Domino’s Pizza, Inc. — Form 10-Q Summary
Business context and reporting period
Domino’s operates a global franchised pizza system, domestic company-owned stores, and supply-chain centers serving franchisees. The filing covers the 12-week fiscal quarter and 36 fiscal weeks ended September 9, 2018, compared with the periods ended September 10, 2017. At period end, the system had 15,354 stores in more than 85 markets, including 5,751 domestic and 9,603 international stores.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 36 weeks 2018 | 36 weeks 2017 |
|---|---|---|---|---|
| Revenue | $786.0 million | $643.6 million | $2,350.7 million | $1,896.5 million |
| Income from operations | $132.4 million | $117.1 million | $392.1 million | $346.0 million |
| Operating margin | 16.8% | 18.2% | 16.7% | 18.2% |
| Net income | $84.1 million | $56.4 million | $250.3 million | $184.6 million |
| Diluted EPS | $1.95 | $1.18 | $5.73 | $3.76 |
| Net cash from operations | Not separately provided | Not separately provided | $262.5 million | $228.1 million |
Reported revenue increased 22.1% in the quarter and 24.0% year to date. Net income increased 49.2% and 35.6%, respectively. Effective tax rates declined to 15.3% in the quarter and 14.9% year to date, compared with 33.3% and 30.0%, primarily because of the Tax Cuts and Jobs Act and higher excess tax benefits from equity compensation.
Reported operating margin expanded because ASC 606 required domestic franchise advertising contributions and related expenses to be presented gross. The filing states that this presentation change materially increased reported revenue and expenses but had little effect on operating income or net income. Excluding the accounting presentation effect, the filing does not provide a single clearly stated comparable operating-margin measure.
At September 9, 2018, unrestricted cash was $84.6 million, restricted cash was $168.2 million, and restricted advertising fund assets were $118.8 million. Working capital was $54.4 million excluding restricted cash, advertising fund assets, and advertising fund liabilities. Total debt was approximately $3.47 billion, including $35.8 million classified as current. The company had no borrowings under its variable funding notes and had $128.3 million available, net of letters of credit.
Year-to-date investing cash use was $65.4 million, including $65.1 million of capital expenditures. Financing cash use was $172.1 million, including $429.2 million of share repurchases and $46.7 million of dividends. The company declared a $0.55 per-share quarterly dividend and had approximately $320.8 million remaining under its repurchase authorization at quarter end.
Material changes versus the prior comparable period
- Global retail sales increased 8.3% in the quarter and 12.5% year to date; store count increased by 920 from the prior-year period to 15,354.
- Domestic franchise same-store sales rose 6.4% in the quarter and 7.3% year to date. Company-owned same-store sales rose 4.9% and 5.4%, respectively. International same-store sales, excluding foreign currency effects, rose 3.3% and 4.0%.
- Supply-chain revenue increased 10.7% in the quarter and 12.3% year to date, primarily from higher order volumes and store growth. Supply-chain margin declined to 10.7% from 10.9% in the quarter and to 10.7% from 11.2% year to date.
- Company-owned store margin declined 1.6 percentage points in the quarter because of higher food, labor, and insurance costs, but increased 0.1 percentage point year to date.
- Interest expense increased to $34.0 million in the quarter and $100.4 million year to date, reflecting higher average borrowings. Total debt increased from $3.15 billion at December 31, 2017 to approximately $3.47 billion at September 9, 2018.
- On April 24, 2018, subsidiaries issued $825.0 million of senior secured notes with fixed rates of 4.116% and 4.328%, using proceeds in part to repay approximately $490.1 million of 2015 notes and fund other transaction and capital-allocation activities.
- The company repurchased 1.75 million shares for approximately $429.2 million during the first 36 weeks of 2018, compared with $1.01 billion during the comparable 2017 period.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide specific full-year revenue, earnings, or same-store-sales guidance in the filing. Management expects unrestricted cash, operating cash flow, and available variable-funding-note capacity to cover anticipated debt service, capital expenditures, and working-capital needs for at least the next twelve months, while cautioning that future cash flows and borrowing availability are not assured.
- Management highlighted loyalty programs, digital ordering, technology initiatives including HotSpots, marketing, operational execution, and continued international and domestic store expansion as growth drivers. The company opened 232 net new stores in the quarter and 498 year to date.
- A $5.9 million pre-tax gain from selling 12 company-owned stores to a former executive who became a franchisee increased third-quarter results.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. The adoption created a $6.7 million adjustment to beginning retained deficit and deferred certain international store-opening fees.
- The company expects adoption of the new lease standard in the first quarter of 2019 to materially increase reported assets and liabilities because of its operating lease portfolio, although initial income-statement and cash-flow effects are not expected to be material.
- Key risks include substantial leverage and refinancing needs, interest-rate and commodity-price volatility, labor and insurance costs, foreign-exchange exposure, competition, franchisee profitability and relationships, food safety, cybersecurity, severe weather, consumer spending, legal matters, and the ability to continue dividends and share repurchases.
- A previously disclosed traffic-accident lawsuit was reversed and remanded for a new trial in May 2018. The company continues to deny liability and states that existing legal matters are not expected to materially affect its financial position, results, or cash flows.
Important facts for investors to verify
- Reconcile reported revenue and operating-margin growth for the effect of gross advertising-fund presentation under ASC 606.
- Assess debt maturities, floating-rate exposure, refinancing requirements, and the company’s ability to fund substantial share repurchases and dividends while maintaining high leverage.
- Monitor whether same-store-sales growth and new-store expansion offset slowing comparisons and rising food, labor, delivery, and insurance costs.
- Verify the effect of the 2019 lease-accounting adoption on assets, liabilities, leverage metrics, and covenant calculations.
- Review the traffic-accident litigation, insurance reserves, and other legal contingencies, including the potential outcome of the retrial.
- Evaluate the sustainability of the unusually low effective tax rate and the contribution of excess tax benefits from equity compensation.