Domino’s Pizza, Inc. 2011 Form 10-K Summary
Business context and reporting period
Domino’s operates a predominantly franchised pizza delivery and carry-out system through three segments: domestic stores, domestic supply chain, and international. At January 1, 2012, the system had 9,742 stores, including 4,907 domestic stores and 4,835 international stores in more than 70 markets. The fiscal year ended January 1, 2012 and contained 52 weeks; the prior year also contained 52 weeks.
The company generated revenue through Company-owned store sales, domestic and international franchise royalties and fees, and the sale of food, equipment and supplies through its supply chain operations.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $1,652.2 million | $1,570.9 million | Up 5.2% |
| Income from operations | $259.1 million | $227.7 million | Up 13.8% |
| Operating margin | 15.7% | 14.5% | Up 1.2 percentage points |
| Net income | $105.4 million | $87.9 million | Up 19.8% |
| Diluted EPS | $1.71 | $1.45 | Up 17.9% |
| Cash flow from operations | $153.1 million | $128.3 million | Up $24.8 million |
| Capital expenditures | $24.3 million | $25.4 million | Down $1.1 million |
- Domestic stores revenue was $523.4 million, with segment operating income of $154.8 million.
- Domestic supply chain revenue was $927.9 million, with segment operating income of $71.8 million. Higher cheese and other commodity prices increased revenue, but supply chain margin declined to 10.4% from 11.1% because of commodity and fuel costs.
- International revenue was $200.9 million, with segment operating income of $93.1 million. Approximately 54% of international revenue and 91% of international segment income related to royalties and fees.
- Domestic same-store sales increased 3.5%, following 9.9% growth in 2010. International same-store sales increased 6.8% on a constant-dollar basis.
- Global retail sales increased 11.0%, reflecting same-store sales growth, store additions and favorable foreign exchange.
- Unrestricted cash was $50.3 million and restricted cash was $92.6 million at year-end. Working capital was $37.1 million, excluding restricted cash.
- Total debt was approximately $1.45 billion, including $60.0 million fully drawn under the variable funding facility. Stockholders’ deficit was $1.21 billion.
- The company repurchased $165.0 million of common stock during 2011; approximately $82.3 million remained under the $200.0 million authorization at year-end. No dividends were declared in 2011.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher domestic supply chain prices, international store and same-store sales growth, favorable currency effects and higher domestic franchise fees. Company-owned store revenue declined 2.7%, principally because 58 Company-owned stores were sold to franchisees.
- Operating income benefited from higher domestic and international franchise royalties, improved Company-owned store margins and the favorable revenue mix. General and administrative expense was essentially flat, increasing 0.2%.
- Interest expense declined to $91.6 million from $96.8 million, primarily because of lower debt balances and fewer debt-related costs.
- The effective tax rate increased to 37.2% from 36.7%; 2010 benefited from state tax reserve adjustments.
- International stores increased by 413 net units, from 4,422 to 4,835. Total stores increased by 391, while domestic Company-owned stores declined from 454 to 394.
- Shares outstanding declined materially as a result of repurchases, while stock-option exercises provided $33.5 million of cash proceeds.
Guidance, outlook, commentary, risks and unusual items
- Management expected fiscal 2012 capital expenditures of approximately $25 million to $35 million for Company-owned stores, supply chain centers, PULSE point-of-sale systems, digital ordering and other technology.
- Management expected continued positive operating cash flow and believed unrestricted cash and expected cash generation would fund operations, capital expenditures, working capital and debt-service requirements for the foreseeable future.
- The company postponed a planned refinancing because of market volatility. Approximately $7.6 million of related fees were incurred in 2011, of which approximately $7.4 million was deferred; some or all could be expensed if the refinancing is no longer likely to proceed as structured.
- Securitized debt required interest-only payments until April 2012, with two potential one-year extensions subject to covenant and financial requirements. Management expected to qualify for the extensions if needed. The expected repayment date for most debt was April 2014, although the legal final maturity was April 2037.
- Key risks include substantial leverage and refinancing requirements, debt-service covenant compliance, limited variable-funding availability, commodity and fuel cost volatility, competition, dependence on franchisee performance, international currency and economic exposure, food safety, labor and regulatory costs, litigation, insurance claims, and cybersecurity or technology interruptions.
- Cheese prices averaged $1.80 per pound in 2011 versus $1.50 in 2010. Management estimated that a hypothetical $0.25 adverse change in the average cheese price would have increased Company-owned store food costs by approximately $2.1 million in 2011.
- Legal accruals were approximately $10.1 million and insurance reserves were approximately $34.4 million at year-end. Management stated that recorded accruals were adequate, but ultimate legal losses could exceed recorded amounts by up to $3.0 million.
- Letters of credit totaled approximately $39.7 million and were collateralized primarily by restricted cash. Franchisee borrowing and lease guarantees totaled potential future payments of approximately $3.7 million.
Most important facts for investors to verify
- Whether the company successfully refinanced or extended the approximately $1.45 billion securitized debt and the resulting interest rates, maturities and covenant requirements.
- Whether operating cash flow remains sufficient to fund debt service, capital expenditures and continued share repurchases.
- The sustainability of domestic same-store sales after the sharp 2010 increase and the effect of promotional activity on margins.
- The impact of cheese, meat, fuel, labor and other commodity costs on domestic store and supply chain profitability.
- International same-store sales, currency movements and the pace and economics of new store openings.
- The remaining share-repurchase authorization, changes in shares outstanding and the company’s future capital-return policy.
- Developments in disclosed employment, casualty, patent, tax and other legal matters, including potential losses beyond recorded reserves.