ANALYSIS: Good numbers for Domino's Pizza, but celebrations aren't yet in order

Aug. 18, 2005

It's been said that records are made to be broken, and as Domino's Pizza's 2003 annual report claims and proves, it broke some of its own last year.

However, the numbers—though positive—aren't positively impressive, despite some of the opinions I've read in recent press reports.

To my understanding, true record-breaking activity is a sprinter shaving a tenth of a second off

Steve Coomes, senior editor

100-meter world record, or a swimmer boiling the pool record in the butterfly—marks that better one's competitors'.

But in the case of Domino's, when your company's 2003 ...

* income from operations increased just 0.7 percent

* net income dropped 36 percent

* U.S. comparable-store sales rose an uninspiring 1.3 percent

* total revenue rose 4 percent on a gross sales increase of 6 percent ...

... you're not talking records for comparison to an industry at large. You're talking all-time highs within one company. Good news, yes, but PR spin at its best.

So are these bad numbers?

Not at all. My hat's off to Domino's Pizza for being the only pizza company from among the "Big 3" to emerge in the black after a brutal 2003. That's a feat worthy of congratulations in a competitive industry only now emerging from a fading worldwide recession.

Still, the numbers aren't all that great. Here's why.

Since Pizza Hut veils most of its numbers behind the scrim of Yum! Brands consolidated accounting, I'll lean on Papa John's numbers for comparison.

* Papa John's gross sales for 2003 were about $1.8 billion, while Domino's were $4.2 billion. Yet Papa John's reported $917 million in revenue, while Domino's reported $1.3 billion in revenue.

* Additionally, Papa John's net income was $34 million, while Domino's was $38.8 million.

* Plus, Papa John's reported a 3.5 percent drop in systemwide comp-store sales, while Domino's systemwide comps rose 5.8 percent.


Bottom line: Domino's still made more, but not much, and it did so on more than double Papa John's gross sales ... and with 4,502 more units.

Takes the spin off the word "record," doesn't it?

So let's ask the next question: Does Domino's really have a reason to cheer itself?

The answer is yes ... just not for now. The world's second-largest pizza chain should reserve its champagne toasts for a few years. Here's why.

International is everything

No matter how you look at it, the U.S. pizza market is saturated. For all intents and purposes, there are no new customers in America, only shifting interests and tastes.

That makes Domino's success overseas highly compelling. Its international units have reported comp-store sales increases for 10 straight years; in 2003, the increase was 4 percent.

Of the 197 net units added to the Domino's system last year, 141 were outside the U.S., and the gap between domestic and international store openings will widen more over time. (Incidentally, Pizza Hut's 2003 net unit openings totaled + 88, while Papa John's totaled - 11.)

Its two largest international operating partners, Domino's Pizza UK & Ireland (318 units) and Alsea (475 Domino's units in Mexico) are well run companies that constantly are adding stores and generating positive comps. Additionally, Domino's UK & Ireland is one of the most innovative pizza companies in the world as these stories demonstrate (Deliveries by Air? and Drivers using GPS systems at Domino's Pizza UK).

By comparison, Pizza Hut has long had its international act together, while Papa John's continues to make minimal overseas advances.

Strong leadership

Few men would ever try to fill the shoes of Domino's founder, Tom Monaghan, but in May 1999, David Brandon met and exceeded that challenge by becoming the chain's chairman and CEO. His leadership has energized the nearly 50-year-old company, and by all accounts he is well liked and respected by the vast majority of Domino's operators. In short, his troops are behind him.

The company is pretty fond of him, too. Last year it paid him a $4.55 million bonus atop his $600,000 base pay ($1.2 million bonus + $3.35 million payout for his 1.76 million shares of preferred Domino's stock).

It's widely known that Brandon wants to finish his working career as a public servant (read "politician"), which means he won't hang it up at Domino's Pizza. However, he's not leaving anytime soon—at least not until the company goes public, which it inevitably will.

New product pipeline

During a March 23 conference call, Brandon was asked whether Domino's had any plans to address America's low-carb craze. Without giving a clear answer, he did say the company will address customer health concerns by broadening the menu with items such as new salads. Most telling, though, was his statement that Domino's has established a new product pipeline and testing protocol that will generate new items over the coming months.

It's not tough to read between the lines here: You don't build a pipeline that puts out just a trickle of product. Expect the flow to grow steadily in the final two quarters of 2004.

Hurdles to overcome

Domino's clearly is on the move, but its path will be strewn with an equal number of rose petals and thorns. This year's cheese price increase will test its financial mettle mightily. As Brandon indicated during the conference call, the company did not hedge itself on the milk futures market for this year, which means that it, like everyone else (my sources tell me that Pizza Hut also is completely exposed), will take a serious profit hit.

Brandon admitted to listeners that he couldn't explain why "cheese has run up to the level it has as fast as it has," but he's hoping that history repeats itself and that "meteoric rises tend to set themselves up for meteoric falls."


Many dairy market indicators point to a rare "double high" in this year's block market. That means already-record prices will peak sometime this spring before summer brings on a moderate drop, and then another market high will follow in the fall on the heels of the annual back-to-school milk orders.

Such predictions spell serious challenges for pizza operators this year, and it's not likely Domino's will announce record net income in 2004, regardless of the positive outlook for top-line sales increases.

Lastly, as market watchers wait for Domino's inevitable initial public offering, it seems odd the company is carrying such a large amount of debt.

When IPO rumors swirled in late 2002, sources estimated the company's worth at $1.3 billion, but according to its 2003 10-K, it has more than $959 million in debt.

Granted, Bain Capital, which bought Domino's in 1998, knows more about making money than Ivana Trump does about spending it. But even to an amateur like me, $400 million doesn't sound like the mega-return on investment such buyout firms want when they take a company public.

Perhaps such heavy leverage indicates several years will pass before Domino's goes public (allowing the company to pay down some of its debt), and perhaps it's no concern at all to Bain—which hasn't ever asked me for financial advice.

Care to comment on this commentary? E-mail Steve Coomes at

Topics: Commentary , Domino's Pizza

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