Dominos Pizza Inc: Form 10-Q for the period ended Mar 22, 2020

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

The 2020 and 2019 first quarters referenced herein represent the twelve-week periods ended March 22, 2020 and March 24, 2019.

Overview

Domino’s is the largest pizza company in the world based on global retail sales, with more than 17,000 locations in over 90 markets around the world. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. Domino’s generates revenues and earnings by charging royalties and fees to our independent franchisees. The Company also generates revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada, and by operating a number of our own stores in the U.S. Franchisees profit by selling pizza and other complementary items to their local customers. In our international markets, we generally grant geographical rights to the Domino’s Pizza® brand to master franchisees. These master franchisees are charged with developing their geographical area, and they can profit by sub-franchising and selling ingredients and equipment to those sub-franchisees, as well as by running pizza stores directly. We believe that everyone in the system can benefit, including the end consumer, who can feed their family Domino’s menu items conveniently and economically.

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 we 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 extensive advertising through various media channels, the impact of technological innovation and digital ordering, our ability to execute our strong and proven business model and the overall global economic environment.

(1) Same store sales growth is calculated by including only sales for a given period from stores that had sales in the comparable weeks of both years. International same store sales growth is calculated similarly to U.S. same store sales growth. Changes in international same store sales are reported excluding foreign currency impacts, which reflect changes in international local currency sales.

(2) Temporary store closures due to COVID-19 in the first quarter of 2020 are not treated as store closures and affected stores are included in the ending store count.

During the first quarter of 2020, we experienced global retail sales growth. Our U.S. and international same store sales growth remained positive but was pressured by our current strategy to increase store concentration in certain markets where we compete. Beginning at the end of the first quarter of 2020 through the date of this filing, while we have seen an increase in U.S. same store sales, the COVID-19 pandemic has negatively impacted our global retail sales growth and, in our international business, same store sales growth due to temporary store closures and changes in operating procedures and store hours resulting from actions taken to increase social distancing across the markets in which we operate.

We continued our global expansion with the opening of 69 net new stores in the first quarter of 2020. Although we opened 143 gross new stores internationally, we also closed 104 stores, primarily resulting from the closure of our South Africa market, unrelated to COVID-19, comprising 71 stores in total. We also opened 30 net new stores in the U.S. during the first quarter of 2020. Overall, we believe our continued global store growth, along with our sales growth, emphasis on technology, operations, and marketing initiatives have combined to strengthen our brand.

Global retail sales, excluding foreign currency impact, which includes total retail sales at franchise and Company-owned stores worldwide, increased 5.9% in the first quarter of 2020. This increase was driven by an increase in worldwide store counts during the trailing four quarters as well as U.S. and international same store sales growth. U.S. same store sales growth reflected positive sales trends and the continued success of our products, marketing and technology platforms. International same store sales growth also reflected continued positive performance.

Total revenues increased $37.1 million, or 4.4%, in the first quarter of 2020 due primarily to higher supply chain food volumes as well as higher global franchise revenues resulting from retail sales growth. These increases in revenues were partially offset by lower U.S. Company-owned store revenues resulting from the sale of 59 Company-owned stores to certain of our existing U.S. franchisees during the second quarter of 2019 (the “2019 Store Sale”). These changes in revenues are described in more detail below.

Income from operations increased $12.3 million, or 8.6%, in the first quarter of 2020, primarily driven by higher royalty revenues from U.S. and international franchised stores, as well as higher supply chain margins. Income from operations was negatively impacted by lower Company-owned store margins and changes in foreign currency exchange rates in the first quarter of 2020.

Net income increased $29.0 million, or 31.2%, in the first quarter of 2020, driven by lower tax expense resulting primarily from higher excess tax benefits from equity-based compensation and higher income from operations, as noted above. This increase in net income was partially offset by higher interest expense resulting from a higher average debt balance following our recapitalization transaction completed on November 19, 2019 (the “2019 Recapitalization”).

Revenues

Revenues primarily consist of retail sales from our Company-owned stores, royalties, advertising contributions and fees from our U.S. franchised stores, royalties and fees from our international franchised stores and sales of food, equipment and supplies from our supply chain centers to substantially all of our U.S. franchised stores and certain international franchised stores. Company-owned store and franchised store revenues may vary from period to period due to changes in store count mix. Supply chain revenues may vary significantly from period to period as a result of fluctuations in commodity prices as well as the mix of products we sell.

U.S. Stores Revenues

U.S. Company-Owned Stores

Revenues from U.S. Company-owned store operations decreased $21.2 million, or 17.1%, in the first quarter of 2020 due primarily to the 2019 Store Sale. This decrease in revenues was partially offset by higher same store sales. Company-owned same store sales increased 3.9% in the first quarter of 2020 and 2.1% in the first quarter of 2019.

U.S. Franchise Royalties and Fees

Revenues from U.S. franchise royalties and fees increased $8.0 million, or 8.3%, in the first quarter of 2020 due primarily to higher same store sales and an increase in the average number of U.S. franchised stores open during the period, due to net store growth and, to a lesser extent, the 2019 Store Sale. U.S. franchise same store sales increased 1.5% in the first quarter of 2020 and 4.1% in the first quarter of 2019. U.S. franchise royalties and fees further benefited from an increase in revenues from fees paid by franchisees for the use of our technology platforms.

U.S. Franchise Advertising

Revenues from U.S. franchise advertising increased $6.7 million, or 7.5%, in the first quarter of 2020 due primarily to higher same store sales and an increase in the average number of U.S. franchised stores open during the period, due to net store growth and, to a lesser extent, the 2019 Store Sale.

Supply Chain

Revenues from supply chain operations are primarily comprised of sales of food, equipment and supplies from our supply chain centers to substantially all of our U.S. franchised stores and certain international franchised stores. Supply chain revenues increased $40.6 million, or 8.6%, in the first quarter of 2020. This increase was due primarily to higher volumes from increased orders resulting from an increase in the average number of U.S. franchise stores open during the year and an increase in market basket pricing to stores. Our market basket pricing to stores increased 2.9% during the first quarter of 2020, which resulted in an estimated $15.9 million increase in supply chain revenue.

International Franchise Royalties and Fee Revenues

Revenues from international franchise royalties and fees increased $2.9 million, or 5.3%, in the first quarter of 2020. This increase was due primarily to an increase in the average number of international stores open during the period and higher same store sales. The negative impact of changes in foreign currency exchange rates of $1.4 million partially offset the increase in revenues in the first quarter of 2020. International franchise same store sales increased 1.5% in the first quarter of 2020 and increased 1.8% in the first quarter of 2019.

Cost of Sales / Operating Margin

Cost of sales consists primarily of Company-owned store and supply chain costs incurred to generate related revenues. Components of consolidated cost of sales primarily include food, labor, delivery and occupancy costs.

Consolidated operating margin (which we define as revenues less cost of sales) increased $17.9 million, or 5.5%, in the first quarter of 2020 due primarily to higher global franchise revenues and higher supply chain volumes. Franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on the operating margin.

As a percentage of revenues, the consolidated operating margin increased 0.4 percentage points in the first quarter of 2020. Company-owned store operating margin decreased 0.2 percentage points in the first quarter of 2020 and supply chain operating margin increased 0.1 percentage points in the first quarter of 2020. These changes in margin are more fully discussed below.

U.S. Company-Owned Stores Operating Margin

The U.S. Company-owned store operating margin (which does not include certain store-level costs such as royalties and advertising) decreased $5.0 million, or 17.8%, in the first quarter of 2020 due primarily to the 2019 Store Sale.

As a percentage of store revenues, the store operating margin decreased 0.2 percentage points in the first quarter of 2020, as discussed in more detail below.

• Food costs increased 0.7 percentage points to 27.8% in the first quarter of 2020 due primarily to higher food prices.
• Labor costs decreased 1.8 percentage points to 29.0% in the first quarter of 2020. The 2019 Store Sale contributed to the reduction in labor costs as a percentage of store revenues due to the high labor rates in the market in which the sold stores operated. The reduction in labor costs as a percentage of store revenues was partially offset by an increase in average labor rates in our remaining Company-owned store markets, including additional bonus pay resulting from the COVID-19 pandemic.
• Insurance costs increased 0.5 percentage points to 3.4% in the first quarter of 2020 due primarily to unfavorable claims experience.
• Delivery costs increased 0.4 percentage points to 3.6% in the first quarter of 2020 due primarily to a higher average per-mile reimbursement rate for our delivery drivers.
• Occupancy costs increased 0.4 percentage points to 8.0% in the first quarter of 2020 due primarily to higher depreciation costs.

Supply Chain Operating Margin

The supply chain operating margin increased $5.1 million, or 9.6%, in the first quarter of 2020, primarily driven by higher volumes from increased store orders. As a percentage of supply chain revenues, the supply chain operating margin increased 0.1 percentage points in the first quarter of 2020 due primarily to lower labor, delivery and insurance costs, offset in part by higher food costs.

General and Administrative Expenses

General and administrative expenses decreased $1.2 million, or 1.3%, in the first quarter of 2020, driven by lower performance-based compensation expense and lower advertising expenses, partially offset by higher health insurance costs. The decrease in advertising expenses resulted primarily from the 2019 Store Sale.

U.S. Franchise Advertising Expenses

U.S. franchise advertising expenses increased $6.7 million, or 7.5%, in the first quarter of 2020, consistent with the increase in U.S. franchise advertising revenue. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized, as our consolidated not-for-profit advertising fund is obligated to expend such revenues on advertising and these revenues cannot be used for general corporate purposes.

Interest Expense, Net

Interest expense, net increased $4.1 million, or 12.2%, in the first quarter of 2020 driven primarily by higher average debt balances resulting from the 2019 Recapitalization.

The Company’s weighted average borrowing rate decreased to 4.0% in the first quarter of 2020, from 4.1% in the first quarter of 2019, resulting from the lower interest rates on the debt outstanding in 2020 following the 2019 Recapitalization as compared to the same period in 2019.

(Benefit) Provision for Income Taxes

Income tax expense decreased $20.8 million, or 126.1%, in the first quarter of 2020 due primarily to higher excess tax benefits on equity-based compensation, which are recorded as a reduction to the income tax provision, partially offset by higher pre-tax income. The Company recognized $30.4 million in excess tax benefits in the first quarter of 2020 as compared to $8.7 million in the first quarter of 2019, resulting from a significant increase in stock options exercised in the first quarter of 2020 as compared to the first quarter of 2019. The effective tax rate decreased to negative 3.7% during the first quarter of 2020 as compared to 15.1% in the first quarter of 2019.

COVID-19 Impact

As of April 21, 2020, nearly all of our U.S. stores remain open, with dining rooms closed and stores deploying contactless delivery and carryout solutions. Based on information reported to us by our master franchisees, we estimate that as of April 21, 2020, there are approximately 1,750 international stores that are temporarily closed.

Subsequent to the end of the first quarter, we borrowed $158.0 million under our outstanding variable funding notes as a precautionary measure due to the market uncertainty arising from COVID-19. These borrowings, along with our current unrestricted cash as of the end of the first quarter, provided us with approximately $358.8 million in cash on hand to provide enhanced financial flexibility.

Beginning at the end of the first quarter of 2020, we have begun making significant investments in our team members as a result of this pandemic, including through enhanced sick pay policies and bonuses for our hourly corporate store and supply chain team members. While it is not possible at this time to estimate the full impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt our continuing operations and supply chain and, as a result, could adversely impact our business, financial condition or results of operations.

Liquidity and Capital Resources

Historically, we have operated with minimal positive working capital or negative working capital, primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities. We generally collect our receivables within three weeks from the date of the related sale, and we generally experience 35 to 45 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. The use of our ongoing cash flows from operations to service our debt obligations, invest in our business, pay dividends and repurchase our common stock reduces our working capital amounts. As of March 22, 2020, we had working capital of $149.7 million, excluding restricted cash and cash equivalents of $189.4 million, advertising fund assets, restricted, of $110.0 million and advertising fund liabilities of $106.8 million. Working capital includes total unrestricted cash and cash equivalents of $200.8 million. Subsequent to the end of the first quarter, we borrowed $158.0 million under our outstanding variable funding notes as a precautionary measure due to the market uncertainty arising from COVID-19.

During the first quarter of 2020, we experienced increases in both U.S. and international same store sales versus the comparable period in the prior year. Additionally, our international and U.S. businesses grew store counts in the first quarter of 2020. These factors contributed to our continued ability to generate positive operating cash flows. We expect to continue to use our unrestricted cash and cash equivalents, cash flows from operations, excess cash from our recapitalization transactions and available borrowings under our variable funding notes to, among other things, fund working capital requirements, invest in our business, service our indebtedness, pay dividends and repurchase our common stock. We did not have any material commitments for capital expenditures as of March 22, 2020.

Based upon the current level of operations and anticipated growth, we believe that the cash generated from operations, our current unrestricted cash and cash equivalents and amounts available under our variable funding note facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for at least the next twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors” in our filings with the Securities and Exchange Commission. There can be no assurance that our business will generate sufficient cash flows from operations or that future borrowings will be available under the variable funding notes or otherwise to enable us to service our indebtedness, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance our fixed and floating rate notes and to service, extend or refinance our variable funding notes will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

Restricted Cash

As of March 22, 2020, we had approximately $140.1 million of restricted cash held for future principal and interest payments and other working capital requirements of our asset-backed securitization structure, $48.4 million of restricted cash held in a three-month interest reserve as required by the related debt agreements and $0.9 million of other restricted cash for a total of $189.4 million of restricted cash and cash equivalents. As of March 22, 2020, we also held $88.2 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s brand.

Long-Term Debt

As of March 22, 2020, we had approximately $4.10 billion of long-term debt, of which $43.4 million was classified as a current liability. Our fixed and floating rate notes from the recapitalizations we completed in 2019, 2018, 2017 and 2015 have original scheduled principal payments of $31.5 million in the remainder of 2020, $42.0 million in 2021, $897.0 million in 2022, $33.0 million in each of 2023 and 2024, $1.15 billion in 2025, $20.8 million in 2026, $1.28 billion in 2027, $6.8 million in 2028 and $614.3 million in 2029. As of March 22, 2020, we had no outstanding borrowings under our variable funding notes and $158.6 million available for borrowing, net of letters of credit issued of $41.4 million. The letters of credit are primarily related to our casualty insurance programs and supply chain center leases. As discussed above, subsequent to the first quarter of 2020, we borrowed $158.0 million of the remaining availability under our variable funding notes. Borrowings under the variable funding notes are available to fund our working capital requirements, capital expenditures and, subject to other limitations, other general corporate purposes including dividend payments and share repurchases.

Share Repurchase Programs

Our share repurchase programs have historically been funded by excess operating cash flows, excess proceeds from our recapitalization transactions and borrowings under our variable funding notes.

During the first week of the first quarter of 2020, we repurchased and retired 271,064 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $79.6 million. The Company’s Board of Directors authorized a share repurchase program to repurchase up to $1.0 billion of the Company’s common stock on October 4, 2019. As of March 22, 2020, the Company had a total remaining authorized amount for share repurchases of approximately $326.6 million.

During the first quarter of 2019, we repurchased and retired 33,549 shares for approximately $8.1 million.

Dividends

On February 19, 2020, the Company’s Board of Directors declared a $0.78 per share quarterly dividend on its outstanding common stock for shareholders of record as of March 13, 2020 which was paid on March 30, 2020. We had approximately $31.0 million accrued for common stock dividends at March 22, 2020.

Subsequent to the first quarter, on April 21, 2020, the Company’s Board of Directors declared a $0.78 per share quarterly dividend on its outstanding common stock for shareholders of record as of June 15, 2020 to be paid on June 30, 2020.

The following table illustrates the main components of our cash flows:

(In millions)

Operating Activities

Cash provided by operating activities decreased $1.6 million in the first quarter of 2020 due to the negative impact of changes in operating assets and liabilities of $32.2 million, partially offset by an increase in net income of $29.0 million and higher non-cash amounts of $1.6 million. The negative impact of changes in operating assets and liabilities was primarily related to the timing of payments on accounts payable and accrued liabilities in 2020 as well as the timing of collections on accounts receivable in 2020 as compared to 2019. These negative impacts of changes in operating assets and liabilities were partially offset by the positive impact of changes in advertising fund assets and liabilities, restricted in 2020 as compared to 2019, due primarily to the timing of advertising spend.

Investing Activities

Cash used in investing activities was $17.9 million in the first quarter of 2020, which consisted primarily of $17.5 million of capital expenditures (driven primarily by investments in technological initiatives and supply chain centers).

Cash used in investing activities was $12.0 million in the first quarter of 2019, which consisted primarily of $12.2 million of capital expenditures (driven primarily by investments in technological initiatives and supply chain centers).

Financing Activities

Cash used in financing activities was $82.1 million in the first quarter of 2020, primarily related to the repurchase of approximately $79.6 million in common stock under our Board of Directors-approved share repurchase program in the first week of the quarter, repayments of long-term debt of $10.8 million and tax payments for restricted stock upon vesting of $1.8 million. These uses of cash were partially offset by proceeds from the exercise of stock options of $10.1 million.

Cash used in financing activities was $55.1 million in the first quarter of 2019, primarily related to repayments of long-term debt of $49.0 million (of which $40.0 million related to the repayment of borrowings under our variable funding notes) and the repurchase of approximately $8.1 million in common stock under our Board of Directors-approved share repurchase program.

Forward-Looking Statements

This filing contains various forward-looking statements about the Company within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”) that are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “could,” “should,” “estimates,” “expects,” “intends,” “may,” “will,” “plans,” “predicts,” “projects,” “seeks,” “approximately,” “potential,” “outlook” and similar terms and phrases that concern our strategy, plans or intentions, including references to assumptions. These forward-looking statements address various matters including information concerning future results of operations and business strategy, our anticipated profitability, estimates in same store sales growth, the growth of our U.S. and international business, ability to service our indebtedness, our future cash flows, our operating performance, trends in our business and other descriptions of future events reflect the Company’s expectations based upon currently available information and data. While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions. Important factors that could cause actual results to differ materially from our expectations are more fully described under the section headed “Risk Factors” in this filing and in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our 2019 Form 10-K. Actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors, including but not limited to: our substantial increased indebtedness as a result of our recapitalization transactions and our ability to incur additional indebtedness or refinance or renegotiate key terms of that indebtedness in the future; the impact a downgrade in our credit rating may have on our business, financial condition and results of operations; our future financial performance and our ability to pay principal and interest on our indebtedness; the effectiveness of our advertising, operations and promotional initiatives; the strength of our brand, including our ability to compete in the U.S. and internationally in our intensely competitive industry, including the food service and food delivery markets; our ability to manage difficulties associated with or related to the COVID-19 pandemic and the effects of COVID-19 on our business and supply chain; the impact of social media and other consumer-oriented technologies on our business, brand and reputation; new product, digital ordering and concept developments by us, and other food-industry competitors; the impact of new or improved technologies and alternative methods of delivery on consumer behavior; our ability to maintain good relationships with and attract new franchisees, and franchisees’ ability to profitably manage their operations without negatively impacting our brand’s reputation; our ability to successfully implement cost-saving strategies; our ability and that of our franchisees to successfully operate in the current and future credit environment; changes in the level of consumer spending given general economic conditions, including interest rates, energy prices and consumer confidence; our ability and that of our franchisees to open new restaurants and keep existing restaurants in operation; changes in operating expenses resulting from changes in prices of food (particularly cheese), fuel and other commodity costs, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness, health epidemics or general health concerns, severe weather conditions and natural disasters may have on our business and the economies of the countries where we operate; changes in foreign currency exchange rates; our ability to retain or replace our executive officers and other key members of management and our ability to adequately staff our stores and supply chain centers with qualified personnel; our ability to find and/or retain suitable real estate for our stores and supply chain centers; changes in government legislation and regulations, including changes in laws and regulations regarding information privacy, payment methods consumer protection and social media; adverse legal judgments or settlements; food-borne illness or contamination of products; data breaches, power loss, technological failures, user error or other cyber risks threatening us or our franchisees; the effect of war, terrorism, catastrophic events or climate change; our ability to pay dividends and repurchase shares; changes in consumer preferences, spending and traffic patterns and demographic trends; actions by activist investors; changes in accounting policies; and adequacy of our insurance coverage. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this filing might not occur. All forward-looking statements speak only as of the date of this filing and should be evaluated with an understanding of their inherent uncertainty. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission, or other applicable law, we will not undertake, and specifically disclaim, any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances arising after the date of this filing, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on the forward-looking statements included in this filing or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

Market Risk

We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In connection with the recapitalizations of our business, we issued fixed and floating rate notes and entered into variable funding notes and, at March 22, 2020, we are exposed to interest rate risk on borrowings under our floating rate notes and variable funding notes. As of March 22, 2020, we had no outstanding borrowings under our variable funding notes. Subsequent to the first quarter of 2020, we borrowed $158.0 million of the remaining availability under our variable funding notes. Our floating rate notes and our variable funding notes bear interest at fluctuating interest rates based on LIBOR.

There is currently uncertainty around whether LIBOR will continue to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate our loan documents and we cannot predict what alternative index would be negotiated with our lenders. As a result, our interest expense could increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.

Our fixed rate debt exposes the Company to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate.

We are exposed to market risks from changes in commodity prices. During the normal course of business, we purchase cheese and certain other food products that are affected by changes in commodity prices and, as a result, we are subject to volatility in our food costs. We may periodically enter into financial instruments to manage this risk. We do not engage in speculative transactions or hold or issue financial instruments for trading purposes. In instances when we use fixed pricing agreements with our suppliers, these agreements cover our physical commodity needs, are not net-settled and are accounted for as normal purchases.

We have exposure to various foreign currency exchange rate fluctuations for revenues generated by our operations outside the U.S., which can adversely impact our net income and cash flows. Approximately 6.6% of our total revenues in the first quarter of 2020 and approximately 6.5% of our total revenues in the first quarter of 2019 were derived from our international franchise segment, a majority of which were denominated in foreign currencies. We also operate dough manufacturing and distribution facilities in Canada, which generate revenues denominated in Canadian dollars. We do not enter into financial instruments to manage this foreign currency exchange risk. A hypothetical 10% adverse change in the foreign currency rates for our international markets would have resulted in a negative impact on royalty revenues of approximately $5.1 million in the first quarter of 2020.

Management, with the participation of the Company’s Chief Executive Officer, Richard E. Allison, Jr., and Executive Vice President and Chief Financial Officer, Jeffrey D. Lawrence, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, Mr. Allison and Mr. Lawrence concluded that the Company’s disclosure controls and procedures were effective.

During the quarterly period ended March 22, 2020, there were no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Except as set forth below, there have been no material changes with respect to those risk factors previously disclosed in Item 1A “Risk Factors” in Part I of our 2019 Form 10-K.

Our operations and results could be adversely affected by the recent outbreak of the disease caused by the novel coronavirus (COVID-19).

The recent outbreak of disease caused by the novel coronavirus (COVID-19), which has been declared a pandemic by the World Health Organization, has spread across the globe and is impacting worldwide economic activity. A public health pandemic such as COVID-19 poses the risk that we and/or our employees, franchisees, supply chain centers, suppliers, customers and other partners may be, or may continue to be, prevented from conducting business activities for an indefinite period of time, including due to shutdowns, travel restrictions, social distancing requirements, stay at home orders and advisories and other restrictions that have been or may be suggested or mandated by governmental authorities, or due to the impact of the disease itself on the workforce of those businesses. In addition, COVID-19 may impact the willingness of customers to purchase food prepared outside of the home. The COVID-19 pandemic may also have the effect of heightening many of the other risks described in the ‘‘Risk Factors’’ section of our 2019 Form 10-K, including but not limited to those relating to our growth strategy, our supply chain and increased food and labor costs, disruption in operations, loss of key employees, our indebtedness, general economic conditions and our international operations.

In response to governmental requirements, we and our franchisees have, among other measures, temporarily closed certain of our stores, modified certain stores’ hours and closed locations to in-store dining, and continue to monitor additional developments. We have also made additional operating changes to respond to changes in consumer behavior resulting from COVID-19. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, the continued spread of the virus and the measures taken by governments or by us in response have disrupted our operations and could disrupt our supply chain, including our access to face coverings and gloves for use in our operations, which could adversely impact our business, financial condition and results of operations. The COVID-19 pandemic and mitigation measures have also had an adverse impact on global economic conditions, which could have an adverse effect on our business and financial condition. The Company’s sales and operating results may be affected by uncertain or changing economic and market conditions arising in connection with and in response to the COVID-19 pandemic, including inflation, deflation, prolonged weak consumer demand, political instability or other changes. The significance of the operational and financial impact to the Company will depend on how long and widespread the disruptions caused by COVID-19, and the corresponding response to contain the virus and treat those affected by it, prove to be.