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  • 1. Integrated Company Analysis Dominos Pizza Team B6 December 14, 2010On my honor, I have neither given nor received unauthorized aid in completing this academicwork. Tai Adkins Vanessa Bailey Ben Schmidt Ankushh Partap Soni Joe Ypma
  • 2. Dominos Pizza Integrated Company AnalysisTeam B6December 14, 2010TABLE OF CONTENTSEXECUTIVE SUMMARY ............................................................................................................. 3BUSINESS SEGMENTS ................................................................................................................ 3ACCOUNTING AND FINANCIAL ANALYSIS .......................................................................... 4 Revenue....................................................................................................................................... 4 Cost of Goods Sold ..................................................................................................................... 5 Financial Ratios........................................................................................................................... 5 Inventory Accounting ................................................................................................................. 6 Allowance for Uncollectible Receivables ................................................................................... 6 Long-lived and Intangible Assets................................................................................................ 6 Capital Structure ......................................................................................................................... 7 DCF Valuation ............................................................................................................................ 8MARKETING ANALYSIS ............................................................................................................ 9 Competitive Analysis ................................................................................................................ 10 Customer Analysis & Market Segmentation............................................................................. 10 Positioning & Marketing Mix ................................................................................................... 10OPPORTUNITIES FOR GROWTH ............................................................................................. 11 Developing a Loyalty Program ................................................................................................. 11 Increased Expansion in China ................................................................................................... 12CONCLUSION ............................................................................................................................. 12 Page 2 of 20
  • 3. Dominos Pizza Integrated Company AnalysisTeam B6December 14, 2010EXECUTIVE SUMMARY Domestically, Dominos faces highly competitive markets and challenges from PizzaHut, Papa Johns and various local/regional competitors. Internationally, opportunities aboundbut Dominos faces the challenge of converting customers to its quick-service model. Even withthese challenges, Dominos has generated fairly consistent Net Operating Income (NOI) over thepast decade. This steady NOI has been necessary to service the high level of debt with whichDominos is financed. Dominos has nearly $1.5 billion in debt on approximately $450 millionof assets. As such, Dominos carries a negative balance in Retained Earnings and a StockholdersDeficit. Servicing and paying down its debt will be central to Dominos again achieving positiveshareholder equity. In the face of its debt, Dominos has undertaken several initiatives to growNOI, including successfully launching a revamped pizza product and increasing its internationalpresence. To continue growing NOI, we recommend Dominos consider initiating a loyaltyprogram for its domestic customers and as well as broader expansion into China.BUSINESS SEGMENTS Dominos business is comprised of three segments: domestic stores, domestic supplychain and international. See Appendix A for a breakdown of revenues by business segment. Domestic Stores Dominos franchises 4,461 stores and owns an additional 466 stores. Domestic stores generated revenues of $493.6 million in FY 2009, which were approximately 35% of total revenues. While domestic franchise fees have been a consistent 11% of total revenues for the past decade, revenues from domestic company- owned stores have been decreasing as a percentage of total revenue, from nearly 30% of total revenue in FY 2002 to about 25% in FY 2009. Domestic Supply Chain Dominos supply chain generated revenues of $763.7 million in FY 2009, which were approximately 54% of total revenues. Domestic supply chain Page 3 of 20
  • 4. Dominos Pizza Integrated Company AnalysisTeam B6December 14, 2010 contains 16 dough manufacturing and food centers, one thin crust manufacturing center and one vegetable-processing center. These facilities manufacture dough and distribute food supplies to all company stores and to 99% of domestic franchised stores. International Internationally, Dominos franchises 4,070 stores in over 60 international markets. Dominos international supply chain also contains six dough manufacturing and supply centers. Together, the international business for Dominos generated revenues of $146.7 million in FY 2009, which were approximately 11% of total revenues. As a percentage of total revenue, international revenues have been steadily increasing, from 6% of total revenue in FY 2002 to 11% in FY 2009. The international segment generates an operating margin of 45%-55% versus only 20% for domestic company-owned stores. As of 3Q FY 2010, Dominos international store count was 46% of its total store count, most of which are operated under master franchise agreements with large companies that own many stores. For example, Higa Industries Co., Ltd., the Japanese master franchisee, operates 179 stores in Japan. See Appendix B for a list of the largest international markets for Dominos.ACCOUNTING AND FINANCIAL ANALYSISRevenue For the first time since FY 2006, both domestic and international revenues are growingon a year-over-year basis in FY 2010. Management believes some of this growth is a short-termeffect generated by increased marketing and its revamped pizza product, but management alsoexpects some of the growth to be sustaining. Revenues fluctuate from time to time as a result of store count changes. Retail sales fromcompany-owned stores are recognized when items are delivered to or carried out by customers,while revenue from franchisees are determined and paid to Dominos weekly based on a Page 4 of 20
  • 5. Dominos Pizza Integrated Company AnalysisTeam B6December 14, 2010percentage of retail sales (generally 5.5%). Dominos will record royalty revenues based on anestimate of the franchisees sales when figures are not timely reported by franchisees, and theseestimates are materially consistent with actual amounts.Cost of Goods Sold Dominos business remains subject to price fluctuations for its commodity ingredients,especially cheese and red hard wheat. While these prices increase the cost of goods sold forDominos company-owned stores, Dominos receives some benefit of higher ingredient prices inthe form of higher revenues for its supply chain operation. Dominos has a five-year contractwith its largest cheese supplier and does not use derivative instruments to hedge its costs forcommodity ingredients. While prices are not hedged, operating margins have remainedconsistently between 25-27% over the past decade.Financial Ratios As of 3Q 2010, Dominos held total assets of approximately $426 million againstliabilities of approximately $1.667 billion. Thus, Dominos carried a stockholders deficit of$1.242 billion. This capital structure is quite atypical, not only for its industry but also generally.Dominos competitor Papa Johns, for example, at the end of its FY 2009 held assets ofapproximately $359 million against liabilities of approximately $212 million for totalstockholders equity of approximately $185 million. Dominos debt-to-assets ratio is 3.47 ascompared to Papa Johns 0.25, and Dominos debt-to-equity ratio is (1.19) as compared to PapaJohns 0.53. The difference in these numbers is primarily due to Dominos debt. Due to its large stockholders deficit and highly leveraged capital structure, Dominosmeasures of profitability can be hard to interpret. On one hand, over the past year Dominosreturn on equity was (6.6)% as compared to 27.8% for Papa Johns. On the other hand, over thepast year Dominos had a gross margin of 27.8% versus 27.4% for Papa Johns, and Dominoshad a return on assets of 20.1% as compared to 13.6%