Nguyen Tien has been employed part-time in a pizza franchise, near the campus, while he completed his Bachelor of Business at La Trobe University. He has been amazed at the increasing number of pizzas being ordered through the company’s iPod app. So much so that he has convinced his father to consider jointly investing in a pizza franchise which is for sale.
Not having much real world experience in preparing a financial business case, Tien has employed your team to provide him with advice on three areas:
1. Tien is provided with a copy of the financial accounts of Domino’s Pizza Enterprises Ltd. Before he can decide on the financial worth of the investment he needs to convince his father of the financial strength and sound reputation of the Domino’s brand and franchisor in Australia. Tien requires your team to analyse and interpret these accounts for his father.
2. Tien requires your team to conduct a breakeven analysis and cash flow forecast of the franchise he is considering acquiring.
3. Based on the breakeven analysis and cash flow forecast you have prepared, Tien requires your team to calculate the NPV of the investment project.
Go to the website of Domino’s Pizza Enterprises Ltd (DMP) and download the Annual Report and Financial Accounts of the company for 2014.
1. Based on the data in Table 1 below, calculate the annual growth in Revenue and the EBITDA margin for DMP for each year between 2010 and 2014. Describe the financial performance of DMP over this period based on your interpretation of this analysis.
2010 2011 2012 2013 2014
Operating Revenue 158,280,000 175,584,000 186,259,000 188,631,000 452,811,000
Other Revenue 78,546,000 70,854,000 80,004,000 106,259,000 135,862,000
Total Revenue 236,826,000 246,438,000 266,263,000 294,890,000 588,673,000
Operating Expenses -205,717,000 -208,707,000 -219,924,000 -240,928,000 -497,943,000
EBITDA 31,109,000 37,731,000 46,339,000 53,962,000 90,730,000
2. Based on the information set out on pages 28 and 29 of the Financial Statements, calculate the annual rate of depreciation for DMP for 2013 and 2014. This is the rate at which DMP depreciates its fixed assets or Property Plant and Equipment. As DMP does not separate out the depreciation from its amortization in the Income Statement, refer to the appropriate note to identify the exact amount of depreciation excluding amortization. As DMP does not show the gross amount of PPE in its Balance Sheet on page 29, you will need to go to the appropriate note referred to in the balance sheet to identify the gross amount of PPE, which DMP refers to as “Cost”.
3. Based on the information set out on page 28 of the Financial Statements, calculate the annual effective tax rate at which DMP is providing for tax in its Income Statement in 2013 and 2014.
4. Based on the information set out on pages 28 and 29 of the Financial Statements, calculate the average interest DMP is earning on its cash and equivalents. Actually interest income is included in Other Revenue, so you will need to refer to the relevant note to the accounts. Also calculate the average interest DMP is paying on its borrowings. Again you may need to refer to the note relevant to Finance Costs for more detail.
5. Based on the information set out on page 28 of the Financial Statements, calculate the Net Profit Margin for 2013 and 2014.
6. Based on the information set out on pages 28 – 29 of the Financial Statements, calculate the Asset Turnover Ratio for 2013 and 2014. Total Assets in 2012 was $175.319 million.
7. Based on the information set out on page 29 of the Financial Statements, calculate the Leverage Ratio for 2013 and 2014. Shareholders Equity in 2012 was $117.041 million. Briefly interpret your results.
8. Based on the information set out on pages 28 – 29 of the Financial Statements, calculate the Return on Equity Ratio at the end of 2013 and 2014. Show how the Du Pont ratios derive the Return on Equity Ratio. Briefly interpret your results.
9. After reviewing the information on the Domino’s Pizza Enterprises website, the Annual Report and any other information source you feel relevant, briefly explain whether you think Domino’s Pizza Enterprises Ltd is a financially sound, ethically sound and reputable brand in which to invest.
10. Pizza Recipe (adapted from Gordon Ramsay):
Ingredients for a single pizza:
• 125g strong bread flower or Italian “00” flour
• 4g dried yeast
• 10ml of extra virgin olive oil
• 35ml of passata
• 30g crushed garlic
• 100g cherry tomatoes
• 125g mozzarella cheese
• 50g Danielle ham
Sieve the four onto a clean work surface and make a well in the middle. Mix the yeast, sugar and oil into 80ml of lukewarm water and leave for a few minutes. Pour into the well. Using a fork, bring the flour in gradually from the sides and whirl it into the liquid. Keep mixing, drawing larger amounts of flour in. When it starts to come together, work the rest of the four in with clean, four-dusted hands. Knead until you have a smooth, springy dough. Put the ball of dough in a large four-dusted bowl, sprinkle with flour and cover with a damp cloth. Place in a warm room for an hour until doubled in size.
Tip the dough onto a four-dusted surface and knead it around a bit to push the air out with your hands. You can either use it immediately, or keep it, wrapped in clingfilm, in the fridge (or freezer) until required. Timing-wise, it's a good idea to roll the pizzas out about 15 to 20 minutes before you want to cook them. Don’t roll them out and leave them hanging around for a few hours, though – if your working in advance like this its better to leave your dough, covered with clingfilm in the fridge.
Put a large oven=proof frying pan on the heat and roll out the pizza dough on a floured work surface, until it's the same size as your pan. Add a little olive oil to the pan and add the pizza base, pressing it into the pan. Cook over a medium heat until the base crisps and the dough starts to cook through and bubble up, about 5-8 minutes. Top the pizza with the passata, the sliced ham, the halved cherry tomatoes and the sliced or grated mozzarella. Put under a pre-heated grill until the toppings bubble. Drizzle with more olive oil to serve.
Wholesale prices for the pizza ingredients:
Ingredient Wholesale price
olive oil $5.50/ltr
cherry tomatoes $6.60/kg
mozzarella cheese $8.20/kg
danielle ham $9.30/kg
Based on the pizza recipe above and the wholesale prices quoted for the ingredients, estimate the unit cost of food and paper for a single pizza.
11. Under the Domino’s Franchise Agreement the franchisee must pay to the franchisor a 7% royalty and a 6% contribution to marketing expenses. Calculate the per unit royalty and marketing contribution based on an Average Sales Price of $10.00 per unit.
12. On average there are three full-time staff employed at a DMP franchise store, including a store manager. Looking at the Award a reasonable average wage for the three full-time staff including the manager would be around $37,000. The number of casuals is harder to estimate. Assume that on Sunday, Monday, Tuesday and Wednesday two casuals are employed for 3 hours per day. On Thursday, Friday and Saturday assume that four casuals are employed for four hours per day. This of course is assumed for all 52 weeks of the year. Assume an average casual rate of $22 per hour.
Estimate the total salaries required to staff the franchise including say 30% for on-costs to cover superannuation etc. While staffing costs, particularly casuals are a semi fixed cost, assume that for the range of pizzas sold by the average franchise they are fixed as you have calculated them.
13. You will have determined from looking at both the DMP website and the prospectus that the average franchise store is about 100sqm in size with a 6 meter frontage. While the lease costs will vary by location, lets assume a monthly rental of $4,000 and outgoings of a further $1,500 per month. You will need to annualise these costs.
Calculate the annual rentals costs and annual outgoings.