Dominos

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Krause Fund Research Spring 2012

Consumer Discretionary

Recommendation: HOLD Analysts

Dongfang Qi [email protected]

Ziyi Wang [email protected]

Austin Dean [email protected]

Chris Speer [email protected]

Company Overview Founded in 1960 and headquartered in Ann Arbor, Michigan, Domino’s Pizza Inc. (DPZ) is the market leader in the United States pizza delivery and second largest pizza company in the world based on number of units. The company offers a wide variety of pizza products as well as pasta, bread sticks, boneless chicken and wings, oven baked sandwiches, chocolate cakes, and soft drinks. As of January 1, 2012, there were 394 company-owned and 4,513 franchised Domino’s Pizza units in the U.S. and 4,835 franchised stores internationally. Domino’s Pizza has three business segments: domestic stores, domestic supply chain, and international. Stock Performance Highlights 52 week High $42.21 52 week Low $17.75 Beta Value 1.064 Average Daily Volume 926,064 Share Highlights Market Capitalization $2.05B Shares Outstanding 50 M EPS $1.79 P/E Ratio 19.8 Company Performance Highlights ROA 21.92% ROE -8.7% Sales $1.65B Financial Ratios Current Ratio 1.65 Debt to Equity -1.20

Domino’s Pizza Inc. (NYSE: DPZ)

April 16, 2012

Current Price $35.69 Target Price $33-$40

DPZ Delivers Consistency

Domino’s Pizza Inc. operates a franchise model business which allows for relatively high returns on invested capital. A business model of this type places the corporation in a position to handle marketing. Domino’s has benefited from a strong marketing campaign since 2009 that has increased market visibility and brand image. Domino’s Pizza Inc. has placed a greater emphasis on international expansion in recent years. During 2005-2010 Domino’s international network grew 48% from 2,987 stores to 4,422 stores. International expansion offers Domino’s its greatest value potential. Over the past 3-5 years Domino’s has made a concerted effort to improve the palatability of their core products. This effort, along with the subsequent marketing campaigns have increased brand loyalty and customer preference which has had a profound effect on increases in revenue and number of franchise openings. Domino’s is not immune to market trends but the CEO describes his company as “recession resistant”. The following analysis shows that Domino’s is somewhat insulated from changes in unemployment but is affected by other external factors such as GDP and disposable income. Along with improving its core products, Domino’s has made a push to expand the breadth of its menu to differentiate itself from more basic pizza delivery companies. By offering customers a wider range of items the company has the potential to earn more revenue per customer. One Year Stock Performance

Source: Yahoo Finance

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Investment Thesis Based on the current stock price of $35.51 our analysis shows that this price does not provide adequate upside potential and we place a HOLD recommendation on this stock. Our analysis and projections show Domino’s has potential for growth and increased profits but many of these factors are reflected in the current stock price. Our valuations deliver a price range between $33.00-$40.00, which translate to between a 2% downside and 12% upside potential. Since the current stock price falls within the limited range of our valuations we conclude the stock does not hold tremendous unrealized value.

Economic Outlook Real Gross Domestic Product (GDP) Real Gross Domestic Product, the value of all goods and services produced in the U.S. when factoring for inflation, is the most widely cited statistic in business and economic discussion. The growth rate for real GDP is a common barometer for the overall health of the domestic economy and although it is a lagging indicator it often influences other economic factors such as consumer confidence and commodity prices. The most recent statistic regarding GDP which was released March 29, 2012 shows a 3.0% fourth quarter increase in annualized GDP in 2011 where as the third quarter real GDP increased 1.8%. The restaurant industry within the consumer discretionary sector is a major factor in GDP because consumption makes up a large part of GDP calculations especially within such a developed country like the United States. Other increases in real GDP in the fourth quarter reflected from private inventory investment, personal consumption expenditures, exports, and nonresidential fixed investments. Given the increase in GDP reported at the end of 2011, it will benefit the consumer discretionary industry. The GDP is heading in an upward direction and we conclude that the GDP of the first quarter of 2012 should increase between 2.5% and 3.5%. As the labor force progresses closer to full employment, consumer spending will increase and real GDP will be boosted. As a result, Domino’s Pizza will benefit from the increase in consumer spending as more consumers will likely spend more money at quick-service restaurants rather than dining at home.

Figure 1

 Source: Net Advantage Unemployment The restaurants industry is significantly affected by the unemployment rate in the United States. The number one expense in the restaurants industry is the wages given to the workers. Having a low unemployment rate in the restaurant industry entails giving higher wages in order to keep workers from leaving the industry. Having a turnover rate of 200%, it’s very important for restaurants to have a steady amount of available workers to ensure restaurant efficiency.1 The unemployment rate significantly increased from April 2007 to October 2009 where it reached a high of 10.0%. The unemployment rate has steadily gone down since the end of October 2009, but nowhere near the low of 4.2% in January, 2001. The latest unemployment rate released for March 2012 is currently at 8.2%. 2 After analyzing the steady decrease from figure 2 below, unemployment will steadily stay around 8.2% in the next six months. We believe in the next two-three years the unemployment rate will reach near 7.0% as more individuals begin to find more job opportunities and we begin to witness our economy slowly recover. Domino’s Pizza is insulated from unemployment rates because lower unemployment rates mean more individuals are working and as a result are earning more income and are more likely to spend more dining out at restaurants. Even though low unemployment is valuable to the general public, a higher unemployment rate for DPZ would also beneficial because it would cause consumers to switch from luxury restaurants to a more casual dining.

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Figure 2

Source: Net Advantage Disposable Income Disposable personal income is classified as the amount of money individuals have designated for spending after subtracting taxes and adjusting for inflation.3 This is important to the restaurant industry because the higher disposable income an individual has, the more willing they are to spend on dining out at restaurants. Having a higher disposable income means people are not necessarily worried about price, and have the leverage to choose where to eat based on cost. On the other hand, people that have low disposable income will most likely shift their dining rituals to a less-expensive restaurant, fast-food restaurant, or cook at home. Since the recession in 2008, disposable income has risen 3.6% in 2010 after falling by 2.1% in 2009. 4 The disposable personal income in January 2012 rose $5.0 billion or less than 0.1% while in February increased $18.9 billion, or 0.2%. Since 2010, the percentage change for disposable personal income has stayed relatively constant above 0.0%. Due to historical records, we believe in the next six months, disposable personal income will remain steady remaining at around 1%. In the next two-three years, we project that with a healthy economy, disposable income will have a gain up to 4.5%. As a result of our prediction, the restaurant industry will significantly benefit from an increase in disposable income due to consumers having more freedom and flexibility to spend money on quick-service restaurants.

Figure 3

Source: Federal Reserve Bank of St. Louis Commodity Prices (PPI) Within almost any industry, corporations must be able to predict and control their input prices to maintain a healthy and profitable outlook. The restaurant industry within the consumer discretionary sector is exposed to fluctuations in commodity prices as much as any industry. The companies within the industry face the challenges of absorbing rapidly increasing commodity prices while reflecting those costs in the menu prices of their product without rapid menu changeover. To provide stability, most companies engage in futures contracts to hedge against the risk of price fluctuations. Figure 4 below shows the prices of the Commodity Food and Beverage Price Index over 2011. The figure depicts how prices have steadily declined since they hit a peak in early spring. It would be expected that input prices will increase again in the coming spring, but variables such as crop yield and weather cannot yet be accurately predicted. The long term outlook depends on additional variables, but given interest rates as low as they are and futures prices trending upwards, it is likely commodity prices will rise consistent with inflation.

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Figure 4

Source: Index Mundi

Capital Markets Outlook The consumer discretionary sector is exposed to economic conditions more directly than many other sectors because in operates within a relatively more demanding economic climate. However, consumers will quickly adapt to their activity within this sector. If consumers are not confident in future prospects both on a macroeconomic level and a personal financial basis, they are more likely to cut spending. Despite the slow growth of the U.S. economy over the past years, the restaurant sector has fared better than expected, especially limited-service or fast food restaurants. This is likely a result of steady, if not decreasing, input prices both in food inputs and other indirect inputs such as energy costs. As a result, people are foregoing more expensive sit-down restaurants in favor of fast food when they choose to eat out. Given the industry’s success during the recent economic slowdown, the overall outlook of capital markets for the industry is positive. It is a good time to invest in the restaurant industry because public firms within this industry have consistently proven themselves to be leaders in emerging markets. Being a frontrunner in the restaurant industry has allowed firms to prosper even when the domestic economy is lagging. Moreover, as the U.S. economy begins to regain its footing and unemployment decreases while consumer disposable income rises, these companies will continue to see increased traffic in their stores. The future prospect of the restaurant industry depends largely on the future prices of food and beverage inputs as well as energy prices. Corporations that operate with large distribution chains could be exposed to a spike in these costs that could eat into profits. Also, the disposable income of consumers poses a double-edged sword for companies because if disposable income increases over the next year, consumers may feel more confident and

therefore may choose more expensive, higher end restaurants over the cheaper and less healthy fast food options.

Industry Analysis The restaurant industry was projected to have $604 Billion sales in 2011, which is approximately 4 percent of the projected total Gross Domestic Product of the United States according to the estimate from National Restaurant Association.5 The industry has been expanding since the 1960s, mainly due to the boom of quick service restaurants such as Yum! Brands Inc. and McDonald’s. The long term expansion of the restaurant industry is expected to continue as the major players in this industry are focusing on providing healthier and less expensive food for both Americans and customers abroad. Figure 5

Source: Nations Restaurants News The restaurant industry provides two categories of services: fast food and full-service restaurant. The fast food restaurants mainly serve products including sandwiches, and pizza. Those restaurants attract customers by offering convenient, inexpensive and appealing foods. Fast food restaurants will still perform comparatively well during financial downturn, because customers will switch from full-service restaurant to the cheaper fast food restaurants. The major players in fast food restaurants include McDonald’s, Yum! Brands Inc., and Burger King Holdings Inc. Full service restaurants typically offer table ordering services, and their price range varies greatly depending on the location and variety of food being served. Casual dining, family restaurants, and coffee and snack shops are three categories that full service restaurants belong to. Casual dining restaurants serve food including seafood, Asian, and Italian. The major companies in full service restaurants showed both increases and declines in

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sales for the year of 2010. Family restaurants tend to offer foods that attract both adults and children. The leaders in this category are IHOP and Denny’s. Coffee and Snack shops serve a variety of breakfast items and snacks but mainly focus on serving coffee to its customers. Starbucks Corporation is the most prevalent example in the coffee and snack shop category. Business Cycle and Its Impacts on Restaurant Industry Restaurants in this industry are cyclical firms which follows the business cycle. Even though the restaurant industry has slightly improved during the last few years in the slowly recovering United States economy, the growth in this industry is slow. Despite the recession in 2008, many restaurants and fast food chains in this industry have further expanded to global markets. For instance, Yum! Brands Inc. has focused its attention on international expansion and has sold two of its brands, A & W restaurants and Long John Silver’s that are not currently operating globally. During financial downturns, customers have switched their selections within the restaurant industry. For the past few years, quick service restaurants have been able to outperform more expensive casual restaurants by promoting cheaper prices to its customers.

External Factors Governments One regulation that the industry may be concerned with is the requirement for labeling the nutrition facts for the foods served in the restaurants. This can significantly affect fast food restaurants since their foods tend to contain higher calories and fat. Social Habits Another force that is shaping this industry is customer tastes and social habits. Customers are paying more attention to their health now than any time before. Many foods in the fast food restaurant industry are considered unhealthy by many customers. In order to respond to this situation, the restaurants industry is changing their menus to add healthier options. For example, McDonald’s has been successful in leading this reformation by adding healthier options to their menus. For example, it has added coffee and fruit and maple oatmeal to its menu, and it is also offers chicken nuggets containing less sodium. Fast food restaurants have also shifted from offering dinner to breakfast and lunch. According to a survey from Morning MealScape 2011, 10% of Americans skip their breakfast every day. 6This allows fast food restaurants to expand in the breakfast business in the next few years. McDonald’s has been expanding its breakfast with a complete new menu and more nutritious foods.

Global Market Many restaurants are competing globally to gain a competitive advantage by trying to increase market shares. Yum! Brand Inc. is the leader in this strategy. The company currently owns three restaurants, KFC, Pizza Hut, and Taco Bell. Most of the revenue generated from KFC and Pizza Hut comes from global markets especially China. Also, Yum! Brands are acquiring the most famous hotpot chain in China called Little Sheep. As the U.S. economy has slowed down in recent years, so has the growth in the restaurant industry. Therefore, restaurant operators have been looking for opportunities to expand their brands in to other countries such as: China, India, and Brazil. Major restaurant operators like YUM Brands and McDonald’s have already acquired essential market share of fast food service in China. Porter’s 5-Forces Analysis Potential Entrants The Restaurant industry has limited potential entrants. Since the major players have already shared the market, it is difficult for a new business to get established. Major players have also accumulated their advantages against new entrants by building new restaurants, franchising, and expanding globally. Suppliers (Bargaining Power of Suppliers) The bargaining power of suppliers shapes the restaurant industry by determining the food commodity costs. Restaurant operators usually negotiate on their purchases through futures contracts; however volatility in the food commodity costs can constrain the power to price their products. Customers (Bargaining Power of Customers) Price is a key factor for customers in choosing restaurants. Consumers compare the values of food and what they pay for the food. For instance, when the food of one restaurant is “irrationally” priced compared to its competitors, the restaurant loses customers. Substitutes One reason for high competition in the restaurant industry is similar menus among the players in the fast food service industry. Most of the restaurant operators focus on burgers, pizzas, tacos, and chicken wings. Few restaurants have successfully differentiated menus from others. Rivalry among existing firms The rivalry in the restaurant industry gives firms more incentive to differentiate themselves from its competitors and meet customers’ needs.

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Figure 6

Source: Bing Finance We use several variables to determine which companies are best positioned in the restaurant industry. The table in Figure 6 is sorted by the size of market capitalization. Gross profit margin, net income, revenue, and EPS indicate the profitability of a company. D/E ratio indicates the risk that a company pays back its debts. A lower P/E ratio is preferred since it indicates potential bargain. Analysts are looking for companies with higher profitability and lower risk. Texas Roadhouse, Inc. has relatively higher profitability in regard to gross profit margin compared to other companies while having a quite low P/E ratio. Also, Texas Roadhouse, Inc. has a really low debt level which ensures the company’s safety. Bob Evans Inc. also has a relatively higher profitability indicated by gross profit margin. The D/E ratio of Bob Evans implies that the company faces small risk to pay back debts. We believe that there will be an increase in full service given the economic and industry outlook. Both casual dining (Texas Roadhouse Inc.) and family restaurants (Bob Evans) will benefit from the general increase in full service.

Company-Specific Analysis Domino’s Pizza Corporation (DPZ) is a publicly traded global pizza chain, offering delivery and carry-out options at over 9,000 stores in over 60 countries worldwide. The company was founded in 1960 and is headquartered in Ann Arbor, Michigan. Domino’s is considered the global leader in the pizza delivery market. Domino’s business is segmented into three distinct sections: the domestic franchises, the supply chain and international business.7 Domino’s is headed by J. Patrick Doyle, who took over as Chief Executive Officer in February 2010 and has been head of domestic operations since September 2007.8 Though only being publicly traded since 2004, Domino’s is considered to be in the mature period of the business life

cycle, and this is evident by consistent revenue and gross margin, but a lack of growth and innovation. Domino’s has experienced substantial gains in its stock price since late 2008, but this is more a result of the company reinventing its image and strategy after its stock price collapsed in 2007 rather than evidence of a growth period in the business life cycle. Corporate Strategy Domino’s Pizza Corporate strategy is to use its superior supply-chain to provide its franchises with lost cost inputs so the franchises may focus on sales and service. Domino’s engages in 50% profit sharing with franchises and relies on cost-plus pricing of its supplies to insulate the corporation from fluctuations in commodity prices.9 Although Domino’s has over 6000 domestic stores, only about 500 are company owned. Given this fact, Domino’s has had to refocus its efforts in recent years in providing quality products and consistent service across a wide number of stores and a diverse group of franchisees. It is evident through revenue and gross margin increases, as well as an overall stock price rise, that Domino’s new focus and its subsequent marketing effort has paid off. Domino’s has benefitted from building stronger relationships with franchisees and lowering the cost of opening. Furthermore, the company is committed to producing a geographically diverse franchise network domestically, without significant regional concentrations, in order to maximize national marketing efforts and supply chain value. Domino’s future strategy and focus is shifting from increasing domestic performance to improving international market share.10 Financial Summary In spring of 2007, Domino’s Pizza common stock experienced a ten-fold increase in trading volume in a matter of weeks. This was an indication of a massive sell-off that continued until the stock price dropped from around $33.00 per share to a low of $3.03 per share in November 2008.11 Not surprisingly, Domino’s financial reports for 2007 showed net income of $37 million, down from over $100 million the previous year. Also, the 2007 income statement shows a 200% increase in interest payments from $53 million in 2006 to $125 million in 2007. 12 From this low point, Domino’s has improved their financial situation drastically. In the fiscal year 2010, Domino’s increased net income to $87 million by increasing sales revenue, decreasing interest payments to under $100 million and reducing their tax bill despite increased earnings. Domino’s latest quarterly report showed net income of $22 million and a continuation of this upward trend in profit is evident with the company’s annual report in early March.13 In the January 2011 investor meeting, Domino’s executives stressed the importance of generating free cash flows to return value to

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shareholders.14 In Domino’s 2010 cash flow statement, the company generated $128 million in cash from operations. Despite making large reductions in Long-Term debt, Domino’s was still able to increase overall cash by $5 million.15 Products and Markets Despite being pigeonholed in the pizza delivery chain market, Domino’s Pizza has made a concerted effort to expand to different customers and appeal to a range of tastes through the diversification of products it offers. Domino’s operates under only one product line; however through expansion, that product line has grown significantly. A few years ago Domino’s revamped its entire product line to provide higher quality and better tasting pizza. This change was accompanied by a well-known advertising campaign to increase awareness of the company’s effort to shift from fast, cheap delivery pizza to a more loyal customer base.16 At this time, Domino’s also expanded their menu to include oven-baked sandwiches and pasta bread bowls. Furthermore, the company has attempted to capitalize on the increase in popularity of specialty pizza by creating the “American Legends” category. Even more recently, Domino’s has attempted to fend off competition from take-and-bake chains and higher end pizza restaurants by offering their new “Artisan Pizzas”. 17 Domino’s CEO Patrick Doyle said in an interview with Bloomberg News in December 2011 that the company was making an effort to build loyal customers who were committed to the brand based on their evaluations of the product with the lower price and fast delivery being an added benefit.18 The company has shifted its marketing strategy to appeal to families and customers willing to spend a bit more for quality pizza, rather than the typical pizza delivery customers (i.e. college students and young adults). Production and Distribution To relieve stores from spending long hours making dough and thin crust products, grating cheese, preparing toppings, processing vegetables, and distributing the food, Domino’s Pizza developed a central distribution and dough manufacturing system. The Domestic Supply Chain segment operates 16 dough manufacturing and food supply chain centers, one thin crust manufacturing center, and one supply chain center. There are also supply chain operations in Canada, Alaska, and Hawaii. 19 Competition With Domino’s Pizza competing in the domestic and global market, its main competitors globally are YUM! Brands, McDonalds, and Wendy’s. Many of these fast-service chain restaurants are expanding internationally at a rapid rate. Each competitor offers wide array of products to its consumers, so Domino’s has had to make many menu changes to help keep their loyal customers satisfied.

Domino’s main U.S. competitors in the pizza delivery service market are Papa Johns, Little Caesar’s, and Pizza Hut. Domino’s is in an industry where it must use its valued brand name as a way of competing with its competitors around the globe. Locally, Domino’s uses its trademark “Domino's Pizza: You Got 30 Minutes”20 to remind consumers that they are the number one pizza delivery company in the U.S. and use this as a competitive edge against its aggressive competitors. Franchising and Availability of Credit Domino’s differentiates itself on a less public level from other quick-service chain restaurants in the way it offers franchising opportunities. Compared to other companies in this industry, Domino’s has a relatively inexpensive start-up cost to franchisees.21 Domino’s offers a franchise fee of $25,000.22 This is in the middle group as far as franchising fees go; Subway has a fee of $15,000 while McDonald’s requires 25% to 40% of down payment which is usually between $75,000 and $100,000.23 However, Domino’s requires far less liquid capital than other franchises-around $75,000, compared to as much as $250,000 for a McDonald’s franchise. Furthermore, Domino’s does offer financing to its franchisees. Despite relatively low start-up costs, Domino’s franchising is still susceptible to changes in the availability of credit. As evident by past income statements and revenue breakdown, franchising revenue was affected by the recent credit crunch. From a peak in 2005, franchising revenue dropped in subsequent years and hit a low in 2008 before finally recovering in 2010. Although Domino’s has been fairly immune to changes in the availability of credit on a corporate level, the credit market does affect its business through franchise revenue. Catalysts for Growth/Change In the limited-service restaurant industry, customer relations are often left on the back burner. Domino’s had a reputation for putting price points ahead of customer experience, but in recent years the company has stressed an open relationship with customers. In the most recent investor meeting in January 2012, the CEO stressed that this would continue to be a priority and that building a stronger customer base had proven to be a lucrative endeavor that other companies were struggling to catch up with. 24 In the same presentation, the company has also focused its efforts on improving the overall taste and quality of their product. A major influence in this decision to focus on quality has been the rise of smaller, local pizza restaurants offering higher quality and fresher ingredients, as well as the take-and-bake segment growing rapidly. As the quick-service restaurant industry in the United States continues to approach saturation among maturing companies, these brands are focusing their efforts on rapid international expansion. The most recent figures show that Domino’s has over 4,600 international stores. This lags behind many other brands, including McDonalds and Yum

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Brands which have nearly 20,000 international locations, respectively. Domino’s has entered the international market more cautiously than some of the other brands, however the company has stressed limiting risk through low capital investment and allowing for flexibility within its franchises to adapt to local markets and tastes.25

S.W.O.T. Analysis

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Source: Data Monitor 26 Strengths Domino’s pizza has a strong and diversified franchising network around the world, which is the main reason its pizza delivery service is so successful. Domino’s pizza shares 50% of the pre-tax revenue generated by regional dough manufacturing and supply chain centers with its domestic franchisees who buys all of its food from Domino’s. As a result, Domino’s strengthens its relationships with its franchisees allowing its business to earn ongoing amounts of profits and earnings with reduced cost structure. In the most recent years, Domino’s Pizza has been experiencing massive growth in its expansion across the globe. During 2005-2010, Domino’s international network grew 48% from 2,987 stores to 4,422 stores. 27 Domino’s Pizza is one of the most well-recognized consumer brands in the world. Domino’s was called the “Mega Brand” as defined by advertising brand magazine. 28 Its positive brand image leads to dependable and trustworthy customers who continue to stick with Domino’s new and improved products. Since Domino’s operates in an industry which is largely driven by customer perception of brands, having a well-respected brand image allows Domino’s to have a strong competitive advantage over its fierce competitors. Domino’s pizza has now launched a Domino’s application for the iPhone and iPod touch as of May, 2011. With Domino’s Pizza offering an application to customers, it makes orders for customers very convenient and quick. If customers choose to get their food delivered, Domino’s

offers a pizza tracker which allows people to track the progress of their food being delivered. Weaknesses Although Domino’s is experiencing growth expansion across the globe, having locations in 65 countries, it lacks significantly the amount of profit it earns outside the United States compared to its competitors in the restaurant industry sector. In fiscal year 2010, Domino’s earned 11.2% revenue from international operations whereas McDonald’s and Yum! Brands each earned 66.3% and 63.7% respectively. Another problem Domino’s faces compared to its top competitors is the amount of stores being operated internationally. Even though Domino’s is increasing its operations overseas, it currently only has 4,422 stores outside the United States. McDonald’s and Yum! Brands have significantly more stores internationally at 18,481 and 17,665 respectively. 29 Opportunities The opportunity for Domino’s Pizza to expand its product outside of its stores and into the frozen food market could be quite profitable and beneficial. Domino’s pizza could have the opportunity to compete with other restaurants in the restaurant industry such as: California Pizza Kitchen, Lou Malnati's, P.F. Changs, and Macaroni Grill. According to datamonitor’s estimate, the global frozen food market grew 3.5% from 2006-2010 and earned total revenues of $192.2 billion in 2010. 30 Putting a well-recognized brand name pizza into the frozen market that consumers trust and respect would have both short-term and long-term effects on the profit level of Domino’s Pizza. Domino’s pizza entered the German market in May, 2010 and signed a Master Franchise Agreement with Yakir Gabay. He is the founder of the Berlin-based group, who manages more than 3,000 residential units, 80 hotels, and 1 million square feet of property across Germany.31 Having Domino’s involved with someone with such strong leadership ties, can potentially have a huge impact on Domino’s brand name being spread throughout Germany and the rest of Europe. Threats With the growing demand for a healthier lifestyle in our economy, Domino’s faces an uphill battle by not offering more nutritious food items to consumers from their diverse menu. More and more consumers are now finding ways to find substitutes for fatty, high calorie foods. Domino’s pizza has to continue to add healthier items to their menu, so they can remain strongly competitive with other healthier restaurants in the food industry. Domino’s is continuing to face high competition among other pizza companies domestically and globally. Major

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pizza company competitors are the following: Papa John’s, Pizza Hut, Little Caesars, and other private label companies. Domino’s is constantly dealing with new product innovation techniques and pricing pressure among the pizza delivery industry. Being involved in an industry where consumers demand fair prices, Domino’s is frequently on the lookout on their competitor’s marketing strategies and pricing techniques to better ensure they have the best quality good, for the best price.

Valuation Analysis and Discussion In analyzing the fundamental value of Domino’s Pizza Inc. when considering our forecasted financial statements, we used a number of different models including Discounted Cash Flows (DCF), Enterprise Economic Profit (EP), Dividend Discount Model/Fundamental P/E (DDM), Relative P/E and PEG Ratio analysis. Each of these models gives a different perspective about our forecasted value drivers and Domino’s stock performance relative to the market. Our DCF model and Economic Profit analysis result in an adjusted stock price of $39.79 as of April 16, 2012. Our DDM analysis gives a price of $33.35. Our forward relative P/E ratio and PEG ratio analysis give us prices of $39.48 and $33.44, respectively. An in depth analysis of each of these models and the effects of our forecasted financials follows. An aggregation of the stock price results for each model produce a predicted price range of $33.00-$40.00. Fundamental P/E Model Domino’s is in a unique position as a large and recognizable company that does not have a consistent history of paying dividends. This makes the DDM analysis less relevant than it would be for a company with a more predictable payout policy. Domino’s has announced a special dividend of $3.00 per share as part of its debt restructuring that was completed in March 2012. Our P/E calculation of 15.10 takes into account an industry average Return on Equity rather than Domino’s ROE because Domino’s has an Accumulated Deficit. This P/E value taken into account with our earnings estimate results in a future 2016 stock price of $43.99. When including our knowledge of the dividend payout and discounting our future value we get an intrinsic value price of $33.35. Since Domino’s does not have a consistent or predictable payout policy, our analysis does not place especially high weight in our Fundamental P/E predicted stock price. DCF and Economic Profit Models The Discounted Cash Flow and Economic Profit models project a stock price of $39.81 adjusted for the partial year on April 16, 2012. Given a current stock price of $35.46 our projection allows for an 11% upside. The relatively high value of Operating Assets is diluted in our DCF

model by the large proportion of debt that Domino’s pizza is responsible for. Since, the DCF model takes into account a wide range of inputs from our projected financial statements and value drivers it is considered our most accurate model prediction. Despite the optimism of our model, we do not feel an 11% upside in this model is enough to warrant a BUY recommendation for Domino’s Pizza. Relative P/E and PEG Ratios When coming up with a relative P/E analysis, we compiled market information about eight relevant companies within the restaurant industry that are comparable to Domino’s Pizza. When the P/E ratio and PEG ratio were calculated and averaged for these companies, we compared our results with Domino’s own statistics and calculated prices for Relative P/E and PEG ratio to be $39.48 and $33.44 respectively. The resulting prices are a reflection of Domino’s having a lower estimated 5-year growth rate than the industry average. It seems that the lower stock price predicted by the PEG ratio analysis is a result of Domino’s differentiation from the industry because it uses a franchise model. Since other firms in the restaurant industry use a corporate model they have different Return on Invested Capital (ROIC), which changes their P/E calculations.

Key Assumptions Revenue Decomposition/Income Statement Our most relevant assumptions for Domino’s Pizza Inc. with regards to operating income come from our revenue decomposition. Domino’s has placed emphasis on expanding its domestic franchising business and its international revenue. Domino’s also has tried to reduce the number of company-owned stores in the United States, from about 570 in 2008 to around 450 in 2011.32 Given this information, our revenue decomposition predicts international revenue to increase around 15% per year through 2016. Also the revenue decomposition predicts domestic franchise and domestic supply chain revenue to increase by about 5% each year through 2016 and domestic company-owned store revenue to decrease between 2-3% per year through 2016. Franchise fee revenue corresponds to the Notes Receivable account on the balance sheet which is sensitive to interest rates and we assume it will increase over the course of our models forecast. Our costs of sales are broken down into categories that correspond to the revenue decomposition (e.g. supply chain revenue and supply chain cost of sales). These items are predicted as a proportion of the corresponding revenue category; therefore, domestic company-owned store cost of sales is shown to be decreasing while supply chain and international cost of sales are increasing.

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Weighted Average Cost of Capital Weighted average cost of capital (WACC) is a reflection of market influences and company specific parameters that predict the collective cost of financing for Domino’s Pizza. The Capital Asset Pricing Model (CAPM) is used to predict Domino’s Cost of Equity. An implied equity risk premium of 6.19% was used and Domino’s beta of 1.064 was calculated using weekly 5-year historical data. The result was a cost of equity of 9.73%. Pre-tax cost of debt was taken from the effective interest rate on Domino’s securitized debt facility. The resulting cost of debt was 4.01% and when taken into account with a relatively high proportion of debt-to-equity the calculated WACC was 7.11%.

Sensitivity Analysis To test the accuracy and sensitivity of our predicted stock price as it relates to certain parameters, we performed a number of sensitivity analyses. The following items were tested because they have a clear effect on either income, ROIC, cost of capital or stock valuation. Risk-Free Rate Due to the volatility of yields on treasury securities a sensitivity analysis of the risk-free rate is appropriate. The risk-free rate (30-year Treasury bond used) has a great effect on the cost of capital calculation for Domino’s which can greatly change the value of the company’s equity. The sensitivity test shows that a 1% decrease in the risk-free rate would translate to a $9 increase in stock price, while a 1% increase in the risk-free rate would lead to a $7 price decrease. The test shows that Domino’s stock price has more upside potential for decreases in risk-free rates than downside risk, however, because interest rates are at recent historical lows it is relevant to consider possible rate increases. Cost of Goods Sold Cost of Sales as a percentage of revenue, like SGA, is a relevant item to test from the income statement. Domino’s has slightly reduced total cost of sales as a percentage of total sales over time. Our model predicts this modest decrease to continue over the next 5 years but a sensitivity test was done to determine the effects of a more dramatic change in cost of sales. The results of the test show that if Domino’s were able to reduce their cost of sales by 2% more than our model forecasts then our DCF model would produce a price of $45.19. CV ROIC The Return on Invested Capital that is predicted by our model in the continue value is 79.89%. Although this is a relatively high return, it is not that unusual for a company

like Domino’s that has a business model that places great emphasis on franchises and as a result has very little corporate invested capital. To account for a change in the future ROIC, we performed a sensitivity test that accounts for a range of between 71% and 89% ROIC. The test shows that stock price is almost indifferent to changes in ROIC within this range. Revenue Total revenue has increased consistently over the past 3 years and our model predicts that with increases in international revenue and decrease in company-owned stores that this trend will continue. However, a sensitivity test was prepared as a way to predict for a significant increase or decrease in revenue in our continuing value forecast. The test shows that a 25% change in revenue would have a dramatic effect on the stock price, almost $12 in either direction. Holding all else constant a $500 million increase in total revenue over our forecasted amount would produce a stock price of $51.07. CV Growth The growth rate used in our continuing value assumption is one of the most influential inputs in the DCF and Economic Profit calculations. We assumed a growth rate of 2% in the constant growth period by accounting for commodity price increases as a result of inflation as well as GDP growth predictions. A narrow range sensitivity test will show the effects a change in the CV growth rate. An increase or decrease in CV growth rate of just .3% would have a  respective increase or decrease of $3.5 on stock price.

Important Disclaimer

This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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Sources 1 Net Advantage. http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndustrySurvey.do?code=rst 2Bureau of Labor Statistics. http://data.bls.gov/timeseries/LNS14000000 3 Investopedia-Disposable Income. http://www.investopedia.com/terms/d/disposableincome.asp#axzz1sGSH91oW 4 Net Advantage. http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndustrySurvey.do?code=rst 5 National Restaurant Association http://www.restaurant.org/research/facts/ 6 NPD Group https://www.npd.com/wps/portal/npd/us/news/pressreleases/pr_111011b 7 Net Advantage. http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch 8 Mergent Online. http://www.mergentonline.com/companydetail.php?compnumber=109104&pagetype=synopsis 9 Net Advantage. http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch 10 DPZ Company Website. http://phx.corporate-ir.net/phoenix.zhtml?c=135383&p=irol-whydominos 11 Yahoo Finance http://finance.yahoo.com/echarts?s=DPZ+Interactive#chart1:symbol=dpz;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined 12 Mergent Online. http://www.mergentonline.com/companyfinancials.php?pagetype=standardized&compnumber=109104&period=Annuals&dataarea=PL&range=5&currency=AsRep&scale=AsRep&Submit=Refresh

13 DPZ Company Website. http://phx.corporate-ir.net/phoenix.zhtml?c=135383&p=irol-SECText&TEXT=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDExOTMxMjUtMTEtMjczMjg3L3htbC9zdWJkb2N1bWVudC8xL3BhZ2UvNA%3d%3d 14 DPZ Company Website. http://phx.corporate-ir.net/phoenix.zhtml?c=135383&p=irol-presentations 15 Mergent Online. http://www.mergentonline.com/companyfinancials.php?pagetype=standardized&compnumber=109104&period=Annuals&dataarea=CF&range=5&currency=AsRep&scale=AsRep&Submit=Refresh 16 Bloomberg. http://www.bloomberg.com/video/82000262/ 17 DPZ Company Website. http://express.dominos.com/pages/menu.jsp#all 18 Bloomberg. http://www.bloomberg.com/video/82000262/ 19 Mergent Online. http://www.mergentonline.com/companydetail.php?pagetype=business&compnumber=109104 20 DPZ Company Website http://phx.corporate-ir.net/phoenix.zhtml?c=135383&p=irol-whydominos 21 About.com-Franchising http://franchises.about.com/od/choosingafranchise/tp/popular-food-franchise-costs.htm 22DPZ Company Website  http://www.dominos.ca/pages/legal-franchise-ca.jsp  23 Subway Company Website http://www.subway.com/subwayroot/own_a_franchise/FranchiseFAQs.aspx 24 DPZ Company Website http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTI0MjIwfENoaWxkSUQ9LTF8VHlwZT0z&t=1

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26 Data Monitor www.datamonitor.com 27 Thompson One. https://www.thomsonone.com/Workspace/Main.aspx?View=Action%3dOpen&BrandName=www.thomsonone.com&IsSsoLogin=True 28 DPZ Company Website. http://phx.corporate-ir.net/phoenix.zhtml?c=135383&p=irol-whydominos 29 Thompson One. https://www.thomsonone.com/Workspace/Main.aspx?View=Action%3dOpen&BrandName=www.thomsonone.com&IsSsoLogin=True 30 Data Monitor www.datamonitor.com 31 Data Monitor www.datamonitor.com 32Entrepreneur http://www.entrepreneur.com/franchises/dominospizzallc/282293-0.html

Domino's Pizza Inc Revenue Decomposition

Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

Scale(Thousands)Revenues:

Domestic company-owned stores revenues 357,703.00 335,779 345,636 336,349 326,307 314,421 306,555 301,110 292,924

Domestic franchise revenues 153,858.00 157,780 173,345 187,007 193,679 201,895 213,244 226,541 239,022

Domestic supply chain revenues 771,106.00 763,733 875,517 927,904 966,500 1,009,534 1,066,625 1,141,048 1,203,185

International revenues 142,447.00 146,765 176,396 200,933 225,940 257,491 293,304 339,304 388,104 Total revenues 1,425,114.00 1,404,057 1,570,894 1,652,193 1,712,426 1,783,341 1,879,728 2,008,003 2,123,236

International Revenue Growth Rate 0.12 0.03 0.20 0.14 0.10 0.12 0.12 0.14 0.12 Forcasted International Growth premium 0.02 0.02 0.02 0.02 0.02 Forcasted International Growth Rate 0.12 0.14 0.14 0.16 0.14

Domestic c-o stores revenue Growth Rate (0.09) (0.06) 0.03 (0.03) -0.03 -0.04 -0.03 -0.02 -0.03Domestic franchise revenue growth rate (0.03) 0.03 0.10 0.08 0.04 0.04 0.06 0.06 0.06 Domestic supply chain revenue growth rate (0.02) (0.01) 0.15 0.06 0.04 0.04 0.06 0.07 0.05

Domino's Pizza Inc Income Statement

Fiscal Years Ending Dec. 31 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

Scale (Thousands)Revenues:

Domestic company-owned stores revenues 335,779 345,636 336,349 326,307 314,421 306,555 301,110 292,924

Domestic franchise revenues 157,780 173,345 187,007 193,679 201,895 213,244 226,541 239,022

Domestic supply chain revenues 763,733 875,517 927,904 966,500 1,009,534 1,066,625 1,141,048 1,203,185

International revenues 146,765 176,396 200,933 225,940 257,491 293,304 339,304 388,104

Total revenues 1,404,057 1,570,894 1,652,193 1,712,426 1,783,341 1,879,728 2,008,003 2,123,236

Cost of sales:Domestic company-owned stores cost of sales 274,474 278,297 267,066 262,849 253,275 246,939 242,552 235,958Domestic supply chain cost of sales 680,427 778,510 831,665 862,381 900,780 951,720 1,018,126 1,073,570International cost of sales 62,180 75,498 82,946 95,112 108,394 123,470 142,834 163,377Total cost of sales 1,017,081 1,132,305 1,181,677 1,220,343 1,262,449 1,322,129 1,403,513 1,472,905Operating margin 386,976 438,589 470,516 492,083 520,893 557,599 604,490 650,330General & administrative expenses 197,467 210,887 211,371 221,688 231,951 249,005 262,716 276,344Income from operations 189,509 227,702 259,145 270,394 288,942 308,593 341,774 373,987Interest income 683 244 296 247 247 283 353 389Interest expense 110,945 96,810 91,635 91,518 105,907 105,862 105,827 105,788Other income (expense) 56,275 7,809 Income before income taxes 135,522 138,945 167,806 179,123 183,283 203,013 236,300 268,587Provision for income taxes 55,778 51,028 62,445 65,235 66,749 73,935 86,058 97,816

Net income 79,744 87,917 105,361 113,889 116,533 129,078 150,242 170,771

Earnings per share:Net income (loss) per common share - basic 1.39 1.5 1.79 1.93 2.00 2.21 2.56 2.91Common shares Outstanding 57,409,448 58,467,769 58,918,038 58,945,468 58,299,248 58,407,994 58,607,704 58,635,691

Domino's Pizza Inc Balance Sheet

Fiscal Years Ending Dec. 31 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

Scale(Thousands)Current assets:Cash & cash equivalents 42,392 47,945 50,292 154,508 285,766 405,435 540,643 696,534Restricted cash & cash equivalents 91,141 85,530 92,612 107,208 107,150 107,106 107,061 107,025Accounts receivable, net 76,273 80,410 87,200 86,912 91,925 97,967 103,767 109,930Inventories 25,890 26,998 30,702 30,252 31,728 33,709 35,807 38,135Notes receivable, net 1,079 1,509 945 978 1,020 1,077 1,144 1,207Prepaid expenses & other current assets 6,155 9,760 12,232 10,262 10,118 11,153 12,536 13,269Advertising fund assets, restricted 25,116 36,134 36,281 35,875 39,181 40,652 43,203 46,083Deferred income taxes 10,622 16,752 16,579 22,389 22,908 25,375 29,535 33,571

Total current assets 278,668 305,038 326,843 448,384 589,796 722,474 873,696 1,045,753

Property, plant and equipment:Land & buildings 21,825 23,211 23,714 27,500 29,770 32,394 35,865 39,212Leasehold & other improvements 83,190 83,451 79,518 82,053 81,674 81,082 81,603 81,453Equipment 170,202 175,125 171,726 206,821 221,469 240,006 267,319 291,518Construction in progress 4,499 4,028 6,052 24,349 7,305 7,305 7,305 7,305Property, plant & equipment, gross 279,716 285,815 281,010 340,723 340,218 360,786 392,092 419,487Accumulated depreciation & amortization 176,940 188,431 188,610 212,652 228,349 242,155 263,166 281,554

Property, plant & equipment, net 102,776 97,384 92,400 128,071 111,868 118,632 128,925 137,933

Other assets:Deferred financing costs, net 17,266 12,274 16,051 16,031 18,551 18,543 18,537 18,530Goodwill 17,606 17,356 16,649 16,649 16,649 16,649 16,649 16,649Capitalized software, net 3,233 7,788 8,176 8,421 8,674 8,934 9,202 9,478Other assets, net 9,024 8,490 8,958 9,227 9,504 9,789 10,082 10,385Deferred income taxes 21,846 8,646 4,858 0 0 0 0 0Total other assets 72,317 58,415 61,300 56,561 56,628 56,913 57,073 57,426

Total assets 453,761 460,837 480,543 633,016 758,293 898,019 1,059,695 1,241,112

Current Liabilities:Current portion of long-term debt 50,370 835 904 904 702 700 565 615Accounts payable 64,120 56,602 69,714 72,256 75,248 79,315 84,727 89,590Accrued compensation 17,168 27,418 21,691 22,750 23,803 25,553 26,960 28,359Accrued interest 17,500 16,028 15,775 15,755 18,232 18,224 18,218 18,211Accrued income taxes 183 - 13,023 0 0 0 0 0Insurance reserves 12,032 13,767 10,069 10,560 11,049 11,862 12,515 13,164Advertising fund liabilities 25,116 36,134 36,281 38,052 39,813 42,741 45,094 47,433Other accrued liabilities 32,934 35,342 29,718 31,169 32,611 35,009 36,937 38,853Total current liabilities 219,423 186,126 197,175 191,445 201,459 213,404 225,017 236,225

Long-term liabilities:Long-term debt, including current portion 1,572,833 1,452,156 1,451,273 1,680,000 1,679,096 1,678,394 1,677,694 1,677,129Less: current portion 50,370 835 904 904 702 700 565 615Long-term debt, less current portion 1,522,463 1,451,321 1,450,369 1,679,096 1,678,394 1,677,694 1,677,129 1,676,514Insurance reserves 15,127 17,438 21,334 18,945 18,643 18,297 18,931 19,230Other accrued liabilities 17,742 16,603 16,383 16,121 15,863 15,609 15,359 15,114Total long-term liabilities 1,555,332 1,485,362 1,493,107 1,714,162 1,712,900 1,711,601 1,711,420 1,710,858

Total liabilities 1,774,755 1,671,488 1,690,282 1,905,607 1,914,358 1,925,004 1,936,436 1,947,083

Common Stock/Additional paid-in capital 25,073 46,133 577 589 583 584 586 586Retained earnings (accumulated deficit) -1,341,961 -1,254,044 -1,207,915 -1,270,780 -1,154,247 -1,025,169 -874,927 -704,156Accumulated other comprehensive income (loss) -4,106 -2,740 -2,401 -2,401 -2,401 -2,401 -2,401 -2,401Total shareholders' equity (deficit) -1,320,994 -1,210,651 -1,209,739 -1,272,592 -1,156,065 -1,026,986 -876,741 -705,970Total Liabilities and Shareholders' Equity 453,761 460,837 480,543 633,015 758,293 898,019 1,059,695 1,241,112

Domino's Pizza Inc Cash Flow Statement

Fiscal Years Ending Dec. 31 2012E 2013E 2014E 2015E CV 2016

Cash from Operating Activities:Net Income 113,889 116,533 129,078 150,242 170,771Deprecition and Amortization 24,042 15,697 13,806 21,012 18,387Dividend Paid -176,754Less: Increase in accounts receivable 288 -5,013 -6,042 -5,800 -6,163Less: Increase in inventory 450 -1,475 -1,982 -2,097 -2,329Less: Increase in prepaid expenses 1,970 144 -1,035 -1,383 -732Less: Increase in advertising fund assets 406 -3,306 -1,471 -2,551 -2,880Less: Increase in deferred income tax asset -5,810 -520 -2,466 -4,160 -4,036Plus: Increase in accounts payable 2,542 2,992 4,067 5,413 4,862Plus: Increase in accrued compensation 1,059 1,053 1,750 1,407 1,398Plus: Increase in accrued interest -20 2,477 -8 -6 -7Plus: Increase in accrued income taxes -13,023 0 0 0 0Plus: Increase in insurance reserves 491 489 812 653 649Plus: Increase in advertising fund liabilities 1,771 1,762 2,927 2,353 2,339Plus: Increase in other accrued liabilities 1,451 1,443 2,398 1,928 1,916

Net Cash from Operating Activities: -47,249 132,275 141,835 167,010 184,177

Cash from Investing Activities:Less: Increase in notes receivable -33 -41 -57 -67 -63Less: Increase in other assets -269 -277 -285 -294 -302Less: Increase in capital expenditure -59,713 506 -20,569 -31,305 -27,395Less: Increase in restricted cash -14,596 58 45 45 36

Net Cash from Investing Activities: -74,611 245 -20,866 -31,621 -27,725

Cash from Financing Activities:Plus: Increase in insurance reserves -2,389 -303 -345 634 299Plus: Change in other long term accrued liabilities -262 -258 -254 -250 -246Plus: Change in Long term Debt 228,727 -702 -700 -565 -615Less: increase in accumulated other comprehensive income 0 0 0 0 0

Net Cash from Financing Activities: 226,076 -1,263 -1,299 -181 -562

Net Increase in cash 104,216 131,258 119,669 135,208 155,891

Cash, beginning of year 50,292 154,508 285,766 405,435 540,643

Cash, end of year 154,508 285,766 405,435 540,643 696,534

Domino's Pizza Inc Cash Flow Statement

Fiscal Years Ending Dec. 31 2009 2010 2011

Scale(Thousands)Cash flows from operating activities:Net income 79,744 87,917 105,361Depreciation & amortization 24,064 24,052 24,042Losses (gains) on debt extinguishment -56,275 -7,809 Losses (gains) on sale/disposal of assets 1,843 403 -2,436Provision (benefit) for deferred income taxes 19,476 6,027 8,169Amortization of deferred financing costs, debt discount & other 9,621 7,837 6,190Non-cash compensation expense 17,254 13,370 13,954Accounts receivable -7,235 -3,395 -7,713Inventories, prepaid expenses & other assets -1,050 -2,357 -4,904Accounts payable & accrued liabilities 16,286 -1,582 21,419Insurance reserves -3,996 3,798 3,152

Net cash flows from operating activities 101,274 128,325 153,073

Cash flows from investing activities:Capital expenditures -22,870 -25,421 -24,349Proceeds from sale of assets 3,730 2,737 6,031Change in restricted cash -12,270 5,611 -7,082Acquisitions of franchise operations - -Repayments of notes receivable, net - -Other investing activities, net -1,481 -1,307 -1,541

Net cash flows from investing activities -32,891 -18,380 -26,941

Cash flows from financing activities:Proceeds from issuance of long-term debt 60,995 2,861 Repayment of long-term debt & capital lease obligations -136,679 -116,760 -890Proceeds from issuance of common stock 4,376 4,548 563Proceeds from exercise of stock options 758 9,450 33,524Tax benefit from exercise of stock options 383 2,100 15,589Purchase of common stock - -5,384 -165,007Tax payments for performance-based restricted stock - -1,082 -3,504Cash paid for financing costs -552 - -3,760Purchase of cumulative preferred stock - -Distributions - -Common stock dividends & equivalents - -Capital contribution & other financing activities -77 -

Net cash flows from financing activities -70,796 -104,267 -123,485

Effect of exchange rate changes on cash & cash equivalents -567 -125 -300Increase (decrease) in cash & cash equivalents -2,980 5,553 2,347

Cash & cash equivalents at beginning of period 45,372 42,392 47,945

Cash & cash equivalents at end of period 42,392 47,945 50,292

Domino's Pizza Inc Common Size Income Statement

Fiscal Years Ending Dec. 31 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

Scale(Thousands)Revenues:Domestic company-owned stores revenues 23.91% 22.00% 20.36% 19.06% 17.63% 16.31% 15.00% 13.80%Domestic franchise revenues 11.24% 11.03% 11.32% 11.31% 11.32% 11.34% 11.28% 11.26%Domestic supply chain revenues 54.39% 55.73% 56.16% 56.44% 56.61% 56.74% 56.83% 56.67%International revenues 10.45% 11.23% 12.16% 13.19% 14.44% 15.60% 16.90% 18.28%

Total revenues 100% 100% 100% 100% 100% 100% 100% 100%

Cost of sales:Domestic company-owned stores cost of sales 19.55% 17.72% 16.16% 15.35% 14.20% 13.14% 12.08% 11.11%Domestic supply chain cost of sales 48.46% 49.56% 50.34% 50.36% 50.51% 50.63% 50.70% 50.56%International cost of sales 4.43% 4.81% 5.02% 5.55% 6.08% 6.57% 7.11% 7.69%

Total cost of sales 72.44% 72.08% 71.52% 71.26% 70.79% 70.34% 69.90% 69.37%

Operating margin 27.56% 27.92% 28.48% 28.74% 29.21% 29.66% 30.10% 30.63%General & administrative expenses 14.06% 13.42% 12.79% 12.95% 13.01% 13.25% 13.08% 13.02%Income from operations 13.50% 14.50% 15.68% 15.79% 16.20% 16.42% 17.02% 17.61%Interest income 0.05% 0.02% 0.02% 0.01% 0.01% 0.02% 0.02% 0.02%Interest expense 7.90% 6.16% 5.55% 5.34% 5.94% 5.63% 5.27% 4.98%Other income (expense) 4.01% 0.50%Income before income taxes 9.65% 8.84% 10.16% 10.46% 10.28% 10.80% 11.77% 12.65%Provision for income taxes 3.97% 3.25% 3.78% 3.81% 3.74% 3.93% 4.29% 4.61%

Net income 5.68% 5.60% 6.38% 6.65% 6.53% 6.87% 7.48% 8.04%

Domino's Pizza Inc Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

Scale(Thousands)

Current assets:Cash & cash equivalents 3.02% 3.05% 3.04% 9.02% 16.02% 21.57% 26.92% 32.81%Restricted cash & cash equivalents 6.49% 5.44% 5.61% 6.26% 6.01% 5.70% 5.33% 5.04%Accounts receivable, net 5.43% 5.12% 5.28% 5.08% 5.15% 5.21% 5.17% 5.18%Inventories 1.84% 1.72% 1.86% 1.77% 1.78% 1.79% 1.78% 1.80%Notes receivable, net 0.08% 0.10% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06%Prepaid expenses & other current assets 0.44% 0.62% 0.74% 0.60% 0.57% 0.59% 0.62% 0.62%Advertising fund assets, restricted 1.79% 2.30% 2.20% 2.09% 2.20% 2.16% 2.15% 2.17%Deferred income taxes 0.76% 1.07% 1.00% 1.31% 1.28% 1.35% 1.47% 1.58%

Total current assets 19.85% 19.42% 19.78% 26.18% 33.07% 38.44% 43.51% 49.25%

Property, plant and equipment:Land & buildings 1.55% 1.48% 1.44% 1.61% 1.67% 1.72% 1.79% 1.85%Leasehold & other improvements 5.92% 5.31% 4.81% 4.79% 4.58% 4.31% 4.06% 3.84%Equipment 12.12% 11.15% 10.39% 12.08% 12.42% 12.77% 13.31% 13.73%Construction in progress 0.32% 0.26% 0.37% 1.42% 0.41% 0.39% 0.36% 0.34%Property, plant & equipment, gross 19.92% 18.19% 17.01% 19.90% 19.08% 19.19% 19.53% 19.76%Accumulated depreciation & amortization 12.60% 12.00% 11.42% 12.42% 12.80% 12.88% 13.11% 13.26%

Property, plant & equipment, net 7.32% 6.20% 5.59% 7.48% 6.27% 6.31% 6.42% 6.50%

Other assets:Deferred financing costs, net 1.23% 0.78% 0.97% 0.94% 1.04% 0.99% 0.92% 0.87%Goodwill 1.25% 1.10% 1.01% 0.97% 0.93% 0.89% 0.83% 0.78%Capitalized software, net 0.23% 0.50% 0.49% 0.49% 0.49% 0.48% 0.46% 0.45%Other assets, net 0.64% 0.54% 0.54% 0.54% 0.53% 0.52% 0.50% 0.49%Deferred income taxes 1.56% 0.55% 0.29% 0.00% 0.00% 0.00% 0.00% 0.00%Total other assets 5.15% 3.72% 3.71% 3.30% 3.18% 3.03% 2.84% 2.70%

Total assets 32.32% 29.34% 29.09% 36.97% 42.52% 47.77% 52.77% 58.45%

Current Liabilities:Current portion of long-term debt 3.59% 0.05% 0.05% 0.05% 0.04% 0.04% 0.03% 0.03%Accounts payable 4.57% 3.60% 4.22% 4.22% 4.22% 4.22% 4.22% 4.22%Accrued compensation 1.22% 1.75% 1.31% 1.33% 1.33% 1.36% 1.34% 1.34%Accrued interest 1.25% 1.02% 0.95% 0.92% 1.02% 0.97% 0.91% 0.86%Accrued income taxes 0.01% 0.79% 0.00% 0.00% 0.00% 0.00% 0.00%Insurance reserves 0.86% 0.88% 0.61% 0.62% 0.62% 0.63% 0.62% 0.62%Advertising fund liabilities 1.79% 2.30% 2.20% 2.22% 2.23% 2.27% 2.25% 2.23%Other accrued liabilities 2.35% 2.25% 1.80% 1.82% 1.83% 1.86% 1.84% 1.83%Total current liabilities 15.63% 11.85% 11.93% 11.18% 11.30% 11.35% 11.21% 11.13%

Long-term liabilities:Long-term debt, including current portion 112.02% 92.44% 87.84% 98.11% 94.15% 89.29% 83.55% 78.99%Less: current portion 3.59% 0.05% 0.05% 0.05% 0.04% 0.04% 0.03% 0.03%Long-term debt, less current portion 108.43% 92.39% 87.78% 98.05% 94.12% 89.25% 83.52% 78.96%Insurance reserves 1.08% 1.11% 1.29% 1.11% 1.05% 0.97% 0.94% 0.91%Other accrued liabilities 1.26% 1.06% 0.99% 0.94% 0.89% 0.83% 0.76% 0.71%Total long-term liabilities 110.77% 94.56% 90.37% 100.10% 96.05% 91.06% 85.23% 80.58%

Total liabilities 126.40% 106.40% 102.31% 111.28% 107.35% 102.41% 96.44% 91.70%

Common stock/Additional paid-in capital 1.79% 2.94% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03%Retained earnings (accumulated deficit) -95.58% -79.83% -73.11% -74.21% -64.72% -54.54% -43.57% -33.16%Accumulated other comprehensive income (loss) -0.29% -0.17% -0.15% -0.14% -0.13% -0.13% -0.12% -0.11%Total shareholders' equity (deficit) -94.08% -77.07% -73.22% -74.32% -64.83% -54.63% -43.66% -33.25%

Total Liabilities and Shareholders' Equity 32.32% 29.34% 29.09% 36.97% 42.52% 47.77% 52.77% 58.45%

Domino's Pizza Inc Value Driver Estimation

Fiscal Years Ending Dec. 31 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

NOPLAT Computation:

EBITA:Total Revenue 1,404,057 1,570,894 1,652,193 1,712,426 1,783,341 1,879,728 2,008,003 2,123,236 (Total Cost of Sales) 1,017,081 1,132,305 1,181,677 1,220,343 1,262,449 1,322,129 1,403,513 1,472,905

(General & Administrative Expenses) 197,467 210,887 211,371 221,688 231,951 249,005 262,716 276,344 Implied Interest on Operating Leases 7,499 7,282 7,005 9,537 8,330 8,834 9,601 10,271 EBITA 197,008 234,984 266,150 279,931 297,272 317,427 351,374 384,258

Less: Adjusted Taxes:Provision for Income Taxes 55,778 51,028 62,445 65,235 66,749 73,935 86,058 97,816 Tax Shield on Interest Expense 42,044 35,596 33,372 33,330 38,570 38,554 38,541 38,527 Tax Shield on Implied Lease Interest 2,842 2,678 2,551 3,473 3,034 3,217 3,496 3,741 Adjusted Taxes 100,664 89,302 98,368 102,038 108,353 115,706 128,095 140,084

Plus: Change in Deferred Tax Liabilities:Current Year DT Liabilities - - - - - - - - (Current Year DT Assets) -32,468 -25,398 -21,437 -22,389 -22,908 -25,375 -29,535 -33,571Net DT Current Year Liabilities -32,468 -25,398 -21,437 -22,389 -22,908 -25,375 -29,535 -33,571

Previous Year DT Liabilities - - - - - - - - Previous Year DT Assets -52,082 -32,468 -25,398 -21,437 -22,389 -22,908 -25,375 -29,535Net DT Previous Year Liabilities -52,082 -32,468 -25,398 -21,437 -22,389 -22,908 -25,375 -29,535

Net Change in DT Liabilities 19,614 7,070 3,961 -952 -520 -2,466 -4,160 -4,036

NOPLAT: 115,958 152,752 171,742 176,942 188,399 199,255 219,119 240,139

Invested Capital Computation:

Operating Current Assets:Normal Cash 28,081 31,418 33,044 34,249 35,667 37,595 40,160 42,465 Advertising fund assets, restricted 25,116 36,134 36,281 35,875 39,181 40,652 43,203 46,083 Prepaid Expenses & other current assets 6,155 9,760 12,232 10,262 10,118 11,153 12,536 13,269 Accounts Receivable, Net 76,273 80,410 87,200 86,912 91,925 97,967 103,767 109,930 Inventory 25,890 26,998 30,702 30,252 31,728 33,709 35,807 38,135 Operating Current Assets 161,515 184,720 199,459 197,550 208,619 221,076 235,474 249,882

Operating Current Liabilities:Accounts Payable 64,120 56,602 69,714 72,256 75,248 79,315 84,727 89,590 Insurance Reserves 12,032 13,767 10,069 10,560 11,049 11,862 12,515 13,164 Advertising fund liabilities 25,116 36,134 36,281 38,052 39,813 42,741 45,094 47,433 Other accrued liabilities 32,934 35,342 29,718 31,169 32,611 35,009 36,937 38,853 Accrued Expenses 17,168 27,418 21,691 22,750 23,803 25,553 26,960 28,359 Operating Current Liabilities 151,370 169,263 167,473 174,786 182,525 194,480 206,233 217,398

Net Operating Working Capital 10,145 15,457 31,986 22,763 26,094 26,597 29,240 32,483 Plus: Net PPE 102,776 97,384 92,400 128,071 111,868 118,632 128,925 137,933 Plus: Capitalized software, net 3,233 7,788 8,176 8,421 8,674 8,934 9,202 9,478 Plus: PV of Operating Leases 118,845 115,403 111,012 151,141 132,020 140,001 152,149 162,780 Plus: Other Operating AssetsLess: Insurance reserves 15,127 17,438 21,334 18,945 18,643 18,297 18,931 19,230 Less: Other Operating LiabilitiesInvested Capital 219,872 218,594 222,240 291,452 260,013 275,866 300,585 323,444

ROIC:NOPLAT 115,958 152,752 171,742 176,942 188,399 199,255 219,119 240,139 Divide: Invested Capital (previous year) 239,972 219,872 218,594 222,240 291,452 260,013 275,866 300,585 ROIC 48% 69% 79% 80% 65% 77% 79% 80%

Economic Profit:Invested Capital: 239,972 219,872 218,594 222,240 291,452 260,013 275,866 300,585 Multiplied by:ROIC 48% 69% 79% 80% 65% 77% 79% 80%Less: WACC 7.11% 7.11% 7.11% 7.11% 7.11% 7.11% 7.11% 7.11%Economic Profit 98,906 137,128 156,209 161,150 167,689 180,779 199,516 218,779

Free Cash Flow:NOPLAT 115,958 152,752 171,742 176,942 188,399 199,255 219,119 240,139 Less: Change in invested capital -20,100 -1,278 3,646 69,212 -31,439 15,853 24,719 22,859 FCF 136,058 154,030 168,096 107,730 219,838 183,402 194,400 217,280

Marginal Taxes Paid: 51,358.00 51,089.00 61,113.00 Marginal Tax Rate: 37.90% 36.77% 36.42%

Domino's Pizza Inc Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity:Risk-free Rate 3.14%Risk Premium 6.19%Beta 1.064Cost of Equity 9.73%

Cost of Debt:Pre-tax Cost of debt 6.31%Marginal Tax Rate 36.42%Cost of Debt 4.01%

Target Weights:Debt 1,783,400,000Equity 2,105,745,664Total 3,889,145,664

Weight of Debt 45.86%Weight of Equity 54.14%

WACC 7.11%

Risk Premium:S&P 500 geometric average returns: 9.26%Less: Historical risk free rate (30 year T-Bond) 5.14%Risk Premium: 4.12%

Implied Equity Risk Premium: 6.19%

Domino's Pizza Inc Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.00% CV ROIC 79.89% WACC 7.11% Cost of Equity 9.73%

Fiscal Years Ending Dec. 31 2011 2012E 2013E 2014E 2015E CV 2016

NOPLAT 171,742 176,942 188,399 199,255 219,119 240,139

Invested Capital 222,240 291,452 260,013 275,866 300,585 323,444 CapEx (Δ IC) 69,212 -31,439 15,853 24,719 22,859

Free Cash Flow 107,730 219,838 183,402 194,400 217,280 ROIC 79.62% 64.64% 76.63% 79.43% 79.89%Economic Profit 161149.85 167689.10 180778.76 199516.03 218779.44WACC 7.1%Shares 58,918,038CV Growth Rate 2.0%

DCF Model: 2012E 2013E 2014E 2015E CV 2016

Free Cash Flow (FCF) to Discount 107,730 219,838 183,402 194,400 Continuing Value (CV) 4,585,445 PV of FCF Discounted by WACC 100,583 191,636 149,267 147,721 3,484,403

Value of Operating Assets 4,073,610 Debt -1,783,400Excess Cash 49,286 Notes Receivable 945 ESOP -57,707Value of Equity 2,282,733,823.69 Shares Outstanding 58,918,038

Intrinsic Value (per share) $38.74

Adjusted For Partial Year $39.81

Economic Profit Model: 2012E 2013E 2014E 2015E CV 2016

Economic Profit to Discount 161,150 167,689 180,779 199,516 Continuing Value (CV) 4,284,860 PV of FCF Discounted by WACC 150,458 146,177 147,132 151,609 3,255,993

PV (Economic Profit) 3,851,370 + Beginning Invested Capital (T=0) 222,240 Value of Operating Assets 4,073,610 Debt -1,783,400Excess Cash 49,286 Notes Receivable 945 ESOP -57,707Value of Equity 2,282,733,823.69 Shares Outstanding 58,918,038

Intrinsic Value (per share) $38.74

Adjusted for Partial-Year $39.81

Domino's Pizza Inc Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2011 2012E 2013E 2014E 2015ECV

2016

EPS $1.79 $1.93 $2.00 $2.21 $2.56 $2.91EPS growth 7.94% 3.46% 10.56% 16.00% 13.61%Key Assumptions CV growth 4.00% CV ROE* (industry average) 29.60% Cost of Equity 9.73%

Future Cash Flows P/E Multiple 15.10 EPS(next period) $2.91 Future Stock Price $43.99 Dividends Per Share 3.00$ Future Cash Flows 3.00$ $43.99

Discounted Cash Flows $3.00 $30.35

Intrinsic Value 33.35$

Domino's Pizza Inc Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

EPS EPS Est.Ticker Company Price 2011E 2012E P/E 11 P/E 12 5yr Gr. PEG 11 PEG 12YUM Yum! Brands, Inc. $73.19 $3.27 $3.76 22.4 19.5 12.93 1.73 1.51 MCD McDonald's Corp $97.11 $5.72 $6.31 17.0 15.4 9.97 1.70 1.54 DRI Darden Restaurants, Inc. $49.81 $3.60 $4.11 13.8 12.1 12.16 1.14 1.00 SBUX Starbucks Corporation $58.66 $1.85 $2.29 31.7 25.6 18.93 1.68 1.35 EAT Brinker International Inc. $28.00 $1.88 $2.18 14.9 12.8 13.33 1.12 0.96 CMG Chipotle Mexican Grill, Inc. $432.43 $8.87 $10.87 48.8 39.8 21.57 2.26 1.84 PNRA Panera Bread Co. $160.29 $5.60 $6.65 28.6 24.1 19.1 1.50 1.26 BAGL Einstein Noah Restaurant Group, Inc. $14.70 $0.93 $1.06 15.8 13.9 20.0 0.79 0.69

Average 24.12 20.40 15.43 1.49 1.27

DPZ Domino's Pizza Inc $35.45 $1.79 $1.93 19.8 18.3 13.61 1.5 1.3

Implied Value: Relative P/E (EPS11) $ 43.18

Relative P/E (EPS12) 39.41$ PEG Ratio (EPS11) 36.28$ PEG Ratio (EPS12) 33.40$

Domino's Pizza Inc Key Management Ratios

Fiscal Years Ending Dec. 31 Formula 2012E 2013E 2014E 2015E CV 2016

Liquidity RatiosCurrent Ratio Current Assets/Current Liability 2.34 2.93 3.39 3.88 4.43Quick Ratio (Cash+Recievables)/Current Liability 1.26 1.87 2.36 2.86 3.41Cash Ratio (Cash+Cash Eq)/Current Liability 0.81 1.42 1.90 2.40 2.95

Activity or Asset-Management RatiosReceivables Turnover Revenue/Total Recivables 19.70 19.40 19.19 19.35 19.31 Days Receivables 365/Receivables Turnover 18.53 18.81 19.02 18.86 18.90 Inventory Turnover COGS/Inventory 40.34 39.79 39.22 39.20 38.62 Days Inventory 365/Inventory Turnover 9.05 9.17 9.31 9.31 9.45 Total Asset Turnover Revenue/Total Assets 2.71 2.35 2.09 1.89 1.71

Financial Leverage RatiosDebt/Equity Total Debt/Total Equity -1.32 -1.45 -1.63 -1.91 -2.38

Profitability RatiosGross Margin (Revenue-COGS)/Revenue 28.74% 29.21% 29.66% 30.10% 30.63%Net Margin Net Income/Revenue 6.65% 6.53% 6.87% 7.48% 8.04%Return on Assets (ROA) Net Income/Total Assets 17.99% 15.37% 14.37% 14.18% 13.76%Return on Equity (ROE) Net Income/Beg. Stockholder's Equity -8.95% -10.08% -12.57% -17.14% -24.19%

Beta39.78 0.5 0.7 0.9 1.1 1.3 1.5 1.72.3% 97.83 72.67 55.63 43.33 34.01 26.71 20.832.2% 93.90 70.17 53.93 42.10 33.09 26.00 20.272.1% 90.23 67.81 52.30 40.92 32.20 25.31 19.72

CV Growth 2.0% 86.80 65.58 50.74 39.78 31.35 24.65 19.191.9% 83.58 63.46 49.26 38.69 30.52 24.00 18.681.8% 80.56 61.45 47.83 37.64 29.72 23.37 18.181.7% 77.71 59.53 46.47 36.63 28.94 22.77 17.69

COGS39.78 63.37% 65.37% 67.37% 69.37% 71.37% 73.37% 75.37%

623,236 10.46 8.85 7.24 5.63 4.02 2.41 0.801,123,236 25.73 22.82 19.92 17.01 14.11 11.21 8.301,623,236 40.99 36.79 32.59 28.40 24.20 20.01 15.81

Revenue 2,123,236 56.25 50.76 45.27 39.78 34.29 28.80 23.322,623,236 71.51 64.73 57.95 51.17 44.38 37.60 30.823,123,236 86.77 78.70 70.63 62.55 54.48 46.40 38.333,623,236 102.04 92.67 83.30 73.93 64.57 55.20 45.83

CV ROIC39.78 74% 76% 78% 80% 82% 84% 86%2.3% 43.17 43.23 43.28 43.33 43.37 43.42 43.462.2% 41.95 42.00 42.05 42.10 42.14 42.18 42.222.1% 40.78 40.83 40.87 40.92 40.96 41.00 41.03

CV Growth 2% 39.66 39.70 39.74 39.78 39.82 39.86 39.891.9% 38.57 38.62 38.65 38.69 38.73 38.76 38.791.8% 37.53 37.57 37.61 37.64 37.68 37.71 37.741.7% 36.53 36.57 36.60 36.63 36.66 36.69 36.72

Beta39.78 0.5 0.7 0.9 1.1 1.3 1.5 1.7

0.14% 218.14 139.83 98.82 73.57 56.44 44.05 34.671.14% 150.83 105.11 77.64 59.29 46.16 36.29 28.602.14% 112.04 82.04 62.33 48.39 37.99 29.94 23.51

Risk Free Rate 3.14% 86.80 65.58 50.74 39.78 31.35 24.65 19.194.14% 69.05 53.24 41.66 32.81 25.82 20.16 15.475.14% 55.89 43.64 34.35 27.05 21.17 16.31 12.246.14% 45.73 35.96 28.33 22.21 17.18 12.97 9.39

COGS39.78 66% 67% 68% 69% 70% 71% 72%10% 56.25 53.51 50.76 48.02 45.27 42.53 39.7811% 53.51 50.76 48.02 45.27 42.53 39.78 37.0412% 50.76 48.02 45.27 42.53 39.78 37.04 34.29

SGA 13% 48.02 45.27 42.53 39.78 37.04 34.29 31.5514% 45.27 42.53 39.78 37.04 34.29 31.55 28.8015% 42.53 39.78 37.04 34.29 31.55 28.80 26.0616% 39.78 37.04 34.29 31.55 28.80 26.06 23.32