North America Equity Research

13 October 2009

Overweight
Domino's Pizza Inc DPZ, DPZ US
Price: $8.43
Domestic Comps Outperform A Tough Pizza
Price Target: $11.00
Environment; Reit OW on Low P/E and Realistic N-T
Expectations

DPZ reported adjusted 3Q09 EPS of $0.17 (ex gains on debt Restaurants
extinguishment and other items of $0.14) vs. our $0.11 estimate and the John Ivankoe
AC
Street’s $0.15. Upside vs. our model came mostly from Domestic (1-212) 622-6487
operating income (+5c) matched with slight upside in International and john.ivankoe@jpmorgan.com
Supply Chain (+1-2c) and lower interest expense (+1-2c), with a slight Steven Rees
offset in corporate G&A (-1c). (1-212) 622-6575
steven.rees@jpmorgan.com
• US blended comps of flat were in line with expectations and 2Q
Renato Basanta, CFA
trend but strong given the environment. Company store comps (10% (1-212) 622-5331
of domestic system) were down 2.0% (vs. down 3.4% in 3Q08) renato.x.basanta@jpmchase.com
compared to our modeled down 1.0% estimate and accelerated vs. the J.P. Morgan Securities Inc.
“YouTube incident” affected (negative 1-2 pts. impact) 2Q09 comps of
down 3.3%. Franchise comps of 0.3% (90% of system) were in line with Price Performance
our flat estimate and were strong given the difficult pizza industry 10

conditions (Pizza Hut in the US down 13% in 3Q) in a value focused 8

consumer environment. Despite recent concerns of store closures, the $ 6

system ended 3Q with 4,937 stores, or 30 fewer than 2Q09 and 149 4

lower than last year. Overall, Domestic store operating income was 2
$25.4 million vs. our $21 million expectation ($0.05 of EPS upside vs. Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

our model) with upside driven by domestic company gross margin of YTD 1m 3m 12m
17.2% vs. an admittedly very easy 12.7% last year and our conservative Abs 79.0% 3.4% 7.9% -15.7%
13.8% expectation. Average cheese prices of $1.19/lb. vs. $1.98/lb. last
year drove the food costs decline of 420 bps y/y, 240 bps lower than
expected as we feared deeper discounting. Our 4Q comp assumption is
down 1.5% as comparisons are 3 points more difficult given the lift
enjoyed from the late August 2008 introduction of sandwiches. Cheese
costs are at a $1.51 spot rate vs. the $1.74 average last year, contributing
to a 140 bps increase in store margins to 17.1% and overall operating
income gain of 2%. In F10, we model flat system comps and cheese
costs of $1.60/lb. vs. the expected $1.29/lb. average in F09 as a 10 cent
increase in cheese costs affects company store margins by 30-40bp. We
expect overall segment operating income to decline 9.6% in F10 and for
the segment to equal 46% of DPZ segment operating income.
Domino's Pizza Inc (DPZ;DPZ US)
2007A 2008A 2009E 2009E 2010E 2010E Company Data
(Old) (New) (Old) (New) Price ($) 8.43
EPS Reported ($) Date Of Price 13 Oct 09
Q1 (Mar) 0.38 0.21 0.20A 0.20A 52-week Range ($) 10.15 - 2.61
Q2 (Jun) 0.28 0.22 0.21A 0.21A Mkt Cap ($ mn) 483.47
Q3 (Sep) 0.17 0.13 0.11A 0.17A Fiscal Year End Dec
Q4 (Dec) 0.21 0.19 0.21A 0.21A Shares O/S (mn) 57
FY 1.03 0.75 0.73A 0.78A 0.81 0.87 Price Target ($) 11.00
P/E FY 8.2 11.3 11.5A 10.8A 10.4 9.7 Price Target End Date 31 Dec 10
Source: Company data, Bloomberg, J.P. Morgan estimates. 2008 EPS adjusted for asset sale gains and one-
time tax benefit.

See page 6 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
John Ivankoe North America Equity Research
(1-212) 622-6487 13 October 2009
john.ivankoe@jpmorgan.com

• The Domestic Supply Chain segment posted $11.6 million in operating

income, up 14% y/y and better than our $10.5 million expectation.
Revenue fluctuates with the cost of cheese, and investors should not focus
on the reported revenue decline to $163.2m vs. $177.9m last year. EBITDA
margins of 8.2% were better than our 7.7% expectation and vs. 6.7% last
year as improved planning and route efficiencies continue to contribute to
upside. We expect basically stable operating income at the segment in F10
as store count and comps are relatively steady and expect the division to
equal 23% of the company's segment operating income.

• International comps were below expectations, but this was offset by

better cost management. International comps of +2.7% (vs. +5.4%) were
below our +5% expectation and slowed from the 4.1% (vs. +7.0%) in
2Q08. Overall reported international operating income was up 4% y/y and
was $15.5 million vs. our $15 million expectation, which included an
approximate 7% impact from currency. The company has remained
steadfast in its commitment to the 3-5% annual comp target to continue,
including in the current 4Q. Our 4Q international comp assumption is 3%
and is 4% for F10. As an exclusively franchised business, unit growth and
comp drive the model, and currency should now become a positive. We are
modeling a 25% increase in international operating in 4Q and a 15% gain in
F10, bringing the segment to 31% of Dominos operating income.

• DPZ valuation - low PE, high EV/EBITDA. Shares trade at 9.7x F10E
EPS, the lowest in the group and slightly below the low end of the 10-12x
range where restaurant stocks typically bottom. On EV/EBITDA, the stock
trades at 9x, at the high end of peers’ 7-10x range. Net debt/EBITDA
remains high at 6.8x, but we expect the company to generate $66.6m in
FCF after a minimal $20m of capex in F10 and for covenant risk to remain
minimal and refinancing risk to be a 2012 (unlikely) or 2014 (probable)
event. The company currently has about $1.5b of net debt, so the annual
$67m of FCF generation will not be enough to fully reduce future refinance
risk. Interest rates in 2014 will become key to earnings in the out years, as
using market interest rates (presumably much higher than the current ~6%
due to high leverage) on current debt would show the company at near
breakeven earnings. As restaurants generally trade on PE and the debt issue
is far enough away, we remain Overweight based on the low PE and
realistically set expectations.

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 John Ivankoe North America Equity Research
(1-212) 622-6487 13 October 2009
john.ivankoe@jpmorgan.com

Table 1: A Summary of 3Q Results vs. Our Expectations and Our Revised F09 and New F10 Expectations
Deviation vs. Our F09E
3Q09A 3Q09E 3Q08A Estimates in cents F08A F09E new previous F10E new F10E pvs
Company SSS -2.0% -1.0% -3.4% -2.3% -1.7% -1.3% 0.2% 2%
US Franchise SSS 0.3% 0.0% -6.4% -5.1% -0.3% 0.2% 0.2% 2%
Intl SSS 2.7% 5.0% 5.4% 6.3% 4.0% 4.8% 4.0% 4%

# Company Stores 481 483 512 489 481 483 481 483
#Domestic Franchise Stores 4,456 4,462 4,574 4,558 4,451 4,446 4,343 4,333
# International Stores 3,949 3,970 3,640 3,726 4,043 4,034 4,335 4,296

Cheese Price $1.27 $1.25 $1.98 $1.89 $1.29 $1.25 $1.60 $1.40
Wheat Price $0.00 $0.00 $791.00 $756.50
COGS 75.2% 72.8% 71.0% 72.4% 74.6% 73.8% 73.7% 73.4%

Domestic Company Revenue 72,700 72,414 77,810 357,702 332,390 333,048 324,262 331,942
Domestic Franchise Revenue 34,300 33,848 34,680 153,857 154,832 155,116 148,495 151,395
Domestic Company Gross Margin 17.2% 13.8% 12.7% 16.5% 18.2% 17.1% 17.1% 16.7%
Domestic Store G&A 21,410 22,910 20,229 100,019 100,071 100,619 99,864 102,128
Domestic Operating Income Margin 23.71% 19.71% 20.02% 22.03% 23.63% 22.85% 22.02% 21.67%
Domestic Op Income $ 25,375 20,940 22,524 $0.05 112,683 115,124 111,541 104,099 104,755

Distribution Rev 163,200 158,126 177,848 771,107 739,456 737,914 725,866 731,906
Distribution G&A 5,756 5,289 5,185 24,380 25,360 24,643 25,577 24,216
Domestic Distribution Income 13,355 12,105 11,974 54,803 59,186 58,574 57,897 57,757
Distribution Operating Income Margin 8.2% 7.7% 6.7% 7.1% 8.0% 7.9% 8.0% 7.9%
Distribution Operating Income $ 11,644 10,458 10,209 $0.01 47,058 51,679 51,221 50,020 50,174

International Revenue 32,554 33,737 33,250 142,448 148,499 148,452 168,682 164,295
International G&A 3,411 3,983 3,722 14,746 17,258 17,697 18,825 19,097
International Operating Income 15,547 15,032 14,957 $0.01 63,934 65,596 64,549 75,715 72,221
International Op Income Margin 47.8% 44.6% 45.0% 44.9% 44.2% 43.5% 0.0% 0.0%

other -12,116 -11,000 -9,263 ($0.01) -41,424 -47,583 -45,657 -47,630 -45,709
Interest Expense -23,688 -25,192 -25,678 $0.02 -110,882 -108,728 -111,640 -98,630 -103,700
Share count 57,981 57,409 58,043 $0.00 58,340 57,716 57,491 57,940 57,610
Tax Rate 42.80% 40.00% 30.65% $0.00 36.50% 40.60% 39.98% 40.00% 40.00%

EPS $0.17 $0.11 $0.13 $0.06 $0.75 $0.78 $0.73 $0.87 $0.81
Source: Company reports and J.P. Morgan estimates. 3Q09 EPS figure adjusted for gain on debt extinguishment.

Table 2: DPZ Domestic Company Same Store Sales

Domestic Company Comps 1Q 2Q 3Q 4Q FY
2005 13.8% 8.6% 4.2% 3.3% 7.2%
2006 -3.0% -3.2% -2.3% -1.0% -2.3%
2007 0.6% 4.4% 0.8% -1.1% 1.0%
2008 -2.4% -1.1% -3.4% -2.2% -2.3%
2009E -0.1%A -3.3%A -2.0% -1.5%E -1.7%E
2010E -2.0%E -2.0%E 2.0%E 2.0%E 0.2%E
Source: J.P. Morgan estimates, Company data.

Table 3: DPZ Domestic Franchise Same Store Sales

Domestic Franchise Comps 1Q 2Q 3Q 4Q FY
2005 10.8% 6.6% 0.7% 1.5% 4.6%
2006 -4.0% -5.2% -3.2% -4.9% -4.4%
2007 -3.4% 1.8% -2.0% -3.9% -2.0%
2008 -5.5% -5.9% -6.4% -3.1% -5.1%
2009E 1.1%A -0.4%A 0.3%A -1.5%E -0.3%E
2010E -2.0%E -2.0%E 2.0%E 2.0%E 0.2%E
Source: J.P. Morgan estimates, Company data.

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John Ivankoe North America Equity Research
(1-212) 622-6487 13 October 2009
john.ivankoe@jpmorgan.com

Table 4: DPZ International Same Store Sales

International Comps 1Q 2Q 3Q 4Q FY
2005 8.5% 7.8% 4.5% 3.8% 6.0%
2006 3.0% 5.7% 3.0% 3.9% 3.9%
2007 3.8% 3.9% 8.3% 9.5% 6.6%
2008 8.8% 7.0% 5.4% 4.5% 6.3%
2009E 6.6%A 4.1%A 2.7% 3.0%E 4.0%E
2010E 4.0%E 4.0%E 4.0%E 4.0%E 4.0%E
Source: J.P. Morgan estimates, Company data.

Table 5: DPZ EPS under Various Interest Cost Scenarios

With $1.6 billion of debt on Interest Cost Scenarios F08A - 6.6% 7% 8% 9% 10% 11%
DPZ’s balance sheet, we Interest Expense 113,628 115,667 132,191 148,715 165,239 181,763
estimate every 1% change in the Net Interest Expense 110,882 114,780 131,304 147,828 164,352 180,875
company’s interest rate effects PreTax Income 71,369 70,036 53,512 36,988 20,464 3,941
EPS by ~$0.17. Net Income 43,648 42,022 32,107 22,193 12,279 2,364
EPS $0.75 $0.73 $0.56 $0.38 $0.21 $0.04
Source: J.P. Morgan estimates, Company data. Note: 7-11% calculations use average debt of $1.65 billion, our F09 EBIT estimate of
$184 million, our F09 interest income estimate of $900k and a 40% tax rate. F08 numbers adjusted for non-recurring gains/charges.

Table 6: DPZ Potential Free Cash Generation and Potential Leverage Reduction through F12
F09E F10E F11E F12E
Net Income (F09/F10 estimates, 5% growth thereafter) 45,199 50,144 52,651 55,284
+D&A (F09/F10 estimate, flat thereafter) 36,544 36,442 36,442 36,442
-Capex (F09/F10 estimate, flat thereafter) -22,000 -20,000 -20,000 -20,000
Cash Generated 59,743 66,587 69,094 71,726
Beginning Debt 1,704,784 1,645,041 1,578,455 1,509,361
Cash Available for Debt Paydown 59,743 66,587 69,094 71,726
Potential Ending Debt 1,645,041 1,578,455 1,509,361 1,437,635
Beginning of F09 Cash Balance (excluding restricted cash) 45,372
Potential Ending Net Debt 1,599,669 1,533,083 1,463,989 1,392,263
F09/F10 EBITDA 221,360 218,646
assuming 5% growth 229,579 241,058
Net Debt/EBITDA 7.0x 6.4x 5.8x
Source: J.P. Morgan estimates, Company data.

Table 7: DPZ Valuation vs. Peers

C10E Enterprise EV/F10E Net Debt/F10E
C10E EPS PE F10E EBITDA Value EBITDA Net Debt EBITDA C09E Capex C09E Capex/EBITDA
DPZ 0.87 9.7 219 1,972 9.0 1,485 6.8 22 10%

BKC 1.41 12.6 447 3,209 7.2 791 1.8 190 43%
MCD 4.25 13.4 8,345 72,245 8.7 8,840 1.1 2050 25%
YUM 2.36 14.8 2,221 19,700 8.9 2,834 1.3 900 41%
THI 2.00 15.1 657 5,729 8.7 264 0.4 179 27%
Source: J.P. Morgan estimates, Company data.

Valuation and Rating Analysis

DPZ valuation - low PE, high EV/EBITDA. Shares trade at 9.7x F10E EPS, the
lowest in the group and slightly below the low end of the 10-12x range where
restaurant stocks typically bottom. On EV/EBITDA, the stock trades at 9x, at the
high end of peers’ 7-10x range. Net debt/EBITDA remains high at 6.8x, but we
expect the company to generate $66.6m in FCF after a minimal $20m of capex in
F10 and for covenant risk to remain minimal and refinancing risk to be a 2012
(unlikely) or 2014 (probable) event. The company currently has about $1.5b of net
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John Ivankoe North America Equity Research
(1-212) 622-6487 13 October 2009
john.ivankoe@jpmorgan.com

debt, so the annual $67m of FCF generation will not be enough to fully reduce future
refinance risk. Interest rates in 2014 will become key to earnings in the out years as
using market interest rates (presumably much higher than the current ~6% due to
high leverage) on current debt would show the company at near breakeven earnings.
As restaurants generally trade on PE and the debt issue is far enough away, we
remain Overweight based on the low PE and realistically set expectations. We
establish an $11 Dec 2010 price target (our Dec 09 price target was $11), with our
PT reflecting a 13x multiple on F10 EPS estimates, below the 15-17x range where
restaurants stocks typically average given the higher leverage.

Risks to Our Rating

The key downside risks to our Overweight rating include lower consumer spending
trends in the US, which could lead to continued domestic same-store sales
underperformance and negatively impact earnings. In addition, higher than expected
commodity cost pressure, specifically with cheese, which accounts for about 40% of
COGS, and wheat, which comprises ~5% of COGS, could lead to greater than
expected margin pressure. Lack of access to capital/liquidity could also hinder the
company's plan to sell off underperforming domestic franchisees to better performing
ones.

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John Ivankoe North America Equity Research
(1-212) 622-6487 13 October 2009
john.ivankoe@jpmorgan.com

Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures

• Client of the Firm: Domino's Pizza Inc is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company investment banking services, non-investment banking securities-related services and non-securities-related
services.
• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking
services from Domino's Pizza Inc.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from Domino's Pizza Inc.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from Domino's Pizza Inc. An affiliate of JPMSI has received compensation in the past 12 months for
products or services other than investment banking from Domino's Pizza Inc.

Domino's Pizza Inc (DPZ) Price Chart

Date Rating Share Price Price Target

($) ($)
52 25-Feb-09 OW 6.15 7.50
OW $11 01-May-09 OW 9.44 11.00

39
OW $7.5
Price($)
26

13

0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
06 07 07 07 07 08 08 08 08 09 09 09 09

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector
and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: John Ivankoe: Brinker International (EAT), Burger King (BKC), Darden Restaurants (DRI), Domino's
Pizza Inc (DPZ), McDonald's (MCD), P.F. Chang's China Bistro (PFCB), Starbucks (SBUX), Sysco Corporation (SYY),
The Cheesecake Factory, Inc. (CAKE), Tim Hortons Inc. (THI.TO), Wendy’s/Arby’s Group (WEN), Yum Brands (YUM)

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John Ivankoe North America Equity Research
(1-212) 622-6487 13 October 2009
john.ivankoe@jpmorgan.com

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2009

Overweight Neutral Underweight
(buy) (hold) (sell)
JPM Global Equity Research Coverage 39% 46% 15%
IB clients* 56% 57% 42%
JPMSI Equity Research Coverage 38% 51% 10%
IB clients* 76% 72% 56%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

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John Ivankoe North America Equity Research
(1-212) 622-6487 13 October 2009
john.ivankoe@jpmorgan.com

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