Krause Fund Research Spring 2012 Consumer Discretionary Recommendation: HOLD

Analysts
Dongfang Qi Dongfang-qi@uiowa.edu Ziyi Wang ziyi-wang@uiowa.edu Austin Dean austin-dean@uiowa.edu Chris Speer christopher-speer@uiowa.edu

Dominos Pizza Inc. (NYSE: DPZ)

April 16, 2012
Current Price $35.69 Target Price $33-$40

DPZ Delivers Consistency

Dominos 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. Dominos has benefited from a strong marketing campaign since 2009 that has increased market visibility and brand image. Dominos Pizza Inc. has placed a greater emphasis on international expansion in recent years. During 2005-2010 Dominos international network grew 48% from 2,987 stores to 4,422 stores. International expansion offers Dominos its greatest value potential. Over the past 3-5 years Dominos 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. Dominos is not immune to market trends but the CEO describes his company as recession resistant. The following analysis shows that Dominos 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, Dominos 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.

Company Overview
Founded in 1960 and headquartered in Ann Arbor, Michigan, Dominos 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 Dominos Pizza units in the U.S. and 4,835 franchised stores internationally. Dominos Pizza has three business segments: domestic stores, domestic supply chain, and international.

Stock Performance Highlights

52 week High 52 week Low Beta Value Average Daily Volume $42.21 $17.75 1.064 926,064

Share Highlights
Market Capitalization Shares Outstanding EPS P/E Ratio $2.05B 50 M $1.79 19.8 21.92% -8.7% $1.65B

Company Performance Highlights

ROA ROE Sales

One Year Stock Performance

Financial Ratios
Current Ratio Debt to Equity 1.65 -1.20

Source: Yahoo Finance

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 Dominos 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.

Figure 1

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, Dominos 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. 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%, its 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. Dominos 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.

Figure 2 Figure 3

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.

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.

Figure 4

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 McDonalds. 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: 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 industrys 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

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 McDonalds, 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

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 Dennys. 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 Silvers 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.

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 McDonalds have already acquired essential market share of fast food service in China. Porters 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.

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, McDonalds 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. McDonalds has been expanding its breakfast with a complete new menu and more nutritious foods.

Figure 6

cycle, and this is evident by consistent revenue and gross margin, but a lack of growth and innovation. Dominos 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 Dominos 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. Dominos 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 Dominos has over 6000 domestic stores, only about 500 are company owned. Given this fact, Dominos 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 Dominos new focus and its subsequent marketing effort has paid off. Dominos 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. Dominos future strategy and focus is shifting from increasing domestic performance to improving international market share.10 Financial Summary In spring of 2007, Dominos Pizza common stock experienced a ten-fold increase in trading volume in a matter of weeks. This was an indication of a massive selloff 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, Dominos 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, Dominos has improved their financial situation drastically. In the fiscal year 2010, Dominos 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. Dominos latest quarterly report showed net income of $22 million and a continuation of this upward trend in profit is evident with the companys annual report in early March.13 In the January 2011 investor meeting, Dominos executives stressed the importance of generating free cash flows to return value to

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 companys 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
Dominos 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. Dominos is considered the global leader in the pizza delivery market. Dominos business is segmented into three distinct sections: the domestic franchises, the supply chain and international business.7 Dominos 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, Dominos is considered to be in the mature period of the business life

shareholders.14 In Dominos 2010 cash flow statement, the company generated $128 million in cash from operations. Despite making large reductions in Long-Term debt, Dominos was still able to increase overall cash by $5 million.15 Products and Markets Despite being pigeonholed in the pizza delivery chain market, Dominos 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. Dominos operates under only one product line; however through expansion, that product line has grown significantly. A few years ago Dominos revamped its entire product line to provide higher quality and better tasting pizza. This change was accompanied by a wellknown advertising campaign to increase awareness of the companys effort to shift from fast, cheap delivery pizza to a more loyal customer base.16 At this time, Dominos 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, Dominos has attempted to fend off competition from take-and-bake chains and higher end pizza restaurants by offering their new Artisan Pizzas. 17 Dominos 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, Dominos 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 Dominos Pizza competing in the domestic and global market, its main competitors globally are YUM! Brands, McDonalds, and Wendys. Many of these fastservice chain restaurants are expanding internationally at a rapid rate. Each competitor offers wide array of products to its consumers, so Dominos has had to make many menu changes to help keep their loyal customers satisfied.

Dominos main U.S. competitors in the pizza delivery service market are Papa Johns, Little Caesars, and Pizza Hut. Dominos is in an industry where it must use its valued brand name as a way of competing with its competitors around the globe. Locally, Dominos uses its trademark Domino's Pizza: You Got 30 Minutes20 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 Dominos 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, Dominos has a relatively inexpensive startup cost to franchisees.21 Dominos 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 McDonalds requires 25% to 40% of down payment which is usually between $75,000 and $100,000.23 However, Dominos requires far less liquid capital than other franchises-around $75,000, compared to as much as $250,000 for a McDonalds franchise. Furthermore, Dominos does offer financing to its franchisees. Despite relatively low start-up costs, Dominos 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 Dominos 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. Dominos 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 Dominos has over 4,600 international stores. This lags behind many other brands, including McDonalds and Yum

Brands which have nearly 20,000 international locations, respectively. Dominos 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

offers a pizza tracker which allows people to track the progress of their food being delivered. Weaknesses Although Dominos 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, Dominos earned 11.2% revenue from international operations whereas McDonalds and Yum! Brands each earned 66.3% and 63.7% respectively. Another problem Dominos faces compared to its top competitors is the amount of stores being operated internationally. Even though Dominos is increasing its operations overseas, it currently only has 4,422 stores outside the United States. McDonalds and Yum! Brands have significantly more stores internationally at 18,481 and 17,665 respectively. 29 Opportunities The opportunity for Dominos Pizza to expand its product outside of its stores and into the frozen food market could be quite profitable and beneficial. Dominos 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 datamonitors 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 wellrecognized 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 Dominos Pizza. Dominos 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 Dominos involved with someone with such strong leadership ties, can potentially have a huge impact on Dominos brand name being spread throughout Germany and the rest of Europe. Threats With the growing demand for a healthier lifestyle in our economy, Dominos 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. Dominos 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. Dominos is continuing to face high competition among other pizza companies domestically and globally. Major

S.W.O.T. Analysis
Figure7

Source: Data Monitor

26

Strengths Dominos pizza has a strong and diversified franchising network around the world, which is the main reason its pizza delivery service is so successful. Dominos 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 Dominos. As a result, Dominos 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, Dominos Pizza has been experiencing massive growth in its expansion across the globe. During 2005-2010, Dominos international network grew 48% from 2,987 stores to 4,422 stores. 27 Dominos Pizza is one of the most well-recognized consumer brands in the world. Dominos 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 Dominos new and improved products. Since Dominos operates in an industry which is largely driven by customer perception of brands, having a well-respected brand image allows Dominos to have a strong competitive advantage over its fierce competitors. Dominos pizza has now launched a Dominos application for the iPhone and iPod touch as of May, 2011. With Dominos Pizza offering an application to customers, it makes orders for customers very convenient and quick. If customers choose to get their food delivered, Dominos

pizza company competitors are the following: Papa Johns, Pizza Hut, Little Caesars, and other private label companies. Dominos 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, Dominos is frequently on the lookout on their competitors marketing strategies and pricing techniques to better ensure they have the best quality good, for the best price.

model by the large proportion of debt that Dominos 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 Dominos 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 Dominos Pizza. When the P/E ratio and PEG ratio were calculated and averaged for these companies, we compared our results with Dominos 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 Dominos 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 Dominos 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.

Valuation Analysis and Discussion

In analyzing the fundamental value of Dominos 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 Dominos 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 Dominos 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. Dominos 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 Dominos ROE because Dominos 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 Dominos 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.

Key Assumptions
Revenue Decomposition/Income Statement Our most relevant assumptions for Dominos Pizza Inc. with regards to operating income come from our revenue decomposition. Dominos has placed emphasis on expanding its domestic franchising business and its international revenue. Dominos 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.

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

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 Dominos Pizza. The Capital Asset Pricing Model (CAPM) is used to predict Dominos Cost of Equity. An implied equity risk premium of 6.19% was used and Dominos 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 Dominos 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%.

like Dominos 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.

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 Dominos which can greatly change the value of the companys 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 Dominos 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. Dominos 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 Dominos 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

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.

10

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12

Domino's Pizza Inc Revenue Decomposition Fiscal Years Ending Dec. 31 Scale(Thousands) Revenues: Domestic company-owned stores revenues Domestic franchise revenues Domestic supply chain revenues International revenues Total revenues International Revenue Growth Rate Forcasted International Growth premium Forcasted International Growth Rate Domestic c-o stores revenue Growth Rate Domestic franchise revenue growth rate Domestic supply chain revenue growth rate 2008 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

357,703.00 153,858.00 771,106.00 142,447.00 1,425,114.00 0.12

335,779 157,780 763,733 146,765 1,404,057 0.03

345,636 173,345 875,517 176,396 1,570,894 0.20

336,349 187,007 927,904 200,933 1,652,193 0.14

326,307 193,679 966,500 225,940 1,712,426 0.10 0.02 0.12 -0.03 0.04 0.04

314,421 201,895 1,009,534 257,491 1,783,341 0.12 0.02 0.14 -0.04 0.04 0.04

306,555 213,244 1,066,625 293,304 1,879,728 0.12 0.02 0.14 -0.03 0.06 0.06

301,110 226,541 1,141,048 339,304 2,008,003 0.14 0.02 0.16 -0.02 0.06 0.07

292,924 239,022 1,203,185 388,104 2,123,236 0.12 0.02 0.14 -0.03 0.06 0.05

(0.09) (0.03) (0.02)

(0.06) 0.03 (0.01)

0.03 0.10 0.15

(0.03) 0.08 0.06

Domino's Pizza Inc Income Statement Fiscal Years Ending Dec. 31 Scale (Thousands) Revenues: Domestic company-owned stores revenues Domestic franchise revenues Domestic supply chain revenues International revenues Total revenues Cost of sales: Domestic company-owned stores cost of sales Domestic supply chain cost of sales International cost of sales Total cost of sales Operating margin General & administrative expenses Income from operations Interest income Interest expense Other income (expense) Income before income taxes Provision for income taxes Net income Earnings per share: Net income (loss) per common share - basic Common shares Outstanding 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

335,779 157,780 763,733 146,765 1,404,057

345,636 173,345 875,517 176,396 1,570,894

336,349 187,007 927,904 200,933 1,652,193

326,307 193,679 966,500 225,940 1,712,426

314,421 201,895 1,009,534 257,491 1,783,341

306,555 213,244 1,066,625 293,304 1,879,728

301,110 226,541 1,141,048 339,304 2,008,003

292,924 239,022 1,203,185 388,104 2,123,236

274,474 680,427 62,180 1,017,081 386,976 197,467 189,509 683 110,945 56,275 135,522 55,778 79,744

278,297 778,510 75,498 1,132,305 438,589 210,887 227,702 244 96,810 7,809 138,945 51,028 87,917

267,066 831,665 82,946 1,181,677 470,516 211,371 259,145 296 91,635 167,806 62,445 105,361

262,849 253,275 246,939 242,552 235,958 862,381 900,780 951,720 1,018,126 1,073,570 95,112 108,394 123,470 142,834 163,377 1,220,343 1,262,449 1,322,129 1,403,513 1,472,905 492,083 520,893 557,599 604,490 650,330 221,688 231,951 249,005 262,716 276,344 270,394 288,942 308,593 341,774 373,987 247 247 283 353 389 91,518 105,907 105,862 105,827 105,788 179,123 65,235 113,889 183,283 66,749 116,533 203,013 73,935 129,078 236,300 86,058 150,242 268,587 97,816 170,771

1.39 1.5 1.79 1.93 2.00 2.21 2.56 2.91 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 Scale(Thousands) Current assets: Cash & cash equivalents Restricted cash & cash equivalents Accounts receivable, net Inventories Notes receivable, net Prepaid expenses & other current assets Advertising fund assets, restricted Deferred income taxes Total current assets Property, plant and equipment: Land & buildings Leasehold & other improvements Equipment Construction in progress Property, plant & equipment, gross Accumulated depreciation & amortization Property, plant & equipment, net Other assets: Deferred financing costs, net Goodwill Capitalized software, net Other assets, net Deferred income taxes Total other assets Total assets Current Liabilities: Current portion of long-term debt Accounts payable Accrued compensation Accrued interest Accrued income taxes Insurance reserves Advertising fund liabilities Other accrued liabilities Total current liabilities Long-term liabilities: Long-term debt, including current portion Less: current portion Long-term debt, less current portion Insurance reserves Other accrued liabilities Total long-term liabilities Total liabilities Common Stock/Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total shareholders' equity (deficit) Total Liabilities and Shareholders' Equity 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

42,392 91,141 76,273 25,890 1,079 6,155 25,116 10,622 278,668

47,945 85,530 80,410 26,998 1,509 9,760 36,134 16,752 305,038

50,292 92,612 87,200 30,702 945 12,232 36,281 16,579 326,843

154,508 107,208 86,912 30,252 978 10,262 35,875 22,389 448,384

285,766 107,150 91,925 31,728 1,020 10,118 39,181 22,908 589,796

405,435 107,106 97,967 33,709 1,077 11,153 40,652 25,375 722,474

540,643 107,061 103,767 35,807 1,144 12,536 43,203 29,535 873,696

696,534 107,025 109,930 38,135 1,207 13,269 46,083 33,571 1,045,753

21,825 83,190 170,202 4,499 279,716 176,940 102,776

23,211 83,451 175,125 4,028 285,815 188,431 97,384

23,714 79,518 171,726 6,052 281,010 188,610 92,400

27,500 82,053 206,821 24,349 340,723 212,652 128,071

29,770 81,674 221,469 7,305 340,218 228,349 111,868

32,394 81,082 240,006 7,305 360,786 242,155 118,632

35,865 81,603 267,319 7,305 392,092 263,166 128,925

39,212 81,453 291,518 7,305 419,487 281,554 137,933

17,266 17,606 3,233 9,024 21,846 72,317 453,761

12,274 17,356 7,788 8,490 8,646 58,415 460,837

16,051 16,649 8,176 8,958 4,858 61,300 480,543

16,031 16,649 8,421 9,227 0 56,561 633,016

18,551 16,649 8,674 9,504 0 56,628 758,293

18,543 16,649 8,934 9,789 0 56,913 898,019

18,537 16,649 9,202 10,082 0 57,073 1,059,695

18,530 16,649 9,478 10,385 0 57,426 1,241,112

50,370 64,120 17,168 17,500 183 12,032 25,116 32,934 219,423

835 56,602 27,418 16,028 13,767 36,134 35,342 186,126

904 69,714 21,691 15,775 13,023 10,069 36,281 29,718 197,175

904 72,256 22,750 15,755 0 10,560 38,052 31,169 191,445

702 75,248 23,803 18,232 0 11,049 39,813 32,611 201,459

700 79,315 25,553 18,224 0 11,862 42,741 35,009 213,404

565 84,727 26,960 18,218 0 12,515 45,094 36,937 225,017

615 89,590 28,359 18,211 0 13,164 47,433 38,853 236,225

1,572,833 50,370 1,522,463 15,127 17,742 1,555,332 1,774,755

1,452,156 835 1,451,321 17,438 16,603 1,485,362 1,671,488

1,451,273 904 1,450,369 21,334 16,383 1,493,107 1,690,282

1,680,000 904 1,679,096 18,945 16,121 1,714,162 1,905,607

1,679,096 702 1,678,394 18,643 15,863 1,712,900 1,914,358

1,678,394 700 1,677,694 18,297 15,609 1,711,601 1,925,004

1,677,694 565 1,677,129 18,931 15,359 1,711,420 1,936,436 586 -874,927 -2,401 -876,741 1,059,695

1,677,129 615 1,676,514 19,230 15,114 1,710,858 1,947,083 586 -704,156 -2,401 -705,970 1,241,112

25,073 46,133 577 589 583 584 -1,341,961 -1,254,044 -1,207,915 -1,270,780 -1,154,247 -1,025,169 -4,106 -2,740 -2,401 -2,401 -2,401 -2,401 -1,320,994 -1,210,651 -1,209,739 -1,272,592 -1,156,065 -1,026,986 453,761 460,837 480,543 633,015 758,293 898,019

Domino's Pizza Inc Cash Flow Statement

Fiscal Years Ending Dec. 31 Cash from Operating Activities: Net Income Deprecition and Amortization Dividend Paid Less: Increase in accounts receivable Less: Increase in inventory Less: Increase in prepaid expenses Less: Increase in advertising fund assets Less: Increase in deferred income tax asset Plus: Increase in accounts payable Plus: Increase in accrued compensation Plus: Increase in accrued interest Plus: Increase in accrued income taxes Plus: Increase in insurance reserves Plus: Increase in advertising fund liabilities Plus: Increase in other accrued liabilities Net Cash from Operating Activities: Cash from Investing Activities: Less: Increase in notes receivable Less: Increase in other assets Less: Increase in capital expenditure Less: Increase in restricted cash Net Cash from Investing Activities: Cash from Financing Activities: Plus: Increase in insurance reserves Plus: Change in other long term accrued liabilities Plus: Change in Long term Debt Less: increase in accumulated other comprehensive income Net Cash from Financing Activities: Net Increase in cash Cash, beginning of year Cash, end of year

2012E

2013E

2014E

2015E CV 2016

113,889 116,533 129,078 150,242 170,771 24,042 15,697 13,806 21,012 18,387 -176,754 288 -5,013 -6,042 -5,800 -6,163 450 -1,475 -1,982 -2,097 -2,329 1,970 144 -1,035 -1,383 -732 406 -3,306 -1,471 -2,551 -2,880 -5,810 -520 -2,466 -4,160 -4,036 2,542 2,992 4,067 5,413 4,862 1,059 1,053 1,750 1,407 1,398 -20 2,477 -8 -6 -7 -13,023 0 0 0 0 491 489 812 653 649 1,771 1,762 2,927 2,353 2,339 1,451 1,443 2,398 1,928 1,916 -47,249 132,275 141,835 167,010 184,177

-33 -269 -59,713 -14,596 -74,611

-41 -277 506 58 245

-57 -285 -20,569 45 -20,866

-67 -294 -31,305 45 -31,621

-63 -302 -27,395 36 -27,725

-2,389 -262 228,727 0 226,076

-303 -258 -702 0 -1,263

-345 -254 -700 0 -1,299

634 -250 -565 0 -181

299 -246 -615 0 -562

104,216 131,258 119,669 135,208 155,891 50,292 154,508 285,766 405,435 540,643 154,508 285,766 405,435 540,643 696,534

Domino's Pizza Inc Cash Flow Statement Fiscal Years Ending Dec. 31 Scale(Thousands) Cash flows from operating activities: Net income Depreciation & amortization Losses (gains) on debt extinguishment Losses (gains) on sale/disposal of assets Provision (benefit) for deferred income taxes Amortization of deferred financing costs, debt discount & other Non-cash compensation expense Accounts receivable Inventories, prepaid expenses & other assets Accounts payable & accrued liabilities Insurance reserves Net cash flows from operating activities Cash flows from investing activities: Capital expenditures Proceeds from sale of assets Change in restricted cash Acquisitions of franchise operations Repayments of notes receivable, net Other investing activities, net Net cash flows from investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt Repayment of long-term debt & capital lease obligations Proceeds from issuance of common stock Proceeds from exercise of stock options Tax benefit from exercise of stock options Purchase of common stock Tax payments for performance-based restricted stock Cash paid for financing costs Purchase of cumulative preferred stock Distributions Common stock dividends & equivalents Capital contribution & other financing activities Net cash flows from financing activities Effect of exchange rate changes on cash & cash equivalents Increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of period Cash & cash equivalents at end of period 2009 2010 2011

79,744 24,064 -56,275 1,843 19,476 9,621 17,254 -7,235 -1,050 16,286 -3,996 101,274

87,917 24,052 -7,809 403 6,027 7,837 13,370 -3,395 -2,357 -1,582 3,798 128,325

105,361 24,042 -2,436 8,169 6,190 13,954 -7,713 -4,904 21,419 3,152 153,073

-22,870 3,730 -12,270 -1,481 -32,891

-25,421 2,737 5,611 -1,307 -18,380

-24,349 6,031 -7,082

-1,541 -26,941

60,995 -136,679 4,376 758 383 -552 -77 -70,796 -567 -2,980 45,372 42,392

2,861 -116,760 4,548 9,450 2,100 -5,384 -1,082 -104,267 -125 5,553 42,392 47,945

-890 563 33,524 15,589 -165,007 -3,504 -3,760

-123,485 -300 2,347 47,945 50,292

Domino's Pizza Inc Common Size Income Statement

Fiscal Years Ending Dec. 31 Scale(Thousands) Revenues: Domestic company-owned stores revenues Domestic franchise revenues Domestic supply chain revenues International revenues Total revenues Cost of sales: Domestic company-owned stores cost of sales Domestic supply chain cost of sales International cost of sales Total cost of sales Operating margin General & administrative expenses Income from operations Interest income Interest expense Other income (expense) Income before income taxes Provision for income taxes Net income

2009

2010

2011

2012E

2013E

2014E

2015E CV 2016

23.91% 11.24% 54.39% 10.45% 100%

22.00% 11.03% 55.73% 11.23% 100%

20.36% 11.32% 56.16% 12.16% 100%

19.06% 11.31% 56.44% 13.19% 100%

17.63% 11.32% 56.61% 14.44% 100%

16.31% 11.34% 56.74% 15.60% 100%

15.00% 11.28% 56.83% 16.90% 100%

13.80% 11.26% 56.67% 18.28% 100%

19.55% 17.72% 16.16% 15.35% 14.20% 13.14% 12.08% 11.11% 48.46% 49.56% 50.34% 50.36% 50.51% 50.63% 50.70% 50.56% 4.43% 4.81% 5.02% 5.55% 6.08% 6.57% 7.11% 7.69% 72.44% 72.08% 71.52% 71.26% 70.79% 70.34% 69.90% 69.37% 27.56% 27.92% 28.48% 28.74% 29.21% 29.66% 30.10% 30.63% 14.06% 13.42% 12.79% 12.95% 13.01% 13.25% 13.08% 13.02% 13.50% 14.50% 15.68% 15.79% 16.20% 16.42% 17.02% 17.61% 0.05% 0.02% 0.02% 0.01% 0.01% 0.02% 0.02% 0.02% 7.90% 6.16% 5.55% 5.34% 5.94% 5.63% 5.27% 4.98% 4.01% 0.50% 9.65% 8.84% 10.16% 10.46% 10.28% 10.80% 11.77% 12.65% 3.97% 3.25% 3.78% 3.81% 3.74% 3.93% 4.29% 4.61% 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 Scale(Thousands) Current assets: Cash & cash equivalents Restricted cash & cash equivalents Accounts receivable, net Inventories Notes receivable, net Prepaid expenses & other current assets Advertising fund assets, restricted Deferred income taxes Total current assets Property, plant and equipment: Land & buildings Leasehold & other improvements Equipment Construction in progress Property, plant & equipment, gross Accumulated depreciation & amortization Property, plant & equipment, net Other assets: Deferred financing costs, net Goodwill Capitalized software, net Other assets, net Deferred income taxes Total other assets Total assets Current Liabilities: Current portion of long-term debt Accounts payable Accrued compensation Accrued interest Accrued income taxes Insurance reserves Advertising fund liabilities Other accrued liabilities Total current liabilities Long-term liabilities: Long-term debt, including current portion Less: current portion Long-term debt, less current portion Insurance reserves Other accrued liabilities Total long-term liabilities Total liabilities Common stock/Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total shareholders' equity (deficit) Total Liabilities and Shareholders' Equity 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

3.02% 6.49% 5.43% 1.84% 0.08% 0.44% 1.79% 0.76% 19.85%

3.05% 5.44% 5.12% 1.72% 0.10% 0.62% 2.30% 1.07% 19.42%

3.04% 5.61% 5.28% 1.86% 0.06% 0.74% 2.20% 1.00% 19.78%

9.02% 6.26% 5.08% 1.77% 0.06% 0.60% 2.09% 1.31% 26.18%

16.02% 6.01% 5.15% 1.78% 0.06% 0.57% 2.20% 1.28% 33.07%

21.57% 26.92% 5.70% 5.33% 5.21% 5.17% 1.79% 1.78% 0.06% 0.06% 0.59% 0.62% 2.16% 2.15% 1.35% 1.47% 38.44% 43.51%

32.81% 5.04% 5.18% 1.80% 0.06% 0.62% 2.17% 1.58% 49.25%

1.55% 5.92% 12.12% 0.32% 19.92% 12.60% 7.32%

1.48% 5.31% 11.15% 0.26% 18.19% 12.00% 6.20%

1.44% 4.81% 10.39% 0.37% 17.01% 11.42% 5.59%

1.61% 4.79% 12.08% 1.42% 19.90% 12.42% 7.48%

1.67% 4.58% 12.42% 0.41% 19.08% 12.80% 6.27%

1.72% 4.31% 12.77% 0.39% 19.19% 12.88% 6.31%

1.79% 4.06% 13.31% 0.36% 19.53% 13.11% 6.42%

1.85% 3.84% 13.73% 0.34% 19.76% 13.26% 6.50%

1.23% 1.25% 0.23% 0.64% 1.56% 5.15% 32.32%

0.78% 1.10% 0.50% 0.54% 0.55% 3.72% 29.34%

0.97% 1.01% 0.49% 0.54% 0.29% 3.71% 29.09%

0.94% 0.97% 0.49% 0.54% 0.00% 3.30% 36.97%

1.04% 0.93% 0.49% 0.53% 0.00% 3.18% 42.52%

0.99% 0.92% 0.89% 0.83% 0.48% 0.46% 0.52% 0.50% 0.00% 0.00% 3.03% 2.84% 47.77% 52.77%

0.87% 0.78% 0.45% 0.49% 0.00% 2.70% 58.45%

3.59% 4.57% 1.22% 1.25% 0.01% 0.86% 1.79% 2.35% 15.63%

0.05% 3.60% 1.75% 1.02% 0.88% 2.30% 2.25% 11.85%

0.05% 4.22% 1.31% 0.95% 0.79% 0.61% 2.20% 1.80% 11.93%

0.05% 4.22% 1.33% 0.92% 0.00% 0.62% 2.22% 1.82% 11.18%

0.04% 4.22% 1.33% 1.02% 0.00% 0.62% 2.23% 1.83% 11.30%

0.04% 0.03% 4.22% 4.22% 1.36% 1.34% 0.97% 0.91% 0.00% 0.00% 0.63% 0.62% 2.27% 2.25% 1.86% 1.84% 11.35% 11.21%

0.03% 4.22% 1.34% 0.86% 0.00% 0.62% 2.23% 1.83% 11.13%

112.02% 3.59% 108.43% 1.08% 1.26% 110.77%

92.44% 0.05% 92.39% 1.11% 1.06% 94.56%

87.84% 98.11% 0.05% 0.05% 87.78% 98.05% 1.29% 1.11% 0.99% 0.94% 90.37% 100.10%

94.15% 0.04% 94.12% 1.05% 0.89% 96.05%

89.29% 83.55% 0.04% 0.03% 89.25% 83.52% 0.97% 0.94% 0.83% 0.76% 91.06% 85.23%

78.99% 0.03% 78.96% 0.91% 0.71% 80.58% 91.70%

126.40% 106.40% 102.31% 111.28% 107.35% 102.41% 96.44% 1.79% -95.58% -0.29% -94.08% 32.32% 2.94% -79.83% -0.17% -77.07% 29.34% 0.03% -73.11% -0.15% -73.22% 29.09% 0.03% -74.21% -0.14% -74.32% 36.97% 0.03% -64.72% -0.13% -64.83% 42.52%

0.03% 0.03% 0.03% -54.54% -43.57% -33.16% -0.13% -0.12% -0.11% -54.63% -43.66% -33.25% 47.77% 52.77% 58.45%

Domino's Pizza Inc Value Driver Estimation Fiscal Years Ending Dec. 31 NOPLAT Computation: EBITA: Total Revenue (Total Cost of Sales) (General & Administrative Expenses) Implied Interest on Operating Leases EBITA Less: Adjusted Taxes: Provision for Income Taxes Tax Shield on Interest Expense Tax Shield on Implied Lease Interest Adjusted Taxes Plus: Change in Deferred Tax Liabilities: Current Year DT Liabilities (Current Year DT Assets) Net DT Current Year Liabilities Previous Year DT Liabilities Previous Year DT Assets Net DT Previous Year Liabilities Net Change in DT Liabilities NOPLAT: Invested Capital Computation: Operating Current Assets: Normal Cash Advertising fund assets, restricted Prepaid Expenses & other current assets Accounts Receivable, Net Inventory Operating Current Assets Operating Current Liabilities: Accounts Payable Insurance Reserves Advertising fund liabilities Other accrued liabilities Accrued Expenses Operating Current Liabilities Net Operating Working Capital Plus: Net PPE Plus: Capitalized software, net Plus: PV of Operating Leases Plus: Other Operating Assets Less: Insurance reserves Less: Other Operating Liabilities Invested Capital 2009 2010 2011 2012E 2013E 2014E 2015E CV 2016

1,404,057 1,017,081 197,467 7,499 197,008

1,570,894 1,132,305 210,887 7,282 234,984

1,652,193 1,181,677 211,371 7,005 266,150

1,712,426 1,220,343 221,688 9,537 279,931

1,783,341 1,262,449 231,951 8,330 297,272

1,879,728 1,322,129 249,005 8,834 317,427

2,008,003 1,403,513 262,716 9,601 351,374

2,123,236 1,472,905 276,344 10,271 384,258

55,778 42,044 2,842 100,664

51,028 35,596 2,678 89,302

62,445 33,372 2,551 98,368

65,235 33,330 3,473 102,038

66,749 38,570 3,034 108,353

73,935 38,554 3,217 115,706

86,058 38,541 3,496 128,095

97,816 38,527 3,741 140,084

-32,468 -32,468 -52,082 -52,082 19,614 115,958

-25,398 -25,398 -32,468 -32,468 7,070 152,752

-21,437 -21,437 -25,398 -25,398 3,961 171,742

-22,389 -22,389 -21,437 -21,437 -952 176,942

-22,908 -22,908 -22,389 -22,389 -520 188,399

-25,375 -25,375 -22,908 -22,908 -2,466 199,255

-29,535 -29,535 -25,375 -25,375 -4,160 219,119

-33,571 -33,571 -29,535 -29,535 -4,036 240,139

28,081 25,116 6,155 76,273 25,890 161,515

31,418 36,134 9,760 80,410 26,998 184,720

33,044 36,281 12,232 87,200 30,702 199,459

34,249 35,875 10,262 86,912 30,252 197,550

35,667 39,181 10,118 91,925 31,728 208,619

37,595 40,652 11,153 97,967 33,709 221,076

40,160 43,203 12,536 103,767 35,807 235,474

42,465 46,083 13,269 109,930 38,135 249,882

64,120 12,032 25,116 32,934 17,168 151,370 10,145 102,776 3,233 118,845 15,127 219,872

56,602 13,767 36,134 35,342 27,418 169,263 15,457 97,384 7,788 115,403 17,438 218,594

69,714 10,069 36,281 29,718 21,691 167,473 31,986 92,400 8,176 111,012 21,334 222,240

72,256 10,560 38,052 31,169 22,750 174,786 22,763 128,071 8,421 151,141 18,945 291,452

75,248 11,049 39,813 32,611 23,803 182,525 26,094 111,868 8,674 132,020 18,643 260,013

79,315 11,862 42,741 35,009 25,553 194,480 26,597 118,632 8,934 140,001 18,297 275,866

84,727 12,515 45,094 36,937 26,960 206,233 29,240 128,925 9,202 152,149 18,931 300,585

89,590 13,164 47,433 38,853 28,359 217,398 32,483 137,933 9,478 162,780 19,230 323,444

ROIC: NOPLAT Divide: Invested Capital (previous year) ROIC Economic Profit: Invested Capital: Multiplied by: ROIC Less: WACC Economic Profit Free Cash Flow: NOPLAT Less: Change in invested capital FCF Marginal Taxes Paid: Marginal Tax Rate:

115,958 239,972 48%

152,752 219,872 69%

171,742 218,594 79%

176,942 222,240 80%

188,399 291,452 65%

199,255 260,013 77%

219,119 275,866 79%

240,139 300,585 80%

239,972 48% 7.11% 98,906

219,872 69% 7.11% 137,128

218,594 79% 7.11% 156,209

222,240 80% 7.11% 161,150

291,452 65% 7.11% 167,689

260,013 77% 7.11% 180,779

275,866 79% 7.11% 199,516

300,585 80% 7.11% 218,779

115,958 -20,100 136,058

152,752 -1,278 154,030

171,742 3,646 168,096

176,942 69,212 107,730

188,399 -31,439 219,838

199,255 15,853 183,402

219,119 24,719 194,400

240,139 22,859 217,280

51,358.00 51,089.00 61,113.00 37.90% 36.77% 36.42%

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

Cost of Equity: Risk-free Rate Risk Premium Beta Cost of Equity Cost of Debt: Pre-tax Cost of debt Marginal Tax Rate Cost of Debt Target Weights: Debt Equity Total Weight of Debt Weight of Equity

3.14% 6.19% 1.064 9.73%

6.31% 36.42% 4.01%

1,783,400,000 2,105,745,664 3,889,145,664 45.86% 54.14%

WACC

7.11%

Risk Premium: S&P 500 geometric average returns: Less: Historical risk free rate (30 year T-Bond) Risk Premium: Implied Equity Risk Premium:

9.26% 5.14% 4.12% 6.19%

Domino's Pizza Inc Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth CV ROIC WACC Cost of Equity Fiscal Years Ending Dec. 31 NOPLAT

2.00% 79.89% 7.11% 9.73% 2011 171,742 2012E 176,942 2013E 188,399 2014E 199,255 2015E 219,119 CV 2016 240,139

Invested Capital CapEx ( IC) Free Cash Flow ROIC Economic Profit WACC Shares CV Growth Rate DCF Model: Free Cash Flow (FCF) to Discount Continuing Value (CV) PV of FCF Discounted by WACC Value of Operating Assets Debt Excess Cash Notes Receivable ESOP Value of Equity Shares Outstanding Intrinsic Value (per share) Adjusted For Partial Year Economic Profit Model: Economic Profit to Discount Continuing Value (CV) PV of FCF Discounted by WACC PV (Economic Profit) + Beginning Invested Capital (T=0) Value of Operating Assets Debt Excess Cash Notes Receivable ESOP Value of Equity Shares Outstanding Intrinsic Value (per share) Adjusted for Partial-Year

222,240

291,452 69,212

260,013 -31,439

275,866 15,853

300,585 24,719

323,444 22,859

107,730 219,838 183,402 194,400 217,280 79.62% 64.64% 76.63% 79.43% 79.89% 161149.85 167689.10 180778.76 199516.03 218779.44 7.1% 58,918,038 2.0% 2012E 107,730 100,583 4,073,610 -1,783,400 49,286 945 -57,707 2,282,733,823.69 58,918,038 $38.74 $39.81 2012E 161,150 150,458 3,851,370 222,240 4,073,610 -1,783,400 49,286 945 -57,707 2,282,733,823.69 58,918,038 $38.74 $39.81 2013E 167,689 146,177 2014E 180,779 147,132 2015E 199,516 151,609 CV 2016 4,284,860 3,255,993 2013E 219,838 191,636 2014E 183,402 149,267 2015E 194,400 147,721 CV 2016 4,585,445 3,484,403

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

Fiscal Years Ending Dec. 31 EPS EPS growth Key Assumptions CV growth CV ROE* (industry average) Cost of Equity Future Cash Flows P/E Multiple EPS(next period) Future Stock Price Dividends Per Share Future Cash Flows Discounted Cash Flows Intrinsic Value

2011 2012E 2013E $1.79

2014E

2015E

CV 2016

$1.93 $2.00 $2.21 $2.56 $2.91 7.94% 3.46% 10.56% 16.00% 13.61%

4.00% 29.60% 9.73%

15.10 $2.91 $43.99 $ 3.00 $ 3.00 $3.00 $ 33.35 $43.99 $30.35

Domino's Pizza Inc Dividend Discount Model (DDM) or Fundamental P/E Valuation Model EPS Company Price 2011E Ticker YUM $3.27 Yum! Brands, Inc. $73.19 MCD $5.72 McDonald's Corp $97.11 DRI $3.60 Darden Restaurants, Inc. $49.81 SBUX $1.85 Starbucks Corporation $58.66 EAT $1.88 Brinker International Inc. $28.00 CMG $8.87 Chipotle Mexican Grill, Inc. $432.43 PNRA $5.60 Panera Bread Co. $160.29 $0.93 BAGL Einstein Noah Restaurant Group, Inc. $14.70

EPS 2012E $3.76 $6.31 $4.11 $2.29 $2.18 $10.87 $6.65 $1.06 Average $1.93

P/E 11 22.4 17.0 13.8 31.7 14.9 48.8 28.6 15.8 24.12 19.8

Est. P/E 12 5yr Gr. PEG 11 PEG 12 19.5 12.93 1.73 1.51 15.4 9.97 1.70 1.54 12.1 12.16 1.14 1.00 25.6 18.93 1.68 1.35 12.8 13.33 1.12 0.96 39.8 21.57 2.26 1.84 24.1 19.1 1.50 1.26 13.9 20.0 0.79 0.69 20.40 15.43 1.49 1.27 18.3 13.61 1.5 1.3

DPZ

Domino's Pizza Inc

$35.45

$1.79

Implied Value: Relative P/E (EPS11) Relative P/E (EPS12) PEG Ratio (EPS11) PEG Ratio (EPS12)

$ $ $ $

43.18 39.41 36.28 33.40

Domino's Pizza Inc Key Management Ratios

Fiscal Years Ending Dec. 31 Liquidity Ratios Current Ratio Quick Ratio Cash Ratio Activity or Asset-Management Ratios Receivables Turnover Days Receivables Inventory Turnover Days Inventory Total Asset Turnover Financial Leverage Ratios Debt/Equity

Formula

2012E

2013E

2014E

2015E CV 2016

Current Assets/Current Liability (Cash+Recievables)/Current Liability (Cash+Cash Eq)/Current Liability

2.34 1.26 0.81

2.93 1.87 1.42

3.39 2.36 1.90

3.88 2.86 2.40

4.43 3.41 2.95

Revenue/Total Recivables 365/Receivables Turnover COGS/Inventory 365/Inventory Turnover Revenue/Total Assets

19.70 18.53 40.34 9.05 2.71

19.40 18.81 39.79 9.17 2.35

19.19 19.02 39.22 9.31 2.09

19.35 18.86 39.20 9.31 1.89

19.31 18.90 38.62 9.45 1.71

Total Debt/Total Equity

-1.32

-1.45

-1.63

-1.91

-2.38

Profitability Ratios Gross Margin Net Margin Return on Assets (ROA) Return on Equity (ROE)

(Revenue-COGS)/Revenue Net Income/Revenue Net Income/Total Assets Net Income/Beg. Stockholder's Equity

28.74% 29.21% 29.66% 30.10% 30.63% 6.65% 6.53% 6.87% 7.48% 8.04% 17.99% 15.37% 14.37% 14.18% 13.76% -8.95% -10.08% -12.57% -17.14% -24.19%

CV Growth

39.78 2.3% 2.2% 2.1% 2.0% 1.9% 1.8% 1.7%

0.5 97.83 93.90 90.23 86.80 83.58 80.56 77.71

0.7 72.67 70.17 67.81 65.58 63.46 61.45 59.53

0.9 55.63 53.93 52.30 50.74 49.26 47.83 46.47

Beta 1.1 43.33 42.10 40.92 39.78 38.69 37.64 36.63

1.3 34.01 33.09 32.20 31.35 30.52 29.72 28.94

1.5 26.71 26.00 25.31 24.65 24.00 23.37 22.77

1.7 20.83 20.27 19.72 19.19 18.68 18.18 17.69

Revenue

39.78 63.37% 65.37% 67.37% 623,236 10.46 8.85 7.24 1,123,236 25.73 22.82 19.92 1,623,236 40.99 36.79 32.59 2,123,236 56.25 50.76 45.27 2,623,236 71.51 64.73 57.95 3,123,236 86.77 78.70 70.63 3,623,236 102.04 92.67 83.30

COGS 69.37% 71.37% 73.37% 75.37% 5.63 4.02 2.41 0.80 17.01 14.11 11.21 8.30 28.40 24.20 20.01 15.81 39.78 34.29 28.80 23.32 51.17 44.38 37.60 30.82 62.55 54.48 46.40 38.33 73.93 64.57 55.20 45.83

CV Growth

39.78 2.3% 2.2% 2.1% 2% 1.9% 1.8% 1.7%

74% 43.17 41.95 40.78 39.66 38.57 37.53 36.53

76% 43.23 42.00 40.83 39.70 38.62 37.57 36.57

78% 43.28 42.05 40.87 39.74 38.65 37.61 36.60

CV ROIC 80% 43.33 42.10 40.92 39.78 38.69 37.64 36.63

82% 43.37 42.14 40.96 39.82 38.73 37.68 36.66

84% 43.42 42.18 41.00 39.86 38.76 37.71 36.69

86% 43.46 42.22 41.03 39.89 38.79 37.74 36.72

Risk Free Rate

39.78 0.14% 1.14% 2.14% 3.14% 4.14% 5.14% 6.14%

0.5 218.14 150.83 112.04 86.80 69.05 55.89 45.73

0.7 139.83 105.11 82.04 65.58 53.24 43.64 35.96

0.9 98.82 77.64 62.33 50.74 41.66 34.35 28.33

Beta 1.1 73.57 59.29 48.39 39.78 32.81 27.05 22.21

1.3 56.44 46.16 37.99 31.35 25.82 21.17 17.18

1.5 44.05 36.29 29.94 24.65 20.16 16.31 12.97

1.7 34.67 28.60 23.51 19.19 15.47 12.24 9.39

SGA

39.78 10% 11% 12% 13% 14% 15% 16%

66% 56.25 53.51 50.76 48.02 45.27 42.53 39.78

67% 53.51 50.76 48.02 45.27 42.53 39.78 37.04

68% 50.76 48.02 45.27 42.53 39.78 37.04 34.29

COGS 69% 48.02 45.27 42.53 39.78 37.04 34.29 31.55

70% 45.27 42.53 39.78 37.04 34.29 31.55 28.80

71% 42.53 39.78 37.04 34.29 31.55 28.80 26.06

72% 39.78 37.04 34.29 31.55 28.80 26.06 23.32