DOMINOS PIZZA INC quarterly report, Q2 FY2023

Domino’s Pizza, Inc. — Q2 2023 Form 10-Q Summary

Business context and reporting period

Domino’s operates a primarily franchised global pizza business, with more than 20,000 locations in over 90 markets as of June 18, 2023. Approximately 99% of stores were operated by independent franchisees. The filing covers the 12-week fiscal quarter and 24-week year-to-date period ended June 18, 2023, compared with periods ended June 19, 2022.

Key financial metrics

Metric	Q2 2023	Q2 2022	YTD 2023	YTD 2022
Total revenue	$1,024.6 million	$1,065.2 million	$2,049.0 million	$2,076.3 million
Gross margin	$404.7 million; 39.5%	$386.3 million; 36.3%	$790.2 million; 38.6%	$754.9 million; 36.4%
Income from operations	$195.4 million; 19.1%	$178.1 million; 16.7%	$372.9 million; 18.2%	$342.7 million; 16.5%
Net income	$109.4 million	$102.5 million	$214.2 million	$193.5 million
Diluted EPS	$3.08	$2.82	$6.02	$5.32
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$242.3 million	$153.4 million

Q2 revenue decreased 3.8%, while operating income increased 9.7%, net income increased 6.7%, and diluted EPS increased 9.2%.
YTD revenue decreased 1.3%, while operating income increased 8.8%, net income increased 10.7%, and diluted EPS increased 13.2%.
Global retail sales, excluding foreign currency effects, increased 5.8% in both Q2 and the first two fiscal quarters. U.S. retail sales increased 1.7% in Q2 and 3.4% YTD; international retail sales increased 10.1% and 8.3%, respectively.
Same-store sales increased 0.1% in U.S. stores and 3.6% internationally in Q2; YTD increases were 1.8% and 2.3%, respectively, excluding foreign currency effects.
Domino’s opened 197 net stores in Q2, including 27 in the U.S. and 170 internationally, ending the quarter with 20,205 stores.
Q2 interest expense was $44.9 million and the YTD amount was $91.5 million. The weighted average borrowing rate was 3.8%.
The effective tax rate was 20.8% in Q2 and 21.1% YTD, down from 23.2% and 23.0%, respectively, in the comparable periods.

Liquidity, debt, capital allocation, and unusual items

June 18, 2023 unrestricted cash and cash equivalents were $77.0 million. Restricted cash was $189.7 million, including amounts reserved for debt-service and working-capital requirements. Advertising fund restricted assets were $154.1 million and cannot be used for general corporate purposes.
Working capital was $58.7 million, excluding restricted cash, advertising fund assets, and advertising fund liabilities.
Total long-term debt was approximately $5.0 billion, including $55.7 million classified as current. The estimated fair value of disclosed fixed-rate notes was approximately $4.42 billion versus principal amounts of approximately $4.95 billion; the filing notes that fair-value estimates are subject to judgment.
The company had no borrowings under its variable funding notes and had $277.8 million of available capacity after letters of credit.
YTD investing cash use was $39.2 million, primarily $38.0 million of capital expenditures. Financing cash use was $193.0 million, including $120.8 million of share repurchases, $42.9 million of dividends, and $27.2 million of debt and finance-lease repayments.
The company repurchased and retired 392,545 shares YTD for approximately $120.8 million. Approximately $289.5 million remained authorized for future repurchases at quarter-end.
The board declared a $1.21 per share quarterly dividend after quarter-end, payable September 29, 2023.
Domino’s recorded a $15.0 million unrealized loss on its DPC Dash investment in Q2 after DPC Dash’s Hong Kong IPO resulted in Level 1 fair-value accounting. The investment was valued at $110.9 million at quarter-end and was subject to a 360-day contractual sale restriction.
Beginning in Q2, the U.S. advertising contribution rate was temporarily reduced by 0.25 percentage points from the standard 6.0%, while U.S. digital technology fees increased by $0.08 per transaction to $0.395.

Material changes versus the prior comparable period

Revenue declined despite higher retail sales, primarily because of lower U.S. company-owned store revenue following the refranchising of 114 stores in Arizona and Utah in Q4 2022, and lower supply-chain revenue.
Supply-chain revenue declined 4.8% in Q2, reflecting lower U.S. franchisee order volumes and a 2.4% decrease in market-basket pricing. Supply-chain gross margin improved to 10.9% from 9.5%.
U.S. franchise royalty and fee revenue increased 8.7% in both Q2 and YTD, supported by higher technology fees, store growth, and improved sales trends.
Consolidated gross margin expanded 3.2 percentage points in Q2 and 2.2 percentage points YTD, benefiting from the greater contribution of franchise revenue and improved company-owned-store and supply-chain margins.
Management prospectively changed the allocation of certain software-development costs. In Q2, this increased reported U.S. Stores Segment Income by an estimated $15.8 million and international franchise Segment Income by $1.9 million, while reducing Other Segment Income by $17.7 million. Comparative segment data was not restated; total Segment Income was unchanged.
Operating cash flow increased $88.9 million YTD, primarily due to favorable timing of operating assets and liabilities, higher net income, and non-cash adjustments.

Guidance, outlook, management commentary, and risks

The filing does not provide a specific full-year revenue, earnings, or same-store-sales guidance range. Management states that quarterly results are not necessarily indicative of full-year results.
Management expects continued store growth, technology and marketing initiatives, and operational improvements to support the brand. A new global agreement with Uber is expected to enable U.S. ordering through Uber Eats and Postmates by the end of fiscal 2023, with delivery performed by Domino’s and franchisee delivery personnel.
Management expects to use operating cash flow, unrestricted cash, available variable-note capacity, and other available liquidity to fund operations, capital investment, debt service, dividends, and share repurchases.
Key risks include approximately $5.0 billion of debt, refinancing and covenant risk, interest-rate exposure on variable-rate facilities, commodity and labor-cost inflation, supply-chain disruption, foreign-currency movements, competitive pressure, consumer spending changes, franchisee performance, technology and cybersecurity risks, food safety, legal matters, severe weather, and the ability to maintain sufficient cash flow.
A hypothetical 10% adverse currency movement would have reduced YTD international royalty revenue by approximately $12.4 million, according to management’s sensitivity analysis.
Existing litigation and administrative proceedings are described as ordinary-course matters that management does not believe will materially affect financial position, results, or cash flows. No material changes to previously disclosed risk factors were reported.
Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

Assess whether same-store-sales momentum and international store openings can offset the lower revenue contribution from company-owned stores and supply-chain volume.
Review the maturity schedule and covenants for the approximately $5.0 billion debt balance, including substantial scheduled principal payments in 2025, 2027, 2028, 2029, and 2031.
Monitor unrestricted liquidity separately from restricted cash and advertising fund assets, and verify the continued availability of variable funding facilities.
Evaluate the sustainability of margin expansion given labor costs, commodity prices, supply-chain pricing, and franchise mix.
Track the market value and sale restrictions of the DPC Dash investment and the potential volatility from future fair-value adjustments.
Verify the financial and operational impact of the temporary advertising contribution reduction, higher technology fees, and planned Uber Eats/Postmates rollout.
Confirm future share repurchases and dividends against debt-service needs, covenant compliance, and operating cash generation.