Domino’s Pizza, Inc. Form 10-K Summary
Reporting period: Fiscal year ended January 3, 2021. Fiscal 2020 included 53 weeks, compared with 52 weeks in fiscal 2019. The filing is an annual report rather than a standalone fourth-quarter filing.
Business context
Domino’s is primarily a franchisor, with approximately 98% of its more than 17,600 global stores operated by independent franchisees across over 90 markets. The company reports three segments: U.S. stores, international franchise, and supply chain. At year-end, the system had 17,644 stores, including 6,355 U.S. stores and 11,289 international stores.
- U.S. stores represented $1.45 billion of revenue, or 35% of consolidated revenue.
- International franchise represented $249.8 million, or 6% of consolidated revenue.
- Supply chain represented $2.42 billion, or 59% of consolidated revenue.
- More than half of global retail sales originated from digital channels in 2020.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $4.117 billion | $3.619 billion | +13.8% |
| Income from operations | $725.6 million | $629.4 million | +15.3% |
| Operating margin | 17.6% | 17.4% | +0.2 percentage points |
| Net income | $491.3 million | $400.7 million | +22.6% |
| Diluted EPS | $12.39 | $9.56 | +29.6% |
| Net interest expense | $170.5 million | $146.8 million | +16.1% |
| Cash flow from operations | $592.8 million | $497.0 million | +19.3% |
| Capital expenditures | $88.8 million | $85.6 million | +3.7% |
| Total debt | $4.12 billion | $4.11 billion | Approximately flat |
U.S. same-store sales increased 11.5%, international same-store sales increased 4.4% excluding foreign currency effects, and global retail sales increased 13.2% excluding foreign currency effects. Net income benefited from a lower effective tax rate of 11.5%, versus 17.0% in 2019, primarily because excess tax benefits from equity compensation increased to $60.4 million from $25.7 million.
Margins, segment performance and liquidity
- Consolidated operating margin was 38.7% before general and administrative and advertising expenses, compared with 38.8% in 2019.
- U.S. Company-owned store margin declined to 21.8% from 23.7%, primarily because of higher labor costs, including additional frontline compensation during COVID-19, and higher food costs.
- Supply chain margin increased to 11.3% from 11.2%, supported by higher volume and lower fuel costs, partly offset by higher food costs.
- U.S. stores segment income increased 20.3% to $435.1 million; supply chain segment income increased 19.3% to $238.4 million; international franchise segment income increased 5.5% to $197.6 million.
- Unrestricted cash and cash equivalents were $168.8 million. Working capital was $174.6 million, excluding restricted cash and advertising fund balances.
- The company had $217.5 million of restricted cash and $157.5 million of available borrowing capacity under its $200 million variable funding facility, net of letters of credit.
- Cash used in financing activities was $446.4 million, including $304.6 million of share repurchases, $121.9 million of dividends, and $202.1 million of debt repayments, partly offset by $158.0 million of variable funding borrowings that were fully repaid during the year.
Material changes versus the prior comparable period
- The additional 53rd week increased 2020 revenue by an estimated $88.4 million and positively affected operating income, costs, taxes and other results.
- U.S. retail sales benefited significantly from increased reliance on delivery and carryout during the COVID-19 pandemic. Nearly all U.S. stores remained open at year-end.
- International operations experienced temporary closures, reduced hours and operating restrictions, although conditions improved during the third and fourth quarters. Fewer than 150 international stores were temporarily closed at year-end based on master franchisee reports.
- The company opened 958 gross stores and closed 334, resulting in 624 net new stores: 229 in the U.S. and 395 internationally.
- Labor costs reduced U.S. Company-owned store margin, while supply chain volumes increased with higher U.S. store sales.
- The company invested $40.0 million in Dash Brands, its China master franchisee, and invested an additional $40.0 million in the first quarter of 2021 after year-end.
- Shares repurchased declined to $304.6 million from $699.0 million in 2019, while declared dividends increased to $3.12 per share from $2.60.
Outlook, risks and unusual items
Management expects to continue generating positive operating cash flow and to use cash, operating cash flow and available variable funding capacity for working capital, capital investments, debt service, dividends and share repurchases. The filing does not provide formal numerical revenue or earnings guidance.
- COVID-19 remains a material uncertainty. Management cannot estimate the duration or full future effect of changes in consumer behavior, government restrictions, store closures, labor availability or supply-chain disruption.
- The company has substantial leverage. Debt principal is scheduled to be concentrated in 2022, 2025, 2027 and 2029. Because the leverage ratio was below 5.0x at the end of the fourth quarter, scheduled principal amortization was suspended beginning in the first quarter of 2021.
- Debt agreements contain financial covenants and could accelerate repayment or restrict cash flows if covenant requirements are not met. A portion of debt bears interest linked to LIBOR, creating transition and refinancing risk.
- Key operating risks include competition, commodity and cheese prices, labor and minimum-wage increases, franchisee performance, international currency movements, food safety, cybersecurity, privacy regulation and supply-chain concentration.
- A 10% adverse change in foreign currency rates would have reduced 2020 international royalty revenue by approximately $22.2 million. A 1% adverse LIBOR change would have increased 2020 interest expense by approximately $3.2 million.
- Insurance reserves were $63.5 million at year-end, including $54.6 million related to workers’ compensation, general liability and automobile retention programs. Valuation of insurance reserves was identified as the critical audit matter.
- The company paid an approximately $8.0 million judgment in a delivery-vehicle lawsuit during the fourth quarter; management stated that it did not materially affect results.
- Legal proceedings, tax examinations and employment-related claims continue in the ordinary course, but management does not expect existing matters to materially affect financial position, results or cash flows.
Most important facts for investors to verify
- Whether COVID-19-related delivery and carryout demand remains elevated or normalizes, and the effect on same-store sales.
- The sustainability of the 2020 effective tax rate, given the unusually large $60.4 million benefit from equity compensation.
- Debt refinancing capacity and covenant compliance ahead of the large scheduled maturities, particularly 2022, 2025, 2027 and 2029.
- Whether labor, food, cheese, insurance and supply-chain costs continue to pressure Company-owned store margins.
- The performance and carrying value of the $40.0 million Dash Brands investment and the additional $40.0 million invested after year-end.
- Future capital allocation between dividends, share repurchases, store and technology investments, and debt reduction.
- International store openings, closures, currency effects and the financial health of major master franchisees.
- The company’s ability to maintain digital ordering platforms, protect customer data and manage cybersecurity and privacy risks.