This past Monday’s Agenda
, a newsletter for board members published by a subsidiary of the Financial Times, carried a story about social media and how boards should be aware that adverse stories can destroy massive value within hours. Senior reporter Amanda Gerut referenced materials discussed in the Society’s book, Mission Intangible
, that sharpen the pixels on the value story and identify specific items in the P&L statement that are impacted by reputation. She also cited the Dominos Pizza
case (NYSE:DPZ), a story we first looked at last year
and to which we now return.
As summarized by Ms. Gerut, “On Easter Sunday last year, two Domino’s Pizza employees uploaded a two-minute prank video to YouTube of the duo abusing food they were preparing. The video was quickly picked up by other websites and within 72 hours had jeopardized Domino’s $490 million in domestic revenues and $1.4 billion spent on brand building during the past five years.” According to a Seeking Alpha earnings call transcript
, the company lost between 1% and 2% in domestic same-store sales for the second quarter of 2009. This is to be expected. Both pricing power and market share are impacted by reputation. Moreover, as we previously noted, Dominos suffered a 10% market capitalization drop in the period immediately following the video. Again, no surprise. Net income, earnings multiples, cost of credit, and other drivers of value are also impacted by reputation.
It is now 2010, and Domino’s equity value is higher than it has been in years. Tim McIntyre, vice president of communications at Domino’s, who helped shepherd the company through the viral video incident, is on the lecture circuit advising directors that their duties of oversight include social media. Is there a connection? Might it be the $2 million insurance payment the company received following the event? Or perhaps the stock surge is due to the December 2009 launch of new crust, new sauce and new cheese? After all, quality is a major driver of intangible asset and reputational value in the food sector.
And yet the Steel City Re Corporate Reputation Index shows a decline over the past year in Domino’s ranking (bright red line, above). We expected
to see reputation resilience because we felt Dominos' had a good story about all of its quality processes
; but Dominos never exploited its latent intangible assets--the business processes that underpin reputation. It never explained how its processes provide better
assurances than other pizza franchises that the quality of its product is protected. This is one reason why be believe it has experienced a two-year ongoing decline in reputation ranking relative to the 42 companies in the Restaurants and fast food franchisers sector.
And yet the stock price surged just before the books for 2009 were closed. Part of the discrepancy with the Reputation Index, and the surge in value, may be explained by the company’s pay down of debt with a net reduction in borrowings of about $75.7 million, which we see in our intangibles chart (above) as a reduction
in % intangible asset value.
If we look at select elements from the corporate financials, we see debt pay down and an increase in shareholder’s equity (book value) by about $100 million.
The cash to pay down debt, however, was not necessarily from sales of pizza alone. In fact, total revenue in 2009 was down 20 million compared to 2008. Fortunately, Dominos found an extra $57 million in income from other sources.
In our experience, a company whose reputation index value is low and continues to drift downward tends to underperform its peers. We’ll continue to watch, because the increased value could be due to better quality pizza. Or it could be less leverage and more cold hard (tangible) cash.
Steel City Re Corporate Reputation Index Metrics
Top 5 firms in the Restaurants and fast food franchisers sector ranked by their Steel City Re Corporate Reputation Index
as of 10 June 2010 and their corresponding rankings 4 weeks, 12 weeks, and one year ago.