Business Context and Reporting Period
Domino’s Pizza, Inc. reported unaudited results for the 12-week fiscal quarter ended March 22, 2020, compared with the quarter ended March 24, 2019. The company operates a global franchised pizza system, U.S. company-owned stores, supply chain centers, and international master-franchise operations. The system had 17,089 stores at quarter-end, including 6,156 U.S. stores and 10,933 international stores.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues | $873.1 million | $836.0 million | +4.4% |
| Operating margin | $340.2 million; 39.0% | $322.3 million; 38.6% | +5.5%; +0.4 pts |
| Income from operations | $155.8 million; 17.8% | $143.5 million; 17.2% | +8.6%; +0.6 pts |
| Net income | $121.6 million | $92.7 million | +31.2% |
| Diluted EPS | $3.07 | $2.20 | +39.5% |
| Net cash from operations | $95.4 million | $97.0 million | -$1.6 million |
| Capital expenditures | $17.5 million | $12.2 million | +$5.3 million |
- Revenue growth was driven primarily by higher supply-chain volumes, higher U.S. and international franchise royalties and fees, and increased U.S. franchise advertising revenue. U.S. company-owned store revenue declined 17.1% to $102.3 million following the sale of 59 stores in 2019.
- Global retail sales increased 5.9%, excluding foreign-currency effects. Same-store sales increased 1.6% in the U.S. and 1.5% internationally; U.S. company-owned same-store sales increased 3.9%, while U.S. franchise same-store sales increased 1.5%.
- Income benefited from higher franchise royalties and supply-chain margins. Net income also benefited from $30.4 million of excess tax benefits from equity-based compensation versus $8.7 million in the prior-year quarter, producing a negative effective tax rate of 3.7% versus 15.1%.
- Interest expense, net increased to $38.5 million from $34.4 million because of higher average debt following the November 2019 recapitalization. The weighted-average borrowing rate declined to 4.0% from 4.1%.
- At March 22, 2020, unrestricted cash was $200.8 million, restricted cash was $189.4 million, and advertising-fund restricted assets were $110.0 million. Reported working capital, excluding restricted and advertising-fund balances, was $149.7 million.
- Total debt was approximately $4.10 billion, including $43.4 million classified as current. Stockholders’ deficit was $3.39 billion.
- Cash used in financing included $79.6 million of share repurchases and $10.8 million of debt repayments. The company repurchased and retired 271,064 shares under its repurchase program, with approximately $326.6 million remaining authorized.
Material Changes Versus the Prior Comparable Period
- Revenue increased $37.1 million, or 4.4%, while income from operations increased $12.3 million, or 8.6%.
- Supply-chain revenue increased 8.6% to $512.7 million, supported by higher volumes and a 2.9% increase in market-basket pricing.
- Consolidated operating margin improved to 39.0% from 38.6%; company-owned store margin declined to 22.4% from 22.6%, while supply-chain margin improved to 11.5% from 11.4%.
- Operating cash flow declined modestly despite higher earnings, primarily because of unfavorable timing in accounts payable, accrued liabilities, and receivable collections.
- Capital expenditures increased to $17.5 million from $12.2 million, primarily for technology initiatives and supply-chain centers.
- The company adopted ASC 326, the expected-credit-loss standard, with a $1.1 million increase to opening retained deficit; management reported no material overall financial-statement impact.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal fiscal-year revenue, earnings, or same-store-sales guidance. Management stated that cash from operations, unrestricted cash, and available borrowings were expected to support debt service, capital expenditures, and working-capital needs for at least the next twelve months, subject to significant uncertainties.
- COVID-19 had not caused significant disruption during the reported quarter, but subsequent developments negatively affected global retail sales and international same-store sales. As of April 21, 2020, nearly all U.S. stores were open with dining rooms closed, while approximately 1,750 international stores were temporarily closed.
- After quarter-end, the company borrowed $158.0 million under its variable funding notes as a precautionary measure. Management reported approximately $358.8 million of cash on hand when combining this borrowing with unrestricted quarter-end cash.
- COVID-19 risks include store closures, modified hours, supply-chain disruption, higher labor and protective-equipment costs, changes in consumer demand, and adverse effects on franchisees and international operations.
- The company had approximately $4.10 billion of debt and substantial scheduled principal payments, including $897.0 million in 2022, $1.15 billion in 2025, and $1.28 billion in 2027. Variable-rate borrowings are exposed to LIBOR transition risk.
- Other risks include food, labor, fuel, insurance and commodity-cost volatility; foreign-currency exposure; competition; franchisee performance; cyber and technology risks; and the ability to refinance or service substantial indebtedness.
- A Florida traffic-accident case resulted in an $8.0 million final verdict against the company after offsets and deductions; the company denied liability and appealed. Management did not believe existing legal matters would materially affect financial position, results, or cash flows.
Important Facts for Investors to Verify
- Monitor COVID-19 effects on U.S. and international same-store sales, store closures, operating hours, labor costs, and supply-chain availability.
- Reconcile post-quarter-end $158.0 million variable-funding-note borrowing with debt balances, interest expense, liquidity, and covenant capacity.
- Assess debt maturities, refinancing requirements, interest-rate exposure, and the effect of LIBOR replacement.
- Evaluate whether earnings growth is sustainable apart from the unusually large $30.4 million excess tax benefit from stock-option exercises.
- Track the balance between share repurchases and dividends and the company’s highly negative stockholders’ equity.
- Verify the status and potential exposure of the Florida litigation, franchisee lease guarantees, and approximately $68.6 million of leases not yet commenced at quarter-end.