Domino's Pizza, Inc. (DPZ) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014
Lynn M. Liddle - Executive VP-Communications & Investor Relations, Domino's Pizza, Inc.
Michael T. Lawton - Chief Financial Officer & Executive Vice President, Domino's Pizza, Inc.J. Patrick Doyle - President, Chief Executive Officer & Director, Domino's Pizza, Inc. Other Participants Jeffrey A. Bernstein - Analyst, Barclays Capital, Inc. Mark E. Smith - Analyst, Feltl & Co. Alvin Caezar Concepcion - Analyst, Citigroup Global Markets Inc. (Broker) Alton K. Stump - Analyst, Longbow Research LLC Brian J. Bittner - Analyst, Oppenheimer & Co., Inc. (Broker) John S. Glass - Analyst, Morgan Stanley & Co. LLC John W. Ivankoe - Analyst, JPMorgan Securities LLC Peter M. Saleh - Analyst, Telsey Advisory Group LLC MANAGEMENT DISCUSSION SECTION Operator: Good morning. My name is Vanita, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 Financial Results Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Liddle, you may begin your conference. Lynn M. Liddle, Executive VP-Communications & Investor Relations Thanks Vanita and thanks everybody for joining us this morning. We should be an hour or less, we will give an opportunity for some prepared remarks as well as Q&A. I would also ask that members of the press who are on the call realize this is for investors and stay in a listen-only mode. And then I'll turn all of your attention to our Safe Harbor statement in the event that any forward-looking-statements are made during the call today. We are going to kick it off today with Mike Lawton, our Chief Financial Officer, who has some prepared remarks. Michael T. Lawton, Chief Financial Officer & Executive Vice President Thank you, Lynn, and good morning, everyone. I am pleased to report that we delivered solid results for our shareholders during the quarter. Our international and our domestic divisions posted strong same-store sales growth. We opened a significant number of new stores and our adjusted EPS grew 15.3% over the prior year quarter. I'll start my review of the quarter by looking at our system-wide sales, which are also known as global retail sales. And these are the total retail sales at franchise and company-owned stores worldwide. Global retail sales grew 9.1%. Foreign currency was a headwind and when we exclude the adverse impact of foreign currency, global retail sales grew by 11.3%. The drivers of this growth included domestic same-store sales, which rose 4.9% in the quarter, lapping a positive 6.2% from last year. This was comprised of franchisee same-store sales, which were up 5.2% and company-owned stores, which were up 1.5%. Although we don't provide specifics of order count and ticket for competitive reasons, we did drive an increase in both order counts and ticket this quarter. Also, we're pleased to report that we opened five net domestic stores consisting of 14 store openings and 9 closures. In the full year of 2013, we had a growth of 58 net stores and our goal is to exceed that this year domestically. Our international division had another very strong quarter as same-store sales grew 7.4%, lapping a solid prior year quarter increase of 6.5%. Our international division grew by 97 stores this quarter, made up of 109 store openings and 12 closures. Turning to revenues, total revenues were up $36.2 million or 8.7% from the prior year. This increase was primarily a result of three factors. First, higher supply chain revenues, resulting mainly from an increase in commodity prices and higher volumes. Second, higher international royalty and supply chain revenues due to increased same-store sales growth and store count growth. And third, higher domestic royalty revenues due to same-store sales growth and the positive impact of increase in our store count over the trailing four quarters. Moving on to operating margin; as a percentage of revenues, consolidated operating margin for the quarter decreased to 30.2% from 31.1% in the prior year quarter. Some of the drivers of this decrease included the following: Company-owned store operating margins decreased slightly as a percentage of revenues due primarily to higher food cost and our supply chain margin percentage decreased from 11.3% to 10.5% due primarily to an increase in commodity cost. The average cheese block price in the first quarter was $2.16 per pound versus $1.67 in the same period last year. Pork and other meats also increased during the quarter which led to our overall market basket increasing 6.9% during the quarter. As a reminder, food commodities are generally priced on a constant dollar markup to our franchisees, therefore, higher commodity prices do not impact our supply chain dollar profit. They do, however, negatively impact our supply chain margin as a percentage of revenues. Because of the increasing commodity prices, we need to make a significant update to our commodity projections. We have previously communicated that we expect that commodities would be flat or down to as much as 2% in 2014. Due to the recent increase in commodities primarily cheese and pork, we now expect that commodities we use in our system will be up 4% to 6% in 2014 versus 2013 levels. Despite the fact that we have diversified monetary risk, currency exchange rates negatively impacted us this quarter by about $1.3 million versus the prior year quarter due to the dollar strengthening against most currencies. We continue to expect that currency exchange rates will be a headwind for us for the remainder of the year. Turning to G&A expenses, G&A decreased by $1.4 million or 2.6% quarter-over-quarter, primarily driven by a $1.7 million pre-tax gain on the sale of 14 corporate stores that we detail as an item affecting comparability in our 8-K. Going forward, the sale of these stores will shift some income from corporate stores into franchise royalties. We've previously indicated that our estimated full year G&A would increase an additional $5 million to $9 million over 2013 levels due to increases for e-commerce and technological support, international support, and the growth of the team there and other strategic initiatives offset by lower non-cash comp expect. We now expect our full year G&A will increase $4 million to $8 million over 2013, primarily a result of the gain that I previously mentioned. Keep in mind too that G&A expense can vary up or down depending upon such things as our performance against plan, which affects our variable performance-based compensation. Regarding income taxes, our reported effective tax rate was 36.6% for the quarter which is slightly below our expected range due to the reversal of a deferred tax valuation allowance that we also detail as an item affecting comparability in our 8-K. We currently expect our effective tax rate for the foreseeable future to be in the 37% to 38% range. Our first quarter net income was up $6.1 million or 17.6%. This increase was primarily driven by higher domestic and international same-store sales, international store growth, and the $1.4 million after-tax gain on the sale of 14 corporate stores, all of this offset in part by the negative impact of foreign currency exchange rates.