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 2022 and 2021 first quarters referenced herein represent the twelve-week periods ended March 27, 2022 and March 28, 2021, respectively. In this section, we discuss the results of our operations for the first quarter of 2022 as compared to the first quarter of 2021.
Overview
Domino’s is the largest pizza company in the world with more than 19,000 locations in over 90 markets around the world as of March 27, 2022, and operates two distinct service models within its stores with a significant business in both delivery and carryout. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. We are a highly recognized global brand, and we focus on serving neighborhoods locally through our large worldwide network of franchise owners and U.S. Company-owned stores. We are primarily a franchisor, with approximately 98% of Domino’s stores currently owned and operated by our independent franchisees. Franchising enables an individual to be his or her own employer and maintain control over all employment-related matters and pricing decisions, while also benefiting from the strength of the Domino’s global brand and operating system with limited capital investment by us.
The Domino’s business model is straightforward: Domino’s stores handcraft and serve quality food at a competitive price, with easy ordering access and efficient service, enhanced by our technological innovations. Our hand-tossed dough is made fresh and distributed to stores around the world by us and our franchisees.
Domino’s generates revenues and earnings by charging royalties and fees to our franchisees. Royalties are ongoing percent-of-sales fees for use of the Domino’s® brand marks. We also generate revenues and earnings by selling food, equipment and supplies to franchisees through our supply chain operations, primarily in the U.S. and Canada, and by operating a number of Company-owned stores in the United States. 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 may profit by sub-franchising and selling food and equipment to those sub-franchisees, as well as by running pizza stores. We believe that everyone in the system can benefit, including the end consumer, who can purchase Domino’s menu items for themselves and their family conveniently and economically.
The Domino’s business model can yield strong returns for our franchise owners and our Company-owned stores. It can also yield significant cash flows to us, through a consistent franchise royalty payment and supply chain revenue stream, with moderate capital expenditures. We have historically returned cash to shareholders through dividend payments and share repurchases. We believe we have a proven business model for success, which includes leading with technology, service and product innovation and leveraging our global scale, which has historically driven strong returns for our shareholders.
First Quarter of 2022 Highlights
•Global retail sales, excluding foreign currency impact (which includes total retail sales at Company-owned and franchised stores worldwide), increased 3.6% as compared to the first quarter of 2021. U.S. retail sales declined 1.4% and international retail sales, excluding foreign currency impact, increased 8.4% as compared to the first quarter of 2021.
•Same store sales declined 3.6% in our U.S. stores and increased 1.2% in our international stores (excluding foreign currency impact).
•Revenues increased 2.8%.
•Income from operations decreased 11.8%.
•Net income decreased 22.8%.
•Diluted earnings per share decreased 16.7%.
Domino’s experienced global retail sales growth during the first quarter of 2022. We believe our commitment to value, convenience, quality and new products continues to keep consumers engaged with the brand. We continued our strong international same store sales performance with the 113th consecutive quarter of positive international same store sales (excluding foreign currency impact). U.S. same store sales declined 3.6% in the first quarter of 2022, rolling over an increase in U.S. same store sales of 13.4% in the first quarter of 2021. The decrease in U.S. same store sales was attributable in part to lower order counts resulting from labor shortages affecting store hours and staffing levels in many of our markets, as well as economic stimulus activity in the U.S in the first quarter of 2021 in response to the COVID-19 pandemic which did not recur in the first quarter of 2022. The decline in U.S. store order counts was partially offset by a higher average ticket per transaction resulting from higher menu prices as well as more items purchased per transaction and increases to our average delivery fee.
13
During the first quarter of 2022, we experienced significant inflationary pressures in our commodity, labor and fuel costs resulting from the macroeconomic environment in the U.S., which had a significant impact on our overall operating results as compared to the prior year quarter. Internationally, we continued to experience increases in retail sales during the first quarter of 2022. Our U.S. and international same store sales (excluding foreign currency impact) continue to be pressured by our fortressing strategy, which includes increasing store concentration in certain markets where we compete, as well as from aggressive competitive activity.
We continued our global expansion with the opening of 213 net stores in the first quarter of 2022. We had 37 net stores open in the U.S. and 176 net stores open internationally during the first quarter of 2022.
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.
Statistical Measures
The tables below outline certain statistical measures we utilize to analyze our performance. This historical data is not necessarily indicative of results to be expected for any future period.
Global Retail Sales Growth (excluding foreign currency impact)
Global retail sales growth (excluding foreign currency impact) is a commonly used statistical measure in the quick-service restaurant industry that is important to understanding performance. Global retail sales refers to total worldwide retail sales at Company-owned and franchise stores. We believe global retail sales information is useful in analyzing revenues because franchisees pay royalties and, in the U.S., advertising fees that are based on a percentage of franchise retail sales. We review comparable industry global retail sales information to assess business trends and to track the growth of the Domino’s Pizza brand. In addition, supply chain revenues are directly impacted by changes in franchise retail sales in the U.S. and Canada. Retail sales for franchise stores are reported to us by our franchisees and are not included in our revenues. Global retail sales growth, excluding foreign currency impact, is calculated as the change of international local currency global retail sales against the comparable period of the prior year.
|
|
|
|
|
|
|
First Quarter
of 2022 |
|
First Quarter
of 2021 |
U.S. stores |
|
(1.4)% |
|
+15.3% |
International stores (excluding foreign currency impact) |
|
+8.4% |
|
+12.8% |
Total (excluding foreign currency impact) |
|
+3.6% |
|
+14.0% |
Same Store Sales Growth
Same store sales growth is a commonly used statistical measure in the quick-service restaurant industry that is important to understanding performance. Same store sales growth is calculated by including only sales from stores that also 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.
|
|
|
|
|
|
|
First Quarter
of 2022 |
|
First Quarter
of 2021 |
U.S. Company-owned stores (1) |
|
(10.5)% |
|
+6.3% |
U.S. franchise stores (1) |
|
(3.2)% |
|
+13.9% |
U.S. stores |
|
(3.6)% |
|
+13.4% |
International stores (excluding foreign currency impact) |
|
+1.2% |
|
+11.8% |
(1) During the first quarter of 2022, we purchased 23 U.S. franchised stores from certain of our existing U.S. franchisees. The same store sales growth for these stores is reflected in U.S. Company-owned stores in the first quarter of 2022.
14
Store Growth Activity
Store counts and net store growth are commonly used statistical measures in the quick-service restaurant industry that are important to understanding performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Company-
owned
Stores |
|
|
U.S.
Franchise
Stores |
|
|
Total
U.S.
Stores |
|
|
International Stores |
|
|
Total |
|
Store count at January 2, 2022 |
|
|
375 |
|
|
|
6,185 |
|
|
|
6,560 |
|
|
|
12,288 |
|
|
|
18,848 |
|
Openings |
|
|
2 |
|
|
|
38 |
|
|
|
40 |
|
|
|
217 |
|
|
|
257 |
|
Closings (1) |
|
|
— |
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(41 |
) |
|
|
(44 |
) |
Transfers (2) |
|
|
23 |
|
|
|
(23 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Store count at March 27, 2022 |
|
|
400 |
|
|
|
6,197 |
|
|
|
6,597 |
|
|
|
12,464 |
|
|
|
19,061 |
|
First quarter 2022 net store growth |
|
|
2 |
|
|
|
35 |
|
|
|
37 |
|
|
|
176 |
|
|
|
213 |
|
Trailing four quarters net store growth |
|
|
13 |
|
|
|
193 |
|
|
|
206 |
|
|
|
1,036 |
|
|
|
1,242 |
|
(1) Temporary store closures are not treated as store closures and affected stores are included in the ending store count. Based on information reported to us by our master franchisees, we estimate that as of March 27, 2022, there were approximately 200 international stores temporarily closed.
(2) Net store growth does not include the effect of transfers. During the first quarter of 2022, we purchased 23 U.S. franchised stores from certain of our existing U.S. franchisees.
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
of 2022 |
|
|
First Quarter
of 2021 |
|
U.S. Company-owned stores |
|
$ |
103.9 |
|
|
|
|
|
$ |
112.7 |
|
|
|
|
U.S. franchise royalties and fees |
|
|
122.3 |
|
|
|
|
|
|
124.5 |
|
|
|
|
Supply chain |
|
|
609.5 |
|
|
|
|
|
|
568.3 |
|
|
|
|
International franchise royalties and fees |
|
|
68.8 |
|
|
|
|
|
|
66.8 |
|
|
|
|
U.S. franchise advertising |
|
|
106.6 |
|
|
|
|
|
|
111.4 |
|
|
|
|
Total revenues |
|
|
1,011.1 |
|
|
|
100.0 |
% |
|
|
983.7 |
|
|
|
100.0 |
% |
U.S. Company-owned stores |
|
|
87.4 |
|
|
|
|
|
|
85.7 |
|
|
|
|
Supply chain |
|
|
555.2 |
|
|
|
|
|
|
508.8 |
|
|
|
|
Total cost of sales |
|
|
642.5 |
|
|
|
63.5 |
% |
|
|
594.5 |
|
|
|
60.4 |
% |
Operating margin |
|
|
368.6 |
|
|
|
36.5 |
% |
|
|
389.2 |
|
|
|
39.6 |
% |
General and administrative |
|
|
97.5 |
|
|
|
9.7 |
% |
|
|
91.3 |
|
|
|
9.3 |
% |
U.S. franchise advertising |
|
|
106.6 |
|
|
|
10.5 |
% |
|
|
111.4 |
|
|
|
11.3 |
% |
Income from operations |
|
|
164.5 |
|
|
|
16.3 |
% |
|
|
186.5 |
|
|
|
19.0 |
% |
Other income |
|
|
— |
|
|
|
0.0 |
% |
|
|
2.5 |
|
|
|
0.2 |
% |
Interest expense, net |
|
|
(46.8 |
) |
|
|
(4.7 |
)% |
|
|
(39.4 |
) |
|
|
(4.0 |
)% |
Income before provision for income taxes |
|
|
117.7 |
|
|
|
11.6 |
% |
|
|
149.6 |
|
|
|
15.2 |
% |
Provision for income taxes |
|
|
26.8 |
|
|
|
2.6 |
% |
|
|
31.9 |
|
|
|
3.2 |
% |
Net income |
|
$ |
91.0 |
|
|
|
9.0 |
% |
|
$ |
117.8 |
|
|
|
12.0 |
% |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
of 2022 |
|
|
First Quarter
of 2021 |
|
U.S. Company-owned stores |
|
$ |
103.9 |
|
|
|
10.3 |
% |
|
$ |
112.7 |
|
|
|
11.4 |
% |
U.S. franchise royalties and fees |
|
|
122.3 |
|
|
|
12.1 |
% |
|
|
124.5 |
|
|
|
12.7 |
% |
Supply chain |
|
|
609.5 |
|
|
|
60.3 |
% |
|
|
568.3 |
|
|
|
57.8 |
% |
International franchise royalties and fees |
|
|
68.8 |
|
|
|
6.8 |
% |
|
|
66.8 |
|
|
|
6.8 |
% |
U.S. franchise advertising |
|
|
106.6 |
|
|
|
10.5 |
% |
|
|
111.4 |
|
|
|
11.3 |
% |
Total revenues |
|
$ |
1,011.1 |
|
|
|
100.0 |
% |
|
$ |
983.7 |
|
|
|
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.
15
U.S. Stores Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
of 2022 |
|
|
First Quarter
of 2021 |
|
U.S. Company-owned stores |
|
$ |
103.9 |
|
|
|
31.2 |
% |
|
$ |
112.7 |
|
|
|
32.3 |
% |
U.S. franchise royalties and fees |
|
|
122.3 |
|
|
|
36.8 |
% |
|
|
124.5 |
|
|
|
35.7 |
% |
U.S. franchise advertising |
|
|
106.6 |
|
|
|
32.0 |
% |
|
|
111.4 |
|
|
|
32.0 |
% |
U.S. stores |
|
$ |
332.8 |
|
|
|
100.0 |
% |
|
$ |
348.6 |
|
|
|
100.0 |
% |
U.S. Company-owned Stores
Revenues from U.S. Company-owned store operations decreased $8.8 million, or 7.8%, in the first quarter of 2022 due to a decrease in U.S. Company-owned same store sales. This decrease was partially offset by an increase in the average number of U.S. Company-owned stores open during the period. U.S. Company-owned same store sales decreased 10.5% in the first quarter of 2022 and increased 6.3% in the first quarter of 2021.
U.S. Franchise Royalties and Fees
Revenues from U.S. franchise royalties and fees decreased $2.2 million, or 1.8%, in the first quarter of 2022 due primarily to a decrease in U.S. franchise same store sales. This decrease was partially offset by an increase in the average number of U.S. franchised stores open during the period resulting from net store growth. U.S. franchise same store sales decreased 3.2% in the first quarter of 2022 and increased 13.9% in the first quarter of 2021.
U.S. Franchise Advertising
Revenues from U.S. franchise advertising decreased $4.8 million, or 4.3%, in the first quarter of 2022 due to a decrease in U.S. franchise same store sales as well as approximately $2.5 million in advertising incentives related to certain brand promotions. These decreases were partially offset by an increase in the average number of U.S. franchised stores open during the period, resulting from net store growth.
Supply Chain
Supply chain revenues increased $41.2 million, or 7.3%, in the first quarter of 2022 due to higher market basket pricing to stores, partially offset by lower order volumes at our U.S. franchise stores. Our market basket pricing to stores increased 11.9% during the first quarter of 2022, which resulted in an estimated $56.1 million increase in supply chain revenues.
International Franchise Royalties and Fee Revenues
Revenues from international franchise royalties and fees increased $2.1 million, or 3.1%, in the first quarter of 2022 due primarily to higher international retail sales resulting from international same store sales growth (excluding foreign currency impact) and an increase in the average number of international franchised stores open during the period, resulting from net store growth. The negative impact of changes in foreign currency exchange rates of $4.3 million in the first quarter of 2022 partially offset the increase in international franchise royalties and fees revenues.
Excluding the impact of foreign currency exchange rates, international franchise same store sales increased 1.2% in the first quarter of 2022 and increased 11.8% in the first quarter of 2021.
Cost of Sales / Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
of 2022 |
|
|
First Quarter
of 2021 |
|
Consolidated revenues |
|
$ |
1,011.1 |
|
|
|
100.0 |
% |
|
$ |
983.7 |
|
|
|
100.0 |
% |
Consolidated cost of sales |
|
|
642.5 |
|
|
|
63.5 |
% |
|
|
594.5 |
|
|
|
60.4 |
% |
Consolidated operating margin |
|
$ |
368.6 |
|
|
|
36.5 |
% |
|
$ |
389.2 |
|
|
|
39.6 |
% |
Consolidated cost of sales consists of U.S. 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) decreased $20.6 million, or 5.3%, in the first quarter of 2022, due primarily to lower U.S. Company-owned store revenues, as well as higher food, labor and delivery costs and lower global franchise revenues. Franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on the operating margin. Additionally, as our market basket prices fluctuate, our revenues and margin percentages in our supply chain segment also fluctuate; however, actual product-level dollar margins remain unchanged.
16
As a percentage of revenues, the consolidated operating margin decreased 3.1 percentage points in the first quarter of 2022. U.S. Company-owned store operating margin decreased 8.0 percentage points in the first quarter of 2022. Supply chain operating margin decreased 1.6 percentage points in the first quarter of 2022. These changes in operating margin are described below.
U.S. Company-Owned Store Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
of 2022 |
|
|
First Quarter
of 2021 |
|
Revenues |
|
$ |
103.9 |
|
|
|
100.0 |
% |
|
$ |
112.7 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
87.4 |
|
|
|
84.1 |
% |
|
|
85.7 |
|
|
|
76.1 |
% |
Store operating margin |
|
$ |
16.5 |
|
|
|
15.9 |
% |
|
$ |
27.0 |
|
|
|
23.9 |
% |
U.S. Company-owned store operating margin (which does not include certain store-level costs such as royalties and advertising) decreased $10.5 million, or 38.8%, in the first quarter of 2022, due primarily to lower same store sales, as well as higher food costs. As a percentage of store revenues, the U.S. Company-owned store operating margin decreased 8.0 percentage points in the first quarter of 2022. These changes in operating margin as a percentage of revenues are discussed in additional detail below.
•Food costs increased 3.8 percentage points to 30.9% in the first quarter of 2022 as a result of higher food basket prices.
•Labor costs increased 2.4 percentage points to 30.8% in the first quarter of 2022 due primarily to continued investments in frontline team member wage rates in our U.S. Company-owned stores in the first quarter of 2022, as well as lower sales leverage. These increases were partially offset by lower headcount attributable to labor shortages affecting store hours and staffing levels in many of our markets.
•Occupancy costs, which include rent, telephone, utilities and depreciation, increased 1.3 percentage points to 9.1% in the first quarter of 2022 due primarily to lower sales leverage.
•Insurance costs increased 0.9 percentage points to 4.2% in the first quarter of 2022 due primarily to unfavorable claims experience, as well as lower sales leverage.
Supply Chain Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
of 2022 |
|
|
First Quarter
of 2021 |
|
Revenues |
|
$ |
609.5 |
|
|
|
100.0 |
% |
|
$ |
568.3 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
555.2 |
|
|
|
91.1 |
% |
|
|
508.8 |
|
|
|
89.5 |
% |
Supply chain operating margin |
|
$ |
54.4 |
|
|
|
8.9 |
% |
|
$ |
59.5 |
|
|
|
10.5 |
% |
Supply chain operating margin decreased $5.1 million, or 8.6%, in the first quarter of 2022, due primarily to higher labor and delivery costs. As a percentage of supply chain revenues, the supply chain operating margin decreased 1.6 percentage points in the first quarter of 2022 due to higher food, labor and delivery costs resulting from inflationary pressures due to the macroeconomic environment in the U.S., as well as lower sales leverage.
General and Administrative Expenses
General and administrative expenses increased $6.2 million, or 6.8%, in the first quarter of 2022, driven primarily by higher labor costs, including non-cash equity-based compensation expense, as well as higher amortization expense for capitalized software. These increases were partially offset by lower variable performance-based compensation expense.
U.S. Franchise Advertising Expenses
U.S. franchise advertising expenses decreased $4.8 million, or 4.3%, in the first quarter of 2022, consistent with the decrease in U.S. franchise advertising revenues. 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 other activities that promote the Domino’s brand and these revenues cannot be used for general corporate purposes.
Other Income
During the first quarter of 2021, we recorded a $2.5 million unrealized gain on our investment in DPC Dash (Note 5) resulting from the observable change in price from the valuation of the additional $40.0 million investment we made in the first quarter of 2021. We did not record any adjustments to the carrying amount of $125.8 million in the first quarter of 2022.
17
Interest Expense, Net
Interest expense, net increased $7.4 million, or 18.8%, in the first quarter of 2022 driven by higher average borrowings resulting from our recapitalization transaction completed on April 16, 2021 (the “2021 Recapitalization”). The Company’s weighted average borrowing rate decreased to 3.7% in the first quarter of 2022 from 3.9% in the first quarter of 2021, resulting from the lower interest rates on the debt outstanding due to the 2021 Recapitalization.
Provision for Income Taxes
Income tax expense decreased $5.1 million, or 16.1%, in the first quarter of 2022 due to a decrease in income before provision for income taxes. The effective tax rate increased to 22.7% during the first quarter of 2022 as compared to 21.3% in the first quarter of 2021. The higher effective tax rate was driven in part by a 0.5 percentage point change in the impact of excess tax benefits from equity-based compensation, which are recorded as a reduction to the income tax provision, as a result of fewer stock option exercises in the first quarter of 2022 as compared to the first quarter of 2021.
Segment Income
We evaluate the performance of our reportable segments and allocate resources to them based on earnings before interest, taxes, depreciation, amortization and other, referred to as Segment Income. Segment Income for each of our reportable segments is summarized in the table below. Other Segment Income primarily includes corporate administrative costs that are not allocable to a reportable segment, including labor, computer expenses, professional fees, travel and entertainment, rent, insurance and other corporate administrative costs.
|
|
|
|
|
|
|
|
|
|
|
First Quarter
of 2022 |
|
|
First Quarter
of 2021 |
|
U.S. stores |
|
$ |
97.3 |
|
|
$ |
107.4 |
|
Supply chain |
|
|
46.3 |
|
|
|
52.6 |
|
International franchise |
|
|
55.0 |
|
|
|
54.5 |
|
Other |
|
|
(7.7 |
) |
|
|
(6.1 |
) |
U.S. Stores
U.S. stores Segment Income decreased $10.1 million, or 9.4%, in the first quarter of 2022, primarily due to the $10.5 million decrease in U.S. Company-owned store operating margin, as well as the $2.2 million decrease in U.S. franchise royalties and fees revenues, each as discussed above. U.S. franchise revenues do not have a cost of sales component, therefore changes in these revenues have a disproportionate effect on U.S. stores Segment Income. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized and had no impact on U.S. stores Segment Income.
Supply Chain
Supply chain Segment Income decreased $6.2 million, or 11.8%, in the first quarter of 2022, primarily due to the $5.1 million decrease in operating margin described above.
International Franchise
International franchise Segment Income increased $0.6 million, or 1.1%, in the first quarter of 2022, primarily due to the $2.1 million increase in international franchise royalties and fees revenues discussed above. International franchise revenues do not have a cost of sales component, therefore changes in these revenues have a disproportionate effect on international franchise Segment Income.
Other
Other Segment Income decreased $1.6 million, or 26.6%, in the first quarter of 2022, due primarily to higher labor, professional fees and travel costs. These increases were partially offset by lower variable performance-based compensation expense.
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Liquidity and Capital Resources
Historically, our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities resulting in efficient deployment of working capital. We generally collect our receivables within three weeks from the date of the related sale and we generally experience multiple inventory turns per month. In addition, our sales are not typically seasonal, which further limits variations in our working capital requirements. These factors allow us to manage our working capital and our ongoing cash flows from operations to invest in our business and other strategic opportunities, pay dividends and repurchase and retire shares of our common stock. As of March 27, 2022, we had working capital of $90.8 million, excluding restricted cash and cash equivalents of $168.2 million, advertising fund assets, restricted, of $175.5 million and advertising fund liabilities of $168.2 million. Working capital includes total unrestricted cash and cash equivalents of $165.0 million.
Our primary source of liquidity is cash flows from operations and availability of borrowings under our variable funding notes. During the first quarter of 2022, we experienced an increase in international same store sales (excluding foreign currency impact) versus the comparable periods in the prior year. While our U.S. same store sales declined, both the U.S. and international businesses grew store counts in the first quarter of 2022. These factors contributed to our global retail sales growth realized in the first quarter of 2022, which resulted in our continued ability to generate positive operating cash flows. As of March 27, 2022, we had a variable funding note facility which allowed for advances of up to $200.0 million of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 Notes and certain other credit instruments, including letters of credit (the “2021 Variable Funding Notes”). The letters of credit are primarily related to our casualty insurance programs and certain supply chain center leases. As of March 27, 2022, we had no outstanding borrowings and $155.8 million of available borrowing capacity under our 2021 Variable Funding Notes, net of letters of credit issued of $44.2 million.
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 core business, service our indebtedness, pay dividends and repurchase shares of our common stock.
Our ability to continue to fund these items and continue to service our debt could be adversely affected by the occurrence of any of the events described under “Risk Factors” in our 2021 Form 10-K. There can be no assurance that our business will generate sufficient cash flows from operations or that future borrowings will be available under our 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 outstanding senior 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 27, 2022, we had $120.9 million of restricted cash held for future principal and interest payments and other working capital requirements of our asset-backed securitization structure, $47.1 million of restricted cash held in a three-month interest reserve as required by the related debt agreements and $0.2 million of other restricted cash for a total of $168.2 million of restricted cash and cash equivalents. As of March 27, 2022, we also held $153.7 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s brand.
Long-Term Debt
As of March 27, 2022, we had approximately $5.06 billion of long-term debt, of which $55.6 million was classified as a current liability. As of March 27, 2022, our fixed rate notes from the recapitalizations we completed in 2021, 2019, 2018, 2017 and 2015 had original scheduled principal payments of $38.6 million in the remainder of 2022, $51.5 million in each of 2023 and 2024, $1.17 billion in 2025, $39.3 million in 2026, $1.31 billion in 2027, $811.5 million in 2028, $625.9 million in 2029, $10.0 million in 2030 and $905.0 million in 2031.
In accordance with our debt agreements, the payment of principal on the outstanding senior notes may be suspended if our leverage ratio is less than or equal to 5.0x total debt to adjusted EBITDA, as defined in the related agreements, and no catch-up provisions are applicable. As of the fourth quarter of 2020, we had a leverage ratio of less than 5.0x, and accordingly, did not make the previously scheduled debt amortization payment on our then-outstanding notes in the first quarter of 2021. Subsequent to the closing of the 2021 Recapitalization, we had a leverage ratio of greater than 5.0x, and accordingly, resumed making the previously scheduled debt amortization payment on our notes beginning in the second quarter of 2021.
The notes are subject to certain financial and non-financial covenants, including a debt service coverage ratio calculation. The covenant requires a minimum coverage ratio of 1.75x total debt service to securitized net cash flow, as defined in the related agreements. In the event that certain covenants are not met, the notes may become due and payable on an accelerated schedule.
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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. On July 20, 2021, our Board of Directors authorized a share repurchase program to repurchase up to $1.0 billion of our common stock.
During the first quarter of 2022, we repurchased and retired 100,810 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $47.7 million. As of March 27, 2022, we had a total remaining authorized amount for share repurchases of approximately $656.4 million.
Dividends
On February 24, 2022, our Board of Directors declared a $1.10 per share quarterly dividend on our outstanding common stock for shareholders of record as of March 15, 2022, which was paid on March 30, 2022. We had approximately $40.6 million accrued for common stock dividends at March 27, 2022. Subsequent to the end of the first quarter, on April 26, 2022, our Board of Directors declared a $1.10 per share quarterly dividend on our outstanding common stock for shareholders of record as of June 15, 2022 to be paid on June 30, 2022.
Sources and Uses of Cash
The following table illustrates the main components of our cash flows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
First Quarter
of 2022 |
|
|
First Quarter
of 2021 |
|
Cash flows provided by (used in) |
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
78.8 |
|
|
$ |
152.9 |
|
Net cash used in investing activities |
|
|
(20.6 |
) |
|
|
(56.4 |
) |
Net cash used in financing activities |
|
|
(62.1 |
) |
|
|
(23.1 |
) |
Effect of exchange rate changes on cash |
|
|
0.4 |
|
|
|
0.2 |
|
Change in cash and cash equivalents, restricted cash and cash equivalents |
|
$ |
(3.6 |
) |
|
$ |
73.5 |
|
Operating Activities
Cash provided by operating activities decreased $74.1 million in the first quarter of 2022, primarily due to the negative impact of changes in operating assets and liabilities of $32.2 million. The negative impact of changes in operating assets and liabilities related to the timing of payments on accounts payable, accrued liabilities and income taxes as well as the timing and pricing of inventory in the first quarter of 2022 as compared to the first quarter of 2021. The decrease in cash provided by operating activities was also due to a $23.3 million negative impact of changes in advertising fund assets and liabilities, restricted, in the first quarter of 2022 as compared to the first quarter of 2021 due to payments for advertising activities outpacing receipts for advertising contributions. Additionally, net income decreased $26.8 million; however, this included an $8.2 million increase in non-cash adjustments, resulting in an overall decrease to cash provided by operating activities in the first quarter of 2022 as compared to the first quarter of 2021 of $18.6 million.
Investing Activities
Cash used in investing activities was $20.6 million in the first quarter of 2022, which primarily consisted of $12.5 million of capital expenditures (driven primarily by investments in technological initiatives, supply chain centers and corporate store operations). We also acquired 23 U.S. franchise stores from certain of our existing U.S. franchisees for $6.8 million.
Financing Activities
Cash used in financing activities was $62.1 million in the first quarter of 2022, which primarily consisted of the repurchase of approximately $47.7 million in common stock under our Board of Directors-approved share repurchase program, repayments of long-term debt and finance lease obligations of $13.9 million and tax payments for the vesting of restricted stock of $0.8 million. These uses of cash were partially offset by proceeds from the exercise of stock options of $0.3 million.
Critical Accounting Estimates
For a description of the Company’s critical accounting estimates, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2021 Form 10-K. The Company considers its most significant accounting policies and estimates to be long-lived assets, casualty insurance reserves and income taxes. There have been no material changes to the Company’s critical accounting estimates since January 2, 2022.
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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, our 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 2021 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; our ability to manage difficulties associated with or related to the ongoing COVID-19 pandemic and the effects of COVID-19 and related regulations and policies on our business and supply chain, including impacts on the availability of labor; labor shortages or 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 effectiveness of our advertising, operations and promotional initiatives; shortages, interruptions or disruptions in the supply or delivery of fresh food products and store equipment; 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; the impact of social media and other consumer-oriented technologies on our business, brand and reputation; the impact of new or improved technologies and alternative methods of delivery on consumer behavior; new product, digital ordering and concept developments by us, and other food-industry competitors; our ability to maintain good relationships with and attract new franchisees, and franchisees’ ability to successfully manage their operations without negatively impacting our royalty payments and fees or 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; 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; changes in income tax 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 and consumer protection and social media; adverse legal judgments or settlements; food-borne illness or contamination of products or food tampering; data breaches, power loss, technological failures, user error or other cyber risks threatening us or our franchisees; the impact that environmental, social and governance matters may have on our business and reputation; the effect of war, terrorism, catastrophic events or climate change; our ability to pay dividends and repurchase shares; changes in consumer tastes, 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.
21