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DPZ > SEC Filings for DPZ > Form 10-Q on 16-Oct-2012All Recent SEC Filings

Show all filings for DOMINOS PIZZA INC

Form 10-Q for DOMINOS PIZZA INC


16-Oct-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 third quarter referenced herein represents the twelve-week period ended September 9, 2012, while the 2011 third quarter represents the twelve-week period ended September 11, 2011. The 2012 three fiscal quarters referenced herein represents the thirty-six week period ended September 9, 2012, while the 2011 three fiscal quarters represents the thirty-six week period ended September 11, 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.

                                               Third Quarter              Third Quarter                Three Fiscal                 Three Fiscal
                                                  of 2012                    of 2011                 Quarters of 2012             Quarters of 2011
Global retail sales growth                     +4.9 %                    +13.3 %                       +5.1 %                      +12.0 %

Same store sales growth:
Domestic Company-owned stores                  +0.5 %                     +4.2 %                       +0.8 %                       +2.2 %
Domestic franchise stores                      +3.6 %                     +2.9 %                       +2.5 %                       +2.0 %

Domestic stores                                +3.3 %                     +3.0 %                       +2.4 %                       +2.0 %

International stores                           +5.0 %                     +8.1 %                       +5.1 %                       +7.9 %

Store counts (at end of period):
Domestic Company-owned stores                   387                        395
Domestic franchise stores                     4,509                      4,496

Domestic stores                               4,896                      4,891
International stores                          5,144                      4,650

Total stores                                 10,040                      9,541

Income statement data:

Total revenues                             $  378.1        100.0 %     $ 376.3        100.0 %     $ 1,138.8        100.0 %     $ 1,150.4        100.0 %
Cost of sales                                 266.7         70.5 %       273.0         72.5 %         798.1         70.1 %         824.8         71.7 %
General and administrative                     49.8         13.2 %        47.5         12.6 %         146.4         12.8 %         142.6         12.4 %

Income from operations                         61.6         16.3 %        55.9         14.9 %         194.3         17.1 %         183.0         15.9 %
Interest expense, net                         (20.6 )       (5.5 )%      (20.9 )       (5.6 )%        (73.4 )       (6.5 )%        (63.3 )       (5.5 )%

Income before provision for income taxes       41.0         10.8 %        34.9          9.3 %         120.9         10.6 %         119.7         10.4 %
Provision for income taxes                     15.0          3.9 %        12.8          3.4 %          46.1          4.0 %          45.3          3.9 %

Net income                                 $   26.0          6.9 %     $  22.1          5.9 %     $    74.8          6.6 %     $    74.5          6.5 %


Table of Contents

During the third quarter, we continued to produce steady, consistent results with strong earnings per share growth, a slight increase in domestic order counts and strong cash flows. We also experienced positive same store sales growth both domestically and internationally and our international division continued its strong store growth. Recently, we celebrated the opening of our 10,000th store, which is a significant milestone for our global brand. We continue to deliver the products, service and value that are resonating with our consumers and have improved store level profitability for our domestic franchise and Company-owned stores throughout 2012. We believe that our product platforms, combined with our innovative and effective advertising campaigns, continued focus on operational excellence and new technology contributed to the growth in our income from operations during the third quarter and the three fiscal quarters of 2012.

Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, increased 4.9% in the third quarter of 2012, and increased 5.1% in the three fiscal 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 increased $1.8 million, up 0.5% in the third quarter of 2012, and decreased $11.6 million, down 1.0% in the three fiscal quarters of 2012. The increase during the third quarter of 2012 was due primarily to 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. These increases were offset, in part by lower Company-owned store revenues, resulting from the sale of 56 Company-owned stores to multiple franchisees during the three fiscal quarters of 2011, and the negative impact on international revenues of changes in foreign currency exchange rates. The decrease during the three fiscal quarters of 2012 was due primarily to lower Company-owned store revenues, resulting from the sale of 56 Company-owned stores to multiple franchisees during the three fiscal quarters of 2011, lower domestic supply chain revenues resulting from lower volumes and lower overall commodity prices, including cheese, and the negative impact on international revenues of changes in foreign currency exchange rates. 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 $5.7 million, up 10.3% in the third quarter of 2012, and increased $11.3 million, up 6.2% in the three fiscal 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. Additionally, the third quarter benefited by higher domestic supply chain margins as described in more detail below. These increases were offset, in part, by the negative impact of the changes in foreign currency exchange rates and higher general and administrative expenses.

Net income increased $3.9 million, up 17.6% in the third quarter of 2012, and increased $0.3 million, up 0.5% in the three fiscal quarters of 2012. These increases were driven by domestic and international same store sales growth, international store growth and higher domestic Company-owned store margins and were negatively impacted by changes in foreign currency exchange rates. The three fiscal quarters of 2012 were negatively impacted by 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.


Table of Contents

Revenues



                                       Third Quarter            Third Quarter             Three Fiscal               Three Fiscal
                                          of 2012                  of 2011              Quarters of 2012           Quarters of 2011
Domestic Company-owned stores       $  72.2        19.1 %    $  76.2        20.3 %    $   223.7        19.7 %    $   237.9        20.7 %
Domestic franchise                     44.0        11.6 %       41.6        11.1 %        133.5        11.7 %        129.0        11.2 %
Domestic supply chain                 213.5        56.5 %      213.1        56.6 %        636.9        55.9 %        645.2        56.1 %
International                          48.3        12.8 %       45.3        12.0 %        144.6        12.7 %        138.3        12.0 %

Total revenues                      $ 378.1       100.0 %    $ 376.3       100.0 %    $ 1,138.8       100.0 %    $ 1,150.4       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



                                      Third Quarter            Third Quarter             Three Fiscal               Three Fiscal
                                         of 2012                  of 2011              Quarters of 2012           Quarters of 2011
Domestic Company-owned stores      $  72.2        62.1 %    $  76.2        64.7 %    $   223.7        62.6 %    $   237.9        64.8 %
Domestic franchise                    44.0        37.9 %       41.6        35.3 %        133.5        37.4 %        129.0        35.2 %

Domestic stores                    $ 116.3       100.0 %    $ 117.9       100.0 %    $   357.3       100.0 %    $   366.9       100.0 %

Domestic stores revenues decreased $1.6 million, down 1.4% in the third quarter of 2012, and decreased $9.6 million, down 2.6% in the three fiscal quarters of 2012. These decreases were due primarily to lower Company-owned store revenues, resulting from the sale of 56 Company-owned stores to multiple franchisees during the three fiscal quarters of 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 $4.0 million, down 5.3% in the third quarter of 2012, and decreased $14.2 million, down 5.9% in the three fiscal quarters of 2012. These decreases were due to fewer Company-owned stores being open during 2012, primarily as a result of the sale of 56 Company-owned stores to multiple franchisees during the three fiscal quarters of 2011. These decreases were partially offset by higher same store sales during the third quarter and three fiscal quarters of 2012. Domestic Company-owned same store sales increased 0.5% in the third quarter of 2012, and increased 0.8% in the three fiscal quarters of 2012. This compared to an increase of 4.2% in the third quarter of 2011, and an increase of 2.2% in the three fiscal quarters of 2011.

Domestic Franchise Revenues

Revenues from domestic franchise operations increased $2.4 million, up 5.7% in the third quarter of 2012, and increased $4.5 million, up 3.5% in the three fiscal 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 3.6% in the third quarter of 2012, and increased 2.5% in the three fiscal quarters of 2012. This compared to an increase of 2.9% in the third quarter of 2011, and an increase of 2.0% in the three fiscal quarters of 2011.

Domestic Supply Chain Revenues

Revenues from domestic supply chain operations increased $0.4 million, up 0.2% in the third quarter of 2012, and decreased $8.3 million, down 1.3% in the three fiscal quarters of 2012. The third quarter of 2012 increase was due primarily to a change in the mix of products sold and an increase in the number of franchise stores in operation. This was offset in part by lower overall commodity prices, including cheese and lower volumes. The decrease during the three fiscal quarters of 2012 was due primarily to lower volumes, a change in the mix of products sold and lower overall commodity prices, including cheese. The published cheese block price-per-pound averaged $1.71 in the third quarter of 2012, and $1.58 in the three fiscal quarters of 2012. This was down from $2.08 and $1.81 in the comparable periods in 2011. We estimate that these lower cheese block prices resulted in approximately a $7.1 million decrease in domestic supply chain revenues during the third quarter of 2012, and an $11.8 million decrease in revenues in the first three quarters of 2012.


Table of Contents

International Revenues



                                      Third Quarter           Third Quarter             Three Fiscal               Three Fiscal
                                         of 2012                 of 2011              Quarters of 2012           Quarters of 2011
International royalty and other     $ 27.0        55.8 %    $ 24.9        55.1 %    $    80.0        55.3 %    $    73.6        53.2 %
International supply chain            21.3        44.2 %      20.4        44.9 %         64.6        44.7 %         64.7        46.8 %

International                       $ 48.3       100.0 %    $ 45.3       100.0 %    $   144.6       100.0 %    $   138.3       100.0 %

International revenues primarily consist of royalties from our international franchise stores and international supply chain sales. Revenues from international operations increased $3.0 million, up 6.7% in the third quarter of 2012, and $6.3 million, up 4.5% in the three fiscal quarters of 2012. These increases were due primarily to higher international royalty and other revenues offset in part by the negative impact of changes in foreign currency exchange rates, as discussed below.

Revenues from international royalties and other revenues increased $2.1 million, up 8.1% in the third quarter of 2012, and increased $6.4 million, up 8.7% in the three fiscal quarters of 2012. These increases were due primarily 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 third quarter of 2012, and approximately $4.1 million in the three fiscal quarters of 2012. On a constant dollar basis (which excludes the impact of foreign currency exchange rates), same store sales increased 5.0% in the third quarter of 2012, and increased 5.1% in the three fiscal quarters of 2012. This compared to an increase of 8.1% in the third quarter of 2011, and 7.9% in the three fiscal quarters of 2011. On a historical dollar basis (which includes the impact of foreign currency exchange rate changes), same store sales decreased 1.1% in the third quarter of 2012, and increased 0.4% in the three fiscal quarters of 2012. This compared to an increase of 16.9% in the third quarter of 2011, and an increase of 15.8% in the three fiscal 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 dollar when compared to the currencies in the international markets in which we compete.

Revenues from international supply chain operations increased $0.9 million, up 4.9% in the third quarter of 2012, and decreased $0.1 million, down 0.2% in the three fiscal quarters of 2012. The increase in the third quarter was due primarily to higher volumes partially offset by the negative impact of foreign currency exchange rates of approximately $0.5 million. The decrease in the three fiscal quarters was due primarily to the negative impact of the primary foreign currency exchange rate of approximately $0.8 million.

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