Sandeep Reddy
Chief Financial Officer at Domino's Pizza
Thank you, Russell, and good morning to everyone on the call. I'll begin my remarks with updates on the actions I have previously outlined to improve our long-term profitability. First, we are continuing to examine and evolve our pricing architecture. During the third quarter, the average price increase that was realized across our U.S. system was 5.4%. As Russell mentioned earlier, we will adjust our carryout mix and match deal from USD5.99 to USD6.99 on October 17. As a result of this update, we expect to realize pricing to increase to approximately 7% in the fourth quarter.
Second, efficiencies 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 operating income margin as a percentage of revenues from 180 basis points in Q2 to 160 basis points in Q3. We need to continue this trend.
Third, we realize the sequential improvement in U.S. same-store sales from minus 2.9% in Q2 to plus 2% in Q3, mostly driven by a smaller decline in order count.
Now, our financial results for the quarter in more detail. Global retail sales decreased 1.6% in Q3 2022 as compared to Q3 2021. When excluding the negative impact of foreign currency, global retail sales grew 4.7% due to positive sales comps in the U.S. and sustained global store growth momentum over the trailing four quarters lapping 8.5% global retail sales growth excluding FX in Q3 2021. As we have discussed in the past, we believe it remains instructive we 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 Q3 2022 global retail sales excluding foreign currency impact grew 28% versus Q3 2019. Breaking down total global retail sales growth, U.S. retail sales increased 4.1% rolling over a prior increase of 1.1% and are up more than 26% on a three-year stack basis relative to Q3 2019. International retail sales excluding the negative impact of foreign currency grew 5.2% rolling over a prior increase of 16.5% and are up more than 30% on a three-year stack basis relative to Q3 2019.
Turning to comps, during Q3, same store sales for our U.S. business increased 2% rolling over a prior decrease of 1.9% and were up 17. 6% on a three-year stack basis relative to Q3 2019, representing a sequential 0.9 percentage point improvement from Q2 on a three-year stack basis. Breaking down the U.S. comp, our franchise business was up 2.2% in the quarter, while our company-owned stores were down 1.9%. The estimated impact of fortressing was 0.7 percentage points during the quarter across the U.S. system.
The increase in U.S. same-store sales in Q3 was driven by an increase in ticket growth which included the 5% and pricing actions I mentioned earlier partially offset by a decline in order count. As we have previously shared, we believe it is instructive to break our U.S. stores into quintiles based on staffing levels relative to our fully staffed store to give a sense for the magnitude of the impact of staffing.
Looking at Q3 same-store sales, stores in the top 20% those that are essentially close to fully staffed on average outperformed stores in the bottom 20% those that are facing the most significant labor challenges by less than 6 percentage points. This is down sequentially from the 7 percentage point gap we saw in Q2 between the top and bottom quintiles showing improvement in the lower quintile stores ability to meet consumer demand.
Now I'll share a few thoughts specifically about the carryout and delivery businesses. The carryout business was strong in Q3 with U.S. carryout same-store sales 19.6% positive compared to Q3 2021. On a three-year basis, our carryout same-store sales were up 35% versus Q3 2019. The gap between the top and bottom quintiles based on staffing levels remained relatively small during the quarter highlighting both strong consumer demand and the lower cost to serve relative to delivery orders.
Delivery business continued to be more pressured. Q3 delivery same store sales declined by 7.5% relative to Q3 2021. Looking at the business on the three-year stack, Q3 delivery same store sales were 8.4% above Q3 2019 level. When we look at the quintiles relative to the delivery business, we continue to see a more pronounced difference in performance. We saw an 8 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 gap in performance between the top and bottom quintiles, this represents a sequential improvement from the 11 percentage point gap in the second quarter and the 17 percentage point gap in the first quarter.
A point to note is that despite the decline in same store sales in the past year, our pizza delivery QSR market share based on NPD data is up modestly over the prior year as we see a similar decline in the size of the delivery market over the past year. This decline in pizza delivery QSR is potentially attributable to a shift of delivery to dine-in as consumer behavior starts to revert to pre-pandemic habits. In fact, the pizza delivery QSR market is still up almost 30% versus three years ago despite the recent decline.
Our market share in total Pizza QSR, which includes delivery, dine-in and carryout, has held steady over the past year and is up by more than 200 basis points versus three years ago. The overlap of our customers who order both delivery and carryout continues to be relatively modest and is trending slightly above our historical overlap rate of 15% pointing to each channel as a relatively unique business.
Shifting to unit count, we and our franchisees added 24 net new stores in the U.S. during Q3 consisting of 27 store openings and three closures bringing our U.S. system store count to 6,643 stores at the end of the quarter, which brought our full quarter net store growth rate in the U.S. to 2.7%. With our strong four-wall economics, we remain bullish on the long-term unit growth potential in the U.S. and we maintain our conviction that the U.S. can be an 8,000-plus store market for Domino's. New store paybacks remain strong with stores opened in 2018 averaging around three-year paybacks and stores opened in 2019 on track to deliver a similar performance.
Same store sales excluding foreign currency impacts for [Technical Issue] declined 1.8% rolling over a prior increase of 8.8% and were up more than 13% on a three-year stack basis relative to Q3 2019. Similar to the second quarter, we faced the headwind of the negative year-over-year impact of the expiration of the 2021 VAT relief in the UK, our largest international market by retail sale. 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 expiration of the 2021 UK VAT relief will continue while we lap the reduced rates to March 31, 2023, but with a lower impact as the UK VAT relief was reduced from 15% the 7.5% last year on October 1.
Our international business added 201 net new stores in Q3, comprised of 263 store openings and 62 closures. Our closures were driven by our master franchisees exit from the Italian market as well as another round of closures in Brazil as our master franchisee there [Technical Issue] to optimize the store base in the market. This brought our current full quarter net store growth rate in international to 8.1%. When combined with our U.S. store growth, our trailing four quarter global net store growth of 6.2% continues to fall within our two- to three-year outlook range of 6% to 8%.
Turning to revenues and operating income. Total revenues for the third quarter increased approximately $70.6 million or 7.1% from the prior year quarter driven by higher supply chain revenues due to a 13.4% higher market basket pricing to stores and U.S. stores revenues resulting from retail sales growth. These increases were partially offset by changes in foreign currency exchange rates, which negatively impacted international royalty revenues $7.9 million during Q3. Our consolidated operating income as a percentage of revenues decreased by 160 basis points 16.5% in Q3 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 Q3 was $2.79 versus $3.24 in Q3 2021. Breaking down that $0.45 decrease in our diluted EPS, our operating results benefited us by [Technical Issue], changes in foreign currency exchange rates negatively impacted us by $0.17, our higher effective tax rate negatively impacted us by $0.48, $0.36 of which was driven by changes in tax impact of stock-based compensation, lower net interest expense benefited us by $0.02, and a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.08.
Although we faced operating headwinds, we continue to generate sizable free cash flow. During the first three quarters of 2022, we generated net cash provided by operating activities of approximately $330 million. After deducting for capital expenditures of approximately $50 million which consisted of investments in our technology initiatives and investments in our supply chain centers including our new facility in Indiana, which will begin serving stores next week, we generated free cash flow of approximately $280 million. Free cash flow decreased $154 million from the first three quarters of 2021 primarily due to changes in working capital, the timing of payments for accrued liabilities and receipts on our accounts receivable and lower net income.
During the quarter, we repurchased and retired approximately 491,000 shares for $196 million at an average price of $399.52 per share. As of the end of Q3, we had approximately $410 million remaining under our current Board authorization for share repurchases. During the quarter, we drew down $120 million on our existing variable funding note facility to fund additional return of capital to shareholders through share repurchases. Subsequent to the quarter, we also closed on a new additional $120 million variable funding note facility with terms that are substantially similar to our existing facility and paid down $60 million of the $120 million drawn on the existing facility during the third quarter. We are very pleased with the competitive terms we were able to achieve given the current volatile interest rate environment.
In addition, as Russell mentioned, subsequent to the end of the quarter on September 26, we completed transactions to re-franchise all our corporate stores in Arizona and Utah to certain franchisees for approximately $41 million. We will provide further details of the financial impact of the transaction when we report our fourth quarter results next year.
Before I close, we would like to update the guidance we previously provided for 2022. Based on the continuously evolving macroeconomic environment, we now expect changes in foreign currency exchange rates to have a negative impact of USD29 million to USD31 million compared to 2021, an increase USD22 million to USD26 million we were expecting to see in July. We now expect capital expenditures to be approximately $100 million for the year, down from the previous guidance of approximately $120 million, and we now expect G&A to be USD415 million to USD420 million, down from the previous guidance of USD420 million to USD428 million.
Thank you all for joining the call today. And now I will turn it back to Russell.