Domino's Pizza Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2023

There are 13 speakers on the call.

Operator

Thank you

Speaker 1

for standing by, and welcome to Domino's Pizza Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr.

Speaker 1

Ryan Goers, Vice President, Finance and Investor Relations. Please go ahead, sir.

Speaker 2

Good morning, everyone. Thank you for joining us today for our conversation regarding the results for the Q2 of 2023. Before we begin, I would like to announce that we will hold our Investor Day on December 7 in Anarbor, Michigan. Chief Executive Officer, Russell Weiner and the entire Domino's leadership team look forward to hosting you at our headquarters. Today's call will feature commentary from Russell and Chief Financial Officer, Sandeep Reddy.

Speaker 2

I want to remind everyone that the forward looking statements in this morning's earnings release and 10 Q also apply to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecast. For more information, Please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8 ks earnings release To find disclosures and reconciliations of non GAAP financial measures that may be referenced on today's call.

Speaker 2

I request to our coverage analysts, Today's call is being webcast and is also being recorded for replay via our website. With that, I'd like to turn the call over to our Chief Executive Officer, Russell Weiner. Well, thank

Operator

you, Ryan, and good morning, everybody. I'm going to open today with some brief remarks regarding our current focus and the momentum we're creating here at Domino's Pizza. Sandeep will then provide a high level overview of our quarterly financial performance followed by ample time for your questions and discussion. We are executing our plan to restore delivery growth here in the United States. Efforts to improve Service and staffing and drive value and innovation will continue to make a difference in driving order counts in this important segment of our business.

Operator

Our delivery service levels ended Q2 nearly 2 minutes better than Q2 of last year. And with the agreement we recently announced with Uber Eats, Domino's will benefit from a large and growing cohort of delivery customers. We believe these transactions will be incremental and provide a meaningful increase in the number of customers who leverage the Domino's delivery experience. Domino's delivered 1 out of every 3 pizzas in the U. S.

Operator

Prior to our decision to compete in the aggregator marketplace. According to Sarcana, aggregator sales for delivery among U. S. Quick serve pizza restaurants has grown to almost $5,000,000,000 for the 12 months ending May of 2023, we plan to get our fair share of this market over time. The opportunity represents Over $1,000,000,000 in incremental sales for our U.

Operator

S. Business. And our research indicates that most of the transactions we gain from participating in this segment This has also been supported by what we've learned from our Domino's Pizza International Master Franchisees We have here at Domino's a common sense process for Making business decisions. We ask ourselves this important question. Is it the right thing to do for the long term growth of our brand and the business?

Operator

Our extensive evaluation indicates that by participating in the aggregator marketplace, we'll drive net incremental orders over the long term by tapping into a new group of consumers. In addition, our contractual agreement has secured the protections that we require to maintain control over our customer data and assess the incrementality of the platform. And most importantly, orders placed through the Uber Eats platform Will be delivered by Domino's delivery experts. So we're excited to begin accepting orders through the Uber Eats channel later this year and look forward to reporting the results of this important growth initiative. Successfully executing an aggressive plan to get our fair share of the scaled pizza distribution channel isn't new to us.

Operator

We approached the carryout pizza Segment in a similar manner back in 2011. Carryout pizza was a smaller percentage of our business before we took thoughtful aggressive action. Today, our carryout business is almost $2,500,000,000 larger than it was in 2011, Making Domino's the number one carryout pizza brand in the U. S. Despite this impressive growth, Our current aspiration is to drive our carryout market share even further to at least the same market share we enjoy in pizza delivery today.

Operator

We need to earn an additional 10 points of market share to reach our fair share in the carryout segment. And this ten points represents about $2,000,000,000 in additional retail sales. Outside of the U. S, Domino's and Uber Eats operate in 27 of the same markets. Our new global deal has the potential to bring Uber Eats customers to 70% of Domino's stores around the world with improved economics for our international franchisees.

Operator

Next, I want to talk about another important initiative for us, the new and improved loyalty program that we'll be launching in the U. S. In September of this year. Finally, we have 2 exciting innovations that are coming to the U. S.

Operator

Market in the Q3. This keeps with our stated intention of increasing the pace of innovation. We launched Domino's Pinpoint Delivery in late June. Delivery innovation, as you know, is the core of who we are, so we're thrilled to give customers this New delivery option by allowing them to receive their order nearly anywhere just with the drop of a pin on our app. And in late August, we're going to launch Pepperoni Stuffed Cheesy Bread.

Operator

Pepperoni Stuffed Cheesy Bread follows the successful launch of Domino's loaded tops and it is delicious. It brings news to our stuffed cheesy bread platform, which was launched over a decade ago. The stuffed cheesy bread line is a significant part of our menu mix and provides a healthy margin for franchisees. My message to you today is more. More sales in both carryout and delivery, More ways to reward customers with our new loyalty program and more innovation, both technology and product related.

Operator

We'll drive orders with innovation and value. We'll tap into those incremental marketplaces I talked about and then we'll bring customers back with best in class service And a new and improved loyalty program. This is our go forward plan at Domino's Pizza. Our momentum will build starting in Q4 and will significantly impact the performance of our business in 2024 and beyond. As important, this momentum should drive continued EBITDA growth for franchisees.

Operator

Our mix and match offer at $6.99 remains a strong value Customers and has helped our franchisees accelerate store level profitability through Q2. That profitability is Higher than it was this time last year despite inflationary headwinds. And I expect it to continue to grow as a result of the sales building initiatives I just outlined. So there are many exciting things underway here at Domino's Pizza. And now for an overview of our Q2 financial results, I'll

Speaker 3

Thank you, Russell, and good morning to everyone on the call. I'll begin with updates on our actions to drive the long term profitability of Domino's and our franchisees. First, pricing. During the Q2, the average price increase across our U. S.

Speaker 3

System was 3.9%. We expect average pricing to be similar in the 3rd quarter before moderating in the 4th quarter to approximately 2% when we lap the carryout mix and match pricing change from October 2022. 2nd, cost efficiencies as we continue to drive margin recovery. We drove improvement in our operating income margin, which grew by 240 basis points versus Q2 2022. This was despite foreign exchange rates having a 15 basis points negative year over year impact on operating income margin during the quarter.

Speaker 3

We now expect full year operating income margins in 2023 to reach or exceed 2019 levels. 3rd, positive same store sales growth excluding foreign currency impact in our U. S. And international businesses For the 3rd consecutive quarter, drove operating income improvement. Now for our financial results for the quarter.

Speaker 3

Excluding the negative impact of foreign currency, global retail sales grew 5.8% Due to positive sales comps and global net store growth. U. S. Retail sales increased 1.7%. International retail sales, excluding the negative impact of currency, grew 10.1%.

Speaker 3

During Q2, same store sales for the U. S. Business increased 0.1%. The increase in U. S.

Speaker 3

Same store sales was driven by a higher average ticket, including the pricing actions I mentioned earlier, partially offset by order count declines. Our carryout business remains strong in Q2 With same store sales plus 5.6 percent, rolling over a plus 14.6% performance in 2022. The U. S. Delivery business continues to be challenged.

Speaker 3

Q2 delivery same store sales declined 3.5%, Rolling over a minus 11.7 percent in Q2 2022. We expect q3 same store sales trends in our delivery business to be challenged similar to Q2. However, we expect a slight improvement in trend in Q4 as our updated loyalty program begins to roll out, followed by a considerable improvement in 2024 as a result of transaction growth from our Uber Eats partnership And other initiatives Russell has shared with you. Shifting to unit count, we added 27 net new stores in the U. S.

Speaker 3

With 30 store openings and 3 closures, bringing our U. S. System store count to 6,735 stores at the end of the quarter And our 4 quarter net store growth rate in the U. S. To 1.8%.

Speaker 3

Domino's unit economics remains strong with continued EBITDA growth For our U. S. Franchisees, we are on track to deliver average U. S. Franchise store profitability of at least $150,000 in 2023.

Speaker 3

Moving to international. Same store sales in our international business, excluding currency impact, increased 3.6%. Our international store count increased by 170 net new stores, comprised of 223 store openings And 53 closures. Closures were driven by the closure of the Denmark market, closures in Brazil As our master franchisee there continues to optimize its store base and some closures in Russia where the master franchisee has indicated an The intention to exit the market. Dona Knoll's Pizza Enterprises, one of our publicly traded master franchisees, Recently disclosed their intention to close an additional 65 to 70 underperforming stores.

Speaker 3

This will likely occur during our Q3. These reductions in underperforming stores will pull down our net store growth rate In the upcoming quarter and for the full year. However, our new store builds in international Continued to be robust and we anticipate returning to our full year run rate of net store growth in 2024 once these store closures are behind us. Our additional 117 net stores brought the current trailing 4 quarter net store growth rate In international to 6.3%. When combined with our U.

Speaker 3

S. Store growth, the trailing 4 quarter global net store growth rate was 4.7%. We now expect our 2023 global retail sales growth And we continue to expect our 2023 global unit growth to track to the low end of our 5% to 7% 2 to 3 year outlook. Despite strong gross openings, we will be pressured by international store closures this year. Since these closures will be underperforming stores in certain challenged markets, this is not anticipated to materially impact The financial benefit of our new international store openings.

Speaker 3

Finally, a capital structure update. A debt leverage ratio of 4 to 6 times is the appropriate leverage for our company and moves within the range depending on the level of interest rates. We have operated with this range of leverage for almost 20 years. In today's interest rate environment, You should expect us to use our free cash flow to make investments to grow the business, create strong shareholder returns through our dividend and share repurchase strategies and retire debt when it's in the best interest of our shareholders for us to do so. As always, We will be opportunistic if credit markets warrant additional borrowing or refinancing.

Speaker 3

Thank you. We will now open the call to questions.

Speaker 1

One moment for our first question. And our first question comes from the line of Brian Bittner from Oppenheimer. Your question please.

Speaker 4

Good morning. Thank you. It seems like you really do have 2 new tangible Catalyst to stimulate incremental demand with 1 being the Uber Eats partnership and 2 Being the relaunch of your loyalty program in September, you've talked about the size of the prize with the Uber Eats partnership being $1,000,000,000 but how quickly could it be impactful to the business once it's launched? And As it relates to the relaunch of loyalty, have you attempted to size up how powerful of an opportunity this could be? Or maybe you can rank order it in importance relative to the Uber Eats partnership for us.

Speaker 4

Thanks.

Operator

Good morning, Brian. Actually, what I'd say is, I think we've got 3 catalysts. You talked about the Uber piece. You talked about loyalty. We also talked a lot about carryout on the call.

Operator

And we've gained $2,500,000,000 since we leaned in Carryout. 2011, we've got another $2,000,000,000 just to get our fair share. Our feeling here at Domino's Pizza is, if there is a category That sells pizza that we compete in vigorously, we should get our fair share, which is our share of delivery, one out of every 3. So we've got a lot more to go on Karyad as well. There are a lot of questions within there.

Operator

So let me unpack a couple and then if I missed anything, you just come back. First is the $1,000,000,000 number that we're talking about here in the U. S, dollars 1,000,000,000 incremental. As you know, we're first starting with Uber. We're really excited to launch with them as exclusive partners for the 1st 12 months.

Operator

After that, we've got optionality in the contract that we can choose to take however we'd like. The $1,000,000,000 is A signal of our fair share of the entire $5,000,000,000 U. S. Aggregator pizza delivery business. So obviously, that's something that would happen when we get on to the broader competitors in the platform, which we intend to do at some point.

Operator

On the loyalty program, by the way, you really listened to Ryan's one part question. I'm totally joking with you. From a loyalty standpoint, the way I like to think of it is, How do I feel as a customer when most brands redo their loyalty programs? Usually, as a customer, I'm on the short end. A new loyalty program for a company usually means they're trying to drive a little bit more profitability, which means things are taken away from me as a customer.

Operator

We're doing the exact opposite here. And so the changes we're making in the loyalty program are there to scope the changes and the opportunity in our business. So we Talked about carryout being one of the catalysts. One of the things that's going to be true in the new loyalty program We're going to recognize that a carryout customer's ticket is lower. And so the hurdle for getting points will be lower.

Operator

Secondarily, we want to engage people at all levels. We expect to have a big influx of new customers coming in today. And you know, our current program, you need 60 points. There'll be points at various levels from a redemption standpoint. So, we think This is a truly new and improved program for our customers and a profitable one for our franchisees.

Speaker 4

Thanks. Thanks for working with me on that.

Operator

Sure. Thank

Speaker 1

you. One moment for our next question. And our next question comes from the line of Peter Saleh from BTIG. Your question please.

Speaker 5

Great. Thanks. Russell, I just wanted to come back to the conversation around the loyalty program and the changes that are happening in September. Can you elaborate a little bit? Are we moving from a transaction based to a spend based model?

Speaker 5

Or how is this going to be configured, I guess, come September? Just trying to understand if there'll be if you do change from transaction based to spend based, do you Anticipate any sort of additional pressure on order counts or just trying to understand the structure here on the new loyalty program?

Operator

Yes, sure. Good morning, Peter. Yes, on the loyalty side, we are big fans in general. We look at as I said in the opening remarks, We look at lifetime value, we look at long term business decisions. And it's clear that In the long term, order counts drives franchisee profitability.

Operator

And so this will continue to be a transactions based program. And so, yes, like I said, the big change on the transaction base is actually We will allow people to transact at a lower level and we think this is really important bringing in incremental frequency into the program. Today, You need to get 60 points. In the future, you'll be able to still get a pizza at 60 points, But at lower value with different products, you'll be able to participate. And we think that will be a nice driver of order counts.

Operator

Ticket in general It's something that through our multiple platforms with mix and match customers end up usually doing themselves and obviously we've got a robust AB testing system. And so there's a lot of upselling, appropriate upselling on the website and on the apps.

Speaker 6

Thank you.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Sara Senatore from Bank of America. Your question please.

Speaker 7

Great. Thank you. I have another 2 part, one part question. The first is, I'm just trying to understand the sort of carryout opportunity. I guess I always thought the distinction between Domino's and independents was perhaps a little bit more evident in delivery just because the speed of Service and things like the tracker.

Speaker 7

So from a carryout perspective, I guess, is it harder to make inroads because perhaps The advantages are less pronounced or how are you thinking about that? And then, a separate question is just on Pricing and the gap versus the industry and it sort of seems to me that keeps widening the industry ahead of you. Is that going to Translate into better traffic trends or is there an opportunity to take price? Thanks.

Operator

Yes, sure. So I'll give you a 2 part answer. I'm sorry. It's Sandeep made me do this 8:30 call this morning. Usually, we do 10:30, so I've had a couple of cups of coffee, so my apologies.

Operator

On carryout, the interesting thing that drives the carryout business, And it kind of makes sense when you think about it, it's just proximity. And so the great piece of our fortressing strategy is that we're opening up stores Closer to customers. So just like our delivery drivers make more efficient deliveries when they're closer to customers, the same thing is if we put a Domino's Pizza, you mentioned, For example, competitors being local pizza companies. If we put a Domino's Pizza right in the middle, that's a great thing that's Those are really, really incremental transactions from us. In fact, the incrementality of carryout when we split a store is even more incremental And delivery from a customer standpoint.

Operator

So, the second piece is carryout customers, they really want value. One of the reasons they're doing carryout is they want to avoid the tip, they want to avoid the delivery fee And nobody provides better value than Domino's Pizza. Part of the scale that we're able to get through our purchasing is then passed along to customers. And I think we're very competitive from a carryout standpoint. And then with pricing, to me, the Pricing at Domino's has always been volume based.

Operator

We certainly want to have on a order by order basis, want to make sure our franchisees are making the profit they need to and Sandeep talked to the increase in franchisee profitability. But then once the Profit per order is established. We have what we call a high volume mentality. And so we price for proper Profitability on a per order basis that will help drive consumer to buy Domino's more frequently. That's kind of how we look.

Operator

I don't expect to be at the high end of pricing. What I expect to do and I think if you look at other Restaurants in our category is I expect our franchisees to be at the high end of profitability, while we're offering best in class value to customers.

Speaker 7

Thank you.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Dennis Geiger from UBS. Your question please.

Operator

Thank you. And thanks for all the details on the Sales driver is definitely helpful. The 3rd party partnerships, the carryout and loyalty all seem quite impactful. But Russell, wondering if you could just speak to some of the other Maybe slightly less impactful sales drivers, that e commerce upgrade, the summer of service, some of the tech and the menu innovation that you spoke to and and seemingly will be a bigger part of the business going forward. Just curious if you could sort of help frame up how impactful you think about some of those other drivers Thank you.

Operator

Yes. No, sure. I appreciate you because a lot of times the headlines are what grabs folks, but actually it's the subtext That actually drives the headlines, if you think about it. And so, maybe not talking about those 3 drivers, but talking about the things behind it, some of which we Mentioned already. But really what we've done is in addition to the significant carryout growth, that you've seen this year We've improved the underlying fundamentals of the business and those fundamentals are going to help us really get the most out of those Other drivers that you've talked about.

Operator

So improved profitability for our franchisees and for us frankly, Sandeep talked about our operating Income margins. Summer of service is leading to improved service. So Dennis, the service This quarter versus quarter last year, we're 1.9 minutes, almost 2 minutes better than just a year ago and actually better Even last quarter. And so the discussions, the best practices, just the fact that we're leaning into service with our franchisees It's making an immediate difference. We we've got this morning a bunch of franchisees here for summer of service.

Operator

So I can tell you firsthand how excited people are to be here. We've already had The equivalent of essentially 50% of our stores represented through this building already in summer of service. So again, improved profitability, improved service and then obviously the new loyalty program that we discussed. From an innovation standpoint, what I would tell you is our approach to innovation is Purposeful innovation. And when I say purposeful innovation, it's We don't sit and say, all right, we need this many new products, we need this many technologies.

Operator

What's the global purpose that we're trying to achieve for this brand over time, right? And so, we look at obviously product being important and And we've got 2 product launches this year, which is significant for us at least that we've mentioned so far. But we also we believe innovation is more than just new products. And in fact, if all you're doing is new products in a way, You're kind of degrading your base product and you're hurting your service. And so what we'd like to do is also lean into other things.

Operator

And so PinPoint Delivery is a great example that we just launched right now. It's a technology innovation. We call those types of innovation Techquity dryers, it drives our technology equity. But what it does too is it shows our consumers from an innovation standpoint, How incredibly obsessed we are with delivery. And whenever we do that, whether it's in this case with PinPoint, We built our own vehicle.

Operator

If you remember years ago with the DXP, we had the electric vehicle, launched earlier this year. When we show our customers We are obsessed with the delivery process or even the ordering process. There are 20 different ways to order Domino's Pizza. They realize and recognize that means we're obsessed with every piece. And what that does is it drives long term brand love.

Operator

And that's why we are and we have to be delivering these aggregator orders, Right. We are obsessed with delivery. We do have pinpoint delivery. We do have fleets of vehicles out there. And we do it, Because we think there's a competitive advantage to owning the entire customer experience.

Operator

And so That is why we're really leaning in and making sure we were the delivery that us as the delivery experts were delivering the pizzas that we were getting through this platform We're really important. So you had a 1 part question. I gave you a 4 part answer to your 1 part question. But as you can tell, we're really excited about delivery here at Domino's Pizza. That's great.

Operator

Thanks, Russell.

Speaker 1

Sure. Thank you. One moment for our next question. And our next question comes from the line of Gregory Francfort from Guggenheim. Your question please.

Speaker 8

Hey, thanks for the question. Russell, my question is just around the data and in terms of the new agreement with Uber and what you're going to get. I think you put in the release a comment about getting sufficient data. What did you go into the negotiations wanting to have that relationship look like? And kind of what did you end up what's going to be the go forward arrangement?

Speaker 8

Thanks.

Operator

Yes. Sure, Greg. On the data standpoint, It was really important for us to get the data that we need to have in order to analyze the incrementality of the platform. And so we are getting that. We appreciate that in the partnership.

Operator

The other thing and it probably hits you over the head as a of course, But we are delivering the pizzas. And if we deliver the pizza, that means we need every piece of information in order to deliver that pizza, which is the customer's name and address Contact information. And so maybe those two things, the ability to analyze the ingrumentality and the fact that we're

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Andrew Strelzik from BMO. Your question please.

Speaker 9

Hey, good morning.

Operator

Excuse me. Thanks for taking the question.

Speaker 4

I guess, this is a question really about value, But also about food costs. And I'm curious if you expect to continue realizing food deflation going forward. And I guess where I'm coming from is, If the broader environment for delivery is pressured by price sensitivity or something like that, do you see an opportunity to maybe Leverage deflation to alleviate some of those consumer pressures or how do

Operator

you think about that? Thanks.

Speaker 3

Hey, Andrew, it's Sandeep. So I think Really important points that you bring up. I think from a value and food cost standpoint, as you know, we've actually had pretty significant volatility on the food basket So I think when you look at 2023 specifically, the food basket is basically up on a year to date basis about 1%. Last quarter was a deflationary quarter with a minus 2.4%. And obviously, when you look at the guidance that we Provided of 3% to 5%.

Speaker 3

If the current level of Food Basket deflation that happened in Q2 continues, it's mostly driven by cheese by the way, We should continue to see material upside on the Food Basket as we go through the balance of the year. This makes a huge difference to profitability of our franchisee. And I think that helps repair some of the pressure that they took last year in their profitability. So from a price opportunity standpoint, I think what we've been very clear about from the get go is value, value to the consumer. So if there is a way to actually pass value to the consumer through all of our different promotional platforms, we always look to actually maximize that opportunity.

Speaker 3

And that will be continually be the way we actually approach this as well. It's too early to actually talk about where we're going to take this, But the framework through which we'll analyze it is exactly the same as what we've always had on pricing.

Operator

Yes. And I would just add to Sandeep's answer. Now that we're in we're going to be in this incremental channel of aggregators, I think it's important to really understand that we have a new unlock for value. So the best value, the best prices, the best offers will be at dominos.com or our apps. The only way to get our great new loyalty programs will be our apps or dominoes.com.

Operator

The only way to get pinpoint delivery, That's going to be our value channel. But essentially what the aggregator platform Opens up for us maybe let me give you my point of view on it. I don't think we need to get every customer on that platform. I think we need to get the right customers. So like I said, the value customers, we want them to come to dominos.com, but this will be a premium price channel for us And specifically, the higher income customers that they've got are the ones that we're going to be targeting here.

Operator

And so I think if anything, this gives us more levers to unlock value for customers, but also value from our franchisees as far as kind of a higher income, higher price marketplace. Great. Thank you very much.

Speaker 1

Thank you. One moment for our next question. And our next question Comes from the line of Chris Carrel from RBC Capital Markets. Your question please.

Speaker 10

Thanks. Good morning. So On development, thanks for all the context around international, but I did want to follow-up on the U. S. Outlook.

Speaker 10

So Can you expand on just the pacing of U. S. Development that you're expecting here for the balance of the year? And then beyond this year, How soon do you think that improving profitability in all the top line drivers that you already spoke of can actually translate into more meaningful acceleration In U.

Operator

S. Store growth. Thanks. Hey, great question, Chris. I'll take that one.

Operator

I think Internationally, I know your question was on the U. S. I'll get to that in 2 seconds. But when you think about it on a global basis, every 8 hours Somewhere around the world, we are opening up a Domino's Pizza. And I just think the magnitude of that is something that our team takes a lot of pride on.

Operator

As Sandeep said, we certainly expect the store growth to inflect towards the end of the year and especially into 2024. And let me give you some kind of perspective why. And what I'd ask is just put yourself in the seat of our franchisees or as an investor And say, and now I'm specifically talking about the U. S. Per your question.

Operator

It's okay, if I'm going to open up a store, if I'm going to spend my money on a store, What do I want to ensure? I want to ensure profitability, right? And Sandeep said, we expect to be At least at $150,000 this year for our franchisees, which is up $11,000 if versus last year. So you want to see growing profits. The other thing you want to do is you want to look at the track record.

Operator

And so let me tell you a little bit about the track record of Domino's Pizza. And when I say track record, look, There are always going to be hiccups, right? But the one thing that I think is really special is if you look at our domestic business over the last 12 months, We've only closed 16 stores. And so at 16 stores, that's 0.2% of our base. I think the QSR average is about 1.5% to 2%.

Operator

And so we closed only 16 stores. Actually, the last time we closed more than 20 stores Was in 2016. And so that to me is the reason to believe why we're going to take A system that's already opening up more stores than its competitors and really lean in more because the profitability is better and the track record is fantastic.

Speaker 3

I just wanted to add one thing to this, Chris, which I think is super important Because when we talked about the development outlook last quarter, we talked about it's beginning to inflect in Q4 and then actually be very strong in 2024. This was before thinking about the Uber Partnership. And I think when you think about the Uber Partnership, this is a tremendous value And the reason I say that is, if you think about what Russell just talked about, all of our national promotions and all the special deals We have will only be on our platform, which means that what is actually being sold on the aggregator platforms will be essentially menu price, which actually drives Great profitability for the franchisees and great flow through to them. And those are all incremental transactions as we talked about Going into 2024, so the increase in profitability for the franchisees is going to be very material on top of what we already talked about last call. And this, if anything, further accelerates the momentum in unit development in the U.

Speaker 3

S. Going into 2024.

Speaker 6

Great. Thanks so much.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Brian Harber from Morgan Stanley. Your question please.

Speaker 11

Yes. Thank you. Good morning. So just on the Aggregator Partnership, could you remind us again, it sounded like the $1,000,000,000 number Any sort of incrementality internationally? And then related to that, you talked about kind of fighting for your fair share on

Operator

those platforms. How else will you

Speaker 11

kind of do that besides just appearing? How else will you kind of do that besides just appearing? Do you intend to market that heavily? Do you intend to emphasize Service times relative to some of your peers, what are the other ways in which you actually compete against most of your peers who of course are already on those platforms?

Operator

Yes, Brian. On the international piece, we already got a $1,000,000,000 business there. And so we're expecting the same type of incrementality as we take this from to those 13 incremental Uber Eats markets. And Just want to remind everyone on the call that between the U. S.

Operator

And international, we'll be on 28 markets that we are overlapping with Uber Eats. And that means that because of where these stores are located, the markets and where the stores are located, 70% of our stores will be getting This incremental volume that we talked about, the $1,000,000,000 number is a net number just to be clear. I think you did a great job answering some of the questions about how we're going to distinguish ourselves on the platform here on the U. S. One of the key pieces is service.

Operator

We will have the best service experience we believe in the pizza or restaurant industry. The only thing we care about is getting the pizza to your house, warm and hot and delicious. The important thing and this is actually part of my opening remarks to our franchisees and some of service. We're the only ones who From the time you order, make your product and the only person who touches it Next is you as the customer. We make it and we deliver it and we just think that's really, really special.

Operator

2nd, it's a premium price, but Domino's has good prices. Even our menu prices, we've got a significant number of things that are going on our menu price. So I fully expect us to be a value there. And yes, you're right. On service times, I expect not only The service to be at the high end, and when I say high end, the good end of that.

Operator

But When you get the product that experience is going to be great, but it will never have left Domino's hand. Finally, we will be spending marketing money, But it's important to understand 2 things. One is the only place we'll be spending our marketing money is on the platform. We won't be spending our money to drive consumers to the platform. But once they're on the platform, we of course want to drive them to Domino's and We've negotiated a return on advertising spend.

Operator

That's in line with how we buy the rest of our digital media. And so we think it's going to be a profitable one. But we know how to buy digital media on any platform. So I'm excited to see what we can do there.

Speaker 1

Thank you. One moment for our next question. And our next question Comes from the line of David Palmer from Evercore ISI. Your question please.

Speaker 4

Thanks. In the prepared remarks, you talked about how Domino's was on its way to restoring growth in U. S. Delivery. It's great to just hear a mention of that.

Speaker 4

And is your thinking that the Uber Eats deal will get you to U. S. Delivery same store sales growth? Or are there other major factors you're contemplating when you're targeting that? And I ask that because the lower check minimum for loyalty sounds like it would be helpful to Carryout transactions, but it's unclear what that would mean for delivery, if anything.

Speaker 4

And then maybe for Sandeep, Did you contemplate this move to aggregators over a multiyear period when you lowered the multiyear growth targets earlier? Thanks so much.

Operator

Yes, David. The loyalty program is really not just focused on Carryout, I mentioned the carryout piece because that's really the front end on ticket. We expect obviously through this deal as well to get a lot of customers Really interested in Domino's Pizza. And so we want to have interactions for delivery customers at the low end, and that's one of the incremental things that we're driving here.

Speaker 3

Yes. And Dave, just to add on to your second question, which is, Was the aggregated deal contemplated when we lowered the 2 to 3 year outlook that we provided in February? No, it was not. At that time, we had not gotten to the point where we thought we were going to actually do any. And so I think this is That's just the context you should have.

Speaker 4

Thank you.

Operator

Thanks. Thank you.

Speaker 1

One moment for our next question. And our next question comes from the line of John Ivankoe from JPMorgan, your question please.

Speaker 8

Hi, thank you. I wanted to talk about Delivery in general, but maybe specifically what you've learned or have taught or have picked up as part of summer of service in terms of how that could You changed some of the mechanics of the way that delivery is working to make you more efficient. Certainly, it's Good to hear about an improvement of 2 minutes in service times. It's better than the 1 minute we were talking about before. But how big of an opportunity is it Is that a headwind or tailwind at this point as you see it?

Speaker 8

Thank you.

Operator

Hey, John. Thanks for the question. Yes, on the I'll start with the Attraction of delivery drivers. We actually have more applications coming in now for delivery drivers than we did back in 2019. And so we're excited about that.

Operator

And some of that is what's translating to the improved services. We've got more drivers and I haven't really spent a lot of time talking about our electric fleet vehicles and we got about 1,000 of them coming on and Actually, we have over 1,000 non electric fleet vehicles. And what that's done is, it's really opened up. Not every store really needs them, but the ones that are having trouble Getting delivery drivers, there are plenty of people with driver's licenses that don't have access to vehicles that want to drive for Domino's Pizza and we're really seeing that make a difference. And so that's Part of why you're seeing the current increase in momentum and the desire with some of service is to continue to drive that In a few ways, right.

Operator

One of it is just bringing it top to line. Every franchisee in the U. S. Is coming to Ann Arbor to do this. And so driving the importance and top of mind, driving the accountability, what it is that we expect from the delivery experience.

Operator

And then lastly, driving some best practices and these are best practices that already exist in the system, but new ones. And so, I'm really looking forward to sharing some of the things that we're sharing with our franchisees now in summer of service during Investor Day. And what you'll see is the circle of operations for a Domino's Pizza today is very different than it was even just a couple of years ago. And those changes are really impacting service. And then there's the technology aspect of it.

Operator

And so We've got systems new systems that are going to be running in our store as part of our next generation store systems to really Upgrade, the level of service because we're helping our franchisees and our team members more. And so these systems are running in many of our stores today. So for example, our many of our stores are making pizzas Before those orders those drivers are even back in the stores. And so if you're making pizzas before people finish ordering them and you're dispatching them In a way that doesn't require your driver to come back into the store and find a parking spot, that's going to help. And so summer service is about best practices, but it's about introducing these kind of AI enabled Thank you very much.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Brian Mulan from Piper Sandler. Your question please.

Speaker 6

Hey, thanks. Just a question on international business, specifically on China. Just wondering if you could comment on how the business is doing today, give a sense of How things feel in regards to the macro and the consumer over there right now for the balance of this year? Understanding long term opportunity is quite big, just hoping to get Your current take on the state of operations in the market and maybe the development outlook over the near term? Thank you.

Speaker 3

Hi, Brian. Thanks for the question. Look, we're really excited about the China market. I think we're doing extremely well. I think now that we've actually come out of The COVID years, we've actually seen a very strong growth in productivity over there, great development actually happening And huge potential for runway in terms of future development.

Speaker 3

And it is going to be one of the biggest growth opportunities in the international portfolio. We are super excited about it.

Operator

I would say that China is one of the when we talk about our top 15 international markets And the fact that there are 10,000 plus stores still to build in those markets, obviously, China plays a big role there.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Joshua Long from Stephens. Your question please. Great.

Speaker 6

Thank you for taking my questions. I was curious if you could give us some insight How you're thinking about marketing and messaging as you build out your platform of seemingly disparate consumers. So we've talked about in the past how the delivery consumer Very different than the carryout consumer and now thinking about the 3rd party opportunity. Just you're sitting on a wealth of transaction data. What Maybe where are we in terms of the opportunity to dig into that and really utilize it?

Speaker 6

What kind of changes or investments might be needed? Just Any sort of high level thoughts you could share there around, just really bringing this whole picture together from a marketing and communications perspective?

Operator

Yes, sure, Josh. I think what's really important to understand is there is a common marketing message really throughout, which I'm not going to go in detail. I think it's a little bit of our special sauce. But suffice it to say, what a customer is looking And see and the strong brand messaging we've had for the last 10, 15 years. What I think and actually we're in a great place in the world now because There are so many different mediums out there.

Operator

And so there's the marketing message, but also then there's the media buy. And what we can do with the media buy is be very, very targeted. And so, yes, that carryout customer that wants control and value, we can reach out to them. That way, the delivery customer that's looking for Maybe quick delivery times and a big bundle for a birthday party or whatever, we can do that as well. And so I think Domino's as a brand is will have a singular meaning to customers.

Operator

But what we'll do is we're going to leverage media And really what I think is a best in class marketing or highest in class marketing budget in order to more personalize the message. And that probably gets me to the last part of your question, which is what am I excited about that we're going to that we're doing today, but we're going to lean into a little bit more And that is just personalization. As you said, we've got millions of users on the database and we're personalizing our message today. But the tools are just getting better and that's where our investment is going and we're going to be at the forefront of that. Thank you.

Operator

Thanks.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Andrew Charles from TD Cowen. Your question please.

Speaker 4

Great. Thank you. I'm trying to fuse a 2 part question on Uber into 1 part, so please bear with me here. But first, just given the reduction in ad fund earlier This month, will Uber Eats be funding advertising the platform in 2024? And then secondly, I appreciate that you're structuring the partnership with franchisee profitability At the center and so what I'm curious about is qualitatively not quantitatively, will the commission borne by franchisees be a fixed fee for these orders or percent of the order volume?

Operator

Well, let me first answer the and I appreciate Ben, that's pretty good, the one part question. I'm going to have to I'm not as good as you, so I'm going to have to give you a 2 part answer. On the Uber piece of it, the First on the marketing funds. The marketing funds that we talked about earlier that are being used right now to cover some of the tech Investments we're trying to do that are marketing related by the way, came out of a surplus of that budget. And so that money was never Could have been, should have been spent this year or even next year.

Operator

And so we have plenty of money to continue to do what we do every year, which is Increase the amount of GRPs out there to our customers despite inflationary environment. So That hasn't held us back at all. I'll let Uber comment on what kind of funding they plan to do. I think I talked to you a little bit about how our funding or marketing message is going Driving within the platform. Sandeep, do you want to talk a little bit about the commission structure?

Speaker 3

Yes. And I think It's a really good question and there's quite a few things that are in there, Andrew. So I'm going to actually kind of unpack them a little bit for you. So I'll start with the tech fee itself. The tech fee is based on order counts.

Speaker 3

So every incremental order that actually comes through the platform, a tech fee will apply, Same as any other order. So I think that's one. And I think the rest of it is what will royalties be payable on basically In terms of what we report, it's really the food sales as well as the delivery fee. So our calculation of same store sales And retail sales will include those. And if there are any service fees or service charges that Uber actually charges, those really won't appear in our numbers.

Speaker 3

This will be directly from Uber. So hopefully that helps you kind of understand the structure of how this is going to work.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Jim Sanderson from Northcoast Research. Your question please.

Speaker 4

Hey, thanks for the question. Just wanted to follow-up to the discussion on Uber and marketing programs. I'm wondering if you plan to participate in some of the Free delivery charges or free promotions that we see often on 3rd party aggregators and if there's any concern that early on you might see some cannibalization of your own delivery business. Thanks.

Operator

Yes. Our delivery fee and franchisees level delivery fees, they're all contemplated In our pricing structure, and so no, I don't think that's going to be affecting our profitability at all. And as we're on the platform, anything they want to do with their customers to drive them to buy Domino's Pizza, that's really upside for us.

Speaker 4

That would be at their expense.

Operator

Yes. I want to be clear that the Ways we're spending our money is specifically on things that we can measure with something called return on advertising spend. And so that would be how we drive a customer on Google or any other kind of social media or digital media.

Speaker 3

And just to clarify one thing, I just want to make sure we touch on it. But any promotional activity on the platform Would have to be agreed with us. And I think we'll do that in partnership with them. So I think that we'll be thinking through the holistic lens of those promotions.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Danilo Giordiulo from Bernstein. Your question please.

Speaker 12

Good morning. Russell, you started the call saying staffing levels are going to be You're making improvement in staffing. So I wonder if you could comment on the level of staffing at the Domino's stores and whether you see any staffing challenges to the service To service the incremental demand from aggregators, if kind of the opportunity come to fruition as you were expecting?

Operator

Yes. Great question. And I'm going to we'll give you a tongue in cheek answer to this one is, I very much hope and expect We do not currently have the number of delivery drivers we will need for this incremental volume. But I also know and I'm confident based on what we've learned through what's been a struggling time to hire drivers that We know what it takes now, whether it's the certain hiring practices, if you look at our new training, if If you look at actually our corporate stores and just the turnover numbers going down as well as the incremental fleet we're talking about. So yes, do I expect to need incremental drivers?

Operator

Yes. And yes, I expect to be able to get them.

Speaker 1

Thank you. One moment for our final question. And our final question for today comes from the line of Jeffrey Bernstein from Barclays. Your question please.

Speaker 9

Great. Thank you very much. I guess, putting some closure around the Uber discussion. I know for a long, long time, you guys had deemed that a partnership was presumably not in the best interest of the company and franchisees. So something I guess very recently maybe tipped the scales to push you to sign up now.

Speaker 9

I'm just wondering if you could talk about what kind of put you over the edge and I assume there are still some lingering headwinds that you're still conscious of and watching closely that perhaps were some of the headwinds you were anticipating before. And If you could just share maybe what will be the consideration set at the end of 2024 to decide who you partner with going forward, whether it's Still just Uber or whether you add somebody else, like what would drive that decision? Thank you.

Operator

Sure. Thanks, Jeff. Really for us, it came down to 3 elements: scale, scope and incrementality. The scale of the aggregator QSR pizza delivery business is big now. It's a $5,000,000,000 category.

Operator

We're the number one pizza delivery company in the country and we don't sell a single order on it. And so if there is a $5,000,000,000 opportunity, That kind of scale, you can expect us to compete for our fair share. The second is scope. The scope of the deal And the terms of the deal is are really favorable for us and our international and domestic franchisees. And I said earlier how now 70% of the stores will have access to potentially orders from Uber.

Operator

And the last piece is just the incrementality. We are it's clear from the work we've done internationally And the studies we've done here in the States that we know how to manage this as a separate channel and drive incremental volume. And those things weren't always there in the past. As frankly, just to be perfectly honest, we are a delivery company And we needed to be able to deliver our own orders before we took on incremental and we are absolutely doing that right now as you can see with The increased or the improvement in service time and we're ready for the next wave of orders.

Speaker 1

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Russell Weiner for any further remarks.

Operator

Well, thank you so much everybody for joining the call this morning. Sandeep, Ryan and I, we really look forward

Speaker 1

This does conclude the program. You may now disconnect. Good day.

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Earnings Conference Call
Domino's Pizza Q2 2023
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