Domino's Pizza Inc (DPZ)

DPZ 
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Domino’s Pizza, Inc. (DPZ)

Q3 2012 Earnings Call

October 16, 2012; 10:00 am ET

Executives

Patrick Doyle - Chief Executive Officer

Mike Lawton - Chief Financial Officer

Lynn Liddle - Executive Vice President - Communications, Investor Relations and Legislative Affairs

Analysts

Michael Kelter - Goldman Sachs

John Glass - Morgan Stanley

Jeffrey Bernstein - Barclays

Brian Bittner - Oppenheimer

Joe Buckley - Bank of America

Mitch Speiser - Buckingham Research

Alvin Concepcion - Citi

Peter Saleh - Telsey Advisory Group

Mark Smith - Feltl & Company

Steve Anderson - Miller Tabak

Presentation

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 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).

I will now turn the call over to Ms. Lynn Liddle.

Lynn Liddle

Thanks Christie and good morning everybody. Thanks for joining us on our third quarter, very pleasant announcement, and with us today we have Mike Lawton, our Chief Financial Officer; and Patrick Doyle, our Chief Executive Officer, who have prepared comments that will follow with an open Q&A.

A couple of housekeeping things; we do ask the media to be in a listen-only mode, since this is primarily an investor call, and second of all, I refer all of you to our 10-Q and our 8-K that were filed this morning and contain a Safe Harbor statement for forward-looking comments.

So with that, I will turn the call over to Mike.

Mike Lawton

Thanks Lynn and good morning everyone. In the third quarter we grew our same store sales both domestically and internationally and we achieved strong store growths in our international markets. We also drove shareholder value with 22.9% adjusted EPS growth over the prior year quarter. Overall, we are really pleased with another quarter of strong results.

I am going to start at the top of our results by looking at our global retail sales. Global retail sales, which are the total retail sales at franchise and company owned stores worldwide grew 8.4% when excluding the impact of foreign currency.

As many of you know, currency exchange rates have had a negative impact for us this year due to the dollar strengthening against most currencies. When we include the negative currency impact, our global retail sales still grew by 4.9%.

The drivers of the growth included domestic same store sales, which were up 3.3% in the third quarter, lapping a positive 3% in the prior year quarter. This was comprised of franchisee same store sales, which were up 3.6% and company owned stores, which were up by 0.5%. Our international division had another good quarter as same store sales grew 5%, lapping a very strong 8.1% last year’s quarter.

We closed five net stores domestically, consisting of 10 store openings and 15 closures. For the trailing 12-month period we have opened five net stores domestically and we still expect to be modestly positive as we close out this calendar year. Our international division grew by a net 121 stores this quarter, made up of 130 store openings and nine closures.

Turning to revenues, our total revenues were up $1.8 million or 0.5% from the prior year. This increase was primarily the result of two factors: First, higher international revenues due to both increased same store sales and store count growth, which was partially offset by the negative impact of foreign currency; and second, higher domestic royalty revenues due to same store sales growth.

This increase was driven by a higher average ticket due to our product mix and marketing promotions, as well as a slight increase in order counts. Partially offsetting these increases was a decline in company owned store revenue from the sale of 30 corporate stores in the third quarter of 2011. More detail regarding our revenue by business unit can be found in our 10-Q, which was filed this morning.

Moving onto our operating margin. As a percentage of revenues, our consolidated operating margin increased 2% from 27.5% to 29.5%. This increase is primarily due to three factors: First, our company owned store operating margins increased 3.2% as a percentage of revenues from the prior year quarter; in part due to the positive impact of our higher average ticket and lower commodity prices, primarily cheese.

Second, a change in our mix of revenues positively impacted our operating margin as we now have fewer company owned stores and more royalty revenues. And third, our supply chain margin percentage went from 9.5% to 10.4%, an increase of 0.9%. This was due to positive impact of product mix, efficiencies in our facilities and lower commodity cost.

The average cheese block price in the third quarter was $1.71 per pound versus $2.08 last year, which led to a 2.6% decrease in our overall market basket during the quarter. As a reminder, food commodities are generally priced on a constant dollar markup to our franchisees. Therefore, lower cheese prices do not impact our supply chain dollar profit. They do however positively impact our supply chain margin as a percentage of revenues.

Although cheese prices have moved up recently, we now expect that our overall market basket in 2012 will be flat to up slightly over 2011 levels. We expect that commodities will be up more in 2013 than they have been in 2012. While it is still too early for us to provide a range, we believe the increase will be manageable in the overall context of our business. We plan to provide an estimate of our 2013 commodity price changes when we hold our investor day, which is scheduled for January 18 in Miami, Florida. So we expect to see good attendance from those of you coming from cold northern climates.

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