Business Context and Reporting Period
Domino’s Pizza, Inc. filed this unaudited Form 10-Q for the 12-week fiscal quarter ended March 22, 2015, compared with the quarter ended March 23, 2014. The company operates domestic company-owned stores, a domestic franchise system, supply-chain centers, and an international franchise business. At quarter-end, Domino’s had 11,739 stores in more than 75 markets, including 6,655 international stores.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $502.0 million | $453.9 million | +10.6% |
| Operating margin | $157.1 million; 31.3% | $137.0 million; 30.2% | +14.6%; +1.1 pts |
| Income from operations | $94.3 million; 18.8% | $84.2 million; 18.5% | +12.0% |
| Net income | $46.3 million; 9.2% | $40.5 million; 8.9% | +14.4% |
| Diluted EPS | $0.81 | $0.71 | +14.1% |
| Operating cash flow | $84.7 million | $36.2 million | +$48.5 million |
| Capital expenditures | $7.6 million | $6.6 million | +$1.0 million |
- Revenue growth was led by supply-chain revenue of $311.7 million, domestic company-owned store revenue of $92.4 million, domestic franchise revenue of $61.8 million, and international franchise revenue of $36.2 million.
- Global retail sales increased 10.4%. Domestic same-store sales rose 14.5%, international same-store sales rose 7.8% excluding foreign currency effects, and U.S. digital sales exceeded 45% of U.S. sales.
- Net cash provided by investing activities was $0.2 million, while financing activities used $41.3 million, primarily for share repurchases and dividends. Cash and cash equivalents increased to $75.0 million from $30.9 million at December 28, 2014.
- Restricted cash and cash equivalents totaled $121.5 million, including amounts for debt-service reserves, letters-of-credit collateral, and an interest reserve.
- Long-term debt was approximately $1.53 billion, substantially consisting of fixed-rate notes. The company had no outstanding variable funding note borrowings and reported $55.9 million of available capacity, net of letters of credit.
- Stockholders’ deficit was $1.21 billion at March 22, 2015, reflecting the company’s highly leveraged capital structure.
- The company repurchased 290,877 shares for approximately $29.5 million and paid approximately $14.0 million of dividends. The quarterly dividend was $0.31 per share.
Material Changes Versus the Prior Comparable Period
- Revenue increased $48.1 million, primarily from higher supply-chain volumes, equipment and supply sales, domestic same-store sales, and international store growth.
- Operating margin expanded because of higher franchise revenue, increased volumes, and lower commodity costs, particularly cheese. The average cheese block price declined to $1.54 per pound from $2.16.
- General and administrative expense increased 18.8% to $62.8 million, driven by technology investments, volume-related costs, franchisee incentives, advertising, performance compensation, and the absence of a prior-year store-sale gain.
- Interest expense declined modestly to $20.2 million, primarily because of a lower average debt balance. The cash borrowing rate remained 5.3%.
- Operating cash flow improved substantially, including a $29.6 million benefit from changes in operating assets and liabilities, primarily related to the timing of tax payments.
- Financing cash use increased from $26.2 million to $41.3 million, largely because of higher share repurchases and dividends; the prior-year period included $6.0 million of debt repayments.
- The first quarter of 2014 included a $1.7 million pretax gain from selling 14 company-owned stores and a related deferred-tax valuation allowance release. That benefit did not recur in 2015.
- Currency translation reduced comprehensive income by $0.4 million in Q1 2015, and foreign exchange reduced international franchise and supply-chain revenue by approximately $3.6 million and $2.7 million, respectively.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal quantitative full-year earnings or revenue guidance. Management expects cash flows, unrestricted cash, and available variable funding capacity to support operations, debt service, capital expenditures, dividends, and repurchases for at least the next twelve months.
- Management expects to continue global store expansion, technology investment, digital ordering growth, and use of excess cash for dividends and share repurchases.
- The company met its debt-agreement leverage conditions through Q1 2015 and therefore ceased scheduled principal amortization payments beginning in Q3 2014. It did not plan to make previously scheduled payments while permitted under the agreements.
- Key risks include refinancing and servicing approximately $1.53 billion of debt, availability of variable funding capacity, commodity-price volatility, foreign currency movements, labor and operating costs, consumer demand, franchisee profitability, litigation, insurance, regulation, severe weather, and technology or competitive developments.
- A hypothetical 10% adverse currency movement in the company’s ten largest international markets would have reduced Q1 2015 revenue by approximately $2.5 million.
- An appellate court reversed and dismissed a prior lawsuit in which the company had been found 60% liable on a $32.0 million judgment. The plaintiff’s time to seek review by the Texas Supreme Court had not expired at the filing date.
- The company stated that no existing legal matters were expected to materially affect its financial position, results of operations, or cash flows. No material changes were reported to the risk factors in the 2014 Form 10-K.
- Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Assess the sustainability of unusually strong domestic same-store sales growth of 14.5% and the contribution from promotional, pricing, and digital-ordering activity.
- Monitor leverage, fixed-rate note maturities and amortization requirements, covenant compliance, refinancing needs, and the availability of the $100.0 million variable funding facility.
- Separate operating improvement from favorable cheese and other commodity costs, which may not persist.
- Evaluate cash allocation: the company generated $84.7 million of operating cash flow while repurchasing $29.5 million of stock and paying approximately $14.0 million of dividends.
- Track foreign exchange exposure, international store growth, and the effect of currency movements on reported revenue and earnings.
- Confirm the final resolution of the dismissed Texas litigation and any potential appeal.