Domino’s Pizza - Q1 2023

Transcript

Operator (participant)

Thank you for standing by. Welcome to Domino's Pizza's first quarter 2023 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. To remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Mr. Ryan Goers, Vice President, Finance, Investor Relations. Please go ahead, sir.

Ryan Goers (VP, Finance, and Investor Relations)

Thank you. Good morning, everyone. Thank you for joining us today for our conversation regarding the results for the first quarter of 2023. Today's call will feature commentary from Chief Executive Officer, Russell Weiner, and Chief Financial Officer, Sandeep Reddy. As this call is primarily for our investor audience, I ask all members of the media and others to be in a listen-only mode. 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-K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call. Our request to our coverage analysts. We want to do our best this morning to accommodate as many of your questions as time permits. As such, we encourage you to ask only one one-part question on this call. 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.

Russell Weiner (CEO)

Thank you, Ryan, good morning, everybody. Thanks for joining us on today's call. I'd like to start this call where we finished our last one. Looking back on what we said we were gonna do. I am really proud of the actions that our team and our franchisees have taken and the positive results that they delivered. You'll recall that there were three themes we discussed last quarter. The first one was the continued evolution of the Domino's brand from a U.S. delivery business to a global pizza company with leadership in both delivery and carry-out. We continue this progress since our last call. Let me start off with China. We're proud to welcome our partners, DPC Dash, our master franchisee there, to the growing list of public companies that are developing and operating Domino's Pizza stores across the globe.

On March 28th, CEO Aileen Wang and her team completed their IPO on a Hong Kong Stock Exchange. We have got tremendous potential in China, where the Dash team believes they've just scratched the surface of their total opportunity with stores operating in only 17 cities in China. Speaking of public companies, as of the end of Q1 2023, six of the top 20 public QSRs in the world, as measured by market cap, are part of the Domino's family. DPZ is joined by our master franchisees, Jubilant FoodWorks, Domino's Pizza Enterprises, Alsea, Domino's Pizza Group, and Alamar, all in the top 20. This, to me, exemplifies an important strength of our brand. We've got a diverse portfolio of more than 90 markets around the world. Our international business has both scale and balance.

What this affords us is the ability to weather any short-term headwinds in certain markets should they come up. We've seen this dynamic play out in Q one, with markets performing exceptionally well, balancing out others that are facing more pressures. All of this, though, resulted in positive international same-store sales growth for the first quarter. On to the U.S. In the U.S., we believe that the QSR pizza delivery and carry-out businesses continue to be incremental to each other with limited overlap. We're number one in both segments and believe we've strengthened our position during the first quarter. The balance we have in our stores, with carry out contributing around half the orders and 40% of sales, has allowed us to mitigate the more recent macro headwinds in the delivery category.

The second theme we discussed at our last call was the need to maintain value in what is a competitive marketplace, where our customers decide every day where to spend their hard-earned dollars. Value has to do with the right balance of price and service. Our U.S. business delivered on both of these things in Q1. I'll start with pricing. On pricing, I mentioned that we and our franchisees have got to be mindful that value on our menu exists outside of our national offers. Menu prices and delivery fees were relatively stable throughout Q1. That means most of the menu pricing increase we saw in the first quarter versus prior year was carryover from changes that were made in 2022. On service and capacity, our stores and our franchisees continue to make progress on both fronts.

Estimated average delivery times in the first quarter were over a minute better than the first quarter of 2022. While our goal is to get back to and improve on our delivery service levels from 2019, I'm really encouraged by the continued improvement we and our franchisees have made in this critical measure. Our system understands that to be the best, you need to beat the best, even when the best may be yourself. That's why we're launching an important initiative. We're calling it our Summer of Service training program. We're inviting all of our U.S. franchisees to come to Ann Arbor to be part of one of the largest system training efforts in our history.

Look, we've driven significant improvements in our back-of-house technology and our circle of operations over the last few years, and we've got more coming. The Summer of Service program will allow us to share best practices with our franchisees who we expect will leave Ann Arbor with specific plans that they create to positively impact service for every one of their stores. I think these changes will also improve the experience for our customers and our team members in our corporate and franchise stores. Our third theme from the last call was around the need to drive more innovation. While new products are certainly one way to do that, our brand has a history of bringing news to all aspects of the business. We dialed up innovation over the last few months, and anticipate this will continue throughout the year and into the future. Let's start with product innovation.

On the product side, we're really pleased with the launch of our Loaded Tots. For consumers, Loaded Tots offer a craveable potato side that delivers extraordinarily well. They also fit nicely into our Mix & Match menu, providing great value and even more variety when consumers build their orders. For franchisees, tots drive healthy ticket, given they've been largely incremental and have a strong margin profile. Early signs point to Loaded Tots performing even better than our last 2 product launches, Dip 'N Twist and the Chicken Taco and Cheeseburger Specialty Pizzas. To drive news and ordering convenience in our carryout business, we launched a convenient way for consumers to place their orders while they're on the go with Apple CarPlay. This innovation allows customers to place and track their orders on CarPlay via our iOS app.

CarPlay ordering is a great alternative to drive-thru because it allows customers to avoid long lines by placing their orders while they're on the go, so their food is hot and fresh and ready when they arrive at their local Domino's. As important as the ordering platform is itself, CarPlay ordering will help drive what we call our Techquity, short for technology equity. We've got a history of leveraging technology to improve customer experiences. Domino's CarPlay ordering continues that tradition. On the delivery innovation side, Domino's fleet of electric vehicles has been expanding. We announced on our last call that the initial order by our corporate stores and franchisees made us the largest electric fleet of pizza delivery vehicles in the country with 800 cars. Today, Domino's has committed to over 1,000 EVs and counting.

The EV fleet is great for our stores and the environment, all while growing the potential pool of drivers by offering opportunities to individuals that may not have access to a car. All of this news contributed to positive US same-store sales growth in Q1 and will provide momentum for Domino's into the future. For more detail on the quarter, I'd like to turn it over to our CFO, Sandeep Reddy. Sandeep.

Sandeep Reddy (EVP and CFO)

Thank you, Russell, and good morning to everyone on the call. I'll begin my remarks with updates on the actions I've previously outlined to improve our long-term profitability. First, on pricing architecture. During the first quarter, the average year-over-year price increase that was realized across our U.S. system was 6.2%. This included the year-over-year benefit of national pricing changes made in 2022. As a reminder, Delivery Mix & Match was updated to $6.99 in March of last year, with Carryout Mix & Match updated in October. As we have lapped the Delivery Mix & Match national pricing update in March, we expect our second quarter realized year-over-year pricing impact to moderate. Second, efficiencies in our cost structure as we continue to drive recovery and margin.

We saw year-over-year improvement in our operating income margin, which grew by 100 basis points versus Q1 2022. This was despite foreign exchange rates having a negative year-over-year impact on operating income margin of approximately 40 basis points during the quarter. Third, we had positive same-store sales growth, excluding foreign currency impact in both our U.S. and international businesses for the second consecutive quarter, which also contributed to improving our operating income leverage. For our financial results for the quarter in more detail. When excluding the negative impact of foreign currency, global retail sales grew 5.9% due to positive sales comps and global net store growth over the trailing 4 quarters, lapping 3.6% global retail sales growth, excluding FX for Q1 2022.

Breaking down global retail sales growth, U.S. retail sales increased 5.1%, rolling over a prior decrease of 1.4%. International retail sales, excluding the negative impact of foreign currency, grew 6.5%, rolling over the prior increase of 8.4%. Turning to comps. During Q1, same-store sales for the U.S. business increased 3.6%, rolling over a prior decrease of 3.6%. The increase in U.S. same-store sales in Q1 was driven by an increase in ticket, which included the 6.2% in pricing actions I mentioned earlier, partially offset by a decline in order counts. The Q1 comps were aided by the Omicron overlap from 2022, as well as the benefit from a Boost Week in 2023 that we did not run in Q1 last year.

Neither of these tailwinds will aid us for the balance of the year, as Omicron receded as a headwind and we ran Boost Weeks in every quarter last year, starting in Q2. Now I'll share a few thoughts specifically about the US carryout and delivery businesses. The carryout business was strong in Q1, with US carryout same-store sales 13.4% positive compared to Q1 2022, rolling over a prior increase of 11.3%. We are very pleased at the strength of our carryout business, we do expect a moderation in growth rates for the balance of the year as we lap accelerating growth in 2022. The delivery business remains more pressured. Q1 delivery same-store sales declined by 2.1% relative to Q1 2022, rolling over a prior decline of 10.7%.

The delivery business is still challenged by two factors that we discussed in our last call. First, a migration of demand from the delivery channel to the sit-down channel as the reversion to pre-pandemic consumer behavior continues. Second, constrained budgets for households with relatively lower disposable income, particularly when factoring fees and tips, prompting them to shift their delivery occasion to cooking at home. We are closely monitoring the evolution of growth in real personal consumption expenditures as a consistent inflection in that trend could result in relief on the second headwind to our delivery business. Shifting to unit count.

We and our franchisees added 22 net new stores to the U.S. during Q1, consisting of 25 store openings and 3 closures, bringing our U.S. system store count to 6,708 stores at the end of the quarter, which brought our 4-quarter net store growth rate in the U.S. to 1.7%. As mentioned on our last call, we expect that the U.S. store development pipeline will continue to be pressured by permitting and store construction supply chain challenges before seeing a gradual recovery starting in the second half of the year, marked by stabilization first before an inflection in trend. Domino's unit economics remain strong relative to the many pressures faced throughout the year, including staffing challenges and a high inflationary environment for food and labor.

We have completed our analysis of estimated average U.S. franchisee store profitability, with the final amount coming in at $139,000 for 2022, up from the $137,000 estimate provided on our last call. As previously mentioned, estimated average store profitability was higher in Q4 2022 than Q4 2019, as franchisees are seeing the flow-through benefits of the Mix & Match national pricing increases for both delivery and carryout. We expect this improvement in profitability to continue in 2023, with the margin flow-through from Loaded Tots being an additional tailwind during the first quarter. We will need further time to evaluate if Loaded Tots will provide an incremental margin dollar lift over the course of the year.

Also, as we have completed our analysis on 2022 build costs for stores relative to our average build costs for in 2019, we saw an approximate build cost increase of 20% in 2022. Even with these increased build costs, franchisees are looking at roughly 3-year paybacks on new store openings for 2023 and beyond. Before we transition to discussing our international business, I would like to briefly touch on our technology costs. To fund additional investments in technology innovation, including a redesign of our e-commerce platform, the technology transaction fee charged to U.S. franchisees will be increased to $0.395 from $0.315, effective the beginning of the second quarter. The technology transaction fee increase covers investments split roughly evenly between G&A and capital expenditures.

These investments are included in the annual guidance measures of $425 million-$435 million in G&A spend and $90 million-$100 million capital expenditures for fiscal year 2023. At the same time, a 25 basis point temporary reduction on contributions to the National Advertising Fund will go into effect. The net impact of these two changes on the increase in technology fee and the 25 basis point reduction of franchisee advertising contributions should be relatively neutral to the estimated average U.S. franchise, franchisee store profitability in 2023. Turning to our international business. Same-store sales excluding foreign currency impact for our international business increased 1.2%, rolling over the prior increase of 1.2%.

We continue to face 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 sales. This was the last full quarter of the negative year-over-year impact, with the UK VAT relief program being in place through March 31, 2022. Our international business added 106 net new stores in Q1, comprised of 143 store openings and 37 closures. Our closures were driven by another round of closures in Brazil as our master franchisee there continues its work to optimize the store base in that market, as well as some closures in Russia.

International store openings in the first quarter were also impacted by the timing of fiscal periods of some of our master franchisees that caused a significant number of openings to shift into the first week of our second quarter. These additional 106 net stores brought our current trailing four quarter net store growth rate in international to 6.7%. When combined with our U.S. store growth, our trailing four quarter global net store growth rate was 5%. Turning to EPS. Our diluted EPS in Q1 was $2.93 versus $2.50 in Q1 2022. Breaking down that $0.43 increase in our diluted EPS, our operating results benefited us by $0.36. Changes in foreign currency exchange rates negatively impacted us by $0.09. Our lower effective tax rate positively impacted us by $0.04.

Lower net interest expense benefited us by $0.06. A lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.06. We continue to generate sizable free cash flow. During the first quarter, we generated net cash provided by operating activities of approximately $115 million. After deducting for capital expenditures of approximately $19 million, which consisted of investments in our technology initiatives and supply chain centers, we generated free cash flow of approximately $96 million. Free cash flow increased $29 million from the first quarter of 2022, primarily due to the positive impact of changes in working capital and higher net income. During the quarter, we returned over $30 million to shareholders through share repurchases.

As of the end of the quarter, we had approximately $380 million remaining under our board authorization for share repurchases. In the first quarter, the allocation methodology for certain costs which support internally developed software was updated on a prospective basis. The change in allocation methodology resulted in an estimated increase in U.S. store segment income of $10 million and an estimated increase in international franchise segment income of $2 million, fully offset by a decrease of other segment income of $12 million. Finally, I would like to provide an update on a few of our annual guidance measures that we previously communicated. We expect a year-over-year market basket increase of 3%-5% in 2023.

Changes in foreign currency rates could have a $2 million-$6 million negative impact on international royalty revenues in 2023. Our tax rate, excluding the impact of equity-based compensation, is expected to range from 22%-24% in 2023. Based on current trends, we expect each of these measures will come in towards the low end of their respective ranges. Additionally, we continue to expect our global retail sales growth and global unit growth in 2023 to trend to the low end of our unchanged 2-3-year outlook. Thank you all for joining the call today. Now I'll turn the call back to Russell.

Russell Weiner (CEO)

Thanks, Sandeep. Before we close out the call, I want to touch on a couple of areas that are important as we move forward in 2023. The first one is store growth. As Sandeep mentioned in his comments, we expect that the U.S. store development pipeline will continue to be pressured by permitting and store construction supply chain challenges before seeing a gradual recovery beginning in the second half of the year. In my conversations with franchisees and discussions with our team on new commitments to store growth by our system, I'm confident that we will see an inflection in trend towards the end of the year and into 2024. Domino's franchisees came out of a challenging 2022 with estimated store EBITDA of almost $140,000.

This proves to me, and more importantly to them, that building a Domino's store remains one of the best investments in the restaurant industry. The second point I wanna highlight is innovation, giving you a little bit of insight into our e-commerce pipeline. It's not a comprehensive list, but it should help you understand that we're bringing news to our customers while also improving our ability to drive loyalty and a more personalized experience, leveraging our robust customer database. As I mentioned on our last call, we'll be refreshing and improving our Piece of the Pie loyalty program. When we launched it back in 2015, we were more of a delivery company with our carryout business still gaining momentum. Naturally, our loyalty program was designed more around the delivery customer.

One of the key objectives of the refreshed Piece of the Pie program will be to explicitly cater to the carryout customer in addition to the delivery customer. We're excited to add more value and rewards for everybody. We've also started to work on a redesign and rewrite of our entire e-commerce platform. This work will continue into 2024. We will update you on progress along the way. Our digital ordering clients and tech stack have been a huge part of our strategy and a competitive advantage for us over time. We need to invest in these forms to ensure we remain in a leadership position. In closing, when I look back on the first quarter, I can't help but be encouraged by the resilience of our business model and the competitive advantage that our franchisees and team members bring to Domino's Pizza.

I remain bullish on our future and look forward to telling you more of our story and our long-term strategy at our Investor Day, which will be held in late Q4. We'll open the call to questions.

Operator (participant)

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

Brian Bittner (Managing Director and Senior Equity Research Analyst)

Thank you. Good morning. Just first a clarification question from you, Sandeep. As it relates to your outlook in 2023 for total retail sales to be at the lower end of the 4%-8% range, can you talk to us about what the implied same-store sales outlook embedded in this guidance is? Russell, my main question to you, just as it relates to delivery and the ongoing weakness in this segment, I appreciate the macro pressures that you outlined during this call and previous calls, but are you currently taking market share, and can you just further elaborate on actions that you are taking inside the company to improve your competitive advantage within delivery to set that business up for a strong turn when these macro pressures recede?

Sandeep Reddy (EVP and CFO)

Good morning, Brian, and thank you for the question. I'll take the first piece, and I think Russell will cover the second piece that you asked. In terms of the outlook, I think you're asking about the global retail sales outlook of 4%-8% rating that still expected to be at the low end for 2023. I think of when we go back to what we said last time and again what we're saying this time, not really changing the narrative of what we said drove that adjustment in the first place, which was the challenges that we were seeing in the U.S. delivery business was the primary driver of the lowered estimation of the global retail sales outlook.

We feel very confident, more broadly about the business because the carryout business has been great. The international business, as you just heard from Russell, did extremely well as well, notwithstanding the UK VAT impact that we were rolling over. We feel really good about the overall business, but I think until we come through the delivery challenges, and that's what you asked Russell about, we basically believe that the outlook is appropriate.

Russell Weiner (CEO)

Thanks, Sandeep. Morning, Brian. On the delivery side, it really is to answer your question really in 2 parts. First, we grew delivery QSR pizza market share last year. We're continuing to do that in Q1. The point that you ask is what can we do in addition to drive that? It's kind of the same basic things we outlined on the same call. It's driving value, delivery service, we're a minute better than we were a year ago. Innovation in all areas, not just product, but we have actually delivery innovation out there now with the electric vehicles. We're up to 1,000 vehicles. This new loyalty program is gonna do a really good job in driving transactions. The majority of our delivery customers order online.

I think what you're hearing when we're talking about redoing our e-commerce platforms, that's certainly gonna help there as well.

Brian Bittner (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

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

Peter Saleh (Managing Director and Restaurants Analyst)

Great, thanks. Russell, I wanted to ask about the decision to reduce the marketing spend, you know, by 25 basis points. I understand it's, you know, a pretty much an offset to the raising the digital fees. Can you just give us a sense on how much total impressions would be down this year with that reduction in spend?

Russell Weiner (CEO)

Sure. I mean, the point at the end of the day is we take a holistic look at the franchisees' P&Ls, and we just think that this is a better investment over the course of the next year, because of where we are in our marketing budget. I don't expect an impression decline. I just think that this is a great overall use of their money for the year.

Sandeep Reddy (EVP and CFO)

Peter, I'll just add a little bit to that because I think it's very important to think about this strategically and holistically from both a financial standpoint and kind of what we're looking at. We were engaged in deep discussions with our franchisees before we actually made this move. I think over the course of the pandemic, we've actually built up the Ad Fund reserve to a point where we believe that the resources that are in the Ad Fund are more than enough to cover the demands that we have from an advertising standpoint this year. At the same time, as we looked at innovation and the need to invest in technology, our franchisees and us believe that this was a right way to redeploy investment.

We've done it, very clearly with a view to the long term. This is, as we said, been a 1-year adjustment that we made. We'll take a look at it in 1 year's time and decide what to do.

Peter Saleh (Managing Director and Restaurants Analyst)

Great. Thank you very much.

Operator (participant)

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

Sara Senatore (Managing Director and Senior Restaurant Analyst)

Great. Thank you. Question and a quick follow-up. You said the Boost Week, you know, won't be continued tailwind. You know, your outlook on same-store sales in general strikes a note of caution. I was wondering if you can quantify what you think that tailwind was. I'm just trying to understand what the underlying run rate might be or what the drivers that Russ highlighted, the magnitude of those might look like as we go forward. Then just quick follow-up on the comment about shifting back to dine-in. You know, delivery across the industry is a lot higher than it was as a share of sales pre-COVID. Do you have any thoughts on how long this shift might last?

I would expect dine-in probably ends up as a lower share of the total mix. Trying to, again, understand, you know, how long that headwind persists in your view. Thanks.

Sandeep Reddy (EVP and CFO)

Hi, Sarah. There are quite a few questions in there, but I'll take them. I'll take them in sequence. I think you're first talking about some of the things that I pointed out to in the prepared remarks on the benefits that we got in the first quarter on the comp from the tailwinds that we had from lapping Omicron, and also the fact that we had a Boost Week in 2023, which we didn't have in 2022. I'm not gonna unpack the details of exactly how much that was, but definitely those were two tailwinds.

There's actually a third tailwind also, if I think about it, because we have now lapped the national pricing update on delivery, and I think we definitely got that benefit of that pricing impact that actually was embedded in ticket as well. When you think about all these different elements, there is going to be an expectation that there will be some deceleration relative to that because those were tailwinds that we had uniquely in the first quarter. And that's why we actually pointed those out. I think the broader topic of shifting to dine-in, I think our point when we actually did the Q4 call was, we'd seen throughout 2022 a shift back into dine-in.

When we looked at where the values of where the dine-in had reached, we were still well below 2019 levels for dine-in. The expectation that we had when we set up our outlook for the 2-3-year timeframe, and particularly on 2023, was to continue to see that shift happening over the course of 2023.

Sara Senatore (Managing Director and Senior Restaurant Analyst)

Thanks.

Operator (participant)

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

Dennis Geiger (Executive Director and Senior Equity Analyst)

Thank you. Russell, you spoke to stepping up the pace of innovation, and you gave some good examples. Just wondering if you could touch a little bit more on what that means, perhaps how long it takes to kinda get innovation going to where it was, you know, a few years back, and anything more you can share in thinking about innovation across menu and technology. If I could slip a related part in there, is there any update with respect to how you think about third-party aggregator relationships as we think about technology and evolution of the brand? Thank you.

Russell Weiner (CEO)

Hey, Dennis. Good morning. Let me maybe take the first, the second question first, is talk a little bit about third party. We've got a billion-dollar business internationally with aggregators, and we're learning there every day. I think the number one thing that we've learned is whoever you work with or whoever you compete with, Domino's is better when we're a stickier brand, when we have more to make consumers, when they decide where they're gonna order, to order from us. Stickiness is getting the value right, it's getting the service right. You talked about innovation, so I'll get to that in a second. I think stickiness is also this new loyalty program.

The updated loyalty program will make us stickier, as well as, you know, recognizing that it's time to upgrade our e-commerce site. If we're a stickier Domino's Pizza, no matter who we compete with or work with here, we'll be in a place that we, that we can win. Secondly, you know, or firstly, I guess would be the, it was your first question. The question on innovation. I would really ask that folks take a broad definition of innovation, and that's not to couch and say we're not gonna be doing a lot of product innovation and stepping up that, and we're not gonna be doing carry out or delivery innovation. Let me give you an example of something that people maybe wouldn't think of as innovation, which is Carryout Tips. Right?

Carryout Tips, the majority of companies, what they call it is a bounce back coupon. What our marketing people did, they did a great job, they said, "You know what? If instead of calling it a $3 bounce back coupon, we're a delivery company. In this case, customers are delivering our pizza. Let's call it a tip." They get the $3 the next week, and it's an incremental purchase, and that's an innovation. I think you got product innovation, you know, with Tots. Value innovation. I don't think anyone talks about value innovation the way we do. Apple CarPlay is a carryout innovation. The cars are, EV is delivery innovation.

All of those types of innovations are things you should see on a quarterly basis I expect to be able to update you on these calls. Thanks.

Operator (participant)

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

Gregory Francfort (Managing Director and Senior Restaurant Analyst)

Hey, excuse me. Russell, can you talk about what you think the competitive differentiation is of the Domino's business today, and if that's changed from four or five years ago? I think aggregators have figured out the profitability a little bit better, but can you maybe help us understand, you know, the reasons for why you have kind of competitive differentiation versus those platforms, and if that's changed over the last four or five years or not? Thanks.

Russell Weiner (CEO)

Yeah. Sure. Good morning, and thanks for the question. Actually, I think when we talk about broad broadness and competitiveness, what I'd like to start out with is carryout. We talk a lot about the fact that there's not a lot of overlap between delivery and carryout, historically about 15%. If you look back at the last three years on our US carryout business, it's up almost 30% in same-store sales. To think that that's a very incremental piece of growth for our business, should hopefully help you understand how we think about diversifying and differentiating and growing ourselves as not only a pizza delivery company, but as a total restaurant.

I think, you know, on the delivery piece, again, I'll point to, you know, we are growing pizza delivery market share, but we think we can do more. A lot of it is because certainly the competition is different. I think we've learned a lot, Greg, over the last few years. You know, you think of what we learned through COVID. We went through some capacity constraints. We went through driver availability issues. You know, they say necessity is the mother of invention. That's why we're doing this Summer of Service program here. We're inviting our franchisees up because we've made significant improvements and innovations.

Of all of this learning, we will now be better in our circle of operations and in our technology. These are substantial enough that it's not something that we can train people in a video. Every single Domino's U.S. franchisee is coming up here to Ann Arbor for this training, and they will leave with individual plans that they're putting together for their stores when they go back. At the end of the day, in order to really step change ourselves when these macro things go away, it's gonna be stepping up service. I think hopefully, this is an example of how we're leaning in there.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Chris Carril from RBC Capital Markets. Your question, please.

Chris Carril (Senior Equity Research Analyst)

Hi, thanks and good morning. On pricing, Sandeep, you noted the lapping of delivery Mix & Match pricing in March, and with that, pricing should moderate here in the 2Q. Appreciating your continued focus on value here, if transactions were to remain stable or potentially improve, how open are you to taking further pricing, particularly if you do see those service levels begin to improve with all the initiatives you have in place? Thanks.

Sandeep Reddy (EVP and CFO)

Hi, Chris, and thanks for the question. I think when we talk about pricing options and value, I think that's a constant. It's not, it's not this last year. It's been over the last decade or more that we've been doing this. We'll continue to evaluate pricing relative to competition and kind of what the macro environment will actually yield from a demand standpoint. Because we always are gonna do the work, but I don't think we're particularly inclined to say what we're gonna do or not gonna do because it's gonna be the outcome of the work.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Brian Harbour from Morgan Stanley. Your question, please.

Brian Harbour (Executive Director and Senior Equity Research Analyst)

Yeah. Thank you. Good morning. One thing I was curious about, just talking about innovation, is could you talk about your market share at different day parts and whether you think that there's, you know, specific opportunities to lean into one or two of those where you perhaps don't have as much share as the others and you know, can that be a source of product innovation perhaps?

Sandeep Reddy (EVP and CFO)

Brian, are you on there?

Brian Harbour (Executive Director and Senior Equity Research Analyst)

Yes. Hello? Can you hear me?

Sandeep Reddy (EVP and CFO)

Yeah. No, sorry. We had a blip, and we lost your question. Do you mind repeating the question, please?

Brian Harbour (Executive Director and Senior Equity Research Analyst)

Sorry about that. I was curious just about, if you could talk about day parts and, you know, how your market share might differ by day part and whether you think that, you know, that's kind of an innovation opportunity as well to target different day parts differently.

Russell Weiner (CEO)

I don't think we're gonna go into. By the way, sorry, good morning. I don't think we're gonna go into the detail of the specific numbers of our day parts, but your answer is or your the answer to your question is absolutely. Finding incremental drill sites has been key for this brand. I remember when I joined in 2008, the majority of our stores weren't open for lunch. We gave them a product with sandwiches and then later pasta and, you know, now that's a pretty significant piece, you know, of our business. We also weren't a big carryout company, and obviously now carryout's half of the orders that come through Domino's.

What our job is to do every day is to find incremental drill sites, and dayparts are absolutely one of those areas that we look.

Brian Bittner (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

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

David Palmer (Senior Managing Director)

Thanks. Just a follow-up on the previous question about third-party sites and marketing and collecting orders from those in the US. You noted how you do it overseas, but your previous answer, you said you were looking for stickier sales and you found that those have the highest value. Is that your way of saying you're kind of closing the book on this and that you've kind of made up your mind? Or are you evaluating this still? If you are evaluating it still, what sort of factors and timing should we be thinking about that you're thinking about? Thanks so much.

Russell Weiner (CEO)

Yeah. I think maybe the way to interpret what I said before is there are opportunities and there are also, you know, potential issues with competing with folks or working with folks. We're not gonna think about going into anything unless we're our best Domino's. The best Domino's, we're getting there every day. We're improving our service, and we talked about some of the tech and loyalty pieces. Then we'll be in a better place to compete with or work with anybody.

David Palmer (Senior Managing Director)

This is something you haven't closed the book on, but perhaps some changes that you're making might enable you to pursue that path. Not that you're committing at this point, but it's something that you haven't closed the book on.

Russell Weiner (CEO)

You know, maybe I'll refer back to the prior questions. We're always looking for drill sites. If there are incremental drill sites that are smart for us, and this is one of them, you're never gonna hear that this team closes the book on things. Right now we're focused on making ourselves a better Domino's.

David Palmer (Senior Managing Director)

Okay, thank you.

Operator (participant)

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

Joshua Long (Managing Director and Research Analyst)

Great. Thanks for taking my question. Excited to hear more about the Summer of Service program, understanding that all the franchisees are gonna be walking away with an individualized plan. That is certainly exciting, but curious if you could talk a bit, little bit more about some of the big pieces that have either already been in test, maybe what you've learned from that, and just help us kind of contextualize what franchisees will be walking away with as they all come up to Ann Arbor later this year.

Russell Weiner (CEO)

Morning, Josh. I think the best way to answer that question is to invite you to come up and join us for our Investor Day in Q4. We are really excited to show you what we show our franchisees, which are takeaways on the things that we've learned through some of these capacity issues, driver availability issues. More importantly, how that is leading to ideas to reinvent our circle of operations and improve technology to help circle of operations, but also help at the end of the day, the product the customer gets to be as hot as it can be and also improve what it's like to work at a Domino's Pizza.

Maybe if there were videos and I'd be able to show you stuff a little bit more, but this is an old school phone call, and so you're gonna have to come up to Ann Arbor. We look forward to seeing you.

Joshua Long (Managing Director and Research Analyst)

Understood. Thank you.

Operator (participant)

Thank you. one moment for our next question. Our next question comes from the line of Chris O'Cull from Stifel. Your question please.

Chris O'Cull (Managing Director and Senior Analyst)

Good morning, guys. Sandeep, you mentioned comparison benefits in the 1st quarter that won't benefit the 2nd quarter, but I was under the impression that transaction declines were also just as weak in the 2nd quarter last year, implying the comparison should continue to be favorable. I'm just wondering if that was true. If you could just help us understand how meaningful the ticket growth should slow in the 2nd quarter, that'd also be helpful. Thank you.

Sandeep Reddy (EVP and CFO)

Chris, you are right that transactions did decline last year in the second quarter as well. I think that piece is consistent between Q1 and Q2. What is not necessarily consistent is the fact that we had the Omicron tailwind. We had one Boost Week in Q1 of this year, which was not there in Q1 of last year. I think you asked the second part of your question was about pricing and the National Pricing Lab. We're not gonna really get into the detail at this point, but clearly it was a pretty significant increase to $6.99 from $5.99. You can do the math, and then look for how much that's gonna be.

I think it is enough of an impact for me to call it out in terms of that being moderating in Q2.

Operator (participant)

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

Andrew Charles (Managing Director and Senior Research Analyst – Restaurants)

Great. Thank you. It's very encouraging to hear you guys talk about confidence in the U.S. performance, but perhaps just from the outside, it looks like trends did deteriorate on a four-year basis by about 200 basis points from 4Q to 1Q. You guys are also talking about, you know, the low end of long-term retail sales growth guys in 2023. So can you just help contextualize, you know, what's driving the encouragement that externally may not perhaps be as obvious?

Sandeep Reddy (EVP and CFO)

Andrew, I think thanks for the question. Like I said on the last call, we're not gonna look at stacks as a way of measuring our business. I think it's fair enough that you can actually ask the question. Really what we wanna look at is some things that are more near-term, that's why we've really talked about the current year comp and the comparison that we're overlapping. What we really see is a terrific carry-out business, a really terrific carry-out business. To basically be lapping 11% last year to be doing 13.5% or 13.4% this year was a great result for us. Look, delivery, there's a number of things that we're working on.

You heard all about the initiatives on value and service and innovation that we're working on. We are doing everything within our control to drive an improvement in the performance on that part of the business. Even there, look, sequentially it improved from -6.6% in Q4 to a -2.1% in Q1. We're not happy with negative comps. We wanna actually inflate to positive comps. We're gonna keep on working on that. We have talked about the macro. It's not gone away. That is impacting us to some extent, but we don't wanna keep making excuses about the macro. We wanna focus on what's in our control.

That's why we're really putting our foot forward and actually driving all of those initiatives to get to the outcome that we need. Super bullish on the long term. I think we just have to work through some of these short-term issues.

Operator (participant)

Thank you. One moment for our next question. Our next question comes to the line of Lauren Silberman from Credit Suisse. Your question please.

Lauren Silberman (Senior Equity Research Analyst)

Thank you. Over the past few years, there's been the shift in delivery carry-out mix and differences in performance between the channels. Can you just help us understand the differences in average order size as well as profitability per order between the two? Just more recently, have you seen any changes in check management across either of the channels? Thank you.

Sandeep Reddy (EVP and CFO)

Lauren, thanks for the question. I think on the delivery carryout business, they're both really good businesses with different margin profiles, very good businesses. I think when we look at the profitability to the franchisees, they're both very accretive to their profits. I think that's why when we actually look at the shift that's occurring, between delivery and carry out, the franchisee profit is not impacted in a significant way because of just the shift. Both businesses are super important, you don't want to actually decline in delivery like unfortunately we did last year. I think overall from a check size, I'm not gonna quantify how big the ticket is on average for delivery versus carry out, typically, delivery ticket is going to be higher than carry out.

I think the cost of delivery is a little bit more labor-intensive for obvious reasons because you have a driver cost in particular. So the flow through on that in terms of dollars is good, but I think the cost profile is higher and therefore the margins are smaller on a delivery transaction versus a carry out transaction.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of John Ivankoe from JPMorgan. Your question please.

John Ivankoe (Equity Research Analyst)

Hi. Thank you. It's John Ivankoe. I did in the spirit of innovation, you know, wanna ask about where we are in the personalization journey. It's something, you know, we've been hearing about, you know, from, you know, the better data-driven companies as which you are certainly the top of, you know, the ability to customize promotions, you know, to customers to really elicit a specific behavior. Where are we in that journey? Is there any kind of significant functionality that can come as part of your new loyalty program, maybe some back-end work that you're doing around PULSE 2.0? You know, just, you know, give us a sense of where you are and where you think you'll go in the relatively near the medium term. Thanks.

Russell Weiner (CEO)

Hey, John, that's a great question. And we are making improvements in, call it kinda the tweaking of it through AB testing, multivariate testing, things like that. I think the reason we're leaning into a new loyalty program and a redo, I don't think I know, and a redo of our e-commerce business is there are certain things that we wanna be able to do that we're not doing right now, and this will really let us lean into personalization in a much bigger way. Great question, and the timing is perfect.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Zach Fadem from Wells Fargo. Your question please.

John Park (Equity Research Analyst)

Hey, good morning, guys. This is John Park on for Zach. Thanks for taking my question. I mean, I guess again, you guys talked about the lower income demo kinda shying away from delivery a bit, given the macro pressures. Can you just provide some color on how that different income cohorts kinda performed within delivery versus takeout?

Sandeep Reddy (EVP and CFO)

I think on this, what we pointed out from the macro standpoint was on the last call, more particularly than this call. What we also noted, if you go back to my prepared remarks, and I did say that we're going to have to continue to monitor real disposable income and the trends in that and kind of how that's evolving. What you're seeing right now is inflation is on a downward trend, but wage growth seems to be holding up in the U.S. economy. I think it cuts a little bit differently depending on income strata. I think over time, you're going to basically see potentially a change in the dynamic. As of now, we still see this being a pressure point.

Russell Weiner (CEO)

I think what I'd add to that is, you know, a lot of times we're asked on these calls, do you see any trade-down from delivery to carryout? I talked earlier about how there's really little overlap between the two. We're seeing a lot of trade-down from non-Domino's carryout into Domino's carryout, I think it's those consumers we're talking about. Certainly from a delivery standpoint, there are macro pressures, but I think that's actually an advantage for us on the carryout side.

Operator (participant)

Thank you. One moment for our next question. Our final question for today comes from the line of Todd Brooks from Benchmark. Your question please.

Todd Brooks (Senior Analyst and Managing Director)

Hey, thanks for squeezing me in. Just on the unit growth side, I know Sandeep, you talked about just timing of fiscal quarter and versus some international openings. Is there any way that you can maybe size how many of those openings did occur in the first couple weeks of the quarter here? Any commentary about what gives you confidence that the frictions on the U.S. construction side will ease in the second half? Then, do you continue to be comfortable with at least reaching that low end of that 5%-7% unit growth guidance? Thanks.

Sandeep Reddy (EVP and CFO)

A few things that I'm gonna unpack there in your questions. I think let's start with the international unit growth question that you had. There was pretty much a timing issue between our fiscal calendar and our master franchisees, which is gonna be a noise factor, frankly, for many quarters and years. You'll see quarter to quarter noise. I think overall, when we look at the pipeline of where our master franchisees are projecting their unit openings are gonna be, we feel pretty good that we are on track for a full year basis. That's really incorporated into our global unit growth estimation. I think then I will talk about the U.S. store growth in particular.

Look, I mean, we've been saying since the beginning of the year that we expected to see our first half be pressured by the same issues, which is permitting supply chain construction challenges that we're gonna get through. You heard Russell say it himself, which is we've been talking to the system, we've been talking to franchisees, we've been talking to our own internal teams, really digging in because our pipeline is very, very robust. Frankly, the appetite for store openings is very strong. That's why we feel that, yeah, first we'll see a bit of a stabilization in the second half, and then we're gonna see that inflection. As Russell said, it's into 2024 because we have a pipeline that goes beyond 2023 right now.

That's why we have so much confidence. I wanna actually bring in another piece which you didn't ask, but I wanna say that this is a very critical element. I talked about the inflection in profits for the franchisees in the fourth quarter. If anything, that inflection is accelerating right now based on our first quarter results. If you look carefully at the food basket guidance, we're now going towards the low end. All that flows through. I think overall, the franchisees are in a very good place from a profit standpoint relative to how they started off Q1 of last year. There's a number of tailwinds that actually will reinforce that confidence that the system is showing in our unit growth projections.

Todd Brooks (Senior Analyst and Managing Director)

Thank you.

Russell Weiner (CEO)

All right. Well, we'd like to thank everyone for joining us this morning. We look forward to speaking to you in July to discuss our Q2 results. Until then, talk to you soon.

Operator (participant)

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.