Sandeep Reddy
Chief Financial Officer at Domino's Pizza
Thank you, Russell, and good morning to everyone on the call. Before I get into the details of the quarter, I wanted to share some of my initial observations as my first full quarter as Domino's CFO. I see some exciting opportunities to improve our long-term profitability. First, while we continue to explore options to further optimize our consumer pricing architecture in the United States, it is important to highlight that the average price increase we realized in the second quarter across our US system was nearly 6%. We have successfully improved many pricing levels, including our standard menu pricing, our national offers, our local offers, and our delivery fees. This has helped us cover some of the cost increases we are incurring in both the food basket and labor market, while also ensuring we continue to deliver terrific value to our consumers. Our work continues on right-pricing our product while keeping a compelling value proposition for our consumers with more opportunities to pursue.
Second, efficiencies exist in our cost structure as we seek to ensure that revenues consistently grow faster than expenses. We saw a sequential improvement in the year-over-year contraction of [Technical Issues] from 270 basis points in Q1 to 180 basis points in Q2. We need to continue this trend.
Third, as a result of the actions we are taking to increase our capacity to meet demand, we realized a sequential improvement in US same-store sales declines from minus 3.6% in Q1 to minus 2.9% in Q2.
Now, our financial results for the quarter in more detail. Global retail sales decreased 3% in Q2 2022 as compared to Q2 2021. When excluding the negative impact of foreign currency, global retail sales grew 1.5% due to sustained positive store growth momentum over the trailing four quarters, lapping 17.1% global retail sales growth excluding FX in Q2 2021. As we have discussed in the past, we believe it remains instructive to look at the cumulative stack of sales across the business anchored back to 2019 as a pre-COVID baseline and we'll continue to do so for as long as we believe it is useful in understanding our business performance.
Looking at the three-year stack, our Q2 2022 global retail sales excluding foreign currency impact grew nearly 27% versus Q2 2019. Breaking down total global retail sales growth, International's retail sales excluding the negative impact of foreign currency, grew 3.7% rolling over a prior year increase of 29.5%, and are up almost to 30% on a three-year stack basis relative to 2019. US retail sales declined 0.6% rolling over a prior increase of 7.4% and are up almost 27% on a three-year stack back basis relative to 2019.
Moving to costs. During Q2, same-store sales excluding foreign currency impact for our International business declined 2.2% rolling over a prior year increase of 13.9% and were up 13% on a three-year stack basis relative to 2019. Order growth was slightly positive during the quarter, demonstrating continued global demand. However, this growth was more than offset by declines in ticket, driven by the year-over-year impact of exploration of the 2021 VAT relief in the UK, our largest international market by retail sales. This resulted in a negative comp for the quarter for International versus a slightly positive comp without this unfavorable UK VAT impact.
The year-over-year impact of exploration of the 2021 UK VAT relief was continuing where we left the reduced rates from 2021 through the rest of the year. Same-store sales for our US business declined 2.9%, rolling over a prior year increase of 3.5%, and were up 16.7% on a three-year stack basis relative to 2019, representing a sequential 5.3 percentage point improvement from Q1 on a three-year stack basis.
Breaking down the US comp, our franchise business was down 2.5% in the quarter, while our company-owned stores were down 9.2%. We believe the difference in the top-line performance in our company-owned stores as compared to our franchise stores continues to be driven by more substantial operational challenges in our company-owned stores that Russell will address later on the call.
The estimated impact of fortressing was 0.7 percentage points during the quarter across the US system. This impact will continue to trend lower as our US store base grows. The decline in US same-store sales in Q2 was driven by a decline in order counts, which continued to be pressured by the challenging staffing environment which had certain operational impacts such as shortened store hours and customer service challenges in many stores, both company-owned and franchise, along with tough COVID and stimulus fuel comps from the prior years.
The decline in order counts was partially offset by ticket growth which included nearly 6% in pricing actions I spoke about earlier. We saw a similar trend on a three-year stack basis with the 16.7% growth in same-store sales driven by growth in ticket and partially offset by a defer in audit terms [Phonetic].
As we have previously shared, we believe it is instructive to break our US stores into quintiles based on staffing levels relative to a fully-staffed store to give a sense for the magnitude of the impact of staffing. Looking at Q2 same-store sales, stores in the top 20%, those that are essentially fully staffed on average, outperformed stores in the bottom 20%, those that are facing the most significant labor shortages, by 7 percentage points. This is down sequentially from the 12 percentage point gap we saw in Q1, but with the top and bottom quintiles showing improvement in the lower [Phonetic] quintile store's ability to meet consumer demand.
Now, I'll share a few thoughts specifically about the carryout and delivery businesses. The carrying our business was strong in Q2, with US carry out same-store sales 14.6% positive compared to Q2 2021. On a three-year basis, our caryout same-store sales were up 33% versus Q2 2019. The gap between the top and bottom quintiles based on staffing levels remained small during the quarter, highlighting both strong consumer demand and the lower cost to serve relative to delivery orders. We are incredibly pleased with our carryout momentum, especially considering carryout is a much larger segment of QSR, giving us a significant runway for growth in the future.
The delivery business continued to be more pressured. Q2 delivery same-store sales declined by 11.7% relative to Q2 2021. Looking at the business on a three-year stack, Q2 delivery same-store sales remained more than 8% above Q2 2019 levels. When we look at the same quintiles relative to the delivery business, we continue to see a more pronounced difference in performance. We saw an 11 percentage point gap in delivery same-store sales between stores in the top 20% and those in the bottom 20%. While we continue to see a significant gap in performance between the top and bottom quintiles, this does represent a sequential improvement from the 17 percentage point gap we observed in the first quarter.
Shifting to unit count. We and our franchisees added 22 net new stores in the US during Q2, consisting of 24 store openings and two closures, bringing our US system store count to 6,619 stores at the end of the quarter. With our strong four-wall economics, we remain bullish on the long-term unit growth potential in the United States and we maintain our conviction that the US can be an 8,000-plus store market for Domino's.
The pace of US store growth may decelerate slightly from the current four-quarter run rate of 3% the rest of the year or until the headwinds subside, given some of the continued development, supply chain, staffing, and inflationary headwinds.
Our International business added 211 net new stores in Q2, comprised of 249 store openings and 38 closures. This brought our current four-quarter net store growth rate in International to 9%. When combined with our US store growth, our trading four-quarter global net store growth of nearly 7% continues to fall within our two-year to three-year outlook range of 6% to 8%.
Turning to Revenues and Operating Income. Total revenues for the second quarter increased approximately $32.7 million or 3.2% from the prior-year quarter, driven by higher supply chain revenues resulting from a 15.2% higher market basket pricing to stores.
Our market basket pricing is up approximately 20% on a three-year basis now. The increase in supply chain revenues was partially offset by declines in our company-owned stores revenues. Changes in foreign currency exchange rates negatively impacted International royalty revenues by $5.9 million during Q2.
Our consolidated operating income as a percentage of revenues decreased by 180 basis points to 16.7% in Q2 from the prior year quarter, primarily driven by food basket and labor cost increases. These impacts were partially offset by pricing actions and G&A leverage. Our diluted EPS in Q2 was $2.82 [Technical Issues] $3.06 in Q2 2021, or $3.12 when adjusted for the $0.06 impact of the recapitalization transaction in the prior year. Breaking down that $0.30 decrease in our diluted EPS as compared to our adjusted diluted EPS, our operating results negatively impacted us by $0.14. Changes in foreign currency exchange rates negatively impacted us by $0.12. Our higher effective tax rate negatively impacted us by $0.14, $0.09 of which was driven by changes in tax impact of stock-based compensation. Higher depreciation negatively impacted us by $0.02, higher net interest expense negatively impacted us by $0.02, and a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.14.
Although we faced operating headwinds, we continue to generate sizable free cash flow. During the first two quarters of 2022, we generated net cash provided by operating activities of approximately $153 million. After deducting for capital expenditures of approximately $33 million, which included investments in our technology initiatives such as our next-generation point-of-sale system and investments in our supply chain centers, we generated free cash flow of approximately $121 million. Free cash flow decreased $142 million from the first two quarters of 2021, primarily due to changes in working capital as a result of the timing of payments of accrued liabilities and receipts on accounts receivable and lower net income.
During the quarter, we repurchased and retired approximately 148,000 shares for $50 million at an average price of $337 per share. As of the end of Q2, we had approximately $606 million remaining under our current Board authorization for share repurchases.
Before I close, we would like to update the guidance we provided in April for 2022. Based on the continuously evolving macroeconomic environment, we now expect the increase in the store food basket within our US system to range from 13% to 15% as compared to 2021 levels, an increase from the 10% to 12% we were expecting in April. Changes in foreign currency exchange rates are now expected to have a negative impact of $22 million to $26 million compared to 2021, an increase from the $12 million to $16 million we were expecting to see in April. We anticipate that we will continue to see fluctuations in commodity prices, including wheat and fuel costs, and foreign currency exchange rates resulting from geopolitical risk and the resulting impact on the overall macroeconomic environment.
Thank you all for joining the call today. And now, I'll turn it back to Russell.