Domino’s Pizza, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
Domino’s operates company-owned stores, supplies food and equipment to franchisees, and earns royalties and fees from domestic and international franchise operations. The filing covers the 12-week fiscal quarter ended September 10, 2017, and the 36-week period ended September 10, 2017, compared with the corresponding periods ended September 11, 2016.
- Worldwide stores increased to 14,434 from 13,252 a year earlier, including 5,491 domestic and 8,943 international stores.
- The company opened 217 net new stores in the quarter and 623 year to date.
- Global retail sales increased 14.5% in the quarter and 13.2% year to date.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | First 36 weeks 2017 | First 36 weeks 2016 |
|---|---|---|---|---|
| Revenue | $643.6 million | $566.7 million | $1,896.5 million | $1,653.2 million |
| Income from operations | $117.1 million | $100.9 million | $346.0 million | $303.3 million |
| Net income | $56.4 million | $47.2 million | $184.6 million | $141.9 million |
| Diluted EPS | $1.18 | $0.96 | $3.76 | $2.82 |
| Operating margin | 18.2% | 17.8% | 18.2% | 18.3% |
| Net margin | 8.8% | 8.3% | 9.7% | 8.6% |
| Net cash from operations | Not separately reported for the quarter | Not separately reported for the quarter | $222.1 million | $162.6 million |
- Q3 revenue increased 13.6%, operating income increased 16.0%, and net income increased 19.3%. Year-to-date revenue increased 14.7%, operating income increased 14.1%, and net income increased 30.0%.
- Q3 same-store sales rose 8.4% for both domestic company-owned and domestic franchise stores and 5.1% internationally, excluding foreign currency effects. Year-to-date increases were 11.2%, 9.2%, and 4.0%, respectively.
- Q3 cost of sales was 69.2% of revenue, compared with 69.3% in the prior-year quarter. Year-to-date cost of sales was 69.2%, compared with 69.0%.
- Q3 interest expense was $33.1 million, up from $25.2 million. Year-to-date interest expense was $83.4 million, up from $76.5 million.
- Cash and cash equivalents were $61.4 million, with $192.0 million of restricted cash, at September 10, 2017. Reported working capital was $2.1 million excluding restricted cash.
- Total debt was approximately $3.16 billion, including $32.3 million classified as current. Stockholders’ deficit was $2.77 billion.
Material changes versus the prior comparable period
- Growth was driven by higher same-store sales, increased store counts, digital ordering and loyalty activity, and greater supply-chain volumes.
- Domestic company-owned store margin declined to 23.1% from 23.5% in the quarter and to 22.4% from 24.2% year to date, primarily because of higher labor and insurance costs.
- General and administrative expense increased 11.5% in the quarter and 14.1% year to date, reflecting technology and strategic investments and higher advertising contributions.
- The effective tax rate declined to 33.3% from 37.7% in the quarter and to 30.0% from 37.6% year to date. Adoption of ASU 2016-09 reduced tax expense by $3.5 million in the quarter and $20.4 million year to date.
- The company completed a $1.9 billion recapitalization on July 24, 2017, issuing $300 million of floating-rate notes, $600 million of five-year fixed-rate notes, and $1.0 billion of ten-year fixed-rate notes. Proceeds repaid approximately $910.5 million of prior debt and funded other transaction uses.
- The company repurchased approximately $1.01 billion of stock during the first 36 weeks, including 4.56 million shares received under a $1.0 billion accelerated share repurchase agreement. The remaining repurchase authorization at quarter-end was approximately $250 million.
Outlook, risks, contingencies and unusual items
- Management stated that operating cash flow, unrestricted cash and available borrowings were expected to support debt service, capital expenditures, working capital, dividends and repurchases for at least the next 12 months. No specific revenue or earnings guidance was provided.
- The variable funding facility permits up to $175 million of borrowings; $43.1 million was supported by letters of credit and $131.9 million remained available at quarter-end. No borrowings were outstanding.
- Scheduled debt maturities are concentrated in 2022, 2025 and 2027, increasing refinancing and interest-rate risk. The floating-rate notes bear interest at LIBOR plus 125 basis points.
- Recapitalization-related expenses included approximately $5.5 million for the write-off of prior debt issuance costs, $16.8 million of new capitalized debt issuance costs, and other transaction costs. Management identified approximately $6.4 million of pretax recapitalization-related expense overall.
- Key operating risks include labor, food and cheese costs, insurance, foreign currency, consumer demand, severe weather, franchisee performance, technology execution, competition, financing availability and high leverage.
- A personal-injury lawsuit remains on appeal. The final verdict after offsets was approximately $8.9 million, but the company denies liability and does not believe existing legal matters will materially affect its financial position, results or cash flows.
- The company expects the upcoming lease standard to materially increase reported assets and liabilities. Revenue-standard adoption was expected to have limited impact on major revenue streams, but the treatment of advertising-fund activity remained under evaluation.
Important facts for investors to verify
- Whether strong same-store sales and store growth continue while domestic company-owned margins remain pressured by labor and insurance costs.
- The company’s ability to service and refinance approximately $3.16 billion of debt, particularly the large scheduled maturities in 2022, 2025 and 2027.
- The effect of the recapitalization, floating-rate exposure and future interest costs on earnings and cash flow.
- The final settlement and share count impact of the accelerated share repurchase agreement, completed October 11, 2017.
- The sustainability of tax-rate benefits from equity compensation, which materially increased 2017 net income and operating cash flow.
- The outcome of the pending personal-injury appeal and any related insurance coverage or cash obligations.