Domino’s Pizza, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
Domino’s operates a primarily franchised pizza business, including domestic company-owned and franchise stores, domestic and international supply-chain operations, and international franchise markets. The filing covers the unaudited 12-week fiscal quarter ended March 24, 2013, compared with the quarter ended March 25, 2012.
- Total stores increased to 10,330 from 9,810, including 5,407 international stores versus 4,912.
- Global retail sales increased 9.4%; domestic same-store sales increased 6.2% and international same-store sales increased 6.5% on a constant-dollar basis.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $417.6 million | $384.6 million | Up 8.6% |
| Operating margin | $129.8 million; 31.1% | $114.6 million; 29.8% | Up $15.2 million; margin up 1.3 points |
| Income from operations | $75.5 million; 18.1% | $66.9 million; 17.4% | Up 12.9% |
| Interest expense | $20.9 million | $32.3 million | Down $11.3 million |
| Net income | $34.4 million; 8.2% | $20.7 million; 5.4% | Up 65.9% |
| Diluted EPS | $0.59 | $0.35 | Up $0.24 |
| Operating cash flow | $47.6 million | $20.2 million | Up $27.4 million |
| Capital expenditures | $5.1 million | $3.6 million | Up $1.5 million |
Revenue growth reflected higher supply-chain volumes and commodity prices, stronger domestic store and franchise sales, and international same-store sales and store-count growth. The operating margin benefited from favorable revenue mix, higher supply-chain margins, and improved company-owned store margins. General and administrative expense rose 13.7% to $54.3 million, partly because of gift-card program costs, higher compensation, and continued technology and international investments.
Cash and cash equivalents were $75.1 million at March 24, 2013, compared with $54.8 million at December 30, 2012. Restricted cash was $61.4 million. Working capital was $23.6 million excluding restricted cash. Cash used in financing activities was $23.1 million, including approximately $18.0 million of share repurchases. Cash used in investing activities was $4.3 million.
Total debt was approximately $1.55 billion, including $24.2 million classified as current. The company had no outstanding variable funding note borrowings, $62.2 million of available capacity under the $100 million variable funding notes, and $37.8 million of letters of credit. Fixed-rate notes comprise substantially all borrowings and carry fixed rates through January 2019.
Material changes versus the prior comparable period
- Net income increased $13.7 million, primarily due to stronger operating performance and lower interest expense.
- Q1 2012 included approximately $10.5 million of pretax recapitalization-related expenses, including $10.2 million of additional interest expense; the estimated after-tax effect was approximately $6.5 million.
- The effective tax rate declined to 37.0% from 40.4%, partly because Q1 2012 included an approximately $0.9 million valuation allowance on a deferred tax asset.
- Domestic company-owned same-store sales rose 5.0% versus 1.6%, and domestic franchise same-store sales rose 6.3% versus 2.1%.
- Domestic supply-chain operating margin increased to 11.3% from 10.6%; company-owned store operating margin increased to 24.4% from 23.6%.
- The company initiated a regular quarterly dividend of $0.20 per share and declared another $0.20 per share dividend payable June 28, 2013.
- The company repurchased and retired 362,899 shares for approximately $18.0 million, leaving approximately $134.4 million under the authorized repurchase program.
- Q1 2013 included approximately $2.6 million of domestic franchise revenue from refinement of the gift-card liability assessment and an approximately $1.8 million reimbursement to the national advertising fund.
Outlook, commentary, risks and unusual items
Management emphasized continued focus on operational execution, effective promotions, technology, food quality and service, and international store growth. The company expects unrestricted cash, operating cash flow, and available variable funding note capacity to fund working capital, capital expenditures, debt service, dividends, and repurchases for at least the next twelve months. No material capital-expenditure commitments were reported as of March 24, 2013.
Management cautioned that future cash generation and debt servicing could be affected by economic conditions, refinancing availability, consumer spending, franchisee profitability, commodity prices, labor and operating costs, foreign exchange, severe weather, litigation, regulation, insurance costs, and availability under the variable funding notes. International revenues represented 12.9% of total revenue; a hypothetical 10% adverse currency movement in the ten largest international markets would have reduced Q1 royalty revenue by approximately $2.2 million.
Cheese prices averaged $1.67 per pound versus $1.52 in the prior-year quarter. Higher cheese prices increased supply-chain revenue but primarily affected reported percentage margins because cheese costs are generally passed through. The filing states that there were no material changes to previously disclosed risk factors, and ordinary-course legal proceedings were not expected to materially affect the company.
Important facts for investors to verify
- Whether strong same-store sales and international store growth continued after the favorable timing of New Year’s Eve and New Year’s Day, which management estimated contributed approximately 1% to domestic and international same-store sales.
- The sustainability of margin improvement amid commodity, labor, insurance, utility, and other operating-cost pressures.
- Debt-service, refinancing, and covenant capacity given approximately $1.55 billion of debt and the January 2019 fixed-rate maturity or repricing horizon.
- Whether operating cash flow remains sufficient to support debt service, dividends, capital expenditures, and share repurchases.
- The effect of foreign currency movements and international market performance on revenue and royalties.
- The recurring versus nonrecurring nature of the gift-card accounting adjustment, higher compensation, technology investments, and other unusual items.