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Investment Management Program 10. 2 0 .2020 Analyst: Matthew D. McGrath Email: mm7420@ship.edu Sector: Consumer Discretionary Stock Type: Large Growth Industry: Hotels, Restaurants, & Leisure MKT CAP: $ 15.8 9 B Key Stock Statistics Dividend Yield 0.77% Beta (5 Year) 0.32 Revenue $ 3. 66 B Operating Margin 17.6 % Net Income $ 430 M EPS $10.43 Operating Cash Flow $ 495 M Free Cash Flow $ 405 M Return On Assets 33.86 % Return on Equity % — P/E 39.06 P/B — P/S 4.60 P/FCF 3 4.01 Projected 5 Year Growth 15.09 % Current Price Fair Value 52 – Wk Rang e $ 3 9 4.41 $41 0.33 $ 251.80 435.58 Company Overview: Domino’s Pizza, Inc., through its subsidiaries, operates as a pizza delivery company in the United States and internationally. It operates through three segments: U.S. Stores, International Franchise, and Supply Chain. The company offers pizzas under the Domino’s brand name through company – owned and franchised stores. As of August 17, 2020, it operated approximately 17,100 stores in 90 markets. The company was founded in 1960 and is headquartered in Ann Arbor, Michigan.

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Equity Research Report Matthew McGrath Shippensburg IMP Fall 2020 2 Table of Contents 3 . 4 Products and . 4 . 5 . 5 5 . 6 . 6 Investment . .. 7 . . 7 7 8 . . 9 9 . 10 10 . 10 Key Financial Ratio Analysis 11 Time – Series Analysis 11 Cross – Sectional Analysis . 13 Fair Value and Target Price 14 Growth Rate of EBIT 14 WACC Calculation 14 Valuation . 14 Risks 15 External Risk s 15 Internal Risks 15 Recommendation 16 17 Appendix 18

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Equity Research Report Matthew McGrath Shippensburg IMP Fall 2020 3 Executive Summary in the Consumer Discretionary sector, specifically in the Hotels, Restaurants, & Leisure industry. Its stock (DPZ) is traded on the NYSE. DPZ has been a fast – growing company over the past 10 years, in terms of revenue, EPS, and dividend payout. Its stock has outperformed the S&P 500 consistently over the past 15 years . Its lack of ROE, which overwhelming use of debt to finance its operations. The company has us ed this debt to recapitalize able to maintain a growing ROA, EPS, dividend payout policy, and gross margins. They are fundamentally outperforming their peers, as well as the industry. Also, using a FCFF discounted cash flows approach to valuation, DPZ stock is undervalued. I recommend the IMP purchase 5 shares of DPZ stock at market price.

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Equity Research Report Matthew McGrath Shippensburg IMP Fall 2020 4 Company Overview They were founded in 1961 in Delaware, although they are now headquartered at the Michigan. s, but was bought by Tom Monaghan and his brother, James. They renamed the existing the duo had purchased two additional stores, which are represented by the three dots in the logo above . James later sold half of t he company to his brother Tom for a Volkswagen Beetle. First, they opened their first international store in Winnipeg , Manitoba, Canada. Second, they also opened their 100 0 t h store. years, Tom Monaghan retired, selling 93 percent of the company to Bain Capital, Inc. for over one billion dollars. would no longer be a private company but would begin trading common stock on the New York Stock Exchange, using the ticker Products and Services latest technology and created an online and mobile ordering site. This was a huge step for pizza ordering technology. In 2008, they were the first franchise to introduce a Pizza Tracker, which is an online applicatio n that that allows the customer to keep track of when his order will be ready, and what stage of the process his pizza is in. This allows for accurate ready times, so the customer can know exactly when his pizza will be ready, as well as when exactly it wi ll be delivered to his door. Also, the Pizza Tracker tells the customer who is making and delivering his order, so if there is an issue, he knows who is to blame. This assures that each and every standards of the high ly acclaimed franchise. in the most technologically advanced delivery methods for their products. In 2015, for delivery that could hold up to 80 pizzas, with extra roo m for sides, dipping sauces, and even soda. This car also had an oven on board, which would hold the food at a desirable temperature for the customer. This car was a Chevrolet Spark, named the

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Equity Research Report Matthew McGrath Shippensburg IMP Fall 2020 5 the y were going to partner with a robotics company named Nuro. This would allow a self – driving car to deliver their products. – minute time frame. pizza is obviously the main focus of the franchise. They do offer a variety of other foods, including pasta, bread bowls, wings, and sandwiches. They also offer desserts, in the form of buns and brownie s, among others. of pizza, in two sizes, with limited topping options. The first menu expansion was in 1989, when they introduced their first deep – dish pizza, due to their research showing that 40% of custome rs like a thicker crust. This launch of the new product cost about $25 million. their recipe, after receiving negative reviews and declining earnings. They used the term ty of this overhaul. The reimagined their sauce, dough, and toppings, all of which have been very positively accepted by the community. Business Segments business segments. These are domestic stores, international franchise stores, and supply chain. The domestic stores are often divided into two separate sub – categories, domestic company – owned stores and domestic f ranchise stores. Domestic Stores its restaurants does have the largest international presence out of its competitors, it also has the largest domestic presence as well. In 2019, a total of $1.27 billion was generated in revenue from its 6,126 domestic stores. This is 35.1% of its total revenue in 2019. $453.6 million of this was directly from its company – owned stores. The other $819.3 million was generated through fees and contribut ions from its franchised stores. In other words, using the generated over double the revenue that trend only began in 2018, while before that the company – owned stores themselves g enerated more revenue. This is an indicator International Franchise international presence out of all its Hut, and Little C ae s a In 201 international franchises generated $241 million in revenue, a total of 6.66% of its total revenue. This total is almost entirely made up of royalty fees and other expenses generated from the franchises.

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Equity Research Report Matthew McGrath Shippensburg IMP Fall 2020 6 Supply Chain Easily the highest sou rce of revenue for supply chain made up $ 2.1 billion of its total revenue, which is 58.2% of its total revenue. This revenue is generated by selling ingredients, equipment, and supplies to its franchised restaur ants around the world. The company also owns and operates dough manufacturing centers in North America, so internally. While the franchisees are free to source their supplies from anyone, it is much easier for the m to get their ingredients Recent News, Stock Performance exceptionally well amidst a pandemic caused by COVID – 19. While most stocks have has maintained its composure in this troubling time. Before the pandemic struck, meaning before Mar stock was sitting at $343.95. As the pandemic dropped to as low as $286.32 on March 16, 2020. In percentage, that is a loss of 16.76%. Pizza, one competitors, started on March 10, 2020 at $57.25 , and it dropped to its relative low on March 18, 2020, at $35.55 . In percentage, this is a loss of 37.90%. What this means is percentage loss of les s than half that of Papa remarkably improved. On March 30, 2020, it had already grown to $346.75, beating its pre – pandemic price. On April 22, 2020, – time high stock price, at $ 383.75. The stock has steadily improved since then. On October 2, 2020, a new all – time high was reached, at $433.78. This is the highest the stock has ever been, and in the week since then, the stock has slightly trailed, most recently reading $ 394.41 as o f October 20 , 2020. composure in the face of a world – altering This is partly because contactless delivery system. Last year, they began te sting a new system that allowed customers to simply use the app to alert the store employees that they had arrived at the store. The employee would then simply bring the food directly out to the customer and place it in their car, without the customer ever leaving the car or entering the store. This was the first example of contactless pickup before it was mandatory, due to COVID – 19. When the pandemic made this mandatory,

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Equity Research Report Matthew McGrath Shippensburg IMP Fall 2020 8 The chart on the previous page compares the compared to the S&P 500. This shows how the consumer discretionary sector is indeed a cyclical sector, one that mimics the performance of the market. This sector tends to do well when the economy is d oing well, and vice – versa. This is due to the nature of the sector; it encompasses goods and services that consumers do not necessarily need, so when the economy is doing well, consumers tend to buy more of them. This sector has outperformed the S&P 500 at nearly every part of this 5 – year analysis, most notably recently. Consumer Discretionary typically performs very well in the early stage of the business cycle. This is due to consumers having more money in their pockets, leading to more spending. Con trarily, it underperforms in both the mid and late stages. This is due to consumers having less spending money due to a downturn in the overall economy. In the recession stage, arguably where the market is at currently, no conclusive data is observed to in dicate whether this sector overperforms or underperforms the market. Hotels, Restaurants, & Leisure Industry The Hotels, Restaurants, and Leisure Industry in the Consumer Discretionary Sector includes owners and operators of c asinos and g aming, h otels, r esorts, and c ruise l ines, l eisure f acilities, and r estaurants. The above chart shows the performance of this industry compared to the S&P 500 over the past 5 years. As for the sector as a whole, the same principles apply. The industry tracks the market due to its cyclical nature. However, it typically has outperformed the market. Currently, the industry is outperforming the market by about 23%. There are several factors that will continue to influence this sector into the future, particularly the restaurant component of the industry. The first of these is the rise of online ordering. According to the National Restaurant Association, three in five American consumers order delivery or takeout at least once a week. Takeout is a large aspect of the modern diet, and in the modern age of technology, making it easier to orde r that food is very important. Subscription based ordering is emerging as a prominent way to attract new customers, as opposed to the per – delivery service fees that have existed in the past. Health is also a main factor in the modern world of the restaur ant industry. Current consumers are becoming more and more health conscious, as research has shown. It is important for restaurants to keep this in mind when designing and updating their menus. One way to stay on top of this trend is to locally source ingr edients, as well as

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Equity Research Report Matthew McGrath Shippensburg IMP Fall 2020 9 removing processed and prepackaged ingredients from inventory. Finally, delivery options are a new trend that will most definitely affect this industry. Typically, pizza chains specifically ha ve their own delivery service. The store i tself is responsible for hiring delivery drivers and delivering food to the customers. However, the times are changing. Third – party delivery services, such as Grub H ub and Uber Eats are becoming more prominent. These services let customers pay a driver to go and collect their food himself, charging a small fee. This is something that restaurants need to keep in mind in the modern age of technology. Company Specific Factors the consumer discretionary sector and the h otels, restaurants, & leisure industry. It is cyclical in nature, so typically when the economy is performing well, so will this company. However, several factors have set it above the competition, making it almost a staple of the modern consumer diet. D app is the most successful and used app for ordering pizza today. They utilize a tracker that allows customers to accurately know at what stage their food is in, and wh en it will be ready. The app also contains several exclusive deals, such as the buy an y two medium two – topping pizzas for only $5.99 each. This is very important for the modern consumers who are price conscious. The Ritch Allison, states pocketbooks are going to be under pressure . national offers, great value on our menus. And we got to have great value with respect to what we charge to customers to deliver that Product innovation is also a key factor that competition. Maintaining a new and exciting menu is important for restaurants in the same directly to customer complaints of the quality and recipe of their food. They responded by complete ly overhauling their menu, as discussed earlier. This is an important factor of a restaurant in the modern era, the willingness to change to customer requests. specifically by introducing wings to their menu. The co mpany stated that customers are now requesting the presence of wings on the them to the menu, albeit at an affordable price. Namely, the deal is a 10 – piece wing for only $7.99. This is a very competitive price, at only $0.79 per wing. The point is that current requests and expectations, a factor that is very important in the modern era. Financial s Analysis This section of the report will focus on key financials from the income statement, balance sheet, and cash flows, all of which are provided in the Appendix.

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Equity Research Report Matthew McGrath Shippensburg IMP Fall 2020 10 Revenue Growth the past 5 years. Notably, its revenue has grown every single year. In 2015, total revenue for D the most recent TTM, total revenue is $3.656 billion, a drastic increase. After calculating the average growth rate in revenue over the revenue has grown 10.5% per year. Even in the wake of the pandemic caused by COVID – increase, albeit by a smaller rate. In 2019, revenue was $3.619 billion. Compared to the revenue in the TTM, that is a growth of 1.02%. Even in times where most brick – and – mortar sto res have been temporarily shut revenue, even in the face of a recession. Looking forward into the future, it is evident that this trend of revenue growth will investmen ts into the factors discussed in the previous section, factors that directly affect the performance of restaurants in the modern of its online and mobile presence. It is also on top of the competition in terms of its adaptability to the COVID – 19 protocols, namely contactless delivery and pickup revenue to grow by 7 to 10% in the next three to five years. Operating Income (EBIT) Growth growth in operating income, also known as earnings before income and taxes, or EBIT. The importance of this measure is that it will be used in the valuation section of this report, as EBIT growth is used in the FCFF discounted cash flows approach to valua tion. past 5 years. In 2015, operating income was $405 million. In the most recent twelve months (TTM), operating income is $642 million. After calculating the average growth wth comes out to 9.65% per year. This means that to increase their EBIT by an average of 9.65% per year. This is in line with their revenue growth, being only about 1% apart. nue has been increasing, they have been able to keep their cost of goods sold and operating expenses to a minimum. Into the future, a similar prediction is evident as the revenue growth into the future, the outlo ok is very positive for their EBIT growth, as they are focusing more and more on their supply chain growth and producing their own ingredients themselves. This will decrease their relative cost of goods sold, only increasing their EBIT growth compared to t heir revenue growth. Dividend Payout Policy Growth e nsure that their dividend payout is steadily increasing as well. Over the past 7 years, dividend growth has consistently improved, even more so than their revenue and EBIT dividend to its shareholders. In that year, its dividend was $0.80 per share. In the TTM, payout per share. After calculating the average growth of this dividend payo ut over the past 7 years, it is apparent that the average growth is 19.2%. To better compare this to the 5 – year growth of revenue and EBIT calculated before, the 5 – year calculation of dividend payout growth is also calculated. In 2015, dividends equaled $1 .24 per share. The

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Equity Research Report Matthew McGrath Shippensburg IMP Fall 2020 11 5 – year average growth is then calculated to be 17.1%. Key Financial Ratio Analysis This portion of the report will be divided into two distinct sections. The first is a time – series will an alyze historical trends within the company over the past 5 years . The second is a cross – sectional analysis of their key ratios, compared to the industry and close competitors. Time Series Analysis First are liquidity ratios, which measure how easily a firm can meets its short – term obligations. The current ratio divides current assets by current liabilities. Typically, this ratio should be higher than one, meaning the company has more current asset s than current liabilities, and if it does, this is a good sign that the company has a high level of liquidity and less the criteria of being over one , and a fairly steady growth in this category can be observe ratio is 1.95, which is relatively high, which could be an indicator that DPZ might have a bloated inventory or unnecessary investments in current assets. The quick ratio is similar to the current ratio, but it tak es into account inventory, quick ratio is significantly lower than its current ratio, indicating that the high current ratio is most likely due to a bloated inventory, through an expansion in terms of supplying its own inventory (ingredients). Note that this ratio is still steadily rising. health ratios, which measure how a company finances its assets, as well as measures its abilit y to meet financial obligations. The first thing to note is that DPZ has a means that the company uses so much debt to finances its equity that total equity is negative. This is a cause for concern for investors, because that much use of debt is debt obligations by increasing its revenue, then investors will be in big trouble. the late nancing this with over $700 million in debt. This debt was recapitalized in 2007 by issuing $1.7 billion in notes. It was recapitalized in 2012 again by issuing even more notes. In 2019. DPZ recapitalized its debt again, in effect extending its deadline ev has a total of $4.17 billion in total debt, $4.13 billion of which is long – term debt and $43 million of which is short – term debt. Adjusting for cash and cash equivalents, the company has a net debt of $3.92 billion .

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