DOMINOS PIZZA INC quarterly report, Q1 FY2022

Domino’s Pizza, Inc. — Q1 2022 Form 10-Q Summary

Business Context and Reporting Period

Domino’s is primarily a franchisor, with approximately 98% of its more than 19,000 global stores operated by franchisees across over 90 markets as of March 27, 2022. Revenue is generated from U.S. company-owned stores, franchise royalties and fees, U.S. franchise advertising, and supply-chain sales of food, equipment and supplies.

The filing covers the 12-week fiscal quarter ended March 27, 2022, compared with the quarter ended March 28, 2021. The interim financial statements are unaudited.

Financial Performance and Key Metrics

Metric	Q1 2022	Q1 2021	Change
Total revenues	$1,011.1 million	$983.7 million	+2.8%
Operating margin	$368.6 million; 36.5%	$389.2 million; 39.6%	Down $20.6 million; margin down 3.1 points
Income from operations	$164.5 million; 16.3% of revenue	$186.5 million; 19.0%	-11.8%
Income before taxes	$117.7 million	$149.6 million	-21.3%
Net income	$91.0 million; 9.0% of revenue	$117.8 million; 12.0%	-22.8%
Diluted EPS	$2.50	$3.00	-16.7%
Net cash from operating activities	$78.8 million	$152.9 million	Down $74.1 million

Global retail sales, excluding foreign currency effects, increased 3.6%; U.S. retail sales declined 1.4% and international retail sales increased 8.4%.
U.S. same-store sales declined 3.6%, including a 10.5% decline at company-owned stores and a 3.2% decline at franchise stores. International same-store sales increased 1.2%, excluding foreign currency effects.
Supply-chain revenue increased 7.3% to $609.5 million, primarily due to an 11.9% increase in market-basket pricing to stores. Supply-chain operating margin declined to 8.9% from 10.5%.
International franchise royalties and fees increased 3.1% to $68.8 million, although foreign currency movements reduced revenue by approximately $4.3 million.
General and administrative expense increased 6.8% to $97.5 million, driven primarily by higher labor costs, equity-based compensation and software amortization.
Interest expense increased 18.8% to $46.9 million because of higher average borrowings following the 2021 recapitalization. The weighted-average borrowing rate decreased to 3.7% from 3.9%.
The effective tax rate increased to 22.7% from 21.3%.

Liquidity, Debt and Capital Allocation

Cash and cash equivalents were $165.0 million at March 27, 2022. Total restricted cash was $168.2 million, and advertising fund restricted assets were $175.5 million; these restricted amounts are not generally available for corporate purposes.
Working capital was $90.8 million, excluding restricted cash, advertising fund assets and related advertising fund liabilities.
Total long-term debt was approximately $5.06 billion, including $55.6 million classified as current. The balance sheet reported total liabilities of $5.87 billion and a stockholders’ deficit of $4.20 billion.
The company had no outstanding borrowings under its $200.0 million variable funding note facility and had $155.8 million of available capacity after letters of credit.
Cash used in investing activities was $20.6 million, including $12.5 million of capital expenditures and $6.8 million to acquire 23 U.S. franchised stores.
Cash used in financing activities was $62.1 million, including $47.7 million of share repurchases and $13.9 million of debt and finance-lease repayments.
Domino’s repurchased 100,810 shares for approximately $47.7 million during the quarter. Approximately $656.4 million remained available under the $1.0 billion repurchase authorization.
The board declared a $1.10 per share quarterly dividend payable June 30, 2022.

Material Changes Versus the Prior Comparable Period

Revenue growth was led by supply-chain pricing and international franchise growth, but U.S. sales weakened materially after strong prior-year performance.
Profitability contracted because of inflation in food, labor and fuel costs, labor shortages, lower sales leverage and unfavorable insurance claims experience.
U.S. company-owned store operating margin fell to 15.9% from 23.9%; food costs rose to 30.9% of store revenue and labor costs rose to 30.8%.
Operating cash flow fell 48.5%, reflecting lower net income, unfavorable working-capital timing and advertising-fund payments exceeding contributions.
Average diluted shares declined from approximately 39.2 million to 36.4 million, partially offsetting the earnings decline on a per-share basis.
Domino’s opened 257 stores and closed 44 during the quarter, for net growth of 213 stores. The ending store count was 19,061, including 12,464 international stores.
The company purchased 23 franchised stores, transferring them into the U.S. company-owned store base.

Outlook, Commentary, Risks and Unusual Items

Management did not provide specific numeric earnings, sales or margin guidance in the filing. Management expects to use unrestricted cash, operating cash flow, excess recapitalization proceeds and available variable-note capacity to fund operations, capital expenditures, debt service, dividends and share repurchases.

Management cited labor shortages, inflation in food, fuel and labor, supply-chain pressures, aggressive competition and the absence of prior-year U.S. pandemic-related stimulus as key pressures on results.
The company reported its 113th consecutive quarter of positive international same-store sales, excluding foreign currency effects, and continued its global expansion strategy.
Debt agreements include financial and non-financial covenants, including a minimum 1.75x debt-service-coverage ratio. Failure to satisfy certain covenants could accelerate debt repayment.
Fixed-rate debt creates refinancing risk, while variable-rate borrowings expose the company to interest-rate risk and the transition from LIBOR to SOFR. There were no variable-note borrowings outstanding at quarter-end.
A hypothetical 10% adverse foreign-currency movement would have reduced first-quarter international royalty revenue by approximately $6.2 million.
The company had approximately $63.0 million of additional lease commitments for a supply-chain center and certain vehicles expected to commence in 2022.
Management stated that ordinary-course legal proceedings, including workers’ compensation, liability, franchise, employment and tax matters, are not expected to materially affect the company.
The filing reports no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.

Important Facts for Investors to Verify

Whether U.S. same-store sales and order counts recover as labor availability and consumer conditions change.
The persistence of food, labor, fuel, insurance and other inflationary pressures and their effect on company-owned and supply-chain margins.
Debt maturities, covenant compliance, refinancing needs and the company’s ability to sustain debt service alongside dividends and repurchases.
Operating cash-flow conversion, particularly working-capital movements and advertising-fund cash requirements.
The pace and profitability of international store expansion, including temporary international store closures and foreign-currency effects.
The effect of the 23 acquired company-owned stores on future revenue, margins and capital requirements.
The carrying value and future valuation of the $125.8 million investment in DPC Dash, which has no readily determinable fair value.