DPZ 10-Q Quarter ended June 15, 2014

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 15, 2014

OR

For the transition period from to

Commission file number: 001-32242

Domino’s Pizza, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(734) 930-3030

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x

As of July 15, 2014, Domino’s Pizza, Inc. had 55,119,392 shares of common stock, par value $0.01 per share, outstanding.

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Domino’s Pizza, Inc.

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Domino’s Pizza, Inc. and Subsidiaries

(Unaudited)

Note: The balance sheet at December 29, 2013 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying notes.

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Domino’s Pizza, Inc. and Subsidiaries

(Unaudited)

See accompanying notes.

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Domino’s Pizza, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

See accompanying notes.

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Domino’s Pizza, Inc. and Subsidiaries

(Unaudited)

See accompanying notes.

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Domino’s Pizza, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited; tabular amounts in thousands, except percentages, share and per share amounts)

June 15, 2014

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended December 29, 2013 included in our annual report on Form 10-K.

In the opinion of the Company, all adjustments, consisting of normal recurring items, considered necessary for a fair statement have been included. Operating results for the fiscal quarter and two fiscal quarters ended June 15, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2014.

The following table summarizes revenues, income from operations and earnings before interest, taxes, depreciation, amortization and other, which is the measure by which the Company allocates resources to its segments and which we refer to as Segment Income, for each of our reportable segments.

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The following table reconciles Total Segment Income to consolidated income before provision for income taxes.

The denominators used in calculating diluted earnings per share for common stock for the second quarter and two fiscal quarters of 2014 do not include 199,040 options to purchase common stock as the effect of including these options would have been anti-dilutive. The denominators used in calculating diluted earnings per share for common stock for the second quarter and two fiscal quarters of 2013 do not include 377,540 and 393,360 options to purchase common stock, respectively, as the effect of including these options would have been anti-dilutive.

The following table summarizes changes in Stockholders’ Deficit for the two fiscal quarters of 2014.

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During the two fiscal quarters of 2014, the Company paid approximately $25.1 million of common stock dividends. Additionally, during the second quarter of 2014, the Company’s Board of Directors declared a $0.25 per share quarterly dividend on its outstanding common stock. The Company had approximately $14.4 million accrued for common stock dividends at June 15, 2014.

On July 16, 2014, the Company’s Board of Directors declared a $0.25 per share quarterly dividend on its outstanding common stock for shareholders of record as of September 15, 2014 to be paid on September 30, 2014.

In 2013, the Company adopted Accounting Standards Update 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income , which requires an entity to present either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items of net income.

The approximately $2.4 million of accumulated other comprehensive loss at June 15, 2014 and the approximately $2.0 million of accumulated other comprehensive loss at December 29, 2013 represent currency translation adjustments, net of tax. There were no reclassifications out of accumulated other comprehensive loss to net income in the two fiscal quarters of 2014 or the two fiscal quarters of 2013.

During the second quarter of 2014, the Company repurchased and retired 687,750 shares of common stock for a total of approximately $49.9 million, and during the two fiscal quarters of 2014, the Company repurchased and retired 909,231 shares of common stock for a total of approximately $65.0 million. As of June 15, 2014, the Company had approximately $150.1 million remaining for future share repurchases under its Board of Directors approved $200.0 million open market share repurchase program. Subsequent to the second quarter of 2014 and through July 15, 2014, the Company repurchased and retired an additional 5,000 shares of common stock for a total of approximately $0.4 million.

During the second quarter and two fiscal quarters of 2013, the Company repurchased and retired 655,248 and 1,018,147 shares of common stock for a total of approximately $38.0 million and $56.1 million, respectively, under the Company’s open market share repurchase program.

Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

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The fair values of the Company’s cash equivalents and investments in marketable securities are based on quoted prices in active markets for identical assets. The following tables summarize the carrying amounts and fair values of certain assets at June 15, 2014 and December 29, 2013:

At June 15, 2014, the Company estimates that the $1.522 billion in principal amount of outstanding fixed rate notes had a fair value of approximately $1.629 billion, and at December 29, 2013 the $1.534 billion in principal amount of outstanding fixed rate notes had a fair value of approximately $1.643 billion. The fixed rate notes are classified as a Level 2 measurement, as the Company estimated the fair value amount by using available market information. The Company obtained broker quotes from two separate brokerage firms that are knowledgeable about the Company’s fixed rate notes and, at times, trade these notes. Further, the Company performs its own internal analysis based on the information it gathers from public markets, including information on notes that are similar to that of the Company. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimates presented here are not necessarily indicative of the amount that the Company or the debtholders could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value.

During the first quarter of 2014, the Company sold 14 Company-owned stores to a franchisee. In connection with the sale of these 14 stores, the Company recorded a $1.7 million pre-tax gain on the sale of the related assets, which was net of a $0.5 million reduction in goodwill. The gain was recorded in general and administrative expense in the Company’s condensed consolidated statements of income. This transaction will not have a material ongoing impact on the Company’s consolidated financial results.

As a result of the capital gain recognized in connection with the sale of the 14 Company-owned stores, the Company also released $0.3 million of a deferred tax valuation allowance.

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(Unaudited; tabular amounts in millions, except percentages and store data)

The 2014 and 2013 second quarters referenced herein represent the twelve-week periods ended June 15, 2014 and June 16, 2013, respectively. The 2014 and 2013 two fiscal quarters referenced herein represent the twenty-four-week periods ended June 15, 2014 and June 16, 2013, respectively.

Overview

We are the number one pizza delivery company in the United States based on reported consumer spending, and the second largest pizza company in the world based on number of units. We operate through a substantially franchised network of stores, located in all 50 states and in more than 70 international markets, as well as Company-owned stores, all of which are in the United States. In addition, we operate regional dough manufacturing and supply chain centers in the United States and Canada.

Our financial results are driven largely by retail sales at our franchise 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 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 marketing, the effectiveness of our digital platforms and technology, our ability to execute our store operating model, the overall global economic environment and the success of our business strategies.

During the second quarter and two fiscal quarters of 2014, we experienced strong domestic same store sales increases, driven by our continued consumer offerings of high quality food at value pricing with effective marketing. Our innovative digital platforms and technology also contributed to those increases, as we believe that our platforms and technology provide us with a competitive advantage. Additionally, we produced earnings growth during the second quarter despite commodity and foreign currency exchange rate pressures. Internationally, we continued to have strong same store sales in both the second quarter and two fiscal quarters of 2014. International store growth continued to be strong during the second quarter, as we opened a net 122 stores, bringing the year-to-date total to a net 219 stores opened. We believe that our strong global brand and the factors described above drove our results for the second quarter and two fiscal quarters of 2014, and we intend to further grow our business by continuing to focus on operational excellence, effective marketing, industry-leading technology platforms and delivering high quality food and service to our customers.

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Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, increased 11.5% in the second quarter of 2014, and 10.3% in the two fiscal quarters of 2014. These increases were driven primarily by domestic and international same store sales growth, as well as an increase in our worldwide store counts during the trailing four quarters. This was offset in part by the negative impact of foreign currency exchange rates. Domestic same store sales growth reflected the sustained positive sales trends and the continued success of our products and marketing. International same store sales growth reflected continued strong performance.

Revenues increased $36.5 million, up 8.8% in the second quarter of 2014, and $72.7 million, up 8.7% in the two fiscal quarters of 2014 due primarily to higher domestic supply chain revenues attributable to higher commodity prices as well as increased volumes. Higher international and domestic franchise revenues also contributed to the increases in revenues as a result of higher same store sales and store count growth. These increases were offset in part by the negative impact on international revenues of changes in foreign currency exchange rates. These changes in revenues are described in more detail below.

Income from operations increased $7.6 million, up 10.2% in the second quarter of 2014, and $16.1 million, up 10.8% in the two fiscal quarters of 2014. These increases were driven primarily by higher royalty revenues from both domestic and international franchise stores and higher domestic supply chain profits driven primarily by higher volumes. These increases were offset in part by the negative impact of the changes in foreign currency exchange rates. Additionally, the two fiscal quarters of 2014 benefited from a $1.7 million pre-tax gain on the sale of 14 Company-owned stores.

Net income increased $5.2 million, up 15.6% in the second quarter of 2014, and $11.2 million, up 16.6% in the two fiscal quarters of 2014. These increases were driven by domestic and international same store sales growth, international store count growth and higher domestic supply chain profits. These increases were offset in part by changes in foreign currency exchange rates. Additionally, the two fiscal quarters of 2014 benefitted from a $1.4 million positive impact from the sale of 14 Company-owned stores and the associated reversal of a deferred tax asset valuation allowance during the first quarter of 2014.

Revenues

Revenues primarily consist of retail sales from our Company-owned stores, royalties from our domestic and international franchise stores and sales of food, equipment and supplies from our supply chain centers to substantially all of our domestic franchise stores and certain international franchise stores. Company-owned store and franchise store revenues may vary significantly from period to period due to changes in store count mix, while supply chain revenues may vary significantly as a result of fluctuations in commodity prices, primarily cheese and meats.

Domestic Stores Revenues

Domestic stores revenues increased $4.2 million, up 3.3% in the second quarter of 2014, and $7.6 million, up 2.9% in the two fiscal quarters of 2014. These increases were due primarily to royalty revenues earned on higher franchise same store sales and higher domestic Company-owned same store sales. These changes in domestic stores revenues are more fully described below.

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Domestic Company-Owned Stores Revenues

Revenues from domestic Company-owned store operations increased $0.3 million, up 0.4% in the second quarter of 2014, and $1.7 million, up 1.0% in the two fiscal quarters of 2014. These increases were due primarily to higher same store sales during the second quarter and two fiscal quarters of 2014, offset in part by the sale of 14 company-owned stores to a franchisee in the first quarter of 2014. Domestic Company-owned same store sales increased 3.5% in the second quarter of 2014, and 2.5% in the two fiscal quarters of 2014. This compared to an increase of 5.7% in the second quarter of 2013, and 5.3% in the two fiscal quarters of 2013.

Domestic Franchise Revenues

Revenues from domestic franchise operations increased $3.8 million, up 8.0% in the second quarter of 2014, and $6.0 million, up 6.0% in the two fiscal quarters of 2014. These increases were due primarily to higher domestic franchise same store sales, and to a lesser extent, an increase in the average number of domestic franchise stores open during 2014. Domestic franchise same store sales increased 5.5% in the second quarter of 2014, and 5.4% in the two fiscal quarters of 2014. This compared to an increase of 6.8% in the second quarter of 2013, and 6.6% in the two fiscal quarters of 2013.

Domestic Supply Chain Revenues

Revenues from domestic supply chain operations increased $24.3 million, up 10.4% in the second quarter of 2014, and $50.3 million, up 10.8% in the two fiscal quarters of 2014. These increases were due primarily to higher overall commodity prices, including cheese and meats, and higher volumes as a result of increased order counts at the store level. The published cheese block price-per-pound averaged $2.20 in the second quarter of 2014 and $2.18 in the two fiscal quarters of 2014, up from $1.77 in the second quarter of 2013 and $1.72 in the two fiscal quarters of 2013. We estimate that the higher cheese block price (passed through directly in domestic supply chain pricing to franchisees) resulted in an approximate $9.0 million increase in domestic supply chain revenues during the second quarter of 2014, and an $18.7 million increase in revenues in the two fiscal quarters of 2014.

International Revenues

International revenues primarily consist of royalties from our international franchise stores and international supply chain sales. Revenues from international operations increased $8.1 million, up 14.9% in the second quarter of 2014, and $14.8 million, up 13.7% in the two fiscal quarters of 2014. These increases were due primarily to higher international royalty and other revenues as well as higher international supply chain revenues as discussed below.

Revenues from international royalties and other increased $4.5 million, up 14.9% in the second quarter of 2014, and $8.3 million, up 13.8% in the two fiscal quarters of 2014. These increases were due primarily to higher same store sales and an increase in the average number of international stores open during 2014. These increases were offset in part by the negative impact of changes in foreign currency exchange rates of approximately $0.3 million in the second quarter of 2014 and $1.5 million in the two fiscal quarters of 2014 caused by the stronger dollar when compared to the currencies in the international markets in which we compete. When excluding the impact of foreign currency exchange rates, same store sales increased 7.7% in the second quarter of 2014, and 7.5% in the two fiscal quarters of 2014. This compared to an increase of 5.8% in the second quarter of 2013, and 6.2% in the two fiscal quarters of 2013. When including the impact of foreign currency exchange rates, same store sales increased 7.6% in the second quarter of 2014 and 5.6% in the two fiscal quarters of 2014. This compared to an increase of 3.9% in the second quarter of 2013, and 4.2% in the two fiscal quarters of 2013. The variance in our same store sales when including the impact of foreign currency exchange rates in 2014 was caused by the stronger dollar when compared to the currencies in the international markets in which we compete.

Revenues from international supply chain operations increased $3.6 million, up 15.1% in the second quarter of 2014, and $6.5 million, up 13.7% in the two fiscal quarters of 2014 due primarily to higher volumes.

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Cost of Sales / Operating Margin