Domino’s Pizza, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Domino’s operates Company-owned stores, domestic and international franchise stores, and supply chain centers. The filing covers the twelve-week fiscal quarter and twenty-four fiscal weeks ended June 19, 2011, compared with the periods ended June 20, 2010. The financial statements are unaudited.
- Stores at quarter-end: 9,436, up from 9,097.
- Domestic stores: 4,894, including 427 Company-owned and 4,467 franchise stores.
- International stores: 4,542, up from 4,188.
Financial Performance and Key Metrics
| Metric | Q2 2011 | Q2 2010 | First Two Quarters 2011 | First Two Quarters 2010 |
|---|---|---|---|---|
| Total revenue | $384.9 million | $362.4 million | $774.1 million | $743.5 million |
| Income from operations | $62.0 million | $54.5 million | $127.2 million | $112.1 million |
| Operating margin | 16.2% | 15.1% | 16.4% | 15.1% |
| Net income | $25.2 million | $22.6 million | $52.4 million | $47.1 million |
| Diluted EPS | $0.40 | $0.37 | $0.83 | $0.78 |
| Net cash from operating activities | Not separately reported | Not separately reported | $44.4 million | $49.6 million |
- Global retail sales increased 14.5% in the quarter and 11.3% for the first two quarters.
- Domestic same-store sales increased 4.8% in the quarter and 1.6% year to date; international same-store sales increased 7.4% and 7.9%, respectively.
- Cost of sales was $274.2 million, or 71.2% of revenue, versus 72.3% in the prior-year quarter. The consolidated operating margin was 28.8%, versus 27.7%.
- Interest expense declined to $21.0 million in the quarter and $42.5 million year to date, primarily because of lower average debt balances and the absence of certain 2010 debt-repurchase costs.
- Effective tax rates were 38.5% for the quarter and 38.3% year to date, compared with 34.1% and 36.2% in the comparable 2010 periods.
- Cash and cash equivalents were $78.6 million at June 19, 2011, compared with $47.9 million at January 2, 2011. Restricted cash was $79.8 million.
- Long-term debt was approximately $1.45 billion, including $60.0 million of outstanding variable funding note borrowings. Stockholders’ deficit was $1.17 billion.
- Capital expenditures were $8.4 million year to date. The Company used $47.3 million to repurchase common stock, including $41.4 million in the second quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.2% in the quarter and 4.1% year to date, driven by international growth, higher domestic franchise revenue, and higher supply chain revenue from increased commodity prices.
- International revenue increased 20.8% in the quarter and 20.0% year to date, aided by same-store sales, store growth, and favorable foreign currency translation.
- Domestic Company-owned store revenue declined 0.2% in the quarter and 3.4% year to date, primarily because 26 stores were sold to a franchisee during the first quarter.
- Domestic supply chain revenue increased 4.9% in the quarter and 3.4% year to date, largely reflecting higher cheese and other commodity prices. The average cheese block price was $1.68 per pound versus $1.40 in the prior-year quarter.
- Income from operations increased 13.7% in the quarter and 13.4% year to date. Net income increased 11.6% and 11.1%, respectively.
- General and administrative expense increased 6.2% in the quarter because of costs associated with services in-sourced for franchisees, but declined 1.1% year to date due partly to lower performance-based bonuses and gains on store-related transactions.
- Cash flow from operations declined $5.2 million year to date, primarily because of timing-related changes in operating assets and liabilities, despite higher net income.
- The Company repurchased and retired 1.75 million shares during the quarter and had approximately $50.0 million remaining under the then-current repurchase authorization at June 19, 2011. In July 2011, the Board increased the total remaining authorization to $200.0 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that products, promotions, marketing, and technology investments positioned the Company for future growth, but did not provide specific full-year revenue or earnings guidance.
- The Company expected to refinance its fixed-rate notes and variable funding facility during the third quarter of 2011, subject to market and other conditions. The proposed financing could include up to $1.525 billion of fixed-rate notes and a new $100.0 million variable funding facility.
- Management reported compliance with all debt covenants and expected to meet the thresholds permitting two one-year extensions of the interest-only period. The fixed-rate notes and variable funding notes had an expected repayment date of April 25, 2014, subject to applicable extension and repayment provisions.
- Management believed unrestricted cash and expected operating cash flows would be sufficient to fund operations, working capital, capital expenditures, debt service, and planned share repurchases for the foreseeable future, while acknowledging that future cash generation and borrowing availability are not assured.
- Key risks include refinancing and servicing approximately $1.45 billion of debt, availability under the variable funding facility, commodity prices, labor and operating costs, consumer spending, franchisee profitability, competition, foreign exchange, tax rates, litigation, severe weather, insurance coverage, and regulatory changes.
- Legal proceedings consisted of ordinary-course litigation, tax reviews, and administrative matters; management did not believe these matters would materially adversely affect financial position, results, or cash flows.
- Unusual or nonrecurring items included 2011 gains of approximately $1.1 million on the sale of 26 Company-owned stores and $0.7 million related to a finalized contingent gain from a prior Netherlands transaction. The 2010 comparison benefited from debt-extinguishment gains of $1.5 million in the quarter and $7.6 million year to date, as well as state tax-related benefits.
Investor Verification Points
- Verify the timing, pricing, and completion of the planned third-quarter 2011 refinancing.
- Assess debt maturity, covenant thresholds, extension options, interest rates, and the Company’s reliance on operating cash flow.
- Track domestic same-store sales, international store growth, and the effect of the 2011 slowdown in domestic comparable sales.
- Monitor cheese, meat, fuel, labor, insurance, and other input costs and their effect on supply chain and Company-owned store margins.
- Reconcile cash generation with share repurchases, debt reduction, restricted cash requirements, and future capital expenditures.
- Separate recurring operating performance from 2011 transaction gains and 2010 debt-repurchase and tax benefits.
- Review the Company’s annual-report risk factors because the filing states that no material changes occurred from the prior Form 10-K.