We also maintain important internal Company data, such as personally identifiable information about our employees and franchisees and information relating to our operations. In addition, more than half80% of all globalour U.S. retail sales in 20192022 were derived from digital channels, primarily through our online ordering website and mobile applications, where customers enter personally identifiable information that we retain. Our use and retention of personally identifiable information is regulated by foreign, federal and state laws and regulations, as well as by certain third-party agreements. For example, the European Union adopted a new regulation that became effective in May 2018,Court of Justice of the European Union Generalinvalidated the U.S. – E.U. Privacy Shield framework, which was a commonly relied upon mechanism for exchanging personal data from the European Union to the U.S., in the July 16, 2020 “Schrems II” decision (Case C-311/18 Data Protection RegulationCommissioner v. Facebook Ireland and Maximillian Schrems) and the State of California has adopted the California Privacy Rights Act of 2020, an amendment to the California Consumer Privacy Act, that became effective on January 1, 2020, both of which may require companies to meet new requirements regardingchange their practices for handling of personal data. In addition, the handlingState of New York promulgated the New York SHIELD Act which has imposed obligations on businesses to implement physical, administrative and technical security measures to protect personal data. As privacy and information security laws and regulations change, we may incur additional costs to ensure that we remain in compliance with those laws and regulations.regulations, and our current and future planned uses of personal and other data may be adversely affected by future adopted privacy and information security laws, regulations and rulings. If our security and information systems are compromised or if we, our employees or franchisees fail to comply with these laws, regulations or contract terms, or to successfully implement appropriate processes related to applicable requirements, laws and regulations governing cyber incidents could require us to notify customers, employees or other groups, and could result in adverse publicity, loss of sales and cash flows, increased fees payable to third parties and fines, penalties or remediation and other costs that could adversely affect our reputation, business and results of operations. Any other material disruption or other adverse event affecting one or more of our digital ordering platforms, including, for instance, power loss, technological or systems failures, user error or cyber-attacks, could similarly result in adverse publicity, loss of sales and cash flows and other costs, which could in turn materially and adversely affect our reputation, business and results of operations.
We cannot predict the impact that new or improved technologies, alternative methods of delivery, including autonomous vehicle delivery, or changes in consumer or employee behavior facilitated by these technologies and alternative methods of delivery will have on our business.
Advances in technologies or alternative methods of delivery, including advances in digital ordering technology and autonomous vehicle delivery, or certain changes in consumer behavior driven by these or other technologies and methods of delivery could have a negative effect on our business and market position. Moreover, technology and consumer offerings continue to develop, and we expect that new or enhanced technologies and consumer offerings will be available in the future. We may pursue certain of those technologies and consumer offerings if we believe they offer a sustainable customer proposition and can be successfully integrated into our business model. However, we cannot predict consumer acceptance of these delivery channels or their impact on our business. In addition, our competitors, some of whom have greater resources (financial or otherwise) than we do, may be able to benefit from changes in technologies or consumer acceptance of alternative methods of delivery, which could harm our competitive position.
There can be no assurance that we will be able to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery, or to effectively adjust our product mix, service offerings, and marketing and merchandising initiatives for products and services that address, and anticipate advances in, technology and market trends. Alternative methods of delivery may also impact the potential labor pool from which we recruit our delivery experts and could reduce the available supply of labor.
22
If we are not able to successfully respond to these challenges, our business, market share, financial condition, and operating results could be materially and adversely affected.
We are subject to a variety of additional risks associated with our franchisees.
Our franchise system subjects us to a number of additional risks, related to credit card and debit card payments we accept.
Our current insurance coverage may not be adequate, insurance premiums for such coverage may increase and we may not be able to obtain insurance at acceptable rates, or at all.
For certain periods prior to December 1998 and for periods after December 2001, we maintain insurance coverage for workers’ compensation, general liability and owned and$1.0$2.0 million per occurrence under these retention programs for workers’ compensation and general liability.liability, depending on policy year and line of coverage. We are generally responsible for up to $3.0between $500,000 and $5.5 million per occurrence under these retention programs for owned andliabilities.liabilities, depending on policy year and line of coverage. Total insurance limits under these retention programs vary depending upon the period covered and range up to $110.0 million per occurrence for general liability and owned and
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Environmental, social and quarterlygovernance matters may impact our business and reputation.
Increasingly, in addition to the importance of their financial performance, companies are being judged by their performance on a variety of environmental, social and governance (“ESG”) matters, which are considered to contribute to the long-term sustainability of companies’ performance. A variety of organizations measure the performance of companies on such ESG topics, and the results of these assessments are widely publicized. In addition, major institutional investors have publicly emphasized the importance of such ESG matters to their investment decisions. Further, we recently announced our goal to set and reach Science Based Targets by 2032 and achieve net zero carbon emissions by 2050. Execution of these strategies and achievement of these goals are subject to significant fluctuations depending on various factors,risks and uncertainties, many of which are beyondoutside of our control and ifmay prove to be more costly than we failanticipate. These risks and uncertainties include, but are not limited to, meetour ability to execute our strategies and achieve our goals within the expectationscurrently projected costs and the expected timeframes; unforeseen design, operational and technological difficulties; the outcome of securities analysts or investors, our share price may decline significantly.
Risks Related to activist investor campaigns. Responding to actions of an activist investor may be a significant distraction for our management and staff and could require us to expend significant time and resources, including legal fees and potential proxy solicitation expenses. Any of these conditions could materially adversely affect our financial performance.
Our substantial indebtedness could adversely affect our business and limit our ability to plan for or respond to changes in our business.
We have a substantial amount of indebtedness. As of December 29, 2019,January 1, 2023, our consolidated total indebtedness was approximately $4.11$5.02 billion. We may also incur additional debt, which would not be prohibited under the terms of our current securitized debt agreements. Our substantial indebtedness could have important consequences for our business and our shareholders. For example, it could:
•
Further, a portion of our indebtedness bears2021 Variable Funding Notes bear interest at fluctuating interest rates that in certain circumstances is based on the London interbank offered rate (“LIBOR”), and there is currently uncertainty around whether. In 2021, ICE Benchmark Administration Limited, the administrator for LIBOR, will continueconfirmed its intention to existcease the publication of any U.S. dollar LIBOR settings immediately following the LIBOR publication on June 30, 2023.
Our 2021 Variable Funding Notes loan documents provide that after 2021. Ifthe date on which the administrator for LIBOR permanently or indefinitely ceases to exist, we may need to renegotiate certainprovide all available settings of U.S. dollar LIBOR, any new advances under the 2021 Variable Funding Notes that would otherwise have borne interest based on LIBOR, as well as any existing LIBOR advances for which the interest period has expired, will instead bear interest at a forward-looking term rate based on the Secured Overnight Financing Rate (“Term SOFR”), plus a spread adjustment, that in each case have been selected or recommended by the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of New York. The loan documents also permit the lenders to effect a transition from LIBOR to Term SOFR at an earlier date, subject to certain conditions. Because the composition and we cannot predict what alternative indexcharacteristics of Term SOFR are not the same as those of LIBOR, there can be no assurance that Term SOFR will perform the same way LIBOR would be negotiated with our lenders. have at any given time or for any applicable period.
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As a result, our interest expense could increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.
In addition, the financial and other covenants we agreed to with our lenders may limit our ability to incur additional indebtedness, make investments, pay dividends and engage in other transactions, and the leverage may cause potential lenders to be less willing to loan funds to us in the future. Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of repayment of all of our indebtedness.
Downgrades in our credit ratings could impact our ability to access capital and materially and adversely affect our business, financial condition and results of operations.
Our debt is rated by credit rating agencies. These agencies may downgrade their credit ratings for us based on the performance of our business, our capital strategies or their overall view of our industry. There can be no assurance that any rating assigned to our currently outstanding indebtedness will remain in effect for any given period of time or that any such ratings will not be lowered, suspended or withdrawn entirely by a rating agency if, in that agency’s judgment, circumstances so warrant. A downgrade of our credit ratings could, among other things, increase our cost of borrowing, limit our ability to access capital or result in more restrictive covenants in agreements governing the terms of any future indebtedness that we may incur, including restrictions on our ability to pay dividends or repurchase shares, or require us to provide collateral for future borrowings, and thereby could adversely impact our business financial condition and results of operations.
We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which would adversely affect our financial condition and results of operations.
Our ability to make principal and interest payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations, in the amounts projected or at all, or if future borrowings are not available to us under our variable funding notes in amounts sufficient to fund our other liquidity needs, our financial condition and results of operations may be adversely affected. If we cannot generate sufficient cash flow from operations to make scheduled principal amortization and interest payments on our debt obligations in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. If we are unable to refinance any of our indebtedness on commercially reasonable terms or at all or to affect any other action relating to our indebtedness on satisfactory terms or at all, our business may be harmed.
The terms of our securitized debt financing of certain of our wholly-owned subsidiaries have restrictive terms and our failure to comply with any of these terms could put us in default, which would have an adverse effect on our business and prospects.
Unless and until we repay all outstanding borrowings under our securitized debt, we will remain subject to the restrictive terms of these borrowings. The securitized debt, under which certain of our wholly-owned subsidiaries issued and guaranteed fixed rate notes and variable funding senior revolving notes, contain a number of covenants, with the most significant financial covenant being a debt service coverage calculation. These covenants limit the ability of certain of our subsidiaries to, among other things:
•
The securitized debt also requires us to maintain specified financial ratios at the end of each fiscal quarter. These restrictions could affect our ability to pay dividends or repurchase shares of our common stock. Our ability to meet these financial ratios can be affected by events beyond our control, and we may not satisfy such a test. A breach of this covenant could result in a rapid amortization event or default under the securitized debt. If amounts owed under the securitized debt are accelerated because of a default under the securitized debt and we are unable to pay such amounts, the investors may have the right to assume control of substantially all of the securitized assets.
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During the term following issuance, the outstanding senior notes will accrue interest in accordance with the terms of the debt agreements. Additionally, our senior notes have original scheduled principal payments of $42.0 million in each of 2020 and 2021, $897.0 million in 2022, $33.0$51.5 million in each of 2023 and 2024, $1.15$1.17 billion in 2025, $20.8$39.3 million in 2026, $1.28$1.31 billion in 2027, $6.8$811.5 million in 2028, and $614.3$625.9 million in 2029. 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 shallmay be suspended if the leverage ratiosratio for the Company areis less than or equal to 5.0x total debt, as defined, to adjusted EBITDA, as defined in the indenture governing our securitized debt, and no
If we are unable to refinance or repay amounts under the securitized debt prior to the expiration of the term, our cash flow would be directed to the repayment of the securitized debt and, other than a weekly management fee sufficient to cover minimal selling, general and administrative expenses, would not be available for operating our business.
Regulatory, Legal and Compliance Risks
We face risks of litigation, investigations, enforcement actions and negative publicity from customers, franchisees, suppliers, employees, regulators and others in the ordinary course of business, which could divert our financial and management resources. Litigation, investigations, enforcement actions or publicity may adversely impact our financial condition and results of operations.
Claims of illness or injury relating to food quality or food handling are common in the food service industry, and vehicular accidents and injuries occur in the food delivery business. We are currently subject to a varietythese types of additionalclaims and have been subject to these types of claims in the past. Claims within our industry of improper supplier actions also occasionally arise that, if made against one of our suppliers, could potentially damage our brand image.
In addition, class action lawsuits have been filed, and may continue to be filed, against various QSRs alleging, among other things, that QSRs have failed to disclose the health risks associated with high-fat foods and that QSR marketing practices have encouraged obesity. State attorney general offices or other regulators have initiated and may in the future initiate investigations or enforcement actions against us. In addition to decreasing our franchisees.
Further, we may be subject to the reliance of a franchised store business on its franchiseesemployee, franchisee and the nature of franchisees in general, including the retention of franchisees (especially including ourtop-performingfranchisees)other claims in the future based on, among other things, discrimination, harassment, working and safety conditions, wrongful termination and wage, expense reimbursement, rest break and meal break issues, including claims relating to minimum wage and overtime compensation. We and our international master franchisees have been and continue to be subject to these types of claims. If one or more of these claims were to be successful or if there is a significant increase in the number of these claims or if we receive significant negative publicity, our abilitybusiness, financial condition and operating results could be harmed.
We and our franchisees are subject to attract, retain,extensive laws and motivate sufficient numbersgovernment regulation and requirements issued by other groups and our failure to comply with existing or increased laws and regulations could adversely affect our business and operating results.
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We are subject to numerous federal, state, local and foreign laws and regulations, as well as requirements issued by other groups, including those relating to:
We are subject to an FTC rule and to various state and foreign laws that govern the offer and sale of franchises. These laws regulate various aspects of the franchise relationship, including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines or other penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business.
We and our franchisees face various regulatory and legislative efforts to enforce employment laws, such as efforts to categorize franchisors as the co-employers or joint employers of their franchisees’ employees or to aggregate individual franchised businesses and classify them as large employers for minimum wage or other employment-related purposes. In August 2015, the National Labor Relations Board (“NLRB”) adopted a new and broader standard for determining when two or more otherwise unrelated employers may be found to be a joint employer of the same caliberemployees under the National Labor Relations Act. The NLRB issued a final rule which became effective April 27, 2020 that reinstates the standard that was in place before August 2015.
In December 2019, the NLRB directed an administrative law judge to approve settlement agreements (rather than rejecting the settlement and allowing the claims asserting that the franchisor should be the joint employer of its franchisees’ employees to proceed) in a decision related to another franchise system. On April 22, 2022, a federal appellate court rejected an appeal seeking to overturn that decision. The NLRB issued a proposed rule on September 6, 2022 that largely reestablishes the August 2015 joint employer standard. If the NLRB’s September 2022 proposed rule goes into effect or is adopted by other government agencies and/or applied generally to franchise relationships, it could cause us to be liable or held responsible for unfair labor practices and other violations of our franchisees and subject us to other liabilities, and require us to conduct collective bargaining negotiations regarding employees of totally separate, independent employers, most notably our franchisees. In such event, our operating expenses may increase as a result of required modifications to our business practices, increased litigation, governmental investigations or proceedings, administrative enforcement actions, fines and civil liability.
Additionally, depending upon the outcome and application of certain legal proceedings pending or concluded in federal court in California involving the California wage and hour laws in another franchise system, franchisors may be subject to claims that their franchisees should be treated as employees and not as independent contractors under the wage and hour laws of that state and, potentially, certain other states and localities with similar wage and hour laws. The California legislature has enacted a statute known as Assembly Bill 5 (AB-5), which went into effect on January 1, 2020. AB-5 requires “gig economy” workers to be reclassified as employees instead of independent contractors. However, depending upon the application of AB-5, franchisors in certain industries could be deemed to be covered by the statute, in which event certain franchisees could be deemed employees of the franchisors. While active efforts to narrow the reach of AB-5 continue, a bill (SB 967), which was introduced specifically to exempt the relationship between a franchisor and franchisee from the scope of AB-5, was not successful in the future.
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We and our franchisees are subject to the Fair Labor Standards Act of 1938, as amended (the “Fair Labor Standards Act”), which, along with the Family and Medical Leave Act, governs such matters as minimum wage and overtime requirements and other working conditions and various family leave mandates, as well as a variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters. We and our franchisees have experienced and expect further increases in payroll expenses as a result of government-mandated increases in the minimum wage, and although such increases are not currently expected to be material, there may be material increases in the future, including as a result of the FAST Act. Enactment and enforcement of various federal, state and local laws, rules and regulations on immigration and labor organizations may adversely impact the availability and costs of labor for Domino’s and franchisees’ stores in a particular area or across the United States. In addition, third-party suppliers may be affected by higher minimum wage standards, which may increase the price of goods and services they supply to us. Such increased expenses may cause our franchisees to exit the business or cause us to reduce the number of Company-owned stores, or otherwise adversely affect the amount of royalty payments and license fees we receive.
On January 12, 2020, the U.S. Department of Labor announced a final rule to update and clarify the definition of joint employer under the Fair Labor Standards Act. Under the final rule, the general test for assessing whether a party can be deemed a joint employer would be based upon whether that party (i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment; (iii) determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records. In the final rule, the Department of Labor describes instances in which joint employment would not be more or less likely to be found to exist under the Fair Labor Standards Act, which, according to the Department of Labor, includes the relationships that exist under the typical franchise business model. This rule may reduce a franchisor’s risk of liability that currently exists under the joint employer standard now in effect under the Fair Labor Standards Act (though ultimately, the facts specific to the franchisor-franchisee model at issue would be considered when determining liability). On September 8, 2020, a federal district court struck down a significant portion of the final rule. On July 29, 2021, the current administration’s Department of Labor issued a final rule rescinding the 2020 rule. The Department of Labor may revert to the more expansive interpretation of joint employer that existed prior to the adoption of the 2020 rule and/or interpretations that could result in franchisors being held liable or responsible for Fair Labor Standards Act violations by their franchisees. The rules of the Department of Labor are separate from the joint employer standard under the National Labor Relations Act or, as described above, potential liability as a joint employer under the National Labor Relations Act.
Certain governmental authorities and private litigants have recently asserted claims against franchisors, including us, for provisions in our prior franchise agreements that restrict franchisees from soliciting or hiring the employees of other franchisees or the applicable franchisor. Claims against franchisors for such clauses include allegations that these clauses violate state and federal antitrust and unfair practices laws by restricting the free movement of employees of franchisees and/or franchisor (including the employees of Company-owned stores), thereby depressing the wages of those employees.
The Patient Protection and Affordable Care Act (as amended, the “Affordable Care Act”) requires employers such as us to provide health insurance for all qualifying employees or pay penalties for not providing coverage. The majority of the increases in these costs began in 2015, and while the incremental costs of this program have not been material to us to date, we cannot predict what effect these costs will have on our results of operations and financial position, or the effects of the Affordable Care Act on some of our larger franchisees. Modifications to, or repeal of, all or certain provisions of the Affordable Care Act are also possible. Changes in tax laws or tax policy more broadly, increases in the enacted tax rates, adverse outcomes in connection with tax audits in any jurisdiction or any change in the pronouncements relating to accounting for income taxes could also impact our financial condition and results of operations. We may also become subject to legislation or regulation seeking to tax and/or regulate high-fat foods, foods with high sugar and salt content, or foods otherwise deemed to be “unhealthy,” and our capital expenditures could increase due to remediation and compliance measures related to these laws or regulations.
Adverse government regulations and enforcement efforts or non-compliance by us or our franchisees with any of the foregoing laws and regulations could lead to various claims or governmental or judicial fines, sanctions or other enforcement measures, which could negatively impact our business.
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Market and General Risks
Fluctuations in value of the U.S. dollar in relation to other currencies may lead to lower revenues and earnings.
Exchange rate fluctuations could have an adverse effect on our results of operations and we have in the past experienced significant adverse changes in foreign currency rates. International franchise royalties and fees represented approximately 6.5%, 6.8% and 6.1% of our total revenues in 2022, 2021 and 2020, respectively, a majority of which were denominated in foreign currencies. We also operate dough manufacturing and distribution facilities in Canada, which generate revenues denominated in Canadian dollars. Sales made by franchise stores outside the U.S. are denominated in the currency of the country in which the store is located, and this currency could become less valuable in U.S. dollars as a result of exchange rate fluctuations. Unfavorable currency fluctuations could lead to increased prices to customers outside the U.S. or lower profitability to our franchisees outside the U.S., or could result in lower revenues for us, on a U.S. dollar basis, from such customers and franchisees. A hypothetical 10% adverse change in the foreign currency rates in our international markets would have resulted in a negative impact on international royalty revenues of approximately $26.1 million in 2022.
Our annual and quarterly financial results are subject to significant fluctuations depending on various factors, many of which are beyond our control, and if we fail to meet the expectations of securities analysts or investors, our stock price may decline significantly or be subject to significant fluctuations.
Our annual and quarterly financial results, including our sales and operating results, can vary significantly from quarter-to-quarter and year-to-year depending on various factors, many of which are beyond our control. These factors include, among other things:
•
As a result, our operational performance may decline quickly and significantly in response to changes in order patterns or rapid decreases in demand for our products. Any such decline may cause us and our franchisees to experience lower sales revenue. We anticipate that fluctuations in operating results will continue in the future, and such fluctuations may result in significant fluctuations or a significant decline in our stock price.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease approximately 250,000285,000 square feet for our World Resource Center, including our Domino’s Innovation Garage, located in Ann Arbor, Michigan under an operating lease with Domino’s Farms Office Park, L.L.C., an unrelated company. Under an amendment to this lease, Domino’s Farms Office Park, L.L.C. constructed a new 33,000 square foot building that was leased to the Company upon completion in 2019. The lease, as amended, expires in 2029 and has two five-year renewal options.
We own five supply chain center buildings. We also own one store building that we lease to a U.S. franchisee. All other U.S. Company-owned stores are leased by us, typically underten-yearleases with one or two five-year renewal options. All other U.S. and internationalCanadian supply chain centers are leased by us, typically under leases ranging between five and 21 years with one or two five-year renewal options. All otherbuildings for U.S. Company-owned stores are leased by us, typically under ten-year leases with one or two five-year renewal options. All franchise stores are leased or owned directly by the respective franchisees. We believe that our existing headquarters and other leased and owned facilities are adequate to meet our current requirements.
Item 3. Legal Proceedings.
We are a party to lawsuits, revenue agent reviews by taxing authorities and administrative proceedings in the ordinary course of business which include, without limitation, workers’workers' compensation, general liability, automobile and franchisee claims. We are also subject to suits related to employment practices.
Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. These matters referenced above could be decided unfavorably to us and could require us to pay damages or make other expenditures in amounts or a range of amounts that cannot be estimated with accuracy. In management’s opinion, these matters, individually and in the aggregate, should not have a significant adverse effect on the financial condition of the Company, and the established accruals adequately provide for the estimated resolution of such claims.
While we may occasionally be party to large claims, including class action suits, we do not believe that any existing matters, individually or in the aggregate, will materially affect our financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 4A. Executive Officers of the Registrant.
The listing of executive officers of the Company is set forth under Part III Item 10. Directors, Executive Officers and Corporate Governance, on pages 75 through 78, which is incorporated herein by reference.
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As of February 13, 2020,16, 2023, Domino’s Pizza, Inc. had 170,000,000 authorized shares of common stock, par value $0.01 per share, of which 38,667,03935,419,653 were issued and outstanding. As of February 16, 2023, there were 1,507 registered holders of record of Domino’s Pizza, Inc.’s common stock. Domino’s Pizza, Inc.’s common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “DPZ.”
Our Board of Directors declared a quarterly dividend of $0.78$1.21 per common share on February 19, 202021, 2023 payable on March 30, 20202023 to shareholders of record at the close of business on March 13, 2020.
We currently anticipate continuing the payment of quarterly cash dividends. The actual amount of such dividends, if any, will depend upon future earnings, results of operations, capital requirements, our financial condition and certain other factors. There can be no assurance as to the amount of free cash flow that we will generate in future years and, accordingly, dividends will be considered after reviewing returns to shareholders, profitability expectations and financing needs and will be declared at the discretion of our Board of Directors.
As of February 13, 2020, there were 1,510 registered holders of record of Domino’s Pizza, Inc.’s common stock.
|
| Total |
|
| Average |
|
| Total |
|
| Maximum |
| ||||
Period #10 (September 12, 2022 to October 9, 2022) |
|
| 1,651 |
|
| $ | 310.40 |
|
|
| — |
|
| $ | 410,358 |
|
Period #11 (October 10, 2022 to November 6, 2022) |
|
| 1,052 |
|
|
| 338.17 |
|
|
| — |
|
|
| 410,358 |
|
Period #12 (November 7, 2022 to December 4, 2022) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 410,358 |
|
Period #13 (December 5, 2022 to January 1, 2023) |
|
| 854 |
|
|
| 380.09 |
|
|
| — |
|
|
| 410,358 |
|
Total |
|
| 3,557 |
|
| $ | 335.34 |
|
|
| — |
|
| $ | 410,358 |
|
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in thousands) | ||||||||||||
Period #10 (September 9, 2019 to October 6, 2019) | 1,281 | $ | 244.16 | — | $ | 1,000,000 | ||||||||||
Period #11 (October 7, 2019 to November 3, 2019) | 4,441 | 239.20 | 3,300 | 999,242 | ||||||||||||
Period #12 (November 4, 2019 to December 1, 2019) | 933,055 | 285.26 | 933,055 | 733,078 | ||||||||||||
Period #13 (December 2, 2019 to December 29, 2019) | 1,128,072 | 290.09 | 1,127,023 | 406,142 | ||||||||||||
Total | 2,066,849 | $ | 287.81 | 2,063,378 | $ | 406,142 | ||||||||||
(2)
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The following comparative stock performance line graph compares the cumulative shareholder return on the common stock of Domino’s Pizza, Inc. (NYSE: DPZ) for the five-year period between December 31, 20142017 and December 31, 2019,2022, with the cumulative total return on (i) the Standard & Poor’s 500 Index (the “S&P 500”) and, (ii) the peer group, the Standard & Poor’s 400 Restaurant Index (the “S&P 400 Restaurant Index”), which was the Company’s previously-utilized comparison index, and (iii) the Company’s current comparison index, the Standard & Poor’s Composite 1500 Restaurant Index (the “S&P 1500 Restaurant Index”). Management believes that the companies included in the S&P 4001500 Restaurant Index more appropriately reflect the scope and scale of the Company’s operations and better match the competitive market in which the Company operates.operates than the S&P 400 Restaurant Index. Due to the change in selected comparative indices, we are presenting the current comparative index and the comparative index that was used in the prior year. The cumulative total return computations set forth in the performance graph assume the investment of $100 in each of the Company’s common stock, the S&P 500, Index and the S&P 400 Restaurant Index and the S&P 1500 Restaurant Index on December 31, 2014.
Item 6. [Reserved].
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in this Form10-K.The selected financial data, with the exception of store counts, global retail sales growth and same store sales growth, has been derived from the audited consolidated financial statements of Domino’s Pizza, Inc. and subsidiaries. This historical data is not necessarily indicative of results to be expected for any future period.
Fiscal year ended (8) | ||||||||||||||||||||
(dollars in millions, except per share data) | December 29, 2019 | December 30, 2018 (4) | December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||||||||
Income statement data: | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
U.S. Company-owned stores | $ | 453.6 | $ | 514.8 | $ | 490.8 | $ | 439.0 | $ | 396.9 | ||||||||||
U.S. franchise royalties and fees | 428.5 | 391.5 | 351.4 | 312.3 | 272.8 | |||||||||||||||
U.S. franchise advertising (1) | 390.8 | 358.5 | — | — | — | |||||||||||||||
U.S. stores | 1,272.9 | 1,264.8 | 842.2 | 751.3 | 669.7 | |||||||||||||||
Supply chain | 2,104.9 | 1,943.3 | 1,739.0 | 1,544.3 | 1,383.2 | |||||||||||||||
International franchise royalties and fees | 241.0 | 224.7 | 206.7 | 177.0 | 163.6 | |||||||||||||||
Total revenues | 3,618.8 | 3,432.9 | 2,788.0 | 2,472.6 | 2,216.5 | |||||||||||||||
Cost of sales | 2,216.3 | 2,130.2 | 1,922.0 | 1,704.9 | 1,533.4 | |||||||||||||||
Operating margin | 1,402.5 | 1,302.7 | 866.0 | 767.7 | 683.1 | |||||||||||||||
General and administrative expense | 382.3 | 372.5 | 344.8 | 313.6 | 277.7 | |||||||||||||||
U.S. franchise advertising (1) | 390.8 | 358.5 | — | — | — | |||||||||||||||
Income from operations | 629.4 | 571.7 | 521.2 | 454.0 | 405.4 | |||||||||||||||
Interest income | 4.0 | 3.3 | 1.5 | 0.7 | 0.3 | |||||||||||||||
Interest expense | (150.8 | ) | (146.3 | ) | (122.5 | ) | (110.1 | ) | (99.5 | ) | ||||||||||
Income before provision for income taxes | 482.6 | 428.7 | 400.2 | 344.7 | 306.2 | |||||||||||||||
Provision for income taxes | 81.9 | 66.7 | 122.2 | 130.0 | 113.4 | |||||||||||||||
Net income | $ | 400.7 | $ | 362.0 | $ | 277.9 | $ | 214.7 | $ | 192.8 | ||||||||||
Earnings per share: | ||||||||||||||||||||
Common stock – basic | $ | 9.83 | $ | 8.65 | $ | 6.05 | $ | 4.41 | $ | 3.58 | ||||||||||
Common stock – diluted | 9.56 | 8.35 | 5.83 | 4.30 | 3.47 | |||||||||||||||
Balance sheet data (at end of period): | ||||||||||||||||||||
Cash and cash equivalents | $ | 190.6 | $ | 25.4 | $ | 35.8 | $ | 42.8 | $ | 133.4 | ||||||||||
Restricted cash and cash equivalents | 209.3 | 167.0 | 191.8 | 126.5 | 180.9 | |||||||||||||||
Cash and cash equivalents included in advertising fund assets, restricted | 84.0 | 45.0 | 27.3 | 25.1 | 19.9 | |||||||||||||||
Working capital (2) | 121.0 | 14.6 | (10.3 | ) | (34.3 | ) | 45.7 | |||||||||||||
Total assets (3) | 1,382.1 | 907.4 | 836.8 | 716.3 | 799.8 | |||||||||||||||
Total debt net of debt issuance cost | 4,114.4 | 3,531.6 | 3,153.8 | 2,187.9 | 2,240.8 | |||||||||||||||
Total stockholders’ deficit | (3,415.8 | ) | (3,039.9 | ) | (2,735.4 | ) | (1,883.1 | ) | (1,800.3 | ) | ||||||||||
Fiscal year ended (8) | ||||||||||||||||||||
(dollars in millions, except per share data) | December 29, 2019 | December 30, 2018 (4) | December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||||||||
Other financial data: | ||||||||||||||||||||
Depreciation and amortization | $ | 59.9 | $ | 53.7 | $ | 44.4 | $ | 38.1 | $ | 32.4 | ||||||||||
Capital expenditures (5) | $ | 88.7 | $ | 119.7 | $ | 90.3 | $ | 61.5 | $ | 62.4 | ||||||||||
Dividends declared per share | $ | 2.60 | $ | 2.20 | $ | 1.84 | $ | 1.52 | $ | 1.24 | ||||||||||
Global retail sales growth | 8.0 | % | 10.8 | % | 13.0 | % | 12.8 | % | 18.6 | % | ||||||||||
Same store sales growth (7): | ||||||||||||||||||||
U.S. Company-owned stores | 2.8 | % | 4.8 | % | 8.7 | % | 10.4 | % | 12.2 | % | ||||||||||
U.S. franchise stores | 3.2 | % | 6.8 | % | 7.6 | % | 10.5 | % | 11.9 | % | ||||||||||
U.S. stores | 3.2 | % | 6.6 | % | 7.7 | % | 10.5 | % | 12.0 | % | ||||||||||
International stores | 1.9 | % | 3.5 | % | 3.4 | % | 6.3 | % | 7.8 | % | ||||||||||
Store counts (at end of period): | ||||||||||||||||||||
U.S. Company-owned stores | 342 | 390 | 392 | 392 | 384 | |||||||||||||||
U.S. franchise stores | 5,784 | 5,486 | 5,195 | 4,979 | 4,816 | |||||||||||||||
U.S. stores | 6,126 | 5,876 | 5,587 | 5,371 | 5,200 | |||||||||||||||
International stores | 10,894 | 10,038 | 9,269 | 8,440 | 7,330 | |||||||||||||||
Total stores | 17,020 | 15,914 | 14,856 | 13,811 | 12,530 | |||||||||||||||
Overview
Our fiscal year typically includes 52 weeks, comprised of three twelve-week quarters and one sixteen-week quarter. Every five or six years our fiscal year includes an extra (or 532019, 20182022 and 20172021 each consisted of 52 weeks and fiscal 2020 consisted of 53 weeks.
In this section, we discuss the results of our operations for the fiscal year ended December 29, 2019January 1, 2023 compared to the fiscal year ended December 30, 2018.January 2, 2022. For a discussion of the fiscal year ended December 30, 2018January 2, 2022 compared to the fiscal year ended December 31, 2017,January 3, 2021, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on FormDecember 30, 2018.
Description of the Business
Domino’s is the largest pizza company in the world, based on global retail sales, with more than 17,00019,800 locations in over 90 markets around the world.world as of January 1, 2023, 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. Although we are a highly-recognized global brand, and we focus on value while serving neighborhoods locally through our large network of franchise owners and Company-owned stores.
Our 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 independent franchisees. Royalties are ongoingpercent-of-salesfees for use of the Domino’s brand marks. We also generate revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada and by operating a number of our own stores.Company-owned stores in the U.S. Franchisees profit by selling pizza and other complementary items to their local customers. In our international markets, we generally grant geographical rights to the Domino’s Pizza brand to master franchisees. These master franchisees are charged with developing their geographical area, and they maycan profit bystores. Everyonestores directly. We believe that everyone in the system can benefit, including the end consumer, who can purchase Domino’s menu items for themselves andfeed their family conveniently and economically.
Our financial results are driven largely by retail sales at our franchised and Company-owned stores. Changes in retail sales are driven by changes in same store sales and store counts. We monitor both of these metrics very closely, as they directly impact our revenues and profits, and we strive to consistently increase both metrics. Retail sales drive royalty payments from franchisees, as well as Company-owned store and supply chain revenues. Retail sales are primarily impacted by the strength of the Domino’s Pizza brand, the results of our extensive advertising through various media channels, the impact of technological innovation and digital ordering, our ability to execute our strong and proven business model and the overall global economic environment.
Our business model can yield strong returns for our franchise owners and our Company-owned stores. It can also yield significant cash flow 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 since becoming a publicly-traded company in 2004.
Critical accounting policies and estimates
The following discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, our management evaluates its estimates, including those related to revenue recognition, long-lived assets, casualty insurance and legal matters, share-based paymentsreserves and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Changesestimates, and changes in our accounting policies and estimates could materially impactaffect our results of operations and financial condition for any particular period.
33
We believe that our most critical accounting policies and estimates are:
Long-lived assets.
We record long-lived assets, including property, plant and equipment and capitalized software, at cost. For acquisitions of franchise operations, we estimate the fair values of the assets and liabilities acquired based on physical inspection of assets, historical experience and other information available to us regarding the acquisition. We depreciate and amortize long-lived assets using useful lives determined by us based on historical experience and other information available to us. We evaluate the potential impairment of long-lived assets at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Our periodic evaluation is based on various analyses, including, on an annual basis, the projection of undiscounted cash flows. If we determine that the carrying amount of an asset (or asset group) may not be recoverable, we compare the net carrying value of the asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. For Company-owned stores, we perform related impairment tests on an operating market basis, which we have determined to be the lowest level for which identifiable cash flows are largely independent of other cash flows. If the carrying amount of a long-lived asset exceeds the amount of the expected future undiscounted cash flows of that asset, we estimate the fair value of the asset. If the carrying amount of the asset exceeds the estimated fair value of the asset, an impairment loss is recognized, and the asset is written down to its estimated fair value.
We have not made any significant changes in the methodology used to project the future market cash flows of Company-owned stores during the years presented. Same store sales fluctuations and the rates at which operating costs will fluctuate in the future are key factors in evaluatingdetermining projected cash flows used to evaluate recoverability of the related assets. If our same store sales significantly decline or if operating costs increase and we are unable to recover these costs, the carrying value of our Company-owned stores, by market, may be unrecoverable and we may be required to recognize an impairment charge.
Casualty insurance reserves
For certain periods prior to December 1998 and for periods after December 2001, we maintain insurance coverage for workers’ compensation, general liability and owned andunder insurance policies requiring paymentdepending on policy year and line of a deductiblecoverage. We are generally responsible for each occurrence up to between $500,000 and $3.0$5.5 million per occurrence under these retention programs for owned and non-owned automobile liabilities, depending on the policy year and line of coverage. The related insurance reserves are based on undiscounted independent actuarial estimates, which are based on historical information along with assumptions about future events. There is inherent uncertainty in the ultimate cost for known claims under our insurance coverages, and for incidents that have occurred that will be subject to a claim, but have yet to be reported to us. Analyses of historical trends and actuarial valuation methods are utilized to estimate the ultimate claim costs for claims incurred as of the balance sheet date and for claims incurred but not yet reported. When estimating these liabilities, several factors are considered, including the severity, duration and frequency of claims, legal cost associated with claims, healthcare trends and projected inflation.
Our methodology for determining our exposure has remained consistent throughout the years presented. Management believes that the various assumptions developed, and actuarial methods used to determine our casualty insurance reserves are reasonable and provide meaningful data that management uses to make its best estimate of our exposure to these risks. Changes in assumptions for such factors as medical costs and legal actions, as well as changes in actual experience, could cause our estimates to change in the near term which could result in an increase or decrease in the related expense in future periods. A 10% change in our casualty insurance liability at December 29, 2019January 1, 2023 would have affected our income before provision for income taxes by approximately $5.8 million in 2019.2022. We had accruals for casualty insurance mattersreserves of approximately $58.4$57.6 million and $56.5 million at December 29, 2019January 1, 2023 and $53.3 million at December 30, 2018.
34
Income taxes
The U.S. Federal statutory income tax rate was 21% in each of 2022, 2021 and 2020. Our Federal income tax provision calculated based on the grant date fair value of the awards. The grant date fair value of each restricted stockFederal statutory rate was $120.3 million, $131.4 million and performance-based restricted stock award is equal to the market price of our stock on the date of grant. The grant date fair value of each stock option award is estimated using the Black-Scholes option pricing model. The pricing model requires assumptions, including the expected life of the stock option, the risk-free interest rate, the expected dividend yield$116.6 million in 2022, 2021 and expected volatility of our stock over the expected life, which significantly impact the assumed fair value. We account for forfeitures as they occur. Additionally, our stock option, restricted stock and performance-based restricted stock arrangements provide for accelerated vesting and the ability to exercise during the remainder of theten-yearstock option life upon the retirement of individuals holding the awards who have achieved specified service and age requirements.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We measure deferred tax assets and liabilitiestaxes using current enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid. Judgment is required in determining the provision for income taxes, related reserves and deferred tax assets and liabilities.taxes. These include establishing a valuation allowance related to the ability to realize certain deferred tax assets, if necessary. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax assets will be realized. Our accounting for deferred tax assetstaxes represents our best estimate of future events. Our netExcept with respect to certain foreign tax credits and interest deductibility in separately filed states, our deferred tax assets assume that we will generate sufficient taxable income in specific tax jurisdictions, based on our estimates and assumptions. As of January 1, 2023 and January 2, 2022, we had total foreign tax credits of $13.5 million and $10.2 million, respectively, each of which were fully offset with a corresponding valuation allowance. We also had valuation allowances related to interest deductibility in separately filed states of $1.5 million and $1.2 million as of January 1, 2023 and January 2, 2022, respectively. We believe our remaining deferred tax assets will be realized. Changes in our current estimates due to unanticipated events could have a material impact on our financial condition and results of operations.
Fiscal 2022 Highlights
Excluding the negative impact of foreign currency, Domino’s experienced global retail sales growth during 2022. U.S. same store sales declined 0.8% during 2022, rolling over an increase in U.S. same store sales of 3.5% in 2021. The decline in U.S. same store sales in 2022 was attributable to lower order counts due in part to labor shortages affecting store hours and staffing levels in many of our markets and economic stimulus activity in the U.S in 2021 in response to the COVID-19 pandemic which did not recur in 2022. A higher average ticket per transaction resulting from higher menu and national offer pricing as well as increases to our average delivery fee partially offset the decline in U.S. same store sales in 2022. International same store sales (excluding foreign currency impact) increased 0.1% during 2022, rolling over an increase in international same store sales (excluding foreign currency impact) of 8.0% in 2021. International same store sales (excluding foreign currency impact) were pressured in 2022 due in part to a value added tax holiday in the United Kingdom in 2021 that expired 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.
During fiscal 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 2021. Our overall operating results in fiscal 2022 were also negatively impacted by changes in foreign currency exchange rates resulting from the global macroeconomic environment.
During 2022, we continued our global expansion with the opening of 1,032 net stores. We had 126 net stores open in the U.S. comprised of 141 store openings and 15 closures. We had 906 net stores open internationally comprised of 1,135 store openings and 229 closures, primarily in Brazil, Russia and Italy.
We remained focused on improving the customer experience through our technology initiatives, including our GPS delivery tracking technology, which allows customers to monitor the progress of their food, from the preparation stages to the time it is in the oven to the time it arrives at their doors. Our emphasis on technological innovation helped the Domino’s system generate approximately two-thirds of global retail sales from digital channels in 2022. Overall, we believe our continued global store growth, along with our global retail sales growth (excluding foreign currency impact), emphasis on technology and marketing initiatives, have combined to strengthen our brand.
35
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 growth 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. 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. Global retail sales growth in 2021 and 2020 reflect the impact of the 53rd week in 2020.
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
U.S. stores |
|
| + 1.3% |
|
|
| + 4.3% |
|
|
| + 17.6% |
|
International stores (excluding foreign currency impact) |
|
| + 6.3% |
|
|
| + 13.9% |
|
|
| + 8.8% |
|
Total (excluding foreign currency impact) |
|
| + 3.9% |
|
|
| + 8.9% |
|
|
| + 13.2% |
|
Same Store Sales Growth
2019 | 2018 (1) | 2017 | ||||||||||
U.S. Company-owned stores | 2.8 | % | 4.8 | % | 8.7 | % | ||||||
U.S. franchise stores | 3.2 | % | 6.8 | % | 7.6 | % | ||||||
U.S. stores | 3.2 | % | 6.6 | % | 7.7 | % | ||||||
International stores (excluding foreign currency impact) | 1.9 | % | 3.5 | % | 3.4 | % | ||||||
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. The 53rd week in fiscal 2020 had no impact on reported same store sales growth amounts.
|
| 2022 |
| 2021 |
| 2020 |
U.S. Company-owned stores (1) |
| (2.6)% |
| (3.6)% |
| + 11.0% |
U.S. franchise stores (1) |
| (0.7)% |
| + 3.9% |
| + 11.5% |
U.S. stores |
| (0.8)% |
| + 3.5% |
| + 11.5% |
International stores (excluding foreign currency impact) |
| + 0.1% |
| + 8.0% |
| + 4.4% |
(1) | During the first quarter of 2022, we |
U.S. Company- owned Stores | U.S. Franchise Stores | Total U.S. Stores | International Stores | Total | ||||||||||||||||
Store count at January 1, 2017 | 392 | 4,979 | 5,371 | 8,440 | 13,811 | |||||||||||||||
Openings | 16 | 213 | 229 | 891 | 1,120 | |||||||||||||||
Closings | — | (13 | ) | (13 | ) | (62 | ) | (75 | ) | |||||||||||
Transfers | (16 | ) | 16 | — | — | — | ||||||||||||||
Store count at December 31, 2017 | 392 | 5,195 | 5,587 | 9,269 | 14,856 | |||||||||||||||
Openings | 12 | 255 | 267 | 916 | 1,183 | |||||||||||||||
Closings | — | (9 | ) | (9 | ) | (116 | ) | (125 | ) | |||||||||||
Transfers (1) | (14 | ) | 45 | 31 | (31 | ) | — | |||||||||||||
Store count at December 30, 2018 | 390 | 5,486 | 5,876 | 10,038 | 15,914 | |||||||||||||||
Openings | 12 | 253 | 265 | 939 | 1,204 | |||||||||||||||
Closings | (1 | ) | (14 | ) | (15 | ) | (83 | ) | (98 | ) | ||||||||||
Transfers | (59 | ) | 59 | — | — | — | ||||||||||||||
Store count at December 29, 2019 | 342 | 5,784 | 6,126 | 10,894 | 17,020 | |||||||||||||||
(dollars in millions) | 2019 | 2018 (1) | 2017 | |||||||||||||||||||||
U.S. Company-owned stores | $ | 453.6 | $ | 514.8 | $ | 490.8 | ||||||||||||||||||
U.S. franchise royalties and fees | 428.5 | 391.5 | 351.4 | |||||||||||||||||||||
Supply chain | 2,104.9 | 1,943.3 | 1,739.0 | |||||||||||||||||||||
International franchise royalties and fees | 241.0 | 224.7 | 206.7 | |||||||||||||||||||||
U.S. franchise advertising (2) | 390.8 | 358.5 | — | |||||||||||||||||||||
Total revenues | 3,618.8 | 100.0 | % | 3,432.9 | 100.0 | % | 2,788.0 | 100.0 | % | |||||||||||||||
U.S. Company-owned stores | 346.2 | 398.2 | 377.7 | |||||||||||||||||||||
Supply chain | 1,870.1 | 1,732.0 | 1,544.3 | |||||||||||||||||||||
Total cost of sales | 2,216.3 | 61.2 | % | 2,130.2 | 62.1 | % | 1,922.0 | 68.9 | % | |||||||||||||||
Operating margin | 1,402.5 | 38.8 | % | 1,302.7 | 37.9 | % | 866.0 | 31.1 | % | |||||||||||||||
General and administrative | 382.3 | 10.6 | % | 372.5 | 10.8 | % | 344.8 | 12.4 | % | |||||||||||||||
U.S. franchise advertising (2) | 390.8 | 10.8 | % | 358.5 | 10.4 | % | — | — | % | |||||||||||||||
Income from operations | 629.4 | 17.4 | % | 571.7 | 16.7 | % | 521.2 | 18.7 | % | |||||||||||||||
Interest expense, net | (146.8 | ) | (4.1 | )% | (143.0 | ) | (4.2 | )% | (121.1 | ) | (4.3 | )% | ||||||||||||
Income before provision for income taxes | 482.6 | 13.3 | % | 428.7 | 12.5 | % | 400.2 | 14.4 | % | |||||||||||||||
Provision for income taxes | 81.9 | 2.3 | % | 66.7 | 2.0 | % | 122.2 | 4.4 | % | |||||||||||||||
Net income | $ | 400.7 | 11.1 | % | $ | 362.0 | 10.5 | % | $ | 277.9 | 10.0 | % | ||||||||||||
During the fourth quarter of 2022, we refranchised 114 U.S. Company-owned stores (the “2022 Store Sale”). The same store sales growth for these stores is reflected in U.S. franchise |
Store Growth Activity
Store counts and net store growth are commonly used statistical measures in the quick-service restaurant industry that are important to 2018
|
| U.S. |
|
| U.S. |
|
| Total |
|
| International Stores |
|
| Total |
| |||||
Store count at December 29, 2019 |
|
| 342 |
|
|
| 5,784 |
|
|
| 6,126 |
|
|
| 10,894 |
|
|
| 17,020 |
|
Openings |
|
| 22 |
|
|
| 218 |
|
|
| 240 |
|
|
| 718 |
|
|
| 958 |
|
Closings |
|
| (1 | ) |
|
| (10 | ) |
|
| (11 | ) |
|
| (323 | ) |
|
| (334 | ) |
Store count at January 3, 2021 |
|
| 363 |
|
|
| 5,992 |
|
|
| 6,355 |
|
|
| 11,289 |
|
|
| 17,644 |
|
Openings |
|
| 13 |
|
|
| 201 |
|
|
| 214 |
|
|
| 1,094 |
|
|
| 1,308 |
|
Closings |
|
| (1 | ) |
|
| (8 | ) |
|
| (9 | ) |
|
| (95 | ) |
|
| (104 | ) |
Store count at January 2, 2022 |
|
| 375 |
|
|
| 6,185 |
|
|
| 6,560 |
|
|
| 12,288 |
|
|
| 18,848 |
|
Openings |
|
| 5 |
|
|
| 136 |
|
|
| 141 |
|
|
| 1,135 |
|
|
| 1,276 |
|
Closings |
|
| (3 | ) |
|
| (12 | ) |
|
| (15 | ) |
|
| (229 | ) |
|
| (244 | ) |
Transfers |
|
| (91 | ) |
|
| 91 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Store count at January 1, 2023 |
|
| 286 |
|
|
| 6,400 |
|
|
| 6,686 |
|
|
| 13,194 |
|
|
| 19,880 |
|
36
Income Statement Data
(tabular amounts in millions, except percentages)
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Company-owned stores |
| $ | 445.8 |
|
|
|
|
| $ | 479.0 |
|
|
|
|
| $ | 485.6 |
|
|
|
| |||
U.S. franchise royalties and fees |
|
| 556.3 |
|
|
|
|
|
| 539.9 |
|
|
|
|
|
| 503.2 |
|
|
|
| |||
Supply chain |
|
| 2,754.7 |
|
|
|
|
|
| 2,561.0 |
|
|
|
|
|
| 2,416.7 |
|
|
|
| |||
International franchise royalties and fees |
|
| 295.0 |
|
|
|
|
|
| 298.0 |
|
|
|
|
|
| 249.8 |
|
|
|
| |||
U.S. franchise advertising |
|
| 485.3 |
|
|
|
|
|
| 479.5 |
|
|
|
|
|
| 462.2 |
|
|
|
| |||
Total revenues |
|
| 4,537.2 |
|
|
| 100.0 | % |
|
| 4,357.4 |
|
|
| 100.0 | % |
|
| 4,117.4 |
|
|
| 100.0 | % |
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Company-owned stores |
|
| 378.0 |
|
|
|
|
|
| 374.1 |
|
|
|
|
|
| 379.6 |
|
|
|
| |||
Supply chain |
|
| 2,510.5 |
|
|
|
|
|
| 2,295.0 |
|
|
|
|
|
| 2,143.3 |
|
|
|
| |||
Total cost of sales |
|
| 2,888.6 |
|
|
| 63.7 | % |
|
| 2,669.1 |
|
|
| 61.3 | % |
|
| 2,522.9 |
|
|
| 61.3 | % |
Gross margin |
|
| 1,648.6 |
|
|
| 36.3 | % |
|
| 1,688.2 |
|
|
| 38.7 | % |
|
| 1,594.5 |
|
|
| 38.7 | % |
General and administrative |
|
| 416.5 |
|
|
| 9.2 | % |
|
| 428.3 |
|
|
| 9.8 | % |
|
| 406.6 |
|
|
| 9.9 | % |
U.S. franchise advertising |
|
| 485.3 |
|
|
| 10.7 | % |
|
| 479.5 |
|
|
| 11.0 | % |
|
| 462.2 |
|
|
| 11.2 | % |
Refranchising gain |
|
| (21.2 | ) |
|
| (0.5 | )% |
|
| — |
|
|
| 0.0 | % |
|
| — |
|
|
| 0.0 | % |
Income from operations |
|
| 767.9 |
|
|
| 16.9 | % |
|
| 780.4 |
|
|
| 17.9 | % |
|
| 725.6 |
|
|
| 17.6 | % |
Other income |
|
| — |
|
|
| 0.0 | % |
|
| 36.8 |
|
|
| 0.8 | % |
|
| — |
|
|
| 0.0 | % |
Interest expense, net |
|
| (195.1 | ) |
|
| (4.3 | )% |
|
| (191.5 | ) |
|
| (4.3 | )% |
|
| (170.5 | ) |
|
| (4.1 | )% |
Income before provision for income taxes |
|
| 572.8 |
|
|
| 12.6 | % |
|
| 625.7 |
|
|
| 14.4 | % |
|
| 555.1 |
|
|
| 13.5 | % |
Provision for income taxes |
|
| 120.6 |
|
|
| 2.6 | % |
|
| 115.2 |
|
|
| 2.7 | % |
|
| 63.8 |
|
|
| 1.6 | % |
Net income |
| $ | 452.3 |
|
|
| 10.0 | % |
| $ | 510.5 |
|
|
| 11.7 | % |
| $ | 491.3 |
|
|
| 11.9 | % |
2022 compared to 2021
(tabular amounts in millions, except percentages)
Revenues
|
| 2022 |
|
| 2021 |
| ||||||||||
U.S. Company-owned stores |
| $ | 445.8 |
|
|
| 9.8 | % |
| $ | 479.0 |
|
|
| 11.0 | % |
U.S. franchise royalties and fees |
|
| 556.3 |
|
|
| 12.3 | % |
|
| 539.9 |
|
|
| 12.4 | % |
Supply chain |
|
| 2,754.7 |
|
|
| 60.7 | % |
|
| 2,561.0 |
|
|
| 58.8 | % |
International franchise royalties and fees |
|
| 295.0 |
|
|
| 6.5 | % |
|
| 298.0 |
|
|
| 6.8 | % |
U.S. franchise advertising |
|
| 485.3 |
|
|
| 10.7 | % |
|
| 479.5 |
|
|
| 11.0 | % |
Total revenues |
| $ | 4,537.2 |
|
|
| 100.0 | % |
| $ | 4,357.4 |
|
|
| 100.0 | % |
Revenues primarily consist of retail sales from our Company-owned stores, royalties and fees and 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 as a result of fluctuations in commodity prices as well as the mix of products we sell.
Consolidated revenues increased $185.9$179.8 million, or 5.4%4.1%, in 20192022 due primarily to higher supply chain food volumes as well as higher global franchise revenues resulting from retail sales growth. Thesedue to increases in revenues were partially offset by lower U.S. Company-owned store revenues resulting from the sale of 59 Company-owned storesour market basket pricing to certain of our existing U.S. franchisees during the second quarter of 2019 (the “2019 Store Sale”). These changes in revenues are more fully described below.
2019 | 2018 | |||||||||||||||
U.S. Company-owned stores | $ | 453.6 | 35.6 | % | $ | 514.8 | 40.7 | % | ||||||||
U.S. franchise royalties and fees | 428.5 | 33.7 | % | 391.5 | 31.0 | % | ||||||||||
U.S. franchise advertising | 390.8 | 30.7 | % | 358.5 | 28.3 | % | ||||||||||
Total U.S. stores revenues | $ | 1,272.9 | 100.0 | % | $ | 1,264.8 | 100.0 | % | ||||||||
37
U.S. Stores
|
| 2022 |
|
| 2021 |
| ||||||||||
U.S. Company-owned stores |
| $ | 445.8 |
|
|
| 30.0 | % |
| $ | 479.0 |
|
|
| 32.0 | % |
U.S. franchise royalties and fees |
|
| 556.3 |
|
|
| 37.4 | % |
|
| 539.9 |
|
|
| 36.0 | % |
U.S. franchise advertising |
|
| 485.3 |
|
|
| 32.6 | % |
|
| 479.5 |
|
|
| 32.0 | % |
Total U.S. stores revenues |
| $ | 1,487.4 |
|
|
| 100.0 | % |
| $ | 1,498.4 |
|
|
| 100.0 | % |
U.S. Company-owned Stores
Revenues from U.S. Company-owned store operations decreased $33.2 million, or 6.9%, in 2022 primarily driven by the 2022 Store Sale. This decrease was partially offset by an increase in revenues resulting from the 2022 Store Purchase. The decrease in U.S. Company-owned store revenue was also a result of lower U.S. Company-owned same store sales in 2022. U.S. Company-owned same store sales declined 2.6% in 2022 and declined 3.6% in 2021.
U.S. Franchise Royalties and Fees
Revenues from U.S. franchise advertisingroyalties and fees increased $32.3$16.4 million, or 9.0%3.0%, in 20192022, due primarily to higher same store sales and an increase in the average number of U.S. franchised stores open during the yearperiod resulting primarily from net store growth as well as an increase in fees paid by our franchisees for the use of our technology platforms. The 2022 Store Sale also contributed to the increase in U.S. franchise royalties and fee revenues. These increases were partially offset by a decline in U.S. franchise same store sales in 2022 and, to a lesser extent, the 20192022 Store Sale.
U.S. Franchise Advertising
Revenues from supply chain operations are primarily comprised of sales of food, equipment and supplies from our supply chain centers to substantially all of our U.S. franchised stores and certain international franchised stores. Supply chain revenuesfranchise advertising increased $161.6$5.8 million, or 8.3%1.2%, in 2019. This increase was due primarily to higher volumes from increased orders resulting from an increase in the average number of U.S. franchise stores open during the year and an increase in market basket pricing to stores. Our market basket pricing to stores increased 1.7% during 2019, which resulted in an estimated $31.8 million increase in supply chain revenue.
Supply Chain
Supply chain revenues increased $193.8 million, or 7.6%, in 2022 due to higher market basket pricing to stores, and was partially offset by lower order volumes at our U.S. franchised stores during 2022. The market basket pricing change, a statistical measure utilized by management, is calculated as the percentage change of the market basket 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 market basket prices fluctuate, our revenues, cost of sales and gross margin percentages in our supply chain segment also fluctuate. Our market basket pricing to stores increased 13.2% during 2022, which resulted in an estimated $296.1 million increase in supply chain revenues.
International Franchise Royalties and Fees
Revenues from international franchise royalties and fees decreased $3.0 million, or 1.0%, in 2022 due primarily to the negative impact of changes in foreign currency exchange rates of approximately $8.9$28.4 million in 20192022 which was partially offset these increases. by an increase in the average number of international franchised stores open during the period resulting from net store growth. 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.
Excluding the impact of foreign currency exchange rates, international same store sales increased 1.9%0.1% in 2019 as compared to 2018.
38
Cost of salesSales / Operating margin.
|
| 2022 |
|
| 2021 |
| ||||||||||
Total revenues |
| $ | 4,537.2 |
|
|
| 100.0 | % |
| $ | 4,357.4 |
|
|
| 100.0 | % |
Total cost of sales |
|
| 2,888.6 |
|
|
| 63.7 | % |
|
| 2,669.1 |
|
|
| 61.3 | % |
Gross margin |
| $ | 1,648.6 |
|
|
| 36.3 | % |
| $ | 1,688.2 |
|
|
| 38.7 | % |
Consolidated cost of sales consists primarily 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. The changes to the consolidated operatingConsolidated gross margin which(which we define as revenues less cost of sales are summarized in the following table.
2019 | 2018 | |||||||||||||||
Consolidated revenues | $ | 3,618.8 | 100.0 | % | $ | 3,432.9 | 100.0 | % | ||||||||
Consolidated cost of sales | 2,216.3 | 61.2 | % | 2,130.2 | 62.1 | % | ||||||||||
Consolidated operating margin | $ | 1,402.5 | 38.8 | % | $ | 1,302.7 | 37.9 | % | ||||||||
As a percentage of total revenues, ourthe consolidated operatinggross margin increased 0.9decreased 2.4 percentage points to 36.3% in 2022 from 38.7% in 2021. Company-owned store gross margin decreased 6.7 percentage points in 2019 due to higher global royalty revenues and an increase in Company-owned store2022 and supply chain operating margins. Company-owned store operatinggross margin increased 1.0 percentage point in 2019 and supply chain operating margin increased 0.3decreased 1.5 percentage points in 2019.2022. These changes in gross margin are described in more fully discusseddetail below.
U.S. Company-owned stores.
|
| 2022 |
|
| 2021 |
| ||||||||||
Revenues |
| $ | 445.8 |
|
|
| 100.0 | % |
| $ | 479.0 |
|
|
| 100.0 | % |
Cost of sales |
|
| 378.0 |
|
|
| 84.8 | % |
|
| 374.1 |
|
|
| 78.1 | % |
Store gross margin |
| $ | 67.8 |
|
|
| 15.2 | % |
| $ | 104.9 |
|
|
| 21.9 | % |
U.S. Company-owned store operatinggross margin which do(which does not include other store-level costs such as royalties and advertising, are summarizedadvertising) decreased $37.1 million, or 35.4%, in 2022 due primarily to the 2022 Store Sale and higher market basket prices and, to a lesser extent, higher occupancy costs. These decreases were partially offset by lower labor and delivery costs, primarily attributable to the decrease in the following table.
2019 | 2018 | |||||||||||||||
Revenues | $ | 453.6 | 100.0 | % | $ | 514.8 | 100.0 | % | ||||||||
Cost of sales | 346.2 | 76.3 | % | 398.2 | 77.3 | % | ||||||||||
Store operating margin | $ | 107.4 | 23.7 | % | $ | 116.6 | 22.7 | % | ||||||||
•
Supply chain.
|
| 2022 |
|
| 2021 |
| ||||||||||
Revenues |
| $ | 2,754.7 |
|
|
| 100.0 | % |
| $ | 2,561.0 |
|
|
| 100.0 | % |
Cost of sales |
|
| 2,510.5 |
|
|
| 91.1 | % |
|
| 2,295.0 |
|
|
| 89.6 | % |
Supply chain gross margin |
| $ | 244.2 |
|
|
| 8.9 | % |
| $ | 266.0 |
|
|
| 10.4 | % |
Supply chain operatinggross margin are summarized in the following table.
2019 | 2018 | |||||||||||||||
Revenues | $ | 2,104.9 | 100.0 | % | $ | 1,943.3 | 100.0 | % | ||||||||
Cost of sales | 1,870.1 | 88.8 | % | 1,732.0 | 89.1 | % | ||||||||||
Supply chain operating margin | $ | 234.8 | 11.2 | % | $ | 211.3 | 10.9 | % | ||||||||
39
General and administrative expenses.
General and administrative expenses increased $9.8decreased $11.8 million, or 2.6%2.8%, in 2019. Apre-taxgain of $5.9 million recognized from the sale of 12 Company-owned stores in 2018 resulted in an increase in general and administrative expenses as compared to the prior year. Lower advertising expenses, resulting2022 driven primarily from the 2019 Store Sale,by lower labor costs, partially offset these increases. Continued investments in technological initiatives and other areas also contributed to the increase in 2019.
U.S. franchise advertising
U.S. franchise advertising expenses increased $32.3$5.8 million, or 9.0%1.2%, in 2019, consistent with the increase in2022 due to higher U.S. franchise advertising revenue.revenues as discussed above. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized, as our consolidated
Refranchising Gain
During 2022, we completed the 2022 Store Sale in which we refranchised 114 U.S. Company-owned stores in Arizona and Utah for proceeds of $41.1 million. In connection with the 2022 Store Sale, we recorded a $21.2 million pre-tax refranchising gain on the sale of the related assets and liabilities, including a $4.3 million reduction in goodwill.
Other Income
Other income increased $0.7 million to $4.0was $36.8 million in 2019 due2021, representing the unrealized gains recorded on the Company’s investment in DPC Dash Ltd resulting from the observable changes in price from the valuation of the Company’s additional $40.0 million investment made in the first quarter of 2021 and the additional $9.1 million investment made in the fourth quarter of 2021. We did not record any adjustments to athe carrying amount of $125.8 million in fiscal 2022.
Interest Expense, Net
Interest expense, net, increased $3.6 million, or 1.9%, in 2022 driven primarily by higher average cash and cash equivalents balance andborrowings resulting from our recapitalization transaction completed on April 16, 2021 (the “2021 Recapitalization”), as well as borrowings on our variable funding notes. These increases were partially offset by higher interest ratesincome earned on our cash equivalents and restricted cash equivalents.
Provision for income taxes.
Provision for income taxes increased $15.2$5.3 million, or 4.6% in 2022 due to $81.9 milliona higher effective tax rate, partially offset by a decrease in 2019 and theincome before provision for income taxes. The effective tax rate increased to 17.0% in 201921.0% during 2022 as compared to 15.6%18.4% in 2018. Higherpre-taxincome and2021. The higher effective tax rate in 2022 was driven in part by a $4.3 million valuation allowance, primarily related to expected limitations on foreign tax credits, contributed to the increase2.6 percentage point change in tax expense. Higher excess tax benefits onfrom equity-based compensation, which are recorded as a reduction to the provision for income tax provision, partially offset these increases. Excesstaxes. The decrease in excess tax benefits recorded were higher by $1.9 millionfrom equity-based compensation was a result of fewer stock option exercises in 20192022 as compared to 2018.
40
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.
|
| 2022 | 2021 |
| ||||
U.S. Stores |
| $ | 438.6 |
|
| $ | 454.9 |
|
Supply Chain |
|
| 208.8 |
|
|
| 229.9 |
|
International Franchise |
|
| 236.1 |
|
|
| 241.9 |
|
Other |
|
| (26.0 | ) |
|
| (42.9 | ) |
U.S. Stores
U.S. stores Segment Income decreased $16.3 million, or 3.6%, in 2022, primarily as a result of the $37.1 million decrease in U.S. Company-owned store gross margin, and was partially offset by the increase in revenues from U.S. franchise royalties and fees of $16.4 million, 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.
Supply Chain
Supply chain Segment Income decreased $21.1 million, or 9.2%, in 2022 due primarily to the $21.7 million decrease in supply chain gross margin described above.
International Franchise
International franchise Segment Income decreased $5.7 million, or 2.4%, in 2022 due primarily to the $3.0 million decrease in international franchise revenues discussed above, as well as higher provision for losses on accounts receivable. 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.
Other
Other Segment Income increased $16.9 million, or 39.4%, in 2022 due primarily to lower labor costs as well as higher corporate administrative costs allocated to our segments as compared to 2021. The increase in allocated costs in 2022 was due primarily to higher investments in technological initiatives to support technology for our U.S. and international franchise stores.
New Accounting Pronouncements
The impact of new accounting pronouncements adopted and the estimated impact of new accounting pronouncements that we will adopt in future years is included in Note 1 to the consolidated financial statements.
COVID-19 Impact
During the COVID-19 pandemic, we have made certain investments related to safety and cleaning equipment, enhanced sick pay and compensation for frontline team members and support for our franchisees and their communities. While we have seen an increase in sales in certain markets during the COVID-19 pandemic, including increased sales related to heightened reliance on delivery and carryout businesses, future sales are not possible to estimate and it is unclear whether and to what extent sales and same store sales will be impacted if and when consumer behavior and general economic and business activity return to pre-pandemic levels. While it is not possible at this time to estimate the full continued impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt our continuing operations and supply chain and, as a result, could adversely impact our business, financial condition or results of operations.
41
Liquidity and capital resources
Historically, we have operated with minimal positive working capital or negative working capital, primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities.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 coupled with the use ofallow us to manage our working capital and our ongoing cash flows from operations to service our debt obligations, invest in our business and other strategic opportunities, pay dividends and repurchase and retire shares of our common stock, reduce our working capital amounts.stock. As of December 29, 2019,January 1, 2023, we had working capital of $121.0$58.0 million, excluding restricted cash and cash equivalents of $209.3$191.3 million, advertising fund assets, restricted of $105.4$162.7 million and advertising fund liabilities of $101.9$157.9 million. Working capital includes total unrestricted cash and cash equivalents of $190.6$60.4 million.
Our primary sourcesources of liquidity isare cash flows from operations and availability of borrowings under our variable funding notes. During 2022, we experienced global retail sales growth, excluding foreign currency impact, in both our U.S. and international businesses. These factors contributed to our continued ability to generate positive operating cash flows. In connection with the 2019 Recapitalization,addition to our cash flows from operations, we issued ahave two variable funding note facilityfacilities. The facilities include our 2022 Variable Funding Notes (defined in the “2022 Variable Funding Notes” section, below), which allows for advances of up to $120.0 million, as well as our 2021 Variable Funding Notes (defined in the “2021 Recapitalization” section, below), which allows for advances of up to $200.0 million of Series2019-1Variable Funding Senior Secured Notes, Class A-1Notes and certain other credit instruments, including letters of credit (the “2019(collectively, with the 2022 Variable Funding Notes, the “2022 and 2021 Variable Funding Notes”). As of December 29, 2019, we had no outstanding borrowings and $158.6 million of available borrowing capacity under our 2019 Variable Funding Notes, net of letters of credit issued of $41.4 million. The letters of credit are primarily relatedrelate to our casualty insurance programs and certain supply chain center leases. BorrowingsDuring 2022, we borrowed and repaid $120.0 million under the 2019our 2021 Variable Funding Notes. As of January 1, 2023, we had no outstanding borrowings and $120.0 million of available borrowing capacity under our 2022 Variable Funding Notes. As of January 1, 2023, we had no outstanding borrowings and $157.8 million of available borrowing capacity under our 2021 Variable Funding Notes, arenet of letters of credit issued of $42.2 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 2022 and 2021 Variable Funding Notes to, among other things, fund our working capital requirements, capital expendituresinvest in our core business and subject to other limitations, other general corporate purposes including dividend payments and share repurchases.
Fiscal Year Ended | ||||||||||||
(In millions) | December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
Cash Flows Provided By (Used In) | ||||||||||||
Net cash provided by operating activities | $ | 497.0 | $ | 394.2 | $ | 341.3 | ||||||
Net cash used in investing activities | (27.9 | ) | (88.3 | ) | (83.7 | ) | ||||||
Net cash used in financing activities | (222.8 | ) | (322.8 | ) | (197.1 | ) | ||||||
Exchange rate changes | 0.2 | (0.5 | ) | 0.1 | ||||||||
Change in cash and cash equivalents, restricted cash and cash equivalents | $ | 246.5 | $ | (17.4 | ) | $ | 60.4 | |||||
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 in Item 1A. Risk Factors. There can be no assurance that our business will generate sufficient cash flows from operations or that future borrowings will be available under the 2019our 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 the 2021, 2019, 2018, 2017 and 2015 Notes and to service, extend or refinance the 20192022 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.
42
Long-Term Debt
2022 Variable Funding Notes
On September 16, 2022, certain of our subsidiaries issued a new variable funding note facility which allows for advances of up to $120.0 million of Series 2022-1 Variable Funding Senior Secured Notes, Class A-1 Notes (the “2022 Variable Funding Notes”). Additional information related to our 2022 Variable Funding Notes is included in Note 3 to our consolidated financial statements.
2021 Recapitalization
On April 16, 2021, we completed the 2021 Recapitalization in which certain of our subsidiaries issued notes pursuant to an asset-backed securitization. The notes consist of $850.0 million Series 2021-1 2.662% Fixed Rate Senior Secured Notes, Class A-2-I with an anticipated term of 7.5 years (the “2021 7.5-Year Notes”) and $1.0 billion Series 2021-1 3.151% Fixed Rate Senior Secured Notes, Class A-2-II with an anticipated term of 10 years (the “2021 Ten-Year Notes”, and, collectively with the 2021 7.5-Year Notes, the “2021 Notes”). Gross proceeds from the issuance of the 2021 Notes were $1.85 billion.
Concurrently, certain of our subsidiaries also issued a new variable funding note facility which allows 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”). In connection with the issuance of the 2021 Variable Funding Notes, our 2019 variable funding notes were canceled.
The proceeds from the 2021 Recapitalization were used to repay the remaining $291.0 million in outstanding principal under our 2017 Floating Rate Notes and $582.0 million in outstanding principal under our 2017 Five-Year Notes, prefund a portion of the interest payable on the 2021 Notes, pay transaction fees and expenses and repurchase and retire shares of our common stock. Additional information related to the 2021 Recapitalization is included in Note 3 to our consolidated financial statements.
2019 Recapitalization
On November 19, 2019, we completed the 2019 Recapitalization in which certain of our subsidiaries issued $675.0 million Series 2019-1 3.668% Fixed Rate Senior Secured Notes, Class A-2 with an anticipated term of 10 years (the “2019 Notes”) pursuant to an asset-backed securitization. Concurrently, we also issued the 2019 variable funding notes. Gross proceeds from the issuance of the 2019 Notes was $675.0 million. Additional information related to the 2019 Recapitalization is included in Note 3 to our consolidated financial statements.
2018 Recapitalization
On April 24, 2018, we completed the 2018 Recapitalization in which certain of our subsidiaries issued notes pursuant to an asset-backed securitization. The notes consist of $425.0 million Series 2018-1 4.116% Fixed Rate Senior Secured Notes, Class A-2-I with an anticipated term of 7.5 years (the “2018 7.5-Year Notes”), and $400.0 million Series 2018-1 4.328% Fixed Rate Senior Secured Notes, Class A-2-II with an anticipated term of 9.25 years (the “2018 9.25-Year Notes” and, collectively with the 2018 7.5-Year Notes, the “2018 Notes”) in an offering exempt from registration under the Securities Act of 1933, as amended. Gross proceeds from the issuance of the 2018 Notes were $825.0 million. Additional information related to the 2018 Recapitalization is included in Note 3 to our consolidated financial statements.
2017 Recapitalization
On July 24, 2017, we completed the 2017 Recapitalization in which certain of our subsidiaries issued notes pursuant to an asset-backed securitization. The notes consisted of $300.0 million Series 2017-1 Floating Rate Senior Secured Notes, Class A-2-I with an anticipated term of five years (the “2017 Floating Rate Notes”), $600.0 million Series 2017-1 3.082% Fixed Rate Senior Secured Notes, Class A-2-II with an anticipated term of five years (the “2017 Five-Year Notes”), and $1.0 billion Series 2017-1 4.118% Fixed Rate Senior Secured Notes, Class A-2-III with an anticipated term of 10 years (the “2017 Ten-Year Notes” and, collectively with the 2017 Floating Rate Notes and the 2017 Five-Year Notes, the “2017 Notes”). The interest rate on the 2017 Floating Rate Notes was payable at a rate equal to LIBOR plus 125 basis points. Gross proceeds from the issuance of the 2017 Notes were $1.9 billion. The 2017 Floating Rate Notes and the 2017 Five-Year Notes were repaid in connection with the 2021 Recapitalization. Additional information related to the 2017 Recapitalization is included in Note 3 to our consolidated financial statements.
43
2015 Recapitalization
On October 21, 2015, we completed the 2015 Recapitalization in which certain of our subsidiaries issued notes pursuant to an asset-backed securitization. The notes consisted of $500.0 million of Series 2015-1 3.484% Fixed Rate Senior Secured Notes, Class A-2-I (the “2015 Five-Year Notes”), $800.0 million Series 2015-1 4.474% Fixed Rate Senior Secured Notes, Class A-2-II (the “2015 Ten-Year Notes” and collectively with the 2015 Five-Year Notes, the “2015 Notes”). Gross proceeds from the issuance of the 2015 Notes were $1.3 billion. The 2015 Five-Year Notes were repaid in connection with the 2018 Recapitalization. Additional information related to the 2015 Recapitalization is included in Note 3 to our consolidated financial statements.
2021, 2019, 2018, 2017 and 2015 Notes
The 2021 Notes, 2019 Notes, 2018 Notes, 2017 Notes and the 2015 Notes are collectively referred to as the “Notes.”
The Notes have original scheduled principal payments of $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. However, 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, as defined, to adjusted EBITDA, as defined, 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 beginning in the first quarter of 2021. Subsequent to the closing of the 2021 Recapitalization, the Company had a leverage ratio of greater than 5.0x and, accordingly, the Company resumed making the scheduled amortization payments 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.
Leases
We lease certain retail store and supply chain center locations, supply chain vehicles, various equipment and our World Resource Center under leases with expiration dates through 2041. Refer to Note 5 to the consolidated financial statements for additional information regarding our leases, including future minimum rental commitments.
Capital Expenditures
In the past three years, we have spent approximately $270.2 million on capital expenditures. In 2022, we spent $87.2 million on capital expenditures which primarily related to investments in our technology initiatives, including our proprietary internally developed point-of-sale system (Domino’s PULSE), our supply chain centers, new Company-owned stores and asset upgrades for our existing Company-owned stores and other assets. We did not have any material commitments for capital expenditures as of January 1, 2023.
Investments
During the second quarter of 2020, we acquired a materialnon-controlling interest in DPC Dash Ltd (“DPC Dash”), a privately-held company limited by shares incorporated with limited liability under the laws of the British Virgin Islands, for $40.0 million. Through its subsidiaries, DPC Dash serves as the Company’s master franchisee in China that owns and operates Domino’s Pizza stores in that market. Our investment in DPC Dash’s senior ordinary shares, which are not in-substance common stock, represents an equity investment without a readily determinable fair value and is recorded at cost with adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairments.
In the first quarter of 2021, we invested an additional $40.0 million in DPC Dash based on DPC Dash’s achievement of certain pre-established performance conditions and recorded a positive adjustment of $2.5 million to the original carrying amount of $40.0 million resulting from the observable change in price from the valuation of the additional investment, resulting in a net carrying amount of $82.5 million as of the end of the first quarter of 2021. In the fourth quarter of 2021, we invested an additional $9.1 million in DPC Dash and recorded a positive adjustment of $34.3 million to the carrying amount of $82.5 million resulting from the observable change in price from the valuation of the additional investment, resulting in a net carrying amount of $125.8 million as of January 2, 2022. We did not record any adjustments to the carrying amount of $125.8 million in fiscal 2022.
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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. We used cash of $293.7 million in 2022, $1.32 billion in 2021 and $304.6 million in 2020 for share repurchases.
On October 4, 2019, our Board of Directors authorized a share repurchase program to repurchase up to $1.0 billion of the Company’s common stock. On February 24, 2021, our Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of the Company's common stock, which was fully utilized in connection with the ASR Agreement, described below. On April 30, 2021, we entered into an accelerated share repurchase agreement with a counterparty (the “ASR Agreement”). Pursuant to the terms of the ASR Agreement, on May 3, 2021, we used a portion of the proceeds from the 2021 Recapitalization to pay the counterparty $1.0 billion in cash and received and retired 2,012,596 shares of our common stock. Final settlement of the ASR Agreement occurred on July 21, 2021. In connection with the ASR Agreement, we received and retired a total of 2,250,786 shares of our common stock at an average price of $444.29, including the 2,012,596 shares of our common stock received and retired during the second quarter of 2021.
On July 20, 2021, our Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of our common stock. This repurchase program replaced our previously approved $1.0 billion share repurchase program, which was fully utilized in connection with the ASR Agreement. We had $410.4 million remaining under this share repurchase authorization as of January 1, 2023.
Dividends
We declared dividends of $157.5 million (or $4.40 per share) in 2022, $139.6 million (or $3.76 per share) in 2021 and $122.2 million (or $3.12 per share) in 2020. We paid dividends of $157.5 million, $139.4 million and $121.9 million in 2022, 2021 and 2020, respectively.
On February 21, 2023, the Company’s Board of Directors declared a quarterly dividend of $1.21 per common share payable on March 30, 2023 to shareholders of record at the close of business on March 15, 2023.
Sources and Uses of Cash
The following table illustrates the main components of our cash flows:
|
| Fiscal Year Ended |
| |||||
(In millions) |
| January 1, 2023 |
|
| January 2, 2022 |
| ||
Cash flows provided by (used in) |
|
|
|
|
|
| ||
Net cash provided by operating activities |
| $ | 475.3 |
|
| $ | 654.2 |
|
Net cash used in investing activities |
|
| (53.7 | ) |
|
| (142.7 | ) |
Net cash used in financing activities |
|
| (515.9 | ) |
|
| (522.8 | ) |
Effect of exchange rate changes on cash |
|
| (1.0 | ) |
|
| (0.3 | ) |
Change in cash and cash equivalents, restricted cash and cash equivalents |
| $ | (95.3 | ) |
| $ | (11.7 | ) |
Operating Activities
Cash provided by operating activities decreased $178.9 million in 2022 primarily due to the negative impact of changes in operating assets and liabilities of $80.8 million. The negative impact of changes in operating assets and liabilities primarily related to the timing of payments on accrued liabilities and higher cash paid for income taxes in 2022 as compared to 2021. The decrease was also a result of a $62.7 million negative impact of changes in advertising fund assets and liabilities, restricted, in 2022 as compared to 2021 due to payments for advertising activities outpacing contributions. Additionally, net income decreased $58.2 million. However, this decrease in net income was partially offset by a $22.8 million increase in non-cash adjustments, resulting in an overall decrease to cash provided by operating activities in 2022 as compared to 2021 of $35.4 million.
We are focused on continually improving our net income and cash flow from operations and management expects to continue to generate positive cash flows from operating activities for the foreseeable future.
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Investing Activities
Cash used in investing activities was $53.7 million in 2022 which consisted primarily of capital expenditures of $87.2 million (driven primarily by investments in technological initiatives, supply chain centers and Company-owned store operations). In connection with the 2022 Store Sale, we refranchised 114 U.S. Company-owned stores for $41.1 million. Additionally, in connection with the 2022 Store Purchase, we acquired 23 U.S. franchised stores from certain of our U.S. franchisees for $6.8 million.
Cash used in investing activities was $142.7 million in 2021 which consisted primarily of capital expenditures of $94.2 million (driven primarily by investments in technological initiatives, supply chain centers and Company-owned stores) and our investments in DPC Dash of $49.1 million.
Financing Activities
Cash used in financing activities was $515.9 million in 2022. We repurchased and retired $293.7 million in shares of our common stock under our Board of Directors-approved share repurchase program and we also made dividend payments to our shareholders of $157.5 million. We borrowed and repaid $120.0 million under our 2021 Variable Funding Notes and also made $55.7 million in repayments on our operationslong-term debt and finance lease obligations. We made $10.7 million of tax payments for restricted stock upon vesting and we also paid $1.6 million in 2019, 2018 or 2017.financing costs associated with the issuance of our 2022 Variable Funding Notes. We also received proceeds from the exercise of stock options in 2022 of $3.3 million.
Cash used in financing activities was $522.8 million in 2021. We completed the 2021 Recapitalization and issued $1.9 billion under the 2021 Notes. We made $910.2 million of payments on our long-term debt (of which $291.0 million related to the repayment of outstanding principal under our 2017 Floating Rate Notes and $582.0 million related the repayment of outstanding principal under our 2017 Five-Year Notes in connection with the 2021 Recapitalization). We also repurchased and retired $1.32 billion in shares of our common stock under our Board of Directors-approved share repurchase program (including $1.0 billion under the ASR Agreement). We also made dividend payments to our shareholders of $139.4 million, paid $14.9 million in financing cost associated with our 2021 Recapitalization and made tax payments of $6.8 million for restricted stock upon vesting. These uses of cash were partially offset by proceeds from the exercise of stock options of $19.7 million.
Impact of Inflation
Given the inflation rates in fiscal 2022, there have been and may continue to be increases in food costs and labor costs which have and could further impact our profitability and that of our franchisees and which could impact the opening of new U.S. and international franchised stores and adversely affect our operating results. Factors such as inflation, increased food costs, increased labor and employee health and benefit costs, increased rent costs and increased energy costs may adversely affect our operating costs and profitability and those of our franchisees and could result in menu price increases. The impact of inflation is described with respect to our market basket pricing to stores and our labor cost, in the discussion of supply chain revenues and gross margin, above. Severe increases in inflation however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of operations. Further discussion on the impact of commodities and other cost pressures is included above, as well as in Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
(dollars in millions) | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
Long-term debt (1): | ||||||||||||||||||||||||||||
Principal | $ | 42.0 | $ | 42.0 | $ | 897.0 | $ | 33.0 | $ | 33.0 | $ | 3,078.7 | $ | 4,125.7 | ||||||||||||||
Interest (2) | 162.3 | 158.3 | 145.2 | 128.9 | 127.5 | 288.8 | 1,011.0 | |||||||||||||||||||||
Finance leases (3) | 3.3 | 2.8 | 2.8 | 2.9 | 2.9 | 25.8 | 40.5 | |||||||||||||||||||||
Operating leases (4) | 39.9 | 40.1 | 36.9 | 34.4 | 30.0 | 92.8 | 274.1 | |||||||||||||||||||||
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form
These forward-looking statements generally can be identified by the use of words such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “predict,” “project,” “seek,” “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, the expected demand for future pizza delivery, our expectation that we will meet the terms of our agreement with our third-party supplier of pizza cheese, our belief that alternative third-party suppliers are available for our key ingredients in the event we are required to replace any of our supply partners, our intention to continue to enhance and grow online ordering, digital marketing and technological capabilities, our expectation that there will be no material environmental compliance-related capital expenditures, our plans to expand U.S. and international operations in many of the markets where we currently operate and in selected new markets, our expectation that the contribution rateobligation for advertising fees payable to DNAF will remain in place for the foreseeable future, and the availability of our borrowings under the 20192021 Variable Funding Notes and 2022 Variable Funding Notes for, among other things, funding working capital requirements, paying capital expenditures and funding other general corporate purposes, including payment of dividends.
Forward-looking statements relating to our anticipated profitability, estimates in same store sales growth, store growth and the growth of our U.S. and international business in general, ability to service our indebtedness, our future cash flows, our operating performance, trends in our business and other descriptions of future events reflect management’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 about us, including the risk factors listed under Item 1A. Risk Factors, as well as other cautionary language in this Form
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, the following:
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