Business Context and Reporting Period
Domino’s Pizza, Inc. filed this Form 10-K for the 52-week fiscal year ended January 1, 2017. The fourth quarter comprised 16 weeks; the prior-year fourth quarter comprised 17 weeks. Domino’s operates through domestic stores, international franchising and supply chain operations, with more than 13,800 locations in over 85 markets.
The business is predominantly franchised and generates revenue from royalties and fees, Company-owned store sales, and sales of food, equipment and supplies to franchisees. At year-end, the system had 392 Company-owned domestic stores, 4,979 domestic franchised stores and 8,440 international stores, or 13,811 total stores.
Financial Performance and Key Metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total revenue | $2,472.6 million | $2,216.5 million | +11.6% |
| Income from operations | $454.0 million | $405.4 million | +12.0% |
| Operating margin | 18.3% | 18.3% | Flat |
| Net income | $214.7 million | $192.8 million | +11.4% |
| Diluted EPS | $4.30 | $3.47 | +23.9% |
| Net cash from operations | $287.3 million | $291.8 million | Down $4.5 million |
| Capital expenditures | $61.5 million | $62.4 million | Down $0.9 million |
- Supply chain revenue was $1,544.3 million, or 62% of consolidated revenue; domestic stores contributed $751.3 million, or 30%; and international franchise revenue was $177.0 million, or 7%.
- Consolidated operating margin before general and administrative expenses was $767.7 million, or 31.0%, compared with 30.8% in 2015. The improvement reflected higher franchise revenue mix and supply chain margins.
- General and administrative expense increased 12.9% to $313.6 million, primarily from technology, e-commerce, information technology, international operations and performance-based compensation investments.
- Interest expense increased to $110.1 million from $99.5 million, despite a lower weighted-average borrowing rate of 4.6% versus 5.1%, because average debt balances were higher.
- Domestic same-store sales increased 10.5%; international same-store sales increased 6.3% on a constant-currency basis. Global retail sales increased 9.8%.
- Operating cash flow of $287.3 million exceeded capital expenditures, but cash used for financing was $375.8 million, including $300.3 million of share repurchases, $122.3 million of debt and capital lease repayments, and $73.9 million of dividends.
- Cash and cash equivalents were $42.8 million, restricted cash was $126.5 million, and working capital was negative $34.3 million at January 1, 2017.
- Total debt, net of issuance costs, was $2.188 billion, and total stockholders’ deficit was $1.883 billion.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income and net income increased despite the absence of the prior year’s 53rd week, which management estimated had increased 2015 revenue by approximately $49.7 million and operating margin by approximately $16.6 million.
- Domestic store revenue increased 12.2% to $751.3 million, driven by same-store sales and store count growth.
- Supply chain revenue increased 11.7% to $1,544.3 million, primarily from higher store order volumes and additional stores. Lower commodity prices reduced revenue by an estimated $3.0 million but did not materially reduce dollar margins.
- International franchise revenue increased 8.2%; foreign currency movements reduced international franchise revenue by approximately $8.9 million and international supply chain revenue by approximately $4.3 million.
- Store growth accelerated: Domino’s opened 1,281 net new stores in 2016, including a record 1,110 international net openings, compared with 901 total net openings in 2015.
- Diluted EPS benefited from higher earnings and a lower diluted share count following substantial share repurchases. The Company repurchased approximately 2.8 million shares for $300.3 million during 2016.
- Debt declined from $2.241 billion to $2.188 billion, but the Company resumed scheduled and catch-up amortization after leverage exceeded the applicable 4.5x threshold following the 2015 recapitalization.
Guidance, Outlook, Risks and Unusual Items
- Management expects positive operating cash flow and believes unrestricted cash, operating cash flow and available variable-funding capacity will be adequate for anticipated debt service, capital expenditures, dividends and working capital needs for the foreseeable future. No formal revenue or earnings guidance is provided in the filing.
- Management expects to complete substantially all Pizza Theater store remodels by the end of 2017 and intends to continue investing in digital ordering, marketing and technology.
- Available borrowing capacity under the 2015 Variable Funding Notes was $80.7 million, with $44.3 million of outstanding letters of credit. The facility had no outstanding borrowings at year-end.
- Debt maturities are concentrated in 2019 and 2020, including scheduled principal payments of $878.5 million in 2019 and $488.0 million in 2020. Refinancing and covenant compliance are significant liquidity considerations.
- Key risks include intense competition, franchisee financial and operating performance, food and labor cost inflation, cheese and other commodity volatility, supply-chain disruptions, foreign currency movements, cybersecurity and privacy incidents, food safety, regulatory changes and litigation.
- A hypothetical 10% adverse currency movement would have reduced international royalty revenue by approximately $16.7 million in 2016. A hypothetical $0.25 per-pound increase in the average cheese block price would have increased Company-owned store food costs by approximately $2.5 million.
- Ordinary-course litigation accruals were recorded, but ultimate losses could exceed recorded amounts by approximately $6.9 million. A separate delivery-accident judgment with a final verdict of $8.9 million was under appeal at year-end.
- The Company recorded no material impairment charge in 2016. The filing notes a $5.8 million corporate-airplane impairment charge in 2014 and approximately $8.1 million of net 2015 recapitalization-related expenses in 2015.
- The Company expects future lease accounting guidance to materially increase reported assets and liabilities when adopted. Management concluded that no conditions raised substantial doubt about the Company’s ability to continue as a going concern.
Most Important Facts for Investors to Verify
- Whether strong domestic and international same-store sales and rapid store expansion remain sustainable after the 2016 performance.
- The timing and funding plan for the substantial 2019 and 2020 debt maturities, including the effects of debt covenants and refinancing conditions.
- Whether operating cash flow remains sufficient to fund debt repayment, capital investment, dividends and share repurchases without increasing leverage.
- The effect of wage increases, labor availability, cheese and other commodity costs, fuel prices and supply-chain disruptions on Company-owned and supply chain margins.
- Foreign exchange exposure, especially the effect of currency movements on international royalty revenue and franchisee economics.
- Progress and cost of Pizza Theater remodels, digital ordering initiatives and other technology investments.
- The status and potential financial impact of pending litigation, insurance reserves, tax examinations, cybersecurity events and franchisee concentration.
- The sustainability of shareholder returns, including the $0.46 per-share dividend declared after year-end and the $149.1 million remaining under the share repurchase authorization.