Domino's Pizza Announces Third Quarter 2008 Financial Results

ANN ARBOR, Mich., Oct. 14 // PRNewswire-FirstCall // -- Domino's Pizza, Inc. (NYSE: DPZ), the recognized world leader in pizza delivery, today announced results for the third quarter ended September 7, 2008. Net income was negatively impacted versus the prior year quarter by continued challenges in the domestic environment and resulting decreases in domestic same store sales and supply chain volumes. The International division continued its strong performance, posting its 59th consecutive quarter of same store sales growth, up 5.4% during the third quarter of 2008.


Third Quarter Highlights:

(dollars in millions,
except per share data) Third Third First Three First Three
Quarter of Quarter of Quarters of Quarters of
2008 2007 2008 2007

Net income $10.1 $11.0 $42.9 $21.7

Weighted average
diluted shares 58,042,743 63,971,505 58,859,220 64,534,801

Diluted earnings per
share, as reported $0.17 $0.17 $0.73 $0.34
Items affecting
comparability
(see section below) $(0.05) $- $(0.17) $0.49
Diluted earnings
per share, as adjusted $0.13 $0.17 $0.56 $0.82

-- Diluted EPS was $0.17 on an as-reported basis for the third quarter,
flat from the as-reported prior year period. However, excluding items
affecting comparability, diluted EPS declined $0.04, primarily due to lower
operating income from domestic operations. (See the Items Affecting
Comparability section and the Comments on Regulation G section.)


Third Quarter Third Quarter
of 2008 of 2007
Same store sales growth: (versus
prior year period)
Domestic Company-owned stores (3.4)% +0.8%
Domestic franchise stores (6.4)% (2.0)%
Domestic stores (6.1)% (1.6)%
International stores +5.4% +8.3%

Global retail sales growth: (versus
prior year period)
Domestic stores (5.8)% (0.4)%
International stores +14.1% +20.4%
Total +2.4% +7.2%



Domestic Domestic Total
Company-owned Franchise Domestic International
Stores Stores Stores Stores Total
Store counts:
Store count at
June 15, 2008 515 4,592 5,107 3,564 8,671
Openings 1 34 35 84 119
Closings - (56) (56) (8) (64)
Transfers (4) 4 - - -
Store count at
September 7, 2008 512 4,574 5,086 3,640 8,726
Third quarter 2008
net growth (3) (18) (21) 76 55
Trailing four
quarters net
growth (53) 3 (50) 266 216


David A. Brandon, Domino's Chairman and Chief Executive Officer, said: "A key component of our turnaround plan is the renewal of our brand - including significantly expanding our menu, improving our existing products, entering new day parts, increasing store traffic and energizing our franchise system. Reversing negative trends in the current environment is very tough. Our operators face the powerful forces of high commodity prices, consumers who are reluctant to spend, and a credit crunch that has slowed domestic new store growth, re-investment in stores, and our ability to expedite the turnover of poor-performing franchisees. Despite these macroeconomic challenges, we believe in our turnaround plan for our domestic business and are encouraged by the initial results of many of our new initiatives. Internationally, we continue to experience strong sales and continued expansion. Most important, our strong cash flows remain the mainstay of our business model. We believe 'cash is king' in today's uncertain market conditions."

Conference Call Information

The Company plans to file its quarterly report on Form 10-Q this morning. Additionally, as previously announced, Domino's Pizza, Inc. will hold a conference call today at 11 a.m. (Eastern) to review its third quarter 2008 financial results. The call can be accessed by dialing (888) 306-6182 (U.S./Canada) or (706) 634-4947 (International). Ask for the Domino's Pizza conference call. The call will also be web cast at http://www.dominos.com. If you are unable to participate on the call, a replay will be available for 30 days by dialing (800) 642-1687 (U.S./Canada) or (706) 645-9291 (International), Conference ID 20163463. The web cast will also be archived for 30 days on http://www.dominosbiz.com.

Share Repurchases

During the third quarter of 2008, the Company repurchased and retired 1,070,100 shares of its common stock under its open market share repurchase program for $12.8 million, or an average price of $12.00 per share.

The Company has used approximately 48% of the total amount authorized under its open market share repurchase program and has approximately $104.5 million remaining under the previously approved $200.0 million.

Sale of Certain Company-Owned Stores

During the first quarter of 2008, the Company announced it had agreements in place to sell certain Company-owned stores in California and Georgia in a series of transactions primarily with current franchisees. During the third quarter of 2008, the Company completed the sale of three of these stores bringing the year-to-date total to 59 stores. The Company recognized a pre-tax gain on the sale of the related assets of approximately $1.8 million and $13.0 million in the third quarter and first three quarters of 2008, respectively. These pre-tax gains were recorded in general and administrative expense. The sales of the stores were substantially complete by the end of the third quarter.

Items Affecting Comparability

The Company's reported financial results for the third quarter and first three quarters of 2008 are not comparable to the reported financial results in the prior year periods. The table below presents certain items that affect comparability between our 2008 and 2007 financial results. Management believes that including such information is important to the understanding of our financial results for the third quarter and first three quarters of 2008 as compared to the same periods in 2007 (See the Comments on Regulation G section).

In addition to the items noted in the table below, the Company's 2007 recapitalization had a significant impact on ongoing interest expense as a result of higher debt levels. This also impacts comparability to the first three quarters of 2007. The increase in ongoing interest expense resulted in a decrease in diluted EPS of approximately $0.17 in the first three quarters of 2008 versus the first three quarters of 2007. Additionally, share repurchases positively impacted diluted EPS in the third quarter and first three quarters of 2008 versus the comparable periods in 2007.


Third Quarter First Three Quarters

(in thousands)
2008 items Diluted Diluted
affecting EPS EPS
comparability: Pre-tax After-tax Impact Pre-tax After-tax Impact

Gain on the sale
of Company-owned
stores (1) $1,810 $1,086 $0.02 $12,969 $7,781 $0.13
Separation
expenses (2) - - - (1,445) (867) (0.01)
Tax reserve
reversals (3) 365 1,554 0.03 990 3,290 0.06
Total of 2008
items $2,175 $2,640 $0.05 $12,514 $10,204 $0.17


2007 items affecting
comparability:
Recapitalization
expenses:
General and
administrative
expenses (4) $- $- $- $(2,873) $(1,781) $(0.03)
Additional
interest income
on recapitalization
funds (5) - - - 2,632 2,632 0.04
Additional interest
expense (6) - - - (33,878) (21,005) (0.32)
Premium on bond
extinguishment (7) - - - (13,294) (8,242) (0.13)
Total
recapitalization
expenses - - - (47,413) (28,396) (0.44)

Legal expenses (8) - - - (5,000) (3,100) (0.05)
Total of 2007 items $- $- $- $(52,413)$(31,496) $(0.49)

(1) The gain recognized relates to the sale of three Company-owned
stores in California in the third quarter of 2008 and 59 stores in
California and Georgia in the first three quarters of 2008.
(2) Represents separation and related expenses incurred in connection
with a previously announced restructuring action and other staffing
reduction costs related to the sale of Company-owned stores in California.

(3) Represents $1.3 million and $2.7 million of income tax benefit in
the third quarter and first three quarters of 2008 and $0.4 million and
$1.0 million ($0.2 million and $0.6 million after-tax) of contra interest
expense in the third quarter and first three quarters, both relating to
required FIN 48 tax reserve reversals due to outcomes of related state tax
matters.
(4) Primarily includes stock compensation expenses, payroll taxes
related to the payments made to certain stock option holders and legal and
professional fees incurred in connection with the recapitalization,
including the tender offers for Domino's Pizza, Inc. common stock and
Domino's, Inc. senior subordinated notes due 2011.
(5) Includes estimated tax-exempt interest income that was earned on
funds received in connection with the recapitalization prior to
disbursement of the funds.
(6) Includes the write-off of deferred financing fees and bond discount
related to extinguished debt as well as net expense incurred in connection
with the settlement of interest rate derivatives.
(7) Represents the premium paid to bond holders in the tender offer for
the Domino's, Inc. senior subordinated notes due 2011.
(8) Represents expenses incurred in connection with certain legal
matters in California.


Liquidity As of September 7, 2008, the Company had:

  • $1.7 billion in total debt,
  • $20.1 million of unrestricted cash and cash equivalents,
  • no borrowings under its available variable funding notes ("VFN"), and
  • letters of credit issued under the VFN of $36.8 million.


Subsequent to the third quarter of 2008, one of the Company's VFN providers (the "Primary VFN Provider") declared bankruptcy. The VFN allows for the issuance of up to $150.0 million of financing and certain other credit instruments, including letters of credit in support of various obligations of the Company. As a result of the Primary VFN Provider's bankruptcy, the Company's ability to draw upon the VFN has likely been reduced. Under the existing terms of the VFN, the Primary VFN Provider's share is $90.0 million. If the Company is ultimately unable to borrow under the existing agreement and is unable to secure additional funding from other parties, the Company's availability under the VFN would be reduced to $60.0 million, of which $38.3 million is currently committed under pre-existing letters of credit. The maximum amount of borrowings under this scenario estimated to be available to the Company under the VFN would be approximately $21.7 million. The Company is in the process of exploring alternative sources of additional liquidity. The Company has historically funded its working capital requirements, capital expenditures, debt repayments and share repurchases primarily from its cash flows from operations and when necessary, its available borrowings under the VFN. Additionally, management believes its current unrestricted cash and cash equivalents balance, its expected ongoing cash flow from operations as well as the estimated $21.7 million available under the VFN is sufficient to fund operations for the foreseeable future.

The Company's cash borrowing rate for the third quarter of 2008 was 6.1%. The Company incurred $13.1 million in capital expenditures during the first three quarters of 2008 versus $12.7 million in the first three quarters of the prior year.

The Company's free cash flow, as reconciled below to cash flows from operations as determined under generally accepted accounting principles (GAAP), was $25.8 million in the first three quarters of 2008.




First Three
Quarters of 2008
(in thousands)
Net income (as reported) $42,945
Changes in operating assets and liabilities (as reported) (33,265)
Other, net (as reported) 29,233
Net cash provided by operating activities (as reported) 38,913
Capital expenditures (as reported) (13,142)

Free cash flow $25,771


The changes in operating assets and liabilities during the first three quarters of 2008 were primarily due to the timing of interest and income tax payments.

Comments on Regulation G

In addition to the GAAP financial measures set forth in this press release, the Company has included non-GAAP financial measures within the meaning of Regulation G due to items affecting comparability between fiscal quarters. Additionally, the Company has included metrics such as global retail sales and same store sales growth, which are commonly used in the quick-service restaurant industry and are important to understanding Company performance.

The Company uses "Diluted EPS, as adjusted," which is calculated as reported Diluted EPS adjusted for the items that affect comparability to the prior year periods discussed above. The most directly comparable financial measure calculated and presented in accordance with GAAP is Diluted EPS. The Company's management believes that the Diluted EPS, as adjusted measure is important and useful to investors and other interested persons and that such persons benefit from having a consistent basis for comparison between reporting periods.

The Company uses "Global retail sales" to refer to total worldwide retail sales at Company-owned and franchise stores. Management believes global retail sales information is useful in analyzing revenues, because franchisees pay royalties that are based on a percentage of franchise retail sales. Management reviews comparable industry global retail sales information to assess business trends and to track the growth of the Domino's Pizza(R) brand. In addition, domestic supply chain revenues are directly impacted by changes in domestic franchise retail sales. Retail sales for franchise stores are reported to the Company by its franchisees and are not included in Company revenues.

The Company uses "Same store sales growth," calculated by including only sales from stores that also had sales in the comparable period of the prior year. International same store sales growth is calculated similarly to domestic same store sales growth. Changes in international same store sales are reported on a constant dollar basis, which reflects changes in international local currency sales.

The Company uses "Free cash flow," calculated as cash flows from operations less capital expenditures, both as reported. The Company's management believes that the free cash flow measure is important to investors and other interested persons and that such persons benefit from having a measure which communicates how much cash flows are available for working capital needs or to be used for de-levering, making acquisitions, repurchasing shares or similar uses of cash.

About Domino's Pizza(R)

Founded in 1960, Domino's Pizza is the recognized world leader in pizza delivery. Domino's is listed on the NYSE under the symbol "DPZ." Through its primarily locally-owned and operated franchised system, Domino's operates a network of 8,726 franchised and Company-owned stores in the United States and 60 international markets. The Domino's Pizza(R) brand, named a Megabrand by Advertising Age magazine, had global retail sales of over $5.4 billion in 2007, comprised of $3.2 billion domestically and $2.2 billion internationally. During the third quarter of 2008, the Domino's Pizza(R) brand had global retail sales of $1.3 billion, comprised of approximately $683 million domestically and approximately $583 million internationally. Domino's Pizza was named "Chain of the Year" by Pizza Today magazine, the leading publication of the pizza industry. Customers can place orders online in English and Spanish by visiting http://www.dominos.com or from a Web-enabled cell phone by visiting mobile.dominos.com. More information on the Company, in English and Spanish, can be found on the Web at http://www.dominos.com. Domino's Pizza. You Got 30 Minutes(TM).

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:

This press release contains forward-looking statements. These forward-looking statements relating to our anticipated profitability and operating performance reflect management's expectations based upon currently available information and data. However, actual results are subject to future risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that can cause actual results to differ materially include: our increased leverage as a result of the borrowings under our asset-backed securitization facility; the uncertainties relating to litigation; consumer preferences, spending patterns and demographic trends; the effectiveness of our advertising, operations and promotional initiatives; our ability to retain key personnel; new product and concept developments by us and other food-industry competitors; the ongoing profitability of our franchisees and the ability of Domino's Pizza and our franchisees to open new stores and keep existing stores in operation; changes in food prices, particularly cheese, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness or general health concerns may have on our business and the economy of the countries in which we operate; severe weather conditions and natural disasters; changes in our effective tax rate; changes in government legislation and regulations; adequacy of our insurance coverage; costs related to future financings; our ability and that of our franchisees to successfully operate in the current credit environment; changes in the level of consumer spending given the general economic conditions, including interest rates, energy prices and weakening consumer confidence; availability of borrowings under our variable funding notes and changes in accounting policies. Further information about factors that could affect our financial and other results is included in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended December 30, 2007. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required to be reported under the rules and regulations of the Securities and Exchange Commission.


Domino's Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Income

Fiscal Quarter Ended

% of % of
September 7, Total September 9, Total
2008 Revenues 2007 Revenues

(In thousands, except per share data)
Revenues:
Domestic Company-owned stores $77,810 $89,264
Domestic franchise 34,680 35,832
Domestic supply chain 177,848 183,670
International 33,250 28,552
Total revenues 323,588 100.0% 337,318 100.0%

Cost of sales:
Domestic Company-owned stores 67,937 73,818
Domestic supply chain 162,454 167,360
International 14,477 12,212
Total cost of sales 244,868 75.7% 253,390 75.1%
Operating margin 78,720 24.3% 83,928 24.9%

General and administrative 38,483 11.9% 40,167 11.9%
Income from operations 40,237 12.4% 43,761 13.0%

Interest expense, net 25,678 7.9% 25,514 7.6%
Income before provision for
income taxes 14,559 4.5% 18,247 5.4%

Provision for income taxes 4,463 1.4% 7,256 2.1%
Net income $10,096 3.1% $10,991 3.3%

Earnings per share:
Common stock - diluted $0.17 $0.17



Domino's Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Income

Three Fiscal Quarters Ended

% of % of
September 7, Total September 9, Total
2008 Revenues 2007 Revenues
(In thousands, except per share data)
Revenues:
Domestic Company-owned stores $255,867 $277,625
Domestic franchise 106,871 110,479
Domestic supply chain 533,605 546,072
International 100,605 82,752
Total revenues 996,948 100.0% 1,016,928 100.0%

Cost of sales:
Domestic Company-owned stores 213,026 221,766
Domestic supply chain 484,762 492,947
International 44,644 35,350
Total cost of sales 742,432 74.5% 750,063 73.8%
Operating margin 254,516 25.5% 266,865 26.2%

General and administrative 111,377 11.2% 129,073 12.7%
Income from operations 143,139 14.4% 137,792 13.5%

Interest expense, net 76,425 7.7% 90,464 8.9%
Other - - 13,294 1.3%
Income before provision
for income taxes 66,714 6.7% 34,034 3.3%

Provision for income taxes 23,769 2.4% 12,329 1.2%
Net income $42,945 4.3% $21,705 2.1%

Earnings per share:
Common stock - diluted $ 0.73 $0.34



Domino's Pizza, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

September 7, December 30,
2008 2007
(In thousands)
Assets
Current assets:
Cash and cash equivalents $20,126 $11,344
Restricted cash and cash equivalents 71,290 80,951
Accounts receivable 69,437 68,446
Inventories 25,235 24,931
Advertising fund assets, restricted 19,781 20,683
Other assets 19,254 20,527
Total current assets 225,123 226,882

Property, plant and equipment, net 112,240 122,890

Other assets 103,483 123,392

Total assets $440,846 $473,164

Liabilities and stockholders' deficit
Current liabilities:
Current portion of long-term debt $331 $15,312
Accounts payable 53,588 60,411
Advertising fund liabilities 19,781 20,683
Other accrued liabilities 67,035 79,102
Total current liabilities 140,735 175,508

Long-term liabilities:
Long-term debt, less current portion 1,704,557 1,704,771
Other accrued liabilities 32,940 43,024
Total long-term liabilities 1,737,497 1,747,795

Total stockholders' deficit (1,437,386) (1,450,139)

Total liabilities and stockholders' deficit $440,846 $473,164



Domino's Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows

Three Fiscal Quarters Ended

September 7, September 9,
2008 2007
(In thousands)
Cash flows from operating activities:
Net income $42,945 $21,705
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization 20,717 21,740
(Gains) losses on sale/disposal of assets (12,678) 680
Amortization of deferred financing costs,
debt discount and other 5,334 34,773
Provision (benefit) for deferred income
taxes 4,600 (4,530)
Non-cash compensation expense 5,962 6,069
Other 5,298 1,851
Changes in operating assets and
liabilities (33,265) (16,069)
Net cash provided by operating activities 38,913 66,219

Cash flows from investing activities:
Capital expenditures (13,142) (12,676)
Proceeds from sale of assets 24,703 3,317
Change in restricted cash and cash equivalents 9,661 (107,501)
Other 613 (58)
Net cash provided by (used in) investing
activities 21,835 (116,918)

Cash flows from financing activities:
Purchase of common stock (41,130) (18,078)
Common stock dividends and equivalents - (896,972)
Proceeds from issuance of long-term debt 3,000 2,509,938
Repayments of long-term debt and capital
lease obligation (18,205) (1,547,102)
Cash paid for financing costs (166) (58,876)
Tax benefit from stock options 240 21,907
Other 4,197 9,071
Net cash (used in) provided by financing
activities (52,064) 19,888

Effect of exchange rate changes on cash and
cash equivalents 98 5

Change in cash and cash equivalents 8,782 (30,806)

Cash and cash equivalents, at beginning of
period 11,344 38,222

Cash and cash equivalents, at end of period $20,126 $ 7,416



SOURCE Domino's Pizza(R)

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