Business Context and Reporting Period
Domino’s Pizza, Inc. filed this unaudited Form 10-Q for the 12-week fiscal quarter and 36 fiscal weeks ended September 6, 2015, compared with September 7, 2014. Domino’s operates company-owned stores, supplies franchisees with food and equipment, and earns royalties and fees from domestic and international franchisees. The company had 12,119 stores in more than 80 markets at quarter-end.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | First 36 Weeks 2015 | First 36 Weeks 2014 |
|---|---|---|---|---|
| Revenue | $484.7 million | $446.6 million | $1,475.3 million | $1,350.9 million |
| Income from operations | $80.5 million | $76.9 million | $267.0 million | $242.5 million |
| Net income | $37.8 million | $35.6 million | $130.0 million | $114.6 million |
| Diluted EPS | $0.67 | $0.63 | $2.30 | $2.01 |
| Operating margin | 16.6% | 17.2% | 18.1% | 18.0% |
| Net margin | 7.8% | 8.0% | 8.8% | 8.5% |
| Cash flow from operations | Not separately provided | Not separately provided | $167.3 million | $118.9 million |
Revenue increased 8.5% in the quarter and 9.2% year to date. Income from operations rose 4.7% in the quarter and 10.1% year to date, while net income increased 6.2% and 13.5%, respectively. The company declared quarterly dividends of $0.31 per share and paid approximately $48.1 million of dividends during the first 36 weeks.
Cash and cash equivalents were $32.5 million at September 6, 2015, with $91.0 million of restricted cash. Working capital was $34.1 million excluding restricted cash. Long-term debt, excluding the current portion, was $1.528 billion; substantially all borrowings were fixed-rate notes. No variable funding note borrowings were outstanding, and $56.5 million of facility capacity was available after letters of credit.
Capital expenditures were $33.8 million year to date. Financing activities used $174.1 million, including $138.6 million for share repurchases and $48.1 million for dividends, partially offset by equity-related cash inflows. Cash increased $1.7 million from year-end to $32.5 million.
Material Changes Versus the Prior Comparable Period
- Domestic same-store sales increased 10.5% in the quarter and 12.6% year to date; international same-store sales increased 7.7% excluding foreign currency effects.
- Global retail sales growth slowed to 6.1% in the quarter from 13.8% in the prior-year quarter, and to 8.0% year to date from 11.4%.
- The company opened 194 net new stores in the quarter, including 180 internationally, and 490 net new stores year to date. Total stores increased from 11,281 to 12,119 year over year.
- Supply chain revenue increased 7.5% in the quarter and 7.8% year to date, primarily from higher volumes and equipment sales associated with store remodeling. Lower cheese prices reduced supply chain revenue by an estimated $7.6 million in the quarter and $30.5 million year to date.
- Operating margin declined 0.6 percentage points in the quarter, despite higher revenue, largely because of a $5.7 million incremental casualty-insurance expense arising from updated actuarial estimates. The charge included $4.3 million in company-owned stores and $1.4 million in supply chain.
- General and administrative expense increased 8.6% in the quarter and 13.5% year to date due to investments in technology, e-commerce, international operations, labor, advertising, incentives and performance-based compensation.
- Foreign currency reduced international franchise revenue by approximately $5.5 million in the quarter and $13.5 million year to date, and reduced international supply chain revenue by approximately $4.3 million and $9.9 million, respectively.
- The company repurchased 1.29 million shares for approximately $138.6 million year to date, leaving approximately $159.4 million authorized for future repurchases. The share count declined to approximately 54.65 million from 55.55 million at December 28, 2014.
Guidance, Outlook, Risks, Contingencies and Unusual Items
Management stated that nearly 50% of U.S. sales came from digital channels during the quarter and year to date, and emphasized technology, marketing, store growth and international expansion. No specific quantitative full-year revenue or earnings guidance is provided in the filing. Management expected cash, operating cash flow and available variable funding capacity to fund operations, debt service, capital expenditures and working capital for at least the next twelve months, while noting that future cash generation and borrowing availability are not assured.
Subsequent to quarter-end, the company announced a planned recapitalization involving approximately $1.5 billion of new fixed-rate notes, retirement at par of approximately $551.3 million of existing notes, and a new $125 million variable funding note facility. The company anticipated closing during the fourth quarter of 2015. It expected defined leverage ratios to exceed 4.5x at closing, which would require approximately $26.9 million of previously deferred principal amortization payments in future quarters.
Other notable matters include a pending Texas Supreme Court review request relating to a previously reversed $32.0 million judgment in which Domino’s had been found 60% liable. Management continues to deny liability and stated that existing legal matters were not expected to materially affect results. Key risks include leverage and refinancing execution, litigation, franchisee performance, commodity and labor costs, insurance costs, foreign exchange, consumer spending, severe weather, regulation, technology execution and availability of variable funding capacity.
Important Facts for Investors to Verify
- Whether the proposed fourth-quarter 2015 refinancing closed on the anticipated terms and how it affected interest expense, leverage and required amortization.
- The sustainability of strong domestic same-store sales and the slower global retail sales growth rate.
- The recurrence or resolution of the $5.7 million casualty-insurance charge and related actuarial estimates.
- Foreign currency effects on international royalties, supply chain revenue and earnings.
- Cash flow coverage of substantial debt, dividends and share repurchases, given the company’s negative stockholders’ equity of $1.256 billion.
- The outcome of the Texas Supreme Court review request and any related financial exposure.
- Execution of international store expansion, digital ordering initiatives and the store remodeling program.