Domino’s Pizza, Inc. 2013 Q3 Form 10-Q Summary
Business context and reporting period
Domino’s operates a substantially franchised global pizza business, including domestic company-owned stores, domestic and international franchise operations, and supply chain centers. The filing covers the 12-week fiscal quarter and 36 fiscal weeks ended September 8, 2013, compared with periods ended September 9, 2012.
- Stores at period-end: 10,566, up from 10,040, including 4,939 domestic stores and 5,627 international stores.
- Global retail sales increased 7.4% in the quarter and 8.7% year to date.
- Domestic same-store sales increased 5.4% in the quarter and 6.1% year to date; international same-store sales increased 5.0% and 5.8%, respectively, before foreign-currency effects.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Change |
|---|---|---|---|
| Revenue | $404.1 million | $378.1 million | +6.9% |
| Operating margin dollars | $120.6 million | $111.4 million | +8.3% |
| Operating margin percentage | 29.9% | 29.5% | +0.4 points |
| Income from operations | $66.8 million | $61.6 million | +8.4% |
| Net income | $30.6 million | $26.0 million | +17.9% |
| Diluted EPS | $0.53 | $0.44 | +20.5% |
| Metric | 36 Weeks 2013 | 36 Weeks 2012 | Change |
|---|---|---|---|
| Revenue | $1,235.7 million | $1,138.8 million | +8.5% |
| Income from operations | $216.1 million | $194.3 million | +11.2% |
| Net income | $98.3 million | $74.8 million | +31.4% |
| Diluted EPS | $1.70 | $1.26 | +34.9% |
| Operating margin percentage | 30.5% | 29.9% | +0.6 points |
- Net cash provided by operating activities was $104.6 million year to date, compared with $101.3 million in the prior-year period.
- Capital expenditures were $20.3 million, compared with $14.3 million; investing cash flow was an outflow of $18.8 million.
- Financing cash flow was an outflow of $108.4 million, including $76.9 million of share repurchases and $23.2 million of dividends.
- Cash and cash equivalents were $32.1 million, with $63.3 million of restricted cash and cash equivalents.
- Total debt was approximately $1.54 billion, including $24.1 million classified as current. Fixed-rate notes comprise substantially all borrowings and have fixed rates until January 2019.
- The company had $62.3 million of available variable funding note capacity after $37.7 million of outstanding letters of credit. No variable funding note borrowings were outstanding at September 8, 2013.
- Working capital was $13.6 million excluding restricted cash. Management stated that unrestricted cash and expected operating cash flow should fund operations, debt service, capital expenditures and working capital needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven by higher domestic supply chain volumes, stronger domestic franchise and company-owned store sales, international store growth and higher international revenues.
- Income from operations benefited from higher franchise royalties, improved supply chain margins and slightly higher company-owned store margins, partially offset by higher general and administrative expenses and foreign exchange effects.
- General and administrative expenses increased 8.2% in the quarter and 9.5% year to date, reflecting higher non-cash compensation, performance-based compensation, technology and international investments, and a $1.8 million reimbursement to the national advertising fund related to the gift card program.
- Interest expense declined year to date by $11.9 million, primarily because the 2012 recapitalization-related expenses and additional interest were incurred in the prior-year period.
- The effective tax rate decreased to 34.1% from 36.6% in the quarter and to 36.4% from 38.1% year to date. The 2013 quarter included an approximately $1.4 million tax benefit related to prior tax years.
- The company repurchased and retired 1.37 million shares for approximately $76.9 million year to date. Approximately $75.5 million remained available under the $200 million repurchase authorization at September 8, 2013.
- The company declared a $0.20 per-share quarterly dividend during the quarter and had $11.7 million of dividends payable at period-end.
Guidance, outlook, risks and unusual items
No formal numerical earnings or sales guidance is provided in the filing. Management expects to continue focusing on operational execution, marketing, technology, food quality and service, domestic same-store sales and international store growth.
- Management expects cash from operations, unrestricted cash and available variable funding capacity to support anticipated needs, but cautions that future cash flows and borrowing availability are not assured.
- A jury awarded a $32.0 million judgment against the company in a lawsuit in which the company was found 60% liable. Domino’s denied liability and planned post-judgment motions and a possible appeal. The matter is covered by casualty insurance subject to a $3.0 million deductible and may also be affected by franchisee indemnification provisions.
- Key risks include substantial leverage and refinancing requirements, franchisee performance, consumer demand, food and commodity costs, labor and insurance costs, foreign exchange, litigation, severe weather, regulation, insurance adequacy and availability of variable funding capacity.
- International revenue represented approximately 13.1% of year-to-date revenue. Management estimated that a hypothetical 10% adverse currency movement in the ten largest international markets would have reduced year-to-date revenue by approximately $6.5 million.
- Cheese prices and other commodities remain a margin risk. Cheese price increases are generally passed through supply chain revenue and cost of sales, affecting reported margin percentages even when dollar margins are unchanged.
- The filing states that no material changes occurred in previously disclosed risk factors. Disclosure controls and procedures were deemed effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the approximately $1.54 billion debt balance, scheduled maturities, covenant requirements and refinancing exposure.
- Assess whether operating cash flow can sustain debt service, dividends, capital expenditures and continued share repurchases.
- Monitor the outcome, insurance recovery and potential cash exposure from the $32.0 million litigation judgment.
- Verify the sustainability of domestic and international same-store sales growth and the pace and profitability of international store openings.
- Review the effects of commodity prices, foreign exchange movements and changes in supply chain product mix on reported margins.
- Separate recurring performance from the $1.4 million tax benefit, gift-card accounting adjustment and the prior-year recapitalization-related expenses.