Business Context and Reporting Period
Domino’s Pizza, Inc. filed this unaudited Form 10-Q for the 12-week fiscal quarter and 36 fiscal weeks ended September 9, 2012, compared with periods ended September 11, 2011. The company operates a primarily franchised global pizza business, domestic company-owned stores, domestic and international supply-chain centers, and franchise operations in more than 70 international markets. Total store count increased to 10,040 from 9,541.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | Change | 36 Weeks 2012 | 36 Weeks 2011 |
|---|---|---|---|---|---|
| Revenue | $378.1 million | $376.3 million | +0.5% | $1,138.8 million | $1,150.4 million |
| Operating margin dollars | $111.4 million | $103.4 million | +7.8% | $340.7 million | $325.7 million |
| Operating margin | 29.5% | 27.5% | +2.0 points | 29.9% | 28.3% |
| Income from operations | $61.6 million | $55.9 million | +10.3% | $194.3 million | $183.0 million |
| Net income | $26.0 million | $22.1 million | +17.6% | $74.8 million | $74.5 million |
| Diluted EPS | $0.44 | $0.36 | +22.2% | $1.26 | $1.19 |
| Operating cash flow | Not separately provided | Not separately provided | $101.3 million | $85.1 million |
Q3 same-store sales increased 3.3% domestically and 5.0% internationally on a constant-dollar basis. Global retail sales increased 4.9%. For the first 36 weeks, domestic same-store sales increased 2.4%, international same-store sales increased 5.1% on a constant-dollar basis, and global retail sales increased 5.1%.
Q3 domestic company-owned store operating margin increased to 21.9% from 18.7%; the first 36-week margin increased to 23.4% from 20.2%. Lower food, labor, occupancy and commodity costs supported margin expansion. Lower cheese prices improved reported margin percentages but reduced supply-chain revenue because cheese costs are generally passed through to customers.
Liquidity, Debt and Capital Allocation
- September 9, 2012 unrestricted cash and cash equivalents were $34.6 million; restricted cash was $60.9 million.
- Working capital was $13.1 million, excluding restricted cash.
- Total debt was approximately $1.57 billion, including $24.4 million classified as current. The balance sheet reported $1.543 billion of long-term debt, excluding the current portion.
- The March 2012 recapitalization issued $1.575 billion of 5.216% fixed-rate senior secured notes and a $100 million variable funding facility, which was undrawn at quarter-end. Available capacity was approximately $60.3 million after letters of credit.
- The company paid approximately $185.5 million in dividends and related anti-dilution payments, including a $3.00 per share special dividend, and repurchased $42.7 million of common stock during the first 36 weeks.
- Approximately $197.9 million remained authorized for future share repurchases at September 9, 2012. Management stated that liquidity and expected operating cash flow should fund operations for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable in Q3 but declined 1.0% for the first 36 weeks, primarily because of fewer company-owned stores following the prior-year sale of 56 stores, lower supply-chain volumes and lower commodity prices.
- International revenue increased 6.7% in Q3 and 4.5% year to date, although foreign exchange reduced international royalty revenue by approximately $1.7 million in Q3 and $4.1 million year to date.
- Operating income increased despite modest revenue growth, reflecting higher franchise royalties, improved company-owned store margins and favorable supply-chain mix.
- Year-to-date net income increased only 0.5%, partly because recapitalization-related expenses reduced pretax results by approximately $10.5 million.
- Interest expense increased $10.2 million year to date to $73.7 million, primarily because of recapitalization-related write-offs and temporary overlapping interest on the old and new debt facilities.
- The company’s stockholders’ deficit increased to $1.346 billion from $1.210 billion at January 1, 2012, primarily reflecting the special dividend, related payments and share repurchases.
Guidance, Outlook, Commentary and Risks
Management did not provide specific numerical earnings or revenue guidance in the filing. Management emphasized continued positive domestic and international same-store sales, international store growth, product and promotional initiatives, technology investment and operational improvements. Management believes current cash, operating cash flow and available variable-funding capacity will be adequate for operating needs, capital expenditures and debt service for at least the next 12 months.
- The company was in compliance with all debt covenants at September 9, 2012. Breach of debt-service, leverage, global-retail-sales or other covenants could cause accelerated repayment or a rapid-amortization event.
- Fixed-rate notes have an anticipated seven-year repayment period and scheduled principal payments; failure to refinance or repay the notes could direct substantially all cash generated by the securitized assets toward debt repayment.
- Substantial leverage may restrict dividends, repurchases, investments and other corporate activities and may reduce financial flexibility.
- Key operating risks include consumer spending, franchisee profitability, competition, food and labor costs, cheese-price volatility, foreign exchange, severe weather, litigation, insurance costs, regulation, tax-rate changes and availability of variable-funding borrowings.
- A hypothetical 10% adverse currency movement in the company’s top ten international markets would have reduced year-to-date royalty revenue by approximately $5.8 million.
- The company recorded a $0.9 million valuation allowance against a deferred tax asset during the first quarter and a $0.7 million tax benefit in Q3 related to increased tax basis in certain assets.
Important Facts for Investors to Verify
- Whether positive same-store sales and international unit growth continue to offset slower domestic company-owned store growth and foreign-exchange pressure.
- Whether operating-margin gains persist after adjusting for favorable cheese and other commodity-price effects.
- Debt covenant compliance, scheduled principal payments, refinancing requirements and actual availability under the variable funding facility.
- The sustainability of cash distributions and share repurchases given the company’s substantial leverage and stockholders’ deficit.
- The magnitude of future recapitalization-related amortization, interest expense and other unusual items.
- Potential changes in food, labor, insurance and utility costs, as well as foreign currency exposure and franchisee financial health.