Pizza Woes

by James & Miel on July 21, 2006 · 0 comments

This posting is about an American icon: Dominos Pizza.

Miel and I had been accumulating shares of Dominos Pizza (DPZ) using the companies dividend reinvestment plan. Over the past two years we managed to buy a total of 158.23 shares of the company making small purchases ($25 to $100 per transaction). However, Dominos iconic status has been overshadowed by some recent financial problems.

The company reported disappointing earnings this last quarter, about 3 cents a share less than analysts expected. However, what’s telling about this is that the company fudged their numbers by buying back shares. (For example, assume a company has 10 shares, and earns 10 dollars a quarter. The earnings per share would be 10/10, or 1. However, if the company buys back two shares, leaving a total of 8, the per share earnings are 1.25, or 10/8). The key here is that the company isn’t any more profitable, they are just manipulating the calculations.

Also, Dominos has a LOT of debt. The company’s debt to assets ratio in 2006 was about 2.10, or they owed about 2 dollars and 10 cents for every dollar in assets. In my view, that’s a very high ratio. In fact, its too high.

Finally, it may be that consumer tastes are changing. The success of business like Whole Foods and public concern about obesity may be the reason other greasy fast food outfits like YUM brands aren’t doing well also.

The long and the short of this is that we’ve decided to sell our shares of Dominos. Its been a fun ride, but it looks like its time to get off.

Best,

James

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