STOCK ANALYSIS

DOMINO’S PIZZA

Prepared By:
Vansh Khanuja
Vanshkhanuja78@gmail.com
July 11, 2021
PREFACE
This analysis report covers various aspects of stock selection.
Although my report is not something you should solely base
your investments on, but I'm sure it can surely serve as a guide.
Stock selection is a process of elimination, with an approach
like this, one should constantly find reasons not to buy the
stock. This will help you make better investment decisions as
stock selection can be quite tedious.
The reasons for eliminating a stock can be different and does
not necessary give a negative opinion about the company.
Everyone has different investment horizons and different risk
appetite; this makes it tough to make an analysis that will serve
everyone equally because of the bias towards different
companies we all have. Thus, it would be better for me to
explain my perspective so you can better understand the
reasons I select/reject a stock.
I’m looking for undervalued growth stocks. My time horizon
varies with kind of stocks but generally you expect it to be at
least 5 years. The company should have excellent management
and display consistent growth over a long term. While the latter
can be easily known just by analyzing the financials, The major
concern is regarding how to check if the management is
competent enough.
The only thing one could do is again try to gain some insights by
looking at the financials. A healthy growth rate added with
better than average margins will display managerial
competency. Along with this, careful scrutinization of
management’s discussion section in the annual reports over the
last few years can surely yield some insights.
Valuation is the last step in stock analysis. The basic role is to
use all the facts obtained to find a price that is justified. This is
probably the most controversial part because there is no
perfect way to value a company. I will be using a DCF
(Discounted Cash Flow) model and use the risk-free-rate as the
discount rate. I understand the conventional method of DCF
includes calculation of weighted average cost of capital that is
used to discount the cash flows but I'm not using it because I
will deduct 25% of the calculated value to get a margin of
safety. Furthermore, I will be conservative in my projections so
using risk-free-rate is appropriate.
Given the fact that the intrinsic value of any given company
cannot be calculated with exact precision, it is important to
consider that I can be wrong in my projections. This is the
reason I will be deducting 25% of the calculated value. If then
the stock is selling at around the price I calculated, then only I
will be bullish on that particular investment.
The strategy I just mentioned is a rough explanation of what I
will follow. There can be certain adjustments that will vary
according to the company. Note that the valuation is based on
forecasts of Future Cash Flows (FCFs) and thus carry an
inherent flaw I.e., predictions. Given that there are many
variables that can disrupt cash flows, you are advised to invest
only after you’ve understood all the points I've mentioned and
if you can hold the stock patiently for years until the
discrepancy between the price and value is fixed. This process
can be frustrating and you’ll be tempted to sell in bear markets,
but if you truly understand the principles of investing, I expect
you to buy more during such conditions. If there are any
questions concerning any phase of the report, I would welcome
hearing from you.
TABLE OF CONTENTS
• INTRODUCTION
1. OVERVIEW
2. BUSINESS MODEL
• FINANCIAL STATEMENTS
1. ANALYSIS OF FINANCIAL CONDITION
2. THE BALANCE SHEET (DETAILED ANALYSIS)
3. THE INCOME STATEMENT (OVERVIEW)
4. THE CASH FLOW STATEMENT (OVERVIEW)
5. VALUATION
• CONCLUSION
1. WHO SHOULD BUY THIS STOCK?
• APPENDIX
1. STORY VS NUMBERS
• REFERENCES
 INTRODUCTION
OVERVIEW
Domino’s pizza is the largest pizza company in the world
(based on global retail sales) with 17,600 locations over
90 markets around the world (as of January 3rd, 2021).
98% of the Domino’s stores are owned by independent
franchisees. This model is a lot similar to that of
McDonald’s which has franchised 93% of its stores.
“Franchising enables an individual to be his or her own
employer and maintain control over all employment-
related matters and pricing decisions, while also
benefiting from the strength of the Domino’s global
brand and operating system with limited capital
investment by us.”
*Source: 10-K
That limited capital investment is what makes this
business model attractive. The main source of revenues
are fees and royalties charged to the franchisee. The
company also sells food, supplies and equipment to
franchisees primarily in US and Canada.
As of January 3, 2021, the Company had $4.12 billion in
total debt.
“The majority of the company’s U.S. and international
stores are constructed in the carryout-friendly Pizza
Theater design. Many of these stores offer casual seating
and enable customers to watch the preparation of their
orders, but do not offer a full-service dine-in experience.
As a result, the stores generally do not require expensive
restaurant facilities and staffing”
The main focus as an investor for me is how much the
company can grow from here. Currently, it has a market
capitalization of USD 18.5 billion.
Recently, hedge fund manager (Pershing Square) Bill
Ackman, revealed a 6% stake in the company. This
obviously is a good thing but the only problem is that the
stock price has jumped after the news (The stock 430$
when Ackman announced his stake).
The company is currently trading at 477.5$/share at 38.7
times earnings (Not excessive as compared to the low
interest rates).
I will analyze the company’s business model in the next
section.
BUSINESS MODEL
1. US stores
2. International franchise
3. Supply chain
4. Competitive advantage

US STORES:
The US stores segment accounted for 35% of all the
revenues for FY20. It operates primarily through
franchising, with 5,992 franchised-stores and 363
company-owned stores (as of 3rd January, 2021).
The company also uses its company-owned stores for
new experiments and to train managers.
The 5,992 franchised-stores are owned by 762
independent US franchisees. As of January 3, 2021, the
average U.S. franchisee owned and operated
approximately seven stores and had been in the
franchise system for over 18 years. Additionally, 19 of the
U.S. franchisees operated more than 50 stores (including
the largest U.S. franchisee who operated 178 stores) and
228 of our U.S. franchisees each operated one store,
each as of that date.
The company enters into a long-term agreement with a
prospective franchisee only after a 1-year experience and
only when the franchisee has graduated from their
franchisee-management school program. This enables
the company to have only quality people run the stores
which is obviously critical for the company’s brand
image.
The term for franchise agreement with US franchisees is
10-years with an option to renew for additional 10-years.
Each franchisee is generally required to pay a 5.5%
royalty fee on sales, as well as certain technology fees. In
certain instances, they collect lower rates based on
certain incentives.
The company also has the right to terminate an
agreement for various reasons including: a franchisee’s
failure to adhere to the Company’s franchise agreement,
failure to make required payments, or failure to adhere
to specified Company policies and standards.
INTERNATIONAL FRANCHISE
During 2020, the international franchise segment
accounted for $249.8 million, or 6% of consolidated
revenues. This segment is comprised of a network of
franchised stores in more than 90 international markets.
At January 3, 2021, the company had 11,289
international franchise stores. The principal sources of
revenues from those operations are royalty payments
generated by retail sales from franchised stores, as well
as certain technology fees.
The stores in international markets are run by master
franchise companies which are also publicly traded.
These master franchisees then franchise to sub-
franchisees and earn the spread.

MARKET STORES
India (JUBLFOOD: NS) 1313
United Kingdom (DOM: L) 1144
Mexico (ALSEA: MX) 779
Japan (DMP: ASX) 742
Australia (DMP: ASX) 709
Turkey (DPEU: L) 560
Canada 541
South Korea 466
France (DMP: ASX) 431
China 363

The international master franchise agreements generally

grant the franchisee exclusive rights to develop and sub
franchise stores. Agreements are generally for a term of
ten years, with options to renew for additional terms.
The agreements typically contain growth clauses
requiring franchisees to open a minimum number of
stores within a specified period. The master franchisee is
generally required to pay an initial, one-time franchise
fee as well as an additional franchise fee upon the
opening of each new store. The master franchisee is also
required to pay a continuing royalty fee as a percentage
of sales, which varies among international markets and
may also differ based on certain incentives and
concessions, and averaged approximately 2.9% in 2020.
SUPPLY CHAINS
During 2020, the supply chain segment accounted for
$2.42 billion, or 59% of consolidated revenues. The
company operates 21 regional dough manufacturing and
supply chain centers in the U.S., two thin crust
manufacturing facilities and one vegetable processing
center in the U.S. and five dough manufacturing and
supply chain centers in Canada. The supply chain
segment leases a fleet of approximately 900 tractors and
trailers. Our centers produce fresh dough and purchase,
receive, store and deliver quality food and other
complementary items to substantially all of our U.S.
stores and most of our Canadian franchised stores. The
regularly supply over 6,800 stores with various food and
supplies.
The company also has agreements with various third-
party suppliers like Coca-Cola, to supply various food
products.
[The company has the right to terminate any agreement
over quality issues]
COMPETITIVE ADVANTAGE
This section is probably the most important because the
competitive advantage will ultimately determine our
growth rate inputs during valuation.
The company surely has a strong brand image and a
stable business model. The growth in the future depends
on how the company can compete with other QSR
companies and how the company can improve margins.
The valuation for this company depends a lot on
probabilities.
The question at last is about the competitive advantage.
Why will a consumer prefer Domino’s over any other
QSR like McDonald’s or Pizza Hut. There is no simple
answer for this because every consumer is different. In
my opinion, Domino’s has a well-structured delivery
system and a good brand image, but the consumer is
more focused on two variables: price and taste. Taste is
subjective and something one cannot value, but price of
the product can have a huge impact. I don’t see any real
competitive advantage in terms of pricing. I expect slow
yet consistent growth in the future because of the
business model.
 FINANCIAL STATEMENTS
ANALYSIS OF FINANCIAL CONDITION

• An obvious red flag:

“Every five or six years our fiscal year includes an extra
(or 53rd) week in the fourth quarter.”
“Fiscal 2020 consisted of 53 weeks and fiscal 2019 and
2018 each consisted of 52 weeks.”
“The inclusion of the 53rd week in 2020 positively
impacted our results.”
The company increased 1 week in the accounting period
for FY20 and also stated that this change had a positive
impact on earnings.
The reason was not stated, I’m counting this as a red flag.
Management is more concerned about short-term
results.
[Feel free to contact me if I’m missing something]
 • STATISTICS:
GLOBAL retail sales growth:
Global retail sales growth refers to total worldwide retail
sales at Company-owned and franchise stores. This is an
important metric because ultimately sales will generate
the royalty and other fees.
“Global retail sales growth in 2020 includes the favorable
impact of the 53rd week.” [!]
2020 2019 2018
US STORES 17.6% 6.9% 11.2%
INTERNATIONAL STORES* 8.8% 9% 10.4%
TOTAL 13.2% 8% 10.8%
*EXCLUDING FOREGIN CURRENCY IMPACT

The data surely tells a positive story because the overall

retail stores have grown much better in FY20 compared
to the previous two years but you should keep in mind
that there’s an extra week.
SAME STORES sales growth:
Same store sales growth is calculated for a given period
by including only sales from stores that also had sales in
the comparable weeks of both years. This is a widely
used metric in food industry.
“The 53rd week in fiscal 2020 had no impact on reported
same store sales growth amounts.”

2020 2019 2018

U.S. Company-owned stores 11.0% 2.8% 4.8%
U.S. franchise stores 11.5% 3.2% 6.8%
U.S. stores 11.5% 3.2% 6.6%
International stores 4.4% 1.9% 3.5%

The numbers are interesting because we see a sudden

increase in 2020. I will talk more about this in the
valuation section.
STORE growth:
The store growth has been consistent, the only cause of
concern is how they will grow further at an increased
rate without too much leverage. (Increasing accounting
periods won’t work)

• DIVIDENDS:
The company declared dividends of approximately
$122.2 million (or $3.12 per share) in 2020,
approximately $105.6 million (or $2.60 per share) in 2019
and approximately $92.2 million (or $2.20 per share) in
2018 and paid dividends of approximately $121.9 million,
$105.7 million and $92.2 million in 2020, 2019 and 2018,
respectively.
 • SHARE REPURCHASES:
The company used cash of approximately $304.6 million
in 2020, $699.0 million in 2019 and $591.2 million in
2018 for share repurchases. The Board of Directors
authorized a share repurchase program to repurchase up
to $1.0 billion of the Company’s common stock on
October 4, 2019. The company had approximately $101.6
million left under this share repurchase program as of
January 3, 2021.
• CAPITAL EXPENDITURES:
In the past three years, the company has spent
approximately $294.2 million for capital expenditures. In
2020, the investment totaled $88.8 million in capital
expenditures which primarily related to investments in
supply chain centers, digital ordering platform, new
Company-owned stores and asset upgrades for existing
Company-owned stores.
THE BALANCE SHEET
(All figures in USD unless otherwise stated)
The company has 1.5 billion in assets and 4.8 billion in
liabilities, a stockholder’s deficit of 3.3 billion. Now I get
the reason behind that additional week.
CURRENT ASSETS AND LIABILITIES:
The company has only 168 million in cash and 217 million
in restricted cash (cash restricted to pay future debt
obligations). Accounts receivables (244 million) are
almost 25% of all current assets (869 million). The
company has a positive working capital of 399 million but
I will try to look behind the numbers to get the real
working capital.
Current Assets: (USD in thousands)
Cash and cash equivalents: 168,821
Restricted cash and cash equivalents: 217,453
Accounts receivable: 244,560
Inventories: 66,683
Prepaid expenses and other: 24,169
Advertising fund assets, restricted: 147,698
Total current assets: 869,384
Cash and cash equivalents (including restricted) can be
taken at face value of 386 million. Advertising fund assets
are to be used for advertising operations and thus, this
should be reduced (because we are concerned about
solvency here). Accounts receivable makes 25% of all
current assets, I cannot determine how much of it can be
realized. I am deducting 50% from accounts receivables (I
am not saying that 50% would never be realized, the
problem is regarding how long it would take). Deducting
additional 50% from inventories to be conservative.
Prepaid expenses and other consists of insurance, taxes,
software installation and other expenses. Not including
these in my calculation (they won’t help pay down the
debt).
Adjusted current assets: 540 million
Current Liabilities: (USD in thousands)
Current portion of long-term debt: 2,855
Accounts payable: 94,499
Accrued compensation: 58,520
Accrued interest: 31,695
Operating lease liabilities: 35,861
Insurance reserves: 26,377
 Advertising fund liabilities: 141,175
Other accrued liabilities: 79,837
Total current liabilities: 470,819
Every line item above can be taken at face value except
for accrued compensation and insurance reserves.
The problem with these is that the management can
change the numbers according to them by changing a
few assumptions. In the auditor’s report, insurance
reserve was highlighted as a critical audit matter.
I normally would take this kind of items at face value but
because I understand how the management is trying to
show a good picture, I’m sure the reserves are
understated. I am adding 20% to this number. (Generally,
reserves understatement is not a red flag because there
are a lot of assumptions. The reserve for Domino’s might
prove to be overstated or maybe too understated that it
could cause serious trouble. The thing is, we don’t know.
There’s nothing magical about 20%, I’m adding it just to
be conservative).
Adjusted current Liabilities: 476 million
This makes our adjusted working capital only 64 million
as against 399 million as reported.
The company has 297 million of Property, Plant and
equipment assets net of accumulated depreciation (282
million). Depreciation and amortization expense on
property, plant and equipment was approximately 42.0
million, 37.1 million and 35.0 million in 2020, 2019 and
2018, respectively.
Leaseholds include 186 million of all PPE mentioned
above (capitalized lease [operating lease stands at 228
million]). 13 million invested in marketable securities is
restricted to fund the Company’s obligations under the
deferred compensation plan.
The Company’s goodwill at 15 million primarily relates to
franchise-store acquisitions and is not amortized. The
Company did not recognize any goodwill impairment
charges in 2020, 2019 and 2018.
This means that earnings are being overstated through
this.
Company has capitalized software which is stated at 81
million (net of amortization).
“As of January 3, 2021, scheduled amortization for
capitalized software that has been placed in service is
approximately $20.5 million in 2021, $12.6 million in
2022, $4.3 million in 2023, $0.8 million in 2024, $0.5
million in 2025 and $0.2 million thereafter.” (More
reported earnings!)
The non-current liabilities are 4.3 billion with 37million of
insurance reserves. The total reported liabilities are at
4.8 billion, making the stockholder deficit 3.3 billion.
(The company made some accounting changes in 2019
which inflated the deficit by 1 million)
“The Company also monitors its off-balance sheet
exposures under its letters of credit (Note 4), lease
guarantees (Note 5) and surety bonds. Total conditional
commitments under surety bonds were $11.0 million as
of January 3, 2021 and $7.6 million as of December 29,
2019. None of these arrangements has had or is likely to
have a material effect on the Company’s results of
operations, financial condition, revenues, expenses or
liquidity.”
On November 19,2019, certain of the company's
subsidiaries issued 675 million series2019-1 3.688% fixed
Secured notes. The Company also entered into a
revolving financing facility on the Closing Date, which
allows for the issuance of up to $200.0 million Series
2019-1 Variable Funding Senior Secured Notes.
The Company capitalized $8.1 million of debt issuance
costs, which are being amortized into interest expense
over the expected term of the 2019 Fixed Rate Notes.
So, 8 million of overstated in assets which is being
expensed as amortization through the income statement.
Capitalizing expenses is surely a red flag.
Another red flag:
The Notes are guaranteed by certain subsidiaries and are
secured by a security interest in substantially all of the
assets of the Company, including royalty and certain
other income from all U.S. and international stores, U.S.
supply chain income and intellectual property. Total debt
equals 4.1 billion.
The balance sheet is far from strong and has many red
flags. The company’s market capitalization at 18 billion is
really surprising. The irrationality prevails because of
brand image only.
THE INCOME STATEMENT
(All figures in USD unless otherwise stated)
The income statement:

A quick glance will tell you that the company is not really
impressive. 4 billion in revenues and only 491 million in
net income. McDonald’s has a net profit margin of 24%.
Surely, Domino’s will be called a mediocre company (if
you have a strong brand image and huge economic
goodwill, that should be evident in the income
statement). The company also issues a lot of stock
options as part of its executive compensation plan. The
company distributes dividends and repurchases stock
(2.4 million shares in 2020) as well. I don’t understand
the reasoning behind this, how can a company distribute
dividends with a negative equity. I am not looking at
individual figures because the numbers can be
misleading in the income statement.
I will look at the free cash flows in the cash flow
statement, then I will do the valuation.

THE CASH FLOW STATEMENT

(All figures in USD unless otherwise stated)
The
2020 2019 2018
CFFO 592 496 394
CAPEX 88 85 119
FCF 504 411 275

The rest of the cash flow statement is about stock

dividends, debt repayment, stock repurchases and other
expenses. The Cash flows are also surely overstated
because of additional week, I will talk about that in
valuation.
VALUATION
The hardest part for this analysis; a company with a
boatload of debt and negative equity.
Now, I’m going to perform a different kind of analysis.
There is a huge probability that the company will not be
worth a dime (bankrupt). The stock at the current price is
a longshot, surely its overvalued at current levels.
I am deducting 202 million from FCF (202 million cash
used in debt repayment and lease payments) because
this company is over-leveraged.
So, the adjusted FCF for FY20 is 504-202 = 302 million. I
will project FCF growth at 9% for 10 years. For terminal
value, I’m assuming no growth after year 10 and instead,
I will use the FCF for year 10 to be a hypothetical bond
return, yielding 12%. I will use 8% as the discount rate
and I will deduct 50% for a margin of safety.
The DCF calculation is shared in the next page.
 Nominal Discounted
0 302
1 329 305
2 359 308
3 391 310
4 426 313
5 465 316
6 506 319
7 552 322
8 602 325
9 656 328
10 715 331
10 5958 2760
SUM: 5938

Intrinsic value after deducting 50% would be around 3

billion USD. The current market cap is 18 billion USD.
The overvalued stock price is due to the brand name, I
don’t think buying at current levels would be rational.
 CONCLUSION
WHO SHOULD BUY THIS STOCK?
You might probably think what my opinion would be if
the stock was trading under 3 billion. Is the stock a good
buy at 2.5 billion, 2billion or even at 1 billion?
The simple answer is ‘no’. I don’t think the management
is good enough to buy the stock. If the management is
trying to manipulate the figures, I will never buy.
[Consider your doctor telling you about a serious heart
condition and instead of following a proper treatment,
you ask him to touch-up the X-ray. That does not make
any sense at all!]
At best, I will say that someone can invest 1% of his
portfolio in this stock (at price below intrinsic value) but
keeping in mind that this stock would be a gamble (or a
calculated-risk in a mispriced gamble).
I’ve explained the difference between story and numbers
in the next section.
 APPENDIX
STORY VS NUMBERS
This stock is a perfect example:
If you imagine Domino’s as the global leader in QSR Pizza
segment, then you will surely experience the Fear of
Missing Out (FOMO). You will look at the market cap and
believe 18 billion is a cheap price for a global leader, you
will try to value the company using unrealistic growth
rates to justify your purchase. Ultimately, you would end
being heavily invested in the stock. You have a thesis for
purchasing, you have valued the company and you also
like the products. This all makes sense (and you ignore
everything that doesn’t).
The problem with this kind of analysis is that you will
often overlook the real condition. Reported numbers are
one thing, your job while analyzing is to look beyond the
numbers. You have to understand how the numbers
form up. Everything is hidden in plain sight. If you look at
the numbers and you’ve understood the ground reality,
then you can focus on the story.
Your story needs a foundation, the dotcom bubble was
formed because of this. People had their own stories
about different stocks, they ignored the numbers. There
was no foundation in the companies they invested for
the kind of returns they were expecting.
These investments are nothing but justified speculation.
You cannot earn money this way (in the long-run).
With this, I end my report on Domino’s Pizza. If you feel I
missed any key detail or my analysis is flawed, feel free
to contact me.
 REFERENCES
• Domino’s: Fundamentals Snapshot. [Online]. 2021.
Available from
https://ir.dominos.com/fundamentals-snapshot
• Domino’s: 10-k. [Online]. 2020. Available from
https://ir.dominos.com/financial-
information/annual-reports
• Domino’s: 10-k. [Online]. 2019. Available from
https://ir.dominos.com/financial-
information/annual-reports
• CNBC: Markets. [Online]. 2021. Available from
https://www.cnbc.com/2021/05/12/bill-ackman-
reveals-6percent-stake-in-dominos-pizza-shares-
jump.html
• Yahoo Finance: DPZ. [Online]. 2021. Available from
https://finance.yahoo.com/quote/DPZ/

(Accessed 12th July, 2021)