Domino’s Pizza Reports Global Retail Sales Growth of 8.3% for Q3 2018

Domino’s Pizza, Inc. (NYSE: DPZ) announced results for the third quarter of fiscal 2018, comprised of strong growth in same store sales, global store counts and earnings per share. Domestic same store sales grew 6.3% during the quarter versus the year-ago period, continuing the positive sales momentum in the Company’s domestic business. The international division also posted positive results, with same store sales growth of 3.3% during the quarter. The third quarter marked the 99th consecutive quarter of positive international same store sales growth and the 30th consecutive quarter of positive domestic same store sales growth. The Company also had third quarter global net store growth of 232 stores, comprised of 173 net new international stores and 59 net new domestic stores. Global retail sales increased 8.3%, or 10.4% without the negative impact of changes in foreign currency exchange rates. Diluted EPS was $1.95 for the third quarter, which was up 65.3% over the Company’s diluted EPS in the prior year quarter.

During the third quarter of 2018, the Company repurchased 397,490 shares of its common stock pursuant to its Board of Directors approved open market share repurchase program for approximately $109.1 million.

In addition to the $0.55 quarterly dividend paid on June 29, 2018, the Company’s Board of Directors also declared a $0.55 per share quarterly dividend for shareholders of record as of September 14, 2018, which was paid on September 28, 2018. Additionally, on October 11, 2018, the Board of Directors declared a $0.55 per share quarterly dividend for shareholders of record as of December 14, 2018, to be paid on December 28, 2018.

“I continue to be proud of our great franchisees and operators around the world.  In particular, our U.S. business once again executed at extremely high levels in the third quarter. Our global business, driven by strong retail sales growth and franchisee economics that outperformed the industry, continued its strong momentum,” said Ritch Allison, Domino’s Chief Executive Officer.

Third Quarter 2018 Highlights:

 (dollars in millions, except per share data)

Third

Quarter of

2018

Third

Quarter of

2017

Three Fiscal

Quarters of

2018

Three Fiscal

Quarters of

2017

Net income

$

84.1

$

56.4

$

250.3

$

184.6

Weighted average diluted shares

43,067,191

47,715,788

43,675,627

49,066,610

Diluted earnings per share, as reported

$

1.95

$

1.18

$

5.73

$

3.76

Items affecting comparability (1)

0.08

0.07

0.08

Diluted earnings per share, as adjusted (1)

$

1.95

$

1.27

$

5.80

$

3.84

(1)     Refer to the Financial Results Comparability section on pages three and four for additional details. Diluted earnings per share,
          as adjusted figures may not sum to the total due to the rounding of each individual calculation. See also the Comments on
          Regulation G
section on page five.

  • Revenues increased $142.3 million, or 22.1%, in the third quarter of 2018. The Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”) in the first quarter of 2018. This resulted in the recognition of $82.5 million in domestic franchise advertising revenues during the third quarter of 2018 related to contributions from domestic franchisees to Domino’s National Advertising Fund Inc. (“DNAF”), the Company’s consolidated not-for-profit advertising fund. In 2017, under accounting standards in effect at that time, the Company had presented these contributions net with the related disbursements in its consolidated statement of income. Refer to the “Adoption of New Accounting Guidance” section on page three for additional information related to the adoption of this accounting standard. The remaining increase in revenues was due primarily to higher supply chain volumes resulting from order and store count growth. Higher domestic franchise revenues, domestic Company-owned store and international franchise revenues resulting from higher retail sales also contributed to the increase.
  • Net Income increased $27.7 million, or 49.2%, in the third quarter of 2018. This increase was driven by higher global royalty revenues and higher supply chain volumes. Additionally, the sale of 12 domestic Company-owned stores to a franchisee in the third quarter of 2018 resulted in a pre-tax gain on sale recorded in general and administrative expenses of $5.9 million. A lower tax rate resulting from regulations under the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) and higher excess tax benefits from equity-based compensation as compared to the prior year also positively impacted net income in the third quarter through a reduction in the provision for income taxes.
  • Diluted EPS was $1.95 for the third quarter versus $1.18 in the prior year quarter. This represents a $0.77 or 65.3% increase over the prior year quarter. Diluted EPS was $1.95 for the third quarter versus diluted EPS, as adjusted, of $1.27 in the prior year quarter, which represents a $0.68 or 53.5% increase over the prior year quarter. These increases were driven by higher net income, as well as lower diluted share count, primarily as a result of the share repurchases made during the trailing four quarters. (See the Financial Results Comparability section on pages three and four and the Comments on Regulation G section on page five.)

The table below outlines certain statistical measures utilized by the Company to analyze its performance. Refer to the Comments on Regulation G section on page five for additional details.

Third

Quarter of

2018

Third

Quarter of

2017

Same store sales growth: (versus prior year period)

Domestic Company-owned stores

+ 4.9

%

+ 8.4

%

Domestic franchise stores

+ 6.4

%

+ 8.4

%

Domestic stores

+ 6.3

%

+ 8.4

%

International stores (excluding foreign currency impact)

+ 3.3

%

+ 5.1

%

Global retail sales growth: (versus prior year period)

Domestic stores

+11.0

%

+12.0

%

International stores

+ 5.7

%

+16.8

%

Total

+ 8.3

%

+14.5

%

Global retail sales growth: (versus prior year period,

   excluding foreign currency impact)

Domestic stores

+11.0

%

+12.0

%

International stores

+ 9.9

%

+16.3

%

Total

+10.4

%

+14.2

%

Domestic

Company-

owned Stores

Domestic

Franchise

Stores

Total

Domestic

Stores

International

Stores

Total

Store counts:

Store count at June 17, 2018

396

5,296

5,692

9,430

15,122

Openings

2

59

61

192

253

Closings

(2)

(2)

(19)

(21)

Transfers

(12)

12

Store count at September 9, 2018

386

5,365

5,751

9,603

15,354

Third quarter 2018 net change

(10)

69

59

173

232

Trailing four quarters net change

(13)

273

260

660

920

Financial Results Comparability

Financial results for the Company are significantly affected by changes in our capital structure, our effective tax rate and the adoption of new accounting guidance. Our recapitalization transactions have resulted in higher net interest expense due primarily to higher net debt levels, as well as the amortization of debt issuance costs associated with the repayment of certain of the Company’s notes. Additionally, repurchases and retirements of the Company’s common stock have reduced our weighted average diluted shares outstanding. A lower statutory tax rate due to the enactment of the 2017 Tax Act has resulted in a reduction in our provision for income taxes in 2018. Finally, the adoption of ASC 606 materially impacted the gross amount of reported domestic franchise advertising revenues and expenses. Domestic franchise advertising revenues do not have a cost of sales component, so changes in revenues have a disproportionate effect on the Company’s operating margin.

In addition to the above factors impacting comparability, the table below presents certain other items that affect comparability between 2018 and 2017 financial results. Management believes that including such information is critical to an understanding of the Company’s financial results for the third quarter of 2018 and the three fiscal quarters of 2018 as compared to the same periods in 2017 (See the Comments on Regulation G section on page five for additional details).

Third Quarter

Three Fiscal Quarters

(in thousands, except per share data)

Pre-tax

After-tax

Diluted EPS

Impact

Pre-tax

After-tax

Diluted EPS

Impact

2018 items affecting comparability:

Recapitalization expenses:

General and administrative expenses (1)

$

$

$

$

(532)

$

(411)

$

(0.01)

Interest expense (2)

(142)

(110)

(0.00)

Debt issuance cost write-off (4)

(3,164)

(2,446)

(0.06)

Total of 2018 items

$

$

$

$

(3,838)

$

(2,967)

$

(0.07)

Third Quarter

Three Fiscal Quarters

(in thousands, except per share data)

Pre-tax

After-tax

Diluted EPS

Impact

Pre-tax

After-tax

Diluted EPS

Impact

2017 items affecting comparability:

Recapitalization expenses:

General and administrative expenses (1)

$

(622)

$

(389)

$

(0.01)

$

(622)

$

(389)

$

(0.01)

Interest expense (3)

(264)

(165)

(0.00)

(264)

(165)

(0.00)

Debt issuance cost write-off (5)

(5,521)

(3,450)

(0.07)

(5,521)

(3,450)

(0.07)

Total of 2017 items

$

(6,407)

$

(4,004)

$

(0.08)

$

(6,407)

$

(4,004)

$

(0.08)

(1)

Represents legal, professional and administrative fees incurred in connection with the Company’s 2018 and 2017 recapitalization transactions.

(2)

Represents interest expense the Company incurred on its 2015 five-year fixed rate notes subsequent to the closing of the 2018 recapitalization transaction, but prior to the repayment of the 2015 five-year fixed rate notes, resulting in the payment of interest on both the 2015 five-year fixed rate notes and the 2018 fixed rate notes for a short period of time.

(3)

Represents interest expense the Company incurred on its 2012 fixed rate notes subsequent to the closing of the 2017 recapitalization transaction, but prior to the repayment of the 2012 fixed rate notes, resulting in the payment of interest on both the 2012 fixed rate notes and the 2017 fixed and floating rate notes for a short period of time.

(4)

Represents the write-off of debt issuance costs related to the extinguishment of the 2015 five-year fixed rate notes in connection with the Company’s 2018 recapitalization transaction.

(5)

Represents the write-off of debt issuance costs related to the extinguishment of the 2012 fixed rate notes in connection with the Company’s 2017 recapitalization transaction.

Share Repurchases

During the third quarter of 2018, the Company repurchased and retired 397,490 shares of its common stock under its Board of Directors-approved open market share repurchase program for approximately $109.1 million, or an average price of $274.53. Subsequent to the third quarter and through October 11, 2018, the Company repurchased and retired an additional 36,671 shares of common stock for a total of approximately $10.0 million, or an average price of $273.01 per share. As of September 9, 2018, the end of the third quarter, the Company’s total remaining authorized amount for share repurchases was approximately $320.8 million.

Liquidity

As of September 9, 2018, the Company had approximately:

  • $84.6 million of unrestricted cash and cash equivalents;
  • $3.47 billion in total debt; and
  • $128.3 million of available borrowings under its $175.0 million variable funding notes, net of letters of credit issued of $46.7 million.

The Company invested $65.1 million in capital expenditures during the three fiscal quarters of 2018, versus $38.9 million during the three fiscal quarters of 2017. Free cash flow, as reconciled below to net cash provided by operating activities, as determined under accounting principles generally accepted in the United States of America (“GAAP”), was approximately $197.4 million in the three fiscal quarters of 2018.

(in thousands)

Three Fiscal

Quarters of

2018

Net cash provided by operating activities

$

262,519

Capital expenditures

(65,074)

Free cash flow

$

197,445

Comments on Regulation G

In addition to the GAAP financial measures set forth in this press release, the Company has included non-GAAP financial measures within the meaning of Regulation G, including free cash flow metrics and measures related to items affecting comparability between fiscal quarters and other fiscal periods. The Company has also included metrics such as global retail sales growth and same store sales growth, which are commonly used statistical measures in the quick-service restaurant industry that are important to understanding Company performance.

The Company uses “Global retail sales” to refer to total worldwide retail sales at Company-owned and franchise stores. The Company believes global retail sales information is useful in analyzing revenues because franchisees pay royalties and advertising fees that are based on a percentage of franchise retail sales. The Company reviews comparable industry global retail sales information to assess business trends and to track the growth of the Domino’s Pizza® brand. In addition, supply chain revenues are directly impacted by changes in franchise retail sales. Retail sales for franchise stores are reported to the Company by its franchisees and are not included in Company revenues.

The Company uses “Same store sales growth,” which is calculated by including only sales from stores that also had sales in the comparable period of the prior year. International same store sales growth is calculated similarly to domestic same store sales growth. Changes in international same store sales are reported excluding foreign currency impacts, which reflect changes in international local currency sales.

The Company uses “Diluted EPS, as adjusted,” which is calculated as reported Diluted EPS, adjusted for the items that affect comparability to the prior year periods discussed above. The most directly comparable financial measure calculated and presented in accordance with GAAP is Diluted EPS. The Company believes that the Diluted EPS, as adjusted, measure is important and useful to investors and other interested persons and that such persons benefit from having a consistent basis for comparison between reporting periods. The Company uses Diluted EPS, as adjusted, to internally evaluate operating performance, to evaluate itself against its peers and in long-range planning. Additionally, the Company believes that analysts covering the Company’s stock performance generally eliminate these items affecting comparability when preparing their financial models, when determining their published EPS estimates and when benchmarking the Company against its competitors.

The Company uses “Free cash flow,” which is calculated as cash flows from operations less capital expenditures, both as reported under GAAP. The Company believes that the free cash flow measure is important to investors and other interested persons, and that such persons benefit from having a measure which communicates how much cash flow is available for working capital needs or to be used for repurchasing debt, making acquisitions, repurchasing common stock, paying dividends or other similar uses of cash.

About Domino’s Pizza®

Founded in 1960, Domino’s Pizza is the largest pizza company in the world based on global retail sales, with a significant business in both delivery and carryout pizza. It ranks among the world’s top public restaurant brands with a global enterprise of over 15,300 stores in over 85 markets. Domino’s had global retail sales of over $12.2 billion in 2017, with more than $5.9 billion in the U.S. and more than $6.3 billion internationally. In the third quarter of 2018, Domino’s had global retail sales of nearly $3.1 billion, with over $1.5 billion in the U.S. and nearly $1.6 billion internationally. Its system is comprised of independent franchise owners who accounted for over 97% of Domino’s stores as of the third quarter of 2018. Emphasis on technology innovation helped Domino’s achieve more than half of all global retail sales in 2017 from digital channels, primarily online ordering and mobile applications. In the U.S., Domino’s generates over 60% of sales via digital channels and has produced several innovative ordering platforms, including Google Home, Facebook Messenger, Apple Watch, Amazon Echo, Twitter and text message using a pizza emoji. In late 2017, Domino’s began an industry-first test of self-driving vehicle delivery with Ford Motor Company – and in April 2018, launched Domino’s HotSpots™, featuring over 200,000 non-traditional delivery locations including parks, beaches, local landmarks and other unique gathering spots.

 

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

Fiscal Quarters Ended

September 9,

2018

% of

Total

Revenues

September 10,

2017

% of

Total

Revenues

(In thousands, except per share data)

Revenues:

Domestic Company-owned stores

$

118,540

$

112,905

Domestic franchise royalties and fees

89,427

80,244

Supply chain

445,096

402,143

International franchise royalties and fees

50,424

48,350

Domestic franchise advertising

82,478

Total revenues

785,965

100.0

%

643,642

100.0

%

Cost of sales:

Domestic Company-owned stores

92,998

86,814

Supply chain

397,688

358,350

Total cost of sales

490,686

62.4

%

445,164

69.2

%

Operating margin

295,279

37.6

%

198,478

30.8

%

General and administrative

80,369

10.2

%

81,398

12.6

%

Domestic franchise advertising

82,478

10.6

%

%

Income from operations

132,432

16.8

%

117,080

18.2

%

Interest expense, net

(33,184)

(4.2)

%

(32,529)

(5.1)

%

Income before provision for income taxes

99,248

12.6

%

84,551

13.1

%

Provision for income taxes

15,153

1.9

%

28,183

4.3

%

Net income

$

84,095

10.7

%

$

56,368

8.8

%

Earnings per share:

Common stock – diluted

$

1.95

$

1.18

Dividends declared per share

$

0.55

$

0.46

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

Three Fiscal Quarters Ended

September 9,

2018

% of

Total

Revenues

September 10,

2017

% of

Total

Revenues

(In thousands, except per share data)

Revenues:

Domestic Company-owned stores

$

358,521

$

338,880

Domestic franchise royalties and fees

266,335

242,548

Supply chain

1,326,076

1,180,800

International franchise royalties and fees

154,182

134,242

Domestic franchise advertising

245,618

Total revenues

2,350,732

100.0

%

1,896,470

100.0

%

Cost of sales:

Domestic Company-owned stores

278,012

263,038

Supply chain

1,183,996

1,048,293

Total cost of sales

1,462,008

62.2

%

1,311,331

69.2

%

Operating margin

888,724

37.8

%

585,139

30.8

%

General and administrative

251,053

10.7

%

239,158

12.6

%

Domestic franchise advertising

245,618

10.4

%

%

Income from operations

392,053

16.7

%

345,981

18.2

%

Interest expense, net

(97,938)

(4.2)

%

(82,384)

(4.3)

%

Income before provision for income taxes

294,115

12.5

%

263,597

13.9

%

Provision for income taxes

43,785

1.9

%

79,019

4.2

%

Net income

$

250,330

10.6

%

$

184,578

9.7

%

Earnings per share:

Common stock – diluted

$

5.73

$

3.76

Dividends declared per share

$

1.65

$

1.38

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

September 9,

2018

December 31,

2017

(In thousands)

Assets

Current assets:

Cash and cash equivalents

$

84,600

$

35,768

Restricted cash and cash equivalents

168,170

191,762

Accounts receivable, net

170,244

173,677

Advertising fund assets, restricted

118,833

120,223

Inventories

41,420

39,961

Prepaid expenses and other

22,382

18,389

Total current assets

605,649

579,780

Property, plant and equipment, net

206,999

169,586

Other assets

99,466

87,387

Total assets

$

912,114

$

836,753

Liabilities and stockholders’ deficit

Current liabilities:

Current portion of long-term debt

$

35,847

$

32,324

Accounts payable

87,509

106,894

Advertising fund liabilities

112,222

120,223

Other accrued liabilities

140,853

138,844

Total current liabilities

376,431

398,285

Long-term liabilities:

Long-term debt, less current portion

3,437,632

3,121,490

Other accrued liabilities

71,809

52,362

Total long-term liabilities

3,509,441

3,173,852

Total stockholders’ deficit

(2,973,758)

(2,735,384)

Total liabilities and stockholders’ deficit

$

912,114

$

836,753

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three Fiscal Quarters Ended

September 9,

2018

September 10,

2017

(In thousands)

Cash flows from operating activities:

Net income

$

250,330

$

184,578

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

35,770

30,054

(Gain) loss on sale/disposal of assets

(5,187)

648

Amortization of debt issuance costs

6,581

9,424

Provision for deferred income taxes

1,737

5,680

Non-cash compensation expense

15,660

14,271

Excess tax benefits from equity-based compensation

(22,722)

(20,430)

Other

356

234

Changes in operating assets and liabilities

(25,580)

(2,321)

Changes in advertising fund assets and liabilities, restricted

5,574

5,961

Net cash provided by operating activities

262,519

228,099

Cash flows from investing activities:

Capital expenditures

(65,074)

(38,897)

Proceeds from sale of assets

8,213

31

Maturities of advertising fund investments, restricted

44,007

Purchases of advertising fund investments, restricted

(50,152)

Other

(2,357)

296

Net cash used in investing activities

(65,363)

(38,570)

Cash flows from financing activities:

Proceeds from issuance of long-term debt

905,000

1,900,000

Repayments of long-term debt and capital lease obligations

(595,067)

(920,093)

Proceeds from exercise of stock options

8,967

4,014

Purchases of common stock

(429,190)

(1,012,721)

Tax payments for restricted stock upon vesting

(6,849)

(9,386)

Payments of common stock dividends and equivalents

(46,720)

(44,630)

Cash paid for financing costs

(8,207)

(16,846)

Other

(205)

Net cash used in financing activities

(172,066)

(99,867)

Effect of exchange rate changes on cash

(235)

349

Change in cash and cash equivalents, restricted cash and cash equivalents

24,855

90,011

Cash and cash equivalents, beginning of period

35,768

42,815

Restricted cash and cash equivalents, beginning of period

191,762

126,496

Cash and cash equivalents included in advertising fund assets, restricted,

   beginning of period

27,316

25,091

Cash and cash equivalents, restricted cash and cash equivalents and cash and

   cash equivalents included in advertising fund assets, restricted, beginning of

   period

254,846

194,402

Cash and cash equivalents, end of period

84,600

61,360

Restricted cash and cash equivalents, end of period

168,170

192,001

Cash and cash equivalents included in advertising fund assets, restricted,

   end of period

26,931

31,052

Cash and cash equivalents, restricted cash and cash equivalents and cash and

   cash equivalents included in advertising fund assets, restricted, end

   of period

$

279,701

$

284,413