Domino's says majority of earnings decline caused by interest expense resulting from recapitalization

By Jennifer Lanning Drey

Portland, Ore., Oct. 16 - Domino's Pizza, Inc.'s April recapitalization had a significant impact on ongoing interest expense, David Mounts, the company's executive vice president of distribution and procurement and former chief financial officer, said Tuesday during the company's third-quarter earnings call.

Domino's reported a $0.17 drop in earnings per share for the third quarter ended Sept. 9 as compared to the correlating period in 2006 and said $0.13 of the decline was due to added interest expense caused by the changes made to the company's capital structure earlier this year.

The quarter was the first to reflect the full impact of the new capital structure. Interest expense totaled $26.5 million, according to Mounts.

Despite contributing to lower earnings, the recapitalization was defended by Mounts and Domino's chief executive officer David A. Brandon, and Mounts said investor feedback related to the new capital structure has been positive.

"We continue to be very comfortable with our new debt level and we have seen no economic effects on our current financing or our capital structure due to recent turbulence in the market," Mounts said.

The company's total debt stood at $1.7 billion on Sept. 9. The amount represented approximately $1.6 billion of fixed-rate senior notes and $100 million of fixed-rate subordinated notes.

Domino's reported net income of $11 million for the quarter.

In addition to being negatively affected by the added interest expense, Domino's drop in earnings also reflected pressures from higher commodity prices and decreased store traffic.

"We are doing our very best to raise prices to reflect the impact of these historically high cost pressures. At the same time, we're trying to stimulate growth in our categories," Brandon said.

Additionally, the company reported that it has secured a multi-year purchasing arrangement with its primary cheese supplier but did not disclose the terms.

Domino's international group showed a strong performance during the quarter, which helped mitigate some of the pressures, Brandon said.

Domino's is an Ann Arbor, Mich., pizza delivery company.

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