Domino’s Pizza, Inc. — 2013 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the 12-week fiscal quarter and 24 weeks ended June 16, 2013, compared with the periods ended June 17, 2012. Domino’s operates a substantially franchised global pizza business, domestic company-owned stores, and domestic and international supply-chain centers. At quarter-end, the system had 10,440 stores, including 4,932 domestic and 5,508 international locations.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | First two quarters 2013 | First two quarters 2012 |
|---|---|---|---|---|
| Revenue | $414.0 million | $376.1 million | $831.6 million | $760.7 million |
| Operating margin dollars | $126.0 million | $114.6 million | $255.8 million | $229.3 million |
| Income from operations | $73.8 million | $65.8 million | $149.4 million | $132.7 million |
| Net income | $33.3 million | $28.1 million | $67.7 million | $48.8 million |
| Diluted EPS | $0.57 | $0.47 | $1.17 | $0.82 |
| Net cash from operations | Not separately reported | Not separately reported | $66.8 million | $58.1 million |
Q2 revenue increased 10.1%, operating income increased 12.3%, and net income increased 18.4%. For the first two quarters, revenue increased 9.3%, operating income increased 12.6%, and net income increased 38.6%. Q2 operating margin was 30.4% of revenue versus 30.5%; the six-month margin was 30.8% versus 30.1%. Q2 net margin was 8.0% versus 7.5%; the six-month net margin was 8.1% versus 6.4%.
Q2 same-store sales increased 6.7% domestically, including 5.7% at company-owned stores and 6.8% at franchise stores, and increased 5.8% internationally on a constant-dollar basis. Global retail sales increased 9.3%. International store growth contributed 101 net openings during Q2 and 181 net openings year to date.
Cash flow, debt and liquidity
- Cash and cash equivalents were $40.8 million at June 16, 2013, compared with $54.8 million at December 30, 2012. Restricted cash was $59.7 million.
- Long-term debt was approximately $1.55 billion, including $24.2 million classified as current. Substantially all borrowings were fixed-rate notes; the company reported no outstanding variable funding note borrowings.
- The company had $62.3 million of available capacity under $100.0 million variable funding notes, net of $37.7 million of letters of credit.
- Six-month capital expenditures were $11.6 million. Cash used in investing activities was $7.9 million, while cash used in financing activities was $72.8 million.
- Working capital was $14.0 million excluding restricted cash. Management stated that existing unrestricted cash, operating cash flow and available borrowing capacity should fund operations, debt service, capital expenditures and working capital needs for at least the next 12 months.
Material changes, outlook and unusual items
- Growth was driven by stronger domestic and international same-store sales, increased store counts, higher franchise royalties, higher supply-chain volumes and favorable product mix.
- Supply-chain revenue benefited from higher commodity prices, particularly cheese. The average cheese block price was $1.77 per pound in Q2 2013 versus $1.52 in Q2 2012. Higher commodity prices increased reported revenue but pressured certain percentage margins.
- General and administrative expense increased 6.8% in Q2 and 10.2% year to date, reflecting higher performance-based and non-cash compensation and continued technology and international investments. The six-month period also included an approximately $1.8 million reimbursement to the national advertising fund and a $2.6 million domestic franchise revenue adjustment related to the gift-card program.
- Interest expense declined year to date primarily because the comparable 2012 period included recapitalization-related costs. The 2012 recapitalization generated approximately $10.5 million of pretax and $6.5 million of after-tax expenses, reducing comparability.
- The company repurchased 1.0 million shares for approximately $56.1 million during the first two quarters, with approximately $96.3 million remaining under the authorized $200.0 million program. It paid approximately $11.5 million of dividends and declared a $0.20 per-share quarterly dividend.
- Management emphasized continued focus on operational execution, marketing, technology, food quality, franchise growth and international expansion. No formal full-year quantitative guidance was provided in the filing.
Risks and contingencies
Key risks include the ability to service, refinance or extend approximately $1.55 billion of debt; availability under variable funding notes; commodity-price volatility, especially cheese; labor, insurance and occupancy costs; foreign-exchange exposure; consumer spending and preferences; franchisee profitability and execution; severe weather, illness and health concerns; regulatory changes; litigation; tax-rate changes; and the effectiveness of marketing and technology initiatives. Management reported no material changes to the risk factors in the 2012 Form 10-K and stated that ordinary-course litigation and proceedings were not expected to materially affect financial position, results or cash flows.
Investor verification checklist
- Reconcile revenue growth with same-store sales, store openings and supply-chain commodity-price pass-through effects.
- Assess leverage, fixed-rate note maturities and refinancing requirements relative to operating cash flow and available borrowing capacity.
- Review the sustainability of domestic and international same-store sales and continued international unit expansion.
- Separate underlying earnings growth from the favorable comparison created by 2012 recapitalization expenses and tax adjustments.
- Monitor share repurchases, dividends and their effect on liquidity and the company’s stockholders’ deficit.
- Evaluate exposure to cheese and other commodity costs, foreign-currency movements, franchisee financial health and technology investment spending.