Performance of Dominos Pizza - Essay Example

?Table of Contents Executive Summary…………………………………………………………….…………………………………2 Background of the company…………………………..…………………………………….3 Segmentation………………………………………………………………………………4 Industry……………………………………………………………………………………………….5 Economy………………………………………………………………………………………………5 Ratio analysis Profitability analysis…………………………………………………………………..6 Asset efficiency analysis……………………………………………………………..7 Liquidity analysis……………………………………………………………………….8 Capital structure analysis………………………………………………………….8 Market performance analysis……………………………………………………9 Trend analysis ……………………………………………………………………………………10 Vertical analysis ……………………………………………………….……………………...12 Creditor’s perspective………………………………………………………………………..13 Investor’s perspective………………………………………………………………………..13 Management’s perspective……………………………………………………………..14 Conclusion…………………………………………………………………………………………14 Appendix …………………………………………………………………………………………………..15 References…………………………………………………………………………………………………18 Executive Summary The goal of this report is to assess the performance of Dominos Pizza Inc. from 2008-2010. All values in the report are taken from financial statements published by the company annually. These statements are studied thoroughly and interpreted in light of company’s background and current performances. Moreover, the company performance is seen in the light of industry comparison as well. Trend analysis and vertical analysis are done to compare company’s performance with its base year 2008 and calculating indexes based on it. Various trends are observed and interpreted in light of market’s performance. Moreover, vertical analysis sheds light on company’s key title accounts in relation to the base title. Positive and negative trends are identified and analyzed to provide critical insight. Ratio analysis is done in detail to provide insight about company’s profitability, liquidity, capital structure, market performance and asset efficiency to help investors, creditors and management make decisions about the company’s future. Background: Domino’s Pizza, Inc. (Domino’s) was founded by two siblings from Michigan in 1960, where they acquired a store name DomiNick’s. It started as a product and after five years transmitted into a brand named ‘Dominos’. It operates as a pizza delivery company in the United States and internationally as well. Domino’s has always seen itself as a growing organization which was evident by the urge to become international. In 1983, it went global and took a ride to become the leading pizza maker in the world. Domino’s employs around 10,900 people in their 9,351 stores worldwide. Domino’s is recognized internationally and in order to provide a common man to be a shareholder in the value Domino’s provide, it got listed on the New York Stock Exchange (NYSE) as DPZ in 2004. Domino’s operate in a highly competitive market and to maintain its brand equity, continuous innovation and promotional activities assist heavily in reaching its objectives in adequate time. Domino’s has not placed itself to fight with its competitors on price; rather it has positioned itself on product differentiation and high value added service provider. Domino’s takes great pride in its innovation which is performed periodically to give its customers a greater trade off for the price they pay. Domino’s has expanded its offering to customers, grown their presence in markets and embraced technology in 2010. Its innovative strategy and growth culture has led its transformation to a high-end brand in the pizza industry. Segmentation: Domino’s business constitutes of three segments namely domestic stores, domestic supply chain and international. Domestic stores: Since 2009, Domino’s stores have spread across the globe especially in European sites like Pessac, France. In 2009, Domino’s franchises were 4,461and it climbed to 4475 in 2010. The revenue generated from these stores is usually 35% of the total revenue but this share has been declining in the recent past. It has become the number one pizza company in France and The Netherlands in sales and store count, and they plan to be the leader of pizza delivery in Belgium by the end of 2010. (Domino's Pizza Inc.) Domestic Supply Chain: This segment constitutes 16 dough manufacturers and food centers, sole crust manufacturing center and a vegetable-processing center as well. This segment is responsible for almost 99% of supplies to the domestic franchises. This constituted roughly about 54% of the total revenue in 2009. International: Dominos enjoys a network of more than 16,000 franchisees with 9,351 company-owned and franchise stores in nearly 65 international markets. Domino’s international supply chain also contains six dough manufacturing and supply centers. According to research as of third quarter for the year 2010, international store count was recorded at 46% of its total store count, most of which are functional under master franchise agreements with big companies that own multiple stores. Lastly, Domino’s plan to open 50 to 60 new stores, most of which would be in Europe to take hold of this market. Industry Pizza was introduced in the inner cities of United States mainly NY and Chicago in 1990s. Major credit for it goes to large population of Italian immigrants. Today, approximately 68,000 pizza stores operate in the United States. Pizza segment of the food industry represent 11.7% of all restaurants. According to PMQ magazine’s Annual Industry Analysis, of the 67,554 pizza stores in the US, 59% are independently-owned and it controls 51% of total pizza sales. Major names in the industry include McDonald’s Corporation, Yum! Brands, Inc., KFC, Starbucks, Papa John’s International Inc. and Domino’s. In the recent years, recession has impacted sales of pizza industry harmfully. However, pizza industry has experienced an increase in take-out and delivery sales. This rise has primarily been a result of saving additional expenses like tips, drinks and gas. Moreover, home leisure and advancements in technology, ordering online or via text, has substantially contributed to this increment. Economy In 2010, US economy faced a 1.3% in inflation from 2009 particularly in the food away from home category (Bureau of Labor Statistics). This was coupled by a rise in unemployment rate from 8.5% to 8.9% in 2009-10. Economy was suffering from the recent financial crises of 2008 and fears of recession and unemployment led to a sharp decline in the Consumer Confidence Index as well. Although these negative sentiments hurt fast-food industry badly but due to increased promotional activities and increased value added services, Domino’s was able to hedge itself from the sharp decline in consumer spending in the stated years. Domino’s launched an iPhone Application (App) in November 2009 to take pizza ordering to a new level. Domino’s also launched a new product in the market which was a mouth-watering new range of Oven Baked Sandwiches (OBS). Both of the above stated innovations received appreciation from across the globe which is evident by their rising revenues. Ratio Analysis: Profitability ratios are an indicator of a company’s performance over the year. Profitability ratios include operating profit margin, net profit margin, return on asset, and return on equity (Puxty, Dodds and Wilson). Gross Profit margin for the year 2010 was 28% with $438.6 M. Moreover, this ratio has been stagnant since 2009. However, the ratio was at 25% in 2008. This shows that Dominos has worked hard on reducing their cost of revenue and subsequently increased their sales. Return on sales, also known as net-profit margin, was impressive in 2010 with 6% and reported net earnings of $87.9 M. Net profit margin has reacted parallel to gross margin and stayed at the same level in 2009. The Company used cash of approximately $42.9 million and $5.4 million in 2008 and 2010, respectively, for share repurchases. This is evident by the growing EPS of the organization. Not only the company has focused on reducing the shares outstanding but increased their net earnings parallel to it. EPS rose to $1.45 in 2010 from 1.38 in 2009. In 2008, Dominos struggled with $0.93 earnings per share. Shareholders are also interested in return on assets and equity. Their decisions are influenced by these ratios therefore; it is essential that a company projects better return on the asset it employs and the equity it takes. For Dominos, return on equity was -4% in 2008 which got to -6% in 2009 and further dipped to -7%. Dominos bought back its shares by paying a higher price than the market. This spread is evident by the negative stock holder’s equity in the books of Dominos. The investment by its shareholders is shown in the form of assets therefore; it is imperative to analyze company’s return on assets for the period. In 2008, ROA was 12% which climbed to 18% in 2009 followed by another increase to end FY 2010 at 19%. In comparison to the industry, Dominos is a top notch company specifically if return on asset is considered. Efficiency Ratios Efficiency ratios judge the ability of a company to earn from its resources in an effective and efficient manner (Besley and Brigham). These include receivable turnover ratio and inventory turnover ratio. Inventory Turnover ratio has also been inspiring with a multiple of 42.8 times in 2010. This means that in a matter of 8.4 days, inventory is converted into sale. This ratio touched heights in 2008 with 43.16 times but dipped in 2009 with 40.5 times. This means that there is minimal investment tied up in the inventory (Fabozzi, Peterson and Drake). Still efforts need to be made to increase its turnover rate as investment in inventory yields zero return and a company would always refrain from having its capital tied up in such an investment. They are ranked above average in comparison to the industry. Another indicator of efficiency is Receivable turnover which is calculated by dividing credit sales from average receivables. This ratio measures the efficiency of a company to collect its receivables. Dominos is not impressive as it is ranked below average with respect to the industry. In 2008, receivable turnover ratio was 20.68 times which dipped a little in 2009 but steadied in 2010 with 20 turnovers in the whole year. This means that payment is collected for a credit sale within 18 days. Liquidity ratios illustrate the company’s ability to pay off obligations in the short term (Shim and Siegel). Current asset ratio and acid-test ratio are observed closely when liquidity is in question. The company is in a good position in both of these parameters. In 2008, their Current ratio was 1.7 which dipped to 1.27 in 2009 because the Company released $6.2 million from restricted cash as a result of a lower cash requirement for capitalization of certain subsidiaries. As of 2010, their current ratio was 1.64 which makes it the leader in comparison to the industry. According to 2010 annual report, the Company had approximately $37.2 million of cash held for future interest payments, $35.4 million of cash held in trust or as collateral for outstanding letters of credit (primarily relating to their insurance programs and supply chain center leases), $6.6 million of cash held in interest reserves, $6.0 million of cash held for capitalization of certain subsidiaries and $0.3 million of other restricted cash, for a total of $85.5 million of restricted cash and cash equivalents. Their Acid-test ratio is also impressive with 1.49 in 2010. In 2008, it was 1.54 which dipped to 1.15 in 2009 due to above mentioned reasons. Capital Structure Ratios judge a company’s proportion of short and long term debt in relation to equity and asset. For dominos, their structure has been highly debt intensive as they are on a spree of purchasing back their shares. Equity is reduced which is also financed by debt. In 2008, the percentage was 407% which fell to 391% in 2009 and further to 363%. It has been a norm of this industry and Dominos leads this ratio in relation to its competitors. Moreover, cash used in financing activities increase by $33.5 million 2010 versus 2009 which was primarily due to a $58.1 million decrease in proceeds from issuance of long-term debt, offset in part by a $19.9 million decrease in repayments of long-term debt and capital lease obligations. The $17.3 million increase in 2009 versus 2008 was due primarily to a $118.4 million increase in repayments of long-term debt and capital lease obligations, offset in part by a $58.0 million increase in the proceeds from issuance of long-term debt. Market Ratios indicate a company’s worth in the eyes of an investor. The P/E Ratio indicates how much investors are willing to pay per dollar for current earnings. If the p/e ratio is high then it is usually associated with a growth stock. For Dominos, this indicator has increased sharply over the span of three years. In 2008, the multiple was 4.73 due to low earnings. However, this multiple climbed to 6.28 in 2009 and a huge heap was taken in 2010 to end at 11.23. Currently, the stock prices are very high for Dominos and its multiple has touched to 21. This indicates that there are positive sentiments about the organization in investor’s mind and it would continue to grow considering the plans undertaken. Trend Analysis: Trend Analysis indicates a firm’s likeliness to improve or deteriorate in the years to come. Following table presents trend analysis of Dominos from 2008-2010, taking 2008 as base. These figures have shown that their revenue decreased by 1% in 2009 but it followed by a 10% increase in 2010. Dominos has worked well to reduce the cost of goods sold in relation to revenue. It did not increase proportionately to revenue. On the other hand, net profit after tax showed a tremendous increase of 48% in 2009 and 63% increase from 2008 in 2010. Furthermore, gross profit jumped by 7% in 2009 and stated absolute numbers of $438.6M in 2010 which was a 21% increase from 2008. Company showed higher EBT because of plummeting interest expense over the time. Company witnessed a drop of 14% in net interest expense by the end of 2010. Assets side of the balance sheet has seen positive growth in 2009 and 2010. For the most liquid asset i.e. Cash and cash equivalents it saw a negative growth of 7% in 2009 due to large portion of shares repurchase. However, it climbed in 2010 to end at 47.9M. Total Current assets showed growth of 10% in 2009 and it climbed up 20% in 2010 in comparison to 2008. Total assets showed slight downfall from 2008. It fell by a mere 2% in 2009 but steadied in 2010. The right side of the balance sheet showed mixed views. Current liabilities grew by 47% in 2009 and 24% in 2010 in relation to 2008. Absolute values indicate that there was a fall 33.3M in 2010 from 2009. Total liabilities witnessed a decline due to high long-term debt repayments. It fell by 11% in 2010 from 2008. Total common equity showed steep decline as there were high repurchase agreements for shares outstanding. Prices paid to shareholders to buy back these shares were higher than the market price which left equity into negative. Total Equity saw a decline of 15% in 2010 and 7% in 2009 in relation to 2008. Overall, the performance has been growth oriented. Dominos is focusing more on debt rather than equity which is an indicator that prospects for future are attractive. Company is not willing to distribute it among shareholders rather it is focusing on limited payments through debt servicing and to keep a large chunk with itself. Vertical Analysis: It expresses each financial item as a percentage of a base amount (Net sales in income statement and total assets in balance sheet). It is also called common-size analysis. (Bragg) Dominos has worked hard to reduce its cost of revenue. In 2008, gross profit was 25% but due to efforts and improved efficiency, GP now stands at 28%. However, they have not been able to control their Selling general and Administrative expenses which has caused decline in operating income. Operating income was 14% of the sales in 2008. It dipped to 13% in 2009 but again steadied at 14% in 2010. Domino’s had a high portion of the sales dedicated to interest expense in 2008 and 2009 with 8%. Considering the sales volume, this was an alarming figure. However, 2010 witnessed many changes and one of them was high debt servicing. Interest expense declined to 6% of the sales in 2010. A major proportion of the debt was reduced in this year. Lastly, reducing expense has been the Moto of Dominos in the last two years. This has caused a rise in the net income’s portion of sales. Net income was 4% in 2008 but due to efforts made by the company it raised to 6% in 2009 and stayed constant in 2010. Creditor’s perspective: It is evident by our analysis that the company is looking forward to repay debts quickly. And they have been successful in doing it. During 2007, the initiative of recapitalization was taken which encompassed issuance of fixed rate notes of $1.7 billion and repaying all subordinated debts. The company started to restrict its cash for future payments. As of 2010, restricted cash includes $37.2 million of cash held for future interest payments, $35.4 million of cash held in trust or as collateral for outstanding letters of credit, $6.6 million of cash held in interest reserves, $6.0 million cash held for capitalization of entities, and $0.3 million of other restricted cash. Still the company is in a highly liquid position therefore; creditors should not be afraid about company’s financial health. They have performed well in the past three years by taking strategic decisions and will continue to do so in future. Investor’s perspective: With a popular new pizza recipe and growing international presence, DPZ has cranked out some big gains in 2010 and will continue to do so in 2011. With a PEG ratio of 1, DPZ trades in line with the traditional benchmark for value. There has been a rise in market price of shares since the closure of 2010 financial performance. Dominos recently came up with new dishes which was a success. A growth of 14% is expected on the basis of solid growth in domestic store revenue as well as bullish international performances. According to Zacks, it is ranked as a buy stock and our analysis of the last three years performance compliments it. (Vodicka) Management’s perspective: As far as the management is concerned, the company is a growth step in their career. This is evident by the sense of ownership each employee presents. Extensive training is given to all employees so that they are equipped with Domino’s culture as well as best practices of the industry. Domino invests in their employees and franchisees which is evident by their initiatives like “High-Performance Franchisee Training”, a comprehensive program to train and re-certify our franchisees, which was held in 2009. All the franchisees and employees were present and they benefitted from the session. There is low employee turnover and employees are sure of their career’s progress in years to come. Conclusion In conclusion, Dominos performance has been effective in all respects. They have been profitable, liquid as well as efficient. They have reduced their debt to satisfy their shareholders. Analysts have recommended it to be a buy-stock which is complimented by our analysis as well. They have focused more on creating value and have complimented their culture with innovations every now and then. They are practicing all pre-requisites to become the leader in the industry. Appendix Ratios Formula 2008 2009 2010 Gross Profit 25% 28% 28% Net profit margin 4% 6% 6% EPS 0.93 1.38 1.45 Return on Equity -4% -6% -7% Return on Asset 12% 18% 19% Current Ratio 1.7 1.27 1.64 Acid Test Ratio 1.54 1.15 1.49 Accounts Receivable Turnover 20.68 19.27 20.04 Inventory Turnover 43.16 40.5 42.8 Capital Structure Ratio 407% 391% 363% Interest Coverage Ratio 1.78 1.70 2.36 Solvency Ratio 2.93% 5.24% 5.94% P/E 4.73 6.28 11.23 *Note: Price taken at year end of 2008 2009 and 2010. Balance Sheet (Clauss) Income Statement: 12-Month Chart: (Vodicka) Bibliography Besley, Scott and Eugene F. Brigham. Principles of Finance. Cengage Learning, 2008. Bragg, Steven M. Financial analysis: a controller's guide. John Wiley and Sons, 2007. Bureau of Labor Statistics. "Consumer Price Index Detailed Report, Tables Annual Averages 2010." Bureau of Labor Statistics, 2010. —. "Consumer Price Index Detailed Report, Tables Annual Averages 2010." 2010. Clauss, Francis J. Corporate Financial Analysis with Microsoft Excel. McGraw-Hill Prof Med/Tech, 2009. Domino's Pizza Inc. "A new Domino's: Annual Report 2010." 2010. Fabozzi, Frank J., Pamela P. Peterson and Pamela Peterson Drake. Financial Management and Analysis. John Wiley and Sons, 2003. Puxty, Anthony G., J. Colin Dodds and Richard M. S. Wilson. Financial management: Method and Meaning. Taylor & Francis, 1988. Shim, Jae K. and Joel G. Siegel. Financial Management. Barron's Educational Series, 2008. Vodicka, Michael. Domino's Pizza, Inc. (DPZ): Zacks Rank Buy. 21st October 2011. . Read More