Domino’s Pizza, Inc. — 2014 First-Quarter Form 10-Q
Business context and reporting period
Domino’s operates a substantially franchised pizza business, domestic company-owned stores, domestic and international supply-chain centers, and franchise stores in more than 70 international markets. The filing covers the 12-week fiscal quarter ended March 23, 2014, compared with the quarter ended March 24, 2013. Results are unaudited.
- Total stores increased to 10,988 from 10,330, including 5,997 international stores versus 5,407.
- Global retail sales increased 9.1%.
- Domestic same-store sales increased 4.9%; international same-store sales increased 7.4% excluding foreign-currency effects.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $453.9 million | $417.6 million | +8.7% |
| Operating margin | $137.0 million; 30.2% | $129.8 million; 31.1% | +5.6%; margin down 0.9 points |
| Income from operations | $84.2 million; 18.5% | $75.5 million; 18.1% | +11.5% |
| Income before taxes | $63.9 million | $54.6 million | +17.0% |
| Net income | $40.5 million; 8.9% | $34.4 million; 8.2% | +17.6% |
| Diluted EPS | $0.71 | $0.59 | +20.3% |
| Operating cash flow | $36.2 million | $47.6 million | Down $11.4 million |
- Revenue growth was led by domestic supply chain revenue of $257.5 million, up 11.2%; international revenue of $60.4 million, up 12.6%; domestic franchise revenue of $53.4 million, up 4.1%; and company-owned store revenue of $82.5 million, up 1.7%.
- Higher cheese and other commodity prices increased supply-chain revenue but pressured percentage margins. Average cheese block prices were $2.16 per pound versus $1.67 in the prior-year quarter.
- General and administrative expense declined 2.6% to $52.9 million. Interest expense declined to $20.3 million from $20.9 million, primarily because of a lower average debt balance. The cash borrowing rate was 5.3% in both periods.
- The effective tax rate decreased to 36.6% from 37.0%.
- Cash and cash equivalents were $38.4 million at March 23, 2014, with restricted cash of $108.6 million. Working capital was $4.9 million excluding restricted cash.
- Total long-term debt was approximately $1.53 billion, including $24.2 million classified as current. Fixed-rate notes represented substantially all borrowings and had rates fixed until January 2019.
- No variable funding note borrowings were outstanding; available capacity was $57.7 million after $42.3 million of letters of credit.
- Capital expenditures were $6.6 million. Financing cash outflows included $15.1 million of share repurchases, $6.0 million of debt repayments, and $11.1 million of dividends.
Material changes versus the prior comparable period
- Net income increased $6.1 million, supported by same-store sales, international store growth, higher supply-chain volumes, lower G&A expense, lower interest expense, and a lower tax rate.
- Income from operations benefited from a $1.7 million pretax gain on the sale of 14 company-owned stores. The transaction also released approximately $0.3 million of deferred tax valuation allowance and increased net income by approximately $1.4 million; management stated that it would not have a material ongoing impact.
- Domestic company-owned same-store sales slowed to 1.5% from 5.0%, while domestic franchise same-store sales slowed to 5.2% from 6.3%.
- Domestic supply-chain operating margin increased in dollars to $27.2 million but declined to 10.5% of revenue from 11.3%, primarily because of higher commodity costs.
- Operating cash flow declined despite stronger earnings, primarily because of timing-related changes in operating assets and liabilities and changes in deferred-tax and equity-compensation items.
- The company repurchased and retired 221,481 shares for approximately $15.1 million and reset its share-repurchase authorization to $200.0 million. It repurchased an additional 153,812 shares for approximately $11.4 million through April 24, 2014.
Outlook, commentary, risks, and unusual items
- Management intends to continue investing in operational execution, marketing, technology and international expansion. It cited digital platforms, technology, product quality and value pricing as competitive advantages.
- The company expects unrestricted cash, operating cash flow and available variable funding-note capacity to fund operations, working capital, capital expenditures, debt service, dividends and repurchases for at least the next 12 months.
- No specific full-year earnings, revenue or same-store-sales guidance was provided in the filing.
- Key risks include refinancing and servicing approximately $1.53 billion of debt, availability of variable funding-note borrowings, commodity-price volatility, foreign-currency movements, consumer spending, franchisee profitability, severe weather, litigation, insurance costs, taxes, regulation and competition.
- International revenue represented approximately 13.3% of total revenue. Management estimated that a hypothetical 10% adverse currency movement in its top ten international markets would reduce quarterly revenue by approximately $2.4 million.
- Management stated that pending legal, tax and administrative matters were not expected to materially affect financial position, results or cash flows. No material changes were reported to previously disclosed risk factors.
Important facts for investors to verify
- Whether domestic same-store-sales momentum and company-owned store margins improve after the winter-weather benefit and commodity-cost pressure.
- The sustainability of international store growth and the effect of foreign-currency movements on reported revenue and earnings.
- Debt maturities, refinancing requirements, covenant restrictions and available liquidity under the variable funding notes.
- Whether operating cash flow recovers from the first-quarter decline while dividends and share repurchases continue.
- The extent to which first-quarter earnings benefited from the $1.7 million store-sale gain and related tax valuation-allowance release.
- Future cheese, meat, labor, insurance and other operating costs, and the company’s ability to pass through or absorb those changes.