Domino’s Pizza(DPZ) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarter ended June 18, 2023, including Balance Sheets, Income, Comprehensive Income, and Cash Flows, with notes on presentation and segments Condensed Consolidated Balance Sheet Highlights (Unaudited, In millions) | | June 18, 2023 | January 1, 2023 | | :--- | :--- | :--- | | Total current assets | $799.6 | $790.7 | | Total assets | $1,596.2 | $1,602.2 | | Total current liabilities | $547.5 | $536.6 | | Total long-term debt | $4,944.7 | $4,967.4 | | Total liabilities | $5,762.7 | $5,791.3 | | Total stockholders' deficit | $(4,166.6) | $(4,189.1) | Condensed Consolidated Statement of Income Highlights (Unaudited, In millions, except per share data) | | Fiscal Quarter Ended June 18, 2023 | Fiscal Quarter Ended June 19, 2022 | | :--- | :--- | :--- | | Total revenues | $1,024.6 | $1,065.2 | | Income from operations | $195.4 | $178.1 | | Net income | $109.4 | $102.5 | | Diluted earnings per share | $3.08 | $2.82 | Condensed Consolidated Statement of Cash Flows Highlights (Unaudited, In millions) | | Two Fiscal Quarters Ended June 18, 2023 | Two Fiscal Quarters Ended June 19, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $242.3 | $153.4 | | Net cash used in investing activities | $(39.2) | $(39.9) | | Net cash used in financing activities | $(193.0) | $(166.7) | - Subsequent to the quarter's end, the Company entered into a new global agreement with Uber to allow customers to order Domino's products through the Uber Eats and Postmates apps, with an expected U.S. rollout by the end of fiscal 2023[48] - On July 20, 2023, the Board of Directors declared a quarterly dividend of $1.21 per share, payable on September 29, 2023[30] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 2023 financial results, covering global retail sales growth, segment performance, revenue and margin changes, and the company's strong liquidity supporting share repurchases and dividends Overview and Highlights Domino's, a global franchisor with over 20,000 stores, focuses on value and technology, with Q2 2023 global retail sales (ex-currency) growing 5.8%, U.S. same-store sales up 0.1%, and net income increasing 6.7% - Domino's is primarily a franchisor, with approximately 99% of its over 20,000 global stores owned and operated by independent franchisees as of June 18, 2023[62] Q2 2023 Financial Highlights vs. Q2 2022 | Metric | Change | | :--- | :--- | | Global retail sales (ex-currency) | +5.8% | | U.S. same store sales | +0.1% | | International same store sales (ex-currency) | +3.6% | | Revenues | -3.8% | | Income from operations | +9.7% | | Net income | +6.7% | | Diluted EPS | +9.2% | YTD 2023 Financial Highlights vs. YTD 2022 | Metric | Change | | :--- | :--- | | Global retail sales (ex-currency) | +5.8% | | U.S. same store sales | +1.8% | | International same store sales (ex-currency) | +2.3% | | Revenues | -1.3% | | Income from operations | +8.8% | | Net income | +10.7% | | Diluted EPS | +13.2% | Statistical Measures This section presents key performance indicators, showing Q2 2023 global retail sales (ex-currency) growth of 5.8%, U.S. same-store sales up 0.1%, and 197 net new stores added globally Global Retail Sales Growth (excluding foreign currency impact) | | Second Quarter of 2023 | Second Quarter of 2022 | | :--- | :--- | :--- | | U.S. stores | +1.7% | (0.6)% | | International stores | +10.1% | +3.7% | | Total | +5.8% | +1.5% | Same Store Sales Growth | | Second Quarter of 2023 | Second Quarter of 2022 | | :--- | :--- | :--- | | U.S. stores | +0.1% | (2.9)% | | International stores (ex-currency) | +3.6% | (2.2)% | - The company added 197 net new stores in Q2 2023, bringing the total to 20,205 stores globally, including 27 in the U.S. and 170 internationally[70][78] Results of Operations Q2 2023 total revenues decreased 3.8% to $1.02 billion due to refranchising and lower supply chain volumes, while consolidated gross margin increased to 39.5%, and net income rose 6.7% to $109.4 million - U.S. Company-owned store revenues decreased 22.1% in Q2 2023, mainly due to the refranchising of 114 stores in late 2022[82] - U.S. franchise royalties and fees increased 8.7% in Q2 2023, driven by higher technology fees and net store growth[84] - Supply chain revenues decreased 4.8% in Q2 2023 due to lower order volumes and a 2.4% decrease in market basket pricing to stores[87] - International franchise royalties and fees increased 5.4% in Q2 2023, driven by same-store sales growth and store count increases, despite a $2.0 million negative impact from foreign currency exchange rates[88] - Consolidated gross margin percentage increased by 3.2 points to 39.5% in Q2 2023, primarily due to higher global franchise revenues and a 1.4 percentage point increase in supply chain gross margin[91][92][94] - The company recorded a $15.0 million unrealized loss on its investment in DPC Dash, its master franchisee in China, following its IPO[99] Segment Performance In Q2 2023, all operating segments reported income growth, with U.S. Stores Segment Income up 18.8% to $123.6 million, Supply Chain up 11.9% to $60.0 million, and International Franchise up 11.3% to $58.9 million - A change in the allocation methodology for certain software development costs significantly impacted segment income, increasing U.S. stores and international franchise income while decreasing 'Other' segment income[103] Segment Income (in millions) | Segment | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | U.S. stores | $123.6 | $104.1 | +18.8% | | Supply chain | $60.0 | $53.6 | +11.9% | | International franchise | $58.9 | $52.9 | +11.3% | | Other | $(18.9) | $(5.6) | -235.6% | Liquidity and Capital Resources The company maintains strong liquidity with operating cash flows increasing to $242.3 million in H1 2023, supported by $77.0 million cash and $277.8 million available borrowing capacity, funding share repurchases and dividends - Net cash provided by operating activities increased by $88.9 million to $242.3 million in the first two fiscal quarters of 2023 compared to the prior year, primarily due to positive changes in working capital[120][121] - As of June 18, 2023, the company had $5.0 billion of long-term debt and $277.8 million of available borrowing capacity under its variable funding notes[110][114] - In the first half of 2023, the company repurchased 392,545 shares for $120.8 million. As of June 18, 2023, $289.5 million remained authorized for future repurchases[118] - The company paid dividends of $42.9 million in the first half of 2023[123] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on variable-rate debt, commodity price volatility, and foreign currency exchange rates, with a hypothetical 10% adverse FX change impacting H1 2023 royalty revenues by $12.4 million - The company is exposed to interest rate risk on its variable funding notes, which are based on Term SOFR. As of June 18, 2023, no borrowings were outstanding[126][127] - The business is subject to volatility in food costs from changes in commodity prices, particularly for cheese[129] - The company has exposure to foreign currency exchange risk, as 6.9% of its Q2 2023 revenues were from the international franchise segment. A hypothetical 10% adverse change in exchange rates would have impacted YTD 2023 royalty revenues by an estimated $12.4 million[130] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 18, 2023, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report[131] - No changes in the Company's internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[132] PART II. OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, which management believes will not materially affect its financial position, results of operations, or cash flows - The company is party to ordinary course lawsuits, including workers' compensation, general liability, and employment practice claims[134] - Management believes that existing legal matters will not materially affect the company's financial condition or results[135] Risk Factors No material changes have occurred regarding the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes have occurred with respect to the risk factors disclosed in the 2022 Form 10-K[136] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's Q2 2023 common stock repurchases, with 292,030 shares bought at an average price of $310.88, leaving $289.5 million available for future repurchases Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Program | | :--- | :--- | :--- | :--- | | Total Q2 2023 | 296,459 | $310.88 | 292,030 | - As of June 18, 2023, $289.5 million remained available for future stock repurchases under the $1.0 billion program authorized in July 2021[139] Defaults Upon Senior Securities The company reported no defaults on its senior securities during the period - None[141] Mine Safety Disclosures This item is not applicable to the company - Not applicable[142] Other Information The company did not report any other information for this item - None[143] Exhibits This section lists exhibits filed with the Form 10-Q, including an amendment to a note purchase agreement and CEO/CFO certifications required by the Sarbanes-Oxley Act - Filed exhibits include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[144] - An amendment to the Class A-1 Note Purchase Agreement dated May 15, 2023 was filed as an exhibit[144]