Business Context and Reporting Period
Company: Domino's Pizza, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 14, 2009 (Second Fiscal Quarter)
Business Overview: Domino's operates as the number one pizza delivery company in the United States with a leading international presence. The company operates through a network of company-owned stores (all in the U.S.) and franchise stores in 50 states and over 60 countries. It also manages regional dough manufacturing and supply chain centers.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 (2 Quarters) | YTD 2008 (2 Quarters) |
|---|---|---|---|---|
| Total Revenues | $316.6 million | $334.3 million | $638.5 million | $673.4 million |
| Net Income | $14.5 million | $18.7 million | $38.3 million | $32.8 million |
| Earnings Per Share (Diluted) | $0.25 | $0.32 | $0.67 | $0.55 |
| Operating Margin | 27.1% | 26.2% | 27.4% | 26.1% |
| Cash from Operations (YTD) | $29.1 million | $43.6 million | $29.1 million | $43.6 million |
| Total Debt (Long-term + Current) | $1.66 billion | $1.70 billion | $1.66 billion | $1.70 billion |
| Cash & Equivalents (Unrestricted) | $61.7 million | $37.0 million | $61.7 million | $37.0 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 5.3% in Q2 2009 and 5.2% YTD compared to 2008. This was driven by lower company-owned store revenues (due to 2008 divestitures), lower domestic supply chain revenues (due to lower cheese prices), and negative foreign currency impacts on international revenues.
- Operating Income: Income from operations decreased 24.7% in Q2 2009 ($40.3M vs $53.6M) and 17.2% YTD. The decline is largely attributed to the absence of $6.9M and $11.2M in gains from the sale of company-owned stores recorded in the comparable 2008 periods.
- Net Income Volatility: While Q2 net income decreased 22.4% year-over-year, YTD net income increased 16.6%. The YTD increase was primarily driven by a $34.1 million pre-tax gain on the extinguishment of debt, which offset lower operating income.
- Same Store Sales: Global retail sales declined 4.7% in Q2 2009. Domestic company-owned same store sales fell 3.3% in Q2, while international same store sales grew 4.1% (constant currency).
- Debt Reduction: The company repurchased and retired $25.0 million of principal in Q2 2009 and $68.3 million YTD, resulting in significant pre-tax gains on debt extinguishment.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that domestic same store sales were negatively impacted by economic challenges and a public relations incident in Q2. However, the company achieved positive domestic same store sales for the first two quarters combined. International growth remains strong with a net addition of 164 stores in Q2.
- Stock Option Expenses: The company incurred approximately $4.9 million in expenses related to a stock option exchange program and retirement provision amendments in the first two quarters of 2009.
- Liquidity: The company maintains working capital of $39.9 million (excluding restricted cash) and $61.7 million in unrestricted cash. Management believes cash flows from operations are sufficient to fund operations and debt service for the foreseeable future.
- Risks: Key risks include high levels of long-term indebtedness, volatility in food commodity prices (specifically cheese), consumer spending patterns, and the impact of foreign currency fluctuations. The company also faces risks related to litigation and franchisee profitability.
- Subsequent Events: Following the quarter-end, the company entered a new Letter of Credit agreement for up to $50.0 million and borrowed an additional $35.1 million on variable funding notes, leaving no availability on that facility.
Investor Verification Checklist
- Debt Extinguishment Gains: Verify the sustainability of net income given the $34.1 million one-time gain on debt repurchases included in YTD results.
- Domestic Same Store Sales: Monitor the trend of domestic same store sales, which turned negative in Q2 (-3.3%) after being positive YTD (+0.1%), to assess the impact of the public relations incident and economic conditions.
- Debt Levels: Review the company's ability to service approximately $1.66 billion in debt, particularly given the reduction in available borrowing capacity on variable funding notes.
- Stock Option Costs: Assess the impact of the $4.9 million in stock option-related expenses on future operating margins.
- Foreign Currency Impact: Evaluate the sensitivity of international revenues to the strengthening U.S. dollar, which significantly reduced reported international revenue growth.