Business Context and Reporting Period
Domino’s Pizza, Inc. operates a global pizza delivery and carryout business through U.S. company-owned stores, franchise royalties and fees, supply-chain operations, advertising activities, and international master franchises. The Form 10-Q covers the 12-week fiscal quarter ended September 6, 2020, and the first 36 fiscal weeks of 2020, compared with the periods ended September 8, 2019. The company had 17,256 stores in more than 90 markets at quarter-end.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | Change |
|---|
| Total revenues | $967.7 million | $820.8 million | +17.9% |
| Operating margin dollars | $362.0 million | $316.3 million | +14.5% |
| Operating margin | 37.4% | 38.5% | Down 1.1 points |
| Income from operations | $162.2 million | $143.0 million | +13.4% |
| Net income | $99.1 million | $86.4 million | +14.8% |
| Diluted EPS | $2.49 | $2.05 | +21.5% |
| Net cash from operations | Not separately reported for the quarter | |
| Metric | First 36 Weeks 2020 | First 36 Weeks 2019 | Change |
|---|
| Total revenues | $2.761 billion | $2.468 billion | +11.8% |
| Income from operations | $481.6 million | $425.5 million | +13.2% |
| Net income | $339.4 million | $271.4 million | +25.1% |
| Diluted EPS | $8.54 | $6.44 | +32.6% |
| Net cash from operations | $370.4 million | $324.6 million | +$45.8 million |
| Capital expenditures | $51.2 million | $42.7 million | Increased |
- Q3 same-store sales increased 17.5% for U.S. franchise stores, 16.6% for U.S. company-owned stores, and 6.2% internationally excluding foreign-currency effects. Global retail sales increased 14.8% excluding foreign currency.
- Supply-chain revenue increased 18.3% in Q3 and 14.1% year to date, driven primarily by higher order volumes and, in part, higher market-basket pricing.
- U.S. company-owned store margin declined to 19.8% from 24.3% in Q3, primarily because of higher labor and pandemic-related compensation costs. Supply-chain margin declined to 10.2% from 10.8% in Q3 but was unchanged at 11.2% year to date.
- Effective tax rates were 19.9% in Q3 and 7.2% year to date, compared with 21.7% and 16.6%, respectively, primarily because of higher excess tax benefits from equity-based compensation.
- At September 6, 2020, unrestricted cash was $330.7 million. Restricted cash was $160.3 million, and advertising-fund restricted assets were $144.3 million; these restricted amounts are not generally available for corporate purposes.
- Total debt was approximately $4.11 billion, including $43.7 million classified as current. Stockholders’ deficit was $3.212 billion.
- Cash used in investing activities was $91.1 million, including $51.2 million of capital expenditures and a $40.0 million investment in Dash Brands, the company’s China master franchisee. Cash used in financing activities was $153.6 million, including debt repayments, dividends, and $79.6 million of share repurchases completed early in 2020.
Material Changes Versus the Prior Comparable Period
- COVID-19-related shifts toward delivery, carryout, larger orders, and contactless service materially strengthened U.S. sales. Nearly all U.S. stores remained open, while fewer than 400 international stores were temporarily closed at September 6, 2020.
- International franchise revenue was flat in Q3 and down 2.4% year to date, reflecting foreign-currency pressure, temporary closures, altered operating hours, and targeted financial relief to certain master franchisees.
- Operating margin percentage narrowed despite higher operating income because of greater cost of sales, labor costs, and pandemic-related expenses.
- Interest expense increased 17.2% in Q3 and 15.9% year to date due primarily to higher average debt following the 2019 recapitalization and temporary variable-funding borrowings.
- The company opened 83 net new stores in Q3 and 236 year to date. Total stores increased to 17,256 from 16,528 a year earlier.
- The company adopted ASC 326, the expected-credit-loss standard, with no material impact on the financial statements and a $1.1 million increase to opening retained deficit.
Guidance, Outlook, Risks, and Unusual Items
- No specific numerical earnings or sales guidance is provided. Management states that current unrestricted cash, operating cash flow, and available variable-funding capacity are expected to cover debt service, capital expenditures, and working-capital needs for at least the next twelve months.
- The company borrowed $158.0 million under variable funding notes as a COVID-19 precaution, repaid the borrowings during the second and third quarters, and had less than $0.1 million outstanding at September 6, 2020. Approximately $160.0 million of capacity remained available, net of letters of credit.
- Management cannot predict the continuing effects of COVID-19. Risks include renewed store closures, supply-chain disruption, labor and commodity-cost inflation, changes in consumer demand, and further international operating restrictions.
- Leverage and refinancing are significant risks. Scheduled principal payments include approximately $897.0 million in 2022, $1.15 billion in 2025, and $1.28 billion in 2027.
- Floating-rate debt is indexed to LIBOR, whose discontinuation could require renegotiation and increase interest expense. A hypothetical 10% adverse currency movement would have reduced year-to-date royalty revenue by approximately $14.1 million.
- The company is contractually required to invest an additional $40.0 million in Dash Brands in the first quarter of 2021 if specified performance conditions are satisfied; otherwise, it may elect whether to invest.
- The company reports an $8.0 million final verdict in a personal-injury lawsuit and has appealed. Management does not believe existing legal matters will materially affect financial position, results, or cash flows.
- The board declared a $0.78 per share dividend payable December 30, 2020. The company had approximately $326.6 million remaining under its share-repurchase authorization at quarter-end.
Important Facts for Investors to Verify
- Whether exceptional pandemic-related U.S. sales growth persists as consumer behavior, restrictions, and restaurant traffic normalize.
- The pace of reopening and sales recovery in international markets, including the effect of foreign exchange and franchisee financial relief.
- Whether labor, food, delivery, safety, and cleaning costs continue to pressure company-owned store margins.
- The company’s ability to refinance or repay substantial scheduled debt maturities while maintaining dividends and potential share repurchases.
- The status and valuation of the Dash Brands investment and the potential additional $40.0 million funding obligation.
- The effect of LIBOR replacement on floating-rate debt and future interest expense.
- Future cash availability after excluding restricted cash and advertising-fund assets, which are not generally available for corporate use.
