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DPZ > SEC Filings for DPZ > Form 10-Q on 24-Jul-2012All Recent SEC Filings

Show all filings for DOMINOS PIZZA INC

Form 10-Q for DOMINOS PIZZA INC


24-Jul-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 second quarter referenced herein represents the twelve-week period ended June 17, 2012, while the 2011 second quarter represents the twelve-week period ended June 19, 2011. The 2012 first two quarters referenced herein represents the twenty-four week period ended June 17, 2012, while the 2011 first two quarters represents the twenty-four week period ended June 19, 2011.

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 metrics. 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.

The information below is based on reported consumer spending obtained by The NPD Group's CREST® report from consumer surveys.

From 2001 to 2011, the U.S. quick service restaurant pizza industry in which Domino's Pizza competes has grown from $29.7 billion to $32.4 billion. We participate primarily in two segments of this industry, the delivery and carry out segments. During this ten year period, the delivery segment declined from $11.2 billion in 2001 to $9.8 billion in 2011. However, the delivery segment has increased slightly over the past three years, going from $9.7 billion in 2009 to $9.8 billion in 2011. From 2001 to 2011, the carry out segment grew from $10.9 billion in 2001 to $14.3 billion in 2011. Additionally, in the past three years the carry out segment grew from $13.3 billion in 2009 to $14.3 billion in 2011. We are the market share leader in the delivery segment and the third largest in carry out, a segment we have been focused on growing.

                                              Second Quarter             Second Quarter                First Two                   First Two
                                                 of 2012                    of 2011                Quarters of 2012            Quarters of 2011
Global retail sales growth                    +4.3 %                    +14.5 %                      +5.2 %                     +11.3 %

Same store sales growth:
Domestic Company-owned stores                 +0.3 %                     +5.3 %                      +1.0 %                      +1.3 %
Domestic franchise stores                     +1.9 %                     +4.8 %                      +2.0 %                      +1.6 %

Domestic stores                               +1.7 %                     +4.8 %                      +1.9 %                      +1.6 %

International stores                          +5.7 %                     +7.4 %                      +5.2 %                      +7.9 %

Store counts (at end of period):
Domestic Company-owned stores                  387                        427
Domestic franchise stores                    4,514                      4,467

Domestic stores                              4,901                      4,894
International stores                         5,023                      4,542

Total stores                                 9,924                      9,436

Income statement data:
Total revenues                             $ 376.1        100.0 %     $ 384.9        100.0 %     $  760.7        100.0 %     $  774.1        100.0 %
Cost of sales                                261.5         69.5 %       274.2         71.2 %        531.5         69.9 %        551.8         71.3 %
General and administrative                    48.8         13.0 %        48.6         12.6 %         96.6         12.7 %         95.1         12.3 %

Income from operations                        65.8         17.5 %        62.0         16.2 %        132.7         17.4 %        127.2         16.4 %
Interest expense, net                        (20.7 )       (5.5 )%      (21.0 )       (5.5 )%       (52.8 )       (6.9 )%       (42.3 )       (5.4 )%

Income before provision for income taxes      45.1         12.0 %        41.1         10.7 %         79.9         10.5 %         84.8         11.0 %
Provision for income taxes                    17.0          4.5 %        15.8          4.1 %         31.1          4.1 %         32.5          4.2 %

Net income                                 $  28.1          7.5 %     $  25.2          6.6 %     $   48.8          6.4 %     $   52.4          6.8 %


Table of Contents

During the second quarter and first two quarters of 2012, we continued our focus on promotions to improve store level profitability for our franchise and Company-owned stores. While we have experienced slight decreases in order counts during this timeframe, we are pleased with the increases in domestic same store sales comparisons and encouraged by our franchisees' reported profitability and Company-owned stores improved unit-level economics. 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 U.S. launch of our Android mobile application in the first quarter of 2012, contributed to the growth in our income from operations during the second quarter and the first two quarters of 2012. Internationally, we produced strong store count growth and same store sales growth. We also believe the strong store-level earnings continue to incentivize the international franchisees to build new stores.

Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, increased 4.3% in the second quarter of 2012, and increased 5.2% in the first two quarters of 2012. These increases were 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 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 $8.8 million, down 2.3% in the second quarter of 2012, and decreased $13.4 million, down 1.7% in the first two quarters of 2012. These decreases were primarily due to lower Company-owned store revenues resulting from the sale of 58 Company-owned stores to multiple franchisees during 2011, lower domestic supply chain revenues resulting from lower volumes, lower cheese prices and the negative impact on international royalties of changes in foreign currency exchange rates. These decreases were offset in part by higher dough and other commodity prices, 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 $3.8 million, up 6.0% in the second quarter of 2012, and increased $5.5 million, up 4.3% in the first two quarters of 2012. These increases were 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 the negative impact of the changes in foreign currency exchange rates.

Net income increased $2.9 million, up 11.3% in the second quarter of 2012, and decreased $3.6 million, down 6.7% in the first two quarters of 2012. The second quarter increase was driven 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. The decrease in the first two quarters was primarily due to approximately $10.5 million of net pre-tax expenses incurred in connection with the Company's recapitalization (the 2012 Recapitalization), including the write-offs of deferred financing fees 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 for the first two quarters of 2012 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.


Table of Contents

Revenues



                                     Second Quarter           Second Quarter               First Two                  First Two
                                         of 2012                  of 2011              Quarters of 2012           Quarters of 2011
Domestic Company-owned stores      $  73.9        19.7 %    $  78.9        20.5 %    $   151.5        19.9 %    $   161.6        20.9 %
Domestic franchise                    44.3        11.8 %       43.3        11.3 %         89.5        11.8 %         87.4        11.3 %
Domestic supply chain                209.3        55.6 %      215.5        56.0 %        423.4        55.7 %        432.1        55.8 %
International                         48.6        12.9 %       47.2        12.2 %         96.3        12.7 %         93.0        12.0 %

Total revenues                     $ 376.1       100.0 %    $ 384.9       100.0 %    $   760.7       100.0 %    $   774.1       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



                                     Second Quarter           Second Quarter               First Two                  First Two
                                         of 2012                  of 2011              Quarters of 2012           Quarters of 2011
Domestic Company-owned stores      $  73.9        62.5 %    $  78.9        64.5 %    $   151.5        62.9 %    $   161.6        64.9 %
Domestic franchise                    44.3        37.5 %       43.3        35.5 %         89.5        37.1 %         87.4        35.1 %

Domestic stores                    $ 118.2       100.0 %    $ 122.3       100.0 %    $   241.0       100.0 %    $   249.0       100.0 %

Domestic stores revenues decreased $4.1 million, down 3.3% in the second quarter of 2012, and decreased $8.0 million, down 3.2% in the first two quarters of 2012. These decreases were due primarily to lower Company-owned store revenues resulting from the sale of 58 Company-owned stores to multiple franchisees during 2011 and were offset in part by higher domestic Company-owned and franchise same store sales. These changes in domestic stores revenues are more fully described below.

Domestic Company-Owned Stores Revenues

Revenues from domestic Company-owned store operations decreased $5.0 million, down 6.3% in the second quarter of 2012, and decreased $10.1 million, down 6.3% in the first two quarters of 2012. These decreases were 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. These decreases were partially offset by higher same store sales during the second quarter and first two quarters of 2012. Domestic Company-owned same store sales increased 0.3% in the second quarter of 2012, and increased 1.0% in the first two quarters of 2012. This compared to an increase of 5.3% in the second quarter of 2011, and an increase of 1.3% in the first two quarters of 2011. There were 387 Company-owned stores in operation at the end of the second quarter of 2012, versus 427 at the end of the second quarter of 2011.

Domestic Franchise Revenues

Revenues from domestic franchise operations increased $1.0 million, up 2.2% in the second quarter of 2012, and increased $2.1 million, up 2.4% in the first two quarters of 2012. These increases were 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 1.9% in the second quarter of 2012, and increased 2.0% in the first two quarters of 2012. This compared to an increase of 4.8% in the second quarter of 2011, and increased 1.6% in the first two quarters of 2011. There were 4,514 domestic franchise stores in operation at the end of the second quarter of 2012, versus 4,467 at the end of the second quarter of 2011.


Table of Contents

Domestic Supply Chain Revenues

Revenues from domestic supply chain operations decreased $6.2 million, down 2.9% in the second quarter of 2012, and decreased $8.7 million, down 2.0% in the first two quarters of 2012. These decreases were 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. Order counts decreased in the second quarter and first two quarters of 2012 due to promotions focused on side items and premium pizzas which were designed to, and did, improve franchise store profitability. The published cheese block price-per-pound averaged $1.52 in both the second quarter and first two quarters of 2012, down from $1.68 in both of the comparable periods in 2011. We estimate that these decreases in cheese block prices resulted in approximately a $2.0 million decrease in domestic supply chain revenues during the second quarter of 2012, and a $4.8 million decrease in revenues in the first two quarters of 2012.

International Revenues



                                       Second Quarter           Second Quarter               First Two                  First Two
                                           of 2012                  of 2011              Quarters of 2012           Quarters of 2011
International royalty and other      $  26.9        55.5 %    $  24.9        52.8 %    $   53.0         55.1 %    $   48.6         52.3 %
International supply chain              21.7        44.5 %       22.3        47.2 %        43.3         44.9 %        44.4         47.7 %

International                        $  48.6       100.0 %    $  47.2       100.0 %    $   96.3        100.0 %    $   93.0        100.0 %

International revenues primarily consist of royalties from our international franchise stores and international supply chain sales. Revenues from international operations increased $1.4 million, up 3.1% in the second quarter of 2012, and $3.3 million, up 3.5% in the first two quarters of 2012. These increases were due to higher international royalty and other revenues, as discussed below.

Revenues from international royalties and other revenues increased $2.0 million, up 8.0% in the second quarter of 2012, and increased $4.4 million, up 9.0% in the first two quarters of 2012. These increases were 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 $1.7 million in the second quarter of 2012 and approximately $2.4 million in the first two quarters of 2012. On a constant dollar basis (which excludes the impact of foreign currency exchange rates), same store sales increased 5.7% in the second quarter of 2012, and 5.2% in the first two quarters of 2012. This compared to an increase of 7.4% in the second quarter of 2011, and 7.9% in the first two quarters of 2011. On a historical dollar basis (which includes the impact of foreign currency exchange rates), same store sales decreased 0.7% in the second quarter of 2012, and increased 1.1% in the first two quarters of 2012. This compared to an increase of 17.7% in the second quarter of 2011, and 15.3% in the first two quarters 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 5,023 international stores in operation at the end of the second quarter of 2012, compared to 4,542 at the end of the second quarter of 2011.

Revenues from international supply chain operations decreased $0.6 million, down 2.8% in the second quarter of 2012, and decreased $1.1 million, down 2.5% in the first two quarters of 2012. The decrease in the second quarter was due primarily to the negative impact of foreign currency exchange rates of approximately $0.8 million. The decrease for the first two quarters was due primarily to lower volumes and the negative impact of foreign currency exchange rates of approximately $0.3 million.

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