Business Context and Reporting Period
Domino’s Pizza, Inc. filed this unaudited Form 10-Q for the 12-week fiscal quarter and 24-week year-to-date period ended June 19, 2016, compared with periods ended June 14, 2015. Domino’s operates company-owned stores, supplies food and equipment to franchisees, and earns royalties and fees from domestic and international franchise operations. At period end, the system had 12,936 stores in more than 80 markets, including 5,245 domestic and 7,691 international stores.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Revenue | $547.3 million | $488.6 million | $1,086.5 million | $990.6 million |
| Income from operations | $103.7 million | $92.2 million | $202.4 million | $186.5 million |
| Net income | $49.3 million | $45.9 million | $94.7 million | $92.2 million |
| Diluted EPS | $0.98 | $0.81 | $1.86 | $1.62 |
| Operating margin | 31.4% | 31.2% | 31.2% | 31.3% |
| Net margin | 9.0% | 9.4% | 8.7% | 9.3% |
| Cash flow from operations | Not separately provided | Not separately provided | $69.5 million | $103.6 million |
Q2 revenue increased 12.0%, operating income increased 12.4%, and net income increased 7.3%. Year-to-date revenue increased 9.7%, operating income increased 8.5%, and net income increased 2.7%. Higher interest expense limited net-income growth.
- Q2 revenue consisted primarily of supply chain revenue of $339.3 million, domestic company-owned store revenue of $97.8 million, domestic franchise revenue of $69.7 million, and international franchise revenue of $40.6 million.
- General and administrative expense increased 12.7% in Q2 and 10.9% year to date, driven by technology and e-commerce investments, international support, labor costs, and performance-based compensation.
- Net interest expense increased to $25.0 million in Q2 and $50.9 million year to date, versus $19.0 million and $39.0 million, respectively, primarily because of higher debt balances following the 2015 recapitalization. The weighted-average borrowing rate declined to 4.6% from 5.3%.
- The effective tax rate was approximately 37.4% in Q2 and 37.5% year to date.
- At June 19, 2016, cash and cash equivalents were $22.3 million, restricted cash was $107.4 million, total debt was approximately $2.21 billion, and stockholders’ deficit was $1.91 billion.
- The company had $10.0 million outstanding and $68.8 million available under its $125.0 million variable funding note facility, net of $46.2 million of letters of credit.
Material Changes Versus the Prior Comparable Period
- Global retail sales increased 11.7% in Q2 and 9.5% year to date, compared with 7.5% and 8.9% in the prior-year periods.
- Domestic same-store sales increased 9.7% in Q2 and 8.0% year to date; international same-store sales increased 7.1% and 7.5%, excluding foreign currency effects.
- Domino’s opened 244 net new stores in Q2, including 215 internationally and 29 domestically, bringing year-to-date net openings to 406.
- Domestic company-owned same-store sales growth moderated to 9.1% in Q2 and 6.5% year to date, from 12.5% and 14.2% in the prior-year periods. Domestic franchise same-store sales growth moderated to 9.8% and 8.2%, from 12.8% and 13.6%.
- Company-owned store margin declined to 24.6% from 25.6% in Q2 and to 24.6% from 25.9% year to date, reflecting higher food, labor, insurance, and transaction-related costs, partly offset by lower delivery expenses.
- Operating cash flow declined $34.1 million year to date, largely because of working-capital timing and a significantly lower tax impact from equity-based compensation.
- Financing cash usage increased to $230.5 million from $122.9 million, primarily because of $224.1 million of share repurchases and $39.9 million of debt repayments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that it expected operating cash flow, unrestricted cash, and available variable-note borrowings to fund working capital, capital expenditures, debt service, dividends, and share repurchases for at least the next twelve months. The filing did not provide formal full-year revenue, earnings, or same-store-sales guidance.
- Management attributed performance to the Piece of the Pie Rewards loyalty program, digital ordering and technology initiatives, marketing, operating execution, and continued store expansion.
- Capital expenditures were $25.0 million year to date, focused on technology, company-owned stores, and supply chain centers.
- The company repurchased 1.845 million shares for approximately $224.1 million during Q2. Approximately $225.2 million remained authorized at June 19, 2016; approximately $214.5 million remained as of July 14, 2016. The quarterly dividend was $0.38 per share, and a subsequent $0.38 dividend was declared in July.
- Debt maturities include approximately $878.5 million of scheduled principal payments in 2019, $488.0 million in 2020, and $728.0 million in 2025. Fixed-rate debt also creates refinancing risk at maturity.
- Foreign currency reduced international revenue; management estimated that a hypothetical 10% adverse currency movement in its ten largest international markets would reduce year-to-date revenue by approximately $5.2 million.
- Commodity prices, especially cheese, labor rates, insurance claims, consumer spending, franchisee profitability, severe weather, regulation, technology competition, foreign exchange, borrowing availability, and the company’s high leverage remain material risks.
- A trial court entered an approximately $8.9 million final verdict in a delivery-accident case. Domino’s denied liability and was pursuing an appeal. A separate $32.0 million Texas judgment was dismissed against the company after the Texas Supreme Court rejected the plaintiff’s review petition.
- The company stated that no existing legal matters were expected to materially affect its financial position, results of operations, or cash flows, individually or in the aggregate.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the sustainability of strong domestic and international same-store sales and the pace of net store additions.
- Evaluate whether higher labor, food, insurance, and transaction costs continue to pressure company-owned store margins.
- Assess leverage, required debt amortization, refinancing exposure, and the adequacy of unrestricted liquidity relative to share repurchases and dividends.
- Reconcile the decline in operating cash flow with reported net income and review the effect of working-capital timing and equity-compensation tax items.
- Monitor foreign currency, commodity prices, insurance claims, franchisee health, and the pending delivery-accident appeal.
- Review the impact of technology and loyalty-program investments on sales growth, general and administrative expense, and future capital requirements.