Domino’s Pizza, Inc. 10-Q Summary
Business Context and Reporting Period
Domino’s Pizza, Inc. operates a global pizza business through domestic company-owned stores, domestic and international franchisees, and supply chain centers. The filing covers the 12-week fiscal quarter ended March 26, 2017, compared with the quarter ended March 27, 2016. The company reported approximately 14,000 stores in more than 85 markets at quarter-end.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $624.2 million | $539.2 million | +15.8% |
| Operating margin | $193.8 million; 31.0% | $167.2 million; 31.0% | +15.9%; margin flat |
| Income from operations | $116.0 million | $98.7 million | +17.5% |
| Net income | $62.5 million | $45.5 million | +37.4% |
| Diluted EPS | $1.26 | $0.89 | +41.6% |
| Net cash from operations | $85.7 million | $17.1 million | Increase of $68.5 million |
| Capital expenditures | $12.4 million | $10.5 million | Increase of $2.0 million |
- Global retail sales increased 13.2%; domestic same-store sales increased 10.2% and international same-store sales increased 4.3%, excluding foreign currency effects.
- Domestic company-owned same-store sales increased 14.1%; domestic franchise same-store sales increased 9.8%.
- The company opened 189 net new stores during the quarter: 161 internationally and 28 domestically.
- General and administrative expense increased 13.5% to $77.8 million, driven by technology, e-commerce, information technology, labor, and performance-based compensation investments.
- The effective tax rate decreased to 31.0% from 37.6%, primarily because adoption of ASU 2016-09 caused $6.5 million of excess tax benefits from equity compensation to reduce income tax expense.
- At March 26, 2017, unrestricted cash was $52.1 million and restricted cash was $165.7 million. Working capital was negative $6.5 million, excluding restricted cash.
- Long-term debt was approximately $2.18 billion, with $0.3 million classified as current. The weighted average borrowing rate was 4.6%.
- The company had $80.7 million of available capacity under its $125.0 million variable funding note facility, net of $44.3 million of letters of credit, and no outstanding borrowings under that facility.
- Cash increased $9.3 million during the quarter to $52.1 million. Investing cash flow was negative $50.3 million, primarily because restricted cash increased by $39.2 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by higher supply chain volumes, increased store counts, and stronger domestic company-owned and franchise same-store sales.
- Income from operations and net income grew faster than revenue, although consolidated operating margin remained at 31.0%.
- Domestic company-owned store margin declined to 23.2% from 24.6%, reflecting higher food, labor, credit-card, and other transaction-related costs. Supply chain margin improved to 11.7% from 10.9%.
- Operating cash flow improved substantially, partly because the prior-year period had a $47.7 million unfavorable working-capital impact. The 2017 period benefited from a $7.2 million favorable working-capital change.
- Financing cash flow changed from a $10.4 million inflow in 2016 to a $26.2 million outflow in 2017, reflecting share repurchases, debt payments, and taxes on restricted stock. The prior-year period included $31.9 million of equity-compensation tax benefits classified as financing cash flow.
- The company repurchased and retired 80,360 shares for approximately $12.7 million and had approximately $136.4 million remaining under its repurchase authorization.
- Because the company met the applicable leverage ratio threshold of less than 4.5x, scheduled principal amortization on its fixed-rate notes was suspended beginning in the second quarter of 2017, subject to the debt agreement’s catch-up provisions.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific full-year revenue, earnings, or same-store sales guidance. Management expects operating cash flow, unrestricted cash, and available borrowing capacity to fund working capital, capital expenditures, debt service, dividends, and share repurchases for at least the next twelve months, while noting that future cash generation and borrowing availability are not assured.
- Key operating risks include high leverage, refinancing requirements, commodity price volatility, labor and operating cost inflation, foreign currency movements, consumer spending, competition, franchisee profitability, store development, technology execution, severe weather, regulatory changes, insurance costs, and changes in tax or accounting rules.
- A hypothetical 10% adverse currency movement in each of the company’s ten largest international markets would have reduced quarterly revenue by approximately $2.7 million.
- Cheese prices averaged $1.63 per pound in Q1 2017 versus $1.47 in Q1 2016. Cheese price changes increased both supply chain revenue and cost by approximately $1.5 million in the quarter.
- Domino’s Pizza LLC continues to appeal an approximately $8.9 million final verdict in a traffic-accident lawsuit. The company denies liability and states that existing legal matters are not expected to materially affect its financial position, results, or cash flows.
- The company expects adoption of the new lease standard to materially increase reported assets and liabilities. The filing states that the expected impact of the new revenue standard was still under evaluation, although significant revenue streams were not expected to be affected.
- The company declared a $0.46 per-share quarterly dividend for payment on June 30, 2017. The board may modify, suspend, or discontinue the share repurchase program.
Important Facts for Investors to Verify
- Whether sustained domestic same-store sales and international store growth continue after the unusually strong first quarter.
- The effect of high leverage, large scheduled debt maturities, leverage-ratio provisions, and future refinancing conditions.
- Whether the $6.5 million tax benefit from equity compensation is recurring or creates a difficult year-over-year comparison.
- Trends in company-owned store margins, labor costs, credit-card expenses, cheese prices, and other commodities.
- The sufficiency of operating cash flow and variable funding capacity to support debt service, dividends, technology investment, and share repurchases.
- Progress and potential financial exposure related to the appealed traffic-accident judgment and other litigation.
- The eventual balance-sheet impact and implementation method for the new lease and revenue recognition standards.