DOMINOS PIZZA INC quarterly report, Q2 FY2022

Domino’s Pizza, Inc. — Q2 2022 Form 10-Q Summary

Business context and reporting period

Domino’s operates primarily as a franchisor, with approximately 98% of its more than 19,200 stores owned and operated by franchisees across more than 90 markets as of June 19, 2022. Revenue is generated from U.S. company-owned stores, franchise royalties and fees, U.S. franchise advertising, and supply-chain sales of food, equipment, and supplies.

The filing covers the 12-week fiscal quarter and 24-week year-to-date period ended June 19, 2022, compared with the periods ended June 20, 2021. The financial statements are unaudited.

Key financial metrics

Metric	Q2 2022	Q2 2021	YTD 2022	YTD 2021
Total revenue	$1,065.2 million	$1,032.5 million	$2,076.3 million	$2,016.2 million
Gross margin	$386.3 million; 36.3%	$407.7 million; 39.5%	$754.9 million; 36.4%	$796.8 million; 39.5%
Income from operations	$178.1 million; 16.7%	$190.9 million; 18.5%	$342.7 million; 16.5%	$377.4 million; 18.7%
Net income	$102.5 million	$116.6 million	$193.5 million	$234.4 million
Diluted EPS	$2.82	$3.06	$5.32	$6.06
Net cash from operating activities	Not separately provided	Not separately provided	$153.4 million	$295.4 million

Q2 revenue increased 3.2%, while operating income declined 6.7%, net income declined 12.1%, and diluted EPS declined 7.8%. Year-to-date revenue increased 3.0%, while operating income declined 9.2%, net income declined 17.5%, and diluted EPS declined 12.2%.

Revenue and operating performance

Supply-chain revenue increased 7.2% in both Q2 and year to date, primarily from higher market-basket pricing to stores. Market-basket pricing increased 15.2% in Q2 and 13.6% year to date.
U.S. company-owned store revenue declined 3.5% in Q2 and 5.6% year to date, reflecting lower same-store sales, partly offset by additional stores from net growth and the acquisition of 23 franchised stores.
U.S. franchise royalties and fees increased 1.0% in Q2 but declined 0.4% year to date. International franchise royalties and fees declined 4.1% in Q2 and 0.6% year to date, including foreign-currency impacts of $5.9 million and $10.1 million, respectively.
U.S. same-store sales declined 2.9% in Q2 and 3.3% year to date. International same-store sales, excluding foreign currency, declined 2.2% and 0.5%, respectively.
Global retail sales, excluding foreign currency, increased 1.5% in Q2 and 2.5% year to date, with international growth offsetting declines in U.S. retail sales.
Consolidated gross margin declined 3.2 percentage points in Q2 and 3.1 percentage points year to date. Management cited inflation in food, labor, fuel, delivery, and other operating costs.
U.S. company-owned store gross margin declined to 16.4% in Q2 from 24.5% and to 16.2% year to date from 24.2%, driven by higher food, labor, occupancy, and insurance costs and lower sales leverage.
The company opened 233 net stores in Q2, including 22 in the U.S. and 211 internationally. The ending store count was 19,294.

Cash flow, liquidity, debt, and capital allocation

Year-to-date operating cash flow was $153.4 million, down from $295.4 million in the prior-year period. The decline reflected working-capital timing, lower net income, and advertising-fund payments exceeding receipts.
Year-to-date investing cash outflows were $39.9 million, including $32.7 million of capital expenditures and $6.8 million for the purchase of 23 U.S. franchised stores.
Year-to-date financing cash outflows were $166.7 million, including $97.7 million of share repurchases, $39.7 million of dividends, and $27.5 million of debt and finance-lease repayments.
At June 19, 2022, unrestricted cash and cash equivalents were $114.4 million. Restricted cash was $158.2 million, and advertising-fund restricted assets were $182.5 million.
Total long-term debt was approximately $5.05 billion, including $55.7 million classified as current. The company had no borrowings under its $200 million variable funding note facility and reported $155.8 million of available capacity after letters of credit.
Debt agreements include financial and non-financial covenants, including a minimum 1.75x debt-service coverage ratio. Certain covenant failures could accelerate repayment obligations.
The company repurchased 249,058 shares for approximately $97.7 million year to date. Approximately $606.4 million remained authorized under the repurchase program at June 19, 2022.
The Board declared a $1.10 per share quarterly dividend in July 2022, payable September 30, 2022.
Stockholders’ deficit was $4.18 billion at June 19, 2022, largely reflecting the company’s highly leveraged capital structure and accumulated share repurchases.

Material changes versus the prior comparable period

Revenue grew because of higher supply-chain pricing and store growth, but profitability weakened materially as inflation and labor constraints increased operating costs.
Gross margin fell from 39.5% to 36.3% in Q2 and remained 36.4% year to date versus 39.5% in the prior-year period.
Interest expense declined modestly in Q2 but increased 7.3% year to date because of higher average borrowings following the 2021 recapitalization.
The effective tax rate increased to 23.2% in Q2 from 19.6% and to 23.0% year to date from 20.5%, partly due to lower excess tax benefits from equity compensation and lower foreign tax credits.
Cash flow from operations declined by $142.0 million year to date, while the company continued returning capital through dividends, share repurchases, and debt repayments.
The company’s investment in DPC Dash remained recorded at $125.8 million, with no valuation adjustment during Q2 or the year-to-date period.

Outlook, management commentary, risks, and unusual items

Management did not provide a specific quantitative earnings or same-store-sales forecast in the filing. Management expects to use unrestricted cash, operating cash flow, excess recapitalization proceeds, and available variable-note capacity to fund working capital, business investments, debt service, dividends, and share repurchases.

Key operating pressures include labor shortages, inflation in food and fuel, wage investments, unfavorable insurance claims experience, competitive activity, and reduced pandemic-related stimulus.
International royalties were affected by foreign-currency movements; a hypothetical 10% adverse currency change would have reduced year-to-date royalty revenue by approximately $12.1 million.
The company is exposed to interest-rate risk on variable-rate borrowings and to potential changes in borrowing costs when fixed-rate debt is refinanced. The variable funding notes contemplate a transition from LIBOR to SOFR.
Debt maturities include approximately $1.17 billion of scheduled principal payments in 2025 and $1.31 billion in 2027, based on the filing’s original scheduled payment amounts.
Additional leases not yet commenced represented approximately $61.1 million of estimated future minimum commitments, and certain franchisee lease guarantees had a maximum potential exposure of $7.9 million.
Management stated that ordinary-course legal proceedings, including workers’ compensation, general liability, employment-practice, automobile, franchisee, and tax matters, were not expected to materially affect financial position, results, or cash flows.
There were no material changes to previously disclosed risk factors, and management concluded that disclosure controls and procedures were effective.

Important facts for investors to verify

Whether same-store sales and order counts stabilize after the Q2 declines, particularly in the U.S.
Whether food, labor, fuel, delivery, and insurance inflation continues to compress company-owned store and supply-chain margins.
The company’s ability to generate sufficient operating cash flow to service approximately $5.05 billion of debt while maintaining dividends and repurchases.
Debt covenant compliance, scheduled maturities, refinancing requirements, and the availability of the variable funding facility.
The sustainability of the $1.10 quarterly dividend and the pace of future share repurchases given declining cash flow.
Foreign-currency effects on international royalties and the performance of international same-store sales.
Execution and returns from continued store expansion, technology investments, supply-chain investments, and the 23-store acquisition.