Domino’s Pizza, Inc. 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Domino’s Pizza, Inc. operates a global pizza business through U.S. company-owned stores, U.S. and international franchisees, supply chain operations, and advertising activities. The filing covers the 12-week fiscal quarter and 36-week year-to-date period ended September 8, 2019, compared with the periods ended September 9, 2018.
- System size increased to 16,528 stores from 15,354 a year earlier, including 5,985 U.S. stores and 10,543 international stores.
- The company opened 214 net new stores during the quarter and 614 year to date.
- Global retail sales increased 5.8% in the quarter and 5.2% year to date.
Financial Performance and Key Metrics
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Total revenues | $820.8 million | $786.0 million | $2,468.4 million | $2,350.7 million |
| Income from operations | $143.0 million | $132.4 million | $425.5 million | $392.1 million |
| Net income | $86.4 million | $84.1 million | $271.4 million | $250.3 million |
| Diluted EPS | $2.05 | $1.95 | $6.44 | $5.73 |
| Operating margin | 38.5% | 37.6% | 38.7% | 37.8% |
| Net margin | 10.5% | 10.7% | 11.0% | 10.6% |
| Net cash from operating activities | Not separately provided | Not separately provided | $324.6 million | $262.5 million |
- Quarterly revenue rose 4.4%; year-to-date revenue rose 5.0%.
- Quarterly operating income increased 8.0%; year-to-date operating income increased 8.5%.
- Quarterly net income increased 2.7%; year-to-date net income increased 8.4%.
- Higher operating income was partly offset by a higher effective tax rate: 21.7% in Q3 and 16.6% year to date, compared with 15.3% and 14.9%, respectively, in the prior-year periods.
- U.S. same-store sales increased 2.4% in the quarter and 3.1% year to date. International same-store sales, excluding foreign currency effects, increased 1.7% and 2.0%, respectively.
Liquidity, Cash Flow, Debt and Capital Allocation
- Cash flow from operations was $324.6 million year to date, up from $262.5 million. Capital expenditures were $42.7 million, compared with $65.1 million in the prior-year period.
- Cash, cash equivalents and restricted cash totaled $312.7 million at September 8, 2019, including $66.7 million of unrestricted cash, $177.3 million of debt-related restricted cash and $68.7 million of advertising-fund restricted cash.
- Long-term debt was approximately $3.44 billion, including $35.9 million classified as current. No borrowings were outstanding under the variable funding notes; $126.9 million was available after letters of credit.
- Working capital was $2.3 million excluding restricted cash, advertising-fund assets and advertising-fund liabilities.
- Year-to-date financing uses included $105.1 million of share repurchases, $91.9 million of debt repayments and $53.6 million of dividends.
- The company repurchased 430,182 shares year to date at an average price of $244.43 per share. On October 4, 2019, the board authorized a new $1.0 billion repurchase program with no expiration date.
- The quarterly dividend was $0.65 per share. A further $0.65 per share dividend was declared on October 4, 2019 for payment on December 27, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue mix shifted toward franchise royalties and supply chain operations. U.S. company-owned store revenue declined 20.2% in Q3 and 9.9% year to date, primarily because 59 company-owned stores were sold to existing franchisees in Q2 2019.
- U.S. franchise royalties and fees increased 8.5% in Q3 and 8.6% year to date. Supply chain revenue increased 9.0% and 7.4%, respectively, supported by higher volumes and market-basket pricing.
- Consolidated operating margin improved 0.9 percentage points in both the quarter and year-to-date period, largely because franchise revenue carries no corresponding cost of sales and supply chain margins improved.
- The company recorded a $2.4 million pretax loss on the sale of the 59 stores, compared with a $5.9 million pretax gain on the sale of 12 stores in Q3 2018.
- Operating cash generation improved materially, while investing cash usage declined because of lower capital expenditures and proceeds from asset sales.
- ASC 842 lease accounting was adopted in 2019, adding $227.5 million of operating lease right-of-use assets and $234.3 million of operating lease liabilities at September 8, 2019. The adoption materially affected the balance sheet but did not materially affect reported income or cash flow.
- Stockholders’ deficit remained substantial at $2.94 billion, although it improved from $3.04 billion at December 30, 2018 because of net income partially offset by dividends and share repurchases.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management did not provide specific earnings or revenue guidance in the filing. It expects operating cash flows, unrestricted cash and available variable-funding capacity to meet anticipated debt service, capital expenditures and working-capital needs for at least the next twelve months.
- Management cited continued store expansion, technology, digital ordering, operations and marketing as drivers of brand strength and future growth.
- U.S. carryout remained strong, while U.S. delivery same-store sales were pressured by store concentration strategies and aggressive competition.
- Risks include substantial leverage and refinancing requirements, interest-rate and LIBOR transition risk, commodity-price volatility, labor and operating-cost inflation, foreign currency exposure, competition, franchisee profitability, consumer spending, technology and cybersecurity failures, adverse legal outcomes, food safety matters and severe weather or other catastrophic events.
- A hypothetical 10% adverse movement in international foreign exchange rates would have reduced year-to-date royalty revenue by approximately $14.4 million.
- The company faces an $8.0 million final jury verdict in a traffic-accident lawsuit after offsets and deductions; it denies liability and has appealed. Management does not believe existing legal matters will materially affect financial position, results or cash flows.
- Additional leases for two supply chain centers and certain vehicles had not commenced and represented approximately $50.6 million of estimated future minimum commitments. Franchise lease-payment guarantees totaled up to $17.9 million.
Important Facts for Investors to Verify
- Whether same-store sales growth and new-store openings can offset slowing U.S. delivery trends and competitive pressure.
- The sustainability of cash flow relative to approximately $3.44 billion of debt, scheduled maturities and ongoing dividends and repurchases.
- The effect of the company-owned store sale and continued franchise mix shift on future revenue, margins and operating risk.
- Future tax rates, particularly the effect of lower excess tax benefits from equity compensation.
- Exposure to food, labor, fuel, interest-rate and foreign-currency volatility, including the transition away from LIBOR.
- The outcome and potential financial impact of the appealed $8.0 million legal judgment and other ordinary-course claims.
- Whether the new $1.0 billion repurchase authorization is executed without constraining debt service, investment or liquidity.