Domino’s Pizza, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Domino’s Pizza, Inc. reported results for the 12-week fiscal quarter ended March 27, 2016, compared with the quarter ended March 22, 2015. The company operates a global pizza business through domestic company-owned stores, domestic and international franchisees, and supply-chain operations. At quarter-end, Domino’s had 12,692 stores in more than 80 markets, including 7,476 international and 5,216 domestic stores.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $539.2 million | $502.0 million | +7.4% |
| Operating income | $98.7 million | $94.3 million | +4.7% |
| Operating margin | 18.3% | 18.8% | Down 0.5 percentage points |
| Net income | $45.5 million | $46.3 million | Down 1.8% |
| Diluted EPS | $0.89 | $0.81 | +9.9% |
| Operating cash flow | $17.1 million | $84.7 million | Down $67.6 million |
| Capital expenditures | $10.5 million | $7.6 million | +38.0% |
Revenue growth was led by supply-chain revenue of $335.7 million, domestic company-owned store revenue of $96.4 million, domestic franchise revenue of $68.2 million, and international franchise revenue of $38.9 million. Global retail sales increased 7.3%, while same-store sales rose 6.4% domestically and 7.9% internationally excluding foreign-currency effects.
Net income declined despite higher operating income because interest expense increased by $6.0 million to $26.1 million following the 2015 recapitalization. The weighted-average borrowing rate declined to 4.6% from 5.3%, but the higher average debt balance more than offset the rate benefit. The effective tax rate was 37.6% in both periods.
Cash and cash equivalents totaled $178.3 million at March 27, 2016, compared with $133.4 million at January 3, 2016. Restricted cash totaled $154.1 million. Working capital was $138.6 million, excluding restricted cash. Long-term debt totaled approximately $2.21 billion, including $41.6 million classified as current. The company had no borrowings under its variable funding notes and $78.8 million of available capacity, net of letters of credit.
Material changes versus the prior comparable period
- Global retail sales growth moderated to 7.3% from 10.4%.
- Domestic same-store sales increased 6.4%, compared with 14.5% in the prior-year quarter; company-owned store growth was 4.0% versus 15.9%, and domestic franchise growth was 6.6% versus 14.4%.
- International same-store sales excluding foreign-currency effects increased 7.9%, broadly consistent with 7.8% in the prior-year quarter.
- The company opened 162 net new stores: 146 internationally and 16 domestically.
- Cost of sales increased to 69.0% of revenue from 68.7%. Store and supply-chain margins were pressured by higher labor costs, transaction-related expenses, and store-reimaging depreciation, partly offset by lower commodity and fuel costs.
- General and administrative expense increased 9.1% to $68.5 million, primarily due to technology, e-commerce, international growth, and labor investments.
- Operating cash flow fell substantially because working-capital changes used $15.8 million of cash, compared with providing $29.6 million in the prior-year period, primarily reflecting payment timing.
- Investing activities provided $17.5 million, largely due to a $26.8 million decrease in restricted cash. Financing activities provided $10.4 million, including proceeds and tax benefits from equity compensation, despite $27.5 million of debt repayments.
- The $600.0 million accelerated share-repurchase program was completed. Total shares retired under the program were 5.3 million at an average price of $112.87 per share. The company had $200.0 million remaining under its open-market repurchase authorization as of April 21, 2016.
Guidance, outlook, commentary, risks, and unusual items
Management stated that unrestricted cash, operating cash flow, and available variable-funding-note capacity should be adequate for anticipated debt service, capital expenditures, working-capital needs, dividends, and other corporate purposes for at least the next twelve months. The filing does not provide specific full-year revenue, earnings, or same-store-sales guidance.
Management emphasized continued investment in digital ordering, e-commerce, technology, marketing, operations, and international expansion. The company expects to continue using cash flows and available borrowing capacity to fund operations, service debt, pay dividends, and potentially repurchase shares.
Key risks include substantial leverage and refinancing requirements, availability of variable funding, commodity prices—particularly cheese—labor and operating costs, foreign-currency fluctuations, consumer demand, franchisee profitability, litigation, severe weather, insurance costs, regulatory changes, technology execution, and changes in tax or accounting requirements.
A previously disclosed lawsuit involving a fatal traffic accident resulted in a $32.0 million jury judgment in which the company was found 60% liable. The appellate court reversed and dismissed the claims against the company; the plaintiff’s writ of review remained pending before the Texas Supreme Court. Management continued to deny liability and stated that existing matters were not expected to materially affect financial position, results, or cash flows.
The company adopted no material new accounting standard during the quarter. It was assessing the future impact of new standards relating to leases, breakage of prepaid stored-value products, and stock-compensation accounting.
Investor verification points
- Verify the sustainability of same-store-sales growth as prior-year comparisons become more difficult.
- Assess the company’s approximately $2.21 billion debt burden, scheduled principal repayments, leverage covenant requirements, and refinancing exposure.
- Reconcile the sharp decline in operating cash flow with net income and monitor working-capital normalization.
- Evaluate whether labor inflation, store-reimaging depreciation, technology spending, and transaction costs continue to pressure margins.
- Separate reported international growth from foreign-currency effects; management estimated that a hypothetical 10% adverse currency movement in its top ten international markets would reduce quarterly revenue by approximately $2.6 million.
- Monitor the pending Texas Supreme Court review and the company’s other ordinary-course legal and insurance matters.
- Confirm the effect of the completed $600.0 million ASR, remaining $200.0 million repurchase authorization, and ongoing $0.38 quarterly dividend on future liquidity and share count.