Domino’s Pizza(DPZ) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Domino's Pizza, Inc.'s unaudited condensed consolidated financial statements and management's financial analysis Item 1. Financial Statements This section provides Domino's Pizza, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flow statements, with explanatory notes Condensed Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and stockholders' deficit, as of September 10, 2023, and January 1, 2023 | (In thousands) | September 10, 2023 | January 1, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $80,879 | $60,356 | | Restricted cash and cash equivalents | 202,307 | 191,289 | | Accounts receivable, net | 249,995 | 257,492 | | Inventories | 69,683 | 81,570 | | Prepaid expenses and other | 41,257 | 37,287 | | Advertising fund assets, restricted | 151,511 | 162,660 | | Total current assets | 795,632 | 790,654 | | Property, plant and equipment, net | 290,391 | 302,235 | | Operating lease right-of-use assets | 209,934 | 219,202 | | Goodwill | 11,688 | 11,763 | | Capitalized software, net | 125,235 | 108,354 | | Investment in DPC Dash | 139,107 | 125,840 | | Deferred income tax assets, net | 5,858 | 1,926 | | Other assets | 41,619 | 42,247 | | Total other assets | 533,441 | 509,332 | | Total assets | $1,619,464 | $1,602,221 | | Liabilities and stockholders' deficit | | | | Current portion of long-term debt | $55,847 | $54,813 | | Accounts payable | 101,058 | 89,715 | | Operating lease liabilities | 38,645 | 34,877 | | Insurance reserves | 29,791 | 31,435 | | Dividends payable | 43,445 | 866 | | Advertising fund liabilities | 147,335 | 157,909 | | Other accrued liabilities | 146,820 | 167,006 | | Total current liabilities | 562,941 | 536,621 | | Long-term debt, less current portion | 4,931,924 | 4,967,420 | | Operating lease liabilities | 183,031 | 195,244 | | Insurance reserves | 37,797 | 40,179 | | Deferred income tax liabilities | — | 7,761 | | Other accrued liabilities | 45,313 | 44,061 | | Total long-term liabilities | 5,198,065 | 5,254,665 | | Total stockholders' deficit | (4,141,542) | (4,189,065) | | Total liabilities and stockholders' deficit | $1,619,464 | $1,602,221 | - Total assets increased by $17.2 million from January 1, 2023, to September 10, 2023, primarily driven by increases in cash and cash equivalents, restricted cash, and capitalized software, partially offset by decreases in accounts receivable and inventories[9] - Total liabilities increased by $28.7 million, mainly due to higher accounts payable and dividends payable, while long-term debt slightly decreased[9] - Stockholders' deficit improved by $47.5 million, from $(4.19) billion to $(4.14) billion, indicating a reduction in the accumulated deficit[9] Condensed Consolidated Statements of Income This section presents the company's financial performance, including revenues, costs, gross margin, and net income, for the fiscal quarter and three fiscal quarters | (In thousands, except per share data) | Fiscal Quarter Ended Sep 10, 2023 | Fiscal Quarter Ended Sep 11, 2022 | Three Fiscal Quarters Ended Sep 10, 2023 | Three Fiscal Quarters Ended Sep 11, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $1,027,361 | $1,068,596 | $3,076,386 | $3,144,927 | | Total cost of sales | 629,192 | 686,746 | 1,888,014 | 2,008,188 | | Gross margin | 398,169 | 381,850 | 1,188,372 | 1,136,739 | | Income from operations | 189,432 | 176,452 | 562,318 | 519,107 | | Net income | $147,676 | $100,504 | $361,826 | $293,961 | | Earnings per share - diluted | $4.18 | $2.79 | $10.19 | $8.11 | - Net income for the fiscal quarter ended September 10, 2023, increased by 46.9% to $147.7 million compared to $100.5 million in the prior year, driven by higher gross margin and other income[12] - Diluted EPS for the fiscal quarter increased by 49.8% to $4.18 from $2.79 year-over-year[12] - For the three fiscal quarters, net income grew by 23.1% to $361.8 million, and diluted EPS increased by 25.6% to $10.19[12] Condensed Consolidated Statements of Comprehensive Income This section outlines the company's comprehensive income, including net income and other comprehensive income components, for the fiscal quarter and three fiscal quarters | (In thousands) | Fiscal Quarter Ended Sep 10, 2023 | Fiscal Quarter Ended Sep 11, 2022 | Three Fiscal Quarters Ended Sep 10, 2023 | Three Fiscal Quarters Ended Sep 11, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $147,676 | $100,504 | $361,826 | $293,961 | | Currency translation adjustment | (1,330) | 47 | (403) | (1,023) | | Comprehensive income | $146,346 | $100,551 | $361,423 | $292,938 | - Comprehensive income for the fiscal quarter ended September 10, 2023, increased by 45.5% to $146.3 million, primarily driven by the increase in net income, despite a negative currency translation adjustment[15] - For the three fiscal quarters, comprehensive income increased by 23.4% to $361.4 million, also reflecting the higher net income and a smaller negative currency translation adjustment compared to the prior year[15] Condensed Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities for the three fiscal quarters | (In thousands) | Three Fiscal Quarters Ended Sep 10, 2023 | Three Fiscal Quarters Ended Sep 11, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $422,130 | $330,154 | | Net cash used in investing activities | (60,014) | (58,697) | | Net cash used in financing activities | (337,194) | (304,264) | | Effect of exchange rate changes on cash | (304) | (611) | | Change in cash and cash equivalents, restricted cash and cash equivalents | $24,618 | $(33,418) | - Net cash provided by operating activities increased by $92.0 million to $422.1 million for the three fiscal quarters of 2023, primarily due to higher net income and favorable changes in operating assets and liabilities[18][123] - Net cash used in investing activities slightly increased to $60.0 million, mainly due to higher capital expenditures[18][124] - Net cash used in financing activities increased to $337.2 million, driven by higher share repurchases and dividend payments[18][125] Notes to Condensed Consolidated Financial Statements This section provides detailed explanatory notes supporting the condensed consolidated financial statements, covering various accounting policies and disclosures 1. Basis of Presentation This note explains the preparation of the unaudited condensed consolidated financial statements in accordance with GAAP and Form 10-Q instructions - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, and include all necessary normal recurring adjustments for fair statement[19][20] - Operating results for the fiscal quarter and three fiscal quarters ended September 10, 2023, are not necessarily indicative of the full fiscal year ending December 31, 2023[20] 2. Segment Information This note provides financial data by operating segment, detailing revenues and income for U.S. Stores, Supply Chain, and International Franchise | Segment Income (in thousands) | Fiscal Quarter Ended Sep 10, 2023 | Fiscal Quarter Ended Sep 11, 2022 | Three Fiscal Quarters Ended Sep 10, 2023 | Three Fiscal Quarters Ended Sep 11, 2022 | | :--- | :--- | :--- | :--- | :--- | | U.S. Stores | $120,351 | $100,529 | $356,626 | $301,876 | | Supply Chain | $55,250 | $49,892 | $163,791 | $149,874 | | International Franchise | $61,495 | $53,762 | $178,499 | $161,698 | | Other | $(19,809) | $(2,919) | $(54,396) | $(16,250) | | Total Segment Income | $217,287 | $201,264 | $644,520 | $597,198 | - In Q1 2023, the Company changed its allocation methodology for certain internally developed software costs, prospectively increasing U.S. stores Segment Income by $15.9 million (Q3 2023) and $41.8 million (3Q 2023), and International franchise Segment Income by $2.0 million (Q3 2023) and $5.9 million (3Q 2023), while decreasing 'Other' Segment Income by $17.9 million (Q3 2023) and $47.7 million (3Q 2023)[22][23] 3. Earnings Per Share This note details the calculation of basic and diluted earnings per share, including net income available to common stockholders and weighted average shares | | Fiscal Quarter Ended Sep 10, 2023 | Fiscal Quarter Ended Sep 11, 2022 | Three Fiscal Quarters Ended Sep 10, 2023 | Three Fiscal Quarters Ended Sep 11, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income available to common stockholders (in thousands) | $147,676 | $100,504 | $361,826 | $293,961 | | Basic weighted average number of shares | 35,030,660 | 35,692,744 | 35,207,117 | 35,869,581 | | Earnings per share – basic | $4.22 | $2.82 | $10.28 | $8.20 | | Diluted weighted average number of shares | 35,357,043 | 36,062,316 | 35,516,434 | 36,265,918 | | Earnings per share – diluted | $4.18 | $2.79 | $10.19 | $8.11 | - Diluted EPS increased significantly by 49.8% to $4.18 in Q3 2023 and by 25.6% to $10.19 for the three fiscal quarters of 2023, compared to the prior year periods[26] - The number of diluted weighted average shares decreased in both periods, contributing to the higher EPS[26] 4. Stockholders' Deficit This note outlines changes in stockholders' deficit, including net income, dividends, and common stock repurchases, from January 1, 2023, to September 10, 2023 | (In thousands, except shares) | Balance at Jan 1, 2023 | Net Income | Dividends Declared | Purchases of Common Stock | Balance at Sep 10, 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | Common Stock Shares | 35,419,718 | — | — | (622,405) | 34,879,123 | | Common Stock Amount | $354 | — | — | $(6) | $349 | | Additional Paid-in Capital | $9,693 | — | — | $(35,806) | $959 | | Retained Deficit | $(4,194,418) | $361,826 | $(128,143) | $(177,018) | $(4,137,753) | | Accumulated Other Comprehensive Loss | $(4,694) | — | — | — | $(5,097) | | Total Stockholders' Deficit | $(4,189,065) | $361,826 | $(128,143) | $(212,824) | $(4,141,542) | - The total stockholders' deficit improved from $(4.19) billion at January 1, 2023, to $(4.14) billion at September 10, 2023, primarily due to net income offsetting dividends and share repurchases[30] - The Company declared dividends of $3.63 per share for the three fiscal quarters of 2023 and repurchased 622,405 shares of common stock[30] - Subsequent to Q3 2023, a quarterly dividend of $1.21 per share was declared for payment on December 29, 2023[30] 5. Fair Value Measurements This note describes the company's fair value measurements, classifying financial instruments into Level 1, 2, and 3 based on input observability - The Company classifies fair value measurements into Level 1 (quoted market prices), Level 2 (observable market-based inputs), and Level 3 (unobservable inputs)[34][35] - The investment in DPC Dash, previously Level 3, was transferred to Level 1 on March 28, 2023, following its IPO on the Hong Kong Exchange, resulting in a $28.2 million unrealized gain in Q3 2023 and $13.3 million for the three fiscal quarters of 2023[38][39] | (In thousands) | Carrying Amount (Sep 10, 2023) | Level 1 Inputs (Sep 10, 2023) | Carrying Amount (Jan 1, 2023) | Level 3 Inputs (Jan 1, 2023) | | :--- | :--- | :--- | :--- | :--- | | Cash equivalents | $57,239 | $57,239 | $23,779 | — | | Restricted cash equivalents | $133,359 | $133,359 | $117,212 | — | | Investments in marketable securities | $15,753 | $15,753 | $13,395 | — | | Advertising fund cash equivalents, restricted | $114,704 | $114,704 | $124,496 | — | | Investment in DPC Dash | $139,107 | $139,107 | $125,840 | $125,840 | 6. Revenue Disclosures This note provides details on contract liabilities, advertising fund assets, and changes in advertising contribution rates and technology fees - Contract liabilities, primarily deferred franchise and development fees, totaled $26.0 million at September 10, 2023, down from $28.2 million at the beginning of the period[44][45] - Advertising fund assets, restricted, decreased to $151.5 million at September 10, 2023, from $162.7 million at January 1, 2023[46][47] - Effective March 27, 2023, the standard advertising contribution was temporarily reduced by 0.25% to 5.75%, while U.S. digital per-transaction technology fees increased by $0.08 to $0.395[48] - During Q3 2023, Domino's entered a global agreement with Uber to allow orders through Uber Eats and Postmates, with U.S. rollout expected by end of fiscal 2023[49] 7. Leases This note provides information on operating and finance lease costs, weighted average remaining lease terms, and discount rates | (In thousands) | Fiscal Quarter Ended Sep 10, 2023 | Fiscal Quarter Ended Sep 11, 2022 | Three Fiscal Quarters Ended Sep 10, 2023 | Three Fiscal Quarters Ended Sep 11, 2022 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $11,058 | $11,302 | $32,734 | $32,366 | | Total finance lease cost | $2,292 | $2,314 | $6,802 | $6,553 | - The weighted average remaining lease term for operating leases was 7 years (4.0% discount rate) and for finance leases was 13 years (6.0% discount rate) as of September 10, 2023[52] - Total lease liabilities as of September 10, 2023, were $221.7 million for operating leases and $74.5 million for finance leases[53] 8. Supplemental Disclosures of Cash Flow Information This note provides supplemental disclosures regarding non-cash investing and financing activities impacting the cash flow statements - Non-cash investing activities related to capital expenditures accruals were $4.7 million at September 10, 2023, down from $6.9 million at January 1, 2023[55] - The Company had $2.0 million in non-cash financing activity related to accruals for excise taxes on share repurchases as of September 10, 2023[55] 9. Company-owned Store Transactions This note details transactions involving company-owned stores, including refranchising and acquisitions, and their financial impact - In Q1 2023, the Company refranchised one U.S. Company-owned store for less than $0.1 million, resulting in a pre-tax refranchising loss of approximately $0.1 million[56] - In Q1 2022, the Company purchased 23 U.S. franchised stores in Michigan for $6.8 million[57] 10. New Accounting Pronouncements This note discusses the adoption of new accounting standards, including ASU 2020-04 and ASU 2022-03, and their impact on the financial statements - The Company adopted ASU 2020-04 (Reference Rate Reform) in Q2 2023, following an amendment to its 2021 variable funding notes to transition from LIBOR to Term SOFR, with no material impact[59] - ASU 2022-03 (Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions) was early adopted in Q2 2023, clarifying fair value measurement for restricted equity securities like the DPC Dash investment, with no material impact[60] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Domino's Pizza, Inc.'s financial condition and operational results, covering key performance indicators, segment performance, and capital resources Overview This overview describes Domino's business model as the world's largest pizza company, focusing on franchising, value, and technological innovation - Domino's is the world's largest pizza company with over 20,000 locations in 90+ markets, primarily operating as a franchisor (99% of global stores)[63] - The business model focuses on value, quality food, easy ordering, efficient service, and technological innovation, generating revenue through royalties, fees, and supply chain sales to franchisees, and operating U.S. Company-owned stores[64][65] - Financial results are driven by retail sales, same store sales, and store counts, with a historical practice of returning cash to shareholders via dividends and share repurchases[66][67] Third Quarter of 2023 Highlights This section summarizes key financial and operational achievements for the third fiscal quarter of 2023, including sales growth, net income, and EPS - Global retail sales, excluding foreign currency impact, increased 5.1% (U.S. +0.9%, International +9.4%)[73] - U.S. same store sales declined 0.6% (due to lower order volumes, partially offset by higher average ticket)[73] - International same store sales (excluding foreign currency impact) increased 3.3%[73] - Revenues decreased 3.9%[73] - Income from operations increased 7.4%[73] - Net income increased 46.9%[73] - Diluted earnings per share increased 49.8%[73] Three Fiscal Quarters of 2023 Highlights This section summarizes key financial and operational achievements for the three fiscal quarters of 2023, including sales growth, net income, and EPS - Global retail sales, excluding foreign currency impact, increased 5.7% (U.S. +2.5%, International +8.9%)[73] - U.S. same store sales increased 1.0% (due to higher average ticket from pricing, partially offset by lower order volumes)[73] - International same store sales (excluding foreign currency impact) increased 2.6%[73] - Revenues decreased 2.2%[73] - Income from operations increased 8.3%[73] - Net income increased 23.1%[73] - Diluted earnings per share increased 25.6%[73] - The Company launched new menu items, Domino's Loaded Tots and Pepperoni Stuffed Cheesy Bread, in the U.S. during the three fiscal quarters of 2023[71] - Global net store decline of 8 stores in Q3 2023, reflecting 27 net U.S. openings and 35 international closures, including 143 stores in Russia due to bankruptcy filing by the master franchisee[72][73] Statistical Measures This section provides key statistical measures, including global retail sales growth, same store sales growth, and store growth activity Global Retail Sales Growth (excluding foreign currency impact) This section details the global retail sales growth, excluding foreign currency impact, for U.S. and international stores | | Third Quarter of 2023 | Third Quarter of 2022 | Three Fiscal Quarters of 2023 | Three Fiscal Quarters of 2022 | | :--- | :--- | :--- | :--- | :--- | | U.S. stores (%) | +0.9% | +4.1% | +2.5% | +0.7% | | International stores (excluding foreign currency impact) (%) | +9.4% | +5.2% | +8.9% | +5.7% | | Total (excluding foreign currency impact) (%) | +5.1% | +4.7% | +5.7% | +3.2% | - Global retail sales growth (excluding foreign currency impact) for Q3 2023 was 5.1%, with international stores showing strong growth of 9.4%, and total growth for the three fiscal quarters was 5.7%[76] - 2023 figures exclude the impact of the Russia market, which was deemed closed as of August 21, 2023[76][77] Same Store Sales Growth This section presents same store sales growth for U.S. Company-owned, U.S. franchise, and international stores | | Third Quarter of 2023 | Third Quarter of 2022 | Three Fiscal Quarters of 2023 | Three Fiscal Quarters of 2022 | | :--- | :--- | :--- | :--- | :--- | | U.S. Company-owned stores (%) | +2.9% | (1.9)% | +5.2% | (7.3)% | | U.S. franchise stores (%) | (0.7)% | +2.2% | +0.8% | (1.2)% | | U.S. stores (%) | (0.6)% | +2.0% | +1.0% | (1.6)% | | International stores (excluding foreign currency impact) (%) | +3.3% | (1.8)% | +2.6% | (0.8)% | - U.S. same store sales declined 0.6% in Q3 2023 but increased 1.0% for the three fiscal quarters, primarily due to higher average ticket prices offsetting lower order volumes[71][79] - International same store sales (excluding foreign currency impact) showed positive growth of 3.3% in Q3 2023 and 2.6% for the three fiscal quarters, reversing declines from the prior year[71][79] Store Growth Activity This section details changes in store counts, including openings and closings, for U.S. Company-owned, U.S. franchise, and international stores | | U.S. Company-owned Stores | U.S. Franchise Stores | Total U.S. Stores | International Stores | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Store count at June 18, 2023 | 286 | 6,449 | 6,735 | 13,470 | 20,205 | | Openings | 2 | 26 | 28 | 190 | 218 | | Closings | — | (1) | (1) | (225) | (226) | | Store count at September 10, 2023 | 288 | 6,474 | 6,762 | 13,435 | 20,197 | | Third quarter 2023 net store growth (decline) | 2 | 25 | 27 | (35) | (8) | | Trailing four quarters net store growth | 1 | 118 | 119 | 559 | 678 | - Global net store count declined by 8 stores in Q3 2023, primarily due to the closure of 143 stores in the Russia market[72][80][81] - For the three fiscal quarters of 2023, the Company achieved 317 net store openings globally[72] Income Statement Data This section provides a summary of key income statement figures, including total revenues, cost of sales, gross margin, and net income | (In thousands) | Third Quarter of 2023 | Third Quarter of 2022 | Three Fiscal Quarters of 2023 | Three Fiscal Quarters of 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $1,027.4 | $1,068.6 | $3,076.4 | $3,144.9 | | Total cost of sales | $629.2 | $686.7 | $1,888.0 | $2,008.2 | | Gross margin | $398.2 | $381.9 | $1,188.4 | $1,136.7 | | Income from operations | $189.4 | $176.5 | $562.3 | $519.1 | | Net income | $147.7 | $100.5 | $361.8 | $294.0 | - Total revenues decreased by 3.9% in Q3 2023 and 2.2% for the three fiscal quarters, primarily due to lower U.S. Company-owned store revenues and supply chain revenues[82][83] - Gross margin increased by 4.3% in Q3 2023 and 4.5% for the three fiscal quarters, driven by higher global franchise royalty revenues and improved supply chain procurement productivity[82][94] Revenues This section provides a detailed breakdown of revenues by segment, including U.S. stores, supply chain, and international franchise royalties and fees U.S. Stores Revenues This section details revenues generated from U.S. Company-owned stores, U.S. franchise royalties and fees, and U.S. franchise advertising | (In thousands) | Third Quarter of 2023 | Third Quarter of 2022 | Three Fiscal Quarters of 2023 | Three Fiscal Quarters of 2022 | | :--- | :--- | :--- | :--- | :--- | | U.S. Company-owned stores | $86.3 | $112.4 | $258.9 | $328.8 | | U.S. franchise royalties and fees | $138.3 | $128.9 | $410.5 | $379.3 | | U.S. franchise advertising | $111.5 | $114.2 | $335.7 | $331.9 | | Total U.S. stores revenues | $336.1 | $355.5 | $1,005.1 | $1,039.9 | - Total U.S. stores revenues decreased by $19.4 million (5.5%) in Q3 2023 and $34.8 million (3.3%) for the three fiscal quarters, primarily due to the refranchising of 114 U.S. Company-owned stores in Q4 2022[84][85] U.S. Company-owned Stores This section analyzes revenue changes and same store sales growth for U.S. Company-owned stores, impacted by refranchising activities - Revenues decreased by $26.1 million (23.2%) in Q3 2023 and $69.9 million (21.3%) for the three fiscal quarters, mainly due to the refranchising of 114 stores in Q4 2022[85] - U.S. Company-owned same store sales increased by 2.9% in Q3 2023 and 5.2% for the three fiscal quarters, partially offsetting the revenue decline from refranchising[85][86] U.S. Franchise Royalties and Fees This section examines revenue growth from U.S. franchise royalties and fees, driven by technology platform fees and increased franchised store count - Revenues increased by $9.4 million (7.3%) in Q3 2023 and $31.2 million (8.2%) for the three fiscal quarters, driven by higher technology platform fees and an increase in the average number of franchised stores[87] - U.S. franchise same store sales declined 0.7% in Q3 2023 but increased 0.8% for the three fiscal quarters[88] U.S. Franchise Advertising This section analyzes U.S. franchise advertising revenues, influenced by changes in contribution rates and same store sales performance - Revenues decreased by $2.7 million (2.3%) in Q3 2023 due to a temporary 0.25% reduction in the advertising contribution rate and lower same store sales[89] - Revenues increased by $3.9 million (1.2%) for the three fiscal quarters, benefiting from an increase in average franchised stores and higher same store sales, partially offset by the reduced advertising contribution[90] Supply Chain This section details revenue changes in the supply chain segment, primarily due to fluctuations in order volumes and market basket pricing - Revenues decreased by $28.0 million (4.3%) in Q3 2023 due to lower order volumes and a 1.7% decrease in market basket pricing to stores[91] - Revenues decreased by $44.2 million (2.3%) for the three fiscal quarters, primarily due to lower order volumes, despite a 0.2% increase in market basket pricing[91] International Franchise Royalties and Fee Revenues This section analyzes revenue growth from international franchise royalties and fees, driven by same store sales and net store growth - Revenues increased by $6.1 million (9.1%) in Q3 2023 and $10.5 million (5.2%) for the three fiscal quarters, driven by same store sales growth and net store growth, partially offset by negative foreign currency exchange rates[92] - International franchise same store sales (excluding foreign currency impact) increased 3.3% in Q3 2023 and 2.6% for the three fiscal quarters[93] Cost of Sales / Gross Margin This section examines the cost of sales and gross margin performance across U.S. Company-owned stores and the supply chain segment U.S. Company-Owned Store Gross Margin This section analyzes the gross margin performance of U.S. Company-owned stores, considering revenues, cost of sales, and refranchising impacts | (In thousands) | Third Quarter of 2023 | Third Quarter of 2022 | Three Fiscal Quarters of 2023 | Three Fiscal Quarters of 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $86.3 | $112.4 | $258.9 | $328.8 | | Cost of sales | $72.6 | $98.6 | $214.6 | $280.0 | | Store gross margin | $13.7 | $13.8 | $44.3 | $48.8 | - U.S. Company-owned store gross margin decreased by $0.1 million (1.0%) in Q3 2023 and $4.5 million (9.2%) for the three fiscal quarters, primarily due to the 2022 Store Sale[96] - As a percentage of store revenues, gross margin increased by 3.5 percentage points in Q3 2023 and 2.3 percentage points for the three fiscal quarters, driven by lower food costs and improved sales leverage[96][97] Supply Chain Gross Margin This section details the supply chain gross margin performance, influenced by procurement productivity, food costs, and labor costs | (In thousands) | Third Quarter of 2023 | Third Quarter of 2022 | Three Fiscal Quarters of 2023 | Three Fiscal Quarters of 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $618.1 | $646.1 | $1,858.0 | $1,902.2 | | Cost of sales | $556.6 | $588.2 | $1,673.4 | $1,728.2 | | Supply chain gross margin | $61.5 | $57.9 | $184.6 | $174.0 | - Supply chain gross margin increased by $3.6 million (6.2%) in Q3 2023 and $10.6 million (6.1%) for the three fiscal quarters, primarily due to procurement productivity[97] - As a percentage of supply chain revenues, gross margin increased by 1.0 percentage point in Q3 2023 and 0.7 percentage points for the three fiscal quarters, benefiting from lower food costs but partially offset by higher labor costs[97] General and Administrative Expenses This section analyzes changes in general and administrative expenses, primarily driven by fluctuations in labor and travel costs - General and administrative expenses increased by $6.0 million (6.6%) in Q3 2023, primarily due to higher labor costs[98] - For the three fiscal quarters of 2023, G&A expenses increased by $4.4 million (1.5%), driven by higher labor costs, partially offset by lower travel costs[98] U.S. Franchise Advertising Expenses This section details U.S. franchise advertising expenses, which align with changes in U.S. franchise advertising revenues - U.S. franchise advertising expenses decreased by $2.7 million (2.3%) in Q3 2023, consistent with the decrease in U.S. franchise advertising revenues[99] - For the three fiscal quarters of 2023, these expenses increased by $3.9 million (1.2%), consistent with the increase in U.S. franchise advertising revenues[99] Other Income This section highlights other income, primarily an unrealized gain on the investment in DPC Dash following its IPO - The Company recorded a $28.2 million unrealized gain on its investment in DPC Dash in Q3 2023 and $13.3 million for the three fiscal quarters of 2023, following DPC Dash's IPO[100] Interest Expense, Net This section analyzes changes in net interest expense, influenced by interest income on cash equivalents and borrowing rates - Interest expense, net, decreased by $2.5 million (5.6%) in Q3 2023 and $7.4 million (5.5%) for the three fiscal quarters, driven by higher interest income on cash equivalents[101] - The weighted average borrowing rate increased to 3.8% in both Q3 and the three fiscal quarters of 2023, up from 3.7% in the prior year periods[101] Provision for Income Taxes This section details the provision for income taxes, reflecting changes in the effective tax rate due to foreign tax credits and equity-based compensation benefits - Provision for income taxes decreased by $3.4 million (11.0%) in Q3 2023 due to a lower effective tax rate (15.9% vs. 23.8%), driven by higher foreign tax credits and excess tax benefits from equity-based compensation[102] - For the three fiscal quarters, the provision decreased by $4.0 million (4.5%) due to a lower effective tax rate (19.0% vs. 23.3%), also influenced by foreign tax credits and equity-based compensation benefits[102] Segment Income This section provides an overview of segment income performance for U.S. Stores, Supply Chain, International Franchise, and Other segments U.S. Stores This section analyzes the increase in U.S. stores Segment Income, primarily due to software cost allocation changes and higher franchise royalties - U.S. stores Segment Income increased by $19.8 million (19.7%) in Q3 2023 and $54.8 million (18.1%) for the three fiscal quarters, primarily due to the change in software cost allocation methodology and higher U.S. franchise royalties and fees[105][106][107] Supply Chain This section details the increase in supply chain Segment Income, driven by improved supply chain gross margin - Supply chain Segment Income increased by $5.4 million (10.7%) in Q3 2023 and $13.9 million (9.3%) for the three fiscal quarters, driven by the increase in supply chain gross margin[106][108] International Franchise This section analyzes the growth in international franchise Segment Income, attributed to higher royalties and software cost allocation changes - International franchise Segment Income increased by $7.7 million (14.4%) in Q3 2023 and $16.8 million (10.4%) for the three fiscal quarters, due to higher international franchise royalties and fees and the change in software cost allocation methodology[105][106][109] Other This section details the significant decrease in 'Other' Segment Income, primarily due to software cost allocation changes and higher labor costs - Other Segment Income decreased significantly by $16.9 million (578.6%) in Q3 2023 and $38.1 million (234.7%) for the three fiscal quarters, primarily due to the change in software cost allocation methodology and higher labor costs[105][106][110] Liquidity and Capital Resources This section discusses the company's liquidity and capital resources, including restricted cash, long-term debt, share repurchases, and dividends Restricted Cash This section details the company's restricted cash and cash equivalents, held for debt payments, working capital, and advertising fund purposes - As of September 10, 2023, the Company held $202.3 million in restricted cash and cash equivalents, including $151.0 million for debt payments and working capital, and $51.1 million in an interest reserve[115] - An additional $136.6 million in advertising fund restricted cash and cash equivalents is held for promoting the Domino's brand[115] Long-Term Debt This section outlines the company's long-term debt, including current portion, scheduled principal payments, and debt covenants - As of September 10, 2023, long-term debt totaled approximately $4.99 billion, with $55.8 million classified as a current liability[116] - Scheduled principal payments on fixed rate notes include $51.5 million in 2024, $1.17 billion in 2025, and $1.31 billion in 2027[116] - Debt agreements include covenants such as a minimum debt service coverage ratio of 1.75x, with potential for accelerated payment if not met[118] Share Repurchase Programs This section details the company's share repurchase activities, including shares repurchased, total value, and remaining authorization - During Q3 2023, the Company repurchased and retired 229,860 shares of common stock for approximately $90.0 million[120] - For the three fiscal quarters of 2023, 622,405 shares were repurchased for approximately $210.8 million[120] - As of September 10, 2023, $199.5 million remained authorized for share repurchases under the $1.0 billion program approved in July 2021[119][120] Dividends This section outlines the company's dividend declarations and payments, including the quarterly dividend per share - A quarterly dividend of $1.21 per share was declared on July 20, 2023, and paid on September 29, 2023[121] - Subsequent to Q3, on October 10, 2023, the Board declared another $1.21 per share quarterly dividend to be paid on December 29, 2023[121] Sources and Uses of Cash This section summarizes the company's cash flows from operating, investing, and financing activities Operating Activities This section details cash generated from operating activities, influenced by net income and changes in operating assets and liabilities - Cash provided by operating activities increased by $92.0 million to $422.1 million for the three fiscal quarters of 2023, driven by positive changes in operating assets and liabilities and higher net income[122][123] Investing Activities This section outlines cash used in investing activities, primarily for capital expenditures in technology, supply chain, and corporate store operations - Cash used in investing activities was $60.0 million for the three fiscal quarters of 2023, primarily consisting of $59.3 million in capital expenditures for technology, supply chain, and corporate store operations[122][124] Financing Activities This section details cash used in financing activities, including common stock repurchases, dividend payments, and debt repayments - Cash used in financing activities was $337.2 million for the three fiscal quarters of 2023, including $210.8 million for common stock repurchases, $85.6 million for dividends, and $41.3 million for debt repayments[122][125] Critical Accounting Estimates This section identifies the company's most significant accounting policies and estimates, including long-lived assets, casualty insurance reserves, and income taxes - The Company's most significant accounting policies and estimates include long-lived assets, casualty insurance reserves, and income taxes[126] - There have been no material changes to these critical accounting estimates since January 1, 2023[126] Forward-Looking Statements This section provides a cautionary note regarding forward-looking statements, outlining inherent risks and uncertainties that could impact actual results - This section contains forward-looking statements based on current management expectations, subject to substantial risks and uncertainties that could cause actual results to differ materially[127] - Key risk factors include increased indebtedness, credit rating impact, competitive industry, labor shortages, commodity price volatility, effectiveness of initiatives, and global economic conditions[127] - The Company disclaims any obligation to publicly update or revise forward-looking statements, except as required by law[127] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details Domino's exposure to market risks, including interest rate, commodity price, and foreign currency exchange risks, and the company's approach to managing them Market Risk This section outlines the company's exposure to interest rate risk on variable funding notes and commodity price risk for food products - The Company is exposed to interest rate risk on its 2022 and 2021 Variable Funding Notes, which bear interest at fluctuating rates based on Term SOFR; a rising interest rate environment could increase interest expense[128][129] - Domino's is exposed to market risks from changes in commodity prices, particularly for cheese and other food products, which can lead to volatility in food costs[131] - The Company does not engage in speculative transactions or hold/issue financial instruments for trading purposes to manage these risks[128][131] Foreign Currency Exchange Risk This section discusses the company's exposure to foreign currency exchange risk from international franchise operations and its potential impact on royalty revenues - Approximately 7.1% of total revenues in Q3 2023 and 6.9% for the three fiscal quarters of 2023 were derived from the international franchise segment, a majority of which are denominated in foreign currencies[132] - A hypothetical 10% adverse change in foreign currency rates for international markets would have negatively impacted royalty revenues by approximately $18.8 million for the three fiscal quarters of 2023[132] - The Company does not use financial instruments to manage foreign currency exchange risk[132] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as of September 10, 2023, concluding they were effective - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 10, 2023[133] - No material changes to the Company's internal control over financial reporting occurred during the fiscal quarter ended September 10, 2023[134] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, equity security sales, and exhibits Item 1. Legal Proceedings Domino's is involved in various lawsuits, tax reviews, and administrative proceedings in the ordinary course of business, including workers' compensation, general liability, automobile, franchisee, and employment-related claims - The Company is a party to various lawsuits, revenue agent reviews by taxing authorities, and administrative proceedings in the ordinary course of business[136] - Management does not believe that any existing legal matters will materially affect the Company's financial position, results of operations, or cash flows[137] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in Item 1A of the Company's 2022 Form 10-K - No material changes have occurred with respect to the risk factors previously disclosed in the Company's 2022 Form 10-K[138] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's share repurchase activities during the third quarter of 2023 under its Board-approved program | Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (2) (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Period 7 (June 19, 2023 to July 16, 2023) | 1,700 | $333.05 | — | $289,511 | | Period 8 (July 17, 2023 to August 13, 2023) | 99,711 | $398.90 | 98,000 | $250,420 | | Period 9 (August 14, 2023 to September 10, 2023) | 132,978 | $386.13 | 131,860 | $199,511 | | Total | 234,389 | $391.18 | 229,860 | $199,511 | - During Q3 2023, the Company repurchased 229,860 shares under its publicly announced program for approximately $90.0 million[120][140] - As of September 10, 2023, approximately $199.5 million remained available for future share repurchases under the $1.0 billion program authorized in July 2021[141] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[143] Item 4. Mine Safety Disclosures This item is not applicable to Domino's Pizza, Inc - Mine Safety Disclosures are not applicable to the Company[144] Item 5. Other Information During the fiscal quarter ended September 10, 2023, none of the Company's directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fiscal quarter ended September 10, 2023[145] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including certifications from the CEO and CFO under the Sarbanes-Oxley Act and XBRL-related documents - Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (Exhibits 31.1, 31.2, 32.1, 32.2)[146] - XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Label Linkbase, Presentation Linkbase, and Definition Linkbase Documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF)[146] - Cover page Interactive Data File (Exhibit 104)[146] SIGNATURES This section confirms the official signing of the report by the company's Executive Vice President and Chief Financial Officer Signatures The report was duly signed on October 12, 2023, on behalf of Domino's Pizza, Inc. by Sandeep Reddy, Executive Vice President and Chief Financial Officer - The report was signed by Sandeep Reddy, Executive Vice President and Chief Financial Officer, on October 12, 2023[149]