208,4773,492,484
CostofSales:
DomesticCompany-OwnedStores:312,130317,730298,857274,474278,297267,066247,391256,596267,385299,294307,173322,445327,059340,714347,480
DomesticSupplyChain:681,700710,894699,669680,427778,510831,665843,329899,860-------
International:58,95855,39263,32762,18075,49882,94686,38196,793-------
SupplyChain:--------1,131,6821,234,1031,365,5771,519,2301,686,3591,874,4072,055,657
TotalCostofSales:1,052,7881,084,0161,061,8531,017,0811,132,3051,181,6771,177,1011,253,2491,399,0671,533,3971,672,7501,841,6752,013,4182,215,1212,403,137
GeneralandAdministrative:170,334184,944168,231197,467210,887211,371219,007235,163249,405277,692300,657331,933368,637404,494440,965
TotalOperatingExpenses:1,223,1221,268,9601,230,0841,214,5481,343,1921,393,0481,396,1081,488,4121,648,4721,811,0891,973,4082,173,6082,382,0552,619,6152,844,102
GrossProfit:384,531378,854363,261386,976438,589470,516501,338548,974594,766683,131746,184818,961909,704993,3571,089,347
GrossMargin:36.5%34.9%34.2%38.0%38.7%39.8%42.6%43.8%42.5%44.6%44.6%44.5%45.2%44.8%45.3%
IncomeFromOperations:214,197193,910195,030189,509227,702259,145282,331313,811345,361405,439445,526487,028541,067588,863648,382
EBITMargin14.9%13.3%13.7%13.5%14.5%15.7%16.8%17.4%17.3%18.3%18.4%18.3%18.5%18.4%18.6%
OtherExpenses(Income):
InterestIncome:(1,239)(5,317)(2,746)(683)(244)(296)(304)(160)(143)(313)(432)(495)(614)(542)(423)
InterestExpense:55,011130,374114,906110,94596,81091,635101,44888,87286,88199,537117,621114,982112,886101,55786,390
Other:-13,294-(56,275)(7,809)----------
TotalOtherExpenses:53,772138,351112,16053,98788,75791,339101,14488,71286,73899,224117,188114,487112,271101,01585,967
Income(Loss)BeforeProvisionforIncomeTaxes:160,42555,55982,870135,522138,945167,806181,187225,099258,623306,215328,338372,541428,795487,848562,415
EBTMargin
ProvisionforIncomeTaxes:54,19817,67728,89955,77851,02862,44568,79582,11496,036113,426121,621137,994158,831180,705208,326
NetIncome(Loss)forthePeriod:106,22737,88253,97179,74487,917105,361112,392142,985162,587192,789206,717234,547269,964307,143354,089
EffectiveTaxRate:33.8%31.8%34.9%41.2%36.7%37.2%38.0%36.5%37.1%37.0%37.0%37.0%37.0%37.0%37.0%
BasicEarnings/(Loss)PerShare(EPS):$1.68$0.61$0.93$1.39$1.50$1.79$1.99$2.58$2.963.58$3.874.425.125.866.81
DilutedEarnings/(Loss)PerShare(EPS):$1.65$0.59$0.93$1.38$1.45$1.711.91$$2.48$2.863.47$3.754.284.965.686.59
WeightedBasicSharesOutstanding:63,139,07362,176,56857,755,51957,409,44858,467,76958,918,03856,419,64555,345,55454,918,47153,828,60953,467,91153,107,21252,746,51452,385,81652,025,117
WeightedDilutedSharesOutstanding:64,541,07963,785,12458,339,53557,827,69760,815,89861,653,51958,997,47657,720,99856,931,22655,532,95555,172,25754,811,55854,450,86054,090,16253,729,463
CashDividendsPerShare:$0.48$-$-$-$-$-$3.00$0.80$1.001.24$1.52$1.52$1.52$1.52$1.52$
HistoricalProjected
22. 21 | P a g e
Appendix 11: PULSE Point of Sale System
Domino’s computerized management information systems are designed to improve operating efficiencies, provide
corporate management with timely access to financial and marketing data and reduce store and corporate
administrative time and expense. Domino’s has installed Domino’s PULSE™, their proprietary point-of-sale
system, in every Company-owned store in the United States and significantly all of their domestic franchise stores.
Some enhanced features of Domino’s PULSE™ over their previous point-of-sale system include:
• Touch screen ordering, which improves accuracy and facilitates more efficient order taking;
• Delivery driver routing system, which improves delivery efficiency;
• Improved administrative and reporting capabilities, which enable store managers to better focus on store
operations and customer satisfaction; and
• Enhanced online ordering capability, including Pizza Tracker which was introduced in 2007.
30%
11%
59%
2015
43%
21%
36%
2011
23. 22 | P a g e
Appendix 12: Domino’s and Competitors SWOT
Strengths, Weaknesses, Opportunities, and Threats Analysis
Dominos Pizza Hut Papa Johns
What are your business
advantages?
12 Ordering Platforms, 25%
marketshare for Delivery
Strong Brand name, High brand
loyalty
Strong brand reliability and loyalty
What are your core
competencies?
Fast Deliveries and Strong
marketing Strategies
Menu variety and consistent
quality
Higher quality toppings than
competitors (fresh dough, no meat
Where are you making the
most money?
Strong Global Supply Chain (64%)
fulfills 99% of Franchises orders
60% of money comes through
company sales and 40% through
Most of the revenue comes from
company-owned restaurant sales
What are you doing well?
U.S. same store sales 10.7%
International store count growth
Their emerging market sales
growth has been increasing by 4%-
Maintaining a high quality in food
provided
What areas are you
avoiding?
Avoiding limited time products,
only creating stable menu
Avoiding international expansion
in the African markets
Avoiding major international
expansion (low international store
What are you doing poorly?
Underpenetration in the Chinese
market and other developed
countries
Opened 355 stores in Chinese
market and same store sales in
China declined 5% for FY 15 and
Ineffective catering to
international markets
Where are you losing
money?
Large currency conversion
headwinds from international
Their franchises and licensing
fees revenues dropped by $4M in
Multiple historical lawsuits
(underpaying drivers, false
What needs improvement?
Further focus on markets with
strong demand
Further focus on the China
Division and other international
More rapid growth to keep up with
competitors
Any beneficial trends?
22 consecutive years of positive
same store sales internationally
Pizza searches in Google are
increasing
Population is growing more aware
of healthy/whole foods
Niches that competitors are
missing?
Growing market share by
acquiring and converting
The dessert menu is the strongest
among pizza chains, partnering
Responding well to a growing
health conscious market
New technologies?
New PULSE POS drives supply
chain effeciency
Innovating delivery technology
New eye tracking technology
creates pizza based on
subconcious desires and eye
Implementation of new payment
systems for iphone and android
that incorporates Google Wallet
New needs of customers?
Offering gluten free and thin crust
pizza for health conscious
consumer
Offering $5 flavor menu - provides
low prices on quality items
Big dinner boxes created for large
Offering "lighter choices" pizza
with less cheese, fresher
ingredients for health conscious
Aggressive competitors? QSR Market very competitive QSR Market very competitive QSR Market very competitive
Successful competitors?
Pizza hut has 14.8 % of pizza
shares
Dominos is the biggest
competator with an increasing
market share over the last 5 years
Pizza hut has 14.8 % of pizza
shares
Dominos has 13.5%
Negative economic
conditions?
High risk of commodities pricing
on cheese, which is their biggest
expense
Increasing minimum wage would
decrease profits on company
owned stores which make up a
High risk of commodities pricing
on cheese, which is their biggest
expense
Government regulation?
Government Regulation of
Labeling of food products could
increase costs
Government Regulation of
Labeling of food products could
increase costs
Government Regulation of
Labeling of food products could
increase costs
Changing business
climate?
Consumers seeking more fast-
casual/upscale dining options
Consumers seeking more fast-
casual/upscale dining options
Consumers seeking more fast-
casual/upscale dining options
Vulnerabilities?
Changing consumer preference
(healthy)
Supplier scandal over expired
meat sales lead to a decrease in
High royalty and advertising fees
could lower possibility of
StrengthsWeaknessesOpportunitiesThreats
24. 23 | P a g e
Valuation Method Weight Price
DCF Valuation 50% 112.51$
P/E Valuation 50% 112.43$
Implied Valuation 112.47$
Perpetuity Growth Method
Terminal Value: 9,004,188
Terminal Growth Rate 2.5%
PV of Terminal Value 6,872,116
Present Value of FCFF: 1,254,319
Implied Enterprise Value 8,126,435
Less: Debt & Capital Leases (2,240,793)
Plus: Cash & Cash Equivalent 321,982
Less: Pension: -
Implied Equity Value 6,207,624
Dilued Share Outstanding 55,172
Implied Share Price 112.51$
Premium/(Discount) to Current -18.8%
Appendix 13: Cost of Capital
WACC – Domino’s Pizza Inc.
($ in Millions Except Per Share and Per Unit Data)
Appendix 14: Discounted Cash Flow Analysis
Cost of Capital Weight
Risk-free rate 2.2%
Market Risk Premium 5.2%
Beta 0.80
Cost of Equity 6.3% 74.7%
After-tax Cost of Debt 3.3% 25.3%
Cost of Preferred Stock 0.0%
WACC 5.55%
Historical Projected
Cash Flow & DCF Model FY11 A FY12 A FY13 A FY14 A FY15 A FY16 E FY17 E FY18 E FY19 E FY20 E
After-tax EBIT 280,682 306,828 340,872 370,983 408,481
Depreciation 29,027 31,928 32,154 35,293 34,925
Net change in Working Capital (11,392) (2,596) (8,633) (4,778) (9,068)
Capital Expenditure (57,439) (63,178) (69,411) (76,187) (82,931)
FCFF 240,878 272,981 294,982 325,311 351,406
% Growth Rate 13.3% 8.1% 10.3% 8.0%
Present Value of FCFF 228,206 245,014 250,832 262,069 268,198
Sum of PV of FCFF 1,254,319
Terminal Value 9,004,188
Normal Discount Period 1.0 2.0 3.0 4.0 5.0
Mid-year Convention Method 0.5 1.5 2.5 3.5 4.5
27. 26 | P a g e
Appendix 17: Recent Litigation
In August 2012, Ruth Christopher, 65, and her husband Devavaram Christopher, 70, were hit by a Domino's
delivery driver who had hydro-planed and crashed into their car on Major Drive. Police found that wet pavement
and a bald tire caused the delivery driver to hydroplane into traffic. Ruth later died and Devavaram is left with
permanent brain damage. Domino's was sued and was awarded 32 million dollars by a jury. This decision was
overturned by a higher court as Domino’s already paid the family 6 million dollars in a pre-trial settlement. This
along with the fact that Domino’s does not control the day to day operations of franchisees and has put in the
company handbook that drivers vehicles should be checked periodically.
28. 27 | P a g e
Appendix 18: Sensitivity Analyses
FCF & WACC
Same Store Sales
29. 28 | P a g e
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