filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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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 2024 and 2023 second quarters referenced herein represent the twelve-week periods ended June 16, 2024 and June 18, 2023, respectively. The 2024 and 2023 two fiscal quarters referenced herein represent the twenty-four-week periods ended June 16, 2024 and June 18, 2023, respectively. In this section, we discuss the results of our operations for the second quarter and two fiscal quarters of 2024 as compared to the second quarter and two fiscal quarters of 2023.
Overview
Domino’s is the largest pizza company in the world, with more than 20,900 locations in over 90 markets around the world as of June 16, 2024, and operates two distinct service models within its stores with a significant business in both delivery and carryout. We are a highly recognized global brand, and we focus on value while serving neighborhoods locally through our large worldwide network of franchise owners and U.S. Company-owned stores through both the delivery and carryout service models. We have been selling quality, affordable food to our customers since 1960. We became “Domino’s Pizza” in 1965 and opened our first franchised store in 1967. Over more than 60 years, we have built Domino’s into one of the most widely-recognized consumer brands in the world. We believe our commitment to value, convenience, quality and new products continues to keep consumers engaged with the brand.
We are primarily a franchisor, with approximately 99% of Domino’s global stores owned and operated by our independent franchisees as of June 16, 2024. Franchising enables an individual to be a business owner 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.
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 from the franchise model, including the end consumer, who can purchase Domino’s menu items for themselves and their family conveniently and economically.
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, through an asset-light model. We have historically returned cash to shareholders through dividend payments and share repurchases. Domino’s financial results are driven largely by retail sales at our franchised and Company-owned stores. Changes in retail sales are primarily driven by same store sales growth and net store growth. 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.
At Domino’s, we believe we have a proven business model for success that has historically driven strong returns for our shareholders. In 2023, we announced our Hungry for MORE strategy aimed at generating MORE sales, MORE stores and MORE profits. The strategic imperatives of our Hungry for MORE strategy are as follows:
Most Delicious Food: We believe we have the best pizza in the industry, and our menu has even more mouthwatering options beyond pizza. We will continue to showcase the breadth of our menu, while highlighting the deliciousness of our food through our innovative marketing promotions.
Operational Excellence: We are relentless in our focus on convenience, consistency and efficiency for our customers.
Renowned Value: We are committed to continuing to offer competitive pricing and personalized value for our customers that is innovative and memorable.
Enhanced by Best-in-Class Franchisees: Our franchisees play a vital role in driving results and excitement across the more than 90 markets in which we operate.
Second Quarter of 2024 Highlights
MORE Sales: Global retail sales, excluding foreign currency impact (which includes total retail sales at Company-owned and franchised stores worldwide), increased 7.2% as compared to the second quarter of 2023. U.S. retail sales increased 6.8% and international retail sales, excluding foreign currency impact, increased 7.7% as compared to the second quarter of 2023. Same store sales increased 4.8% in our U.S. stores and increased 2.1% in our international stores (excluding foreign currency impact).
MORE Stores: Global net store growth of 175.
MORE Profits: Income from operations increased 0.4%.
Two Fiscal Quarters of 2024 Highlights
MORE Sales: Global retail sales, excluding foreign currency impact (which includes total retail sales at Company-owned and franchised stores worldwide), increased 7.3% as compared to the two fiscal quarters of 2023. U.S. retail sales increased 7.3% and international retail sales, excluding foreign currency impact, increased 7.2% as compared to the two fiscal quarters of 2023. Same store sales increased 5.2% in our U.S. stores and increased 1.5% in our international stores (excluding foreign currency impact).
MORE Stores: Global net store growth of 339.
MORE Profits: Income from operations increased 9.0%.
Excluding the negative impact of foreign currency, Domino’s experienced global retail sales growth during the second quarter and two fiscal quarters of 2024, driven by same store sales growth and net store growth in both our U.S. and international businesses. These factors also contributed to an increase in income from operations. In the second quarter, these increases in income from operations were partially offset by higher general and administrative expenses primarily driven by higher labor costs as well as expenses for our Worldwide Rally that takes place every two years. Overall, we believe our global retail sales growth (excluding foreign currency impact), emphasis on technology, operations and marketing initiatives have combined to strengthen our brand. These financial and statistical measures are described in additional detail below.
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
Global retail sales 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 franchised 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, and we believe they are indicative of the financial health of our franchisee base. In addition, supply chain revenues are directly impacted by changes in franchise retail sales in the U.S. and Canada. As a result, sales by Domino’s franchisees have a direct effect on our profitability. Retail sales for franchised stores are reported to us by our franchisees and are not included in our revenues.
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||||||||||
| Global retail sales: | ||||||||||||||||
| U.S. stores | $ | 2,222.1 | $ | 2,081.2 | $ | 4,434.0 | $ | 4,132.2 | ||||||||
| International stores | 2,206.1 | 2,128.7 | 4,358.2 | 4,191.3 | ||||||||||||
| Total | $ | 4,428.2 | $ | 4,209.9 | $ | 8,792.2 | $ | 8,323.5 |
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 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. Changes in global retail sales growth, excluding foreign currency impact are primarily driven by same store sales growth and net store growth.
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||
| U.S. stores | + 6.8% | + 1.7% | + 7.3% | + 3.4% | ||||
| International stores (excluding foreign currency impact) (1) | + 7.7% | + 10.1% | + 7.2% | + 8.3% | ||||
| Total (excluding foreign currency impact) (2) | + 7.2% | + 5.8% | + 7.3% | + 5.8% |
| (1) | 2024 second quarter and two fiscal quarters figures each exclude the impact of the Russia market. Including the impact of the Russia market, international stores retail sales growth, excluding foreign currency impact, was 7.2% and 6.7% for the second quarter and two fiscal quarters of 2024, respectively. | |
| (2) | 2024 second quarter and two fiscal quarters figures each exclude the impact of the Russia market. Including the impact of the Russia market, total global retail sales growth, excluding foreign currency impact, was 7.0% for each of the second quarter and two fiscal quarters of 2024. |
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 for a given period by including only sales from stores that also had sales in the comparable weeks of both periods. International same store sales growth is calculated similarly to U.S. 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. Same store sales growth for transferred stores is reflected in their current classification.
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||
| U.S. Company-owned stores | + 4.5% | + 5.5% | + 6.5% | + 6.4% | ||||
| U.S. franchise stores | + 4.8% | (0.1)% | + 5.2% | + 1.6% | ||||
| U.S. stores | + 4.8% | + 0.1% | + 5.2% | + 1.8% | ||||
| International stores (excluding foreign currency impact) | + 2.1% | + 3.6% | + 1.5% | + 2.3% |
U.S. same store sales increased 4.8% in the second quarter of 2024, rolling over an increase in U.S. same store sales of 0.1% in the second quarter of 2023. U.S. same store sales increased 5.2% in the two fiscal quarters of 2024, rolling over an increase in U.S. same store sales of 1.8% in the two fiscal quarters of 2023. The increases in U.S. same store sales in the second quarter and two fiscal quarters of 2024 were primarily driven by higher customer transaction counts in both our delivery and carryout businesses, driven by our Domino’s Rewards loyalty program and other national offers. International same store sales (excluding foreign currency impact) increased 2.1% in the second quarter of 2024, rolling over an increase in international same store sales (excluding foreign currency impact) of 3.6% in the second quarter of 2023. International same store sales (excluding foreign currency impact) increased 1.5% in the two fiscal quarters of 2024, rolling over an increase in international same store sales (excluding foreign currency impact) of 2.3% in the two fiscal quarters of 2023. The increase in international same store sales (excluding foreign currency impact) in the second quarter of 2024 was primarily attributable to higher customer transaction counts across our international markets, while the increase in international same store sales (excluding foreign currency impact) in the two fiscal quarters of 2024 was attributable to a higher average ticket per transaction across our international markets.
Store Growth Activity
Net store growth is a commonly used statistical measure in the quick-service restaurant industry that is important to understanding performance. Net store growth is calculated by netting gross store openings with gross store closures during the period. Transfers between Company-owned stores and franchised stores are excluded from the calculation of net store growth. As previously announced, the remaining 143 net stores in Russia were reflected as closed in the third quarter of 2023 and are reflected as closures in the trailing four quarters ended June 16, 2024.
| U.S. Company- owned Stores | U.S. Franchise Stores | Total U.S. Stores | International Stores | Total | ||||||||||||||||
| Store count at March 24, 2024 | 289 | 6,585 | 6,874 | 13,881 | 20,755 | |||||||||||||||
| Openings | 1 | 32 | 33 | 195 | 228 | |||||||||||||||
| Closings | — | (1 | ) | (1 | ) | (52 | ) | (53 | ) | |||||||||||
| Transfers | (1 | ) | 1 | — | — | — | ||||||||||||||
| Store count at June 16, 2024 | 289 | 6,617 | 6,906 | 14,024 | 20,930 | |||||||||||||||
| Second quarter 2024 net store growth | 1 | 31 | 32 | 143 | 175 | |||||||||||||||
| Trailing four quarters net store growth | 5 | 166 | 171 | 554 | 725 |
Russia Market
On August 21, 2023, our master franchisee that owned and operated Domino’s Pizza stores in Russia announced its intent to file for bankruptcy with respect to the stores in that market. Therefore, as of August 21, 2023, we have considered the stores in the Russia market to be closed and they are excluded from our ending store count as of the end of the third quarter of 2023. We have presented our statistical measure of global retail sales growth, excluding foreign currency impact, for the second quarter and two fiscal quarters of 2024 excluding the impact of the retail sales from the Russia market. We believe the impact of the Russia market on our statistical measure of global retail sales growth, excluding foreign currency impact, for the second quarter and two fiscal quarters of 2023 was immaterial and prior amounts have not been adjusted to conform to the current year presentation. We believe the impact of the Russia market on our statistical measure of same store sales growth for the periods presented was immaterial, and we also believe the impact of the Russia market on our consolidated statements of income related to international franchise royalties and fee revenues and general and administrative expenses for the second quarter and two fiscal quarters of 2023 was immaterial.
Income Statement Data
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||
| U.S. Company-owned stores | $ | 92.3 | $ | 87.7 | $ | 184.9 | $ | 172.6 | ||||||||||||||||||||||||
| U.S. franchise royalties and fees | 147.6 | 139.3 | 298.1 | 272.1 | ||||||||||||||||||||||||||||
| Supply chain | 659.2 | 615.7 | 1,318.4 | 1,239.9 | ||||||||||||||||||||||||||||
| International franchise royalties and fees | 73.7 | 70.5 | 145.7 | 140.2 | ||||||||||||||||||||||||||||
| U.S. franchise advertising | 125.0 | 111.5 | 235.3 | 224.2 | ||||||||||||||||||||||||||||
| Total revenues | 1,097.7 | 100.0 | % | 1,024.6 | 100.0 | % | 2,182.4 | 100.0 | % | 2,049.0 | 100.0 | % | ||||||||||||||||||||
| Cost of sales: | ||||||||||||||||||||||||||||||||
| U.S. Company-owned stores | 76.1 | 71.4 | 152.5 | 142.0 | ||||||||||||||||||||||||||||
| Supply chain | 584.6 | 548.5 | 1,171.0 | 1,116.8 | ||||||||||||||||||||||||||||
| Total cost of sales | 660.7 | 60.2 | % | 620.0 | 60.5 | % | 1,323.5 | 60.6 | % | 1,258.8 | 61.4 | % | ||||||||||||||||||||
| Gross margin | 437.0 | 39.8 | % | 404.7 | 39.5 | % | 858.9 | 39.4 | % | 790.2 | 38.6 | % | ||||||||||||||||||||
| General and administrative | 115.9 | 10.5 | % | 97.8 | 9.5 | % | 217.0 | 10.0 | % | 193.0 | 9.4 | % | ||||||||||||||||||||
| U.S. franchise advertising | 125.0 | 11.4 | % | 111.5 | 10.9 | % | 235.3 | 10.8 | % | 224.2 | 11.0 | % | ||||||||||||||||||||
| Refranchising loss | 0.0 | 0.0 | % | 0.0 | 0.0 | % | 0.2 | 0.0 | % | 0.1 | 0.0 | % | ||||||||||||||||||||
| Income from operations | 196.1 | 17.9 | % | 195.4 | 19.1 | % | 406.5 | 18.6 | % | 372.9 | 18.2 | % | ||||||||||||||||||||
| Other income (expense) | 11.4 | 1.0 | % | (15.0 | ) | (1.5 | )% | (7.3 | ) | (0.3 | )% | (15.0 | ) | (0.7 | )% | |||||||||||||||||
| Interest expense, net | (40.5 | ) | (3.7 | )% | (42.4 | ) | (4.1 | )% | (82.6 | ) | (3.8 | )% | (86.6 | ) | (4.2 | )% | ||||||||||||||||
| Income before provision for income taxes | 167.0 | 15.2 | % | 138.0 | 13.5 | % | 316.6 | 14.5 | % | 271.4 | 13.3 | % | ||||||||||||||||||||
| Provision for income taxes | 25.0 | 2.3 | % | 28.7 | 2.8 | % | 48.8 | 2.2 | % | 57.2 | 2.8 | % | ||||||||||||||||||||
| Net income | $ | 142.0 | 12.9 | % | $ | 109.4 | 10.7 | % | $ | 267.8 | 12.3 | % | $ | 214.2 | 10.5 | % |
Revenues
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||||||||||||||||||||||||||
| U.S. Company-owned stores | $ | 92.3 | 8.4 | % | $ | 87.7 | 8.5 | % | $ | 184.9 | 8.5 | % | $ | 172.6 | 8.4 | % | ||||||||||||||||
| U.S. franchise royalties and fees | 147.6 | 13.4 | % | 139.3 | 13.6 | % | 298.1 | 13.6 | % | 272.1 | 13.3 | % | ||||||||||||||||||||
| Supply chain | 659.2 | 60.1 | % | 615.7 | 60.1 | % | 1,318.4 | 60.4 | % | 1,239.9 | 60.5 | % | ||||||||||||||||||||
| International franchise royalties and fees | 73.7 | 6.7 | % | 70.5 | 6.9 | % | 145.7 | 6.7 | % | 140.2 | 6.8 | % | ||||||||||||||||||||
| U.S. franchise advertising | 125.0 | 11.4 | % | 111.5 | 10.9 | % | 235.3 | 10.8 | % | 224.2 | 11.0 | % | ||||||||||||||||||||
| Total revenues | $ | 1,097.7 | 100.0 | % | $ | 1,024.6 | 100.0 | % | $ | 2,182.4 | 100.0 | % | $ | 2,049.0 | 100.0 | % |
Revenues primarily consist of retail sales from our Company-owned stores, royalties and fees and advertising contributions 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.
Consolidated revenues increased $73.1 million, or 7.1%, in the second quarter of 2024 as compared to the second quarter of 2023. Consolidated revenues increased $133.4 million, or 6.5%, in the two fiscal quarters of 2024 as compared to the two fiscal quarters of 2023. The increases in consolidated revenues in both the second quarter and two fiscal quarters of 2024 were primarily driven by higher supply chain and U.S. stores revenues. These changes in revenues are described in more detail below.
U.S. Stores Revenues
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||||||||||||||||||||||||||
| U.S. Company-owned stores | $ | 92.3 | 25.3 | % | $ | 87.7 | 25.9 | % | $ | 184.9 | 25.7 | % | $ | 172.6 | 25.8 | % | ||||||||||||||||
| U.S. franchise royalties and fees | 147.6 | 40.4 | % | 139.3 | 41.2 | % | 298.1 | 41.5 | % | 272.1 | 40.7 | % | ||||||||||||||||||||
| U.S. franchise advertising | 125.0 | 34.3 | % | 111.5 | 32.9 | % | 235.3 | 32.8 | % | 224.2 | 33.5 | % | ||||||||||||||||||||
| Total U.S. stores revenues | $ | 364.8 | 100.0 | % | $ | 338.4 | 100.0 | % | $ | 718.3 | 100.0 | % | $ | 668.9 | 100.0 | % |
U.S. Company-owned Stores
Revenues from U.S. Company-owned store operations increased $4.6 million, or 5.2%, in the second quarter of 2024, and increased $12.3 million, or 7.1%, in the two fiscal quarters of 2024 primarily due to higher same store sales.
U.S. Company-owned same store sales increased 4.5% in the second quarter of 2024 and increased 5.5% in the second quarter of 2023. U.S. Company-owned same store sales increased 6.5% in the two fiscal quarters of 2024 and increased 6.4% in the two fiscal quarters of 2023.
U.S. Franchise Royalties and Fees
Revenues from U.S. franchise royalties and fees increased $8.3 million, or 6.0%, in the second quarter of 2024 primarily due to higher same store sales and net store growth. Additionally, U.S. franchise royalties and fees benefited from an increase in digital transactions which resulted in an increase in fees paid by our franchisees for the use of our technology platforms, but this increase was offset by a $0.04 decrease in the digital per transaction technology fee to $0.355 effectuated as of March 25, 2024. Revenues from U.S. franchise royalties and fees increased $26.0 million, or 9.5%, in the two fiscal quarters of 2024 primarily due to higher same store sales and an increase in fees paid by U.S. franchisees for the use of our technology platforms, as well as net store growth.
U.S. franchise same store sales increased 4.8% in the second quarter of 2024 and declined 0.1% in the second quarter of 2023. U.S. franchise same store sales increased 5.2% in the two fiscal quarters of 2024 and increased 1.6% in the two fiscal quarters of 2023.
U.S. Franchise Advertising
Revenues from U.S. franchise advertising increased $13.5 million, or 12.1%, in the second quarter of 2024 primarily due to higher same store sales, the return to the standard 6.0% advertising contribution rate at the beginning of the second quarter of 2024 following the end of the temporary reduction to 5.75% which began in the second quarter of 2023, and net store growth. Revenues from U.S. franchise advertising increased $11.1 million, or 4.9%, in the two fiscal quarters of 2024 primarily due to higher same store sales and net store growth. An increase in advertising incentives related to our Emergency Pizza promotion in the first quarter of 2024 partially offset the increase in U.S. franchise advertising revenue in the two fiscal quarters of 2024.
Supply Chain
Supply chain revenues increased $43.5 million, or 7.1%, in the second quarter of 2024 primarily due to higher order volumes, as well as an increase in our food basket pricing to stores, but was partially offset by a shift in the relative mix of products we sell. Our food basket pricing to stores increased 0.7% in the second quarter of 2024, which resulted in an estimated $3 million increase in supply chain revenues. Supply chain revenues increased $78.5 million, or 6.3%, in the two fiscal quarters of 2024 primarily due to higher order volumes, but was partially offset by a shift in the relative mix of products we sell and a decrease in our food basket pricing to stores. Our food basket pricing to stores decreased 0.6% in the two fiscal quarters of 2024, which resulted in an estimated $9 million decrease in supply chain revenues. The food basket pricing change, a statistical measure utilized by management, is calculated as the percentage change of the food basket (including both food and cardboard products) purchased by an average U.S. store (based on average weekly unit sales) from our U.S. supply chain centers against the comparable period of the prior year. We believe this measure is important to understanding Company performance because as our food basket prices fluctuate, our revenues, cost of sales and gross margin percentages in our supply chain segment also fluctuate.
International Franchise Royalties and Fee Revenues
Revenues from international franchise royalties and fees increased $3.2 million, or 4.5%, in the second quarter of 2024, and increased $5.5 million, or 3.9%, in the two fiscal quarters of 2024 primarily due to an increase in the average number of international franchised stores open during the period resulting from net store growth as well as same store sales growth (excluding foreign currency impact), but was partially offset by the negative impact of changes in foreign currency exchange rates of approximately $2.7 million in the second quarter of 2024 and $4.1 million in the two fiscal quarters of 2024. The impact of changes in foreign currency exchange rates on international franchise royalty revenues, a statistical measure utilized by management, is calculated as the difference in international franchise royalty revenues resulting from translating current year local currency results to U.S. dollars at current year exchange rates as compared to prior year exchange rates. We believe this measure is important to understanding Company performance given the significant variability in international franchise royalty revenues that can be driven by changes in foreign currency exchange rates.
International franchise same store sales increased 2.1% in the second quarter of 2024, and increased 3.6% in the second quarter of 2023, each excluding the impact of foreign currency exchange rates. International franchise same store sales increased 1.5% in the two fiscal quarters of 2024, and increased 2.3% in the two fiscal quarters of 2023, each excluding the impact of foreign currency exchange rates.
Cost of Sales / Gross Margin
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||||||||||||||||||||||||||
| Total revenues | $ | 1,097.7 | 100.0 | % | $ | 1,024.6 | 100.0 | % | $ | 2,182.4 | 100.0 | % | $ | 2,049.0 | 100.0 | % | ||||||||||||||||
| Total cost of sales | 660.7 | 60.2 | % | 620.0 | 60.5 | % | 1,323.5 | 60.6 | % | 1,258.8 | 61.4 | % | ||||||||||||||||||||
| Gross margin | $ | 437.0 | 39.8 | % | $ | 404.7 | 39.5 | % | $ | 858.9 | 39.4 | % | $ | 790.2 | 38.6 | % |
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 gross margin (which we define as revenues less cost of sales) increased $32.3 million, or 8.0%, in the second quarter of 2024, and increased $68.7 million, or 8.7%, in the two fiscal quarters of 2024 primarily due to higher global franchise royalty revenues, as well as gross margin dollar growth within supply chain, discussed below. Franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on gross margin. Additionally, as food basket prices fluctuate, revenues, cost of sales and gross margin percentages in our supply chain segment also fluctuate, and further, cost of sales, gross margins and gross margin percentages for our U.S. Company-owned stores also fluctuate.
As a percentage of revenues, the consolidated gross margin increased 0.3 and 0.8 percentage points in the second quarter and two fiscal quarters of 2024, respectively. U.S. Company-owned store gross margin decreased 1.0 percentage point in the second quarter of 2024, and decreased 0.2 percentage points in the two fiscal quarters of 2024. Supply chain gross margin increased 0.4 and 1.3 percentage points in the second quarter and two fiscal quarters of 2024, respectively. These changes in gross margin are described in more detail below.
U.S. Company-Owned Store Gross Margin
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||||||||||||||||||||||||||
| Revenues | $ | 92.3 | 100.0 | % | $ | 87.7 | 100.0 | % | $ | 184.9 | 100.0 | % | $ | 172.6 | 100.0 | % | ||||||||||||||||
| Cost of sales | 76.1 | 82.4 | % | 71.4 | 81.4 | % | 152.5 | 82.5 | % | 142.0 | 82.3 | % | ||||||||||||||||||||
| Store gross margin | $ | 16.2 | 17.6 | % | $ | 16.3 | 18.6 | % | $ | 32.4 | 17.5 | % | $ | 30.6 | 17.7 | % |
U.S. Company-owned store gross margin (which does not include certain store-level costs such as royalties and advertising) decreased $0.1 million, or 0.4%, in the second quarter of 2024, and increased $1.8 million, or 5.8%, in the two fiscal quarters of 2024. As a percentage of store revenues, U.S. Company-owned store gross margin decreased 1.0 percentage point in the second quarter of 2024, and decreased 0.2 percentage points in the two fiscal quarters of 2024. These changes in gross margin as a percentage of revenues are discussed in additional detail below.
Food costs decreased 0.2 percentage points to 28.5% in the second quarter of 2024 as a result of store level productivity. Food costs decreased 0.4 percentage points to 28.6% in the two fiscal quarters of 2024 due to the decrease in the cost of our food basket.
Labor costs increased 0.2 percentage points to 30.9% in the second quarter of 2024 and increased 0.4 percentage points to 31.4% in the two fiscal quarters of 2024 due to higher wage rates in our U.S. Company-owned stores.
Higher insurance costs contributed to the remaining decrease in U.S. Company-owned store gross margin as a percentage of revenues.
Sales leverage driven by higher customer transaction counts partially offset the decreases in U.S. Company-owned store gross margin as a percentage of revenues described above.
Supply Chain Gross Margin
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||||||||||||||||||||||||||
| Revenues | $ | 659.2 | 100.0 | % | $ | 615.7 | 100.0 | % | $ | 1,318.4 | 100.0 | % | $ | 1,239.9 | 100.0 | % | ||||||||||||||||
| Cost of sales | 584.6 | 88.7 | % | 548.5 | 89.1 | % | 1,171.0 | 88.8 | % | 1,116.8 | 90.1 | % | ||||||||||||||||||||
| Supply chain gross margin | $ | 74.6 | 11.3 | % | $ | 67.2 | 10.9 | % | $ | 147.4 | 11.2 | % | $ | 123.1 | 9.9 | % |
Supply chain gross margin increased $7.4 million, or 11.1%, in the second quarter of 2024, and increased $24.3 million, or 19.8%, in the two fiscal quarters of 2024. As a percentage of supply chain revenues, the supply chain gross margin increased 0.4 percentage points in the second quarter of 2024, and increased 1.3 percentage points in the two fiscal quarters of 2024. The increase in supply chain gross margin as a percentage of revenues in the second quarter of 2024 was primarily due to procurement productivity, partially offset by investments in supply chain labor. The increase in supply chain gross margin as a percentage of revenue in the two fiscal quarters of 2024 was primarily due to lower food costs resulting from procurement productivity and a decrease in the cost of our food basket.
General and Administrative Expenses
General and administrative expenses increased $18.2 million, or 18.6%, in the second quarter of 2024, and increased $24.0 million, or 12.4%, in the two fiscal quarters of 2024. These increases were primarily driven by higher labor costs as well as expenses for our Worldwide Rally that takes place every two years.
U.S. Franchise Advertising Expenses
U.S. franchise advertising expenses increased $13.5 million, or 12.1%, in the second quarter of 2024, and increased $11.1 million, or 4.9%, in the two fiscal quarters of 2024 consistent with the increases 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.
Refranchising Loss
During each of the first and second quarters of 2024, we refranchised one U.S. Company-owned store, for proceeds of less than $0.1 million each. The pre-tax refranchising losses associated with the sale of the related assets and liabilities, including goodwill, were approximately $0.1 million each and were recorded in refranchising loss in our condensed consolidated statements of income.
During the first quarter of 2023, we refranchised one U.S. Company-owned store, for proceeds of less than $0.1 million. The pre-tax refranchising loss associated with the sale of the related assets and liabilities, including goodwill, was approximately $0.1 million and was recorded in refranchising loss in our condensed consolidated statements of income.
Other Income (Expense)
During the second quarter of 2024, we recorded an $11.4 million unrealized gain on our investment in DPC Dash (Note 6). During the two fiscal quarters of 2024, we recorded a $7.3 million unrealized loss on our investment in DPC Dash. During the second quarter of 2023, we recorded a $15.0 million unrealized loss on our investment in DPC Dash. We did not record any adjustments to the carrying amount in the first quarter of 2023. These unrealized gains and losses were based on the active exchange quoted price for the equity security.
Interest Expense, Net
Interest expense, net, decreased $1.9 million, or 4.5%, in the second quarter of 2024, and decreased $3.9 million or 4.6%, in the two fiscal quarters of 2024, each driven by higher interest income on our cash equivalents.
Our weighted average borrowing rate was 3.8% in each of the second quarter and two fiscal quarters of 2024 and 2023.
Provision for Income Taxes
Provision for income taxes decreased $3.6 million, or 12.7%, in the second quarter of 2024 due to a lower effective tax rate, partially offset by higher income before provision for income taxes. The effective tax rate decreased to 15.0% in the second quarter of 2024 as compared to 20.8% in the second quarter of 2023, driven by a 7.0 percentage point change in the impact of excess tax benefits from equity-based compensation, which are recorded as a reduction to the provision for income taxes.
Provision for income taxes decreased $8.4 million, or 14.7%, in the two fiscal quarters of 2024 due to a lower effective tax rate, partially offset by higher income before provision for income taxes. The effective tax rate decreased to 15.4% in the two fiscal quarters of 2024 as compared to 21.1% in the two fiscal quarters of 2023, driven by a 6.3 percentage point change in the impact of excess tax benefits from equity-based compensation, which are recorded as a reduction to the provision for income taxes.
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.
| Second Quarter of 2024 | Second Quarter of 2023 | Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||||||||||
| U.S. stores | $ | 129.5 | $ | 123.6 | $ | 265.6 | $ | 236.3 | ||||||||
| Supply chain | 65.0 | 60.0 | 129.5 | 108.5 | ||||||||||||
| International franchise | 59.1 | 58.9 | 118.4 | 117.0 | ||||||||||||
| Other | (26.2 | ) | (18.9 | ) | (44.3 | ) | (34.6 | ) |
U.S. Stores
U.S. stores Segment Income increased $5.9 million, or 4.8%, in the second quarter of 2024 primarily due to higher U.S. franchise royalties and fees revenues, as discussed above. U.S. stores Segment Income increased $29.3 million, or 12.4%, in the two fiscal quarters of 2024 primarily due to higher U.S. franchise royalties and fees revenues, as well as the $1.8 million increase in U.S. Company-owned store gross margin, each as discussed above. U.S. franchise revenues do not have a cost of sales component, so 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. These increases were partially offset by expenses for our Worldwide Rally that takes place every two years.
Supply Chain
Supply chain Segment Income increased $5.0 million, or 8.3%, in the second quarter of 2024 primarily due to the $7.4 million increase in supply chain gross margin, as discussed above. Supply chain Segment Income increased $21.0 million, or 19.4%, in the two fiscal quarters of 2024 primarily due to the $24.3 million increase in supply chain gross margin, as discussed above.
International Franchise
International franchise Segment Income increased $0.2 million, or 0.3%, in the second quarter of 2024, and increased $1.4 million, or 1.2%, in the two fiscal quarters of 2024 primarily due to higher international franchise royalties and fees revenues, as discussed above. International franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on international franchise Segment Income. These increases were partially offset by expenses for our Worldwide Rally that takes place every two years.
Other
Other Segment Income decreased $7.3 million, or 38.6%, in the second quarter of 2024, and decreased $9.7 million, or 28.0%, in the two fiscal quarters of 2024. These decreases were primarily driven by higher labor costs.
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. As of June 16, 2024, we had working capital of $279.2 million, excluding restricted cash and cash equivalents of $197.0 million, advertising fund assets, restricted, of $99.8 million and advertising fund liabilities of $97.8 million. Working capital includes total unrestricted cash and cash equivalents of $283.7 million.
Our primary sources of liquidity are cash flows from operations and availability of borrowings under our 2022 and 2021 Variable Funding Notes (as defined below). During the second quarter and two fiscal quarters of 2024, we experienced an increase in both U.S. and international same store sales (excluding foreign currency impact) versus the comparable periods in the prior year. Additionally, both our U.S. and international businesses grew store counts during the second quarter and two fiscal quarters of 2024. These factors contributed to our continued ability to generate positive operating cash flows. In addition to our cash flows from operations, we have two variable funding note facilities. These facilities include our Series 2022-1 Variable Funding Senior Secured Notes, Class A-1 Notes (the “2022 Variable Funding Notes”), which allows for advances of up to $120.0 million, as well as our Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 Notes (the “2021 Variable Funding Notes,” and, together with the 2022 Variable Funding Notes, the “2022 and 2021 Variable Funding Notes”), which allows for advances of up to $200.0 million and certain other credit instruments, including letters of credit. The letters of credit primarily relate to our casualty insurance programs. As of June 16, 2024, we had no outstanding borrowings and $278.9 million of available borrowing capacity under our 2022 and 2021 Variable Funding Notes, net of letters of credit issued of $41.1 million.
We expect to continue to use our unrestricted cash and cash equivalents, cash flows from operations, any excess cash from our recapitalization transactions and available borrowings under our 2022 and 2021 Variable Funding Notes to, among other things, fund working capital requirements, invest in our core business and other strategic opportunities, repay outstanding borrowings under our securitized debt, pay dividends and repurchase and retire 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 2023 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 2022 and 2021 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 2022 and 2021 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 June 16, 2024, we had $145.9 million of restricted cash held for future principal and interest payments and other working capital requirements of our asset-backed securitization structure, $50.9 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 $197.0 million of restricted cash and cash equivalents. As of June 16, 2024, we also held $80.0 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 June 16, 2024, we had approximately $4.98 billion of long-term debt, of which $4.9 million was classified as a current liability. As of June 16, 2024, 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 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. However, in accordance with our debt agreements, the payment of principal on our outstanding senior notes may be suspended if our Holdco 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 end of the first and second quarters of 2024, we had a Holdco Leverage Ratio of less than 5.0x, and accordingly, did not make the previously scheduled debt amortization payments on our outstanding notes beginning in the second quarter of 2024. Accordingly, all principal amounts of our outstanding notes have been classified as long-term debt in our condensed consolidated balance sheet as of June 16, 2024.
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.
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 2022 and 2021 Variable Funding Notes. On February 21, 2024, our Board of Directors authorized an additional share repurchase program to repurchase up to $1.0 billion of our common stock, in addition to the $141.3 million that was previously remaining for a total authorization of $1.14 billion for future share repurchases as of that date.
During the two fiscal quarters of 2024, we repurchased and retired 56,372 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $25.0 million. As of June 16, 2024, we had a total remaining authorized amount for share repurchases of approximately $1.12 billion.
Dividends
On April 25, 2024, our Board of Directors declared a $1.51 per share quarterly dividend on our outstanding common stock for shareholders of record as of June 14, 2024, which was paid on June 28, 2024. We had approximately $54.5 million accrued for common stock dividends at June 16, 2024. Subsequent to the end of the second quarter, on July 16, 2024, our Board of Directors declared a $1.51 per share quarterly dividend on our outstanding common stock for shareholders of record as of September 13, 2024, to be paid on September 30, 2024.
Sources and Uses of Cash
The following table illustrates the main components of our cash flows:
| Two Fiscal Quarters of 2024 | Two Fiscal Quarters of 2023 | |||||||
| Cash flows provided by (used in) | ||||||||
| Net cash provided by operating activities | $ | 274.2 | $ | 242.3 | ||||
| Net cash used in investing activities | (45.0 | ) | (39.2 | ) | ||||
| Net cash used in financing activities | (70.7 | ) | (193.0 | ) | ||||
| Effect of exchange rate changes on cash | (1.0 | ) | 0.5 | |||||
| Change in cash and cash equivalents, restricted cash and cash equivalents | $ | 157.5 | $ | 10.6 |
Operating Activities
Cash provided by operating activities increased $31.9 million in the two fiscal quarters of 2024, as a result of higher net income, excluding non-cash operating activities, partially offset by the negative impact of changes in operating assets and liabilities and advertising fund assets and liabilities, restricted. Net income increased $53.7 million and non-cash adjustments increased $0.9 million, resulting in an overall increase to cash provided by operating activities in the two fiscal quarters of 2024 as compared to the two fiscal quarters of 2023 of $54.6 million. The negative impact of changes in operating assets and liabilities of $18.0 million primarily related to payments on income taxes, accrued liabilities and inventory in the two fiscal quarters of 2024 as compared to the two fiscal quarters of 2023. Additionally, the $4.7 million negative impact of changes in advertising fund assets and liabilities, restricted, in the two fiscal quarters of 2024 as compared to the two fiscal quarters of 2023 was a result of payments for advertising activities outpacing receipts for advertising contributions.
Investing Activities
Cash used in investing activities was $45.0 million in the two fiscal quarters of 2024, which primarily consisted of $43.7 million of capital expenditures (driven primarily by investments in technological initiatives, supply chain centers and corporate store operations).
Financing Activities
Cash used in financing activities was $70.7 million in the two fiscal quarters of 2024, which included dividend payments of $53.1 million, the repurchase of approximately $25.0 million in common stock under our Board of Directors-approved share repurchase program, repayments of long-term debt and finance lease obligations of $14.8 million and tax payments for the vesting of restricted stock of $9.3 million. These uses of cash were partially offset by proceeds from the exercise of stock options of $31.5 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 2023 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 December 31, 2023.
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, store growth and the growth of our U.S. and international business in general, 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 2023 Form 10-K for the fiscal year ended December 31, 2023. 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 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 successfully implement our growth strategy, including through our participation in the third-party order aggregation marketplace; labor shortages or changes in operating expenses resulting from increases in prices of food (particularly cheese), fuel and other commodity costs, labor, utilities, insurance, employee benefits and other operating costs or negative economic conditions; 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 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; the additional risks our international operations subject us to; 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 or negative economic conditions in general; our ability and that of our franchisees to open new restaurants and keep existing restaurants in operation and maintain demand for new stores; 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, advertising and consumer protection and social media; adverse legal judgments or settlements; food-borne illness or contamination of products or food tampering or other events that may impact our reputation; 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, other geopolitical or reputational considerations or climate change; our ability to pay dividends and repurchase shares; changes in consumer tastes, spending and traffic patterns and demographic trends; 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.
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