Domino’s Pizza, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Domino’s reported results for the 12-week fiscal quarter and 36 fiscal weeks ended September 11, 2022, compared with September 12, 2021. The company operated more than 19,500 stores in over 90 markets, with approximately 98% of global stores operated by franchisees. The filing was signed October 13, 2022.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 36 Weeks 2022 | 36 Weeks 2021 |
|---|---|---|---|---|
| Total revenue | $1,068.6 million | $998.0 million | $3,144.9 million | $3,014.2 million |
| Gross margin | $381.9 million; 35.7% | $385.2 million; 38.6% | $1,136.7 million; 36.1% | $1,182.0 million; 39.2% |
| Income from operations | $176.5 million; 16.5% | $180.3 million; 18.1% | $519.1 million; 16.5% | $557.7 million; 18.5% |
| Net income | $100.5 million | $120.4 million | $294.0 million | $354.8 million |
| Diluted EPS | $2.79 | $3.24 | $8.11 | $9.30 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $330.2 million | $484.6 million |
Q3 revenue increased 7.1%, while net income declined 16.5% and diluted EPS declined 13.9%. For the first 36 weeks, revenue increased 4.3%, while income from operations declined 6.9%, net income declined 17.1%, and diluted EPS declined 12.8%.
At September 11, 2022, unrestricted cash and cash equivalents were $114.8 million; restricted cash was $184.6 million; and advertising fund assets were $181.2 million. Total long-term debt, including the current portion, was approximately $5.15 billion. Stockholders’ deficit was $4.32 billion.
Material changes versus the prior comparable period
- Global retail sales, excluding foreign currency effects, increased 4.7% in Q3 and 3.2% for the first 36 weeks. U.S. retail sales increased 4.1% and 0.7%, respectively; international retail sales increased 5.2% and 5.7%, respectively.
- U.S. same-store sales increased 2.0% in Q3 but declined 1.6% for the first 36 weeks. International same-store sales, excluding currency effects, declined 1.8% and 0.8%, respectively.
- Supply chain revenue increased 9.7% in Q3 and 8.1% for the first 36 weeks, primarily from higher market-basket pricing. Pricing to stores increased 13.4% and 13.5%, respectively, while order volumes were lower.
- International franchise royalties and fees declined 5.0% in Q3 and 2.1% for the first 36 weeks, primarily reflecting unfavorable foreign exchange effects of $7.9 million and $18.0 million, respectively.
- Gross margin declined 2.9 percentage points in Q3 and 3.1 percentage points for the first 36 weeks. Management attributed the pressure primarily to food, labor, delivery, fuel, utility and insurance inflation, as well as lower sales leverage.
- U.S. Company-owned store gross margin declined to 12.3% in Q3 from 19.8% and to 14.8% for the first 36 weeks from 22.8%, driven by higher food and labor costs and lower same-store sales.
- The effective tax rate increased to 23.8% in Q3 from 10.7% and to 23.3% for the first 36 weeks from 17.4%, partly because of lower excess tax benefits from equity-based compensation and lower foreign tax credits.
- Operating cash flow declined $154.4 million for the first 36 weeks, primarily because of unfavorable working-capital and advertising-fund changes and lower net income.
- The company opened 225 net stores in Q3, including 24 in the U.S. and 201 internationally, bringing year-to-date net openings to 671 and the total store count to 19,519.
Capital allocation, liquidity and unusual items
- The company repurchased 739,847 shares for approximately $293.7 million during the first 36 weeks, with approximately $410.4 million remaining under the authorized program at September 11, 2022.
- Dividends paid during the first 36 weeks totaled $79.7 million. A subsequent $1.10-per-share quarterly dividend was declared for payment December 30, 2022.
- Financing activities used $304.3 million during the first 36 weeks, including share repurchases, dividends and debt repayments, partially offset by $120.0 million of variable-rate borrowings.
- The 2021 variable funding facility had $120.0 million drawn and $35.8 million of available capacity, net of letters of credit, at quarter-end. The company subsequently repaid $60.0 million and established a new $120.0 million 2022 variable funding facility, which was undrawn at issuance.
- Subsequent to quarter-end, the company sold 114 U.S. Company-owned stores in Arizona and Utah for $41.1 million and expected to record a gain in Q4 2022; accounting remained in process when the financial statements were issued.
- The company purchased 23 U.S. franchised stores for $6.8 million during the first quarter of 2022.
Outlook, commentary and risks
The filing does not provide formal numerical revenue, earnings or same-store-sales guidance. Management expects to use unrestricted cash, operating cash flow and available variable funding capacity to fund working capital, business investments, debt service, dividends and share repurchases, but cautions that future cash flows and borrowing availability may not be sufficient for all anticipated uses.
Key risks include substantial leverage and refinancing requirements; variable-rate exposure and the transition from LIBOR to SOFR; food, fuel, labor, utility and insurance inflation; labor shortages; supply-chain disruptions; intense competition; foreign exchange volatility; weaker consumer spending; franchisee execution and financial health; technology and cybersecurity failures; litigation; regulatory changes; severe weather, health events, war and other catastrophic events.
Management stated that there were no material changes to previously disclosed risk factors, no material legal proceedings affecting the company’s financial position, and no material changes to internal control over financial reporting. A hypothetical 10% adverse foreign-currency movement would have reduced first-36-week royalty revenue by approximately $18.0 million.
Most important facts for investors to verify
- Whether inflation and labor pressures continue to reduce company-owned-store and supply-chain margins.
- The company’s ability to service or refinance approximately $5.15 billion of debt, including scheduled principal payments of approximately $1.17 billion in 2025 and $1.31 billion in 2027.
- Compliance with debt covenants, including the minimum 1.75x debt-service coverage requirement and leverage-related amortization provisions.
- Whether U.S. and international same-store sales recover after declines over the first 36 weeks and whether store openings translate into sustainable retail-sales growth.
- The effect of foreign exchange movements, LIBOR-to-SOFR transition terms and variable-rate borrowings on interest expense and cash flow.
- The final accounting and expected gain from the post-quarter-end sale of 114 company-owned stores.
- Whether continued share repurchases and dividends remain appropriate given declining operating cash flow and the company’s highly negative stockholders’ equity.