Domino's Pizza: Should $1.5 Billion In Debt Cause Concerns?

| About: Domino's Pizza, (DPZ)

Summary

Bain Capital left Domino's with a lot of debt, but also a lot of profitability.

Domino's is not afraid to change course when it is needed.

New innovations from Domino's help keep them ahead of the industry.

Since the depths of the recent recession, Domino's Pizza (NYSE:DPZ) has been the stock that could seemingly do no wrong. It has risen from a price of just under $6 a share in October of 2008 to over $95 per share during today's trading. There have been few if any major blips along the way. This rocket ship rise could be attributed to a number of factors. For one, Domino's has been able to benefit from some of the same factors that have lifted a lot of other stocks. The growing economy, falling unemployment and gas prices, and federal interest rates remaining low. However, there have been a few more twists in the Domino's Pizza story than what most other companies have experienced in the same period of time.

The Bain Connection

The famous (or infamous depending upon how you look at it) Bain Capital plays a starring role in the situation that Domino's Pizza finds itself in today. In 1998, Bain Capital wrote a check to purchase the pizza chain. The Boston Globe reported on this story and produced the following quote about it,

Domino's was not in need of rescue, nor was it a classic turnaround case for Bain. But it was still a bonanza for the Boston leveraged buyout firm, which makes money by buying and selling businesses. Bain reaped a 500 percent return on its investment in the nation's largest pizza delivery chain over 12 years.

The Globe later went on to explain that the results of having Bain as a partner for all those years were mixed. The company did grow its earnings and profits over the 12 years under Bain's watchful eyes. However, the debt that Domino's is responsible for also ballooned out to $1.5 billion. As you will see in a moment, this debt level is a lot higher than what many other restaurants are carrying.

Debt Levels Are A Cause For Concern, But There Is More To It

To understand the importance of having $1.5 billion in debt on the books, it is best to examine what debt load that their main competitor is carrying.

Company Debt Cash On Hand Market Cap
Domino's $1.5 billion $30.9 million $5.26 billion
Papa John's (NASDAQ:PZZA) $224.6 million $17.1 million $2.16 billion

These numbers are accurate as of the time of this writing. They show a stark contrast between the two big pizza chains that trade on the markets. The debt level differences are enormous. Domino's carries more than six times the amount of debt that Papa John's does. Clearly, this is an impact of the overhang from being partners with Bain Capital and having to make huge debt payments for the privilege. However, let us not take away from the improvements that Domino's experienced under Bain as well. These improvements are what provide for exciting opportunities for Domino's going forward.

A Changed Recipe And Enhanced Profitability

It is old news at this point that Domino's changed its core recipe in order to make for a more delicious pizza. They made this move in late 2009 as referenced here at USA Today. Almost from that exact moment, the company's stock price took off. The new recipe was rolled out nationwide on December 27th, 2009. On that day, the stock closed at an adjusted $7.70 per share. As of the market close on Friday, the stock now trades at $95.69 per share. The new recipe was clearly a hit, but even more than that, Domino's increasing profits and earnings continued to propel the stock higher.

Some of the stock improvement could be attributed to a strong overall market in general in those five years. However, Domino's has been a strong outperformer of the market. The company has used innovative marketing techniques to make their products more appealing. They have even taken to the risky and unique approach of poking fun at themselves. It seems to have paid off handsomely. One must wonder though if this success is something that will continue into the future.

The Future For Domino's Is Bright

Domino's seems to be one step ahead of the competition when it comes to providing for their customers. The company has done it again by allowing the customers to be the commanders of their own pizza choices. A new development that they simply call "The Pizza Chef" allows customers to design their own pizza creations and share what they have made on their social networks. Every time someone purchases the type of pizza that the creator has made can generate between $0.25 and $4.50 for the creator. It rewards innovators for helping the company make what the people want.

Creative ideas like this are what is helping Domino's keep a nose ahead in an industry that could easily become stagnant. Barring a tremendous downturn in the economy or a major stumble by the business, the leftover Bain debt should be a problem in the rear view mirror. Buy this innovative pioneer.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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