Domino’s Pizza, Inc. — Form 10-Q Summary
Business context and reporting period
Domino’s operates a global pizza restaurant system, generating revenue from company-owned stores, franchise royalties and fees, and the sale of food, equipment and supplies through its supply chain business. The filing covers the 12-week fiscal quarter and 24 weeks ended June 14, 2015, compared with periods ended June 15, 2014. The company reported 11,925 stores in more than 80 markets at quarter-end, including 5,098 domestic and 6,827 international stores.
Key financial metrics
| Metric | Quarter ended June 14, 2015 | Quarter ended June 15, 2014 | 24 weeks ended June 14, 2015 | 24 weeks ended June 15, 2014 |
|---|---|---|---|---|
| Total revenue | $488.6 million | $450.5 million | $990.6 million | $904.3 million |
| Income from operations | $92.2 million | $81.4 million | $186.5 million | $165.5 million |
| Net income | $45.9 million | $38.5 million | $92.2 million | $78.9 million |
| Diluted EPS | $0.81 | $0.67 | $1.62 | $1.38 |
| Operating margin | 31.2% | 29.9% | 31.3% | 30.0% |
| Net margin | 9.4% | 8.5% | 9.3% | 8.7% |
| Operating cash flow | Not separately provided | Not separately provided | $103.6 million | $60.8 million |
- Global retail sales increased 7.5% in the quarter and 8.9% year to date. Domestic same-store sales increased 12.8% in the quarter and 13.7% year to date; international same-store sales increased 6.7% and 7.2%, respectively, excluding foreign currency effects.
- Supply chain revenue was $302.9 million in the quarter and $614.6 million year to date. Lower cheese prices reduced reported domestic supply chain revenue by approximately $11.8 million in the quarter and $22.9 million year to date.
- General and administrative expense increased 13.4% in the quarter and 16.1% year to date, primarily due to technology investments, higher performance-based compensation, company-owned store advertising and franchisee incentives.
- Interest expense declined to $19.0 million in the quarter and $39.2 million year to date, partly because of a lower average debt balance and the reversal of interest associated with an uncertain tax position.
- The effective tax rate was 37.3% for the quarter and 37.5% year to date.
Balance sheet, debt and liquidity
- At June 14, 2015, unrestricted cash and cash equivalents were $25.9 million, while restricted cash and cash equivalents were $96.8 million. Total assets were $597.9 million.
- Long-term debt was $1.524 billion, including $0.2 million classified as current. The fixed-rate notes represented substantially all outstanding borrowings and had an estimated fair value of approximately $1.577 billion versus $1.522 billion of principal.
- The company had no outstanding variable funding note borrowings, $55.9 million of available capacity under its $100 million facility, and $44.1 million of outstanding letters of credit.
- Working capital was $38.5 million when excluding restricted cash. Management stated that cash, operating cash flow and available borrowing capacity should fund operations, debt service, capital expenditures and other needs for at least the next twelve months.
- The company met the applicable leverage condition of less than 4.5 times total debt to EBITDA and therefore was not required to make previously scheduled debt amortization payments. Scheduled principal amortization would otherwise have been $29.5 million in 2015.
Cash flow, capital allocation and material changes
- Year-to-date investing cash flow was positive $14.1 million, including $24.1 million from a decrease in restricted cash and $8.8 million of asset-sale proceeds, partly offset by $20.2 million of capital expenditures.
- Financing activities used $122.9 million, including $97.6 million for share repurchases and $31.0 million for dividends. The company repurchased and retired 928,464 shares during the first 24 weeks and had approximately $35.1 million remaining under the then-current authorization at June 14, 2015.
- The board subsequently reset the share repurchase authorization, leaving $200 million available as of July 15, 2015. A quarterly dividend of $0.31 per share was declared for September 2015.
- Net cash and cash equivalents decreased $5.0 million year to date to $25.9 million, despite the increase in operating cash flow, primarily because of share repurchases and dividends.
- Net new store openings totaled 186 in the quarter and 296 year to date, including 172 international and 14 domestic openings in the quarter.
- Digital channels generated nearly 50% of U.S. sales during the quarter and year-to-date period.
Outlook, risks, contingencies and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management expects to continue using operating cash flow, unrestricted cash and available variable funding capacity to fund working capital, investments, debt service, dividends and share repurchases. Management also stated that no material capital expenditure commitments existed at June 14, 2015.
- Foreign currency translation adversely affected international franchise and supply chain revenue. Management estimated that a hypothetical 10% adverse currency movement in the company’s ten largest international markets would reduce year-to-date revenue by approximately $5.0 million.
- Commodity prices, particularly cheese, remain a margin and revenue variable. Labor, utilities, insurance, employee benefits and other operating costs are additional exposure areas.
- The company is highly leveraged and depends on continued operating cash flow, compliance with debt covenants, refinancing availability and access to its variable funding notes.
- A prior $32.0 million jury judgment, in which Domino’s had been found 60% liable, was reversed and dismissed by an appellate court in the first quarter of 2015. The period for petitioning the Texas Supreme Court had not expired at filing. Management continued to deny liability.
- The first quarter of 2014 included a nonrecurring $1.7 million pretax gain from the sale of 14 company-owned stores and an associated $0.3 million deferred tax valuation allowance release. These items affected year-over-year comparisons.
- Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether strong domestic same-store sales and international store growth remain sustainable after the reported period.
- The effect of cheese and other commodity prices on supply chain revenue and operating margins.
- Debt covenant compliance, scheduled amortization requirements and the company’s ability to refinance approximately $1.5 billion of fixed-rate debt.
- Cash available for dividends and share repurchases after capital expenditures, debt service and other restricted-cash requirements.
- Foreign currency effects on international royalties, supply chain revenue and earnings.
- The final resolution of the Texas litigation appeal period and any related financial exposure.
- Whether continued technology, marketing and store expansion investments produce sufficient returns to offset higher general and administrative expense.