Executive Summary
This paper presents a financial analysis of Domino’s Pizza based on information from the reporting for the last three years. The evaluation was made according to vertical and horizontal analysis and compared with competitor Yum! Brands and the industry. In addition, the current financial position was shown through the prism of the dynamics of the strategic direction of the organization’s development – how much the monetary aspect affects the activity as a whole, and whether this influence is positive or negative.
Financial Strengths and Weaknesses
Over the last three years, the horizontal showed positive dynamics of critical indicators only regarding sales, while current and long-term assets, net income, and cash flows decreased. At the same time, spending grew in terms of the cost of goods sold, software, and equipment. Still, the company experienced a significant increase in short-term debt associated with capital increases in 2022 (Securities and Exchange Commission, 2023).
Domino’s generally maintains a relatively confident level of liquidity – the current ratio does not fall below 1.4, despite a significant drop in assets. At the same time, net working capital is decreasing, complicating the company’s ability to develop and enter new markets. Despite the increase in sales, Domino’s profitability falls across all key indicators from gross profit to net profit. The relative hands of net profit fell significantly, and such dynamics have been maintained for at least the second year.
This fact suggests that the organization does not have time to adapt and optimize its operating system to maintain even a tiny growth rate due to changes in supplier pricing or other external factors. Although minor deviations are typical for the restaurant industry in a short period of two reporting periods, the fall in 2023 still reaches 5-14% in key indicators, which is quite a lot. Consequently, the potential influence of external determinants becomes tangible and should be implemented in further brand activity planning.
However, it is worth noting Domino’s long-term stability, which maintains a low debt-to-equity and assets ratio despite these problems. Accordingly, extreme situations, such as losing leadership positions in the market or even bankruptcy, are not worth attention due to the company’s fairly wide financial leverage. One of the organization’s strengths is that Domino’s is quite efficient in collecting receivable accounts; however, in percentage terms, the accounts payable turnover ratio grows much faster, likely due to increased short-term liability.
The decline in 2023 is also seen in inventory turnover, which signals some risks, as in the restaurant business, such assets have a concise life (Park & Kim, 2021). The fall in assets and the balance of current liabilities causes an increase in assets and working capital turnover ratios, which, given the circumstances described above, cannot be considered a strong point. The P/E ratio has declined over the past three years, which is a positive sign for investors. The company is getting closer to the balance of EPS and the shares’ actual value, making them less overpriced and more attractive. In general, the company’s financial position is stable both in the short and long term; however, at the moment, there are several significant negative changes, the consequences of which can only be assessed in the longer term.
Comparison to Yum! Brands
Yum! Brands, which includes restaurants such as KFC, Pizza Hut, and others, is one of Domino’s Pizza’s direct competitors. This company has seen unique dynamics across many key financial relationships that have risen significantly in 2021 and are falling in 2022 – the 2023 reporting period is not yet available as Yum! reports later than Domino’s (Securities and Exchange Commission, 2022). Overall, Yum! Brands is much more efficient than Domino’s in terms of profitability.
Gross profit ratios differ by almost 40%, while net profit ratios differ by 10%. If, in the first case, different approaches to financial reporting can explain such a difference, then the efficiency of net profit is indicative. Significant differences between 2021 and 2020 for this organization are defined by the impact of the pandemic and adaptation to it (Norris et al., 2021). However, this comparison highlights Domino’s weakness in terms of operational optimization – there is a lot of room for improvement.
Yum! lost liquidity in the current ratio, which is also experiencing a downward trend. At the same time, it fell below one for the first time in many years. However, Domino’s has fewer critical assets used in the quick ratio calculation. Despite growing short-term liabilities, Yum! always has the best cash and accounts receivable. At the same time, Yum! Brands relies more on debt rather than equity, which creates risks in the long term. Despite the competitor’s efficiency, Domino’s has the best leverage, which will enable it to survive a potential crisis better in the face of severe external challenges.
Activity ratios for the two companies have similar dynamics, but the absolute figures are, on average, lower for Yum! Brands. On the one hand, they are less efficient in collecting accounts receivable, which partly improves the value and quality of the quick ratio. Still, at the same time, accounts payable turnover is almost eight times lower than Domino’s, creating more significant maneuverability opportunities. The companies’ P/E ratios are also at the same level, but Yum!’s dynamics are less promising.
Domino’s is steadily declining in this indicator, while Yum! Brands’ changes are more abrupt. The effects of the pandemic and market factors are likely driving this dynamic, given that Domino’s has more up-to-date statistics. However, the analysis of financial performance relative to competitor Yum! revealed that Domino’s in this industry has room for improving profitability; however, in the long term, the company in question is more stable, which makes it and its share prices less sensitive to global challenges, respectively, bearing fewer risks.
Comparison to Industry
The restaurant business industry, particularly fast food, assumes an extremely high efficiency of increasing sales from year to year, simultaneously associated with constant optimization of operating costs to maximize profits. However, against the backdrop of these actions, the net profit ratio remains relatively low for companies, which leads to the need to scale brand networks through franchising or entering new markets as the most promising strategy (Chatelain, 2020).
It is believed that fast food has an average of 5 to 8% of this indicator, respectively; Domino’s is slightly above this market level, despite a significant lag behind Yum! Brands (FoodIndustry, 2021). Here, it is worth emphasizing the high diversification of the competitor, which allows optimization of entry into new markets by offering a more suitable product within different brands. As a result, this approach is instead an exception, but it can be perceived as a potential development strategy.
The liquidity of such companies in the industry stays at the level of one on average since the operating products of activity do not involve the accumulation of assets due to high turnover rates. Domino’s approach is unique in this area because, first, the company relies on equity; second, it has a reasonably high current ratio at the level of global market leaders like McDonald’s (Macrotrends, 2023a).
However, despite the company’s larger scale, Yum! Brands’ reporting does not differentiate many assets and does not contain indicators for software, lease right-of-use, or advertising funds. Because of this, it is difficult to say which of Domino’s assets achieves such high performance in comparison. Leverage rates are correspondingly lower in the industry than at Domino’s. According to current trends, only new local players prefer equity over debt. However, they are usually not comparable in scale to the networks under consideration (Li & Signal, 2019).
Such decisions are governed by current trends in social responsibility, which large companies must also comply with. However, market leaders tend to choose policy changes that include the agenda of inclusion and diversity rather than the financial aspect (Kaur et al., 2022). As a result, Domino’s Pizza stands out from the industry with this approach to capital structuring, which gives it a significant long-term advantage over its competitors.
Activity ratios for the industry as a whole are closer to those of Yum! than they are to Domino’s. Domino’s financial policy likely allows for a more active collection of accounts receivable while allowing correspondingly faster payments on obligations, which creates an accelerated cash flow. As a result, the organization increases sales and is a more profitable supplier to customers.
Domino’s inventory turnover ratio lags far behind the industry average – as a rule, companies are much better at selling these assets in a year, translating into Domino’s reduced profitability (Dinsmore, 2022). At the same time, the P/E ratio in this industry averages 23.22, which is lower than that of the companies reviewed (Macrotrends, 2023b). Therefore, Yum! and Domino’s are not very attractive to investors. However, the dynamics favor Domino’s, as the indicator has steadily declined over the past three years.
Impact on Strategic Choice
Domino’s is betting on several competitive offerings simultaneously, evolving as strategies. The company has a solid drop-shipping infrastructure without intermediaries, improving customer experience through direct contact. In addition, Domino’s is taking an innovative approach by implementing self-driving cars for delivery. Adding to this, a digital presence through Twitter or a loyalty program, Domino’s tries to retain its customers through a service that such networks often cannot offer (McKinnon, 2023).
The company’s financial position only contributes to this approach: long-term sustainability and equity choice, liquidity support, and high marketing costs. As a result, Domino’s is playing for the future, not trying to make money on delivery, allocating significant funds for service and innovation, which reduces profit efficiency in the short term. Given this strategy, the problems outlined above cannot be said to be in the zone of increased risks for the company; on the contrary, they indicate a policy ready to sacrifice profits and financial efficiency to strengthen the brand’s strength.
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