Domino’s Pizza, Inc. 2013 Form 10-K Summary
Business context and reporting period
Domino’s operates a predominantly franchised pizza delivery and carry-out business through domestic stores, a vertically integrated domestic supply chain, and international operations. The filing covers the 52-week fiscal year ended December 29, 2013; the fourth quarter comprised 16 weeks. The company operated 10,886 stores, including 4,986 domestic stores and 5,900 international stores, in more than 70 international markets.
- Domestic stores: 4,596 franchise stores and 390 company-owned stores.
- Domestic supply chain: 16 regional centers plus equipment, thin-crust, vegetable-processing, and other facilities.
- International: primarily master-franchised operations; approximately 90% of segment operating income related to franchise royalties and fees.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $1,802.2 million | $1,678.4 million | 7.4% increase |
| Operating margin | $549.0 million; 30.5% of revenue | $501.3 million; 29.9% | 9.5% increase; margin up 0.6 points |
| Income from operations | $313.8 million; 17.4% of revenue | $282.3 million; 16.8% | 11.2% increase |
| Net income | $143.0 million; 7.9% of revenue | $112.4 million; 6.7% | 27.2% increase |
| Diluted EPS | $2.48 | $1.91 | 29.8% increase |
| Cash flow from operations | $194.0 million | $176.3 million | 10.0% increase |
| Capital expenditures | $40.4 million | $29.3 million | Increase |
| Total debt | $1,536.4 million | $1,560.8 million | Decrease of $24.4 million |
Segment revenue and operating income were $549.8 million and $182.0 million for domestic stores, $1.01 billion and $84.5 million for domestic supply chain, and $242.6 million and $118.9 million for international operations. Corporate and other unallocated expenses were $71.6 million.
- Domestic same-store sales increased 5.4%; domestic company-owned stores increased 3.9% and domestic franchise stores increased 5.5%.
- International same-store sales increased 6.2% on a constant-dollar basis, with 573 net international store openings.
- Global retail sales increased 8.2%, partly offset by unfavorable foreign currency translation.
- Approximately 40% of domestic store sales originated digitally.
- Cash and cash equivalents declined to $14.4 million from $54.8 million, while restricted cash increased to $125.5 million from $60.0 million.
- Working capital was negative $28.5 million, consistent with the company’s franchise and supply-chain operating model.
- Stockholders’ deficit was $1.29 billion at year-end, reflecting the company’s leveraged capital structure and shareholder distributions.
Material changes versus the prior comparable period
- Revenue growth was driven by higher domestic franchise and company-owned store sales, increased supply-chain volume and commodity prices, and international store and same-store sales growth.
- Domestic supply-chain revenue increased 7.2%, supported by higher volumes, product mix, equipment and supply sales, and higher cheese prices.
- Income from operations benefited from higher royalty revenue, improved company-owned store margins, and higher domestic supply-chain margins.
- General and administrative expense increased 7.4% to $235.2 million, including higher non-cash compensation, performance-based compensation, technology and international investments, and a $1.5 million reimbursement to the national advertising fund related to the gift-card program.
- Interest expense declined $12.6 million to $88.9 million, primarily because 2012 recapitalization-related expenses did not recur and average debt was lower.
- The effective tax rate declined to 36.5% from 38.0%, including a $1.4 million tax benefit related to prior tax years.
- The domestic advertising contribution requirement increased from 5.5% to 6.0% of store sales beginning in 2013.
- The company began a system-wide store re-image and relocation campaign, with substantial completion of domestic stores targeted by the end of 2017.
Guidance, outlook, commentary, risks and unusual items
Management did not provide quantified earnings or revenue guidance in the filing. Management expects continued store growth, positive operating cash flow, continued investment in technology and store re-imaging, and ongoing dividends and share repurchases, subject to debt restrictions and future performance.
- The $1.575 billion fixed-rate notes bear interest at 5.216% and have an expected repayment date in January 2019, with legal maturity in 2042. Scheduled principal payments are $23.6 million in 2014, $29.5 million in 2015, $37.4 million in 2016, $39.4 million in each of 2017 and 2018, and $9.8 million in 2019.
- The $100.0 million variable funding facility had $57.7 million available after $42.3 million of letters of credit. The facility had no outstanding borrowings at year-end.
- Debt covenants include debt-service coverage and leverage requirements. Failure to comply could accelerate repayment and restrict cash available for operations, dividends, or share repurchases.
- Management expects current cash, restricted cash available as collateral, operating cash flow, and available variable funding capacity to fund operations, debt service, capital expenditures, dividends, and repurchases for the foreseeable future.
- Key risks include substantial leverage and refinancing, commodity and labor-cost inflation, competition, franchisee financial or operational weakness, foreign currency movements, international economic and regulatory exposure, supply-chain disruptions, food safety, litigation, cybersecurity, privacy, labor regulation, and changing consumer preferences.
- A hypothetical 10% adverse foreign-exchange movement in the top ten international markets would have reduced 2013 revenue by approximately $9.7 million.
- The company was found 60% liable in a third-quarter 2013 lawsuit involving a $32.0 million jury judgment. Domino’s appealed; the matter is covered by casualty insurance subject to a $3.0 million deductible and franchise indemnity provisions.
- Management stated that legal and insurance accruals were adequate, but reasonably possible losses could exceed recorded amounts by $5.0 million.
- Fourth-quarter 2013 revenue was $566.5 million, net income was $44.7 million, and diluted EPS was $0.78.
Important facts for investors to verify
- Whether same-store sales and international store growth remain sufficient to offset currency pressure, competition, and cost inflation.
- The company’s ability to meet debt-service coverage and leverage covenants and refinance or repay the fixed-rate notes around January 2019.
- Available unrestricted liquidity after considering restricted cash, letters of credit, debt service, dividends, repurchases, and capital expenditures.
- The financial impact and execution progress of the domestic store re-image and relocation program.
- Commodity exposure, particularly cheese prices, labor costs, minimum-wage changes, and the ability to pass cost increases through the system.
- The outcome and ultimate cash exposure from the $32.0 million litigation judgment and other employment, casualty, franchise, and insurance claims.
- The sustainability of dividends and share repurchases, including the February 2014 increase of remaining repurchase authorization to $200.0 million.
- The filing’s audited financial statements and controls opinion: PricewaterhouseCoopers reported no material misstatement and concluded that internal control over financial reporting was effective as of December 29, 2013.