Business Context and Reporting Period
Domino’s Pizza, Inc. reported unaudited results for the 12-week fiscal quarter ended March 25, 2018, compared with the quarter ended March 26, 2017. Domino’s operates company-owned stores, franchises, supply-chain centers, and international master-franchise relationships. At quarter-end, the system had 14,966 stores in more than 85 markets, including 9,317 international and 5,649 domestic stores.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $785.4 million | $624.2 million | +25.8% |
| Income from operations | $133.5 million | $116.0 million | +15.0% |
| Operating margin | 17.0% | 18.6% | Down 1.6 points |
| Net income | $88.8 million | $62.5 million | +42.2% |
| Diluted EPS | $2.00 | $1.26 | +58.7% |
| Net cash from operations | $83.7 million | $76.6 million | +9.2% |
| Capital expenditures | $13.6 million | $12.4 million | Higher |
| Cash, unrestricted | $44.6 million | $35.8 million at Dec. 31, 2017 | Higher |
| Total debt | Approximately $3.15 billion | Approximately $3.15 billion at Dec. 31, 2017 | Broadly stable |
Global retail sales increased 16.8%. Same-store sales increased 8.3% domestically, including 6.4% at company-owned stores and 8.4% at domestic franchise stores, and increased 5.0% internationally excluding foreign-currency effects. The company opened 110 net new stores during the quarter.
Net income benefited from higher operating income, a lower effective tax rate of 14.3% versus 31.0%, and higher excess tax benefits from equity compensation. Interest expense increased to $30.3 million from $25.6 million due to higher average borrowings, partly offset by a lower weighted-average borrowing rate of 3.9% versus 4.6%.
At March 25, 2018, restricted cash totaled $145.2 million, including amounts reserved for debt principal and interest. Working capital was less than $0.1 million excluding restricted cash and advertising fund assets and liabilities. The company had no borrowings under its variable funding notes and $128.3 million of availability, net of letters of credit.
Material Changes Versus the Prior Comparable Period
- Revenue increased $161.2 million, primarily from strong same-store sales, store growth, higher supply-chain volumes, favorable foreign-currency effects, and the adoption of ASC 606.
- ASC 606 caused $82.2 million of domestic franchise advertising contributions and related expenses to be presented gross. This materially increased reported revenue and expenses but had little effect on operating income or net income.
- Operating margin increased on a gross-reporting basis to 38.2% from 31.0%, while reported operating income margin declined to 17.0% from 18.6% after general and administrative and advertising expenses.
- Supply-chain operating margin declined to 10.8% from 11.7%, primarily because of higher delivery and labor costs, partly offset by procurement savings.
- The company repurchased 448,008 shares for approximately $101.1 million, compared with $12.7 million of repurchases in the prior-year quarter. Approximately $648.9 million remained under the new $750.0 million authorization.
- Shares outstanding and weighted-average diluted shares declined, contributing to diluted EPS growth.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a specific quantitative earnings, revenue, or same-store-sales forecast. Management stated that current operating cash flows, unrestricted cash, and available variable funding-note borrowings were expected to be adequate for debt service, capital expenditures, working capital, dividends, and share repurchases for at least the next twelve months, while cautioning that future cash flows and borrowing availability are not assured.
On April 24, 2018, after quarter-end, subsidiaries issued $825.0 million of senior secured notes: $425.0 million at 4.116% and $400.0 million at 4.328%. Proceeds were intended in part to repay approximately $490.1 million of outstanding 2015 five-year notes, fund transaction costs and debt reserves, and support general corporate purposes. The company subsequently borrowed $80.0 million under its variable funding notes to fund incremental share repurchases.
Key risks include substantial leverage and refinancing requirements, interest-rate and commodity-price volatility, foreign-currency exposure, competition, franchisee profitability and relationships, labor and operating costs, food safety, cyber risks, adverse legal outcomes, economic conditions, and the ability to maintain dividends and repurchases. A pending traffic-accident lawsuit resulted in an $8.9 million final verdict after adjustments; Domino’s denies liability and has appealed. Management does not believe existing legal matters will materially affect financial position, results, or cash flows.
The company expects adoption of the then-upcoming lease standard, ASC 842, to materially increase reported assets and liabilities through recognition of right-of-use assets and lease liabilities.
Investor Verification Checklist
- Separate organic operating growth from the ASC 606 gross presentation of domestic advertising contributions.
- Assess debt maturities, refinancing needs, interest-rate exposure, and the effect of the April 2018 recapitalization.
- Evaluate whether strong domestic and international same-store sales and store openings are sustainable.
- Monitor supply-chain margin pressure from delivery, labor, food, and commodity costs.
- Verify the cash available for dividends and buybacks after debt service and capital expenditures.
- Review the pending legal matter, insurance coverage, and potential appeal outcomes.
- Assess the future balance-sheet impact of ASC 842 lease accounting.