Domino’s Pizza Announces Third Quarter 2007 Financial Results
ANN ARBOR, Mich., Oct. 16 /PRNewswire-FirstCall/ — Domino’s Pizza, Inc. , the recognized world leader in pizza delivery, today announced results for the third quarter ended September 9, 2007. Net income was negatively impacted versus the prior year by increased interest expense as a result of higher borrowings under the Company’s new debt facility and a continued challenging domestic environment. The International same store sales growth of 8.3% during the quarter, its highest in nearly three years, marked the 55th consecutive quarter of International same store sales growth.
Highlights: Third Third First Three First Three Quarter of Quarter of Quarters of Quarters of (dollars in millions, 2007 2006 2007 2006 except per share data) Net income $11.0 $24.5 $21.7 $75.2 Weighted average 63,971,505 63,405,773 64,534,801 64,856,318 diluted shares Diluted earnings per $0.17 $0.39 $0.34 $1.16 share, as reported Items affecting $- $(0.04) $0.49 $(0.09) comparability (see section below) Diluted earnings per $0.17 $0.34 $0.82 $1.07 share, as adjusted — Net income was down 55.2% for the third quarter, driven primarily by increased interest expense from higher borrowings under the Company’s new debt facility and, to a lesser extent, higher food costs and a decrease in distribution profits resulting from lower volumes. This was offset in part by continued strong performance in international operations. — Diluted EPS was $0.17 on an as-reported basis for the third quarter, down $0.22 from the as-reported amount in the prior year period. However, excluding items affecting comparability, diluted EPS declined $0.17, driven primarily by lower net income as described in more detail above. The increase in ongoing interest expense under the Company’s new debt facility resulted in a decrease in diluted EPS of approximately $0.13 in the third quarter and $0.23 in the first three quarters of 2007. (See the Items Affecting Comparability section and the Comments on Regulation G section.) Third Third Quarter Quarter of 2007 of 2006 Same store sales growth: (versus the prior year period) Domestic Company-owned stores + 0.8 % (2.3)% Domestic franchise stores (2.0)% (3.2)% Domestic stores (1.6)% (3.1)% International stores + 8.3 % + 3.0 % Global retail sales growth: (versus the prior year period) Domestic stores (0.4)% (1.3)% International stores + 20.4 % + 11.5 % Total + 7.2 % + 3.1 % Domestic Domestic Total Company- Franchise Domestic International owned Stores Stores Stores Stores Total Store counts: Store count at 567 4,561 5,128 3,321 8,449 June 17, 2007 Openings 1 32 33 67 100 Closings (2) (23) (25) (14) (39) Transfers (1) 1 – – – Store count at 565 4,571 5,136 3,374 8,510 September 9, 2007 Third quarter (2) 10 8 53 61 2007 net growth Trailing four – 36 36 236 272 quarters net growth
David A. Brandon, Domino’s Chairman and Chief Executive Officer, said: “Unprecedented cost pressures and a weak consumer environment negatively impacted our domestic results in the quarter, which made striking the right balance between increasing prices, while operating in a period of declining traffic, very difficult. Our Team USA stores did the best job of managing this challenge, and we continue to share our results and tactics with our franchise organization to assist and support them. We are not standing idly by while we face these challenges, as our recently-announced management changes and selection of a new creative agency demonstrate. The elevation of Patrick Doyle to President of Domino’s U.S.A. is a great help to me as we bring intense focus to our domestic sales challenges. We’re also very excited that our new creative agency, Crispin Porter + Bogusky, will bring some fresh advertising and unique perspective to our brand message going forward.”
Brandon continued: “We are proud of our International division for leading the way with tremendous results and their best sales showing since the first quarter of 2005. We are clearly navigating through a very challenging period for our company. However, I believe the inherent strength of our highly- resilient business model; our new leadership structure; our new advertising agency; our strong international growth and expansion; and our culture of perseverance and doing what it takes to WIN will bode well for the future growth and success of our company.”
The Company reported that its Board of Directors has approved moving forward on a three-year employment agreement for Dave Brandon through 2010 at its October 11th meeting. The Company and Mr. Brandon are in the process of negotiating the terms of that agreement.
Conference Call Information
The Company plans to file its quarterly report on Form 10-Q this morning. Additionally, as previously announced, Domino’s Pizza, Inc. will hold a conference call today at 11 a.m. (Eastern) to review its third quarter 2007 financial results. The call can be accessed by dialing (888) 306-6182 (U.S./Canada) or (706) 634-4947 (International). Ask for the Domino’s Pizza conference call. The call will also be webcast at http://www.dominos.com/. If you are unable to participate on the call, a replay will be available through midnight November 16, 2007 by dialing (800) 642-1687 (U.S./Canada) or (706) 645-9291 (International), Conference ID 2474410. The webcast will be archived for 30 days on http://www.dominos.com/.
Share Repurchases
As previously communicated, the Board of Directors approved an open market share repurchase program for up to $200 million of the Company’s common stock. During the third quarter of 2007, the Company repurchased and retired approximately 1.1 million shares of its common stock under the open market share repurchase program for approximately $18.0 million, or an average price of $17.08 per share.
Items Affecting Comparability
The Company’s reported financial results for the first three quarters of 2007 as well as the third quarter and first three quarters of 2006, included several items that affect the comparability to the reported financial results in the same periods in the prior year, including:
(i) the impact of the Company’s re-capitalization, which was completed in April 2007, (ii) the 2007 impact of the reserve recorded in the second quarter in connection with legal matters in California, and (iii) the 2006 impact of the sale of Company-owned France and Netherlands operations.
The table below presents the items that affect comparability between the 2007 and 2006 financial results. Management believes that disclosing the following information is critical to the understanding of our financial results for the third quarter and first three quarters of 2007 as compared to similar periods in 2006 (See the Comments on Regulation G section). In addition to the items noted in the table below, the Company’s recapitalization had a significant impact on ongoing interest expense as a result of higher debt levels. This impacts comparability to prior year periods. The increase in ongoing interest expense resulted in a decrease in diluted EPS of approximately $0.13 in the third quarter and approximately $0.23 in the first three quarters of 2007.
Third Quarter First Three Quarters Diluted Diluted EPS EPS (in thousands) Pre-tax After-tax Impact Pre-tax After-tax Impact 2007 items affecting comparability: Recapitalization expenses: General and – – – $(2,873) $(1,781) $(0.03) administrative expenses (1) Additional interest – – – 2,632 2,632 0.04 income on recapitalization funds (2) Additional interest – – – (33,878) (21,005) (0.32) expense (3) Premium on bond – – – (13,294) (8,242) (0.13) extinguishment (4) Subtotal – – – (47,413) (28,396) (0.44) Legal expenses (5) – – – (5,000) (3,100) (0.05) 2007 items affecting – – – $(52,413) $(31,496) $(0.49) comparability 2006 items affecting comparability: Gain on the sale of France and Netherlands operations and related tax effects (6) $2,825 $2,682 $0.04 $2,825 $5,571 $0.09 (1) Primarily includes stock compensation expenses, payroll taxes related to the payments made to certain stock option holders and legal and professional fees incurred in connection with the recapitalization, including the tender offers for Domino’s Pizza, Inc. common stock and Domino’s, Inc. senior subordinated notes due 2011. (2) Includes tax-exempt interest income that was earned on funds received in connection with the recapitalization prior to disbursement of the funds. (3) Includes the write-off of deferred financing fees and bond discount related to extinguished debt as well as net expense incurred in connection with the settlement of interest rate derivatives. (4) Represents the premium paid to bond holders in the tender offer for the Domino’s, Inc. senior subordinated notes due 2011. (5) Represents expenses incurred in connection with certain legal matters in California. (6) Represents the gain recognized in the third quarter of 2006 on the sale of our Company-owned France and Netherlands operations of approximately $2.8 million and the related tax benefit recognized in the second quarter of 2006. Liquidity As of September 9, 2007, the Company had: — $1.7 billion in total debt, — $114.9 million of cash and cash equivalents, — no borrowings under its $150.0 million revolving credit facility and, — letters of credit issued under its revolving credit facility of $30.7 million.
The Company’s cash borrowing rate for the third quarter of 2007 was 6.1%. The Company incurred $12.7 million in capital expenditures during the first three quarters of 2007 versus $14.8 million in the first three quarters of the prior year.
Comments on Regulation G
In addition to the GAAP financial measures set forth in this press release, the Company has included a non-GAAP financial measure within the meaning of Regulation G due to items affecting comparability between fiscal quarters. Additionally, the Company has included metrics commonly used in the quick-service restaurant industry that are important to understanding Company performance.
The Company uses “Diluted EPS, as adjusted,” which is calculated as reported Diluted EPS less the items that affect comparability to the prior year periods discussed above. The most directly comparable financial measure calculated and presented in accordance with GAAP is Diluted EPS. The Company’s management believes that the Diluted EPS, as adjusted measure is important and useful to investors and other interested persons and that such persons benefit from having a consistent basis for comparison between reporting periods.
The Company uses “Global retail sales” to refer to total worldwide retail sales at Company-owned and franchise stores. Management believes global retail sales information is useful in analyzing revenues, because franchisees pay royalties that are based on a percentage of franchise retail sales. Management reviews comparable industry global retail sales information to assess business trends and to track the growth of the Domino’s Pizza(R) brand. In addition, distribution revenues are directly impacted by changes in domestic franchise retail sales. Retail sales for franchise stores are reported to the Company by its franchisees and are not included in Company revenues.
The Company uses “Same store sales growth,” calculated including only sales from stores that also had sales in the comparable period of the prior year. International same store sales growth is calculated similarly to domestic same store sales growth. Changes in international same store sales are reported on a constant dollar basis, which reflects changes in international local currency sales.
About Domino’s
Founded in 1960, Domino’s Pizza is the recognized world leader in pizza delivery. Domino’s is listed on the NYSE under the symbol “DPZ.” Through its primarily franchised system, Domino’s operates a network of 8,510 franchised and Company-owned stores in the United States and more than 55 countries. The Domino’s Pizza(R) brand, named a Megabrand by Advertising Age magazine, had global retail sales of nearly $5.1 billion in 2006, comprised of $3.2 billion domestically and nearly $1.9 billion internationally. During the third quarter of 2007, the Domino’s Pizza(R) brand had global retail sales of more than $1.2 billion, comprised of approximately $725.7 million domestically and approximately $510.7 million internationally. Domino’s Pizza was named “Chain of the Year” by Pizza Today magazine, the leading publication of the pizza industry and is the “Official Pizza of NASCAR(R).” Customers can place orders online in English and Spanish by visiting http://www.dominos.com/ or from a Web-enabled cell phone by visiting mobile.dominos.com. More information on the Company, in English and Spanish, can be found on the Web at http://www.dominos.com/.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
This press release contains forward-looking statements. These forward- looking statements relating to our anticipated profitability and operating performance reflect management’s expectations based upon currently available information and data. However, actual results are subject to future risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that can cause actual results to differ materially include: our increased leverage as a result of the borrowings under our asset-backed securitization facility; the uncertainties relating to litigation; consumer preferences, spending patterns and demographic trends; the effectiveness of our advertising, operations and promotional initiatives; our ability to retain key personnel; new product and concept developments by us and other food- industry competitors; the ongoing profitability of our franchisees and the ability of Domino’s Pizza and our franchisees to open new restaurants; changes in food prices, particularly cheese, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness or general health concerns may have on our business and the economy of the countries in which we operate; severe weather conditions and natural disasters; changes in our effective tax rate; changes in government legislation and regulations; adequacy of our insurance coverage; costs related to future financings and changes in accounting policies. Further information about factors that could affect our financial and other results is included in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended December 31, 2006. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required to be reported under the rules and regulations of the Securities and Exchange Commission.
TABLES TO FOLLOW Domino’s Pizza, Inc. and Subsidiaries Condensed Consolidated Statements of Income Fiscal Quarter Ended September 9, % of September 10, % of 2007 Total 2006 Total Revenues Revenues (In thousands, except per share data) Revenues: Domestic Company-owned $89,264 $89,284 stores Domestic franchise 35,832 35,696 Domestic distribution 183,670 175,531 International 28,552 26,158 Total revenues 337,318 100.0% 326,669 100.0% Cost of sales: Domestic Company- owned stores 73,818 71,785 Domestic distribution 167,360 157,070 International 12,212 12,035 Total cost of sales 253,390 75.1% 240,890 73.7% Operating margin 83,928 24.9% 85,779 26.3% General and administrative 40,167 11.9% 35,066 10.7% Income from operations 43,761 13.0% 50,713 15.6% Interest expense, net 25,514 7.6% 13,219 4.1% Income before provision for income taxes 18,247 5.4% 37,494 11.5% Provision for income taxes 7,256 2.1% 12,970 4.0% Net income $10,991 3.3% $24,524 7.5% Earnings per share: Common stock – diluted $0.17 $0.39 Domino’s Pizza, Inc. and Subsidiaries Condensed Consolidated Statements of Income Three Fiscal Quarters Ended September 9, % of September 10, % of 2007 Total 2006 Total Revenues Revenues (In thousands, except per share data) Revenues: Domestic Company- owned stores $277,625 $275,987 Domestic franchise 110,479 109,588 Domestic distribution 546,072 527,967 International 82,752 88,523 Total revenues 1,016,928 100.0% 1,002,065 100.0 % Cost of sales: Domestic Company- owned stores 221,766 218,221 Domestic distribution 492,947 471,317 International 35,350 43,688 Total cost of sales 750,063 73.8% 733,226 73.2% Operating margin 266,865 26.2% 268,839 26.8% General and administrative 129,073 12.7% 117,836 11.8% Income from operations 137,792 13.5% 151,003 15.0% Interest expense, net 90,464 8.9% 37,704 3.7% Other 13,294 1.3% – – Income before provision for income taxes 34,034 3.3% 113,299 11.3% Provision for income 12,329 1.2% 38,117 3.8% taxes Net income $21,705 2.1% $75,182 7.5% Earnings per share: Common stock – diluted $0.34 $1.16 Domino’s Pizza, Inc. and Subsidiaries Condensed Consolidated Balance Sheets September 9, 2007 December 31, 2006 (In thousands) Assets Current assets: Cash and cash equivalents $114,917 $38,222 Accounts receivable 68,035 65,697 Inventories 23,513 22,803 Advertising fund assets, restricted 24,490 18,880 Other assets 29,193 20,703 Total current assets 260,148 166,305 Property, plant and equipment, net 108,834 117,144 Other assets 128,185 96,754 Total assets $497,167 $380,203 Liabilities and stockholders’ deficit Current liabilities: Current portion of long-term debt $304 $1,477 Accounts payable 48,683 55,036 Accrued interest 41,273 19,499 Advertising fund liabilities 24,490 18,880 Other accrued liabilities 63,184 60,309 Total current liabilities 177,934 155,201 Long-term liabilities: Long-term debt, less current portion 1,704,874 740,120 Other accrued liabilities 48,618 49,775 Total long-term liabilities 1,753,492 789,895 Total stockholders’ deficit (1,434,259) (564,893) Total liabilities and stockholders’ deficit $497,167 $380,203 Domino’s Pizza, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows Three Fiscal Quarters Ended September 9, September 10, 2007 2006 (In thousands) Cash flows from operating activities: Net income $21,705 $75,182 Adjustments to reconcile net income to net cash flows provided by operating activities: Depreciation and amortization 21,740 22,390 Amortization and write-off of deferred financing costs and debt discount 34,773 2,568 Benefit for deferred income taxes (4,530) (2,570) Non-cash compensation expense 6,069 3,412 Other 2,531 (3,832) Changes in operating assets and liabilities (16,069) (7,034) Net cash provided by operating activities 66,219 90,116 Cash flows from investing activities: Capital expenditures (12,676) (14,794) Proceeds from sale of property, plant and equipment 3,317 12,974 Other (58) 73 Net cash used in investing activities (9,417) (1,747) Cash flows from financing activities: Repurchase of common stock (18,078) (145,000) Common stock dividends and equivalents (896,972) (14,875) Proceeds from issuance of long-term debt 2,509,938 100,000 Cash paid for financing costs (58,876) (250) Repayments of long-term debt and capital lease obligation (1,547,102) (95,194) Tax benefit from stock options 21,907 4,112 Other 9,071 6,907 Net cash provided by (used in) financing activities 19,888 (144,300) Effect of exchange rate changes on cash and cash equivalents 5 55 Increase (decrease) in cash and cash equivalents 76,695 (55,876) Cash and cash equivalents, at beginning of period 38,222 66,919 Cash and cash equivalents, at end of period $114,917 $11,043
Domino’s Pizza, Inc.
CONTACT: Lynn Liddle, Executive Vice President, Communications andInvestor Relations of Domino’s Pizza, +1-734-930-3008
Web site: http://www.dominos.com/