Domino’s Pizza, Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
Domino’s operates a global pizza business through company-owned stores, domestic and international franchisees, and supply-chain centers. The filing covers the 12-week fiscal quarter ended September 11, 2016, and the first 36 fiscal weeks of 2016, compared with periods ended September 6, 2015. At quarter-end, the system had 13,252 stores in more than 80 markets, including 5,273 domestic and 7,979 international stores.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 36 weeks 2016 | 36 weeks 2015 |
|---|---|---|---|---|
| Total revenues | $566.7 million | $484.7 million | $1,653.2 million | $1,475.3 million |
| Income from operations | $100.9 million | $80.5 million | $303.3 million | $267.0 million |
| Net income | $47.2 million | $37.8 million | $141.9 million | $130.0 million |
| Diluted EPS | $0.96 | $0.67 | $2.82 | $2.30 |
| Operating margin | 17.8% | 16.6% | 18.3% | 18.1% |
| Net margin | 8.3% | 7.8% | 8.6% | 8.8% |
- Global retail sales increased 14.9% in the quarter and 11.3% year to date. Domestic same-store sales increased 13.0% in the quarter and 9.7% year to date; international same-store sales increased 6.6% and 7.2%, respectively, excluding foreign currency effects.
- Revenue growth was led by supply chain revenue of $355.0 million, up 16.9% in the quarter, and domestic company-owned store revenue of $101.0 million, up 16.8%.
- Cost of sales was 69.3% of revenue in the quarter versus 70.7% in the prior-year quarter. General and administrative expense increased 18.9% in the quarter to $73.0 million, primarily from technology, labor, international-market support and performance compensation.
- Interest expense increased to $25.2 million in the quarter and $76.5 million year to date, reflecting higher average debt following the 2015 recapitalization. The weighted-average borrowing rate declined to 4.6% from 5.3%.
- Cash provided by operating activities was $162.6 million year to date, compared with $167.3 million in the prior-year period. Capital expenditures were $38.3 million.
- Cash used in financing activities was $287.8 million, including $283.9 million of share repurchases and $37.5 million of dividends. Ending unrestricted cash was $30.0 million, with $123.6 million of restricted cash.
Material changes versus the prior comparable period
- Quarterly revenue increased 16.9%, operating income increased 25.3%, net income increased 24.8%, and diluted EPS increased 43.3%, aided by strong same-store sales, store growth, higher supply-chain volumes and lower insurance expense.
- Year-to-date revenue increased 12.1%, operating income increased 13.6%, and net income increased 9.2%. Higher interest expense reduced the conversion of operating gains into net income.
- The third quarter of 2015 included a $5.7 million casualty-insurance charge, including a $4.3 million company-owned-store charge and a $1.4 million supply-chain charge, making year-over-year margin comparisons favorable in 2016.
- The company opened 316 net new stores in the quarter, including 288 internationally and 28 domestically, bringing year-to-date net openings to 722.
- The company repurchased 412,260 shares for approximately $59.7 million in the quarter. Approximately $165.5 million remained authorized under the open-market repurchase program at September 11, 2016. The previously announced $600.0 million accelerated share repurchase program was completed during the first quarter.
- Total debt was approximately $2.23 billion, including $73.9 million classified as current. Stockholders’ deficit increased to approximately $1.94 billion, primarily reflecting share repurchases, dividends and the company’s capital structure.
Guidance, outlook, commentary and risks
Management did not provide specific quantitative full-year revenue or earnings guidance in the filing. Management expects to fund working capital, capital expenditures, debt service, dividends and share repurchases through operating cash flow, unrestricted cash and available variable-funding-note capacity. Management believes these sources will be adequate for at least the next 12 months, while noting that future cash generation and borrowing availability are not assured.
- At September 11, 2016, the company had $35.0 million drawn and $46.2 million available under its $125.0 million variable funding note facility, net of $43.8 million of letters of credit.
- Scheduled principal payments on fixed-rate notes include $878.5 million in 2019, $488.0 million in 2020 and $728.0 million in 2025, creating significant refinancing and liquidity exposure.
- Key risks include high leverage, refinancing and interest-rate exposure, commodity costs—particularly cheese—labor and insurance costs, foreign currency movements, franchisee health, consumer demand, competition, technology execution, litigation, severe weather and regulatory changes.
- International operations represented approximately 13.1% of revenue in the first 36 weeks. A hypothetical 10% adverse currency movement in the company’s ten largest international markets would have reduced year-to-date revenue by approximately $7.9 million.
- The company appealed an approximately $8.9 million final verdict in the Wiederhold traffic-accident litigation. A separate $32.0 million verdict against the company was previously dismissed by the Texas appellate court, and the Texas Supreme Court declined review; the filing also reports a subsequent U.S. Supreme Court petition. Management states that existing legal matters are not expected to materially affect financial position, results or cash flows.
- The company declared a $0.38-per-share quarterly dividend for payment in December 2016. It was assessing the future effects of new lease, revenue-recognition, stock-compensation and other accounting standards.
Investor verification checklist
- Verify the sustainability of double-digit domestic same-store sales and the pace of international store openings.
- Reconcile reported operating-margin improvement for the favorable comparison against the prior-year insurance charges.
- Assess debt maturities, variable-rate borrowings, refinancing needs and compliance with leverage-related covenants.
- Evaluate whether operating cash flow can support debt service, dividends, capital expenditures and continued share repurchases.
- Review foreign-exchange, commodity, labor and insurance-cost sensitivity, as well as the status and potential exposure from outstanding litigation.
- Confirm the effects and adoption timing of the accounting standards identified by management.