Domino’s Pizza, Inc. — Form 10-Q Summary
Business context and reporting period
Domino’s operates a primarily franchised pizza-delivery network, domestic company-owned stores, domestic and international supply-chain centers, and franchise operations in more than 70 international markets. The filing covers the 12-week quarter and 36 weeks ended September 11, 2011, compared with the periods ended September 12, 2010.
- Total stores increased to 9,541 from 9,169, including 4,650 international stores versus 4,264.
- Domestic company-owned stores declined to 395 from 455, primarily from sales to franchisees.
- Global retail sales increased 13.3% in the quarter and 12.0% year to date.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | First 3 quarters 2011 | First 3 quarters 2010 |
|---|---|---|---|---|
| Revenue | $376.3 million | $347.4 million | $1,150.4 million | $1,090.9 million |
| Operating margin | $103.4 million | $94.2 million | $325.7 million | $302.5 million |
| Income from operations | $55.9 million | $48.2 million | $183.0 million | $160.3 million |
| Net income | $22.1 million | $16.6 million | $74.5 million | $63.7 million |
| Diluted EPS | $0.36 | $0.27 | $1.19 | $1.05 |
| Operating cash flow | Not separately provided | Not separately provided | $85.1 million | $82.3 million |
- Revenue increased 8.3% in the quarter and 5.5% year to date. Income from operations increased 15.8% and 14.2%, respectively; net income increased 33.1% and 16.8%.
- Consolidated operating margin as a percentage of revenue improved to 27.5% from 27.1% in the quarter and to 28.3% from 27.7% year to date. Income from operations margins were 14.9% and 15.9%, versus 13.9% and 14.7%.
- Domestic same-store sales increased 3.0% in the quarter and 2.0% year to date, versus 11.7% and 11.6% in the comparable 2010 periods. International same-store sales increased 8.1% and 7.9%.
- Domestic supply-chain revenue rose primarily because of higher commodity prices, particularly cheese. Supply-chain operating margin declined to 9.5% from 10.9% in the quarter and to 10.5% from 11.4% year to date.
- Domestic company-owned store margin improved to 18.7% from 16.1% in the quarter and to 20.2% from 19.4% year to date, supported by labor efficiencies, lower insurance expense and higher same-store sales.
- Interest expense declined to $21.0 million from $22.0 million in the quarter and to $63.5 million from $67.9 million year to date, principally because of lower average debt balances and the absence of certain 2010 debt-repurchase costs.
- Cash and cash equivalents were $32.1 million at September 11, 2011, compared with $47.9 million at January 2, 2011. Restricted cash totaled $83.3 million.
- Working capital was $34.9 million excluding restricted cash. Management stated that unrestricted cash and expected operating cash flow should fund operations, capital expenditures, working capital and debt service for the foreseeable future, although no assurance was provided.
- Long-term debt was approximately $1.45 billion, including $60.0 million of fully drawn variable funding notes. Stockholders’ deficit was $1.22 billion.
Material changes versus the prior comparable period
- Performance benefited from higher domestic and international franchise royalties, international store growth, favorable foreign exchange and improved company-owned store margins.
- Domestic supply-chain margins were pressured by higher cheese and other commodity prices, fuel costs and lower volumes, despite higher revenue.
- General and administrative expense increased 3.4% in the quarter and 0.3% year to date. Franchisee-funded online ordering and call-center initiatives increased both franchise revenue and related G&A expense and were intended to operate at breakeven.
- The company sold 30 company-owned stores to four franchisees during the quarter and 56 stores year to date. The transactions generated approximately $0.8 million and $1.9 million of gains, respectively, partly offset by related expenses.
- The company repurchased and retired 3.16 million shares for approximately $81.9 million during the quarter and 5.27 million shares for approximately $129.2 million year to date. Approximately $118.2 million remained under the $200 million authorization at quarter-end.
- Unlike 2010, the company reported no debt-repurchase gains in 2011. The prior-year periods included gains of $0.9 million in the quarter and $8.6 million year to date.
Guidance, outlook, risks and unusual items
- Management expected to remain in compliance with debt covenants and believed it exceeded the threshold for extending the fixed-rate notes’ interest-only period for two one-year terms. The expected repayment date for the fixed-rate and variable funding notes was April 25, 2014, subject to applicable extension and repayment provisions.
- The company announced plans to refinance its securitized debt but postponed the transaction because of financial-market volatility. It incurred approximately $6.9 million of related fees, with approximately $6.8 million recorded as deferred financing costs; some or all could be expensed if the refinancing is no longer likely to proceed as structured.
- Fixed-rate notes had approximately $1.31 billion of principal and estimated fair value of $1.32 billion; Class M-1 notes had approximately $76.1 million of principal and estimated fair value of $76.7 million.
- Key risks include refinancing and debt-service requirements, availability of variable borrowings and letters of credit, commodity prices, labor and insurance costs, consumer spending, franchisee performance, competition, litigation, weather, foreign exchange, taxes and regulatory changes.
- Management reported no material change to previously disclosed risk factors, no defaults upon senior securities and no material adverse effect expected from ordinary-course legal proceedings.
- Disclosure controls and procedures were assessed as effective, with no material changes to internal controls during the quarter.
Investor verification points
- Verify the company’s ability to refinance or extend approximately $1.45 billion of debt and maintain covenant compliance as the April 2012 interest-only milestone approaches.
- Assess whether domestic same-store sales can stabilize after slowing materially from 2010 levels and whether international growth remains durable.
- Monitor cheese, meat, fuel, labor and insurance costs and their effect on supply-chain and company-owned store margins.
- Evaluate the cash impact and sustainability of the share-repurchase program relative to debt reduction and liquidity needs.
- Confirm the ultimate treatment of the $6.8 million deferred refinancing costs if the postponed refinancing does not proceed.