Domino’s Pizza, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Domino’s operates a global franchised pizza business, U.S. company-owned stores, and supply-chain centers serving franchisees. The filing covers the 12-week quarter and 24 weeks ended June 14, 2020, compared with periods ended June 16, 2019. The company had 17,173 stores at quarter-end, including 6,195 U.S. stores and 10,978 international stores.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total revenue | $920.0 million | $811.6 million | +13.4% |
| Income from operations | $163.6 million | $138.9 million | +17.8% |
| Operating margin | 17.8% | 17.1% | +0.7 percentage points |
| Net income | $118.7 million | $92.4 million | +28.5% |
| Diluted EPS | $2.99 | $2.19 | +36.5% |
| Net interest expense | $39.1 million | $32.9 million | +18.6% |
- For the first 24 weeks, revenue increased 8.8% to $1.793 billion, operating income increased 13.1% to $319.4 million, and net income increased 29.9% to $240.3 million. Diluted EPS was $6.05 versus $4.38.
- Q2 global retail sales increased 8.1%, while U.S. same-store sales increased 16.1% and international same-store sales increased 1.3%, excluding foreign currency effects.
- Q2 supply-chain revenue increased 15.3% to $539.1 million, with supply-chain operating margin rising to 11.9% from 11.3%.
- U.S. franchise royalties and fees increased 18.3% to $113.1 million. International franchise royalties and fees declined 12.5% to $48.1 million.
- Net cash provided by operating activities for the first 24 weeks was $211.8 million, compared with $201.6 million in the prior-year period. Capital expenditures were $33.7 million, and the company invested $40.0 million in Dash Brands, its China master franchisee.
- Cash and cash equivalents were $248.0 million, excluding $238.2 million of restricted cash and $113.1 million of restricted advertising-fund assets.
- Total debt was approximately $4.17 billion, including $43.0 million classified as current. Stockholders’ deficit was $3.283 billion.
Material Changes Versus the Prior Comparable Period
- U.S. demand strengthened materially as customers shifted toward delivery and carryout during the COVID-19 pandemic. U.S. same-store sales growth accelerated from 3.0% to 16.1%.
- International operations were adversely affected by temporary store closures, reduced operating hours, social-distancing measures, and foreign-currency movements. At the quarter-end, fewer than 700 international stores were temporarily closed, compared with a peak of approximately 2,400 during the quarter.
- Labor costs increased as a percentage of U.S. company-owned store revenue, primarily because of additional pandemic-related bonus pay. The company also provided enhanced sick pay and other support to employees.
- Interest expense increased because of higher average debt following the 2019 recapitalization and borrowings under the variable funding notes.
- The effective tax rate fell to 4.7% in Q2 and 0.6% for the first 24 weeks, principally because of higher excess tax benefits from stock-option exercises.
- The company opened 84 net new stores in Q2 and 153 year-to-date, including 45 internationally and 39 in the U.S.
- The company repurchased approximately $79.6 million of stock during the first week of 2020 but made no program repurchases during Q2. Approximately $326.6 million remained authorized at June 14, 2020.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that operating cash flow, unrestricted cash, and available borrowings were expected to cover debt service, capital expenditures, and working-capital needs for at least the next 12 months. No formal sales or earnings guidance is provided in the filing.
- As a precaution during the pandemic, the company borrowed $158.0 million under its variable funding notes during the first 24 weeks and repaid $100.0 million during the quarter. It repaid an additional $15.0 million after quarter-end. At June 14, 2020, $102.0 million was available under the facility, net of letters of credit; availability was $117.0 million as of July 8, 2020.
- The company is contractually required to invest an additional $40.0 million in Dash Brands in the first quarter of 2021 if specified performance conditions are satisfied; otherwise, the investment is discretionary.
- COVID-19 remains the principal near-term uncertainty, with potential effects on store operations, international closures, labor and supply costs, customer demand, staffing, and the supply chain. As of July 8, 2020, nearly all U.S. stores remained open and fewer than 600 international stores were temporarily closed.
- Other material risks include substantial leverage, refinancing and interest-rate risk, LIBOR transition risk, commodity-price volatility, foreign-currency exposure, competition, franchisee performance, cybersecurity, food safety, labor availability, and adverse legal or regulatory developments.
- A pending legal matter includes an $8.0 million final verdict against the company in a Florida traffic-accident case; the company denies liability and has appealed. Management does not believe existing proceedings will materially affect financial position, results, or cash flows.
- The company adopted ASC 326 for expected credit losses with no material impact on the financial statements. Disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether elevated U.S. same-store sales persist after pandemic-related delivery and carryout demand normalizes.
- The pace of reopening and sales recovery in international markets, including the effect of future COVID-19 restrictions.
- Debt maturities, refinancing capacity, variable-rate exposure, and the company’s ability to sustain dividends and future share repurchases.
- The financial impact and performance conditions associated with the additional $40.0 million Dash Brands investment.
- The unusually low effective tax rate and the extent to which excess tax benefits from equity compensation recur.
- Supply-chain margins, labor costs, commodity prices, foreign exchange, and the effect of pandemic-related employee support programs.