Domino’s Pizza(DPZ) - 2023 Q4 - Annual Report

Part I Business Domino's operates as the world's largest pizza chain, primarily through franchising, generating revenue from royalties, fees, and supply chain activities - As of December 31, 2023, Domino's is the largest pizza company globally, with over 20,500 locations in more than 90 markets[17] - The business is heavily franchised, with approximately 99% of global stores owned and operated by independent franchisees[18] - The company's 'Hungry for MORE' strategy focuses on four key pillars: Most Delicious Food, Operational Excellence, Renowned Value, and Enhanced by Best-in-Class Franchisees[21][22] 2023 Revenue by Business Segment | Segment | Revenue (in millions) | Percentage of Total | | :--- | :--- | :--- | | U.S. Stores | $1,450 | 32% | | International Franchise | $310.1 | 7% | | Supply Chain | $2,720 | 61% | Industry and Competition Domino's leads the $41.3 billion U.S. QSR pizza market in delivery and carryout, facing intense competition from chains and aggregators - The U.S. QSR pizza category grew from $37.5 billion in 2018 to $41.3 billion in 2023[24] U.S. Market Share (2023) | Segment | Domino's Market Share | Total Segment Size (in billions) | | :--- | :--- | :--- | | Delivery | ~30% | $16.5 | | Carryout | ~19% | $20.2 | - Competition exists not only with other pizza chains but also with other restaurants and order/delivery aggregation companies for customers, employees, and real estate[27] Business Segments The company operates three segments: U.S. Stores, International Franchise, and Supply Chain, with the Supply Chain segment accounting for 61% of 2023 revenue - The U.S. Stores segment includes 6,566 franchised stores operated by 735 franchisees and 288 Company-owned stores as of year-end 2023[32][34] - The International Franchise segment consists of 13,737 stores, with the top 10 markets accounting for approximately 64% of the international store count, and India being the largest market with 1,916 stores[40][43][44] - The Supply Chain segment operates 22 regional centers in the U.S. and 5 in Canada, supplying over 7,400 stores, and offers a 50% pre-tax profit-sharing arrangement to participating franchisees[47][48] - Key supply agreements include an exclusive deal with Coca-Cola® until at least December 2030, a cheese supply agreement expiring in September 2024, and a meat toppings agreement expiring in December 2025[50] Our Strengths Domino's strengths include strong brand equity, a cost-efficient franchised model, and significant technological innovation, with over 85% U.S. digital sales - Over 85% of U.S. retail sales in 2023 were generated from digital channels[59] - In 2023, the company entered a global agreement with Uber Technologies, allowing orders through Uber Eats and Postmates, and launched Pinpoint Delivery for non-traditional locations[60] - The Domino's Rewards® loyalty program was relaunched in 2023, offering members the ability to redeem points for a wide selection of menu items[61] Human Capital and Corporate Stewardship Domino's employs approximately 11,200 people, focusing on talent development and diversity, and pursues net-zero emissions goals and philanthropic partnerships - The company employed approximately 11,200 people as of December 31, 2023, with the majority supporting U.S. Company-owned stores and supply chain operations[66] - A unique cultural strength is that substantially all U.S. franchisees started their careers as delivery drivers or in other in-store positions[79] - The company has set a goal to achieve net-zero carbon emissions by 2050 and submitted its Science Based Targets for validation in 2023[84] - Since 2004, the Domino's system has contributed approximately $124.7 million to its national philanthropic partner, St. Jude Children's Research Hospital®, including about $15.5 million in 2023[85] Risk Factors The company faces multiple risks, including intense competition, cost inflation, cybersecurity threats, franchisee dependence, international market volatility, and substantial indebtedness - The company faces intense competition from national pizza chains, local pizzerias, and increasingly from order and delivery aggregators, which creates pressure on market share and profitability[98] - Profitability is vulnerable to cost increases in food (cheese is ~25% of a store's market basket), labor, and energy, particularly in the current inflationary environment, with legislation like California's AB 1228 potentially increasing labor costs[105][108][109] - Cybersecurity incidents pose a significant risk due to the high volume of digital sales (over 85% in the U.S.) and the collection of customer data, potentially disrupting operations, exposing confidential information, and harming the brand[125][131] - The business is highly dependent on the performance of independent franchisees, whose actions are outside the company's direct control and can impact brand reputation and financial results, with the largest international master franchisee operating 3,840 stores representing a significant concentration[121][122] - The company's substantial indebtedness of approximately $4.99 billion as of year-end 2023 could make it more difficult to satisfy obligations, increase vulnerability to adverse economic conditions, and limit flexibility[140] - Regulatory risks include potential classification of franchisors as joint employers of their franchisees' employees, as seen in the NLRB's 2023 final rule, which could increase liability and operating expenses[151] Unresolved Staff Comments The company reports that it has no unresolved staff comments - The company has no unresolved staff comments[164] Cybersecurity Cybersecurity oversight is managed by the Board and Audit Committee, with operational responsibility by the CISO, following NIST and CIS frameworks, and no material incidents have occurred to date - The Board of Directors and its Audit Committee oversee cybersecurity risk, with regular updates from the Chief Technology Officer (CTO) and Chief Information Security Officer (CISO)[165][166] - The company's cybersecurity program is based on the NIST Cybersecurity Framework and CIS Critical Security Controls, is certified as PCI DSS compliant, and includes a dedicated Security Operations Center (SOC)[171] - The company has not experienced any cybersecurity incidents that have materially affected its business strategy, results of operations, or financial condition to date[173] Properties The company leases its corporate headquarters and all U.S. company-owned stores, while owning four supply chain centers and leasing others, with franchisees responsible for their own store locations - The company leases its approximately 285,000 sq. ft. corporate headquarters in Ann Arbor, Michigan, with the lease expiring in 2029[174] - Domino's owns four supply chain center buildings; all other supply chain centers and all Company-owned stores are leased[175] Legal Proceedings The company is involved in various ordinary course lawsuits and administrative proceedings, which management does not expect to have a material adverse effect on its business or financial condition - The company is involved in ordinary course litigation but does not expect these matters to have a material adverse effect on its financial condition[177][178] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Domino's common stock trades on the NYSE under 'DPZ', with a recent quarterly dividend of $1.51 per share declared, and the Board authorized an additional $1.0 billion for share repurchases, bringing the total authorization to $1.14 billion - On February 21, 2024, the Board of Directors declared a quarterly dividend of $1.51 per common share[183] - Subsequent to fiscal 2023, the Board authorized an additional $1.0 billion for share repurchases, increasing the total available authorization to $1.14 billion[185] Share Repurchase Activity (Q4 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Dollar Value Remaining (in thousands) | | :--- | :--- | :--- | :--- | | Total Q4 2023 | 171,032 | $347.63 | $141,333 | Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2023, Domino's achieved a 5.4% increase in global retail sales and 711 net new stores, despite a 1.3% decrease in total revenues to $4.48 billion, driven by refranchising and supply chain mix, while income from operations grew 6.7% to $819.5 million and net income increased to $519.1 million Fiscal 2023 Highlights and Statistical Measures Key performance indicators for 2023 showed positive momentum, with global retail sales growing 5.4% to $18.28 billion, U.S. same-store sales up 1.6%, international up 1.7%, and net store growth of 711 units Global Retail Sales (in millions) | Region | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | U.S. stores | $9,026.1 | $8,751.7 | | International stores | $9,249.7 | $8,788.2 | | Total | $18,275.8 | $17,539.9 | Same Store Sales Growth vs. Prior Year | Region | 2023 | 2022 | | :--- | :--- | :--- | | U.S. stores | +1.6% | (0.8)% | | International stores (ex-currency) | +1.7% | +0.1% | - Global net store count grew by 711 stores in 2023, reaching a total of 20,591 stores worldwide, including 168 net new stores in the U.S. and 543 internationally[215][219] Results of Operations (2023 vs 2022) Consolidated revenues for 2023 decreased 1.3% to $4.48 billion due to refranchising and product mix, but gross margin improved to 38.6%, and net income significantly increased to $519.1 million due to higher franchise fees, improved supply chain margins, and unrealized gains Consolidated Financial Results (in millions) | Metric | 2023 (in millions) | 2022 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $4,479.4 | $4,537.2 | (1.3)% | | Gross Margin | $1,727.4 | $1,648.6 | +4.8% | | Income from Operations | $819.5 | $767.9 | +6.7% | | Net Income | $519.1 | $452.3 | +14.8% | - U.S. Company-owned store revenues decreased 15.6% to $376.2 million, primarily due to the refranchising of 114 stores in late 2022[225] - U.S. franchise royalties and fees increased 8.7% to $604.9 million, driven by higher technology fees and net store growth[226] - Supply chain gross margin increased by $33.5 million (13.7%), with the margin rate improving to 10.2% from 8.9% due to procurement productivity[235] - Other income of $17.7 million was recorded in 2023, representing unrealized gains on the investment in DPC Dash, the master franchisee for China[240] Segment Income In 2023, all operating segments reported increased income, with U.S. Stores up 18.8% to $521.0 million, Supply Chain up 17.5% to $245.4 million, and International Franchise up 9.9% to $259.6 million, partly due to a cost allocation change - A change in the allocation methodology for certain software development costs in Q1 2023 increased U.S. Stores Segment Income by an estimated $65.7 million and International Franchise Segment Income by $8.9 million[245] Segment Income (in millions) | Segment | 2023 (in millions) | 2022 (in millions) | Change | | :--- | :--- | :--- | :--- | | U.S. Stores | $521.0 | $438.6 | +18.8% | | Supply Chain | $245.4 | $208.8 | +17.5% | | International Franchise | $259.6 | $236.1 | +9.9% | Liquidity and Capital Resources The company maintains liquidity through operating cash flows and $320 million in variable funding notes, with $114.1 million unrestricted cash and $4.99 billion total long-term debt at year-end 2023, while investing in capital expenditures, share repurchases, and dividends - As of December 31, 2023, the company had $114.1 million in unrestricted cash and cash equivalents and full availability under its two variable funding note facilities, totaling $320.0 million of borrowing capacity[253][254] - Total consolidated long-term debt was approximately $4.99 billion at year-end 2023[140][427] 2023 Uses of Cash (in millions) | Activity | Amount (in millions) | | :--- | :--- | | Capital Expenditures | $105.4 | | Share Repurchases | $269.0 | | Dividends Paid | $169.8 | - Cash provided by operating activities increased by $115.5 million to $590.9 million in 2023, primarily due to positive changes in working capital and higher net income[282][283] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including interest rate risk on variable funding notes, significant commodity price risk for food costs like cheese, and foreign currency exchange rate risk, which could impact international royalty revenues - The company is exposed to interest rate risk on its variable funding notes, which bear interest at fluctuating rates based on Term SOFR[298] - The company is subject to volatility in food costs from changes in commodity prices, especially cheese[300] - A hypothetical 10% adverse change in foreign currency exchange rates would have resulted in a negative impact on international royalty and fee revenues of approximately $27.4 million in 2023[301] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2023, 2022, and 2021, with an unqualified opinion from PricewaterhouseCoopers LLP, highlighting the valuation of casualty insurance reserves as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified (clean) opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[306] - The auditor identified the 'Valuation of Casualty Insurance Reserves' as a critical audit matter due to the significant management judgment and complex assumptions involved[314][315] Key Financial Statement Data (in thousands) | Metric | Dec 31, 2023 (in thousands) | Jan 1, 2023 (in thousands) | | :--- | :--- | :--- | | Balance Sheet: | | | | Total Assets | $1,674,899 | $1,602,221 | | Total Liabilities | $5,745,266 | $5,791,286 | | Total Stockholders' Deficit | $(4,070,367) | $(4,189,065) | | Income Statement (FY): | 2023 (in thousands) | 2022 (in thousands) | | Total Revenues | $4,479,358 | $4,537,158 | | Net Income | $519,118 | $452,263 | | Diluted EPS | $14.66 | $12.53 | Note 3: Recapitalizations and Financing Arrangements The company's debt structure comprises approximately $4.99 billion in fixed-rate asset-backed securitization notes, secured by company assets, and two variable funding note facilities for liquidity, subject to a 1.75x debt service coverage ratio covenant Consolidated Long-Term Debt Components (as of Dec 31, 2023, in thousands) | Debt Series | Principal Amount (in thousands) | | :--- | :--- | | 2015 Ten-Year Notes | $744,000 | | 2017 Ten-Year Notes | $942,500 | | 2018 Notes | $783,750 | | 2019 Ten-Year Notes | $649,688 | | 2021 Notes | $1,803,750 | | Total Notes (Principal) | $4,923,688 | - The notes are subject to a key financial covenant requiring a minimum debt service coverage ratio of 1.75x[424] Note 11: Segment Information The company reports three segments: U.S. Stores, Supply Chain, and International Franchise, with 2023 revenues of $1.45 billion, $2.83 billion, and $310.1 million respectively, and segment income impacted by a Q1 2023 cost allocation change 2023 Segment Financials (in thousands) | Segment | Revenues (in thousands) | Segment Income (in thousands) | | :--- | :--- | :--- | | U.S. Stores | $1,454,272 | $520,977 | | Supply Chain | $2,829,224 | $245,430 | | International Franchise | $310,077 | $259,608 | - In Q1 2023, a change in cost allocation for internally developed software increased U.S. Stores segment income by an estimated $65.7 million and International Franchise segment income by $8.9 million for the year[476] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes reported - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of the end of the period[485] - Management concluded that its internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework, and this assessment was audited by PricewaterhouseCoopers LLP[485] Part III Directors, Executive Officers and Corporate Governance This section lists the company's executive officers, including Russell J. Weiner (CEO) and Sandeep Reddy (CFO), with further details incorporated by reference from the definitive proxy statement Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Russell J. Weiner | 55 | Chief Executive Officer and Director | | Joseph H. Jordan | 50 | President, U.S. and Global Services | | Sandeep Reddy | 53 | Executive Vice President, Chief Financial Officer | | Arthur P. D'Elia | 46 | Executive Vice President, International | | Kelly E. Garcia | 48 | Executive Vice President, Chief Technology Officer | | Frank R. Garrido | 53 | Executive Vice President, Chief Restaurant Officer | | Cynthia A. Headen | 55 | Executive Vice President, Chief Supply Chain Officer | | Samuel A. Jackson | 46 | Executive Vice President, Human Resources | | Kevin S. Morris | 63 | Executive Vice President, General Counsel and Corporate Secretary | - Additional information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days of December 31, 2023[503] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[504] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[505] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[506] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[507] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K, including corporate governance documents, material contracts, and debt agreements - This item lists all financial statements, schedules, and exhibits included with or incorporated by reference into the Form 10-K filing[509] Form 10-K Summary This item is not applicable - This item is not applicable[531]