Domino’s Pizza, Inc. — Form 10-Q Summary
Business context and reporting period
Domino’s operates a substantially franchised network of U.S. and international stores, domestic and international supply-chain centers, and U.S. company-owned stores. This unaudited filing covers the 12-week fiscal quarter and 24-week year-to-date period ended June 15, 2014, compared with June 16, 2013.
- Total stores increased to 11,121 from 10,440, including 6,119 international stores and 5,002 domestic stores.
- Global retail sales increased 11.5% in the quarter and 10.3% year to date.
- International operations opened a net 122 stores in the quarter and 219 year to date.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Change |
|---|---|---|---|
| Total revenues | $450.5 million | $414.0 million | +8.8% |
| Operating income | $81.4 million | $73.8 million | +10.2% |
| Operating margin | 18.1% | 17.8% | +0.3 pts |
| Net income | $38.5 million | $33.3 million | +15.6% |
| Diluted EPS | $0.67 | $0.57 | +17.5% |
| Operating cash flow | Not separately reported for the quarter |
| Metric | 24 weeks ended June 15, 2014 | 24 weeks ended June 16, 2013 | Change |
|---|---|---|---|
| Total revenues | $904.3 million | $831.6 million | +8.7% |
| Operating income | $165.5 million | $149.4 million | +10.8% |
| Operating margin | 18.3% | 18.0% | +0.3 pts |
| Net income | $78.9 million | $67.7 million | +16.6% |
| Diluted EPS | $1.38 | $1.17 | +17.9% |
| Operating cash flow | $60.8 million | $66.8 million | -$6.0 million |
- Q2 same-store sales increased 5.4% domestically and 7.7% internationally excluding foreign-currency effects. Domestic company-owned same-store sales rose 3.5%; domestic franchise same-store sales rose 5.5%.
- Year-to-date cost of sales increased to 70.0% of revenue from 69.2%, while general and administrative expense declined to 11.7% from 12.8%.
- Cash and cash equivalents were $15.3 million at June 15, 2014; restricted cash was $74.7 million. Working capital was $30.3 million excluding restricted cash.
- Total debt was approximately $1.52 billion, principally fixed-rate notes. The estimated fair value of the fixed-rate notes was approximately $1.63 billion.
- The company had $57.9 million of available capacity under its $100.0 million variable funding notes and no outstanding variable funding note borrowings.
- Capital expenditures were $18.9 million year to date. Financing cash outflows included $65.0 million of share repurchases and $25.1 million of dividends.
- The quarterly dividend was $0.25 per share. The board declared another $0.25 per share dividend on July 16, 2014.
Material changes versus the prior comparable period
- Revenue growth was led by domestic supply-chain revenue, which increased 10.4% in Q2 and 10.8% year to date, reflecting higher commodity prices and volumes.
- International revenue increased 14.9% in Q2 and 13.7% year to date, supported by same-store sales and store-count growth, partially offset by unfavorable foreign-currency translation.
- Domestic company-owned store revenue increased only 0.4% in Q2 and 1.0% year to date, partly because 14 company-owned stores were sold to a franchisee.
- Higher cheese, meat, and other commodity costs reduced store and supply-chain margin percentages. The higher cheese price was largely passed through to franchisees and did not materially affect supply-chain margin dollars.
- Interest expense declined $0.6 million in Q2 and $1.2 million year to date, primarily because of lower average debt and lower cash-collateralization fees.
- Year-to-date results included a $1.7 million pretax gain from selling 14 company-owned stores and an approximately $0.3 million deferred-tax valuation allowance reversal.
- The company repurchased 909,231 shares for approximately $65.0 million year to date, leaving approximately $150.1 million authorized for future repurchases at June 15, 2014.
- After meeting leverage conditions below 4.5x, the company intended to suspend scheduled debt amortization beginning in the third quarter of 2014. Approximately $23.6 million was reclassified from current to long-term debt.
Outlook, commentary, risks, and unusual items
Management attributed performance to value-oriented products, effective marketing, digital platforms and technology, operational execution, strong domestic and international same-store sales, and international unit growth. Management expects to continue focusing on operational excellence, marketing, technology, food quality, service, and store expansion.
Management stated that unrestricted cash, operating cash flow, and available variable funding capacity should be sufficient for operations, debt service, capital expenditures, dividends, and working capital needs for at least the next twelve months. The filing provides no quantitative full-year revenue, earnings, or same-store-sales guidance.
- Principal risks include substantial leverage and the ability to refinance debt, availability of variable funding capacity, commodity-price volatility, labor and operating-cost inflation, foreign-currency movements, consumer spending, franchisee performance, litigation, insurance, severe weather, cyber-attacks, regulatory changes, and changes in tax rates.
- A hypothetical 10% adverse currency movement in the company’s ten largest international markets by store count would have reduced year-to-date revenue by approximately $4.9 million.
- Fixed-rate notes have fixed interest rates through January 2019. Scheduled principal amortization payments are $23.6 million in 2014, $29.5 million in 2015, $37.4 million in 2016, $39.4 million in each of 2017 and 2018, and $9.8 million in 2019, subject to applicable leverage conditions.
- Legal proceedings are described as ordinary-course matters, and management does not believe they will materially affect financial position, results, or cash flows. No material changes to previously disclosed risk factors were reported.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether international unit growth and same-store sales remain strong after adjusting for foreign-currency effects.
- Whether elevated cheese, meat, labor, occupancy, and other commodity costs pressure company-owned store and supply-chain margins.
- The company’s ability to service and refinance approximately $1.52 billion of debt while continuing dividends and share repurchases.
- Whether suspension of scheduled debt amortization remains permitted under the applicable leverage tests.
- Operating cash-flow conversion, restricted-cash requirements, available variable funding capacity, and future capital-expenditure needs.
- The sustainability of earnings growth after excluding the $1.7 million store-sale gain and related tax benefit.
- Potential effects of foreign exchange, consumer spending, franchisee health, litigation, insurance claims, cyber events, and food-price volatility.