Fiac214 Financial Accounting: Domino’S Pizza| Assessment Answers

Answer:

Introduction 

Domino’s Pizza is an international company with its base in the United States and is the second largest food chain across the world. We are studying the annual report of the year 2016 according to which the company has 13800 stores in over 85 countries (Pizza 2016). The company operates as a franchise model and also sells pizza through company owned stores. The majority revenue comes from royalties earned from the franchises which are an on-going percent of the sales fees for using brand name of Dominos. Revenue is also generated by selling food equipment’s and other supplies to franchises and by selling pizza through company owned stores.

History

The company was founded in 1960 when two brothers Thomas and James bought a small pizza store in Y psilanti, Michigan for $900. The company first built pizza stores near college campus and military bases during 1960’s and 1970’s.  The company was named Domino’s Pizza in 1965 and opened their first franchise store in 1967. The company’s first international store was opened in Canada and Australia during 1983. In 1998, Thomas sold 93% of his stake to Bain Capital, LLC, and the company took out its initial public offering in 2004.

Annual Report  

The major portion of the annual report is comprised of the financial statements and discussion of the financial performance, results of operations. 

Directors

There are 7 directors in the company. David A. Brandson is the Chairman of the board of directors.  J. Patrick Doyle is the President, CEO of the company and he is also a director. The names of some other directors include Diana F. Cantor, James A. Goldman and C. Andrew Ballard.

According to the director’s report addressed to the shareholders, the year 2016 has been terrific with a year of increasing same store sales, store developments in US and internationally. The new stores added were 1281 in number with 1110 stores being opened internationally.  The increase in US sales was double digit at 10.5% as a result of order counts, tasty food, great service and digital excellence. The company continuously strives for innovation which resulted in launching of five new platforms for ordering food including Apple Watch, Facebook Messenger, Google Home, Zero click ordering. 2016 is marked as the eighth consecutive year of soaring profitability of the franchisees in the US.  The EBIDTA was $130,000 per store on an average in USA. The shareholder returns were strong with the EPS increasing by 24% to $4.3 as compared to 2015. The company also undertook a share buyback program of $600 million. The company paid out dividends of $74 million quarterly. The company is running a pizza theatre program which it expects to complete in 2017. This is will result in better service, quality and cleanliness. The company aims to come to the top of the game by taking bold steps and improving day by day.

Auditors

The auditor of the company is Pricewaterhouse Coopers LLP.  According to the auditors, the financial statements fairly present the financial position of the company and its subsidiaries as on January 1, 2017 and January 3, 2016. The results of the operations are in conformity with the GAAP of USA. Also the notes to financial statements present all material information relating to the consolidated financial statements. As per the auditors, the company maintained effective internal control on financial reporting of financial year 2015-16 adhering to the criterion of the Internal Control Integrated Framework (2013) issued by COSO (Committee of Sponsoring Organization of the Treadway Commission).

Financial Statement Items

Sales

The total revenue has increased by 11.6% in 2016 from $2,216 million in 2015 to $2,472 million. This is majorly due to increase in revenue in company owned stores, domestic and international franchise. The revenue increased due to opening of 1281 new stores and increased sales from old stores. The company introduced new technology driven ordering platforms like zero – click ordering, Apple Watch, Facebook Messenger, Amazon Echo all of which focus on online ordering. This further led to increased sales.

Net Cash Flows from Operating Activities

There is a net cash inflow from operating activities of $287 million in 2016. The net cash flow has decreased in 2016 as compared to 2015 by $4.5 million i.e. 1.5%. The net cash flow in 2015 was $291.7 million.

Retained Profit

There was a retained deficit in 2016 of $1881.5 million.

Borrowings

The company has long term debt in the form of Fixed rate notes and Variable funding notes.

Ratios Analysis

The table depicting the various ratios under the profitability, liquidity, efficiency and leverage categories is given below:

 Analysis

The profitability of the company has remained the same in both years. This means the profits have increased in the same proportion as the revenue. The return on assets has increased in 2016. This is because the average total assets have decreased in 2016. The profitability of the company is good. The current ratio is more than 1 in both the years. This means current assets are sufficient to pay for the current obligations. Also the quick ratio is above 1, this means the immediate liquidity of the company is good. The company does not have much investment in inventory because it operates on a franchise model which reduced the need of keeping any inventory. The company has satisfactory short term liquidity. The asset turnover ratio is the same for both years at 3.3. This means the company is able to turn its assets 3 times in a year to generate sales. The debt ratio is higher in 2016 because of large long term debt. The company can be said to be highly leveraged as it has more debt than equity. Also the debt to equity ratio is negative which means there is a shareholder’s deficit. This is on account of the share buyback program undertaken by the company in 2015 and 2016. The share buyback has increased the earnings per share. A share buyback shows strong financial position of the company as the company has utilized its excess cash to buy back its shares in the market.

Hence, it can be said that Domino’s Pizza has impressive profit margins, it also has a good liquidity and efficiency ratios. The company is highly leveraged and since it is a cash rich company, there is no risk of solvency.

Bibliography

Pizza, D 2016, 'Domino's Pizza, Annual Report 2016', Annual Report, United States.