Domino’s Pizza, Inc. FY2021 Form 10-K Summary
Business context and reporting period
Domino’s is primarily a franchisor, with approximately 98% of its more than 18,800 global stores operated by independent franchisees across over 90 markets. The Company reports three segments: U.S. stores, supply chain, and international franchise. Fiscal 2021 ended January 2, 2022 and consisted of 52 weeks; fiscal 2020 consisted of 53 weeks, which affects year-over-year comparisons.
- Store count increased by 1,204 net locations to 18,848, including 6,560 U.S. stores and 12,288 international stores.
- More than half of global retail sales came through digital channels.
- U.S. franchisees generally pay a 5.5% royalty and contribute 6% of sales to national advertising.
Financial performance and key metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $4.357 billion | $4.117 billion | +5.8% |
| Income from operations | $780.4 million | $725.6 million | +7.5% |
| Operating margin | 17.9% | 17.6% | +0.3 points |
| Net income | $510.5 million | $491.3 million | +3.9% |
| Diluted EPS | $13.54 | $12.39 | +9.3% |
| Net cash from operating activities | $654.2 million | $592.8 million | +10.4% |
| Capital expenditures | $94.2 million | $88.8 million | +6.1% |
| Total debt | $5.070 billion | $4.119 billion | +23.1% |
- Revenue mix: supply chain $2.561 billion, U.S. stores $1.498 billion, international franchise $298.0 million, and U.S. franchise advertising $479.5 million.
- Global retail sales, excluding foreign currency effects, increased 8.9%; U.S. retail sales increased 4.3% and international retail sales increased 13.9%.
- U.S. same-store sales increased 3.5%, while international same-store sales increased 8.0%. U.S. Company-owned same-store sales declined 3.6%, compared with a 3.9% increase for U.S. franchise stores.
- Supply chain operating margin declined to 10.4% from 11.3%, primarily because of higher labor and delivery costs. U.S. Company-owned store margin increased slightly to 21.9% from 21.8%.
- Interest expense increased to $191.8 million from $172.2 million, primarily because of higher average borrowings after the 2021 recapitalization. The weighted-average borrowing rate declined to 3.8% from 3.9%.
- The effective tax rate increased to 18.4% from 11.5%, primarily because excess tax benefits from equity compensation fell to $18.9 million from $60.4 million.
- Unrestricted cash and cash equivalents were $148.2 million. Total working capital was $82.1 million, excluding restricted cash and advertising fund balances.
- The Company generated $654.2 million of operating cash flow, used $142.7 million in investing activities, and used $522.8 million in financing activities.
Material changes versus the prior comparable period
- Revenue growth reflected higher retail sales, store growth, increased supply chain volumes, and international store reopenings. The comparison was partly offset by the 53rd week in fiscal 2020, which contributed an estimated $88.4 million of prior-year revenue.
- Supply chain market-basket pricing increased 3.3%, adding an estimated $66.3 million to supply chain revenue, but labor and delivery inflation reduced supply chain margin.
- In April 2021, Domino’s issued $1.85 billion of fixed-rate senior secured notes and established a $200.0 million variable funding facility. Proceeds were used to refinance debt, fund reserves and transaction costs, and repurchase shares.
- Total debt increased to $5.07 billion. Scheduled debt principal payments include approximately $1.18 billion in 2025 and $1.31 billion in 2027, subject to provisions that may suspend principal amortization when leverage is at or below the applicable threshold.
- The Company repurchased $1.32 billion of common stock in 2021, including a $1.0 billion accelerated share repurchase, and paid $139.4 million of dividends. Shares outstanding declined to 36.1 million from 38.9 million.
- Domino’s invested $49.1 million in DPC Dash, its China master franchisee, and recorded a $36.8 million unrealized gain. This gain was included in other income and was a significant unusual contributor to pretax income.
Guidance, outlook, commentary and risks
Management did not provide a specific numerical revenue, earnings, or same-store-sales forecast in the filing. Management expects positive operating cash flow for the foreseeable future and intends to continue investing in technology, supply chain capacity, stores, strategic opportunities, dividends, and share repurchases.
- Management plans to continue U.S. and international store expansion, including fortressing existing markets, and expects an additional regional dough manufacturing and supply chain center to open in fiscal 2022.
- Nearly all U.S. stores were open at year-end, while fewer than 50 international stores were temporarily closed. COVID-19 continued to affect labor availability, store hours, supply chains, consumer behavior, and operating costs.
- Labor shortages, wage inflation, food-cost inflation, delivery costs, energy costs, and higher occupancy expenses may pressure Company-owned and franchisee profitability.
- Cheese is the largest food cost, and the Company relies on a single U.S. cheese supplier under a seven-year agreement. Meat toppings are sourced primarily from a supplier contract expiring in June 2022, although management believes alternative suppliers are available.
- The Company has substantial leverage and restrictive securitized-debt covenants, including a minimum 1.75x debt-service coverage ratio. Failure to comply could restrict cash transfers, accelerate repayment, and impair liquidity.
- The variable funding facility bears interest based on LIBOR and contemplates a transition to SOFR. The transition could increase interest expense or otherwise affect liquidity.
- Other significant risks include intense competition, franchisee execution and financial health, international currency exposure, cyber incidents and data privacy, food safety, litigation and employment regulation, joint-employer risks, supply-chain disruptions, and changing consumer preferences.
- Management reported no material unresolved staff comments, no material impairment charges, and no legal matters expected to have a significant adverse effect individually or in aggregate. PricewaterhouseCoopers issued an unqualified audit opinion and found internal control over financial reporting effective.
Most important facts for investors to verify
- Whether U.S. same-store sales and Company-owned store performance improve after labor shortages and stimulus comparisons normalize.
- Whether supply chain margins recover despite food, labor, transportation, and commodity inflation.
- Cash flow coverage of approximately $5.07 billion of debt, upcoming maturities, dividends, and continued share repurchases.
- The sustainability and valuation of the $36.8 million unrealized DPC Dash gain and the performance of Domino’s China investment.
- Compliance with securitized-debt covenants and the availability of the $155.8 million of variable-funding capacity after letters of credit.
- The effect of COVID-19, labor availability, supplier concentration, foreign currency movements, cyber risks, and franchisee health on future results.
- Whether the planned supply chain capacity additions and store expansion generate returns sufficient to offset fortressing-related sales pressure and higher operating costs.