Dominos Pizza Announces Second Quarter 2007 Financial Results

Domino’s Pizza Announces Second Quarter 2007 Financial Results

Posts Positive Domestic and International Same Store Sales Gains

ANN ARBOR, Michigan, July 24, 2007: Domino’s Pizza, Inc. (NYSE: DPZ), the recognized world leader in pizza delivery, today announced results for the second quarter ended June 17, 2007. Management noted that, although it posted positive same store sales both domestically and internationally, the quarter’s earnings were significantly impacted by expenses associated with the Company’s recapitalization, which was completed in April 2007.

 

Highlights:

(dollars in millions, except per share data)

Second Quarter of 2007

 

Second Quarter of 2006

 

First Two Quarters of 2007

 

First Two Quarters of 2006

Revenues

$340.3

 

$327.7

 

$679.6 

 

$675.4

Net income

$    2.3

 

 $  24.5 

 

$  10.7

 

$  50.7

 

 

 

 

 

 

 

 

Weighted average diluted shares

64,717,208

 

63,340,062

 

64,798,109

 

65,522,650

 

 

 

 

 

 

 

 

Diluted earnings per share, as reported

$  0.04

 

$  0.39

 

$  0.17

 

$  0.77

Items affecting comparability (see section below)

$  0.24

 

$ (0.05) 

 

$  0.49

 

$ (0.04)

Diluted earnings per share, as adjusted

$  0.28

 

$  0.34

 

$  0.65

 

$  0.73

 

·      Revenues were up 3.8% for the second quarter, due primarily to an increase in domestic distribution revenues, driven by higher food prices, primarily cheese, and to a lesser extent, higher domestic Company-owned store and domestic franchise revenues, driven by increases in same store sales.

·      Net income was down 90.5% for the second quarter, driven primarily by the impact of the Company’s recapitalization, offset in part by domestic same store sales growth and continued strong performance in international operations.

·      Diluted EPS was $0.04 on an as-reported basis for the second quarter, which reflected $0.24 per share of special items that affect comparability to the prior year period.  As a result, diluted EPS on an as-reported basis was down $0.35 from the as-reported amount in the prior year period. However, excluding the effect of these special items, diluted EPS declined by $0.06, driven by higher interest expense related to increased debt levels as a result of the Company’s recapitalization.  (See the Items Affecting Comparability section and the Comments on Regulation G section.)  

 

 

Second

 Quarter of 2007

 

Second

 Quarter of 2006

Same store sales growth: (versus the prior year period)

 

 

 

  Domestic Company-owned stores

+  4.4%

 

(3.2)%

  Domestic franchise stores

+  1.8%

 

(5.2)%

  Domestic stores

+  2.1%

 

(4.9)%

  International stores

+  3.9%

 

+  5.7%

 

 

 

 

Global retail sales growth: (versus the prior year period)

 

 

 

  Domestic stores

+  3.2%

 

(3.9)%

  International stores

+15.3%

 

+11.5%

  Total

+  7.7%

 

+  1.3%

 

 

Domestic

Company-owned Stores

 

Domestic Franchise Stores

 

Total

Domestic Stores

 

 

International Stores

 

 

 

Total

Store counts:

 

 

 

 

 

 

 

 

 

  Store count at March 25, 2007

570

 

4,559

 

5,129

 

3,265

 

8,394

  Openings

4

 

12

 

16

 

66

 

82

  Closings

(1)

 

(16)

 

(17)

 

(10)

 

(27)

  Transfers

(6)

 

6

 

 

 

  Store count at June 17, 2007

567

 

4,561

 

5,128

 

3,321

 

8,449

  Second quarter 2007 net growth

(3)

 

2

 

(1)

 

56

 

55

  Trailing four quarters net growth

(10)

 

35

 

25

 

234

 

259

 

David A. Brandon, Domino’s Chairman and Chief Executive Officer, said: “We are pleased to report the sales momentum we created in our domestic system during the first quarter continued into the second quarter. The marketing and operational initiatives we implemented in our Team USA stores have been duplicated by many of our franchised stores over the past few quarters, and have helped drive the sales gains we are reporting today.  And, we continue to benefit from the strong store growth and same store sales growth we have come to expect from our International division.” 

Brandon continued: “Our positive sales momentum is particularly important at this time, as we are currently experiencing a challenging cost environment with labor, commodity and energy prices all rising in unison, putting a short-term strain on store margins. Although we have nearly 47-years of experience successfully managing through commodity pricing cycles and fluctuating cost pressures, the current situation is unique due to the number of significant cost increases we are incurring at one time. We believe these conditions will lead to a material price increase in the pizza category.”  

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 11a.m. (Eastern) to review its second 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 web cast at www.dominos.com.  If you are unable to participate on the call, a replay will be available through midnight August 24, 2007 by dialing (800) 642-1687 (U.S./Canada) or (706) 645-9291 (International), Conference ID 2473543.  The web cast will be archived for 30 days on www.dominos.com.

California Legal Matter


A state of California regulation, which provides that employees are entitled to an unpaid 30-minute, duty-free meal period after working for five hours and a paid 10-minute rest period per four hours of work, has resulted in lawsuits affecting Domino’s Pizza and others in the restaurant sector.   On June 10, 2003, Vega v. Domino’s Pizza LLC was filed, in Orange County Superior Court, alleging that Domino’s Pizza failed to provide meal and rest breaks to employees. Employers who fail to provide a meal or rest period “shall pay the employee one additional hour of pay” for each work day that the period is not provided. A central issue in the case has been whether “one additional hour of pay” constitutes a wage subject to a three-year statute of limitations, or a penalty subject to a one-year statute of limitations. On April 16, 2007, the California Supreme Court ruled that the additional hour of pay should be designated as “wages” and therefore subject to the three (3) year statue of limitations.  Based on the current status of these matters and based on management’s best estimate of future potential loss, the Company reserved $5.0 million for these matters during the second quarter of 2007.

Items Affecting Comparability

The Company’s reported financial results for the second quarter and first two quarters of 2007 included several items that affect the comparability to the reported financial results in the comparable periods in the prior year, including:

(i)       the impact of the Company’s recapitalization, which was completed in April 2007,

(ii)     the 2007 impact of the aforementioned reserve recorded in connection with legal matters in California, and

(iii)   the 2006 tax 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 second quarter and first two quarters of 2007 as compared to similar periods in 2006 (See the Comments on Regulation G section). 

                                                                                                                   

 

Second Quarter

 

First Two Quarters

 

 

(in thousands)

 

 

Pre-tax

 

 

 

After-tax

 

Diluted EPS Impact

 

 

 

Pre-tax

 

 

 

After-tax

 

Diluted EPS Impact

2007 items affecting comparability:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recapitalization expenses:

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses (1)

$ (2,418)

 

$ (1,499)

 

$(0.02)

 

$ (2,873)

 

$ (1,781)

 

$(0.03)

Additional interest income on

   recapitalization funds (2)

 

2,632

 

 

2,632

 

 

0.04

 

 

2,632

 

 

2,632

 

 

0.04

Additional interest expense (3)

(21,913)

 

(13,586)

 

(0.21)

 

(33,878)

 

(21,005)

 

(0.32)

Premium on bond extinguishment (4)

N/A

 

N/A

 

 N/A

 

(13,294)

 

(8,242)

 

(0.13)

   Subtotal

(21,699)

 

(12,453)

 

(0.19)

 

(47,413)

 

(28,396)

 

(0.44)

 

 

 

 

 

 

 

 

 

 

 

 

Legal expenses (5)

(5,000)

 

(3,100)

 

(0.05)

 

(5,000)

 

(3,100)

 

(0.05)

2007 items affecting comparability

$(26,699)

 

$(15,553)

 

$(0.24)

 

$(52,413)

 

$(31,496)

 

$(0.49)

 

 

 

 

 

 

 

 

 

 

 

 

2006 item affecting comparability:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit related to sale of France

   and the Netherlands (6)

 

N/A

 

 

$   2,889

 

 

$ 0.05

 

 

N/A

 

 

$   2,889

 

 

$ 0.04

 

(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 tax benefit recognized in the second quarter of 2006 relating to the third quarter 2006 sale of the France and Netherlands operations. 

 


Liquidity

As of June 17, 2007, the Company had:

·         $1.7 billion in total debt,

·         $93.3 million of cash and cash equivalents,

·         $5.0 million of 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 second quarter of 2007 was 6.1%. The Company incurred $8.7 million in capital expenditures during the first two quarters of 2007 versus $9.4 million in the first two 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® 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 8,449 franchised and Company-owned stores in the United States® 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 second quarter of 2007, the Domino’s Pizza® brand had global retail sales of more than $1.2 billion, comprised of approximately $754.7 million domestically and approximately $492.5 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®.”  More information on the Company, in English and Spanish, can be found on the web at www.dominos.com. and more than 55 countries. The Domino’s Pizza 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 second quarter of 2007, the Domino’s Pizza® brand had global retail sales of more than $1.2 billion, comprised of approximately $754.7 million domestically and approximately $492.5 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®.”  More information on the Company, in English and Spanish, can be found on the web at www.dominos.com.