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DPZ > SEC Filings for DPZ > Form 10-Q on 30-Apr-2013All Recent SEC Filings

Show all filings for DOMINOS PIZZA INC

Form 10-Q for DOMINOS PIZZA INC


30-Apr-2013

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 2013 and 2012 first quarters referenced herein represent the twelve-week periods ended March 24, 2013 and March 25, 2012, 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 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.

                                               First Quarter              First Quarter
                                                  of 2013                    of 2012
Global retail sales growth                      9.4 %                      6.1 %
Same store sales growth:
Domestic Company-owned stores                   5.0 %                      1.6 %
Domestic franchise stores                       6.3 %                      2.1 %

Domestic stores                                 6.2 %                      2.0 %
International stores                            6.5 %                      4.7 %
Store counts (at end of period):
Domestic Company-owned stores                   388                        387
Domestic franchise stores                     4,535                      4,511

Domestic stores                               4,923                      4,898
International stores                          5,407                      4,912

Total stores                                 10,330                      9,810

Income statement data:
Total revenues                               $417.6        100.0 %     $ 384.6        100.0 %
Cost of sales                                 287.8         68.9 %       269.9         70.2 %
General and administrative                     54.3         13.0 %        47.8         12.4 %

Income from operations                         75.5         18.1 %        66.9         17.4 %
Interest expense, net                         (20.9 )       (5.0 )%      (32.1 )       (8.4 )%

Income before provision for income taxes       54.6         13.1 %        34.8          9.0 %
Provision for income taxes                     20.2          4.9 %        14.1          3.6 %

Net income                                   $ 34.4          8.2 %     $  20.7          5.4 %

During the first quarter of 2013, domestic same store sales increases were driven by our continued consumer offerings of higher quality food at value pricing, increased advertising to support our first quarter promotions that had high advertising scores, and incremental sales from New Year's Eve and New Year's Day that fell within the quarter this year. Internationally, we continued to have robust same store sales, which benefited from the inclusion of New Year's Eve and New Year's Day in the current year quarter, and store growth, as we opened a net 80 stores during the quarter. We believe that our strong global brand, quality and affordable food offerings, combined with our operators and innovative technology all contributed to our results during the first quarter of 2013. We intend to further grow our business by continuing to focus on operational excellence, effective promotions, industry-leading technology platforms and delivering high quality food and service to our customers.


Table of Contents

Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, increased 9.4% in the first quarter of 2013. This increase was driven primarily by domestic and international same store sales growth, as well as an increase in our worldwide franchise store counts during the trailing four quarters. This was 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 products and promotions. International same store sales growth reflected continued strong performance in the markets where we compete. Additionally, the Company estimates that the same store sales increases for its domestic and international stores were each positively impacted by approximately 1% from having New Year's Eve and New Year's Day in its first quarter 2013 results. Fiscal 2012 began on January 2, 2012 and, therefore, did not include sales from these days in the same store sales results in the first quarter of 2012.

Revenues increased $33.0 million, up 8.6% in the first quarter of 2013. This increase was due primarily to higher domestic supply chain revenues attributable to higher volumes from increased order counts, combined with higher cheese and other commodity prices, higher domestic franchise and Company-owned store revenues, and higher international revenues attributable to same store sales and store count growth. These increases were offset in part by the negative impact on international revenues of changes in foreign currency exchange rates. These changes in revenues are described in more detail below.

Income from operations increased $8.6 million, up 12.9% in the first quarter of 2013. This increase was driven primarily by higher royalty revenues from both domestic and international franchise stores, higher supply chain margins and higher domestic Company-owned store margins. 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 $13.7 million, up 65.9% in the first quarter of 2013. The increase was driven in part by domestic and international same store sales growth, international store count growth, higher supply chain margins and higher domestic Company-owned store margins and was offset in part by changes in foreign currency exchange rates. Additionally, during the first quarter of 2012, the Company incurred approximately $6.5 million of net after-tax expenses in connection with the 2012 recapitalization and recorded a valuation allowance on a deferred tax asset of approximately $0.9 million.

Revenues



                                           First Quarter            First Quarter
                                              of 2013                  of 2012
        Domestic Company-owned stores   $  81.1        19.4 %    $  77.6        20.2 %
        Domestic franchise                 51.3        12.3 %       45.2        11.7 %
        Domestic supply chain             231.5        55.4 %      214.1        55.7 %
        International                      53.7        12.9 %       47.6        12.4 %

        Total revenues                  $ 417.6       100.0 %    $ 384.6       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 2013                  of 2012
        Domestic Company-owned stores   $  81.1        61.2 %    $  77.6        63.2 %
        Domestic franchise                 51.3        38.8 %       45.2        36.8 %

        Domestic stores                 $ 132.4       100.0 %    $ 122.8       100.0 %

Domestic stores revenues increased $9.6 million, up 7.8% in the first quarter of 2013. This increase was due primarily to higher domestic Company-owned same store sales and royalty revenues earned on higher franchise same store sales. These changes in domestic stores revenues are more fully described below.


Table of Contents

Domestic Company-Owned Stores Revenues

Revenues from domestic Company-owned store operations increased $3.5 million, up 4.5% in the first quarter of 2013. This increase was due primarily to higher same store sales during the first quarter of 2013. Domestic Company-owned same store sales increased 5.0% in the first quarter of 2013, compared to an increase of 1.6% in the first quarter of 2012.

Domestic Franchise Revenues

Revenues from domestic franchise operations increased $6.1 million, up 13.5% in the first quarter of 2013. This increase was due primarily to higher domestic franchise same store sales and to a lesser extent, an increase in the average number of domestic franchise stores open during 2013. Domestic franchise same store sales increased 6.3% in the first quarter of 2013, compared to an increase of 2.1% in the first quarter of 2012. Additionally, during the first quarter of 2013, we contracted with a third party to manage our gift card program. In connection with this program change, we refined our assessment of our gift card liability and recorded approximately $2.6 million of domestic franchise revenue and reimbursed approximately $1.8 million to our national advertising fund, as discussed further below in general and administrative expenses.

Domestic Supply Chain Revenues

Revenues from domestic supply chain operations increased $17.4 million, up 8.1% in the first quarter of 2013. This increase was due primarily to higher volumes as a result of increased order counts at the store level, higher overall commodity prices, including cheese, and a change in the mix of products sold. The published cheese block price-per-pound averaged $1.67 in the first quarter of 2013, up from $1.52 in the comparable period in 2012. We estimate that the higher cheese block price resulted in an approximate $3.0 million increase in domestic supply chain revenues during the quarter.

International Revenues



                                            First Quarter           First Quarter
                                               of 2013                 of 2012
        International royalty and other   $ 29.9        55.7 %    $ 26.0        54.7 %
        International supply chain          23.8        44.3 %      21.6        45.3 %

        International                     $ 53.7       100.0 %    $ 47.6       100.0 %

International revenues primarily consist of royalties from our international franchise stores and international supply chain sales. Revenues from international operations increased $6.1 million, up 12.7% in the first quarter of 2013. These increases were due primarily to higher international royalty and other revenues as well as higher international supply chain 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 $3.9 million, up 14.7% in the first quarter of 2013. This increase was due primarily to higher same store sales and more international stores being open during 2013, offset in part by the negative impact of changes in foreign currency exchange rates of approximately $0.5 million. On a constant dollar basis (which excludes the impact of foreign currency exchange rates), same store sales increased 6.5% in the first quarter of 2013, compared to an increase of 4.7% in the first quarter of 2012. On a historical dollar basis (which includes the impact of foreign currency exchange rate changes), same store sales increased 4.5% in the first quarter of 2013, compared to an increase of 2.9% in the first quarter of 2012. The variance in our same store sales on a constant dollar basis versus a historical dollar basis in 2013 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 $2.2 million, up 10.3% in the first quarter of 2013 due primarily to higher volumes.

Cost of Sales / Operating Margin



                                      First Quarter            First Quarter
                                         of 2013                  of 2012
             Total revenues        $ 417.6       100.0 %    $ 384.6       100.0 %
             Total cost of sales     287.8        68.9 %      269.9        70.2 %

             Operating margin      $ 129.8        31.1 %    $ 114.6        29.8 %


Table of Contents

Total cost of sales consists primarily of domestic Company-owned store and domestic supply chain costs incurred to generate related revenues. Components of total cost of sales primarily include food, labor and occupancy costs.

The operating margin, which we define as total revenues less total cost of sales, increased $15.2 million, up 13.2% in the first quarter of 2013. This increase in the operating margin was due primarily to higher domestic and international franchise revenues, higher supply chain margins and higher margins at our Company-owned stores. Franchise revenues do not have a cost of sales component and, as such, changes in franchise revenues have a disproportionate effect on the operating margin.

As a percentage of revenues, the operating margin increased 1.3 percentage points in the first quarter of 2013. This increase was due primarily to a change in our mix of revenues, higher supply chain margins and higher Company-owned stores operating margins, offset in part by higher overall commodity prices, including cheese.

As indicated above, the operating margin as a percentage of total revenues was negatively impacted by higher cheese costs. Cheese price changes are a "pass-through" in domestic supply chain revenues and cost of sales and, as such, have no impact on the related operating margin as measured in dollars. However, cheese price changes do impact operating margin when measured as a percentage of revenues. For example, if the 2013 average cheese prices had been in effect during 2012, the impact on supply chain margins would have caused the operating margin for the first quarter of 2012 to be approximately 29.6% of total revenues versus the reported 29.8%. However, the dollar margins for those same periods would have been unaffected.

Domestic Company-Owned Stores Operating Margin



                                           First Quarter           First Quarter
         Domestic Company-Owned Stores        of 2013                 of 2012
         Revenues                        $ 81.1       100.0 %    $ 77.6       100.0 %
         Cost of sales                     61.3        75.6 %      59.3        76.4 %

         Store operating margin          $ 19.8        24.4 %    $ 18.3        23.6 %

The domestic Company-owned store operating margin, which does not include certain store-level costs such as royalties and advertising, increased $1.5 million, up 8.1% in the first quarter of 2013. This increase was due primarily to higher same store sales.

As a percentage of store revenues, the store operating margin increased 0.8 percentage points in the first quarter of 2013. Labor and related costs decreased 0.6 percentage points to 28.1% in the first quarter of 2013 due primarily to leveraging the higher sales per store. Occupancy costs (which include rent, telephone, utilities and depreciation) decreased 0.5 percentage points to 8.7% in the first quarter of 2013 due primarily to the positive impact of higher sales per store during the first quarter of 2013, and to a lesser extent, lower utilities and depreciation costs per store. Insurance costs decreased 0.4 percentage points to 2.9% in the first quarter of 2013 due to better experience. Food costs increased 1.0 percentage point to 27.7% in the first quarter of 2013 due primarily to higher cheese and other commodity prices. The cheese block price per pound averaged $1.67 in the first quarter of 2013 compared to $1.52 in the first quarter of 2012.

Domestic Supply Chain Operating Margin



                                           First Quarter            First Quarter
        Domestic Supply Chain                 of 2013                  of 2012
        Revenues                        $ 231.5       100.0 %    $ 214.1       100.0 %
        Cost of sales                     205.4        88.7 %      191.5        89.4 %

        Supply Chain operating margin   $  26.1        11.3 %    $  22.6        10.6 %

The domestic supply chain operating margin increased $3.5 million, up 15.6% in the first quarter of 2013, due primarily to higher volumes resulting from higher order counts at the store level and a change in the mix of the products sold.

As a percentage of supply chain revenues, the supply chain operating margin increased 0.7 percentage points in the first quarter of 2013, due primarily to the positive impact of product mix and higher volumes, offset in part by higher commodity costs. Increases in certain food prices have a negative effect on the domestic supply chain operating margin percent due to the fixed dollar margin earned by domestic supply chain on certain food items. Had the 2013 cheese prices been in effect during 2012, the domestic supply chain operating margin as a percentage of domestic supply chain revenues would have been approximately 10.4% for the first quarter of 2012 versus the reported 10.6%. However, the dollar margins for those same periods would have been unaffected.


Table of Contents

General and Administrative Expenses

General and administrative expenses increased $6.5 million, up 13.7% in the first quarter of 2013. General and administrative expenses include a reimbursement of approximately $1.8 million during the first quarter of 2013 to our national advertising fund related to their historical costs to support the Company's gift card program, as discussed above in domestic franchise revenues, as well as an increase in non-cash compensation expense of $1.3 million and an increase in variable performance-based compensation expenses of approximately $1.2 million. Additionally, we continued our investments in technology and international initiatives, which also increased general and administrative expenses during the quarter compared to the prior year quarter.

Interest Expense

Interest expense decreased $11.3 million to $20.9 million in the first quarter of 2013. This decrease was due primarily to approximately $10.2 million of additional interest expense incurred in the first quarter of 2012 related to the 2012 recapitalization, primarily the write-off of deferred financing fees in connection with the retirement of our previous debt facility.

The Company's cash borrowing rate was 5.3% during the first quarter of 2013, 0.7 percentage points lower than the first quarter in 2012, due primarily to the completion of the 2012 recapitalization during the first quarter of 2012. The Company's average outstanding debt balance, excluding capital lease obligations, decreased slightly to $1.55 billion in the first quarter of 2013 compared to $1.60 billion in the first quarter of 2012.

Provision for Income Taxes

Provision for income taxes increased $6.1 million to $20.2 million in the first quarter of 2013, due primarily to higher pre-tax income. The effective tax rate decreased 3.4 percentage points to 37.0% during the first quarter of 2013, from 40.4% in the comparable period in 2012. The 40.4% effective rate in the first quarter of 2012 was due primarily to a valuation allowance recorded on a deferred tax asset of approximately $0.9 million.

Summary of Recapitalization Expenses

The following table presents total recapitalization-related expenses incurred
during the first quarter of 2012. These pre-tax expenses affect comparability
between the periods presented for 2013 and 2012.



                                                             First Quarter
      (in millions)                                             of 2012
      2012 recapitalization expenses:
      General and administrative expenses (1)               $           0.3
      Additional interest expense (2)                                  10.2

      Total of 2012 recapitalization expenses (pre-tax)     $          10.5

      Total of 2012 recapitalization expenses (after-tax)   $           6.5

(1) Primarily includes stock compensation expenses, payroll taxes related to the payments made to certain stock option holders, legal and professional fees incurred in connection with the recapitalization.

(2) Primarily includes the write-off of deferred financing fees. Additionally, we incurred $2.1 million of interest expense on the 2007 borrowings subsequent to the closing of the 2012 recapitalization but prior to the repayment of the 2007 borrowings, essentially paying interest on both the 2007 and 2012 facilities for a period of time.

Liquidity and Capital Resources

As of March 24, 2013, we had working capital of $23.6 million, excluding restricted cash and cash equivalents of $61.4 million, and including unrestricted cash and cash equivalents of $75.1 million. Historically, we have operated with minimal positive working capital, or negative working capital, primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities. We generally collect our receivables within three weeks from the date of the related sale, and we generally experience 30 to 40 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. These factors, coupled with servicing our debt obligations, investing in our business and repurchasing our common stock, all of which are generally funded by ongoing cash flows from operations, also reduce our working capital amounts. As of March 24, 2013, we had approximately $39.8 million of restricted cash held for future principal and interest payments, $21.3 million of restricted cash held in a three month interest reserve as required by the related debt agreements and $0.3 million of other restricted cash, for a total of $61.4 million of restricted cash and cash equivalents.


Table of Contents

As of March 24, 2013, we had approximately $1.55 billion of long-term debt, of which $24.2 million was classified as a current liability. Additionally, as of March 24, 2013, we had $37.8 million of outstanding letters of credit and $62.2 million of available capacity under our $100.0 million variable funding notes. The letters of credit are primarily related to our casualty insurance programs and supply chain center leases. Borrowings under the variable funding notes are available to fund our working capital requirements, capital expenditures and other general corporate purposes. Our primary source of liquidity is cash flows from operations and availability of borrowings under our variable funding notes.

The Company used cash of approximately $18.0 million during the first quarter of 2013 for the repurchase and retirement of 362,899 shares of common stock. As of March 24, 2013, we had approximately $134.4 million remaining for future share repurchases under the current Board of Directors approved $200.0 million open market share repurchase program. Subsequent to the first quarter of 2013, the Company repurchased and retired an additional 32,205 shares of common stock for a total of approximately $1.6 million. We continue to maintain our flexibility to use ongoing excess cash flow generation and (subject to certain restrictions in the documents governing the variable funding notes) availability under the variable funding notes for, among other things, the repurchase of shares under the current authorized program, the payment of dividends and other corporate uses.

During the first quarter of 2013, the Company's Board of Directors initiated a $0.20 per share regular quarterly dividend on its outstanding common stock. The Company recorded $11.1 million of dividends payable during the first quarter of 2013, which was subsequently paid on March 29, 2013. Additionally, during the first quarter of 2013, the Company recorded an estimated $0.2 million of dividends payable for payments to be made as certain performance-based restricted stock grants vest in the future. On April 23, 2013, the Company's Board of Directors declared a $0.20 per share quarterly dividend for shareholders of record as of June 14, 2013 to be paid on June 28, 2013.

During the first quarter of 2013, we experienced strong increases in both domestic and international same store sales versus the comparable periods in the prior year. Additionally, our international business continued to grow store counts in the first quarter of 2013. Both domestic supply chain and Company-owned stores produced higher margins versus the first quarter of 2012. These factors have contributed to our continued ability to generate positive operating cash flows. We expect to use our unrestricted cash and cash equivalents, ongoing cash flows from operations and available borrowings under the variable funding notes to, among other things, fund working capital requirements, invest in our core business, service our indebtedness, pay dividends and repurchase our common stock. We have historically funded our working capital requirements, capital expenditures, debt repayments and repurchases of common stock primarily from our cash flows from operations and, when necessary, our available borrowings under variable funding note facilities. The Company believes its current unrestricted cash and cash equivalents balance and its expected ongoing cash flows from operations will be sufficient to fund operations for at least the next twelve months. We did not have any material commitments for capital expenditures as of March 24, 2013.

Cash provided by operating activities was $47.6 million in the first quarter of 2013 and $20.2 million in the first quarter of 2012. The $27.4 million increase was due primarily to a $17.5 million net change in operating assets and liabilities, due primarily to the timing of payments of current operating liabilities. Cash provided by operating activities was also positively impacted by a $9.9 million increase in net income, excluding non-cash adjustments versus the prior year period, resulting primarily from our improved operating performance.

Cash used in investing activities was $4.3 million in the first quarter of 2013 and cash provided by investing activities was $42.5 million in the first quarter . . .

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