Dominos Pizza Inc 10-Q for FY2020 Q1
Dominos Pizza Inc (DPZ)
10-Q
2020-04-23
For: 2020-03-22
View Original
Added on
April 08, 2026
About this 10-Q
Dominos Pizza Inc filed this 10-Q on April 23, 2020, covering the quarter ended March 22, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 22, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $873.1M
- up 4.4% from $835.96M a year earlier
- Net income
- $121.6M
- up 31.2% from net income of $92.65M a year earlier
- Diluted EPS
- $3.07
- up 39.5% from $2.20 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 22, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-32242
.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
(Address of Principal Executive Offices) |
(Zip Code) |
(734 ) 930-3030
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class |
Trading Symbol |
Name of Each Exchange on Which Registered | ||
Domino’s Pizza, Inc. |
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.☒ |
Accelerated filer |
☐ | ||||
Non-accelerated filer |
☐ |
Smaller reporting company |
||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). Yes ☐
No As of April 16, 2020, Domino’s Pizza, Inc. had 39,117,878 shares of common stock, par value $0.01 per share, outstanding.
Domino’s Pizza, Inc.
TABLE OF CONTENTS
Page No. |
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PART I. |
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Item 1. |
3 |
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3 |
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4 |
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5 |
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6 |
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7 |
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Item 2. |
14 |
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Item 3. |
21 |
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Item 4. |
21 |
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PART II. |
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Item 1. |
22 |
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Item 1A. |
22 |
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Item 2. |
23 |
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Item 3. |
23 |
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Item 4. |
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Item 5. |
23 |
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Item 6. |
23 |
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24 |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
| (In thousands) |
March 22, 2020 |
December 29, 2019 (1) |
||||||
| Assets |
||||||||
| Current assets: |
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| Cash and cash equivalents |
$ | |
$ | |
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| Restricted cash and cash equivalents |
|
|
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| Accounts receivable, net |
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| Inventories |
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| Prepaid expenses and other |
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| Advertising fund assets, restricted |
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| Total current assets |
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| Property, plant and equipment: |
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| Land and buildings |
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| Leasehold and other improvements |
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| Equipment |
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| Construction in progress |
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| |
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| Accumulated depreciation and amortization |
( |
) | ( |
) | ||||
| Property, plant and equipment, net |
|
|
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| Other assets: |
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| Operating lease right-of-use assets |
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|
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| Goodwill |
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| Capitalized software, net |
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| Other assets |
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| Deferred income taxes |
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| Total other assets |
|
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| Total assets |
$ | |
$ | |
||||
| Liabilities and stockholders’ deficit |
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| Current liabilities: |
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| Current portion of long-term debt |
$ | |
$ | |
||||
| Accounts payable |
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| Operating lease liabilities |
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| Insurance reserves |
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| Dividends payable |
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| Advertising fund liabilities |
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| Other accrued liabilities |
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| Total current liabilities |
|
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| Long-term liabilities: |
||||||||
| Long-term debt, less current portion |
|
|
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| Operating lease liabilities |
|
|
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| Insurance reserves |
|
|
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| Other accrued liabilities |
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|
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| Total long-term liabilities |
|
|
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| Stockholders’ deficit: |
||||||||
| Common stock |
|
|
||||||
| Additional paid-in capital |
|
|
||||||
| Retained deficit |
( |
) | ( |
) | ||||
| Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
| Total stockholders’ deficit |
( |
) | ( |
) | ||||
| Total liabilities and stockholders’ deficit |
$ | |
$ | |
||||
| (1) | The balance sheet at December 29, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. |
The accompanying notes are an integral part of these condensed consolidated statements.
3
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
| Fiscal Quarter Ended |
||||||||
| March 22, |
March 24, |
|||||||
| (In thousands, except per share data) |
2020 |
2019 |
||||||
| Revenues: |
||||||||
| U.S. Company-owned stores |
$ | |
$ | |
||||
| U.S. franchise royalties and fees |
|
|
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| Supply chain |
|
|
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| International franchise royalties and fees |
|
|
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| U.S. franchise advertising |
|
|
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| Total revenues |
|
|
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| Cost of sales: |
||||||||
| U.S. Company-owned stores |
|
|
||||||
| Supply chain |
|
|
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| Total cost of sales |
|
|
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| Operating margin |
|
|
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| General and administrative |
|
|
||||||
| U.S. franchise advertising |
|
|
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| Income from operations |
|
|
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| Interest income |
|
|
||||||
| Interest expense |
( |
) | ( |
) | ||||
| Income before (benefit) provision for income taxes |
|
|
||||||
| (Benefit) provision for income taxes |
( |
) | |
|||||
| Net income |
$ | |
$ | |
||||
| Earnings per share: |
||||||||
| Common stock - basic |
$ | |
$ | |
||||
| Common stock - diluted |
|
|
||||||
The accompanying notes are an integral part of these condensed consolidated statements.
4
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| Fiscal Quarter Ended |
||||||||
| March 22, |
March 24, |
|||||||
| (In thousands) |
2020 |
2019 |
||||||
| Net income |
$ | |
$ | |
||||
| Currency translation adjustment |
( |
) | |
|||||
| Comprehensive income |
$ | |
$ | |
||||
The accompanying notes are an integral part of these condensed consolidated statements.
5
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Fiscal Quarter Ended |
||||||||
| March 22, |
March 24, |
|||||||
| (In thousands) |
2020 |
2019 |
||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | |
$ | |
||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
|
|
||||||
| Loss on sale/disposal of assets |
|
|
||||||
| Amortization of debt issuance costs |
|
|
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| Provision for deferred income taxes |
|
|
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| Non-cash compensation expense |
|
|
||||||
| Excess tax benefits from equity-based compensation |
( |
) | ( |
) | ||||
| Provision for losses on accounts and notes receivable |
|
|
||||||
| Changes in operating assets and liabilities |
( |
) | |
|||||
| Changes in advertising fund assets and liabilities, restricted |
|
( |
) | |||||
| Net cash provided by operating activities |
|
|
||||||
| Cash flows from investing activities: |
||||||||
| Capital expenditures |
( |
) | ( |
) | ||||
| Other |
( |
) | |
|||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities: |
||||||||
| Repayments of long-term debt and finance lease obligations |
( |
) | ( |
) | ||||
| Proceeds from exercise of stock options |
|
|
||||||
| Purchases of common stock |
( |
) | ( |
) | ||||
| Tax payments for restricted stock upon vesting |
( |
) | ( |
) | ||||
| Payments of common stock dividends and equivalents |
( |
) | ( |
) | ||||
| Other |
|
— |
||||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Effect of exchange rate changes on cash |
( |
) | |
|||||
| Change in cash and cash equivalents, restricted cash and cash equivalents |
( |
) | |
|||||
| Cash and cash equivalents, beginning of period |
|
|
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| Restricted cash and cash equivalents, beginning of period |
|
|
||||||
| Cash and cash equivalents included in advertising fund assets, restricted, beginning of period |
|
|
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| Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, beginning of period |
|
|
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| Cash and cash equivalents, end of period |
|
|
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| Restricted cash and cash equivalents, end of period |
|
|
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| Cash and cash equivalents included in advertising fund assets, restricted, end of period |
|
|
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| Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, end of period |
$ | |
$ | |
||||
The accompanying notes are an integral part of these condensed consolidated statements.
6
Domino’s Pizza, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited; tabular amounts in thousands, except percentages, share and per share amounts)
March 22, 2020
1. Basis of Presentation and Updates to Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form
10-Q
and Rule 10-01
of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended December 29, 2019 included in the Company’s 2019 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on February 20, 2020 (the “2019 Form 10-K”).
In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair statement have been included. Operating results for the fiscal quarter ended March 22, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 202
1
. Updates to Significant Accounting Policies
The Company adopted Accounting Standards Codification 326, (“ASC 326”) in the first quarter of 2020. As a result, the Company updated its significant accounting policies for the measurement of credit losses below. Refer to Note
Financial Instruments – Credit Losses
9
for information related
to
the impact of the adoption of ASC 326 on the Company’s condensed consolidated financial statements.Allowances for Credit Losses
The Company closely monitors accounts and notes receivable balances and estimates the allowance for credit losses. These estimates are based on historical collection experience and other factors, including those related to current market conditions and events. The Company’s allowance
s
for accounts and notes receivable have not historically been material. The Company also monitors its
off-balance
sheet exposures under its letters of credit, surety bonds and lease guarantees. None of these arrangements has or is likely to have a material effect on the Company’s results of operations, financial condition, revenues, expenses or liquidity. 2. Segment Information
The following table summarizes revenues, income from operations and earnings before interest, taxes, depreciation, amortization and other, which is the measure by which the Company allocates resources to its segments and which the Company refers to as Segment Income, for each of its reportable segments.
Fiscal Quarters Ended March 22, 2020 and March 24, 2019 |
||||||||||||||||||||||||
U.S. |
Supply |
International |
Intersegment |
|||||||||||||||||||||
Stores |
Chain |
Franchise |
Revenues |
Other |
Total |
|||||||||||||||||||
Revenues |
||||||||||||||||||||||||
2020 |
$ | $ | $ | $ | ( |
) | $ | — |
$ | |||||||||||||||
2019 |
( |
) | — |
|||||||||||||||||||||
Income from operations |
||||||||||||||||||||||||
2020 |
$ | $ | $ | N/A |
$ | ( |
) | $ | ||||||||||||||||
2019 |
N/A |
( |
) | |||||||||||||||||||||
Segment Income |
||||||||||||||||||||||||
2020 |
$ | $ | $ | N/A |
$ | ( |
) | $ | ||||||||||||||||
2019 |
N/A |
( |
) | |||||||||||||||||||||
7
The following table reconciles Total Segment Income to consolidated income before (benefit) provision for income taxes.
Fiscal Quarter Ended |
||||||||
March 22, |
March 24, |
|||||||
2020 |
2019 |
|||||||
Total Segment Income |
$ | $ | ||||||
Depreciation and amortization |
( |
) | ( |
) | ||||
Loss on sale/disposal of assets |
( |
) | ( |
) | ||||
Non-cash compensation expense |
( |
) | ( |
) | ||||
Income from operations |
||||||||
Interest income |
||||||||
Interest expense |
( |
) | ( |
) | ||||
Income before (benefit) provision for income taxes |
$ | $ | ||||||
3. Earnings Per Share
Fiscal Quarter Ended |
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March 22, |
March 24, |
|||||||
2020 |
2019 |
|||||||
Net income available to common stockholders - basic and diluted |
$ | $ | ||||||
Basic weighted average number of shares |
||||||||
Earnings per share – basic |
$ | $ | ||||||
Diluted weighted average number of shares |
||||||||
Earnings per share – diluted |
$ | $ | ||||||
The denominator used in calculating diluted earnings per share for the first quarter of 2020 does not include 128,280 options to purchase common stock as the effect of including these options would have been anti-dilutive. The denominator used in calculating diluted earnings per share for the first quarter of 2020 does not include 84,765 restricted performance shares, as the performance targets for these awards had not yet been met.
The denominator used in calculating diluted earnings per share for the first quarter of 2019 does not include 71,880 options to purchase common stock as the effect of including these options would have been anti-dilutive. The denominator used in calculating diluted earnings per share for the first quarter of 2019 does not include 1,800 shares subject to restricted stock awards, as the effect of including these shares would have been anti-dilutive. The denominator used in calculating diluted earnings per share for the first quarter of 2019 does not include 96,712 restricted performance shares, as the performance targets for these awards had not yet been met.
4. Stockholders’ Deficit
The following table summarizes changes in stockholders’ deficit for the first quarter of 2020.
Accumulated |
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Additional |
Other |
|||||||||||||||||||
Common Stock |
Paid-in |
Retained |
Comprehensive |
|||||||||||||||||
Shares |
Amount |
Capital |
Deficit |
Loss |
||||||||||||||||
Balance at December 29, 2019 |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
Net income |
— |
— |
— |
— |
||||||||||||||||
Dividends declared on common stock and equivalents ($ |
— |
— |
— |
( |
) | — |
||||||||||||||
Issuance and cancellation of stock awards, net |
— |
— |
— |
— |
||||||||||||||||
Tax payments for restricted stock upon vesting |
( |
) | — |
( |
) | — |
— |
|||||||||||||
Purchases of common stock |
( |
) | ( |
) | ( |
) | ( |
) | — |
|||||||||||
Exercise of stock options |
— |
— |
||||||||||||||||||
Non-cash compensation expense |
— |
— |
— |
— |
||||||||||||||||
Adoption of ASC 326 (Note 9 ) |
— |
— |
— |
— |
||||||||||||||||
Currency translation adjustment |
— |
— |
— |
— |
( |
) | ||||||||||||||
Balance at March 22, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
Subsequent to the first quarter, on April 21, 2020 , the Company’s Board of Directors declared a $0.78 per share quarterly dividend on its outstanding common stock for shareholders of record as of June 15, 2020 to be paid on June 30, 2020 .
8
The following table summarizes changes in stockholders’ deficit for the first quarter of 2019.
Accumulated |
||||||||||||||||||||
Additional |
Other |
|||||||||||||||||||
Common Stock |
Paid-in |
Retained |
Comprehensive |
|||||||||||||||||
Shares |
Amount |
Capital |
Deficit |
Loss |
||||||||||||||||
Balance at December 30, 2018 |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
Net income |
— |
— |
— |
— |
||||||||||||||||
Dividends declared on common stock and equivalents ($ |
— |
— |
— |
( |
) | — |
||||||||||||||
Issuance and cancellation of stock awards, net |
— |
— |
— |
— |
||||||||||||||||
Tax payments for restricted stock upon vesting |
( |
) | — |
( |
) | — |
— |
|||||||||||||
Purchases of common stock |
( |
) | — |
( |
) | ( |
) | — |
||||||||||||
Exercise of stock options |
— |
— |
||||||||||||||||||
Non-cash compensation expense |
— |
— |
— |
— |
||||||||||||||||
Currency translation adjustment |
— |
— |
— |
— |
||||||||||||||||
Balance at March 24, 2019 |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
5. Fair Value Measurements
Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair values of the Company’s cash equivalents and investments in marketable securities are based on quoted prices in active markets for identical assets. The following tables summarize the carrying amounts and fair values of certain assets at March 22, 2020 and December 29, 2019:
At March 22, 2020 |
||||||||||||||||
Fair Value Estimated Using |
||||||||||||||||
Carrying |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Amount |
Inputs |
Inputs |
Inputs |
|||||||||||||
Cash equivalents |
$ | $ | $ | — |
$ | — |
||||||||||
Restricted cash equivalents |
— |
— |
||||||||||||||
Investments in marketable securities |
— |
— |
||||||||||||||
Advertising fund cash equivalents, restricted |
— |
— |
||||||||||||||
At December 29, 2019 |
||||||||||||||||
Fair Value Estimated Using |
||||||||||||||||
Carrying |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Amount |
Inputs |
Inputs |
Inputs |
|||||||||||||
Cash equivalents |
$ | $ | $ | — |
$ | — |
||||||||||
Restricted cash equivalents |
— |
— |
||||||||||||||
Investments in marketable securities |
— |
— |
||||||||||||||
Advertising fund cash equivalents, restricted |
— |
— |
||||||||||||||
9
Management estimated the approximate fair values of the 2015 fixed rate notes, the 2017 fixed and floating rate notes, the 2018 fixed rate notes and the 2019 fixed rate notes as follows:
March 22, 2020 |
December 29, 2019 |
|||||||||||||||
Principal Amount |
Fair Value |
Principal Amount |
Fair Value |
|||||||||||||
2015 Ten-Year Fixed Rate Notes |
$ | $ | $ | $ | ||||||||||||
2017 Five-Year Fixed Rate Notes |
||||||||||||||||
2017 Ten-Year Fixed Rate Notes |
||||||||||||||||
2017 Five-Year Floating Rate Notes |
||||||||||||||||
2018 7.5-Year Fixed Rate Notes |
||||||||||||||||
2018 9.25-Year Fixed Rate Notes |
||||||||||||||||
2019 Ten-Year Fixed Rate Notes |
||||||||||||||||
The Company’s variable funding notes are a variable rate loan and the fair value of this loan approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. This fair value represents a Level 2 measurement. The Company did no t have any outstanding borrowings under its variable funding notes at March 22, 2020 or December 29, 2019. Subsequent to the first quarter of 2020, the Company borrowed $158.0 million under its variable funding notes
.
The fair values in the table above represent the fair value of such notes at March 22, 2020 and December 29, 2019. In light of the
COVID-19
pandemic (discussed further in Note 10), these fair values fluctuated significantly during the first quarter and may continue to fluctuate based on market conditions and other factors.
The fixed and floating rate notes are classified as Level 2 measurements, as the Company estimates the fair value amount by using available market information. The Company obtained quotes from two separate brokerage firms that are knowledgeable about the Company’s fixed and floating rate notes and, at times, trade these notes. The Company also performed its own internal analysis based on the information gathered from public markets, including information on notes that are similar to those of the Company. However, considerable judgment is required to interpret market data to estimate fair value. Accordingly, the fair value estimates presented are not necessarily indicative of the amount that the Company or the debtholders could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair values stated above.
6. Revenue Disclosures
Contract Liabilities
Contract liabilities
primarily
consist of deferred franchise fees and deferred development fees. Changes in deferred franchise fees and deferred development fees for the first quarter of 2020 and the first quarter of 2019 were as follows:
Fiscal Quarter Ended |
||||||||
March 22, |
March 24, |
|||||||
2020 |
2019 |
|||||||
Deferred franchise fees and deferred development fees at beginning of period |
$ | $ | ||||||
Revenue recognized during the period |
( |
) | ( |
) | ||||
New deferrals due to cash received and other |
||||||||
Deferred franchise fees and deferred development fees at end of period |
$ | $ | ||||||
Advertising Fund Assets
As of March 22, 2020, advertising fund assets, restricted of $110.0 million consisted of $88.2 million of cash and cash equivalents, $19.5 million of accounts receivable and $2.3 million of prepaid expenses. As of March 22, 2020, advertising fund cash, cash equivalents and investments included $3.2 million of cash contributed from Company-owned stores that had not yet been expended.
As of December 29, 2019, advertising fund assets, restricted of $105.4 million consisted of $84.0 million of cash and cash equivalents, $15.3 million of accounts receivable and $6.1 million of prepaid expenses. As of December 29, 2019, advertising fund cash and cash equivalents included $3.5 million of cash contributed from U.S. Company-owned stores that had not yet been expended.
10
7. Leases
The Company leases certain retail store and supply chain center locations, supply chain vehicles and its corporate headquarters with expiration dates through 2041.
The components of operating and finance lease cost for the first quarter of 2020 and the first quarter of 2019 were as follows:
| Fiscal Quarter Ended |
||||||||
| March 22, |
March 24, |
|||||||
| 2020 |
2019 |
|||||||
| Operating lease cost |
$ | |
$ | |
||||
| Finance lease cost: |
||||||||
| Amortization of right-of-use assets |
|
|
||||||
| Interest on lease liabilities |
|
|
||||||
| Total finance lease cost |
$ | |
$ | |
||||
Rent expense totaled $16.4
million
in both the first quarter of 2020 and the first quarter of 2019, and includes operating lease cost, as well as expense for
non-lease
components including common area maintenance, real estate taxes and insurance for the Company’s real estate leases. Rent expense also includes the variable rate per mile driven and fixed maintenance charges for the Company’s supply chain center tractors and trailers and expense for short-term rentals. Variable rent expense and rent expense for short-term leases were immaterial in both the first quarter of 2020 and the first quarter of 2019. Supplemental balance sheet information related to the Company’s finance leases as of March 22, 2020 and December 29, 2019 was as follows:
| March 22, |
December 29, |
|||||||
| 2020 |
2019 |
|||||||
| Land and buildings |
$ | |
$ | |
||||
| Accumulated depreciation and amortization |
( |
) | ( |
) | ||||
| Finance lease assets, net |
$ | |
$ | |
||||
| Current portion of long-term debt |
$ | |
$ | |
||||
| Long-term debt, less current portion |
|
|
||||||
| Total principal payable on finance leases |
$ | |
$ | |
||||
As of March 22, 2020 and December 29, 2019, the weighted average remaining lease term and weighted average discount rate for the Company’s operating and finance leases were as follows:
| March 22, 2020 |
December 29, 2019 |
|||||||||||||||
| Operating |
Finance |
Operating |
Finance |
|||||||||||||
| Leases |
Leases |
Leases |
Leases |
|||||||||||||
| Weighted average remaining lease term |
|
|
|
|
||||||||||||
| Weighted average discount rate |
|
% | |
% | |
% | |
% | ||||||||
Supplemental cash flow information related to leases for the first quarter of 2020 and the first quarter of 2019 was as follows:
| Fiscal Quarter Ended |
||||||||
| March 22, |
March 2 4 , |
|||||||
| 2020 |
2019 |
|||||||
| Cash paid for amounts included in the measurement of lease liabilities: |
||||||||
| Operating cash flows from operating leases |
$ | |
$ | |
||||
| Operating cash flows from finance leases |
|
|
||||||
| Financing cash flows from finance leases |
|
|
||||||
| Right-of-use assets obtained in exchange for lease obligations: |
||||||||
| Operating leases |
|
|
||||||
| Finance leases |
|
|
||||||
11
Maturities of lease liabilities as of March 22, 2020 were as follows:
| Operating |
Finance |
|||||||
| Leases |
Leases |
|||||||
| 2020 |
$ | |
$ | |
||||
| 2021 |
|
|
||||||
| 2022 |
|
|
||||||
| 2023 |
|
|
||||||
| 2024 |
|
|
||||||
| Thereafter |
|
|
||||||
| Total future minimum rental commitments |
|
|
||||||
| Less – amounts representing interest |
( |
) | ( |
) | ||||
| Total lease liabilities |
$ | |
$ | |
||||
As of March 22, 2020, the Company has additional leases for two supply chain centers and certain supply chain tractors and trailers that had not yet commenced with estimated future minimum rental commitments of approximately $68.6 million. These leases are expected to commence in 2020 with lease terms of up to 21 years.
One of the supply chain center leases commenced in the second quarter of 2020. These undiscounted amounts are not included in the table above.
The Company has guaranteed lease payments related to certain franchisees’ lease arrangements. The maximum amount of potential future payments under these guarantees was $15.8 million as of March 22, 2020. The Company does not believe these arrangements have or are likely to have a material effect on its results of operations, financial condition, revenues
,
expenses or liquidity. 8
. Supplemental Disclosures of Cash Flow Information The Company had 3.4 million at March 22, 2020 and $6.9 million at December 29, 2019.
non-cash
investing activities related to accruals for capital expenditures of $9
. New Accounting Pronouncements Recently Adopted Accounting Standard
ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326) In June 2016, the FASB issued ASU . ASC 326 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company adopted this standard as of December 30, 2019, the first day of its 2020 fiscal year, using the modified retrospective approach and it did not have a material impact on its condensed consolidated financial statements.
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The effects of the changes made to the Company’s condensed consolidated balance sheet as of December 30, 2019 for the adoption of ASC 326 were as follows:
Balance at December 29, 2019 |
Adjustments Due to ASC 326 |
Balance at December 30, 2019 |
||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Accounts receivable, net |
$ | $ | $ | |||||||||
Prepaid expenses and other |
||||||||||||
Other assets: |
||||||||||||
Other assets |
||||||||||||
Deferred income taxes |
( |
) | ||||||||||
Liabilities and stockholders’ deficit |
||||||||||||
Stockholders’ deficit: |
||||||||||||
Retained deficit |
( |
) | ( |
) | ||||||||
12
The Company recognized the cumulative effect of initially applying ASC 326 as an adjustment to the opening balance of retained deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for that period. An adjustment to beginning retained deficit and a corresponding adjustment to the allowance for doubtful accounts and notes receivable of approximately $1.5 million was recorded on the date of adoption, representing the remeasurement of these accounts to Company’s estimate for current expected credit losses. The adjustment to beginning retained deficit was also net of a $0.4 million adjustment to deferred income taxes.
Accounting Standards Not Yet Adopted
The Company has considered all new accounting standards issued by the FASB. The Company has not yet completed its assessment of the following standard.
ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes (Topic 740)
In December 2019, the FASB issued , which simplifies the accounting for income taxes. ASU
Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12)
2019-12
is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.10.
COVID-19
Pandemic In December 2019, a novel coronavirus disease
(“COVID-19”)
was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19
threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19
as a pandemic. While the Company did not incur significant disruptions to its operations during the first quarter of 2020 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties and is closely monitoring the impact of the pandemic on all aspects of its business.13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Unaudited; tabular amounts in millions, except percentages and store data)
The 2020 and 2019 first quarters referenced herein represent the twelve-week periods ended March 22, 2020 and March 24, 2019.
Overview
Domino’s is the largest pizza company in the world based on global retail sales, with more than 17,000 locations in over 90 markets around the world. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. Domino’s generates revenues and earnings by charging royalties and fees to our independent franchisees. The Company also generates revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada, and by operating a number of our own stores in the U.S. Franchisees profit by selling pizza and other complementary items to their local customers. In our international markets, we generally grant geographical rights to the Domino’s Pizza
®
brand to master franchisees. These master franchisees are charged with developing their geographical area, and they can profit by sub-franchising
and selling ingredients and equipment to those sub-franchisees,
as well as by running pizza stores directly. We believe that everyone in the system can benefit, including the end consumer, who can feed their family Domino’s menu items conveniently and economically.Our financial results are driven largely by retail sales at our franchise and Company-owned stores. Changes in retail sales are driven by changes in same store sales and store counts. We monitor both of these metrics very closely, as they directly impact our revenues and profits, and we strive to consistently increase both metrics. Retail sales drive royalty payments from franchisees, as well as Company-owned store and supply chain revenues. Retail sales are primarily impacted by the strength of the Domino’s Pizza
®
brand, the results of our extensive advertising through various media channels, the impact of technological innovation and digital ordering, our ability to execute our strong and proven business model and the overall global economic environment. | First Quarter |
First Quarter |
|||||||||||||||
| of 2020 |
of 2019 |
|||||||||||||||
| Global retail sales growth (versus prior year period, excluding foreign currency impact) |
+5.9 |
% | +8.5 |
% | ||||||||||||
| Same store sales growth (1): |
||||||||||||||||
| U.S. Company-owned stores |
+3.9 |
% | +2.1 |
% | ||||||||||||
| U.S. franchise stores |
+1.5 |
% | +4.1 |
% | ||||||||||||
| U.S. stores |
+1.6 |
% | +3.9 |
% | ||||||||||||
| International stores (excluding foreign currency impact) |
+1.5 |
% | +1.8 |
% | ||||||||||||
| Store counts (at end of period): |
||||||||||||||||
| U.S. Company-owned stores |
345 |
392 |
||||||||||||||
| U.S. franchise stores |
5,811 |
5,511 |
||||||||||||||
| U.S. stores |
6,156 |
5,903 |
||||||||||||||
| International stores |
10,933 |
10,211 |
||||||||||||||
| Total stores (2) |
17,089 |
16,114 |
||||||||||||||
| Income statement data: |
||||||||||||||||
| Total revenues |
$ | 873.1 |
100.0 |
% | $ | 836.0 |
100.0 |
% | ||||||||
| Cost of sales |
532.9 |
61.0 |
% | 513.7 |
61.4 |
% | ||||||||||
| General and administrative |
88.5 |
10.2 |
% | 89.7 |
10.7 |
% | ||||||||||
| U.S. franchise advertising |
95.8 |
11.0 |
% | 89.1 |
10.7 |
% | ||||||||||
| Income from operations |
155.8 |
17.8 |
% | 143.5 |
17.2 |
% | ||||||||||
| Interest expense, net |
(38.5 |
) | (4.4 |
)% | (34.4 |
) | (4.1 |
)% | ||||||||
| Income before provision for income taxes |
117.3 |
13.4 |
% | 109.1 |
13.1 |
% | ||||||||||
| (Benefit) provision for income taxes |
(4.3 |
) | (0.5 |
)% | 16.5 |
2.0 |
% | |||||||||
| Net income |
$ | 121.6 |
13.9 |
% | $ | 92.7 |
11.1 |
% | ||||||||
| (1) | Same store sales growth is calculated by including only sales for a given period from stores that had sales in the comparable weeks of both years. International same store sales growth is calculated similarly to U.S. same store sales growth. Changes in international same store sales are reported excluding foreign currency impacts, which reflect changes in international local currency sales. |
| (2) | Temporary store closures due to COVID-19 in the first quarter of 2020 are not treated as store closures and affected stores are included in the ending store count. |
14
During the first quarter of 2020, we experienced global retail sales growth. Our U.S. and international same store sales growth remained positive but was pressured by our current strategy to increase store concentration in certain markets where we compete. Beginning at the end of the first quarter of 2020 through the date of this filing, while we have seen an increase in U.S. same store sales, the
COVID-19
pandemic has negatively impacted our global retail sales growth and, in our international business, same store sales growth due to temporary store closures and changes in operating procedures and store hours resulting from actions taken to increase social distancing across the markets in which we operate.We continued our global expansion with the opening of 69 net new stores in the first quarter of 2020. Although we opened 143 gross new stores internationally, we also closed 104 stores, primarily resulting from the closure of our South Africa market, unrelated to
COVID-19,
comprising 71 stores in total. We also opened 30 net new stores in the U.S. during the first quarter of 2020. Overall, we believe our continued global store growth, along with our sales growth, emphasis on technology, operations, and marketing initiatives have combined to strengthen our brand.Global retail sales, excluding foreign currency impact, which includes total retail sales at franchise and Company-owned stores worldwide, increased 5.9% in the first quarter of 2020. This increase was driven by an increase in worldwide store counts during the trailing four quarters as well as U.S. and international same store sales growth. U.S. same store sales growth reflected positive sales trends and the continued success of our products, marketing and technology platforms. International same store sales growth also reflected continued positive performance.
Total revenues increased $37.1 million, or 4.4%, in the first quarter of 2020 due primarily to higher supply chain food volumes as well as higher global franchise revenues resulting from retail sales growth. These increases in revenues were partially offset by lower U.S. Company-owned store revenues resulting from the sale of 59 Company-owned stores to certain of our existing U.S. franchisees during the second quarter of 2019 (the “2019 Store Sale”). These changes in revenues are described in more detail below.
Income from operations increased $12.3 million, or 8.6%, in the first quarter of 2020, primarily driven by higher royalty revenues from U.S. and international franchised stores, as well as higher supply chain margins. Income from operations was negatively impacted by lower Company-owned store margins and changes in foreign currency exchange rates in the first quarter of 2020.
Net income increased $29.0 million, or 31.2%, in the first quarter of 2020, driven by lower tax expense resulting primarily from higher excess tax benefits from equity-based compensation and higher income from operations, as noted above. This increase in net income was partially offset by higher interest expense resulting from a higher average debt balance following our recapitalization transaction completed on November 19, 2019 (the “2019 Recapitalization”).
Revenues
| First Quarter |
First Quarter |
|||||||||||||||
| of 2020 |
of 2019 |
|||||||||||||||
| U.S. Company-owned stores |
$ | 102.3 |
11.7 |
% | $ | 123.5 |
14.8 |
% | ||||||||
| U.S. franchise royalties and fees |
104.7 |
12.0 |
% | 96.7 |
11.6 |
% | ||||||||||
| Supply chain |
512.7 |
58.7 |
% | 472.1 |
56.4 |
% | ||||||||||
| International franchise royalties and fees |
57.5 |
6.6 |
% | 54.6 |
6.5 |
% | ||||||||||
| U.S. franchise advertising |
95.8 |
11.0 |
% | 89.1 |
10.7 |
% | ||||||||||
| Total revenues |
$ | 873.1 |
100.0 |
% | $ | 836.0 |
100.0 |
% | ||||||||
Revenues primarily consist of retail sales from our Company-owned stores, royalties, advertising contributions and fees from our U.S. franchised stores, royalties and fees from our international franchised stores and sales of food, equipment and supplies from our supply chain centers to substantially all of our U.S. franchised stores and certain international franchised stores. Company-owned store and franchised store revenues may vary from period to period due to changes in store count mix. Supply chain revenues may vary significantly from period to period as a result of fluctuations in commodity prices as well as the mix of products we sell.
U.S. Stores Revenues
| First Quarter |
First Quarter |
|||||||||||||||
| of 2020 |
of 2019 |
|||||||||||||||
| U.S. Company-owned stores |
$ | 102.3 |
33.8 |
% | $ | 123.5 |
39.9 |
% | ||||||||
| U.S. franchise royalties and fees |
104.7 |
34.6 |
% | 96.7 |
31.3 |
% | ||||||||||
| U.S. franchise advertising |
95.8 |
31.6 |
% | 89.1 |
28.8 |
% | ||||||||||
| U.S. stores |
$ | 302.9 |
100.0 |
% | $ | 309.3 |
100.0 |
% | ||||||||
U.S. Company-Owned Stores
Revenues from U.S. Company-owned store operations decreased $21.2 million, or 17.1%, in the first quarter of 2020 due primarily to the 2019 Store Sale. This decrease in revenues was partially offset by higher same store sales. Company-owned same store sales increased 3.9% in the first quarter of 2020 and 2.1% in the first quarter of 2019.
15
U.S. Franchise Royalties and Fees
Revenues from U.S. franchise royalties and fees increased $8.0 million, or 8.3%, in the first quarter of 2020 due primarily to higher same store sales and an increase in the average number of U.S. franchised stores open during the period, due to net store growth and, to a lesser extent, the 2019 Store Sale. U.S. franchise same store sales increased 1.5% in the first quarter of 2020 and 4.1% in the first quarter of 2019. U.S. franchise royalties and fees further benefited from an increase in revenues from fees paid by franchisees for the use of our technology platforms.
U.S. Franchise Advertising
Revenues from U.S. franchise advertising increased $6.7 million, or 7.5%, in the first quarter of 2020 due primarily to higher same store sales and an increase in the average number of U.S. franchised stores open during the period, due to net store growth and, to a lesser extent, the 2019 Store Sale.
Supply Chain
Revenues from supply chain operations are primarily comprised of sales of food, equipment and supplies from our supply chain centers to substantially all of our U.S. franchised stores and certain international franchised stores. Supply chain revenues increased $40.6 million, or 8.6%, in the first quarter of 2020. This increase was due primarily to higher volumes from increased orders resulting from an increase in the average number of U.S. franchise stores open during the year and an increase in market basket pricing to stores. Our market basket pricing to stores increased 2.9% during the first quarter of 2020, which resulted in an estimated $15.9 million increase in supply chain revenue.
International Franchise Royalties and Fee Revenues
Revenues from international franchise royalties and fees increased $2.9 million, or 5.3%, in the first quarter of 2020. This increase was due primarily to an increase in the average number of international stores open during the period and higher same store sales. The negative impact of changes in foreign currency exchange rates of $1.4 million partially offset the increase in revenues in the first quarter of 2020. International franchise same store sales increased 1.5% in the first quarter of 2020 and increased 1.8% in the first quarter of 2019.
Cost of Sales / Operating Margin
| First Quarter |
First Quarter |
|||||||||||||||
| of 2020 |
of 2019 |
|||||||||||||||
| Consolidated revenues |
$ | 873.1 |
100.0 |
% | $ | 836.0 |
100.0 |
% | ||||||||
| Consolidated cost of sales |
532.9 |
61.0 |
% | 513.7 |
61.4 |
% | ||||||||||
| Consolidated operating margin |
$ | 340.2 |
39.0 |
% | $ | 322.3 |
38.6 |
% | ||||||||
Cost of sales consists primarily of Company-owned store and supply chain costs incurred to generate related revenues. Components of consolidated cost of sales primarily include food, labor, delivery and occupancy costs.
Consolidated operating margin (which we define as revenues less cost of sales) increased $17.9 million, or 5.5%, in the first quarter of 2020 due primarily to higher global franchise revenues and higher supply chain volumes. Franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on the operating margin.
As a percentage of revenues, the consolidated operating margin increased 0.4 percentage points in the first quarter of 2020. Company-owned store operating margin decreased 0.2 percentage points in the first quarter of 2020 and supply chain operating margin increased 0.1 percentage points in the first quarter of 2020. These changes in margin are more fully discussed below.
U.S. Company-Owned Stores Operating Margin
| First Quarter |
First Quarter |
|||||||||||||||
| of 2020 |
of 2019 |
|||||||||||||||
| Revenues |
$ | 102.3 |
100.0 |
% | $ | 123.5 |
100.0 |
% | ||||||||
| Cost of sales |
79.4 |
77.6 |
% | 95.5 |
77.4 |
% | ||||||||||
| Store operating margin |
$ | 22.9 |
22.4 |
% | $ | 27.9 |
22.6 |
% | ||||||||
The U.S. Company-owned store operating margin (which does not include certain store-level costs such as royalties and advertising) decreased $5.0 million, or 17.8%, in the first quarter of 2020 due primarily to the 2019 Store Sale.
16
As a percentage of store revenues, the store operating margin decreased 0.2 percentage points in the first quarter of 2020, as discussed in more detail below.
| • | Food costs increased 0.7 percentage points to 27.8% in the first quarter of 2020 due primarily to higher food prices. |
| • | Labor costs decreased 1.8 percentage points to 29.0% in the first quarter of 2020. The 2019 Store Sale contributed to the reduction in labor costs as a percentage of store revenues due to the high labor rates in the market in which the sold stores operated. The reduction in labor costs as a percentage of store revenues was partially offset by an increase in average labor rates in our remaining Company-owned store markets, including additional bonus pay resulting from the COVID-19 pandemic. |
| • | Insurance costs increased 0.5 percentage points to 3.4% in the first quarter of 2020 due primarily to unfavorable claims experience. |
| • | Delivery costs increased 0.4 percentage points to 3.6% in the first quarter of 2020 due primarily to a higher average per-mile reimbursement rate for our delivery drivers. |
| • | Occupancy costs increased 0.4 percentage points to 8.0% in the first quarter of 2020 due primarily to higher depreciation costs. |
Supply Chain Operating Margin
| First Quarter |
First Quarter |
|||||||||||||||
| of 2020 |
of 2019 |
|||||||||||||||
| Revenues |
$ | 512.7 |
100.0 |
% | $ | 472.1 |
100.0 |
% | ||||||||
| Cost of sales |
453.6 |
88.5 |
% | 418.1 |
88.6 |
% | ||||||||||
| Supply chain operating margin |
$ | 59.1 |
11.5 |
% | $ | 54.0 |
11.4 |
% | ||||||||
The supply chain operating margin increased $5.1 million, or 9.6%, in the first quarter of 2020, primarily driven by higher volumes from increased store orders. As a percentage of supply chain revenues, the supply chain operating margin increased 0.1 percentage points in the first quarter of 2020 due primarily to lower labor, delivery and insurance costs, offset in part by higher food costs.
General and Administrative Expenses
General and administrative expenses decreased $1.2 million, or 1.3%, in the first quarter of 2020, driven by lower performance-based compensation expense and lower advertising expenses, partially offset by higher health insurance costs. The decrease in advertising expenses resulted primarily from the 2019 Store Sale.
U.S. Franchise Advertising Expenses
U.S. franchise advertising expenses increased $6.7 million, or 7.5%, in the first quarter of 2020, consistent with the increase in U.S. franchise advertising revenue. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized, as our consolidated
not-for-profit
advertising fund is obligated to expend such revenues on advertising and these revenues cannot be used for general corporate purposes.Interest Expense, Net
Interest expense, net increased $4.1 million, or 12.2%, in the first quarter of 2020 driven primarily by higher average debt balances resulting from the 2019 Recapitalization.
The Company’s weighted average borrowing rate decreased to 4.0% in the first quarter of 2020, from 4.1% in the first quarter of 2019, resulting from the lower interest rates on the debt outstanding in 2020 following the 2019 Recapitalization as compared to the same period in 2019.
(Benefit) Provision for Income Taxes
Income tax expense decreased $20.8 million, or 126.1%, in the first quarter of 2020 due primarily to higher excess tax benefits on equity-based compensation, which are recorded as a reduction to the income tax provision, partially offset by higher
pre-tax
income. The Company recognized $30.4 million in excess tax benefits in the first quarter of 2020 as compared to $8.7 million in the first quarter of 2019, resulting from a significant increase in stock options exercised in the first quarter of 2020 as compared to the first quarter of 2019. The effective tax rate decreased to negative 3.7% during the first quarter of 2020 as compared to 15.1% in the first quarter of 2019.17
COVID-19
Impact As of April 21, 2020, nearly all of our U.S. stores remain open, with dining rooms closed and stores deploying contactless delivery and carryout solutions. Based on information reported to us by our master franchisees, we estimate that as of April 21, 2020, there are approximately 1,750 international stores that are temporarily closed.
Subsequent to the end of the first quarter, we borrowed $158.0 million under our outstanding variable funding notes as a precautionary measure due to the market uncertainty arising from
COVID-19.
These borrowings, along with our current unrestricted cash as of the end of the first quarter, provided us with approximately $358.8 million in cash on hand to provide enhanced financial flexibility.Beginning at the end of the first quarter of 2020, we have begun making significant investments in our team members as a result of this pandemic, including through enhanced sick pay policies and bonuses for our hourly corporate store and supply chain team members. While it is not possible at this time to estimate the full impact that
COVID-19
could have on our business, the continued spread of COVID-19
and the measures taken by the governments of countries affected could disrupt our continuing operations and supply chain and, as a result, could adversely impact our business, financial condition or results of operations.Liquidity and Capital Resources
Historically, we have operated with minimal positive working capital or negative working capital, primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities. We generally collect our receivables within three weeks from the date of the related sale, and we generally experience 35 to 45 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. The use of our ongoing cash flows from operations to service our debt obligations, invest in our business, pay dividends and repurchase our common stock reduces our working capital amounts. As of March 22, 2020, we had working capital of $149.7 million, excluding restricted cash and cash equivalents of $189.4 million, advertising fund assets, restricted, of $110.0 million and advertising fund liabilities of $106.8 million. Working capital includes total unrestricted cash and cash equivalents of $200.8 million. Subsequent to the end of the first quarter, we borrowed $158.0 million under our outstanding variable funding notes as a precautionary measure due to the market uncertainty arising from
COVID-19.
During the first quarter of 2020, we experienced increases in both U.S. and international same store sales versus the comparable period in the prior year. Additionally, our international and U.S. businesses grew store counts in the first quarter of 2020. These factors contributed to our continued ability to generate positive operating cash flows. We expect to continue to use our unrestricted cash and cash equivalents, cash flows from operations, excess cash from our recapitalization transactions and available borrowings under our variable funding notes to, among other things, fund working capital requirements, invest in our business, service our indebtedness, pay dividends and repurchase our common stock. We did not have any material commitments for capital expenditures as of March 22, 2020.
Based upon the current level of operations and anticipated growth, we believe that the cash generated from operations, our current unrestricted cash and cash equivalents and amounts available under our variable funding note facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for at least the next twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors” in our filings with the Securities and Exchange Commission. There can be no assurance that our business will generate sufficient cash flows from operations or that future borrowings will be available under the variable funding notes or otherwise to enable us to service our indebtedness, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance our fixed and floating rate notes and to service, extend or refinance our variable funding notes will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
Restricted Cash
As of March 22, 2020, we had approximately $140.1 million of restricted cash held for future principal and interest payments and other working capital requirements of our asset-backed securitization structure, $48.4 million of restricted cash held in a three-month interest reserve as required by the related debt agreements and $0.9 million of other restricted cash for a total of $189.4 million of restricted cash and cash equivalents. As of March 22, 2020, we also held $88.2 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s brand.
18
Long-Term Debt
As of March 22, 2020, we had approximately $4.10 billion of long-term debt, of which $43.4 million was classified as a current liability. Our fixed and floating rate notes from the recapitalizations we completed in 2019, 2018, 2017 and 2015 have original scheduled principal payments of $31.5 million in the remainder of 2020, $42.0 million in 2021, $897.0 million in 2022, $33.0 million in each of 2023 and 2024, $1.15 billion in 2025, $20.8 million in 2026, $1.28 billion in 2027, $6.8 million in 2028 and $614.3 million in 2029. As of March 22, 2020, we had no outstanding borrowings under our variable funding notes and $158.6 million available for borrowing, net of letters of credit issued of $41.4 million. The letters of credit are primarily related to our casualty insurance programs and supply chain center leases. As discussed above, subsequent to the first quarter of 2020, we borrowed $158.0 million of the remaining availability under our variable funding notes. Borrowings under the variable funding notes are available to fund our working capital requirements, capital expenditures and, subject to other limitations, other general corporate purposes including dividend payments and share repurchases.
Share Repurchase Programs
Our share repurchase programs have historically been funded by excess operating cash flows, excess proceeds from our recapitalization transactions and borrowings under our variable funding notes.
During the first week of the first quarter of 2020, we repurchased and retired 271,064 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $79.6 million. The Company’s Board of Directors authorized a share repurchase program to repurchase up to $1.0 billion of the Company’s common stock on October 4, 2019. As of March 22, 2020, the Company had a total remaining authorized amount for share repurchases of approximately $326.6 million.
During the first quarter of 2019, we repurchased and retired 33,549 shares for approximately $8.1 million.
Dividends
On February 19, 2020, the Company’s Board of Directors declared a $0.78 per share quarterly dividend on its outstanding common stock for shareholders of record as of March 13, 2020 which was paid on March 30, 2020. We had approximately $31.0 million accrued for common stock dividends at March 22, 2020.
Subsequent to the first quarter, on April 21, 2020, the Company’s Board of Directors declared a $0.78 per share quarterly dividend on its outstanding common stock for shareholders of record as of June 15, 2020 to be paid on June 30, 2020.
The following table illustrates the main components of our cash flows:
| (In millions) |
First Quarter of 2020 |
First Quarter of 2019 |
||||||
| Cash Flows Provided By (Used In) |
||||||||
| Net cash provided by operating activities |
$ | 95.4 |
$ | 97.0 |
||||
| Net cash used in investing activities |
(17.9 |
) | (12.0 |
) | ||||
| Net cash used in financing activities |
(82.1 |
) | (55.1 |
) | ||||
| Exchange rate changes |
(1.0 |
) | 0.1 |
|||||
| Change in cash and cash equivalents, restricted cash and cash equivalents |
$ | (5.6 |
) | $ | 30.0 |
|||
Operating Activities
Cash provided by operating activities decreased $1.6 million in the first quarter of 2020 due to the negative impact of changes in operating assets and liabilities of $32.2 million, partially offset by an increase in net income of $29.0 million and higher
non-cash
amounts of $1.6 million. The negative impact of changes in operating assets and liabilities was primarily related to the timing of payments on accounts payable and accrued liabilities in 2020 as well as the timing of collections on accounts receivable in 2020 as compared to 2019. These negative impacts of changes in operating assets and liabilities were partially offset by the positive impact of changes in advertising fund assets and liabilities, restricted in 2020 as compared to 2019, due primarily to the timing of advertising spend.Investing Activities
Cash used in investing activities was $17.9 million in the first quarter of 2020, which consisted primarily of $17.5 million of capital expenditures (driven primarily by investments in technological initiatives and supply chain centers).
Cash used in investing activities was $12.0 million in the first quarter of 2019, which consisted primarily of $12.2 million of capital expenditures (driven primarily by investments in technological initiatives and supply chain centers).
19
Financing Activities
Cash used in financing activities was $82.1 million in the first quarter of 2020, primarily related to the repurchase of approximately $79.6 million in common stock under our Board of Directors-approved share repurchase program in the first week of the quarter, repayments of long-term debt of $10.8 million and tax payments for restricted stock upon vesting of $1.8 million. These uses of cash were partially offset by proceeds from the exercise of stock options of $10.1 million.
Cash used in financing activities was $55.1 million in the first quarter of 2019, primarily related to repayments of long-term debt of $49.0 million (of which $40.0 million related to the repayment of borrowings under our variable funding notes) and the repurchase of approximately $8.1 million in common stock under our Board of Directors-approved share repurchase program.
Forward-Looking Statements
This filing contains various forward-looking statements about the Company within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”) that are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “could,” “should,” “estimates,” “expects,” “intends,” “may,” “will,” “plans,” “predicts,” “projects,” “seeks,” “approximately,” “potential,” “outlook” and similar terms and phrases that concern our strategy, plans or intentions, including references to assumptions. These forward-looking statements address various matters including information concerning future results of operations and business strategy, our anticipated profitability, estimates in same store sales growth, the growth of our U.S. and international business, ability to service our indebtedness, our future cash flows, our operating performance, trends in our business and other descriptions of future events reflect the Company’s expectations based upon currently available information and data. While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions. Important factors that could cause actual results to differ materially from our expectations are more fully described under the section headed “Risk Factors” in this filing and in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our 2019 Form
10-K.
Actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors, including but not limited to: our substantial increased indebtedness as a result of our recapitalization transactions and our ability to incur additional indebtedness or refinance or renegotiate key terms of that indebtedness in the future; the impact a downgrade in our credit rating may have on our business, financial condition and results of operations; our future financial performance and our ability to pay principal and interest on our indebtedness; the effectiveness of our advertising, operations and promotional initiatives; the strength of our brand, including our ability to compete in the U.S. and internationally in our intensely competitive industry, including the food service and food delivery markets; our ability to manage difficulties associated with or related to the COVID-19
pandemic and the effects of COVID-19
on our business and supply chain; the impact of social media and other consumer-oriented technologies on our business, brand and reputation; new product, digital ordering and concept developments by us, and other food-industry competitors; the impact of new or improved technologies and alternative methods of delivery on consumer behavior; our ability to maintain good relationships with and attract new franchisees, and franchisees’ ability to profitably manage their operations without negatively impacting our brand’s reputation; our ability to successfully implement cost-saving strategies; our ability and that of our franchisees to successfully operate in the current and future credit environment; changes in the level of consumer spending given general economic conditions, including interest rates, energy prices and consumer confidence; our ability and that of our franchisees to open new restaurants and keep existing restaurants in operation; changes in operating expenses resulting from changes in prices of food (particularly cheese), fuel and other commodity costs, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness, health epidemics or general health concerns, severe weather conditions and natural disasters may have on our business and the economies of the countries where we operate; changes in foreign currency exchange rates; our ability to retain or replace our executive officers and other key members of management and our ability to adequately staff our stores and supply chain centers with qualified personnel; our ability to find and/or retain suitable real estate for our stores and supply chain centers; changes in government legislation and regulations, including changes in laws and regulations regarding information privacy, payment methods consumer protection and social media; adverse legal judgments or settlements; food-borne illness or contamination of products; data breaches, power loss, technological failures, user error or other cyber risks threatening us or our franchisees; the effect of war, terrorism, catastrophic events or climate change; our ability to pay dividends and repurchase shares; changes in consumer preferences, spending and traffic patterns and demographic trends; actions by activist investors; changes in accounting policies; and adequacy of our insurance coverage. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this filing might not occur. All forward-looking statements speak only as of the date of this filing and should be evaluated with an understanding of their inherent uncertainty. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission, or other applicable law, we will not undertake, and specifically disclaim, any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances arising after the date of this filing, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on the forward-looking statements included in this filing or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In connection with the recapitalizations of our business, we issued fixed and floating rate notes and entered into variable funding notes and, at March 22, 2020, we are exposed to interest rate risk on borrowings under our floating rate notes and variable funding notes. As of March 22, 2020, we had no outstanding borrowings under our variable funding notes. Subsequent to the first quarter of 2020, we borrowed $158.0 million of the remaining availability under our variable funding notes. Our floating rate notes and our variable funding notes bear interest at fluctuating interest rates based on LIBOR.
There is currently uncertainty around whether LIBOR will continue to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate our loan documents and we cannot predict what alternative index would be negotiated with our lenders. As a result, our interest expense could increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.
Our fixed rate debt exposes the Company to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate.
We are exposed to market risks from changes in commodity prices. During the normal course of business, we purchase cheese and certain other food products that are affected by changes in commodity prices and, as a result, we are subject to volatility in our food costs. We may periodically enter into financial instruments to manage this risk. We do not engage in speculative transactions or hold or issue financial instruments for trading purposes. In instances when we use fixed pricing agreements with our suppliers, these agreements cover our physical commodity needs, are not
net-settled
and are accounted for as normal purchases.We have exposure to various foreign currency exchange rate fluctuations for revenues generated by our operations outside the U.S., which can adversely impact our net income and cash flows. Approximately 6.6% of our total revenues in the first quarter of 2020 and approximately 6.5% of our total revenues in the first quarter of 2019 were derived from our international franchise segment, a majority of which were denominated in foreign currencies. We also operate dough manufacturing and distribution facilities in Canada, which generate revenues denominated in Canadian dollars. We do not enter into financial instruments to manage this foreign currency exchange risk. A hypothetical 10% adverse change in the foreign currency rates for our international markets would have resulted in a negative impact on royalty revenues of approximately $5.1 million in the first quarter of 2020.
Item 4. Controls and Procedures.
Management, with the participation of the Company’s Chief Executive Officer, Richard E. Allison, Jr., and Executive Vice President and Chief Financial Officer, Jeffrey D. Lawrence, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rules
13a-15(e)
and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, Mr. Allison and Mr. Lawrence concluded that the Company’s disclosure controls and procedures were effective.During the quarterly period ended March 22, 2020, there were no changes in the Company’s internal control over financial reporting as defined in Rules
13a-15(f)
and 15d-15(f)
that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party to lawsuits, revenue agent reviews by taxing authorities and administrative proceedings in the ordinary course of business which include, without limitation, workers’ compensation, general liability, automobile and franchisee claims. We are also subject to suits related to employment practices as well as intellectual property, including patents.
On February 14, 2011, Domino’s Pizza LLC was named as a defendant in a lawsuit along with Fischler Enterprises of C.F., Inc., a franchisee, and Jeffrey S. Kidd, the franchisee’s delivery driver, filed by Yvonne Wiederhold, the plaintiff, as Personal Representative of the Estate of Richard E. Wiederhold, deceased. The case involved a traffic accident in which the franchisee’s delivery driver is alleged to have caused an accident involving a vehicle driven by Richard Wiederhold. Mr. Wiederhold sustained spinal injuries resulting in quadriplegia and passed away several months after the accident. The case went to trial in 2016 and the Company was found liable, but the verdict was reversed by the Florida Fifth District Court of Appeals in May 2018 and was remanded to the Ninth Judicial Circuit Court of Florida for a new trial. The case was tried again in June 2019 and the jury returned a $9.0 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 100% liable (after certain offsets and other deductions the final verdict was $8.0 million). The Company continues to deny liability and has filed an appeal.
While we may occasionally be party to large claims, including class action suits, we do not believe that any existing matters, individually or in the aggregate, will materially affect our financial position, results of operations or cash flows.
Item 1A. Risk Factors.
Except as set forth below, there have been no material changes with respect to those risk factors previously disclosed in Item 1A “Risk Factors” in Part I of our 2019 Form
10-K.
Our operations and results could be adversely affected by the recent outbreak of the disease caused by the novel coronavirus
(COVID-19).
The recent outbreak of disease caused by the novel coronavirus
(COVID-19),
which has been declared a pandemic by the World Health Organization, has spread across the globe and is impacting worldwide economic activity. A public health pandemic such as COVID-19
poses the risk that we and/or our employees, franchisees, supply chain centers, suppliers, customers and other partners may be, or may continue to be, prevented from conducting business activities for an indefinite period of time, including due to shutdowns, travel restrictions, social distancing requirements, stay at home orders and advisories and other restrictions that have been or may be suggested or mandated by governmental authorities, or due to the impact of the disease itself on the workforce of those businesses. In addition, COVID-19
may impact the willingness of customers to purchase food prepared outside of the home. The COVID-19
pandemic may also have the effect of heightening many of the other risks described in the ‘‘Risk Factors’’ section of our 2019 Form 10-K,
including but not limited to those relating to our growth strategy, our supply chain and increased food and labor costs, disruption in operations, loss of key employees, our indebtedness, general economic conditions and our international operations.In response to governmental requirements, we and our franchisees have, among other measures, temporarily closed certain of our stores, modified certain stores’ hours and closed locations to
in-store
dining, and continue to monitor additional developments. We have also made additional operating changes to respond to changes in consumer behavior resulting from COVID-19.
While it is not possible at this time to estimate the impact that COVID-19
could have on our business, the continued spread of the virus and the measures taken by governments or by us in response have disrupted our operations and could disrupt our supply chain, including our access to face coverings and gloves for use in our operations, which could adversely impact our business, financial condition and results of operations. The COVID-19
pandemic and mitigation measures have also had an adverse impact on global economic conditions, which could have an adverse effect on our business and financial condition. The Company’s sales and operating results may be affected by uncertain or changing economic and market conditions arising in connection with and in response to the COVID-19
pandemic, including inflation, deflation, prolonged weak consumer demand, political instability or other changes. The significance of the operational and financial impact to the Company will depend on how long and widespread the disruptions caused by COVID-19,
and the corresponding response to contain the virus and treat those affected by it, prove to be.22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
c. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
| Maximum Approximate Dollar |
||||||||||||||||
| Total Number of Shares |
Value of Shares that |
|||||||||||||||
| Total Number |
Purchased as Part of |
May Yet Be Purchased |
||||||||||||||
| of Shares |
Average Price Paid |
Publicly Announced |
Under the Program |
|||||||||||||
| Period |
Purchased (1) |
Per Share |
Program (2) |
(in thousands) |
||||||||||||
| Period #1 (December 30, 2019 to January 26, 2020) |
272,092 |
$ | 293.62 |
271,064 |
$ | 326,552 |
||||||||||
| Period #2 (January 27, 2020 to February 23, 2020) |
2,093 |
272.41 |
— |
326,552 |
||||||||||||
| Period #3 (February 24, 2020 to March 22, 2020) |
2,763 |
342.55 |
— |
326,552 |
||||||||||||
| Total |
276,948 |
$ | 293.95 |
271,064 |
$ | 326,552 |
||||||||||
| (1) | 5,884 shares in the first quarter of 2020 were purchased as part of the Company’s employee stock payroll deduction plan. During the first quarter, the shares were purchased at an average price of $309.02. |
| (2) | As of March 22, 2020, the Company had a Board of Directors-approved share repurchase program for up to $1.0 billion of our common stock, of which $326.6 million remained available for future purchases of our common stock. Authorization for the repurchase program may be modified, suspended, or discontinued at any time. The repurchase of shares in any particular period and the actual amount of such purchases remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
| Exhibit Number |
Description | |||
| 10.1 |
||||
| 31.1 |
||||
| 31.2 |
||||
| 32.1 |
||||
| 32.2 |
||||
| 101.INS |
XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document. | |||
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document. | |||
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||
| 104 |
Cover page Interactive Data File (formatted as Inline XBRL and contained in exhibit 101). | |||
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| DOMINO’S PIZZA, INC. (Registrant) | ||
| Date: April 23, 2020 |
/s/ Jeffrey D. Lawrence | |
| Jeffrey D. Lawrence | ||
| Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) |
24