Domino’s Pizza, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the 12-week fiscal quarter and 24 fiscal weeks ended June 17, 2018, compared with June 18, 2017. Domino’s operates a global franchised-store system, domestic company-owned stores, and supply-chain centers serving primarily U.S. and Canadian stores. The company had 15,122 stores in more than 85 markets at quarter-end, including 5,692 domestic and 9,430 international stores.
Financial performance and key metrics
| Metric | Q2 2018 | Q2 2017 | First 24 weeks 2018 | First 24 weeks 2017 |
|---|---|---|---|---|
| Total revenue | $779.4 million | $628.6 million | $1,564.8 million | $1,252.8 million |
| Income from operations | $126.1 million | $112.9 million | $259.6 million | $228.9 million |
| Net income | $77.4 million | $65.7 million | $166.2 million | $128.2 million |
| Diluted EPS | $1.78 | $1.32 | $3.78 | $2.58 |
| Operating margin | 16.2% | 18.0% | 16.6% | 18.3% |
| Net margin | 9.9% | 10.5% | 10.6% | 10.2% |
| Net cash from operating activities | Not separately reported for the quarter | $154.7 million | $112.8 million |
- Revenue increased 24.0% in the quarter and 24.9% year to date. Growth reflected store expansion, higher same-store sales, increased supply-chain volumes, foreign-exchange benefits and gross presentation of domestic advertising contributions under ASC 606.
- Global retail sales increased 12.6% in the quarter and 14.7% for the first 24 weeks. Domestic same-store sales increased 6.9% and international same-store sales, excluding foreign currency effects, increased 4.0% in the quarter.
- Net income increased 17.7% in the quarter and 29.7% year to date. The lower effective tax rate following the 2017 Tax Cuts and Jobs Act was a significant benefit.
- Operating margin declined as a percentage of reported revenue because ASC 606 added advertising revenue and the related advertising expense on a gross basis. On an absolute basis, operating income increased.
- Q2 revenue included $80.9 million of domestic franchise advertising contributions; first-half revenue included $163.1 million. These amounts generally did not materially affect operating income or net income.
Balance sheet, cash flow, debt and liquidity
- At June 17, 2018, unrestricted cash and cash equivalents were $157.8 million; restricted cash was $145.0 million; and advertising fund assets, restricted, were $123.8 million.
- Total long-term debt was approximately $3.47 billion, including $35.6 million classified as current debt. Stockholders’ deficit was $2.93 billion.
- The April 2018 recapitalization issued $825.0 million of senior secured notes: $425.0 million at 4.116% and $400.0 million at 4.328%. Proceeds were used to repay approximately $490.1 million of prior debt and fund other transaction costs, reserves and share repurchases.
- Cash flow from operations increased to $154.7 million for the first 24 weeks. Capital expenditures were $37.3 million, and net cash used in investing activities was $43.8 million.
- The company had no outstanding borrowings under its variable funding notes and approximately $128.3 million available, net of letters of credit. Management believed available cash, operating cash flow and borrowing capacity would cover expected needs for at least the next 12 months.
- The company repurchased 1.35 million shares for approximately $320.1 million during the first half and had approximately $429.9 million remaining under its authorization. It declared a $0.55 per-share quarterly dividend.
Material changes versus the prior comparable period
- Net new store openings totaled 156 in Q2 and 266 year to date, compared with a year-end store base that expanded to 15,122 locations.
- Company-owned store same-store sales growth moderated to 5.1% in Q2 from 11.2% in the prior-year quarter, while domestic franchise same-store sales moderated to 7.0% from 9.3%. International same-store sales improved to 4.0% from 2.6%, excluding currency effects.
- Supply-chain revenue increased 13.0% in Q2 and 13.1% year to date, driven by higher order volumes, store growth and a 4.5% increase in market-basket pricing to stores. Supply-chain margin declined due primarily to higher delivery and labor costs.
- Interest expense increased to $36.1 million in Q2 from $24.6 million, reflecting higher average borrowings and approximately $3.2 million of accelerated amortization of debt issuance costs.
- General and administrative expense increased 8.2% in both the quarter and first half, primarily due to investments in technology and other strategic initiatives.
- ASC 606 was adopted using the modified retrospective method. It deferred certain international store-opening fees, presented domestic advertising contributions and related expenses gross, and reduced opening retained earnings by approximately $6.7 million. Reported 2018 net income was only minimally different from the amount that would have been reported under the prior standard.
Guidance, outlook, commentary and risks
- Management did not provide specific full-year numerical guidance in the filing. It expected continued investment in technology, digital ordering, marketing, operations and store expansion.
- Management highlighted the Piece of the Pie Rewards loyalty program, online ordering and the launch of Domino’s Hotspots as contributors to domestic performance.
- Key risks include substantial leverage and refinancing requirements, interest-rate exposure on floating-rate debt, commodity costs—particularly cheese—labor and insurance costs, foreign currency volatility, competition, franchisee profitability, consumer spending, severe weather, cybersecurity, food safety, legal claims and the ability to maintain sufficient cash flow to service debt and fund dividends and repurchases.
- A hypothetical 10% adverse currency movement in the company’s ten largest international markets would have reduced first-half revenue by approximately $6.5 million.
- A previously disclosed traffic-accident lawsuit involving Domino’s was reversed and remanded for a new trial on May 11, 2018. The company continues to deny liability; the filing states that existing legal matters are not expected to materially affect financial position, results or cash flows.
- The company expects adoption of the new lease standard to have a material effect on reported assets and liabilities when adopted, although the filing does not provide a quantified impact.
Investor verification points
- Reconcile revenue and margin trends excluding the ASC 606 gross presentation of advertising contributions.
- Evaluate leverage, scheduled debt maturities and refinancing exposure, particularly the large principal payments scheduled in 2025 through 2027.
- Monitor same-store sales trends, store openings and franchisee economics as expansion continues.
- Assess whether operating cash flow can sustainably support debt service, capital expenditures, dividends and the remaining share-repurchase authorization.
- Review the effect of labor, food, insurance and delivery costs on company-owned-store and supply-chain margins.
- Track the traffic-accident litigation, implementation of the lease standard and any changes to legal or contingent liabilities.