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Article by DailyStocks_admin    (10-27-08 03:51 AM)

Domino's Pizza Inc. CEO DAVID BRANDON bought 52500 shares on 10-21-2008 at $6.34

BUSINESS OVERVIEW

Overview

Domino’s Pizza, Inc. (referred to as the “Company,” “Domino’s” or in the first person notations of “we,” “us” and “our”) is the number one pizza delivery company in the United States, based on reported consumer spending, and has a leading presence internationally. On average, over one million pizzas are sold each day throughout the system, with deliveries covering approximately ten million miles per week. We pioneered the pizza delivery business and have built the Domino’s Pizza ® brand into one of the most widely-recognized consumer brands in the world. Together with our franchisees, we have supported the Domino’s Pizza ® brand with an estimated $1.4 billion in domestic advertising spending over the past five years. We operate through a network of 8,624 Company-owned and franchise stores, located in all 50 states and in more than 55 countries. In addition, we operate 17 regional dough manufacturing and supply chain centers in the contiguous United States and six dough manufacturing and supply chain centers outside the contiguous United States. The foundation of our system-wide success and leading market position is our strong relationships with our franchisees, comprised of over 2,000 owner-operators dedicated to the success of the Domino’s Pizza ® brand.

Over our 47-year history, we have developed a simple business model focused on our core strength of delivering quality pizza in a timely manner. This business model includes a delivery-oriented store design with low capital requirements, a focused menu of pizza and complementary side items, committed owner-operator franchisees and a vertically-integrated supply chain system. Our earnings are driven largely from retail sales at our franchise stores, which generate royalty payments and supply chain revenues to us. We also generate earnings through retail sales at our Company-owned stores.

We operate our business in three segments: domestic stores, domestic supply chain and international.

• Domestic stores. The domestic stores segment, which is comprised of 4,584 franchise stores and 571 Company-owned stores, generated revenues of $552.6 million and income from operations of $128.6 million during 2007.

• Domestic supply chain. Our domestic supply chain segment, which manufactures dough, processes vegetables and distributes food, equipment and supplies to all of our Company-owned stores and over 98% of our domestic franchise stores, generated revenues of $783.3 million and income from operations of $49.7 million during 2007.

• International. Our international segment oversees 3,469 franchise stores outside the contiguous United States. It also manufactures dough and distributes food and supplies in a limited number of these markets. During 2007, our international segment generated revenues of $126.9 million, of which approximately 52% resulted from the collection of franchise royalties and fees, and generated income from operations of $57.2 million, of which approximately 93% resulted from the collection of franchise royalties and fees.

On a consolidated basis, we generated revenues of more than $1.4 billion and income from operations (after deducting $41.6 million of unallocated corporate and other expenses) of $193.9 million in 2007. Net income was $37.9 million in 2007. We have been able to increase our income from operations more than 52% over the past six years through domestic and international same store sales growth, the addition of over 1,500 stores worldwide during that time and strong performance by our domestic supply chain business. This growth was achieved with capital expenditures by us that generally range between only $20.0 million to $30.0 million on an annualized basis, since a significant portion of our earnings are derived from retail sales by our franchisees.

During 2007, the Company completed a recapitalization transaction (the “2007 Recapitalization”), consisting of (i) $1.7 billion of borrowings of fixed rate notes, (ii) a stock tender offer resulting in the purchase of 2,242 shares of the Company’s common stock at a purchase price of $30.00 per share, (iii) the purchase and retirement at a premium of all the outstanding Domino’s, Inc. 8 1 / 4 % senior subordinated notes due 2011, (iv) the repayment of all outstanding borrowings under its senior credit facility, and (v) a $13.50 per share special cash dividend to shareholders and related anti-dilution payments and adjustments to certain option holders.

Additionally, the Board of Directors approved an open market share repurchase program for up to $200.0 million of the Company’s common stock, to be funded by future free cash flow and borrowings available under variable funding notes. During 2007, the Company repurchased 3,614,310 shares of common stock for approximately $54.4 million. The Company has approximately $145.6 million remaining under the open market share repurchase program.

Our history

We have been delivering quality, affordable pizza to our customers since 1960 when brothers Thomas and James Monaghan borrowed $900 and purchased a small pizza store in Ypsilanti, Michigan. Since that time, our store count and geographic reach have grown substantially. We opened our first franchise store in 1967, our first international store in 1983 and, by 1998, we had expanded to over 6,200 stores, including more than 1,700 international stores, on six continents. During 2005, we opened our 8,000 th store worldwide. At December 30, 2007 we had 8,624 stores worldwide in more than 55 countries.

In 1998, an investor group led by investment funds associated with Bain Capital, LLC completed a recapitalization through which the investor group acquired a 93% controlling economic interest in our Company from Thomas Monaghan and his family. At the time of the recapitalization, Mr. Monaghan retired, and, in March 1999, David A. Brandon was named our Chairman and Chief Executive Officer. In 2004, Domino’s Pizza, Inc. completed its initial public offering (the “IPO”) and now trades on the New York Stock Exchange under the ticker symbol “DPZ.”

Industry overview

In this document, we rely on and refer to information regarding the U.S. quick service restaurant, or QSR, sector, the U.S. QSR pizza category and its components and competitors (including us) from the CREST report prepared by The NPD Group, as well as market research reports, analyst reports and other publicly-available information. Although we believe this information to be reliable, we have not independently verified it. Domestic sales information relating to the QSR sector, U.S. QSR pizza category and U.S. pizza delivery and carry-out represent reported consumer spending obtained by The NPD Group’s CREST report from consumer surveys. This information relates to both our Company-owned and franchise stores. Unless otherwise indicated, all U.S. industry data included in this document is based on reported consumer spending obtained by The NPD Group’s CREST report from consumer surveys.

The U.S. QSR pizza category is large and fragmented. With sales of $33.9 billion in the twelve months ended November 2007, the U.S. QSR pizza category is the second largest category within the $224.2 billion U.S. QSR sector. The U.S. QSR pizza category is primarily comprised of delivery, dine-in and carry-out.

We operate primarily within U.S. pizza delivery. Its $11.6 billion of sales accounted for 34% of total U.S. QSR pizza category sales in the twelve months ended November 2007. We and our top two competitors account for approximately 46% of U.S. pizza delivery, based on reported consumer spending, with the remaining 54% attributable to regional chains and individual establishments.

We also compete in carry-out, which together with pizza delivery are the largest components of the U.S. QSR pizza category. U.S. carry-out pizza had $13.3 billion of sales in the twelve months ended November 2007 and while our primary focus is on pizza delivery, we are also favorably positioned to compete in carry-out given our strong brand, convenient store locations and quality, affordable menu offerings.

In contrast to the United States, international pizza delivery is relatively underdeveloped, with only Domino’s and one other competitor having a significant multinational presence. We believe that demand for international pizza delivery is large and growing, driven by international consumers’ increasing emphasis on convenience.

Our competitive strengths

We believe that our competitive strengths include the following:

• Strong and proven growth and earnings model. Over our 47-year history, we have developed a focused growth and earnings model. This model is anchored by strong store-level economics, which provide an entrepreneurial incentive for our franchisees and generate demand for new stores. Our franchise system, in turn, has produced strong and consistent earnings for us through royalty payments and supply chain revenues, with minimal associated capital expenditures by us.

• Strong store-level economics . We have developed a cost-efficient store model, characterized by a delivery and carry-out oriented store design, with low capital requirements and a focused menu of quality, affordable pizza and complementary side items. At the store level, we believe that the simplicity and efficiency of our operations give us significant advantages over our competitors who in many cases also focus on dine-in.

Our domestic stores, and most of our international stores, do not offer dine-in areas and thus do not require expensive restaurant facilities and staffing. In addition, our focused menu of pizza and complementary side items simplifies and streamlines our production and delivery processes and maximizes economies of scale on purchases of our principal ingredients. As a result of our focused business model and menu, our stores are small (averaging approximately 1,000 to 1,300 square feet) and inexpensive to build, furnish and maintain as compared to many other QSR franchise opportunities. The combination of this efficient store model and strong store sales volume has resulted in strong store-level financial returns and makes Domino’s Pizza an attractive business opportunity for existing and prospective franchisees.

• Strong and well-diversified franchise system . We have developed a large, global, diversified and committed franchise network that is a critical component of our system-wide success and our leading position in pizza delivery. As of December 30, 2007, our franchise store network consisted of 8,053 stores, 57% of which were located in the contiguous United States. In the United States, only seven franchisees operate more than 50 stores, including our largest domestic franchisee, which operates 143 stores. Our domestic franchisees, on average, operate between three and four stores. We require our domestic franchisees to forego active, outside business endeavors, aligning their interests with ours and making the success of each Domino’s Pizza franchise of critical importance to our franchisees.

In addition, we generally share 50% of the pre-tax profits generated by our regional dough manufacturing and supply chain centers with those domestic franchisees who agree to purchase all of their food from our supply chain system. These arrangements strengthen our ties with our franchisees by enhancing their profitability while providing us with a continuing source of revenues and earnings. This arrangement also provides incentives for franchisees to work closely with us to reduce costs. We believe our strong, mutually-beneficial franchisee relationships are evidenced by the over 98% voluntary participation in our domestic supply chain system, our over 99% domestic franchise contract renewal rate and our over 99% collection rate on domestic franchise royalty and domestic supply chain receivables.

Internationally, we have also been able to grow our franchise network by attracting franchisees with business experience and local market knowledge. We generally use our master franchise model, which provides our international franchisees with exclusive rights to operate stores or sub-franchise our well-recognized Domino’s Pizza ® brand name in specific, agreed-upon market areas. From year-end 2002 through 2007, we grew our international franchise network 46%, from 2,382 stores to 3,469 stores. Our largest master franchisee operates 687 stores in five markets, which accounts for approximately 20% of our total international store count.

• Strong cash flow and earnings stream . A substantial percentage of our earnings are generated by our committed, owner-operator franchisees through royalty payments and revenues to our vertically-integrated supply chain system.

We believe that our store economics have led to a strong, well diversified franchise system. This established franchise system has produced strong cash flow and earnings for us, enabling us to invest in the Domino’s Pizza ® brand and our stores, pay significant dividends, repurchase shares of our common stock and deliver attractive returns to our stockholders.

• #1 pizza delivery company in the United States with a leading international presence . We are the number one pizza delivery company in the United States with an 18.9% share based on reported consumer spending. With 5,155 stores located in the contiguous United States, our domestic store delivery areas cover a majority of U.S. households. Our share position and scale allow us to leverage our purchasing power, supply chain strength and advertising investment across our store base. We also believe that our scale and market coverage allow us to effectively serve our customers’ demands for convenience and timely delivery.

Outside the United States, we have significant share positions in the key markets in which we compete, including, among other countries, Mexico, where we are the largest QSR company in terms of store count in any QSR category, the United Kingdom, Australia, South Korea, Canada, Japan, India, France and Taiwan. Our top ten international markets, based on store count, accounted for approximately 81% of our international retail sales in 2007. We believe we have a leading presence in these markets.

• Strong brand awareness. We believe our Domino’s Pizza ® brand is one of the most widely-recognized consumer brands in the world. We believe consumers associate our brand with the timely delivery of quality, affordable pizza and complementary side items. Over the past five years, our domestic franchise and Company-owned stores have invested an estimated $1.4 billion on national, local and co-operative advertising in the United States. Our Domino’s Pizza ® brand has been routinely named a MegaBrand by Advertising Age . We continue to reinforce our brand with extensive advertising through television, radio, print and web-based promotions. We also enhance the strength of our brand through marketing affiliations with brands such as Coca-Cola ® and NASCAR ® .

We believe that our brand is particularly strong among pizza consumers for whom dinner is a fairly spontaneous event. In these situations, we believe that service and product quality are the consumers’ priorities. We believe that well established demographic and lifestyle trends will drive continuing emphasis on convenience and will, therefore, continue to play into our brand’s strength.

• Internal dough manufacturing and supply chain system. In addition to generating significant revenues and earnings, we believe that our vertically integrated dough manufacturing and supply chain system enhances the quality and consistency of our products, enhances our relationships with franchisees, leverages economies of scale to offer lower costs to our stores and allows our store managers to better focus on store operations and customer service by relieving them of the responsibility of mixing dough in the stores.

In 2007, we made approximately 660,000 full-service food deliveries to our domestic stores, or between two and three deliveries per store, per week, with a delivery accuracy rate of approximately 99%. All of our Company-owned and over 98% of our domestic franchise stores purchase all of their food and supplies from us. This is accomplished through our network of 17 regional dough manufacturing and supply chain centers, each of which is generally located within a one-day delivery radius of the stores it serves, and a leased fleet of over 400 tractors and trailers. Additionally, we supply our domestic and international franchisees with equipment and supplies through our equipment and supply center, which we operate as part of our domestic supply chain segment. Our equipment and supply center sells and delivers a full range of products, including ovens and uniforms. We also supply certain of our domestic stores with ingredients that are processed at our vegetable processing supply chain center, which we operate as part of our domestic supply chain segment.

Because we source the food for substantially all of our domestic stores, our domestic supply chain segment enables us to leverage and monitor our strong supplier relationships to achieve the cost benefits of scale and to ensure compliance with our rigorous quality standards. In addition, the “one-stop shop” nature of this system, combined with our delivery accuracy, allows our store managers to eliminate a significant component of the typical “back-of-store” activity that many of our competitors’ store managers must undertake.

Our business strategy

We intend to achieve further growth and strengthen our competitive position through the continued implementation of our business strategy, which includes the following key elements:

• Continue to execute on our mission statement. Our mission statement is “Exceptional franchisees and team members on a mission to be the best pizza delivery Company in the world.” We implement this mission statement by following a business strategy that:

• puts franchisees and Company-owned stores at the foundation of all our thinking and decisions;

• emphasizes our ability to select, develop and retain exceptional team members and franchisees;

• provides a strong infrastructure to support our stores; and

• builds excellent store operations to create loyal customers.

We adhere to the following guiding principles, which are based on the concept of one united brand, system and team:

• putting people first;

• demanding integrity;

• striving to make every customer a loyal customer;

• delivering with smart hustle and positive energy; and

• winning by improving results every day.

• Grow our leading position in an attractive industry. U.S. pizza delivery and carry-out are the largest components of the U.S. QSR pizza category. They are also highly fragmented. Pizza delivery, through which a majority of our retail sales are generated, had sales of $11.6 billion in the twelve months ended November 2007. As the leader in U.S. pizza delivery, we believe that our convenient store locations, simple operating model, widely-recognized brand and efficient supply chain system are competitive advantages that position us to capitalize on future growth.

Carry-out had $13.3 billion of sales in the twelve months ended November 2007. While our primary focus is on pizza delivery, we are also favorably positioned as a leader in carry-out given our strong brand, convenient store locations and quality, affordable menu offerings.

• Leverage our strong brand awareness. We believe that the strength of our Domino’s Pizza ® brand makes us one of the first choices of consumers seeking a convenient, quality and affordable meal. We intend to continue to promote our brand name and enhance our reputation as the leader in pizza delivery. In 2007 we launched a rebranding campaign, “You Got 30 Minutes™,” with our new advertising agency Crispin Porter + Bogusky. The campaign builds on the Company’s 30-minute delivery heritage by highlighting the value of what pizza delivery really does for consumers – gives them free time.

In 2006 and 2007, each of our domestic stores contributed 4% of their retail sales to our advertising fund for national advertising in addition to contributions for market-level advertising. Additionally, for 2006 and 2007, our domestic stores within active co-operatives elected to allocate an additional 1% of their advertising contributions to support national advertising initiatives.

We intend to leverage our strong brand by continuing to introduce innovative, consumer-tested and profitable new pizza varieties (such as Domino’s Brooklyn Style Pizza), complementary side items (such as buffalo wings, cheesy bread, Domino’s Buffalo Chicken Kickers ® and Cinna Stix ® ) and value promotions (such as the Domino’s 555 Deal) as well as through marketing affiliations with brands such as Coca-Cola ® and NASCAR ® . We believe these opportunities, when coupled with our scale and share leadership, will allow us to grow our position in U.S. pizza delivery.

• Expand and optimize our domestic store base. We plan to continue expanding our base of domestic stores to take advantage of the attractive growth opportunities in U.S. pizza delivery. We believe that our scale allows us to expand our store base with limited marketing, distribution and other incremental infrastructure costs. Additionally, our franchise-oriented business model allows us to expand our store base with limited capital expenditures and working capital requirements. While we plan to expand our traditional domestic store base primarily through opening new franchise stores, we will also continually evaluate our mix of Company-owned and franchise stores and strategically acquire franchise stores and refranchise Company-owned stores.

• Continue to grow our international business. We believe that pizza has global appeal and that there is strong and growing international demand for delivered pizza. We have successfully built a broad international platform, almost exclusively through our master franchise model, as evidenced by our 3,469 international stores in more than 55 countries. We believe that we continue to have significant long-term growth opportunities in international markets where we have established a leading presence. In our current top ten international markets, we believe that our store base in total for these ten markets is less than half of the total long-term potential store base in those markets. Generally, we believe we will achieve long-term growth internationally as a result of the favorable store-level economics of our business model, the growing international demand for delivered pizza and the strong global recognition of the Domino’s Pizza ® brand. Our international stores have produced positive quarterly same store sales growth for 56 consecutive quarters.

Store operations

We believe that our focused and proven store model provides a significant competitive advantage relative to many of our competitors who focus on multiple components of the pizza category, particularly dine-in. We have been focused on pizza delivery for 47 years. Because our domestic stores and most of our international stores do not offer dine-in areas, they typically do not require expensive real estate, are relatively small and are relatively inexpensive to build and equip. Our stores also benefit from lower maintenance costs, as store assets have long lives and updates are not frequently required. Our simple and efficient operational processes, which we have refined through continuous improvement, include:

• strategic store locations to facilitate delivery service;

• production-oriented store designs;

• product and process innovations;

• focused menu;

• efficient order taking, production and delivery;

• Domino’s PULSE™ point-of-sale system; and

• comprehensive store audit program.

CEO BACKGROUND

David A. Brandon has served as our Chairman, Chief Executive Officer and as a Director since March 1999. Mr. Brandon has also served as Chairman, Chief Executive Officer and as a Manager of Domino’s Pizza LLC since March 1999. Mr. Brandon was President and Chief Executive Officer of Valassis, Inc., a company in the sales promotion and coupon industries, from 1989 to 1998 and Chairman of the board of directors of Valassis, Inc. from 1997 to 1998. Mr. Brandon serves on the Boards of Directors of The TJX Companies, Inc., Burger King Corporation, Kaydon Corporation and Northwest Airlines.

Andrew B. Balson has served on our Board of Directors since March 1999. Mr. Balson also serves on the Nominating and Corporate Governance Committee of the Board of Directors. Mr. Balson has been a Managing Director of Bain Capital, a global investment company, since January 2001. Mr. Balson became a Principal of Bain Capital in June 1998. Mr. Balson serves on the Boards of Directors of Burger King Corporation, OSI Restaurant Partners, Inc. and Dunkin’ Brands, Inc., as well as a number of other private companies.

Diana F. Cantor has served on our Board of Directors since October 2005. Ms. Cantor also serves on the Nominating and Corporate Governance Committee and the Audit Committee of the Board of Directors. Ms. Cantor has been a Managing Director with the New York Private Bank and Trust since January 2008. Ms. Cantor served as Executive Director of the Virginia College Savings Plan, the state’s 529 college savings program, from 1996 to January 2008. She served on the board of the College Savings Plans Network from 1997 through 2007 and was its chair from 2001 to 2004. Ms. Cantor served seven years as Vice President of Richmond Resources, Ltd. from 1990 through 1996, and as Vice President of Goldman, Sachs & Co. from 1985 to 1990. Ms. Cantor is also a member of the Board of Directors of Media General, Inc.

Vernon “Bud” O. Hamilton has served on our Board of Directors since May 2005 and serves as the Chairman of the Nominating and Corporate Governance Committee of the Board of Directors. Mr. Hamilton served in various executive positions for Procter & Gamble from 1966 through 2003. Mr. Hamilton most recently served as Vice President, Innovation-Research & Development-Global from 2002 through 2003 and served as President of Eurocos, a wholly-owned subsidiary of Procter & Gamble, from 1994 to 1995, Vice President of Procter & Gamble Customer Marketing-North America from 1996 through 1998 and Vice President of Procter & Gamble Customer Business Development-North America from 1999 to 2001.

Dennis F. Hightower has served on our Board of Directors since February 2003, serves as the Chairman of the Audit Committee of our Board of Directors, and serves on the Compensation Committee of our Board of Directors. Mr. Hightower served as Chief Executive Officer of Europe Online Networks, S.A., a broadband interactive entertainment provider, from May 2000 to March 2001. He was Professor of Management at Harvard Business School from July 1997 to May 2000, and a senior lecturer from July 1996 to June 1997. He was previously employed by The Walt Disney Company, serving as President of Walt Disney Television & Telecommunications, President of Disney Consumer Products (Europe, Middle East and Africa) and related service in executive positions in Europe. He serves on the Board of Directors of Accenture, Ltd.

Mark E. Nunnelly has served on our Board of Directors since December 1998. Mr. Nunnelly also serves on the Compensation Committee of the Board of Directors. Mr. Nunnelly has been a Managing Director of Bain Capital, a global investment company since 1990. Mr. Nunnelly serves on the Boards of Directors of Dunkin’ Brands, Inc., Warner Music and OSI Restaurant Partners, Inc., as well as a number of private companies and not-for-profit corporations.

Robert M. Rosenberg has served on our Board of Directors since April 1999 and serves as the Chairman of the Compensation Committee and also serves on the Audit Committee of the Board of Directors. Mr. Rosenberg served as President and Chief Executive Officer of Allied Domecq Retailing, USA from 1993 to August 1999 when he retired. Allied Domecq Retailing, USA was comprised of Dunkin’ Donuts, Baskin-Robbins and Togo’s Eateries. Mr. Rosenberg also serves on the Boards of Directors of Sonic Corp. and Buffets, Inc.
MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Our fiscal year typically includes 52 weeks, comprised of three twelve week quarters and one sixteen week quarter. Fiscal 2005, fiscal 2006 and fiscal 2007 each consisted of 52 weeks.

We are the number one pizza delivery company in the United States with an 18.9% share of the pizza delivery market based on reported consumer spending. We also have a leading international presence. We operate through a network of 571 Company-owned stores, all of which are in the United States, and 8,053 franchise stores located in all 50 states and in more than 55 countries. In addition, we operate 17 regional dough manufacturing and supply chain centers in the contiguous United States as well as six dough manufacturing and supply chain centers outside the contiguous United States.

Our financial results are driven largely by retail sales at our Company-owned and franchise stores. Changes in retail sales are driven by changes in same store sales and store counts. We monitor both of these metrics very closely, as they directly impact our revenues and profits, and strive to consistently increase the related amounts. Retail sales drive Company-owned store revenues, royalty payments from franchisees and domestic supply chain revenues. Retail sales are primarily impacted by the strength of the Domino’s Pizza ® brand, the success of our marketing promotions and our ability to execute our store operating model and other business strategies.

We devote significant attention to our brand-building efforts, which is evident in our system’s estimated $1.4 billion of domestic advertising spending over the past five years and our frequent designation as a MegaBrand by Advertising Age . We plan on continuing to build our brand and retail sales by satisfying customers worldwide with our pizza delivery offerings and by continuing to invest significant amounts in the advertising and marketing of the Domino’s Pizza ® brand.

We also pay particular attention to the store economics, or the investment performance of a store to its owner, of both our Company-owned and franchise stores. We believe that our system’s favorable store economics benefit from the relatively small initial and ongoing investments required to own and operate a Domino’s Pizza store. We believe these favorable investment requirements, coupled with a strong brand message supported by significant advertising spending, as well as high-quality and focused menu offerings, drive strong store economics, which, in turn, drive demand for new stores.

In 2007, global retail sales, which are total retail sales at Company-owned and franchise stores worldwide, increased 6.6% as compared to 2006. This increase in global retail sales was driven by strong international same store sales growth as well as growth in worldwide store counts, offset in part by a decrease in domestic franchise same store sales. In 2006, global retail sales increased 2.0% as compared to 2005. This increase in global retail sales was driven by strong international same store sales growth as well as growth in worldwide store counts.

Revenues decreased $74.3 million or 4.9% in 2006 and increased $25.6 million or 1.8% in 2007. The decline in 2006 was due primarily to lower volumes in our domestic supply chain operations and lower food prices, primarily cheese and lower Company-owned store and international revenues. The increase in revenues in 2007 was largely due to higher domestic supply chain revenues, due primarily to higher food prices, including cheese. Worldwide store counts have increased from 7,757 at the beginning of 2005 to 8,624 at the end of 2007. This growth in store counts can be attributed to the growing global acceptance of our brand and our pizza delivery concept as well as the economics inherent in our system which attracts new franchisees and encourages existing franchisees to grow their business. Domestic same store sales increased 4.9% in 2005 and decreased 4.1% and 1.7% in 2006 and 2007, respectively. International same store sales increased 6.1%, 4.0% and 6.7% during the same periods. The Company’s domestic same store sales results in 2006 and 2007 reflected a weak consumer environment and the underperformance of our product and promotional offerings during those years. Internationally, same stores sales growth continues to result from the growing acceptance of delivered pizza around the globe and the successful execution of the concept.



Income from operations increased 7.6%, from $199.1 million in 2005 to $214.2 million in 2006 and decreased 9.5% in 2007 to $193.9 million. The growth in income from operations in 2006 was primarily the result of increases in global retail sales and related profits from domestic supply chain operations, as well as decreases in general and administrative expenses. The decline in income from operations in 2007 was primarily the result of lower profits from the domestic stores and domestic supply chain operations, as well as certain recapitalization-related expenses. Net income declined 1.9% from $108.3 million in 2005 to $106.2 million in 2006 and declined 64.3% from 2006 to $37.9 million in 2007. The decline in net income in 2007 was primarily due to a $75.4 million increase in interest expense in 2007 due primarily to higher average outstanding debt balances offset in part by lower average borrowing rates, both the result of the Company’s recapitalization and the aforementioned decrease in income from operations. Net income was also negatively impacted in 2007 by $13.3 million of other expense related to the premium paid to repurchase and retire the senior subordinated notes that were tendered in the debt tender offer in connection with the 2007 recapitalization.

We are highly leveraged primarily as the result of recapitalizations in 1998, 2003 and 2007. As of December 30, 2007, consolidated long-term debt was $1.7 billion. Since 1998, a large portion of our cash flows provided from operations has been used to make principal and interest payments on our indebtedness as well as distributions to shareholders in the form of dividends and stock repurchases. Our securitized debt requires no principal payments until anticipated maturity in 2012. Overall, we believe that our ability to consistently produce significant free cash flows allows us the flexibility not only to service our significant debt but also to invest in our growing business as well as return cash to our shareholders.

Critical accounting policies and estimates

The following discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, our management evaluates its estimates, including those related to revenue recognition, allowance for uncollectible receivables, long-lived and intangible assets, insurance and legal matters and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Changes in our accounting policies and estimates could materially impact our results of operations and financial condition for any particular period. We believe that our most critical accounting policies and estimates are:

Revenue recognition . We earn revenues through our network of domestic Company-owned and franchise stores, dough manufacturing and supply chain centers and international operations. Retail sales from Company-owned stores and royalty revenues resulting from the retail sales from franchise stores are recognized as revenues when the items are delivered to or carried out by customers. Sales of food from our supply chain centers are recognized as revenues upon delivery of the food to franchisees while sales of equipment and supplies are generally recognized as revenues upon shipment of the related products to franchisees.

Allowance for uncollectible receivables. We closely monitor our accounts and notes receivable balances and provide allowances for uncollectible amounts as a result of our reviews. These estimates are based on, among other factors, historical collection experience and a review of our receivables by aging category. Additionally, we may also provide allowances for uncollectible receivables based on specific customer collection issues that we have identified. While write-offs of bad debts have historically been within our expectations and the provisions established, management cannot guarantee that future write-offs will not exceed historical rates. Specifically, if the financial condition of our franchisees were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required.

Long-lived and intangible assets. We record long-lived assets, including property, plant and equipment and capitalized software, at cost. For acquisitions of franchise operations, we estimate the fair values of the assets and liabilities acquired based on physical inspection of assets, historical experience and other information available to us regarding the acquisition. We depreciate and amortize long-lived assets using useful lives determined by us based on historical experience and other information available to us. We review long-lived assets for impairment when events or circumstances indicate that the related amounts might be impaired. When required, we perform related impairment tests on a market-level basis for Company-owned stores. At December 30, 2007, we determined that our long-lived assets were not impaired. However, if our future operating performance were to deteriorate, we may be required to recognize an impairment charge.

We evaluate goodwill annually for impairment by comparing the fair value of our reporting units to their carrying values. A significant portion of our goodwill relates to acquisitions of domestic franchise stores and is included in our domestic stores segment. At December 30, 2007, the fair value of our business operations with associated goodwill exceeded their recorded carrying value, including the related goodwill. However, if the future performance of our domestic Company-owned stores or domestic supply chain operations were to deteriorate, we may be required to recognize a goodwill impairment charge.

Insurance and legal matters. We are a party to lawsuits and legal proceedings arising in the ordinary course of business. Management closely monitors these legal matters and estimates the probable costs for the resolution of such matters. These estimates are primarily determined by consulting with both internal and external parties handling the matters and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. If our estimates relating to legal matters proved inaccurate for any reason, we may be required to increase or decrease the related expense in future periods.

For certain periods prior to December 1998 and for periods after December 2001, we maintain insurance coverage for workers’ compensation, general liability and owned and non-owned auto liability under insurance policies requiring payment of a deductible for each occurrence up to between $500,000 and $3.0 million, depending on the policy year and line of coverage. The related insurance reserves are based on undiscounted independent actuarial estimates, which are based on historical information along with assumptions about future events. Changes in assumptions for such factors as medical costs and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term which could result in an increase or decrease in the related expense in future periods.

Income taxes. Our net deferred tax assets assume that we will generate sufficient taxable income in specific tax jurisdictions, based on estimates and assumptions. The amounts relating to taxes recorded on the balance sheet, including tax reserves, also consider the ultimate resolution of revenue agent reviews based on estimates and assumptions. If these estimates and assumptions change in the future, we may be required to adjust our valuation allowance or other tax reserves resulting in additional income tax expense or benefit in future periods.

2007 compared to 2006

(tabular amounts in millions, except percentages)

Revenues. Revenues include retail sales by Company-owned stores, royalties from domestic and international franchise stores and sales of food, equipment and supplies by our supply chain centers to certain domestic and international franchise stores.

Consolidated revenues increased $25.6 million or 1.8% in 2007. This increase in revenues was due primarily to higher domestic supply chain revenues related to higher food prices, primarily cheese, as well as higher international revenues. These increases in revenues are more fully described below.

Domestic stores. Domestic stores revenues are comprised of retail sales from domestic Company-owned store operations and royalties from retail sales at domestic franchise stores, as summarized in the following table.

Domestic stores revenues increased $1.5 million or 0.3% in 2007. This increase was due primarily to higher domestic Company-owned same store sales and an increase in the average number of domestic stores open during 2007, offset in part by lower domestic franchise same store sales. These results are more fully described below.

Domestic Company-owned stores. Revenues from domestic Company-owned store operations increased $1.2 million or 0.3% in 2007. This increase was due primarily to higher same store sales. Domestic Company-owned same store sales increased 1.0% in 2007 compared to 2006. There were 571 domestic Company-owned stores in operation as of December 31, 2006 and December 30, 2007.

Domestic franchise. Revenues from domestic franchise operations increased $0.4 million or 0.2% in 2007. This increase was due primarily to a slightly higher average royalty rate and an increase in the average number of domestic franchise stores open during 2007, offset in part by lower same store sales. There were 4,572 and 4,584 domestic franchise stores in operation as of December 31, 2006 and December 30, 2007, respectively. Domestic franchise same store sales decreased 2.1% in 2007 compared to 2006.

Domestic supply chain. Revenues from domestic supply chain operations increased $20.5 million or 2.7% in 2007. This increase was due primarily to increases in cheese prices, offset in part by lower volumes related to decreases in domestic franchise same store sales. Cheese prices positively impacted revenues by approximately $51.8 million in 2007.

International. Revenues from international operations increased $3.5 million or 2.8% in 2007. This increase was due primarily to higher royalty revenues due to increases in same store sales and the average number of international stores open during 2007, offset in part by the sale of Company-owned operations in France and the Netherlands in 2006. On a constant dollar basis, same store sales increased 6.7% in 2007 compared to 2006. On a historical dollar basis, same store sales increased 12.3% in 2007 compared to 2006, reflecting a generally weaker U.S. dollar in those markets in which we compete. There were 3,223 and 3,469 international stores in operation as of December 31, 2006 and December 30, 2007, respectively.

Cost of sales / Operating margin. Consolidated cost of sales is comprised primarily of Company-owned store and domestic supply chain costs incurred to generate related revenues. Components of consolidated cost of sales primarily include food, labor and occupancy costs.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

We are the number one pizza delivery company in the United States and have a leading international presence. We operate through a network of Company-owned stores, all of which are in the United States, and franchise stores located in all 50 states and in 60 international markets. In addition, we operate regional dough manufacturing and supply chain centers in the United States and Canada.

Our financial results are driven largely by retail sales at our Company-owned and franchise stores. Changes in retail sales are driven by changes in same store sales and store counts. We monitor both of these metrics very closely, as they directly impact our revenues and profits, and strive to consistently increase the related amounts. Retail sales drive Company-owned store revenues, royalty payments from franchisees and supply chain revenues. Retail sales are primarily impacted by the strength of the Domino’s Pizza ® brand, the success of our marketing promotions and our ability to execute our store operating model and other business strategies.

Global retail sales growth in 2008, comprised of retail sales results at both our franchise and Company-owned stores worldwide, was driven primarily by same store sales growth in our international markets as well as a net increase in our worldwide store counts during the trailing four quarters. The decreases in domestic same store sales during the third quarter and first three quarters of 2008 were due primarily to continued challenges in our domestic business, a weak consumer environment and continued strong competition on a national, regional and local scale. International same store sales growth reflects continued strong performance in the key markets where we compete. Additionally, we grew our worldwide net store counts by 55 and 216 stores during the third quarter of 2008 and trailing four quarters, respectively.

Revenues decreased $13.7 million, or 4.1%, in the third quarter of 2008 and decreased $20.0 million, or 2.0%, in the first three quarters of 2008. These decreases were driven primarily by lower domestic Company-owned store and domestic franchise revenues, driven primarily by lower same store sales and lower domestic supply chain revenues, due primarily to lower volumes. These decreases were offset in part by increases in international revenues due primarily to higher international same store sales and increased store counts, both of which resulted in increased royalty and international supply chain revenues.

Income from operations decreased $3.6 million, or 8.1%, in the third quarter of 2008 and increased $5.3 million, or 3.9%, in the first three quarters of 2008. The decrease in the third quarter of 2008 was due primarily to lower margins in our Company-owned store and domestic supply chain businesses as well as a decrease in domestic franchise same store sales. This decrease was offset in part by $1.8 million of gains recorded on the sale of three Stores to franchisees and continued strong performance in our international business. The increase during the first three quarters of 2008 was primarily due to lower income from operations in the prior year, when we incurred higher expenses associated with the Company’s recapitalization and recorded a $5.0 million reserve related to certain legal matters in California. Additionally, the first three quarters of 2008 benefited from $13.0 million of gains on the sale of 59 Stores to franchisees and continued strong performance in our international business. These increases were offset in part by lower margins in our Company-owned store and domestic supply chain businesses, as well as a decrease in domestic franchise same store sales. Additionally, the first three quarters of 2008 were negatively impacted by approximately $1.4 million of separation and other costs related primarily to the Company’s previously announced and executed restructuring action.

Net income decreased $0.9 million from the third quarter of 2007 and increased $21.2 million from the first three quarters of 2007. The decrease in the third quarter was driven primarily by the aforementioned decreases in income from operations, offset in part by a lower effective tax rate resulting from reserve adjustments related to the settlement of certain state income tax matters. The net income increase in the first three quarters of 2008 was primarily due to the comparison to lower net income amounts in the prior year period, when we incurred higher expenses associated with the Company’s recapitalization. These expenses included a $13.3 million premium paid to repurchase and retire then-outstanding notes and the write-off of deferred financing fees and bond discount related to extinguished debt. These net income increases in the first three quarters of 2008 were offset in part by higher ongoing interest expense associated with increased debt under our new capital structure and higher estimated interest income earned in the comparable periods in 2007 on funds received in connection with the Company’s recapitalization.

Domestic Company-Owned Stores Revenues

Revenues from domestic Company-owned store operations decreased $11.5 million, or 12.8%, in the third quarter of 2008 and decreased $21.7 million, or 7.8%, in the first three quarters of 2008. These decreases were due primarily to lower domestic Company-owned same store sales and a decrease in the average number of domestic Company-owned stores open during 2008 primarily as a result of store divestitures to franchisees. Domestic Company-owned same store sales decreased 3.4% and 2.2% in the third quarter and first three quarters of 2008, respectively, compared to an increase of 0.8% and 1.9% in the third quarter and first three quarters of 2007. There were 512 Company-owned stores in operation at the end of the third quarter of 2008 compared to 565 at the end of the third quarter of 2007.

Domestic Franchise Revenues

Revenues from domestic franchise operations decreased $1.1 million, or 3.2%, in the third quarter of 2008 and decreased $3.6 million, or 3.3%, in the first three quarters of 2008. These decreases were due primarily to lower same store sales. Domestic franchise same store sales decreased 6.4% and 6.0% in the third quarter and first three quarters of 2008, respectively, compared to a decrease of 2.0% and 1.3% in the third quarter and first three quarters of 2007. There were 4,574 domestic franchise stores in operation at the end of the third quarter of 2008 compared to 4,571 at the end of the third quarter of 2007.

Domestic Supply Chain Revenues

Revenues from domestic supply chain operations, formerly referred to as domestic distribution, decreased $5.9 million, or 3.2%, in the third quarter of 2008 and decreased $12.5 million, or 2.3%, in the first three quarters of 2008. These decreases were due primarily to lower volumes, related to decreases in domestic same store sales and were offset in part by an increase in overall food prices. The published cheese block price-per-pound averaged $1.98 and $1.94 in the third quarter and first three quarters of 2008, respectively, up from $1.95 and $1.60 in the comparable periods in 2007. Had the 2008 average cheese prices been in effect during 2007, domestic supply chain revenues for the third quarter would not have been materially different than the reported 2007 amount while domestic supply chain revenues for the first three quarters of 2007 would have been approximately $17.3 million higher than the reported 2007 amount.

International Revenues

Revenues from international operations increased $4.7 million, or 16.5%, in the third quarter of 2008 and increased $17.8 million, or 21.6%, in the first three quarters of 2008, comprised of a $2.2 million and $7.7 million increase, respectively, in royalty and other revenues and a $2.5 million and $10.1 million increase, respectively, in supply chain revenues. These increases are primarily due to higher same store sales and an increase in the average number of international stores open during 2008. On a constant dollar basis, same store sales increased 5.4% and 7.0% in the third quarter and first three quarters of 2008, respectively, compared to an increase of 8.3% and 5.4% in the third quarter and first three quarters of 2007. On a historical dollar basis, same store sales increased 7.7% and 12.1% in the third quarter and first three quarters of 2008, respectively, reflecting a generally weaker U.S. dollar in those markets in which we compete. There were 3,640 international stores in operation at the end of the third quarter of 2008, compared to 3,374 at the end of the third quarter of 2007.


CONF CALL

Lynn M. Liddle

With me here today are Dave Brandon, our Chief Executive Officer, and Wendy Beck, our Chief Financial Officer.

We have some prepared remarks and then we’re going to follow that with Q&A. We are going to end on or before Noon, but before we begin I have a couple of brief comments.

One is to have you refer to our safe harbour statement in our press release and our 10Q so that in the event we make any forward-looking statements that you can take a look at that. And then also I would ask the media to be in a listen-only mode.

With that I’d like to start with Wendy Beck, Chief Financial Officer.

Wendy A. Beck

As you all know from our filings this morning, we once again experienced challenges this quarter in our domestic environment while continuing to generate strong international growth.

Starting with the top line, please remember that revenues are low and do not necessarily give you the complete picture of our top-line growth and instead consider global retail sales as a clearer gauge of overall sales and store growth performance.

Our global retails sales increased 2.4% during the third quarter. This was driven primarily by same-store sales growth in our international business and an increase in world-wide store counts of 55 net units during the third quarter and 216 net units over the trailing four quarters. Our international division now operates in 60 markets, including recently opened stores in Indonesia and Qatar.

Same-store sales. Domestically our sales decreased 6.1% for the quarter compared with a negative 1.6% comp in the third quarter of 2007. Company-owned stores decreased 3.4%, rolling over a positive 0.8% in the third quarter of 2007. While franchise same-store sales decreased 6.4% rolling over a negative 2% in the third quarter of 2007.

International same-store sales, however, increased 5.4% over last year’s comp of a very strong positive 8.3%. This marks the 59th consecutive quarter of international same-store sales growth. As a result, our total revenues for the third quarter were $323.6 million, a $13.7 million or 4.1% decrease from prior year.

Company-owned store revenues declined $11.5 million or 12.8% primarily due to a lower store count from store divestitures earlier this year, as well as lower same-store sales. The loss of sales from the store divestitures was approximately $9.4 million.

Domestic franchise revenues declined $1.1 million or 3.2% due to lower same-store sales and domestic supply chain revenues declined $5.9 million or 3.2% due to lower volume. This was offset in part by higher revenues due to higher pass through commodity costs.

Offsetting these declines was a $4.7 million or 16.5% increase in international revenue due to higher same-store sales and increased store counts.

Moving on to our operating margin. Our consolidated operating margin as a percentage of revenue decreased 0.6% in the third quarter versus the prior year period.

[Break in Recording]

There were essentially three main operating margin variances. First, our company-owned store operating margin declined 4.6% from the prior year period which accounted for 1.2% of the consolidated operating margin decline. Food, labour, and delivery costs accounted for over 60% of the decline with occupancy costs accounting for most of the remainder.

Second, our supply chain margin declined 0.2% from the prior year quarter which had a minimal impact on our consolidated operating margin. The supply chain margin decline was due primarily to the increase in pass through costs on other non-cheese commodities such as wheat, meats, and sauces. This had no impact on dollar margins. Dollar margin was negatively impacted due to reduced volume from lower same-store sales and traffic declines, as well as increased costs for fuel.

Third, a change in the blend of our revenue had a positive impact on our margin this quarter. We had a greater percent of our revenue from our international franchise business this year, which has a 100% gross margin, and a lower percent of our revenue from our company-owned stores. This change in blend improved our consolidated margin by 0.6%.

Now let’s look at our G&A expenses. G&A decreased $1.7 million or 4.2% in the quarter versus the prior year; $1.8 million of the decrease is non-recurring relating to the gain on the sale of three stores sold in California as part of our previously announced California store divestiture plan. Including the three stores sold during the third quarter we have sold 59 stores year to date. These details are also outlined in the items affecting comparability table in our earnings release. Excluding this non-recurring activity G&A would have been essentially flat.

While we did experience lower advertising expense due to the store divestitures and lower variable labour expense, our bad debt expense did increase in 2008. Having said that, the company continued to collect over 99% of domestic franchise royalty and domestic supply chain receivables during the third quarter and year to date. Believe me, we are all over aggressively managing our G&A in this challenging environment.

Now let’s look at our leverage. I’m thrilled to report that this quarter marks the first quarter that we do not have comparability issues with our debt structure. Given the uncertainty in today’s debt markets, we are very pleased to have a debt facility in place with a blended fixed cash interest rate of 6.06% through 2012 with two possible one-year extensions.

As for our tax rates, our effective rate was 30.7% in the third quarter. We recorded approximately $1.6 million of tax reserve reversals related to certain state income tax matters. This reduced our effective rate for the quarter and is also outlined in the items affecting comparability table in the earnings release. However, as previously indicated, we currently anticipate approximately a 40% normalized rate in the foreseeable future.

Now let’s look at bottom line earnings. Our third quarter diluted EPS as reported on a GAAP basis was $0.17 or $0.13 when adjusted for items affecting comparability. The $0.13 of adjusted EPS figure is a $0.04 decrease from the $0.17 in 2007. Our operating results negatively impacted us by $0.05 for the quarter. This was all driven by the lower domestic sales that we’ve experienced. Our EPS benefited $0.01 from the lower share count in the quarter versus 2007, primarily resulting from our share repurchases. Please note, our 2007 recap did not impact the comparison during the quarter.

As stated in our earnings release, we repurchased approximately $1.1 million shares of our common stock under the share repurchase program for $12.8 million during the quarter or $12 per share. Additionally, on a year-to-date basis, we have returned $41.1 million to our share holders and $95.5 million life-to-date under our share repurchase program. We have now completed 48% of our repurchase authorization. Due to the anticipated impact of recent events in the credit markets which we’ll discuss in a minute, we plan to build our cash reserves and will continue to evaluate the share repurchase program.

Now let’s look at our liquidity. As of the third quarter we had $20.1 million of unrestricted cash. Subsequent to the third quarter, Lehman Brothers, our primary provider of our revolver, declared bankruptcy. As a result, our ability to draw upon the $150 million revolver has likely been reduced, but we are actively monitoring the bankruptcy proceedings. Lehman’s share of the $150 million revolver was $90 million. If we cannot borrow under this agreement and we are unable to secure replacement financing from other parties for the $90 million our availability will be reduced to $60 million, of which approximately $38.3 million is already committed under letters of credit giving us a net availability of approximately $21.7 million. The company has historically not needed or used the revolver for working capital requirements. We believe that our current unrestricted cash balance, our expected ongoing free cash flow generation, and our estimated $21.7 million availability under the revolver is more than sufficient to fund our operations for the foreseeable future. However, as I mentioned earlier, we plan to build our cash reserves during these unprecedented times and we’ll be conservative and prudent with our cash.

In closing, despite a challenging year we continue to generate positive free cash flow of $25.8 million year to date and continue to grow our global system as we have great momentum within our international division with both strong sales and store growth. We have a proven business model that is resilient, even during these challenging times. We also have a long-term fixed rate favourably priced debt structure that has a [inaudible]. In addition, we are taking action to ensure we are well positioned for growth when the domestic environment stabilizes.

This concludes our financial update. I’d now like to turn it over to Dave.

David A. Brandon

We entered the third quarter knowing it was going to be a difficult quarter for us. We had virtually no sales momentum going into the quarter. We had fewer national weeks on TV than we had a year ago by nearly 50% and this was at the same time it became very apparent to us that our national competitors were stepping up their spending considerably. Our main national topic was a movie property and something I would describe as more of a gimmick-limited, time-only pizza product for our national promotion. We had committed to that a year earlier and it clearly wasn’t a great fit for the sales environment that we face.

We experienced a peak in cheese costs. We incurred another increase in federal minimum wage. We saw tremendous volatility and spikes in fuel costs. And we knew the benefit we would get from our introduction of oven-baked sandwiches wasn’t going to begin until the fourth quarter. So it was a lousy quarter. In fact, it was a quarter that I can best describe as one of those that if it could go wrong it did go wrong. And I take full responsibility for it.

Now let me share with you what we’re doing to improve our outcomes in the fourth quarter. First off, I’d like to start with our new product platform introduction: oven-baked sandwiches. This is a big new product introduction for us and one of the quickest products to go from concept to test to national rollout in the history of our company.

While sandwiches are not a panacea for all of the problems that we face, they are a huge launch for our brand that has our franchisees national wide more excited about a new product line than they’ve been in years. And they’re doing a great job of really working this product hard with local store marketing, sampling programs, and a keen eye on operations. Our team members are very eager to sell these products because they’re great. And so far this launch has given us promising indications that we’re on the right track with this exciting new line of permanent products on the Domino’s menu.

In the first seven weeks of our rollout, when we had no national TV and we were still just ramping up to have the product available in all of our domestic stores, we sold nearly 5 million sandwiches. That’s already about $25 million in sandwich sales before we really got started. That was without any benefit of national TV support. We will likely sell a million sandwiches a week during our national promotion, and that’s in addition to the pizzas, chicken wings, and breadsticks we will also be selling.

Significantly, sandwiches have increased our store traffic, which has been on a decline along with most of the rest of the industry, for a long period of time. Plus, we’ve expanded our lunch opportunity. Every Domino’s Pizza store in the US is now open for lunch, which is becoming an increasing valuable day part. The dinner day part has been suffering from recent consumer economic malaise, but the lunch day part has held up better. Sandwiches are a huge part of our lunch and, interestingly, our dinner sales as well. We’ll take all the incremental sales we can get at this particular time.

All that said, I would like to caution you to remember that there are no silver bullets in this business. As I stated at the outset, sandwiches are not a panacea to solve every ill of our current domestic environment. We have only been on national TV for two weeks and it’s still in its early days. But sandwiches, and it’s important for you to remember that sandwiches are a lower ticket item which will make it tough for them alone to drive enough business to overcome a string of negative comps. We have lots of work to do to get back to positive domestic sales comps and sandwiches are just one of the levers we’re using in that effort, but I want to emphasize it’s an important lever. Not the only lever, but a very important one.

So in addition to sandwiches our team is also filling our product pipeline with more new products than I’ve seen in years. These are not one-time, limited-time only type products that they’re developing and testing. These are products designed to become permanent menu layers that will improve our product variety, our brand quality, and our consumer brand impressions. We’re also developing and testing more value oriented promotions and products than we’ve ever had in our pipeline. And considering the current economic environment, we’re convinced this is the right path to follow.

To ensure that we have the ability to shout very loudly about upcoming product and promotion news we plan to have a much more significant presence on national TV in 2009. We plan to have a much greater share of voice in our category at the national level and we are going to launch our menu expansion with more weeks of television than we had in 2008. We know our franchisees agree that more television exposure, particularly for our new products and promotions, will be a good thing. Particularly in a year where we will likely be facing a continued difficult consumer environment.

We’re also continuing to develop our technological edge with on-line ordering now making up over 20% of our Team USA orders and with franchise stores not far behind. We expect this percentage to continue to grow, which is positive for our business.

My team and I believe that one of the most important tasks we’re undertaking is to revitalize our brands and refresh our franchise system, placing a strong focus on making sure our franchise base is where we need it to be for success going forward and that we have the right franchise partners in place, particularly in our domestic business.

Admittedly, a shakeout is happening right now and it’s a bit painful at the moment. Exiting ex-franchisees from the system is hard on everyone and with the credit markets where they are right now, getting stores turned over to new franchisees has become even more difficult. It’s paramount that we work hard with lenders to get credit lines opened up so that this turnover of the store base continues to move along at the rate and pace we need. It’s important that we recognize that all store operators, regardless of grade, are under pressure in today’s environment.

Being lower EBIDTA margins as franchise P&L gets squeezed by a touch sales environment and higher commodity and labour costs. We know from a recent rollup of the 2007 self reported franchise P&L that EBIDTA margins were down from traditional levels, putting additional strain on unit economics. Plugging in some projections for 2008, we expect this year will be worse. It’s hard on our operators out there right now, and we expect that and we’re doing everything we can to address the issue.

We’re working hard to assist ex-franchisees who want to stay in the system and improve to an A or a B. Our former interim CFO Bill Kapp, who is a very respected leader and a 20-year veteran of our company, is leading this most important project. He’s in the trenches working with banks and other lending institutions to get the sale of stores executed and to create workout plans so that those with marginal stores who need bank support to turn their stores around have the capital to do it.

I’ve promised you an update on a quarterly basis as to where we stand relative to those A, B, and F franchisees and here’s where we are as of the moment. Of the 247 original F rated franchisees we’re happy to report that 111 of them have recommitted to the brand and are doing everything they can do to earn their way back into the system as a permanent member, and many of them are making substantial progress. Right now 75 franchisees are in the process of selling their stores. Fourteen are still working out their options. We have removed 47 of those F franchisees from the system. Twenty-two of them left during the third quarter. The F franchisees who committed to stay are performing better overall, both operationally as well as their sales trends. We’re continuing our efforts to keep them moving along to a more positive outcome.

Our goal is to not allow marginal stores to be operated at sub-standard levels. Most of them are owned by F franchisees, but some are not. Even our strong franchisees are feeling the pressure of marginal stores. As we work through the tough market for selling stores it makes it difficult to project what our total number of US store closures will be this year. In Q2 we said that the US could be down by 50 to 75 net stores domestically. From where I sit today I hesitate to try to update that range except to say I expect it will be higher than that. We do expect to open approximately 100 new domestic stores during this year. However, market conditions will dictate what the final net domestic store growth number will be at year end.

All of that notwithstanding, we still expect our worldwide net store growth numbers to be very positive thanks to the continued strong store growth in our international markets. Unfortunately, our final net store growth for 2008 will be less than the 200 to 250 range we have established as normal annual net store growth for our system.

Speaking of our international business, I continue to not only be impressed by the growth and drive of this division, but what I see on the ground when I visit these countries. I recently travelled in five countries from Turkey to France to the UK, Ireland, and Mexico, touring many stores and meeting with many franchisees. The most impressive thing that I observed was the energy in the stores. I saw franchisees and team members proudly growing their business by providing great products and services to their customers. I saw aggressive marketing both at the local level and the national level. I saw well located stores with strong brand imaging and strong operations. That’s the basic formula. It’s no wonder we’ve been enjoying consistent growth from our international division because in my opinion they are operating at a very high level.

Another strength of our international business model is what we truly refer to as our portfolio of countries. We tend to discuss international as if it’s one unified market. It’s not. It’s 60 different markets with 60 different market conditions. That means when one market is weak typically we can figure out a way to get another market to grow faster and offset it with strength.

We’ve been asked lately if we’re seeing a slowdown in our global business and the current answer to that question is best found in the outstanding results our international business achieved in the third quarter. However, we’ll continue to stay focused as we know global markets are being impacted more and more by the unstable financial markets, a higher commodity cost pressures, and in many cases reduced consumer confidence.

One thing that may work against us in many countries in the weeks or months ahead is the recent strengthening of the US dollar, which could impact our reported earnings going forward as we have benefited from a weaker dollar in past years. Despite whatever challenges we may need to confront in our international business we still expect robust sales and store growth going forward.

Before I go to questions I just want to say that despite the fact that commodities are high, consumers are scared, stores are battling tough trends, Domino’s Pizza is still producing ample free cash flow. Right now, as Wendy mentioned, I believe hanging on to that cash is the prudent decision. We will be building our cash reserves over the next several weeks until we feel the markets are more stable and the debt markets are becoming more receptive to the needs of our franchisees.

It will never be my preference to provide financing to our franchisees. We would rather keep our relationship with them focused on being the franchisor rather than their bank. However, we are wading through uncharted waters and we are not going to let our A and B franchisees fail if there are ways we can be helpful with some short-term financial support and solutions. We will be monitoring this situation carefully in the weeks ahead and invest capital, as always, that are in the best ways in the long-term interest of our shareholders.

And finally, an important reminder to you all. We’re working on some of our weaker franchisees. We’re working on some franchisees that are not operating at the level or the standard required in the environment that we’re in. I want to be sure to put on the record that we still have a talented, experienced core group of domestic franchisees and they have not only the talent but the experience and the passion to get their businesses turned around. And we’re working well together with them to make that happen.

With that, I’d like to open up the call for questions.

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