Domino's Pizza Inc (DPZ)

DPZ 
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Domino's Pizza (DPZ)

Q4 2012 Earnings Call

February 28, 2013 11:00 am ET

Executives

Lynn M. Liddle - Executive Vice President of Communications, Legislative Affairs & Investor Relations

Michael T. Lawton - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

J. Patrick Doyle - Chief Executive Officer, President and Director

Analysts

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

John S. Glass - Morgan Stanley, Research Division

Mitchell J. Speiser - The Buckingham Research Group Incorporated

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Mark E. Smith - Feltl and Company, Inc., Research Division

Peter Saleh - Telsey Advisory Group LLC

Presentation

Operator

Good morning. My name is LaShondra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 and Year End Financial Results Earnings Call. [Operator Instructions] I will now turn the call over to Ms. Liddle. You may begin your conference.

Lynn M. Liddle

Thanks to you, and good morning, everyone. We're excited to be here with you today. I'm just taking care of the little housekeeping items, such as making sure that you've all looked at our Safe Harbor statement in the event that we do make any forward-looking statements and also kindly ask the media to be in a listen-only mode this morning.

With me today, we have our CEO, Patrick Doyle; and our CFO, Mike Lawton, who will make some prepared comments for you, and then we'll open it up to Q&A.

So with that, I'm going to turn it over to Mike.

Michael T. Lawton

Thank you, Lynn, and good morning, everyone. We continued to build on the positive results we had in the first 3 quarters of 2012 and delivered another solid quarter for our shareholders. The international division led the way with both strong same-store sales and store comp growth, and our domestic stores also posted positive same-store sales and store comp growth.

Our bottom line grew in the fourth quarter with 21.6% net income growth over the prior year, which provided additional free cash flow for share repurchases.

Here's how the fourth quarter came together. Global retail sales, which are the total retail sales at franchise and company-owned stores worldwide, grew 9.4% when excluding the impact of foreign currency. When we include the impact of foreign currency in the quarter, our global retail sales grew by 9.7%. The drivers of this growth included domestic same-store sales, which were up 4.7% in the quarter, lapping a positive 6.8% in the prior year quarter. This was comprised of franchise same-store sales, which were up 4.9%, and company-owned stores, which were up 2.5%. Our Pan Pizza launch in the fourth quarter positively impacted our same-store sales and also drove an increase in order counts.

Our international division had another good quarter, as same-store sales grew 5.2%, lapping a 4.7% increase in the fourth quarter of 2011. Now we opened 32 net stores domestically in the quarter, consisting of 51 store openings and 19 closures. For the full year, we opened 21 net domestic stores, and we remain focused on growing our store count in the United States. Our international division grew by 183 stores this quarter, made up of 223 openings and 40 closures. For the full year, we had a record international growth of 492 net new stores.

Turning to revenues. Our total revenues for the quarter were up $37.9 million or 7.6% from the prior year. This increase was primarily a result of 3 factors: first, higher supply chain revenues resulting from both increased volumes from higher order counts and a change in the mix of products sold per order; second, higher international revenues due to increased same-store sales and store count growth; and third, higher domestic royalty revenues due the same-store sales growth and the impact of increased store count.

Moving on to our operating margin. As a percentage of revenues, our consolidated operating margin for the quarter increased 0.9% from 28.9% to -- from 28.9% to 29.8%. This change was primarily driven by 3 factors: first, company-owned store operating margins increased as a percentage of revenues from the prior year quarter due to reduced utility and occupancy costs as well as adjustments in our self-insurance reserves; second, a change in our mix of revenues positively impacted our operating margin, as we now have fewer company-owned stores and more franchise royalty revenues; and third, our supply chain margin percentage increased slightly from 10% to 10.3% due to the positive impact to product mix and efficiencies at our facilities.

On a separate note, commodities were up slightly during the fourth quarter, but ended fiscal '12 -- 2012 fairly flat, and the market basket in the stores was down 0.3% for the year. As I stated at our Investor Day in January, we currently expect to see a commodity increase of 3% to 4% in 2013, which we believe will be manageable in the overall context of our business.

Turning to G&A expenses. G&A increased by $3.9 million or 5.7% quarter-over-quarter. The increase was due to investments we're making to feed our international growth engine and to continue our technological advantage. There was also additional expense from variable performance-based compensation.

Our G&A for the full year 2012 was $219 million. As we look to 2013, we expect to have increases for international support personnel, e-commerce and technological support and other strategic initiatives. Additionally, we now expect 2013 G&A to be higher than previously communicated because of an increase in noncash compensation expense, which I will elaborate on shortly. The result is an expected increase of $9 million to $13 million over our 2012 reported levels.

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