Case Study: Domino’s Pizza Financial Performance

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Domino Pizza consolidated report analysis

Question Answer Page # Mark
  1. Is the entity a company, partnership or a sole proprietorship? How do you know?
Basically, Domino’s Pizza as business entity is a public limited company and it trades in the New York Stock Exchange under the initials DPZ. Prior to going public in the fiscal 2004, Domino’s Pizza was partnership entity under the management of two brothers namely James and Tom Monaghan. Later in the financial year 1960, Domino’s Pizza became a sole proprietorship under the sole ownership of Monaghan. This happened after James decided to trade part of business shares to Tom Monaghan. The founder of Domino’s Pizza, Tom Monaghan, retired in 1998 and sold 98% of the company’s shares to Bain Capital Inc. However, Domino’s Pizza remained a privately held for a time span of forty-four years till the year 2004 when it went public and started trading on NYSE common stock. Currently, the Domino’s Pizza is well known as Domino’s Pizza Enterprise Limited also dubbed as DPE Limited or Company. p.37 2
  1. Does the company sell other products apart from their core product? If yes, what types of products?
Yes, Domino’s Pizza sells various other products apart from the primary pizza which comes in an assortment of toppings and crust styles. In addition to the core product pizza, Domino’s Pizza offers desserts known as popping ice cream chocolate dessert, beverages, breadsticks, chicken side dishes and beverages. p.12 2
  1. Did the Chairman of the board believe that the company had a good year? Why?
From the statement made by Domino’s Pizza chairman, it is clear that the sitting chairman believed the company had a remarkable year. This is because when Domino’s Pizza started its financial year 2010-2011, the company embarked on the journey of taking its business to other new operational levels of success. This was realized through increasing the number of stores to 866 across five different countries. In total, a network of 53 new stores was set up in Europe (25) as well as in New Zealand and Australia (28). It was the chairman’s pleasure that the closed stores in Netherlands and France in addition to those that were removed from the network were replaced in this fiscal year.
The company also had significant improvements in service provisions together with key digital developments and solid promotions which saw Domino’s Pizza realizing robust results in the financial year 2010-2011. For instance, in that trading period, sale grew by 11% from similar stores as compared to the previous year. In New Zealand and Australia, double digit sales growth of 13.2% were realized from same stores, but Australia achieved the strongest similar store sale growth in the past ten years.
Moreover, the company had a good year given that the new product rollouts were successfully marketed and there were also improvements in key operational areas across different business levels. These significantly contributed to the remarkable swales growth and full year results.
In all markets, Domino’s Pizza managed to attract new consumers during the fiscal year 2010-2011 through the company’s commitment to attain enhanced online presence and service initiatives which was customer focused.
Finally, Domino’s Pizza had strong balance sheet earnings during the year that gave it a positive net cash and surplus position.
p.5 2
  1. What do they cite as indicators of their company’s recent performance?
The company cites that the indicators for Domino’s Pizza recent performance are: The growth in the net profit after tax by 20.3% to $21.4 million as compared to the previous year; there were strong same store sales growth equivalent to 11% as compared to the previous year; successful marketing strategies which resulted into double digit sales growth of 13.2% in both New Zealand and Australia; Continued strong operation in Europe which led to a growth of 5.9% in same store sales and the group network solid sales performance which grew by 7.5% to $746.4 million as compared to the previous financial year.
Besides, other indicators for Domino’s Pizza recent performance include the reported strong EBITDA which moved up 20.2% to $39.1 million irrespective of the currency movements throughout the fiscal year 2010 as well as robust balance sheet and strong earnings which gave the company a positive net cash and surplus position of +$12.5 million.
pp.5-7 2
  1. How many years does the report present for the
  1. Statement of Financial Position (Balance Sheet)?
  2. Statement of Comprehensive Income?
  3. Statement of Cash Flows?
a) For balance sheet, the report presents two years financial position. That is, 2009-2010 and 2010-2011.
b) The report present two years for the statement of comprehensive income (fiscals 2010 and 2011).
c) For the statement of cash flow, the report presents two years namely 2009-2010 and 2010-2011
pp.57-57 3
  1. Are the financial reports audited by an independent auditor? How do you know and who are they, if they exist?
The financial reports for Domino’s Pizza are audited by independent auditors. This is clearly indicated in the auditors’ independence declaration which was attached in the independent auditor’s report. The independent auditors were Deloitte Touche Tohmatsu. p.51 2
  1. Which partner from the auditors signed off the reports?
The audit reports were signed off by RD Wanstall who is a chartered accountants partner. 1
  1. The entity shows in its Statement of Financial Position for 2011 that Property, Plant and Equipment are worth $34,378,000. Does this amount represent the cost of the property, plant and equipment? Why yes or why not?
The amount reported in the statement of financial position for property, plant and equipment is not the actual cost of these non-current assets. It is the balance that remains after the depreciation cost has been deducted. pp.54-55 2
  1. List the types of current obligations for the entity.
Under the financial leases, the types of current obligations include the leasing agreements, financial lease liabilities and fair value. pp.91-92 3
  1. What did other revenue of $84,508,000 consist of?
Other revenue of $84,508 consisted of: interest revenues such as other receivables, loans and banks deposits (1369), rental revenues (2118), royalties (41,890), franchise services (13,433), sale of store builds (240) as well as other revenue (25,458). p.71 5
  1. How much cash did the entity spend on purchasing property, plant and equipment for the years ended 30 June 2010 and 2011? Where did you find this information?
The company spent $59,048,000 and $52,487,000 in the fiscals 2011 and 2010 to purchase property, plant and equipment. This information is available in the notes to financial statement. p.84 3
  1. The entity reported cash flows from operating activities of $36,037,000. Cash and cash equivalents increased by $11,844,000 ($28,085,000 – $16,241,000).Explain how this can happen?
The cash and cash equivalents is distinctive while cash flows from operating activities can include all cash generated. p.57 4
  1. Were any bonuses and share-based payments made to directors and senior management during the year ended 30 June 2011? If yes, how much. If not, why not.
Yes. The total bonuses paid were $908,973 while the share based payments were $215,724. p.42 2
  1. What does the entity include in its cash and cash equivalents?
For the cash flow statement purpose, the cash and cash equivalents include cash in banks and cash on hand. Cash in bank is net of the outstanding bank overdraft. p.113 2
  1. What amount of income tax was paid in the most recent year reported? Where was this reported?
The amount of income tax paid in the most recent year was $5,699,000. The amount was reported in the cash-flow from operating activities. p.57 1
  1. What are two key strategic objectives of the company?
The two key strategic objectives of Domino’s Pizza are to be best Pizza company globally and to meet the needs and demands of both consumers and shareholders. p.40 2
  1. How much dividend will the entity pay in the financial year of 2011? When will this dividend be paid?
Dividend to be paid in the fiscal 2011 is equivalent to $7,867,000. The dividend will be paid on 30 August 2011. p.95 2
  1. Examine the cash from financial and investing for the entity. List the 3 largest uses of cash over the past year. List 2 major sources of cash for these activities.
The three largest uses of cash include: payment for property, plant and equipment; payment for investment and business operations net of cash acquired; and dividends paid. The two major sources of cash for these activities include proceed from the sale of businesses and other non-current assets as well as loans repaid from third parties and franchisees. p.57 5
  1. List the different types of remuneration for directors and company executives.
The different types of remuneration for the company executives and directors include short term employees benefits such as salary and fees, bonus and non-monetary. Others include post-employment benefits superannuation, long-term employees’ benefits, terminations benefits, and share-based payments options and rights. p.42 4
  1. When was the final dividend for 2010 paid? How much was the dividend paid?
The final dividend for the fiscal 2010 was paid on 4thJuly 2010. The amount was $8,073,000. p.42 2
  1. In what other countries does Domino’s Enterprises Limited operate?
Domino’s Pizza Enterprise Limited operates in five different countries namely the Netherlands, Belgium, France, New Zealand and Australia. p.7 4

Memorandum

To: Shareholders Domino’s Pizza Enterprises Limited

From:______________________________________

Subject: The report on financial position of Domino’s Pizza Enterprises Limited

Date: May 16 2012

Introduction

In this report, we will be looking at the company’s financial performance in terms of the returns on investments or the profitability in the last five financial years. Moreover, the average returns on investments will be leveraged with the industry averages so as to ascertain the financial performance of the company compared with the other firms in the industry. The company’s financial performance will be analyzed using the financial ratios as a tool to determine the firm’s bottom line.

The firm’s profitability and efficiency

According to the firm’s profitability ratios, the firm’s overall returns or profitability have been increasing in the last five years. As indicated, the performance of the firm in terms of profits has been improving over the last five years. In fact, the company returns have been steadily growing. The steady growth is being observed in the returns on assets, equity and capital employed. In fact, the returns on capital employed have recorded tremendous growth in the last two years (Domino’s Pizza Enterprises.

The firm’s profitability ratios show how we have been using the company’s limited resources so as to generate revenues which in effect will add value to you as shareholders (Guerard & Schwartz 2007, p.167). Drawing from the financial report, the company’s five years of active business engagement have resulted in tremendous growth in profits and shareholders’ dividends (Domino’s Pizza Enterprises 2011, p.23). To the shareholders, this is a clear indication that the returns in their investments are guaranteed (Lasher 2010, p.89).

The profitability ratios indicate both the overall performance of the company and its efficiency in the use of resources. In fact, the margin ratios indicate the profit quantity the company generates on sales at various levels (Gibson 2010, p.225). The ratios that indicate the company returns such as the return on assets, return on equity and return on capital employed measure the firm’s overall efficiency in generating returns (Kimmel et al 2011, p.700). From the report, the ratios indicated the increasing efficiency in the use of the firm’s resources to generate income.

Compared with the average industry profitability ratios, the firm’s profitability ratios are below the average. This shows that the company’s returns are below most of its competitors within the industry (Brigham & Houston 2012, p.124). Furthermore, the indication is that the company did not perform well in the last five years as compared with its competitors. Even though the company has been making profits in the last five years, it could not reach the level of others within the industry.

The turnover ratio that measures the firm’s efficiency indicates the decreasing trend in the last five years. Since the firm’s efficiency is an important determining factor in the firm’s profitability, the decreasing efficiency has been attributed to the slow growth in the firm’s profitability (Haber 2004, p.146). However, the effect has not prevented the firm from making a profit. Furthermore, the firm has not been able to recover its interests. Comparing these efficiency ratios with those of the industry, the company has not been performing well. The ratios are far much below those of the industry indicating that the firm has not been efficient enough in its management as compared with its competitors.

Generally, the trends in the profitability ratios show steady growth in the company profitability for the last five years. There was an increase in the profit ratios by more than 1%. Similar trends are also depicted with other profitability ratios such as returns on assets, return on equity and the return on capital employed. However, the efficiency ratios have been declining though with a smaller percentage. Despite the fact that there has been a decline in the growth of efficiency ratios, the firm is still viable for investments. The growth in profits and returns on investment indicates that the firm has a future prospective (Madura 2006, p.581).

Liquidity ratios

The liquidity-ratios measure the company’s ability to meet its short-term debt obligations (Lee et al, 2009). The liquidity of the firm also shows the ability to meet its operative activities which are essential for growth and development. The ratios that have been used to measure the firm’s liquidity include the current ratio and the quick ratio. The company’s capability of meeting its short-term obligation is measured by balancing the company’s most liquid assets to the immediate liabilities (Stickney et al. 2009, p.159). The highly liquid assets are those assets that can readily be converted to cash.

Generally, greater liquid-asset coverage to current obligations ratio is better for the firm. The greater ratio indicates that the company can easily pay for the due debt within the shortest time period and can still meet the ongoing operations (Covello & Hazelgren 2006, p.214). On the contrary, a lower coverage ratio shows that the company is incapable of meeting its short-term needs and at the same has complications in managing its operations (Albrecht et al 2010, p.681).

The liquidity ratios of the firm show a decreasing trend in the last four years. This is not encouraging. It shows that the firm has been having difficulties in meeting its short-term debts (Needles & Powers 2008, p.79). However, the decrease in the firm’s liquidity has not affected the firm. The firm is still capable of paying its creditors such as the suppliers. Compared with the industry liquidity, the firm is better placed. The ratios indicate that the firm’s liquidity is higher than that of the industry. Therefore, the firm is still capable of meeting its short-term obligations as compared with other firms in the industry.

Conclusion and recommendation

The trends in the profitability ratios indicate that the firm has been improving its returns on investments. Nevertheless, other ratios such as liquidity and efficiency ratios declining trends indicate the firm’s poor performance in these areas. Therefore, it is essential for the firm to have long-term strategies on how to generate revenues in order to survive. Long-term profits are not only essential for the firm’s survivability but also for the benefit of the shareholders who in most cases get the shares in form of dividends. Moreover, the firm’s management should also find ways in which they could increase their efficiency in the management of the firm’s resources.

References

Albrecht, W Stice, E & Swain, M 20110, Accounting concepts and applications, Cengage Learning, Farmington Hills, MI.

Brigham, E & Houston, J 2012, Fundamentals of financial management, Cengage Learning, Farmington Hills, MI.

Covello, J & Hazelgren, B 2006, The complete book of business Plans: simple steps to writing powerful business plans, Sourcebooks, Inc, NJ.

Domino’s Pizza Enterprises, Annual report 2011, Web.

Gibson, C 2010, Financial reporting & analysis: using financial accounting information, Cengage Learning, Farmington Hills, Michigan.

Guerard, J & Schwartz, E 2007, Quantitative corporate finance, Springer, Chicago, USA.

Haber, J 2004, Accounting demystified, AMACOM Division American Management Association, New York.

Kimmel, P Weygandt, J & Kieso, D 2011, Financial accounting: tools for business decision making, John Wiley, Hoboken, NJ.

Lasher, W 2010, Practical financial management, Cengage Learning, Farmington Hills, MI

Lee, A Lee, J & Lee, C 2009, Financial analysis, planning & forecasting: theory and application, World Scientific, New Jersey, California.

Madura, J 2006, Introduction to business, Cengage Learning, Farmington Hills, MI.

Needles, B & Powers, M 2008, Financial accounting, Cengage Learning, Farmington Hills, MI.

Stickney, C Weil, R Schipper, K & Francis, J 2009, Financial accounting: an introduction to concepts, methods, and uses, Cengage Learning, Farmington Hills, MI.

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