Domino’s Pizza, Inc. — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Domino’s is primarily a franchisor, with approximately 98% of stores operated by independent franchisees. The company also operates U.S. company-owned stores and supply-chain centers. As of September 12, 2021, Domino’s had 18,380 locations in more than 90 markets. The filing covers the 12-week fiscal quarter and 36 fiscal weeks ended September 12, 2021, compared with periods ended September 6, 2020.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Revenue | $998.0 million | $967.7 million | +3.1% |
| Operating margin | $385.2 million; 38.6% | $362.0 million; 37.4% | +6.4%; +1.2 points |
| Income from operations | $180.3 million; 18.1% | $162.2 million; 16.8% | +11.2% |
| Net income | $120.4 million; 12.1% | $99.1 million; 10.2% | +21.5% |
| Diluted EPS | $3.24 | $2.49 | +30.1% |
| Interest expense, net | $45.5 million | $38.4 million | +18.4% |
For the first 36 weeks of 2021, revenue was $3.014 billion, up 9.2%; operating income was $557.7 million, up 15.8%; net income was $354.8 million, up 4.5%; and diluted EPS was $9.30, up 8.9%.
- Q3 global retail sales increased 8.5% excluding foreign currency effects, including 1.1% growth in the U.S. and 16.5% international growth.
- Q3 same-store sales decreased 1.9% in the U.S. and increased 8.8% internationally.
- International franchise royalties and fees increased 29.2% to $70.6 million, while supply-chain revenue increased 2.6% to $588.8 million.
- Q3 consolidated cost of sales declined to 61.4% of revenue from 62.6%, although higher food costs and occupancy costs affected company-owned stores.
- Net cash provided by operating activities for the first 36 weeks was $484.6 million, compared with $370.4 million in the prior-year period.
- Capital expenditures were $50.7 million, and investing cash outflows totaled $90.3 million, including a $40.0 million additional investment in Dash Brands.
Debt, Liquidity, and Capital Allocation
- Long-term debt totaled approximately $5.07 billion at September 12, 2021, including $54.8 million classified as current. Total stockholders’ deficit was $4.13 billion.
- In April 2021, Domino’s issued $1.85 billion of senior secured notes at fixed rates of 2.662% and 3.151%, repaid $873.0 million of 2017 notes, and established a $200.0 million variable funding facility.
- The variable funding facility had no borrowings and $157.5 million of available capacity at quarter-end, net of $42.5 million of letters of credit.
- Unrestricted cash and cash equivalents were $295.4 million. Restricted cash was $206.3 million, and advertising-fund restricted assets were $186.8 million.
- Cash used in financing activities was $228.1 million, including approximately $1.1 billion of share repurchases, $896.2 million of debt and finance-lease repayments, and $71.2 million of dividends, partially offset by $1.85 billion of debt proceeds.
- Domino’s repurchased 2.47 million shares for approximately $1.1 billion during the first 36 weeks. Approximately $920.3 million remained authorized at quarter-end; an additional 205,145 shares were repurchased for approximately $100.1 million through October 12, 2021.
- The quarterly dividend was $0.94 per share. A further $0.94 per share dividend was declared on October 12, 2021.
Material Changes Versus the Prior Comparable Period
- Profitability improved despite lower U.S. third-quarter same-store sales, primarily because of international franchise growth, store expansion, lower comparable COVID-related costs, and a more favorable revenue mix.
- U.S. same-store sales weakened from 17.5% growth in Q3 2020 to a 1.9% decline in Q3 2021. Management attributed the decline partly to labor shortages, reduced economic stimulus, fortressing, and competitive activity.
- International performance strengthened as markets reopened and normal store hours resumed after COVID-19 disruptions.
- Net store growth remained strong: 323 stores were added in Q3 and 736 during the first 36 weeks, bringing the total to 18,380.
- Interest expense increased because of higher average borrowings following the recapitalization, although the weighted-average borrowing rate decreased to 3.8% in Q3 from 3.9%.
- The effective tax rate fell to 10.7% in Q3 from 19.9%, primarily due to higher excess tax benefits from equity compensation. For the first 36 weeks, the effective tax rate increased to 17.4% from 7.2%.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a specific numerical earnings, revenue, or same-store-sales outlook. Management expects to continue using operating cash flow, unrestricted cash, recapitalization proceeds, and available variable-funding capacity to fund operations, capital investment, debt service, dividends, and share repurchases.
- Management cited labor shortages, food and commodity inflation, supply-chain pressures, competitive activity, and reduced stimulus as risks to U.S. performance.
- COVID-19 effects remained relevant, particularly through temporarily closed international stores, altered operating hours, staffing constraints, and supply-chain disruptions.
- Debt service and refinancing risk are significant given approximately $5.07 billion of debt. Scheduled principal payments and leverage-ratio requirements may affect liquidity and cash deployment.
- The variable funding notes use LIBOR-based rates, creating transition risk if LIBOR is replaced by SOFR or another benchmark.
- Commodity-price volatility, particularly cheese and other food costs, may pressure margins. A hypothetical 10% adverse foreign-currency movement would have reduced first-36-week royalty revenue by approximately $18.4 million.
- Other unusual items included a $2.5 million unrealized gain on the Dash Brands investment and approximately $2.0 million of accelerated amortization of debt issuance costs related to repaid 2017 notes.
- Ordinary-course litigation, tax reviews, workers’ compensation, general liability, automobile, franchisee, and employment-related claims were disclosed; management did not believe existing matters would materially affect financial condition or results.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify the sustainability of international growth and whether U.S. same-store sales recover from the Q3 decline.
- Monitor labor availability, wage investment, food costs, supply-chain margins, and their effect on company-owned-store profitability.
- Review debt maturities, leverage-ratio tests, fixed-rate note terms, and the availability and covenants of the variable funding facility.
- Assess whether continued share repurchases and dividends are consistent with debt-service and liquidity requirements.
- Reconcile unrestricted cash with restricted cash and advertising-fund assets, which are not generally available for corporate purposes.
- Track foreign-currency exposure, LIBOR-to-SOFR transition terms, and the valuation of the privately held Dash Brands investment.
- Confirm subsequent share repurchases and dividend payments after the September 12, 2021 quarter-end.