Domino’s Pizza, Inc. 2014 Form 10-K Summary
Business context and reporting period
Domino’s operates a global pizza delivery and carryout system through domestic stores, international franchisees and supply chain operations. The filing covers the 52-week fiscal year ended December 28, 2014. The fourth quarter comprised 16 weeks and ended December 28, 2014.
- System size increased to 11,629 stores in more than 75 markets, including 5,067 domestic and 6,562 international stores.
- The Company opened 743 net new stores, including a record 662 net international openings.
- In the fourth quarter, the Company reorganized reporting into Domestic Stores, Supply Chain and International Franchise segments and recast historical segment information.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $1,993.8 million | $1,802.2 million | +10.6% |
| Operating income | $345.4 million | $313.8 million | +10.1% |
| Operating margin | 17.3% | 17.4% | Down 0.1 percentage points |
| Net income | $162.6 million | $143.0 million | +13.7% |
| Diluted EPS | $2.86 | $2.48 | +15.3% |
| Operating cash flow | $192.3 million | $194.0 million | Down $1.7 million |
| Capital expenditures | $70.1 million | $40.4 million | +73.5% |
- Revenue mix: Supply Chain generated $1.263 billion, Domestic Stores $578.7 million and International Franchise $152.6 million.
- Same-store sales increased 7.5% domestically and 6.9% internationally excluding foreign currency effects; reported international same-store sales increased 4.9% including currency effects.
- Consolidated operating margin declined to 29.8% from 30.5% on a revenue-less-cost-of-sales basis, primarily because higher commodity costs reduced Supply Chain and Company-owned store margin percentages.
- Company-owned store margin was 23.3% versus 24.0%; Supply Chain margin was 10.4% versus 10.9%.
- Cheese prices averaged $2.13 per pound versus $1.75 in 2013, increasing food costs and Supply Chain revenue and costs.
- Cash and cash equivalents were $30.9 million, with restricted cash of $121.0 million. Working capital was $41.8 million, excluding restricted cash.
- Total debt was $1.524 billion, principally fixed-rate secured notes bearing interest at 5.216%. The Company had no borrowings outstanding under its variable funding notes and had $55.9 million of available borrowing capacity, subject to approximately $44.1 million of outstanding letters of credit.
- Dividends declared increased to $1.00 per share from $0.80. The Company repurchased $82.4 million of common stock and had approximately $132.7 million remaining under its $200.0 million authorization.
Fourth-quarter results
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Revenue | $643.0 million | $566.5 million |
| Operating margin dollars | $189.6 million | $172.5 million |
| Net income | $48.0 million | $44.7 million |
| Diluted EPS | $0.85 | $0.78 |
The fourth-quarter figures are unaudited periodic data and reflect 16-week quarters for both 2014 and 2013.
Material changes versus the prior comparable period
- Global retail sales increased 11.1%, supported by higher same-store sales, store growth and digital ordering.
- Digital channels represented approximately 45% of U.S. sales, compared with approximately 40% in 2013; estimated global digital sales reached $3.6 billion.
- General and administrative expense increased 6.1% to $249.4 million, including a $5.8 million pre-tax impairment charge related to replacing the corporate airplane and continued technology and international investments.
- Interest expense declined $2.0 million to $86.9 million, primarily because of lower average debt and lower costs associated with collateralized letters of credit.
- The Company sold 14 Company-owned stores to a franchisee and recognized a $1.7 million pre-tax gain.
- Capital spending increased substantially, primarily for Company-owned stores, supply chain centers, technology, training facilities and a corporate airplane.
Guidance, outlook, risks and unusual items
- Management expects capital expenditures of approximately $50 million to $60 million in future periods, focused on technology, store reimaging and related growth initiatives.
- Management expects positive operating cash flow and believes available cash, operating cash flow and variable funding capacity will be adequate for anticipated debt service, capital expenditures, dividends and working capital needs. No formal revenue or earnings guidance was provided.
- The Company expects to continue international expansion, digital ordering initiatives and the Pizza Theater store redesign, with substantial completion of remodels targeted by the end of 2017.
- Debt agreements permit suspension of scheduled principal amortization while defined leverage remains at or below 4.5 times total debt to EBITDA. The Company met the threshold in 2014 and stopped scheduled amortization in the third quarter.
- The fixed-rate notes have an expected repayment date in January 2019, although their legal final maturity is January 2042. Refinancing risk and restrictive covenants remain significant.
- Key risks include competition, commodity and labor inflation, minimum-wage increases, dependence on franchisees and supply chain operations, foreign currency exposure, food safety, cybersecurity and data breaches, regulatory compliance, litigation and the Company’s substantial leverage.
- A hypothetical 10% adverse currency movement would have reduced 2014 international royalty revenue by approximately $14.7 million. A $0.25 adverse change in the average cheese price would have increased Company-owned store food costs by approximately $2.2 million.
- The Company was appealing a $32.0 million jury judgment in which it was found 60% liable; the matter is covered by casualty insurance subject to a $3.0 million deductible. Management stated that recorded accruals were adequate and that the matter was not expected to materially affect the Company.
- Other legal matters could result in ultimate losses exceeding recorded amounts by approximately $4.0 million, although management did not expect a significant adverse effect.
Important facts for investors to verify
- Whether strong same-store sales and store openings continue to offset margin pressure from cheese, labor, health insurance and other operating costs.
- The Company’s ability to refinance or repay approximately $1.522 billion of fixed-rate notes expected to be repaid in 2019.
- Compliance with debt-service and leverage covenants and the continued availability of variable funding capacity.
- Actual cash conversion after capital expenditures, dividends, share repurchases and required debt payments.
- The effect of foreign exchange movements on international royalties and Canadian supply chain operations.
- Progress and returns from digital ordering, technology investments and Pizza Theater remodels.
- Developments in the appealed casualty judgment, other litigation, insurance reserves and contingent liabilities.