Domino’s Pizza - Earnings Call - Q2 2010
July 27, 2010
Transcript
Speaker 0
Good morning, everyone. I'm Lynn Liddell, Executive Vice President of Investor Relations at Domino's. And we are pleased to be here to announce our second quarter results. With me today is Patrick Patrick Doyle, our Chief Executive Officer and Wendy Beck, our Chief Financial Officer. We will begin with some prepared remarks today and then follow-up with Q and A.
But in the meantime, two reminders for you. One is to the extent that we do make any forward looking statements, I will turn your attention to our Safe Harbor statement contained in our 10 Q. Additionally, I would ask that members of the media media remain in a listen only mode. So with that, I will turn it over to Wendy Beck. Thanks, Lynn, and good morning, everyone.
I'm happy to report that we continue to build on the momentum we had in the first delivered another quarter of strong results for our shareholders. Our domestic same store sales growth led the way, while our international division posted its sixty sixth consecutive quarter of same store sales growth. We also grew our bottom line in the second quarter with a robust 57% EPS growth, providing additional free cash flow, which we are using to continue to delever at a discount. Stepping down the P and L, I'll start by taking a look at our top line for the quarter. Global retail sales grew 10.3% during the quarter when excluding the impact of foreign currency.
When including this positive impact, our global retail sales grew 12.5%. The increase this quarter was driven primarily by strong domestic same store sales growth resulting from the continued success of our new pizza recipe, combined with our international same store sales growth, as well as store count growth in our international markets. Now looking at the different business unit components. Domestically, we posted another impressive quarter as total domestic same store sales grew 8.8% rolling over relatively flat sales comps in the prior year quarter. Franchise same store sales were up 8.8 while company owned stores were up 8.3%.
We closed a net one store domestically during the quarter made up of 21 store openings and 22 closures, demonstrating we are making progress toward our goal of growing our domestic store count. Our overall store growth in the quarter was really generated by our international division, which grew by a net 62 stores in the quarter. Further on our international division, international same store sales were positive 6.2% on a constant dollar basis, rolling over a positive 4.1% a year ago. This division has shown no signs of weakening and continues to produce consistent results for our company, once highlighting the strength of our best in class international franchise model. Our total revenues for the second quarter were $362,400,000 a $45,800,000 or 14.5% increase from prior year.
We experienced revenue growth in all of our operating divisions versus the prior year quarter. Over two thirds of the total revenue increase was attributable to supply chain. This increase was the result of higher sales volumes combined with higher commodity prices versus the prior year quarter. Additional revenue increases came from higher international royalties due to both same and store count growth and higher domestic royalties and company owned store revenues driven by higher domestic sales. Further detail regarding our revenue by business unit can be found in our 10 Q that was filed this morning.
Now moving on to our operating margin, our consolidated operating margin as a percentage of revenues increased 0.6% in the second quarter versus the prior year quarter. Consolidated operating margin was driven by higher margins in all of our operating divisions, all of which benefited from higher volumes quarter over quarter. Offsetting these increases were higher commodity including cheese and meat, which pressured company owned store and supply chain margins as a percentage of revenue. Our company owned store operating margin increased 2% from the prior year quarter, even though our ticket is down slightly from the prior year quarter. Labor as well as occupancy costs, which include rent, utilities and depreciation dropped as a percent of revenues as a result of leveraging the fixed portion of some of these costs with the higher sales volume.
Offsetting these decreases was a 1.5% increase in food cost as a percent of revenues, mostly due to commodity price inflation in cheese and meat. Our top commodities including cheese increased versus the prior year quarter. The average cheese lot price in the second quarter was $1.4 per pound versus $1.2 last year or 16.7% increase. We are still estimating cheese prices will remain in the $1.5 to $1.7 range for the latter part of this year. As a reminder, higher cheese prices benefit our supply chain revenues, but do not impact our supply chain dollar profit.
They do however negatively impact our supply chain margin as a percent of revenue. Our supply increased 0.7% from the prior year quarter attributable to higher volumes in our supply chain centers which allowed us to leverage our fixed costs and return higher profit sharing to our franchisee. Additionally, Our supply chain margins benefited from product mix changes, offsetting the volume increases with the impact of higher commodity costs. Now turning to G and A expenses. G and A increased slightly in the second quarter versus the prior year quarter.
However, it decreased 1.8% as a percent of revenue. I would like to remind you that there is noise in the prior year G and A line, namely the February G and A included 4,900,000.0 compensation expense resulting from our stock option plan changes, offset by $2,000,000 of net proceeds received for an insurance settlement. Excluding the items I just mentioned, G and A increased $3,000,000 versus the prior year quarter, due primarily to higher performance based bonus expenses resulting from our strong operating performance during the second quarter of twenty ten and expenses we continue to incur for some of the new growth initiatives I've discussed on previous calls. Turning to our income taxes, we recorded approximately $2,000,000 of tax reserve reversals related to certain state income tax matters. This decreased our effective tax rate to 34.1% for the quarter and is also outlined in the items affecting comparability table in the earnings release.
We continue to expect that 39% will be our normalized effective tax rate for the foreseeable future. Next bottom line earnings, our second quarter diluted EPS as reported on a GAAP basis was $0.37 or $0.33 as adjusted for items affecting comparability. The $0.33 as adjusted EPS figure is percent increase from the $0.21 in the February. Here's how the $02 difference breaks down. Our improved operating results benefited us by $09 in the quarter.
Our lower interest expense primarily as a result of our lower debt balance benefited us by $03 in the quarter. Foreign currency positively impacted us by $01 and we benefited $01 from our lower effective tax rate. Offsetting these amounts was a $02 negative impact resulting from our higher diluted share count due primarily to our higher share price. Now turning to our balance sheet. In the second quarter, we repurchased at a discount $2,020,000,000 dollars of principal on our senior notes, an additional $355,000 of principal on our subordinated notes for total pre tax gain of $1,500,000 Subsequent to the second quarter, we repurchased an additional $10,000,000 of principal on our senior notes at a discount for pre tax gain of approximately 700,000.
Like today, we've repurchased 279,600,000.0 of principal on our fixed rate notes at an average price of $0.77 on the dollar. We ended the quarter with $29,000,000 of unrestricted cash. Free cash flow remains strong as we generated $38,600,000 during the first two quarters of twenty ten averaging in excess of $1,500,000 per week. In closing, the momentum we have experienced has driven solid results for us and we believe this positions us well for the remainder of 2010. We will continue to drive shareholder value performance and we'll remain opportunistic with our growing free cash flow.
Thanks for your time today. And now I'll turn it over to Patrick.
Speaker 1
Thanks, Wendy. I'm happy to be reporting another great quarter of sales and earnings, and I really like where we are overall as a global brand. Despite continued uncertainties in the world economy, our business continues to thrive, and all of our divisions posted significant improvements again this quarter. I'd like to explain how we're accomplishing this and why we believe it's sustainable. First, our U.
S. Business is experiencing great momentum. As we've told you before and as we have seen so often in the past, momentum is a great thing for our franchise organization. Success breeds success. Our franchisees make more money.
They have the ability to reinvest and open stores again. Our relationship becomes even stronger. We have a number of drivers of this momentum. Let's take a step back and remind you of what led up to today's success. Starting back in 02/2008, we began to lay the foundation and gradually build upon it.
From improvements in our franchise base expansion to technology, training and operations investments to breakthrough marketing developments and, of course, the big one, our improved pizza recipe. We've created a new larger base of consumers, and we're bringing them back more frequently. Repeat purchase among new and existing customers continues to be high. The length of time between orders from customers continues to be shorter, and customer retention remains strong. We experienced yet another quarter of very positive traffic.
This is a really important indicator for sustainable growth. That growth is also reflected in our strong two year same store sales comp, which leads the industry. Our advertising scores are strong as is the buzz around our ad campaigns. Our ad fund is flush, allowing us flexibility to continue Our to spend consistently throughout the year and drive customer traffic. We are appealing to consumers with an attractive price point of $5.99 for two medium pizzas.
This also works for our stores because it's a minimum of a $12 ticket that brings in customers with an opportunity to upsell. We're clearly very happy with the results. Also of note is that these higher volume levels also feed our supply chain business, which helps both our bottom line and the profitability at store level. These volumes allow our supply chain business to effectively leverage fixed costs. Higher volumes have also made us sharper with store operations.
Our execution is good and it's getting better as indicated by our operational audit scores in our stores. I'm proud of the system for continuing to drive improvements in execution. This improved environment has resulted in fewer store closures, driving our nearly net flat domestic store results for the quarter. We see this as a very good sign and definitely makes us feel good about our goal of net flat for the full year in The U. S.
We also earned a significant accolade in our sector for all of this when we were named twenty ten Pizza Chain of the Year in June by industry's leading publication Pizza Today. The second major reason we're experiencing such strong results is that our international business continues to perform exceptionally well. Over sixteen years of consistent positive sales comps and strong profits sort of speaks for itself. But I think it's fair to punctuate the point by reminding you that this is a very consistent and reliable part of our business that sets us apart from other international models. We ended the quarter above our long term same store sales comp range.
Store growth internationally continues to be robust. Last quarter, we told you we were expecting to open stores in new markets in Europe, Asia and Latin America in 2010. We're making great progress there. We recently announced the planned opening of Germany and are happy to announce a new master franchisee for Poland. Additionally, we have four more new markets in the pipeline for this year that we have yet to announce.
Our UK master franchisee continues to outperform, having just reported same store sales up 13.7 for the first half of the year. We continue to see strength in our other European businesses in much of Asia, and we are simply executing at a high level outside of The U. S. Through what has been a difficult economic environment. I'm proud of our team and franchise partners and their team members around the world for their great results.
When you combine the opening of new existing markets, our overall international store growth is in great shape, and we feel good about our ability to perform within or above our stated global range of net store growth of 200 to two fifty stores for the full year. The first half of twenty ten has been very successful for Domino's on both the domestic and international fronts and has driven significant earnings growth for improved U. S. Sales base, momentum with both continued trial of our new recipe as well as strong repeat, continually improving store operations, a reliable international business and global store growth, we believe all bodes well for our second half of twenty ten. We believe that 2010 will be one of those years that performs above our stated long outlook on a number of fronts.
Looking at it from 30,000 feet, remember that we're a franchise model with very little direct corporate expense. So sales flow straight through to the bottom line. Even modest top line growth drives better bottom line growth. So robust top line growth drives an even better bottom line, as evidenced by our 75% increase in EPS in Q1 and our 57% EPS increase in Q2. In summary, I believe this performance is sustainable.
First, we're not dealing with a typical new product introduction in The U. S. It's a reformulation of our pizza recipe and people really like it. Second, we've been laying the foundation and developing this trend for two years and made many significant improvements menu, our franchise base and our operations. This has affected our domestic business in a profoundly positive way.
Additionally, our international business is growing very fast as it has for sixty six straight quarters, proving its resiliency no matter what the macro environment is like. This division is highly profitable, well proven and far from mature. Essentially established a new base business on which to build. As we consider the back half of twenty ten, we expect to expand that base further through better than typical domestic international growth and additional EPS improvement we can drive by deploying our plentiful free cash into debt repurchase. Longer term, if we return to our traditional sales comps in 2011, we will still drive earnings growth on a new bigger base with improved U.
S. Store growth and with continued debt buybacks and a larger cash flow bank from which to purchase. Essentially, we believe we're reliable with an upside, and our business model is set to deliver for shareholders year after year. With that, I will turn it over for questions.
Speaker 0
And Monica, if you could give us a brief on what buttons to press for Q and A.
Speaker 2
And your first question comes from the line of Matt DiFrisco.
Speaker 3
On mute there. Could you give us a little color into the commodity picture that you're seeing ahead as far as it would relate to cheese cost and some of the other commodity inputs, especially affecting the supply chain?
Speaker 1
Yes. I think cheese is interesting. We've been I think the last two calls, we've been guessing that cheese was going to be in the range of kind of 1.5 to $1.7 and it finally got there. It's sitting right at $1.6 today. It's in line with what our expectation was for this year.
And our best estimate is that it's going to trade kind of in this range in the back half of the year. That said, forecasting cheese prices has been a dangerous business for a long time. But we do think that it's kind of where we'd expected it to be this year now and think it will largely stay in this range throughout the year now. The other kind of notable commodity is wheat, which has been moving. Thankfully, we are locked in through first quarter of next year on our wheat buy.
So we're in great shape there. And there will be another harvest between now and when we need to go back out and buy wheat again. So we're effectively insulated there.
Speaker 4
Excellent. Thank you.
Speaker 2
And your next question comes from the line of Greg Badishkanian.
Speaker 5
This is Jeff Hans on behalf of Greg. Great quarter, guys. Thanks, Jeff. Yes, sure. Looking at your domestic same store sales, there's been a bit of, I guess, sequential volatility over the past few quarters.
As we look into the back half, is a high single digit comp a reasonable run rate to expect?
Speaker 1
Yes. I mean, we're not going to get into forecasting the specific number. I guess what I would say, given a little bit more color on the second quarter is this is being driven by repeat business. People love this new pizza. We certainly saw more new customers along with the repeat business in the first quarter.
Second quarter was really about repeat business and frequency. Customers love this new pizza. So we feel very good about where we are and the momentum in the business. I'm not going to call kind of specific numbers for third or fourth quarter, but this is now about the repeat and the frequency from people having tried this pizza and loving it and coming back to us.
Speaker 5
Okay. And then with commodities a bit higher off, in particular cheese, and given your robust traffic, do you see any opportunity to selectively take some price?
Speaker 1
Consumers are still hurting out there. We think giving them good value is important. You can see in the second quarter, if you kind of break out our corporate store operations, you can see that we were up about 200 basis points on margin in the second quarter year over year, which is the volume leveraging against the fixed cost base. Sales were up, margin was up. We're still out there with two medium, two tops at $5.99 It's on air today and that started the December.
So we're seven months into it, and there's an indication in there that we haven't changed it for a reason.
Speaker 5
Great. Thanks so much.
Speaker 2
And your next question comes from the line of Joe Buckley.
Speaker 6
Thank you. Question again on the sustainability of sales. We talked on the first quarter call how was natural to expect some drop off and there was from the 14% comp in the first quarter. Do you feel comfortable that you're kind of leveling out now? Or do you think it's still more logical to expect some slower rate of increase heading into the back half?
Speaker 1
Joe, I guess I got to kind of repeat the last answer. I mean, what I guess I'd say is we are well into this. We relaunched the December. We did see new customer growth early in the first quarter. But this is all about how people are reacting to this pizza now.
And so I'm not going to get into saying just how long this goes, but this isn't a promotion. This is consumers reacting to a pizza that they love and coming back more than they did in the past and coming back more frequently than they did in the past. And second quarter was not about just the news value of the relaunch and people wanting to try it. It was about how people were reacting to that pizza. So momentum is strong in the business, and I'm feeling very good about where we are.
Speaker 6
Okay. And then just a question. I think in the first call, you mentioned that the demographics of your customers pushed up a bit, that you did better in some suburban kind of higher income levels. Did you see that continue in the second quarter?
Speaker 1
Yes, we did. I mean, we're seeing very strong growth. I mean, you don't get a nearly 9% comp growth by just hitting one demographic. We're seeing growth from every demographic. But we did continue to see relatively even more strength from kind of higher income and higher education levels.
But all that said, again, as I said in prepared remarks, I mean, we believe our U. S. Same store sales are going to continue to be higher than our typical range. And we're in very good shape right now. And the consumer response, while there is a relative strength from a little bit higher income and higher education level demographics, we're seeing strength across the board.
Speaker 6
Okay. Thank you.
Speaker 1
Thanks, Joe.
Speaker 2
And there's a question from the line of John Glass.
Speaker 7
Morgan Stanley. I first want to take just one more pass at the at this current strength and sustainability. And maybe if you could talk the extent you're willing about the mix of new versus existing customers. So it sounds like there was a lot of trial in the first quarter. And now you're feeling is the majority, can you put a percent or some fraction around what the percentage of orders are today that are repeat customers, maybe that's what's giving you confidence in the sustainability?
Speaker 1
Yes. I mean, what I I guess what I can say is it's the majority of the business now is from repeat and frequency. Frankly, if I tried to split it apart even more, I'd start getting into covariances and things like that on new customers that are now repeat customers in the second quarter. But what I would tell you and is that a lot of the difference between the first quarter and the second quarter was heavy trial along with repeat. We said on the last call that we saw improved repeat immediately in the first quarter.
We could see it by the January, early February, but we were definitely seeing a lot of new customers coming in. While our new customer count is still healthy, we're always getting new customers. This is now mostly about repeat and frequency, And it's what gives us confidence about the momentum and the sustainability on this.
Speaker 7
That's very helpful. And then switching to the international for a moment. Maybe I should know and don't, but what are the plans for this pizza launch to the extent there are international markets? And can you talk about the pricing architecture in the international markets, if you can make some broad comments, it's different market to market. In other words, is the international business comps that you've seen been driven more by check than The U.
S, which has primarily been traffic? Or is it same in The U. S, which is a lot of traffic and maybe even negative check at different points in time?
Speaker 1
Okay. So let's see. First, the new pizza is still largely international markets. It is we're testing it carefully. We want to make sure that we've got it for those markets.
My expectation is that you're going to wind up seeing it in many or most of the markets, at least in some form. So for instance, Australia has rolled out the sauce, but it's the only market we have that is a pan only market. So you really can't do the same thing with the garlic oil on the crust that you do. And you will not see real changes with the cheese outside of The U. S.
For the most part because the cheese was already somewhat different outside of The U. S. Than it was inside The U. S. So you're really largely going to be looking at sauce and whether or not we put the garlic onto the crust.
But what I would say is that for the most part, we have not yet launched the new pizza in our international markets and would still expect that we're going to see at least components of it moving into many or most of the markets. We're sixty six straight quarters into the international same store sales growth. I mean, that has been overwhelmingly about traffic growth for international, we were our ticket was a little bit negative domestically. So our order growth was higher than the 8.8 domestically. Wendy, remind me if I'm correct on this, but I believe that we still have a little bit of ticket growth going on internationally, but there was still very, very solid growth in order counts on the international side.
I'm getting nods, yes. So yes, I mean, very solid, but you're still you're seeing a little bit of ticket on the international side, whereas ticket was negative on the domestic side. But order count growth internationally was still very, very robust.
Speaker 4
And
Speaker 2
your next question comes from the line of Jeffrey Bernstein.
Speaker 8
A couple of questions. One, if you could talk about the competitive thoughts, whether from your international peers or your independents in terms of category trends, discounting, whether you're seeing significant reaction to your promotion or how would you size up The U. S. Competitive landscape now that you've had this run for the past seven plus months?
Speaker 1
I think you're seeing a little bit more strength in the category, which I like. Pizza Hut recently announced a plus 8% in the second quarter. They were up against a negative 8% in the prior year quarter. So it gave them a net flat over two years. But I think we're clearly the standout right now in the pizza category and in the restaurant industry.
So we're pretty confident we're performing better than most or all of our competitors within pizza. But frankly, I was encouraged to see some growth from Pizza Hut in the second quarter. I like that there are some signs that the category is getting a little bit healthier. I think as I would repeat what I've said in the past, which is I think the category had taken too much price over the course of the last five or seven years. And it was part of why we saw some relative weakness in the category in kind of 2007 through 02/2009.
We're starting to see that reverse and there's a little bit healthier category out there. I don't have visibility right now on Papa John's and never have visibility on Little Caesars. But certainly, with our results for the second quarter and Pizza Hut's results for the second quarter, it can give you some confidence that the category is looking a little better than it has.
Speaker 8
Understood. And then just your comment, I know, about the repeat driving majority of it. You also made mention to the frequency, I guess, the time between orders without giving away too much. Mean, what is it historically or what's the industry average? Or can you talk about the relative improvement in terms of the shrinkage of time between orders?
Or how can we get a picture without divulging too much detail?
Speaker 1
Yes. I mean, you're looking at even for this kind of growth, you're looking at relatively small changes that will lead to this kind of growth. It's part of what gives you some confidence on the future. But the average customer buys from us about five times a year. And so you're looking at average every couple of months that they come around.
That's made up of more loyal customers who are coming in monthly or more often. But you're looking at a category in total that off premise pizza, so delivery or carryout pizza is 17 or 18 purchases a year for the average household in The U. S. So to get an 8.8% growth in the quarter, you don't need to see that much change in frequency. And so it has shrunk up a little bit.
We can see that movement there. We can also see that our retention of customers, customers who are leaving Domino's has reduced. And so that retention number is better and the time between orders has gotten a little bit better.
Speaker 8
Okay. And then just lastly, know you gave the cheese color, but in terms of the back half from a basket perspective, I think you said plus 1.5% in the second quarter. What should we think about in terms of a basket for the back half of the year all in?
Speaker 1
Yes, I don't think it's going to move a whole lot from where it is right now.
Speaker 0
So quarter over quarter, we're up 6.8% from a market basket perspective year to date up 5.5%. But feeling pretty good with the fact that we got wheat locked down, keeping in mind that we've got a long term contract that helps us with the volatility on cheese, so pretty much flattish.
Speaker 8
But the comment you made about a 1.5% basket, how does that tie into the
Speaker 1
That's 1.5 on food costs as a percentage of sales. It was Right. The basket increase was, what, 6.7%?
Speaker 0
Right. So when you look at the 2% movement in margin, we improved on our company owned stores. That actually is net of a 1.5 hit on our food cost.
Speaker 8
Got it. Thank you very much.
Speaker 2
Your next question comes from the line of
Speaker 9
Great. Thank you for taking my question. Couple of things. First, can you tell us, given, I guess, the tremendous strength of the performance in the system, but still challenging market for debt financing, where your franchise operators stand today and their ability to secure financing either for new units or to purchase other restaurants?
Speaker 0
We haven't seen a lot of change as far as new financing opening up. Some of the growth that we've seen in the past couple of quarters and what we have going on right now is really coming still from existing banking relationships, well capitalized franchisees, combination of their existing banking relationships and their own liquidity. But as far as capital markets opening up, we have not seen a glut of that. We've just seen the very beginning of companies like GE starting to get back into the game. But we're hoping to see movement there.
Speaker 9
And then second, can you talk about you mentioned a penny benefit, I think, from foreign exchange in the quarter. Any thoughts on what to expect for the second half of this year from foreign exchange?
Speaker 0
Sure. We actually anticipate that it's going to turn negative. So we're it's hard to say because the consensus that we get changes so quickly as especially we see movement in the euro and the pound. But we do expect to see some erosion from the benefit that we received in the first and the second quarter. Third quarter looks fairly flattish, but by fourth quarter right based on current consensus, it could be a penny or two.
Speaker 9
Great, thank you. Congrats on another awesome quarter.
Speaker 0
You. And
Speaker 2
your next question comes from the line of Mitch Sizer.
Speaker 4
It's 5.5%, I believe.
Speaker 1
Mitch, you weren't coming through there at the start. Can you repeat it again, please?
Speaker 4
Yes. My first question is on marketing spend. And I believe it's at 5.5% on the national level as a percent of sales. Can you give us a sense, I believe before 2010, your total marketing spend was 6% with some local in there. Is there any thought about going back up to 6% perhaps in 2011 as you start lapping the new pizza launch?
Speaker 1
Yes. The great news is we don't need to. The 5.5% is working very well for us. It's put us in a position where our ad fund is in very good shape. We were buying more efficiently at a national level because we moved from local buy to national buy.
It was a little bit better upfront last year than we've seen in previous years, which also allowed us to get some efficiency in the buy. But the level of spending that we have had in the first and second quarter is absolutely sustainable through the back half of the year. So we're in great shape. You are going to see more advertising from Domino's over the course of the year than you have ever seen from us in the past, and it's something that can certainly continue.
Speaker 4
Is the year over year marketing spend in the back half more than in the first half on a year over year basis?
Speaker 1
You're going to see a very consistent level in the second half versus what we did in the first half.
Speaker 4
Great. And Wendy, a question for you on the debt. And is it official that you did extend your the structure out to 2014 or is it still at 2012?
Speaker 0
So as far as being official that actually happens when we get to that timeframe. So there's we have to reach our benchmark, which we're far above So we're confident that it's a matter of sending in a letter saying we opt to extend and that will then happen again in the year 2013 where we extend it.
Speaker 4
Okay. And can you update us on EBITDA and net debt to EBITDA levels at the end of the second quarter?
Speaker 0
Sure. At the end of the second quarter, we were down to 5.8%. From a net debt standpoint, we were down to 5.4
Speaker 4
Great. And my last question, back to you, Patrick, on the if you can give us a sense of online ordering percent, where that has gone? And separately, lunch, takeout, dinner, any trend changes that you've seen from first quarter to second quarter? Thanks.
Speaker 1
Yes. We're still in the kind of 20% to 25% range consistent with where we were in the first quarter. For whatever reason, and we've only been doing this now for about three years, but we always percent see a little bit of a lull in the increase in percentage in this time of year. I think it says students go home for the summer college students who tend to be heavier users. And I think just maybe some change in media consumption patterns maybe a little bit.
But so not unexpected that it was still kind of in the same range that we were in, still feeling very, very good about the growth that we've had year over year and how that will continue to progress through the year. I think in terms of dayparts, we're seeing a little bit more in the evening than we were a year ago, but that dinner daypart a year ago was a real weak spot for us and for the whole category. So I think the we're really seeing some recovery there, which is why we're seeing probably a little bit more relative strength. Our sales our absolute sales are up year over year in every daypart. But I think we're seeing a little bit more relative strength in the dinner again, but I think it's mostly mostly because it was pretty bad a year ago.
Speaker 2
And there's a question from the line of Mark Smith.
Speaker 10
Two quick questions. First, I'm just going to a stab at the momentum in sales. Can you talk at all about the trends maybe during the quarter and anything that we can quantify there?
Speaker 1
Nope. We really like where we are.
Speaker 10
Okay. Thought it was worth a try. Second one, looking at the sales momentum, are you seeing any increased demand from your franchisees for opening new domestic stores?
Speaker 1
Yes. I mean, we're starting to see that. And we were net negative one in the second quarter. And but I got to tell you, we really wanted that one last store in the second quarter to get to zero for the quarter. But we actually just had our fiftieth anniversary rally last week.
We had almost 5,500 franchisees and team members from around the world together last week, which was far and away the largest gathering we've ever had. And I think first, just the attendance, which was nearly 50% larger than any previous rally we have had is an indication of the level of excitement and enthusiasm right now that our franchisees from around the world have for the brand. Secondly, we had a lot of very specific sit down meetings, our development group with our franchisees last week to talk to them about future store growth. And those conversations are part of why I'm I expressed earlier that I'm bullish that we're going to be at our net flat for the year. I feel very good about
We definitely are seeing that the improvement in sales and profits at the store level are driving more interest for getting stores open. So we feel very good about where we are on that.
Speaker 10
Great. Thank you.
Speaker 2
And there's a question from the line of Jon Ivanko.
Speaker 11
Great. Hi, thanks. I'm wondering if the debt trading now closer to par is influencing your decision to buy back debt. And just a follow on to that question, I mean, with your share count going up significantly, I just wanted to get a sense, even at current share prices, we can look at it however you want. I mean how much more option dilution is going to come into the income statement over the next couple of years?
And do you have a specific intention through stock buybacks to either offset that dilution or actually start to decrease shares given the recent increase?
Speaker 1
Yes. Well, first of all, if you can tell me where our share price will be, I'll tell you how many options will wind up being out there. Because remember, they've made a change in how you account for shares based on the share price. And so that's part of what you're seeing flowing through. But what I would tell you is we are going to continue to be very opportunistic.
We want to be as shareholder friendly as we can possibly be in terms of returning value to our shareholders. We believe today that the best answer continues to be to buy down our debt. We've settled into a bit of a range in terms of where we're buying that debt. We think that is still the best answer for creating value for our shareholders. But it's something that we're going to continue to examine.
And when we feel like there's a better opportunity for us to return capital to shareholders through either buying in shares or paying a dividend, it's certainly something we're looking at. It's certainly something that we have active discussions about, both internally and externally. We believe right now the right answer is to continue to buy down debt, but we'll look at that.
Speaker 11
And I guess I didn't really look at it, and I apologize. I mean, share price of first quarter into the second quarter, I mean, can you I didn't think it was that different. And I mean, I'm not used to seeing that kind of an increase sequentially. Was there anything unusual in terms of that
Speaker 0
increase from the first quarter to the second?
Speaker 1
Average for the calculation, know that you know what, we don't we will loop back around to you on the average for that. But obviously, I mean, our share is up a lot this year. So the average was clearly up. And that plays into your Right.
Speaker 11
Okay. Well, of course. And I guess, I mean, the point was is that we're not going to see continued increases like that sequentially unless the share price does something dramatic from here. Hopefully, it will take off. Okay.
And then just one final question. I mean, is there given your current promotions of the two pizzas $5.99 a piece, I mean, is there a break point in the cheese price where that doesn't make sense? I mean, are we anywhere close to that?
Speaker 1
I mean, it's something we'll always look at. But remember, $0.40 move in the cheese block is equal to 100 basis points of food cost at store level. And this is where we are today at $1.6 is where we thought we were going to be when we first walked went out to our franchise system with this price point. And so we're where we thought we were going to be. So if worst case scenario, we got up to $2 from where we are today, you're looking at a 1% hit on food costs.
And you can see in our corporate store margins that not only are we making more money because sales are up a lot, but we're also making more money because we're leveraging our fixed costs well and margins were up a couple of 100 basis points. So there is certainly some room to stick with it. But it's something we will always look at if the market moves materially from a commodity standpoint. And we look at it competitively. And at the end of the day, it's about what consumers will bear more than anything else.
And when you're getting this kind of traffic growth, you got to feel pretty good about where your price point is.
Speaker 11
Well, maybe I'll take the bait on that question. I mean, is it I mean, down the future, do you think like something like a $10 any pizza promotion could economically work for you? I mean, is that an option that you have in the future? I mean, it's something that your competition seems relatively happy with.
Speaker 1
Yeah, I think yeah, I think Pizza Hut actually though is kind of modifying it as of today. They appear to have gone to $10 for up to three toppings from $10 for any pizza. But we'll wait and see whether or not that's something that is really going to be national and is going to stick. So it looks like they just modified their pricing a little bit this week. We like what we're doing.
We if we thought what they were doing was better than the approach we're taking, we'd be there. We think we're smarter. And we've done a lot of research on price points. And so our view is that we're in better place than our competitors are. But that's what makes for a horse race.
Otherwise, if they thought we were doing a better thing, then I'm sure they'd be matching it. And
Speaker 2
there's a question from the line of Joe Buckley.
Speaker 6
Thank you. Just a follow-up question. Wendy, on the G and A, first quarter about $50,000,000 and second quarter 45,000,000 and change. How should we think about it going forward? And I see in the queue there's some new employment agreements signed yesterday.
Does that reflect some general salary or compensation move within the company we should be aware of?
Speaker 0
Yes. As far as employment agreement, those are just tweaking policies. So that's not anything to concern you. As far as Q1 versus Q2, of that almost $5,000,000 movement, 1,500,000.0 is really related to the variable bonuses. And the way I would think about that is the movement between the 14.3% same store sales number down to the 8.8% quarter over quarter.
As far as the remainder between the two quarters, I would say Q1 was actually a little bit high on G and A, just based on timing of items that we needed to book, whereas Q2 is a little bit low. So probably to average those out and then bake into the appropriate amount for variable bonus where you think the same store sales will come in for the next quarter.
Speaker 6
And
Speaker 2
there are no further questions at this time.
Speaker 1
All right. Well, thanks for joining us today. I'm just going to wrap up with a couple of last comments. But I think the conclusion is our investment profile has not changed. We're about the reliable cash flow we generate and the fact that our franchise model doesn't require a lot of capital from us in order to thrive.
We can return that available capital to shareholders. We continue to believe the best near term opportunity has been to buy back debt at a discount, ultimately driving long term value for our shareholders. Our first half twenty ten has just made that model that much more compelling. The numbers have grown that much more, providing more available cash flow to deploy on behalf of our shareholders. And I look forward to updating you again next quarter.
Thanks for joining us.
Speaker 2
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.