Business Context and Reporting Period
Domino’s Pizza, Inc. filed this unaudited Form 10-Q for the 12-week fiscal quarter ended March 27, 2011, compared with the quarter ended March 28, 2010. The company operates company-owned and franchised stores, domestic supply-chain centers, and international operations. At quarter-end, it had 9,379 stores: 4,909 domestic and 4,470 international.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $389.2 million | $381.1 million | +2.1% |
| Operating margin dollars | $111.6 million | $108.0 million | +3.3% |
| Operating margin | 28.7% | 28.3% | +0.4 percentage points |
| Income from operations | $65.1 million | $57.5 million | +13.2% |
| Income before taxes | $43.7 million | $39.6 million | +10.5% |
| Net income | $27.1 million | $24.5 million | +10.6% |
| Diluted EPS | $0.43 | $0.41 | +4.9% |
| Cash flow from operations | $27.8 million | $32.4 million | -$4.6 million |
| Capital expenditures | $3.9 million | $5.1 million | -$1.3 million |
Revenue growth was led by international operations, which increased 19.2% to $45.8 million, and domestic supply-chain revenue, which increased 1.9% to $216.6 million. Domestic company-owned store revenue declined 6.2% to $82.7 million.
Domestic same-store sales declined 1.4%, including a 2.3% decline at company-owned stores and a 1.3% decline at franchise stores. International same-store sales increased 8.3% on a constant-dollar basis. Global retail sales increased 8.2%.
Cash and cash equivalents were $92.6 million at March 27, 2011, compared with $47.9 million at January 2, 2011. Restricted cash was $84.8 million. Working capital was $83.1 million excluding restricted cash. Long-term debt was approximately $1.45 billion, including $60.0 million of outstanding variable funding notes. Stockholders’ deficit was $1.17 billion.
Material Changes Versus the Prior Comparable Period
- Income from operations increased primarily from higher international royalties, favorable foreign exchange, lower general and administrative expenses, and gains on store-related asset sales.
- General and administrative expense declined 7.8% to $46.5 million, reflecting lower performance-based bonuses and approximately $1.8 million of pre-tax gains related to sales of company-owned operations.
- Interest expense declined $2.7 million to $21.5 million because of lower average debt balances following 2010 debt repurchases.
- Q1 2010 included a $6.1 million pre-tax gain from repurchasing and retiring $60.0 million of senior notes; no comparable debt repurchase occurred in Q1 2011.
- Domestic company-owned store margin declined to 20.7% from 21.5%, pressured by lower same-store sales and higher food, insurance, and occupancy costs.
- Domestic supply-chain margin declined to 11.2% from 11.8%, primarily because of lower volumes, higher commodity prices, and higher fuel costs. Average cheese prices increased to $1.69 per pound from $1.44.
- The company sold 26 company-owned stores to a franchisee and recognized an approximately $1.1 million pre-tax gain. The transaction was not expected to have a material ongoing effect.
- The company repurchased 357,605 shares for approximately $5.8 million under its $200 million authorization; approximately $91.5 million remained available.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific numerical earnings or revenue guidance in the filing. It stated that new product platforms, marketing, technology initiatives, international growth, and the customer base established during 2010 position the company for future growth despite a difficult economic and consumer environment.
Management expected unrestricted cash and ongoing operating cash flow to fund operations, working capital, capital expenditures, debt service, debt reduction, and share repurchases for the foreseeable future. The company had an interest-only period on its securitized debt through April 2012, with potential one-year extensions in 2012 and 2013 if specified requirements are met. Management believed it currently exceeded the applicable threshold.
Principal risks include substantial leverage, refinancing and debt-service requirements, availability of variable funding and letters of credit, commodity and fuel-cost volatility, labor and insurance costs, consumer spending, franchisee profitability, competition, product execution, foreign exchange, litigation, taxes, regulation, severe weather, and the ability to maintain adequate insurance coverage. The filing states that no material changes occurred to previously disclosed risk factors.
The company recognized a $0.2 million income-tax benefit from reducing unrecognized tax benefits related to a state tax matter. Ordinary-course lawsuits, tax reviews, workers’ compensation, liability, automobile, franchise, and employment claims were not expected to materially affect financial position, results, or cash flows.
Important Facts for Investors to Verify
- Whether domestic same-store sales stabilize after the difficult comparison with Q1 2010 and whether international growth remains durable.
- The sustainability of operating-margin improvement amid elevated cheese, food, fuel, labor, and insurance costs.
- Liquidity, covenant compliance, and the company’s ability to extend, refinance, or service approximately $1.45 billion of long-term debt.
- The timing and conditions for extending the securitized debt interest-only period beyond April 2012.
- The effect of continued store refranchising, share repurchases, and debt reduction on future revenue, leverage, cash flow, and per-share results.
- The filing’s statement that interim results are not necessarily indicative of full-year results and that management provided no specific numerical guidance.