Domino’s Pizza, Inc. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Domino’s operates a global franchised pizza system, U.S. company-owned stores, supply-chain centers and advertising operations. The filing covers the 12-week fiscal quarter and 24-week year-to-date period ended June 16, 2019, compared with June 17, 2018. At quarter-end, the system had 16,314 stores in more than 85 markets, including 5,945 U.S. stores and 10,369 international stores.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $811.6 million | $779.4 million | $1,647.6 million | $1,564.8 million |
| Operating income | $138.9 million | $126.1 million | $282.4 million | $259.6 million |
| Operating margin | 17.1% | 16.2% | 17.1% | 16.6% |
| Net income | $92.4 million | $77.4 million | $185.0 million | $166.2 million |
| Net margin | 11.4% | 9.9% | 11.2% | 10.6% |
| Diluted EPS | $2.19 | $1.78 | $4.38 | $3.78 |
| Operating cash flow | Not separately provided | Not separately provided | $201.6 million | $154.7 million |
Q2 revenue increased 4.1%, operating income increased 10.1%, and net income increased 19.3%. Year-to-date revenue increased 5.3%, operating income increased 8.8%, and net income increased 11.3%.
- Global retail sales grew 5.1% in Q2 and 4.8% year to date.
- U.S. same-store sales increased 3.0% in Q2 and 3.5% year to date; international same-store sales increased 2.4% and 2.1%, respectively, excluding foreign-currency effects.
- Supply-chain operating margin improved to 11.3% in Q2 from 10.7%, primarily due to higher volume, procurement savings and lower insurance expense.
- Unrestricted cash and cash equivalents were $108.3 million at June 16, 2019. Restricted cash was $152.7 million, and restricted advertising-fund assets were $117.7 million.
- Total long-term debt was approximately $3.45 billion, including $35.9 million classified as current. No borrowings were outstanding under the variable funding notes, with $126.9 million available net of letters of credit.
- Working capital was $73.5 million, excluding restricted cash, advertising-fund assets and advertising-fund liabilities.
Material changes versus the prior comparable period
- The company opened 200 net new stores in Q2, including 158 internationally and 42 in the U.S.; year-to-date net additions totaled 400.
- Domino’s sold 59 U.S. company-owned stores to existing franchisees for $9.7 million of proceeds and recorded a $2.4 million pretax loss, including a $1.4 million goodwill reduction. The transaction reduced company-owned-store revenue but increased the franchise store base.
- U.S. company-owned-store revenue declined 11.6% in Q2 and 4.8% year to date because of the store sale, while U.S. franchise royalties and fees increased 9.4% and 8.7%, respectively.
- Cash flow from operations increased $46.9 million year to date, primarily because of higher net income and favorable timing of receivables and payables.
- Financing cash use was $114.3 million, including $82.9 million of debt repayments, $26.7 million of dividends and $11.5 million of share repurchases. The prior-year period included substantial recapitalization debt issuance and significantly higher share repurchases.
- The company adopted ASC 842 lease accounting on December 31, 2018, adding $211.2 million of operating lease right-of-use assets and $218.5 million of operating lease liabilities at June 16, 2019. Management stated that adoption did not materially affect the income statement or cash flows.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative earnings or same-store-sales guidance. Management expects to use operating cash flow, unrestricted cash and available variable-funding-note capacity to fund working capital, capital expenditures, debt service, dividends and share repurchases. Management believes these resources will be adequate for at least the next twelve months, while cautioning that future cash flows and refinancing availability are not assured.
- Management said positive U.S. and international same-store sales, store growth, technology, operations and marketing initiatives continued to strengthen the brand, although same-store sales were pressured by a strategy to increase store concentration in certain markets.
- Key risks include substantial leverage, refinancing and interest-rate risk, commodity and labor-cost inflation, foreign-currency movements, competition, franchisee health, consumer spending, store development, technology and cybersecurity risks, adverse legal outcomes, food safety and severe weather.
- A 10% adverse movement in international foreign-currency rates would have reduced year-to-date royalty revenue by approximately $9.6 million, based on the company’s estimate.
- Interest-rate exposure includes floating-rate debt tied to LIBOR; the company noted uncertainty regarding LIBOR’s continuation after 2021.
- In June 2019, a jury returned an $8.0 million final verdict, after offsets and deductions, against Domino’s and a franchisee in a traffic-accident case. The company denies liability and intends to pursue post-judgment remedies and, if necessary, an appeal.
- Additional future lease commitments not included in the reported lease-liability tables were approximately $36.4 million for operating leases and $28.7 million for a finance lease. The company also guaranteed certain franchisee lease payments with potential future payments of $18.2 million.
- The board declared a $0.65 per share quarterly dividend payable September 30, 2019. Approximately $147.3 million remained under the share-repurchase authorization at quarter-end.
Important facts for investors to verify
- Whether continued store growth offsets moderating same-store-sales growth and foreign-currency pressure.
- The company’s ability to service or refinance approximately $3.45 billion of debt, particularly scheduled maturities of $888.0 million in 2022, $1.14 billion in 2025 and $1.27 billion in 2027.
- The effect of labor, food, fuel, insurance and technology costs on company-owned-store and supply-chain margins.
- The ultimate outcome and financial impact of the $8.0 million legal judgment and any related appeals.
- Whether operating cash flow remains sufficient to support debt repayment, dividends, repurchases, capital investment and lease obligations.
- The impact of ASC 842 lease obligations and approximately $65.1 million of additional undiscounted lease commitments expected to commence in 2019.