Business Context and Reporting Period
Domino’s Pizza, Inc. filed this Form 10-K for the 52-week fiscal year ended December 29, 2019. Domino’s is primarily a franchisor, with approximately 98% of its more than 17,000 global stores operated by independent franchisees across more than 90 markets. Reportable segments are U.S. Stores, Supply Chain, and International Franchise.
The fourth fiscal quarter comprised 16 weeks. Fiscal fourth-quarter revenue was $1.15 billion and net income was $129.3 million; annual results are summarized below.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $3,618.8 million | $3,432.9 million | +5.4% |
| Income from operations | $629.4 million | $571.7 million | +10.1% |
| Net income | $400.7 million | $362.0 million | +10.7% |
| Diluted EPS | $9.56 | $8.35 | +14.5% |
| Operating margin | 17.4% | 16.7% | +0.7 percentage points |
| Net margin | 11.1% | 10.5% | +0.6 percentage points |
| Cash flow from operations | $497.0 million | $394.2 million | +$102.8 million |
| Capital expenditures | $85.6 million | $119.9 million | Decrease |
| Total debt, net of issuance costs | $4,114.4 million | $3,531.6 million | +$582.8 million |
- Revenue mix included Supply Chain of $2.10 billion, U.S. Stores of $1.27 billion, International Franchise of $241.0 million, and U.S. franchise advertising of $390.8 million.
- Global retail sales increased 8.0%, excluding foreign currency effects. Same-store sales increased 3.2% in U.S. stores and 1.9% internationally.
- Supply Chain operating margin improved to 11.2% from 10.9%; U.S. Company-owned store margin improved to 23.7% from 22.7%, although total Company-owned store operating margin dollars declined because of store sales.
- Unrestricted cash and cash equivalents were $190.6 million. Restricted cash totaled $209.3 million, including amounts reserved for debt service and other requirements; an additional $84.0 million was restricted for advertising activities.
- Working capital was $121.0 million, excluding restricted cash and advertising fund assets and liabilities.
- Net cash used in financing activities was $222.8 million, including $699.0 million of share repurchases and $105.7 million of dividends.
- Dividends declared increased to $2.60 per share from $2.20. The company had $406.1 million remaining under its $1.0 billion repurchase authorization at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher Supply Chain volumes and pricing, increased U.S. and international franchise royalties, and store growth. U.S. Company-owned store revenue declined 11.9% because the company sold 62 stores, including 59 in the second quarter.
- The company opened 1,204 stores and closed 98, for 1,106 net new stores. Year-end store count increased to 17,020 from 15,914, including 10,894 international stores and 6,126 U.S. stores.
- Consolidated operating margin increased to 38.8% from 37.9%, primarily because higher-margin franchise revenue and Supply Chain volume grew faster than consolidated revenue.
- Interest expense increased to $150.8 million from $146.3 million as a result of higher debt balances and borrowing rates. The weighted-average borrowing rate increased to 4.1% from 4.0%.
- The effective tax rate increased to 17.0% from 15.6%, partly because of a $4.3 million valuation allowance related primarily to expected foreign tax credit limitations.
- The company adopted the new lease accounting standard in 2019, recognizing $228.8 million of operating lease right-of-use assets and $236.0 million of operating lease liabilities at year-end. The adoption materially increased reported assets and liabilities but did not materially affect income or cash flow.
- The 2019 Recapitalization added $675.0 million of 3.668% fixed-rate senior secured notes and established a $200.0 million variable funding facility. The proceeds funded debt service reserves, transaction costs, and share repurchases.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No specific numerical revenue, earnings, same-store sales, or store-opening guidance is provided in the filing. Management expects continued positive operating cash flow, ongoing U.S. and international expansion, further investment in technology and supply-chain capacity, and continued enhancement of digital ordering capabilities.
- More than half of global retail sales were generated through digital channels in 2019. Management highlighted GPS delivery tracking, technology innovation, fortressing, carryout growth, and planned additional Supply Chain centers as key initiatives.
- Management identifies substantial leverage as a principal risk. Debt agreements contain financial covenants, and scheduled principal payments may be suspended or resumed based on leverage ratios. Scheduled debt principal payments include $897.0 million in 2022, $1.15 billion in 2025, $1.28 billion in 2027, and $614.3 million in 2029.
- The company had $158.6 million of available borrowing capacity under its variable funding notes after letters of credit, with no outstanding borrowings at year-end. A portion of debt bears interest tied to LIBOR, creating transition and interest-rate risk.
- Key operating risks include competition, food and labor cost inflation, cheese and other commodity volatility, supply-chain disruption, minimum-wage increases, franchisee performance, foreign currency movements, privacy and cybersecurity incidents, food safety events, litigation, and regulatory developments affecting franchising and joint-employer status.
- A hypothetical 10% adverse foreign-currency movement would have reduced 2019 international royalty revenue by approximately $21.2 million. A hypothetical 1% adverse LIBOR movement would have increased 2019 interest expense by approximately $3.1 million.
- The company disclosed an $8.0 million final jury verdict in a traffic-accident case, against which it continues to deny liability and has filed an appeal. Management believes existing legal matters are adequately accrued and are not expected to materially affect financial condition, results, or cash flows.
- Insurance reserves were approximately $58.4 million at year-end, including $50.3 million for workers’ compensation, general liability, and automobile liability programs. The valuation of insurance reserves was the filing’s critical audit matter.
- The company sold 62 Company-owned stores for $12.3 million and recorded a $0.3 million pretax loss. It also purchased three franchised stores for $3.4 million.
Important Facts for Investors to Verify
- Reconcile reported revenue growth with the gross presentation of U.S. franchise advertising contributions and related expenses following adoption of ASC 606.
- Assess debt-service capacity, refinancing requirements, covenant compliance, and the concentration of scheduled maturities in 2022, 2025, 2027, and 2029.
- Evaluate whether same-store sales growth and store openings can offset pressure on U.S. delivery sales from fortressing and competitive activity.
- Monitor labor, cheese, fuel, insurance, and supply-chain costs, including the company’s reliance on limited suppliers for certain ingredients.
- Review the sustainability of dividends and share repurchases relative to operating cash flow, capital expenditures, debt service, and available borrowing capacity.
- Consider the effects of ASC 842 lease recognition, foreign currency exposure, LIBOR transition, cybersecurity risks, and franchise-related litigation or regulation.