Domino's Pizza, Inc. (NASDAQ: DPZ)

Domino's reported total revenues of $1.11 billion in Q1 2025, representing a 2.5% increase compared to Q1 2024. This growth was primarily driven by higher U.S. franchise advertising revenues, increased supply chain revenues, and higher international franchise royalties and fees. U.S. franchise advertising revenues grew due to a decrease in advertising incentives related to certain brand promotions and the return to the standard 6.0% advertising contribution rate at the beginning of Q2 2024, following the end of a temporary reduction to 5.75%.

Supply chain revenues increased primarily due to a 4.8% rise in food basket pricing to stores, partially offset by the transition of the company's equipment and supplies business to a third-party supplier and a shift in the mix of products sold. International franchise royalties and fees grew as a result of same-store sales growth and net store growth over the trailing four quarters, though this increase was partially offset by a $3.2 million negative impact from foreign currency exchange rates.

Income from operations showed a marginal decrease of 0.2% to $210.1 million. However, excluding the negative impact of foreign currency exchange rates on international franchise royalty revenues, income from operations would have increased by 1.4%. This underlying growth was primarily driven by gross margin dollar growth within the supply chain segment and higher international franchise royalties and fees, partially offset by higher general and administrative expenses, including approximately $5 million in severance expenses related to an organizational realignment in Q1 2025.

Net income increased significantly by 18.9% to $149.7 million, largely due to a favorable change of $42.7 million in pre-tax unrealized gains associated with the remeasurement of the company's investment in DPC Dash Ltd. This increase was partially offset by higher income taxes, with the effective tax rate increasing to 22.3% in Q1 2025 from 15.9% in Q1 2024, primarily due to a 4.6 percentage point unfavorable change in the impact of excess tax benefits from equity-based compensation.

Diluted EPS increased by 20.9% to $4.33, driven by higher net income and a lower weighted average diluted share count resulting from the company's share repurchases over the trailing four quarters. The company demonstrated strong cash generation with free cash flow of $164.4 million, representing a significant 59.1% increase from Q1 2024, primarily due to positive changes in operating assets and liabilities, timing of advertising contributions and payments, and lower capital expenditures.

Supply chain operations continued to be Domino's largest revenue segment, contributing 60.2% of total revenues in Q1 2025. This segment showed 1.6% growth year-over-year, primarily driven by the 4.8% increase in food basket pricing to stores, partially offset by the transition of the equipment and supplies business to a third-party supplier and changes in product mix. Supply chain gross margin improved by 0.5 percentage points to 11.6%, primarily due to procurement productivity gains.

U.S. franchise royalties and fees showed modest growth of 0.3% despite the slight decline in same-store sales, likely supported by the net addition of 153 franchised stores over the trailing four quarters. U.S. Company-owned stores revenue decreased by 1.1%, reflecting the 2.9% same-store sales decline in company-owned locations. The gross margin for company-owned stores decreased by 1.5 percentage points to 16.0% due to increased food costs and lower sales leverage.

International franchise royalties and fees demonstrated strong growth of 5.0% despite currency headwinds, reflecting the robust 3.7% international same-store sales growth and the addition of 446 net new international stores over the trailing four quarters. Excluding the $3.2 million negative impact of foreign currency exchange rates, this segment would have shown even stronger growth.

U.S. franchise advertising revenues increased significantly by 12.4%, primarily due to the reduction in advertising incentives for certain brand promotions and the return to the standard 6.0% advertising contribution rate following the temporary reduction to 5.75% that ended in Q1 2024.

Domino's experienced its first quarterly net store decline in recent history, with a global net reduction of 8 stores in Q1 2025. This decline was the result of continued expansion in the U.S. offset by international closures. The U.S. market showed relatively healthy store growth, with a net addition of 17 stores during the quarter, consisting of 20 openings and 3 closures among franchise stores.

The international segment faced challenges with a net decline of 25 stores, despite 203 openings, as 228 locations closed during the quarter. This marks a departure from the typical pattern of robust international expansion. The company did not provide specific details about the geographic distribution of these closures or whether they were concentrated in particular markets. However, the challenging global macroeconomic environment mentioned by management could be contributing to these closures.

Despite the quarterly decline, Domino's still shows strong trailing four-quarter net store growth of 603 units globally (157 in the U.S. and 446 internationally), indicating that the long-term expansion trend remains intact. The Q1 decline may represent a temporary adjustment rather than a fundamental shift in the company's growth trajectory.

As of March 23, 2025, Domino's global store count stood at 21,358 locations across more than 90 markets. The company continues to maintain its position as the world's largest pizza company, with independent franchise owners accounting for 99% of Domino's stores as of the end of Q1 2025.

Same-store sales (SSS) performance showed a clear divergence between the U.S. and international markets in Q1 2025. The U.S. segment experienced a modest decline of 0.5% compared to a strong 5.6% growth in Q1 2024, representing a significant 6.1 percentage point swing. Company-owned stores in the U.S. faced greater challenges with a 2.9% decline, while franchise stores performed somewhat better with a slight 0.4% decrease.

The U.S. SSS decline follows several quarters of positive growth and comes against a challenging comparison with the strong Q1 2024 performance. This could indicate increased competitive pressures in the U.S. market, consumer price sensitivity amid persistent inflation, or shifts in discretionary spending patterns. The steeper decline in company-owned stores compared to franchise locations suggests potential operational or market-specific challenges in the company's corporate store portfolio.

In contrast, international same-store sales demonstrated strong acceleration, growing by 3.7% (excluding foreign currency impact) compared to just 0.9% in Q1 2024. This 2.8 percentage point improvement highlights the resilience and growing strength of Domino's international business despite global macroeconomic challenges. The robust international SSS growth is particularly noteworthy given the net store closures in the international segment during the quarter, suggesting that the remaining store base is performing well.

The divergence between U.S. and international performance reflects the benefits of Domino's geographic diversification, as strength in international markets has helped offset temporary weakness in the U.S. business. Management's commentary about continued market share growth in QSR Pizza across both U.S. and international businesses suggests that while SSS may be facing headwinds in the U.S., the company believes it is still outperforming the broader pizza category.

Domino's demonstrated strong cash flow performance in Q1 2025, with net cash provided by operating activities increasing 45.0% year-over-year to $179.1 million. This substantial improvement was driven by positive changes in operating assets and liabilities, favorable timing of advertising contributions and payments, partially offset by lower net income when excluding the non-cash impact of unrealized gains related to the company's investment in DPC Dash.

Capital expenditures decreased by 26.9% to $14.7 million, contributing to an impressive 59.1% increase in free cash flow, which reached $164.4 million for the quarter. The company's efficient capital allocation and strong cash generation demonstrate operational discipline and effective working capital management.

The balance sheet remains heavily leveraged but stable, with a slight improvement in the leverage ratio to 4.9x from 5.0x in the prior year. Total debt was relatively unchanged at approximately $4.98 billion, consisting of $1.15 billion in current portion of long-term debt and $3.83 billion in long-term debt. Cash and cash equivalents increased significantly to $304.3 million as of March 23, 2025, up 63.5% from $186.1 million at the end of fiscal 2024.

During Q1 2025, Domino's repurchased and retired 115,280 shares of common stock for a total of $50.0 million, double the amount spent on share repurchases in Q1 2024. As of March 23, 2025, the company had $764.3 million remaining under its authorized share repurchase program. Subsequent to quarter-end, the Board of Directors declared a quarterly dividend of $1.74 per share, payable on June 30, 2025, to shareholders of record as of June 13, 2025.

The company's strong cash generation and continued commitment to returning capital to shareholders through dividends and share repurchases reflect management's confidence in the long-term business outlook despite near-term challenges in certain markets.

While Domino's did not provide specific quantitative guidance for the remainder of 2025, management's commentary emphasized the company's commitment to the "Hungry for MORE" strategy focused on driving market share growth across both U.S. and international businesses. CEO Russell Weiner highlighted the importance of "controlling what is under its control" as a key to long-term success, suggesting that the company is focusing on operational execution and strategic initiatives that are within its power to influence, rather than being distracted by broader macroeconomic factors.

The company's strategy continues to focus on three key pillars: MORE sales, MORE stores, and MORE profits. Despite the slight decline in U.S. same-store sales and the net store decrease in Q1, management expressed confidence that these strategic pillars are working together to drive long-term value creation. The organizational realignment that resulted in approximately $5 million in severance expenses during the quarter may indicate that the company is streamlining operations to enhance efficiency and adapt to changing market conditions.

Management's emphasis on sustained market share growth suggests that while the company may be facing some challenges in absolute sales growth, it believes it is performing better than competitors within the QSR pizza category. This focus on relative performance rather than absolute metrics may indicate a strategic perspective that prioritizes competitive positioning in a challenging industry environment.

The absence of specific financial targets or updated guidance for the full year suggests a degree of caution given the uncertain macroeconomic environment. However, the company's continued dividend declaration and accelerated share repurchases indicate management's confidence in Domino's cash generation capabilities and long-term business prospects despite near-term challenges.