Domino’s Pizza, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Domino’s operates a primarily franchised pizza delivery and carryout network, domestic Company-owned stores, domestic and international supply-chain operations, and international franchise operations. The filing covers the twelve-week fiscal quarter and twenty-four fiscal weeks ended June 17, 2012, compared with the periods ended June 19, 2011.
- Stores at quarter-end: 9,924, including 4,901 domestic and 5,023 international stores.
- Domestic Company-owned stores declined to 387 from 427, primarily following the sale of 58 stores to franchisees during 2011.
- Global retail sales increased 4.3% in the quarter and 5.2% year to date.
Financial Performance and Key Metrics
| Metric | Q2 2012 | Q2 2011 | First Two Quarters 2012 | First Two Quarters 2011 |
|---|---|---|---|---|
| Total revenues | $376.1 million | $384.9 million | $760.7 million | $774.1 million |
| Operating margin | $114.6 million, 30.5% | $110.7 million, 28.8% | $229.3 million, 30.1% | $222.3 million, 28.7% |
| Income from operations | $65.8 million | $62.0 million | $132.7 million | $127.2 million |
| Interest expense | $20.7 million | $21.0 million | $53.0 million | $42.5 million |
| Net income | $28.1 million | $25.2 million | $48.8 million | $52.4 million |
| Diluted EPS | $0.47 | $0.40 | $0.82 | $0.83 |
| Operating cash flow | Not separately provided | Not separately provided | $58.1 million | $44.4 million |
Quarterly revenue decreased 2.3%, while income from operations increased 6.0% and net income increased 11.3%. Year-to-date revenue decreased 1.7%, operating income increased 4.3%, and net income decreased 6.7%.
- Domestic same-store sales increased 1.7% in the quarter and 1.9% year to date; domestic franchise same-store sales increased 1.9% and 2.0%, respectively.
- International same-store sales increased 5.7% and 5.2% on a constant-dollar basis, but foreign exchange reduced reported results.
- Domestic Company-owned store operating margin improved to 24.7% in the quarter from 21.1% and to 24.1% year to date from 20.9%.
- Domestic supply-chain operating margin was 10.8% in the quarter versus 10.8% and 10.7% year to date versus 11.0%.
Balance Sheet, Debt, Liquidity, and Cash Flow
- Cash and cash equivalents were $10.8 million; restricted cash was $59.6 million.
- Total assets were $424.6 million, compared with $480.5 million at January 1, 2012.
- Debt was approximately $1.57 billion, including $24.5 million classified as current debt. Stockholders’ deficit was $1.37 billion.
- Working capital was negative $6.7 million excluding restricted cash. Management stated that operating cash flow, unrestricted cash, and available borrowing capacity should fund operations and anticipated needs for at least the next twelve months.
- Cash provided by operating activities was $58.1 million year to date. Investing activities provided $27.3 million, primarily reflecting a reduction in restricted cash. Financing activities used $124.2 million.
- The Company had $60.3 million available under its $100.0 million variable funding notes facility, net of letters of credit. No variable funding note borrowings were outstanding at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue declined because of fewer Company-owned stores, lower domestic supply-chain volumes, lower cheese prices, and foreign-exchange pressure on international royalties.
- Profitability improved through higher franchise royalties, improved Company-owned store margins, lower cheese costs, and a more favorable revenue mix.
- Year-to-date net income was lower because of $10.5 million of recapitalization-related expenses and a $0.9 million valuation allowance against a deferred tax asset.
- Interest expense increased year to date because of debt extinguishment costs, deferred financing-fee write-offs, and temporary overlapping interest on the old and new debt facilities. Second-quarter interest expense declined as the new financing reduced the average borrowing rate.
- Operating cash flow increased $13.7 million year to date, supported by improved operating performance and timing of operating liability payments.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide specific numerical full-year revenue or earnings guidance in the filing. Management expects to continue investing in the core business, funding working capital and capital expenditures, servicing debt, and repurchasing shares using operating cash flow, unrestricted cash, and available variable-note capacity.
- In March 2012, subsidiaries completed a recapitalization consisting principally of $1.575 billion of 5.216% fixed-rate senior secured notes and $100 million of variable funding notes. Approximately $1.447 billion of old debt was repaid.
- The recapitalization funded a $3.00 per share special dividend of $171.1 million, related option and restricted-stock payments, financing costs, and debt reserves.
- The fixed-rate notes have an anticipated seven-year maturity and scheduled principal payments beginning in 2012. Covenants include debt-service coverage, leverage, minimum global retail sales, and other restrictions. The Company reported compliance with all covenants at June 17, 2012.
- Substantial leverage creates refinancing, liquidity, covenant-compliance, and accelerated-repayment risks. Failure to refinance or repay the fixed-rate notes by the anticipated repayment date could redirect substantially all cash flow toward debt repayment.
- Key operating risks include consumer spending, franchisee profitability, food and labor costs, cheese prices, foreign exchange, severe weather, insurance, litigation, regulation, technology and promotional effectiveness, and availability of variable-note capacity.
- A hypothetical 10% adverse currency movement in the ten largest international markets by store count would have reduced first-half revenue by approximately $3.9 million.
- Legal proceedings and tax reviews are described as ordinary-course matters that management does not believe will materially affect the Company’s financial position, results, or cash flows.
Important Facts for Investors to Verify
- Reconcile reported revenue declines with global retail sales growth and the continuing shift from Company-owned to franchised stores.
- Assess whether improved Company-owned store margins and franchise royalty growth can offset supply-chain volume pressure and slower same-store sales growth.
- Review debt covenants, scheduled principal payments, refinancing requirements, and the availability and conditions of the variable funding notes.
- Separate recurring operating performance from the $10.5 million of recapitalization-related expenses and the $0.9 million deferred-tax valuation allowance.
- Monitor cash generation after the special dividend and share repurchases, along with the substantial stockholders’ deficit and negative working capital.
- Track international growth, foreign-exchange effects, commodity prices, franchisee economics, and the Company’s ability to maintain store expansion.