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DPZ > SEC Filings for DPZ > Form 10-Q on 1-May-2012All Recent SEC Filings

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Form 10-Q for DOMINOS PIZZA INC


1-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Unaudited; tabular amounts in millions, except percentages and store data)

The 2012 and 2011 first quarters referenced herein represent the twelve-week periods ended March 25, 2012 and March 27, 2011, respectively.

Overview

We are the number one pizza delivery company in the United States based on reported consumer spending, and the second largest pizza company in the world based on number of units. We operate through a primarily franchised network of stores, located in all 50 states and in more than 70 international markets, as well as Company-owned stores, all of which are in the United States. In addition, we operate regional dough manufacturing and supply chain centers in the United States and Canada.

Our financial results are driven largely by retail sales at our franchise and Company-owned stores. Changes in retail sales are driven by changes in same store sales and store counts. We monitor both of these metrics very closely, as they directly impact our revenues and profits, and strive to consistently increase both same store sales and store counts. Retail sales drive royalty payments from franchisees as well as Company-owned store and supply chain revenues. Retail sales are primarily impacted by the strength of the Domino's Pizza brand, the results of our marketing promotions, our ability to execute our store operating model, the overall global economic environment and the success of our business strategies.

                                              First Quarter               First Quarter
                                                 of 2012                     of 2011
Global retail sales growth                     6.1 %                      8.2 %
Same store sales growth:
Domestic Company-owned stores                  1.6 %                     (2.3 )%
Domestic franchise stores                      2.1 %                     (1.3 )%

Domestic stores                                2.0 %                     (1.4 )%
International stores                           4.7 %                      8.3 %
Store counts (at end of period):
Domestic Company-owned stores                  387                        427
Domestic franchise stores                    4,511                      4,482

Domestic stores                              4,898                      4,909
International stores                         4,912                      4,470

Total stores                                 9,810                      9,379

Income statement data:
Total revenues                             $ 384.6        100.0 %     $ 389.2         100.0 %
Cost of sales                                269.9         70.2 %       277.6          71.3 %
General and administrative                    47.8         12.4 %        46.5          12.0 %

Income from operations                        66.9         17.4 %        65.1          16.7 %
Interest expense, net                        (32.1 )       (8.4 )%      (21.4 )        (5.5 )%

Income before provision for income taxes      34.8          9.0 %        43.7          11.2 %
Provision for income taxes                    14.1          3.6 %        16.6           4.2 %

Net income                                 $  20.7          5.4 %     $  27.1           7.0 %

During the first quarter of 2012, we continued to generate positive domestic same store sales on our bigger base of customers and continue to benefit from the brand equity we have built over the past several years. During the first quarter of 2012, we focused on promotions to improve store level profitability for our franchise and Company-owned stores. Internationally, we produced strong store count growth and same store sales growth. We believe the strong store-level earnings continue to incentivize the international franchisees to build new stores. During the first quarter of 2012, our international store count surpassed the number of domestic stores. We believe that our product platforms combined with our innovative and effective advertising campaign, continued focus on operational excellence and new technology, such as the launch of our Android mobile application in the first quarter of 2012, contributed to the growth in our income from operations during the first quarter of 2012.


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Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, increased 6.1% in the first quarter of 2012. This increase was driven primarily by international and domestic same store sales growth, as well as an increase in our worldwide franchise store counts during the trailing four quarters, offset in part by the negative impact of foreign currency exchange rates. Domestic same store sales growth reflected the sustained positive sales trends on our bigger base of customers and the continued success of our new products and promotions. International same store sales growth reflected continued strong performance in the markets where we compete.

Revenues decreased $4.6 million, down 1.2% in the first quarter of 2012. This decrease was primarily due to lower Company-owned store revenues resulting from the sale of 58 Company-owned stores to multiple franchisees during 2011 and lower domestic supply chain revenues resulting from lower volumes and lower cheese prices, partially offset by higher dough costs and other commodity prices, including meats. These decreases were offset in part by higher international revenues attributable to same store sales and store count growth and higher domestic franchise revenues due to an increase in same store sales and store count growth. These changes in revenues are described in more detail below.

Income from operations increased $1.8 million, up 2.7% in the first quarter of 2012. This increase was driven primarily by higher royalty revenues from both domestic and international franchise stores and higher domestic Company-owned store margins. These increases were offset, in part, by lower domestic supply chain operating margins and higher general and administrative expenses.

Net income decreased $6.4 million, down 23.5% in the first quarter of 2012. This decrease was primarily due to approximately $10.5 million of net pre-tax expenses incurred in connection with the 2012 recapitalization, including the write-offs of deferred financing fees, bond discount and interest rate swap related to the extinguished debt, interest expense incurred on the 2007 debt subsequent to the closing of the 2012 recapitalization, and other expenses including stock compensation expenses, payroll taxes related to the dividend equivalent payments made to certain stock option holders and legal and professional fees. Additionally, net income was negatively impacted by a valuation allowance recorded on a deferred tax asset of approximately $0.9 million during the first quarter of 2012. Further, net income was positively impacted by domestic and international same store sales growth, international store growth and higher domestic Company-owned store margins and was negatively impacted by lower supply chain margins.

Revenues



                                           First Quarter            First Quarter
                                              of 2012                  of 2011
        Domestic Company-owned stores   $  77.6        20.2 %    $  82.7        21.3 %
        Domestic franchise                 45.2        11.7 %       44.0        11.3 %
        Domestic supply chain             214.1        55.7 %      216.6        55.6 %
        International                      47.6        12.4 %       45.8        11.8 %

        Total revenues                  $ 384.6       100.0 %    $ 389.2       100.0 %

Revenues primarily consist of retail sales from our Company-owned stores, royalties from our domestic and international franchise stores and sales of food, equipment and supplies from our supply chain centers to substantially all of our domestic franchise stores and certain international franchise stores. Company-owned store and franchise store revenues may vary significantly from period to period due to changes in store count mix, while supply chain revenues may vary significantly as a result of fluctuations in commodity prices, primarily cheese and meats.

Domestic Stores Revenues



                                           First Quarter            First Quarter
                                              of 2012                  of 2011
        Domestic Company-owned stores   $  77.6        63.2 %    $  82.7        65.3 %
        Domestic franchise                 45.2        36.8 %       44.0        34.7 %

        Domestic stores                 $ 122.8       100.0 %    $ 126.8       100.0 %

Domestic stores revenues decreased $4.0 million, down 3.1% in the first quarter of 2012. This decrease was due primarily to lower Company-owned store revenues resulting from the sale of 58 Company-owned stores to multiple franchisees during 2011. This decrease was offset in part by higher domestic Company-owned and franchise same store sales. These changes in domestic stores revenues are more fully described below.


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Domestic Company-Owned Stores Revenues

Revenues from domestic Company-owned store operations decreased $5.1 million, down 6.2% in the first quarter of 2012. This decrease was due to fewer Company-owned stores being open during 2012, primarily as a result of the sale of 58 Company-owned stores to multiple franchisees during 2011. This decrease was partially offset by higher same store sales during the first quarter of 2012. Domestic Company-owned same store sales increased 1.6% in the first quarter of 2012, compared to a decrease of 2.3% in the first quarter of 2011. There were 387 Company-owned stores in operation at the end of the first quarter of 2012, versus 427 at the end of the first quarter of 2011.

Domestic Franchise Revenues

Revenues from domestic franchise operations increased $1.2 million, up 2.6% in the first quarter of 2012. This increase was due primarily to higher domestic franchise same store sales and an increase in the average number of domestic franchise stores open during 2012. Domestic franchise same store sales increased 2.1% in the first quarter of 2012, compared to a decrease of 1.3% in the first quarter of 2011. There were 4,511 domestic franchise stores in operation at the end of the first quarter of 2012, versus 4,482 at the end of the first quarter of 2011.

Domestic Supply Chain Revenues

Revenues from domestic supply chain operations decreased $2.5 million, down 1.1% in the first quarter of 2012. This decrease was due primarily to lower volumes as a result of lower order counts at the store level, a change in the mix of products sold and a decrease in cheese prices. These decreases were partially offset by higher dough costs and other commodity prices, including meats. Order counts decreased in the quarter due to promotions focused on side items which were designed to, and did, improve franchise store profitability. The published cheese block price-per-pound averaged $1.52 in the first quarter of 2012, down from $1.69 in the comparable period in 2011. We estimate that this decrease in cheese block price resulted in approximately a $2.8 million decrease in domestic supply chain revenues during the first quarter of 2012.

International Revenues



                                            First Quarter           First Quarter
                                               of 2012                 of 2011
        International royalty and other   $ 26.0        54.7 %    $ 23.7        51.8 %
        International supply chain          21.6        45.3 %      22.1        48.2 %

        International                     $ 47.6       100.0 %    $ 45.8       100.0 %

International revenues primarily consist of royalties from our international franchise stores and international supply chain sales. Revenues from international operations increased $1.8 million, up 3.9% in the first quarter of 2012, primarily due to higher international royalty and other revenues, as discussed below.

Revenues from international royalties and other revenues increased $2.3 million, up 9.6% in the first quarter of 2012. This increase was primarily due to higher same store sales and more international stores being open during 2012, offset in part by the negative impact of changes in foreign currency exchange rates of approximately $0.6 million. On a constant dollar basis (which excludes the impact of foreign currency exchange rates), same store sales increased 4.7% in the first quarter of 2012, compared to an increase of 8.3% in the first quarter of 2011. On a historical dollar basis (which includes the impact of foreign currency exchange rates), same store sales increased 2.9% in the first quarter of 2012, compared to an increase of 12.8% in the first quarter of 2011. The variance in our same store sales on a constant dollar basis versus a historical dollar basis in 2012 was caused by the stronger U.S. dollar when compared to the currencies in the international markets in which we compete. There were 4,912 international stores in operation at the end of the first quarter of 2012, compared to 4,470 at the end of the first quarter of 2011.


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