Domino’s Pizza - Earnings Call - Q2 2011
July 26, 2011
Transcript
Speaker 6
Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Domino's Pizza Inc. second quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to Ms. Lynn Liddell, Executive Vice President of Communications. Thank you, Ms. Liddell. You may begin your conference.
Speaker 5
Thanks, Carrie, and welcome everybody to our second quarter earnings call. We ask the media to be in a listen-only mode for this call as it is intended for investors. As usual, we will have all of you look to our safe harbor statement in the event that we do have any forward-looking statements today. With me today, I have our CEO, Patrick Doyle, and our Chief Financial Officer, Mike Lawton. We're going to begin with some prepared remarks, then we will open it up to Q&A. I'd like to introduce Mike.
Speaker 4
Thanks, Lynn, and good morning, everyone. Before I discuss the results for the second quarter, I'd like to make a brief comment on our recently announced refinancing. As you may have seen in a separate press release today, we've announced the intention to refinance our existing securitized debt with a new securitized debt facility to be issued in a private placement transaction. Due to securities law restrictions, we will not be discussing the refinancing or answering questions regarding it on the call today. Our investor relations team will not be able to answer inquiries of any kind, including those on the quarter results or the refinancing, until after the transaction closes. All of your questions regarding the refinancing will be answered after the closing when we hold another conference call. We appreciate your respecting these guidelines in the Q&A session. Now let's dive into the second quarter results.
This quarter, the momentum continued as we posted strong same-store sales results in both our domestic and international businesses. We also continue to grow our bottom line in the quarter with 21% adjusted EPS growth over the prior year. Starting with global retail sales, which are our total retail sales at franchise and company-owned stores worldwide, they grew 9.6% during the quarter, and that's excluding the impact of foreign currency. When including this positive impact, our global retail sales grew 14.5%. Looking at the different business units, our domestic same-store sales grew a strong 4.8% in the second quarter. This was rolling over a positive 8.8% domestic sales comp in the prior year. Broken down, franchisee same-store sales were up 4.8%, while our company-owned stores were up 5.3%. We closed a net 15 stores domestically during the quarter, made up of 13 store openings and 28 closures.
Our overall store growth in the quarter was solely generated by our international division, which grew by a net 72 stores. International same-store sales were up 7.4% in the second quarter, rolling over a positive 6.2% a year ago. This marks the 70th consecutive quarter of positive same-store sales for this division. Our total revenues for the second quarter were $384.9 million, a $22.5 million or 6.2% increase from the prior year. Approximately $10.1 million or 45% of the total revenue increase was attributable to our supply chain division, largely due to higher commodity costs than in the prior year quarter. The increase was also attributable to higher international revenues resulting from same-store sales and store count growth, as well as the positive impact of foreign currency exchange rates due to a weaker U.S. dollar.
Further, our domestic franchise revenues increased due to higher same-store sales and the benefit of fees paid by franchisees related to the insourcing of certain services, including online ordering and a call center. As mentioned on previous calls, we also incur a corresponding increase in G&A expenses for the insourcing of these initiatives, with the net result being breakeven for the company. Partially offsetting these revenue increases were lower company-owned store revenues, primarily resulting from the sale of 26 company-owned stores to a franchisee during the first quarter of 2011. More detail regarding our revenue by business unit can be found in our 10-Q, which was filed this morning. Moving on to our operating margin, as a percentage of revenues, our consolidated operating margin increased 1.1% from 27.7% to 28.8% quarter over quarter.
This was due primarily to a change in our mix of revenues attributable to fewer company-owned stores and increased franchise royalty revenue. This was offset in part by a lower supply chain margin percentage, which was impacted by higher commodity prices. As a percentage of revenues, our company-owned store operating margin increased 0.6% from the prior year quarter, due primarily to labor efficiencies and lower average labor rates. This was partially offset by commodity price inflation, including cheese and meats, as well as higher delivery costs. Our supply chain margin decreased 0.5% from the prior year quarter, mostly due to the impact of higher commodity and fuel costs. With food commodities priced on a constant dollar markup to our franchisees, note that increases in commodity costs do not impact our supply chain dollar profit. They do, however, negatively impact our supply chain margin as a percentage of revenues.
Our top commodities, including cheese, increased versus the prior year quarter. The average cheese block price in the second quarter was $1.68 per pound versus $1.40 last year, which drove an over 5% increase in our market basket in the second quarter. During the second quarter, the cheese block price rose to over $2 per pound. We anticipate the price during the second half of the year to come down slightly, but still remain relatively high. Given higher than originally anticipated cheese prices, we currently expect our overall market basket for 2011 will increase by 4.5% to 6% over 2010 levels. This was up from our previously communicated range of 3% to 5%. Turning to G&A expenses, G&A increased by $2.8 million or 6.2% quarter over quarter.
This $2.8 million increase was due primarily to the additional expenses that we incurred for insourcing certain services, including online ordering and a call center. The company expects to add additional personnel in our IT and international groups during the second half of the year as well. Regarding income taxes, we had no items of note this quarter and continue to expect that 38% to 39% will be our normalized effective tax rate for the foreseeable future. Our net income, as reported, was up $2.6 million or 11.6% for the second quarter. This increase was primarily the result of our strong domestic and international same-store sales growth, international store count growth, and lower interest expense. This was partially offset by the gains from our 2010 debt repurchases and higher general administrative expenses.
Our second quarter diluted EPS was $0.40 and included no items that affected comparability in the second quarter of 2011. This $0.40 is a $0.07 or 21% increase from the $0.33 as adjusted EPS in the second quarter of last year. Here's how the $0.07 difference breaks down. Our operating results benefited us by $0.08, and our lower interest expense benefited us by $0.01. Offsetting these amounts was a $0.02 negative impact resulting from our higher diluted share count, primarily due to shares issued for options exercised in our higher average share price, offset by our share repurchases. Turning to our financial position, we ended the quarter with $78.6 million of unrestricted cash and generated $36 million of free cash flow during the first half of 2011.
In the second quarter, we utilized some of our available cash to repurchase and retire approximately 1.75 million shares of our common stock for a cost of $41.4 million at an average price of $23.71 per share. During the third quarter, our board of directors replenished our open market share repurchase program. We now have $200 million authorized for future stock repurchases. In closing, we continue to have great momentum, which has driven solid results for us during the first half of 2011. We will continue to leverage our strong cash flows opportunistically for the benefit of our shareholders. Thanks for your time today, and now I'll turn it over to Patrick.
Speaker 5
Thanks, Mike, and thanks to all of you for being here today for our second quarter earnings call. As you saw from our release this morning, we announced some really very strong sales and EPS results for the quarter. Our second quarter has demonstrated the continued strength of our brand and overall business model. We were able to report these strong results because our global franchise model continues to drive excellent free cash flow. Our domestic business continues to demonstrate its strength, and our international division is truly best in class. Domestically, our results were due to many of the same business drivers we've discussed before: our larger base of new customers and better repeat business, our continued focus on product quality, including our improved chicken, and a continuation of giving good value to our consumers.
We will always be true to our core as the pizza delivery experts, but we have an opportunity to improve and optimize our carryout business as well, which resonates well with consumers during this anemic economic recovery. Carryout is a part of the business that we've always participated in that now has grown to a full one-third of our sales. With additional focus, we feel it can be a stronger part of our domestic business model moving forward. We also feel it provides us with the opportunity to take even more market share in our category. We remain focused on our barbell pricing strategy with everyday value carryout specials and specialty pizza promotions. We will always highlight our strong consumer message of delivery and service, as evidenced by our current promotion, which began yesterday, featuring our tracker technology.
Internationally, we've had 17.5 years of positive quarterly same-store sales, an impressive feat for any restaurant or retailer. To give you a little perspective, kids going to college this fall were just being born the last time we had a negative same-store sales comp in international. Part of the success in international is due to the exceptional operational performance of our master franchisees. A few notable examples include Turkey, which grew by 30 stores in the second quarter and had an impressive double-digit comp increase. With a total of 192 stores as of the end of the quarter, their continued success is due to top-notch execution in that market. Australia also continues to maintain their flawless execution, along with some impressive product innovation and industry-leading market share.
I'm also pleased to say Mexico's launch of the new and inspired pizza has continued to gain momentum and is now in its second phase, including a new barbell pricing strategy similar to what we've done successfully here in the U.S. Ultimately, we continue to perform very well internationally and have established a presence in over 70 markets outside the U.S. Our international business, with minimal capital investment from us, shows why our master franchise model works so well. It's an exciting part of the Domino's story and one that continues to thrive. The fact that we've got over 4,500 franchised international stores in such a wide variety of markets means we have a nice balance of economies and currencies, which tend to offset each other so that we can produce consistently positive results regardless of what's going on in an international country or business.
Moving over to the cost side of our business, some of you may have noticed the run-up in cheese prices over the past eight weeks. Part of this is due to a large industry recall of cheddar cheese in late May, which sets the market price for all block cheese, including our mozzarella. While this was expected to be a short-term price spike, demand has also increased recently, keeping prices higher. We are taking these increases lightly because we are always focused on franchisees' profitability at the unit level. Every year, we set a goal to increase franchise store profitability. More expensive cheese is obviously going to make that internal goal more difficult this year. Part of our strategy to keep store profits strong for franchisees includes implementing cost improvement tactics and other tools available in our point-of-sale system to help keep this cheese price spike.
Our supply chain division remains committed to doing everything it can to mitigate cost increases for our stores. While generating a good return for our shareholders, a key strategic purpose of our supply chain business is to generate a competitive advantage for our stores relative to our competition. In conclusion, our primarily franchised system, combined with our efficient supply chain business and diversified global geography, is what makes Domino's a dependable free cash flow generator. In short, I'm proud to be reporting another excellent quarter. With that, I'd like to turn it over to questions.
Speaker 6
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Mitch Spicer with Buckingham Research.
Speaker 0
Great, thanks very much. Patrick, can you discuss the online ordering % in the U.S. and how that has trended versus perhaps the first quarter and the year ago period?
Speaker 4
Yeah, it continues to move up. The summer tends to have a little bit of a lull as we get into late second quarter. The kind of the upward move on that has tended to flatten out a little bit most years, we see that, but we're continuing to be up on a year-over-year basis. I think, as you're aware, we've also launched our Domino’s app recently and are pleased with kind of the initial uptake on that and consumer response to it. It continues to be a strong part of the business. We're still in that kind of 25%+ range overall on online ordering. We typically see, as students come back in in the fall, is when we start to see that moving up again.
Speaker 0
Great, thanks. It seems like the carryout percentage, or can you comment on that? Has that carryout percentage moved up, and is there any target where you could take that carryout percentage of sales?
Speaker 4
No, I don't know that we've got a specific % target on carryout. What I would tell you is, over the last few years, carryout overall in the category has been a little bit better than delivery. As we've focused on a little bit more, we've seen some nice move in our carryout numbers. You know, we are a delivery company first and foremost. We're going to continue to focus hard on that. We continue to believe that there is an opportunity to grow the carryout business, and you know, we're seeing some of that. It is why we've been running some carryout specials here recently.
Speaker 0
Great. My last question, then I'll pass it on to the next one, is just on the point-of-sale system. You did mention that there are initiatives through the point-of-sale system to control food costs. Can you comment on that a bit further?
Speaker 4
Yeah, I mean, what we're doing is, as we're working with the system, and clearly, we're feeling a little bit of pressure at the unit level with the cheese block as high as it is right now. We're just working on a number of initiatives. We've got terrific visibility into the stores and kind of the costs in the stores. We're looking at a number of really opportunities to just manage the food costs better in the stores. That may also include managing the coupon mix that we've got out there to take a little bit of margin there, if possible, with kind of what we're doing with the national promotions. It's really across the board.
As we've got this one platform across our domestic system, it's really a powerful way for us to go in and analyze unit-level profitability all the way down to the store level and help our franchisees look for opportunities on margins.
Speaker 0
Thanks very much, and congrats on a great quarter.
Speaker 4
Thanks, Mitch.
Speaker 6
Our next question comes from John Ivankoe with JP Morgan.
Speaker 1
Hi, thank you. Also, just a question on the franchise margins. A few years ago, and this is a case in your system and a case in a lot of systems, kind of an excessive focus on cost can sometimes affect the customer or the employee experience. We're just hoping you could kind of give us a sense that anything that happens at the cost side is actually going to bring continued increases in guest satisfaction scores, which has obviously been a huge reason for your success. The second question, if I may, when we think about margins and costs in general, a logical and very easy solution to that is pricing. If you could talk about whether your brand, the industry, the consumer is kind of in a place where pricing can become more aggressive. Thanks.
Speaker 4
Yep, thanks, John. Yeah, you're exactly right. In terms of the cost, we got to be very careful on making sure that we're delivering value to our consumers. Our stores right now, I am proud of the performance of our franchisees and our corporate stores and how they're operating. Our service level measures, our audit measures continue to improve in the stores. We're doing a very, very nice job of executing out there at the store level. At the same time, we've got to always look at where there are opportunities for waste out there. That can be everything from looking at how we're managing food within the stores. You saw in our corporate store margin results for the quarter that we've gotten some labor efficiencies year over year.
Even as we're out there with promotions at the national level that continue to get the phone to ring, or more importantly these days, to get the internet orders and app orders coming in, we look at what the other coupons are surrounding that and whether or not there's an opportunity to focus in a little bit on the specials that are being given kind of around those national promotions. It's certainly a delicate balance. As you heard, we raised our commodity range expectation for the year a little bit. It is running a point or so ahead of where we thought it was going to be. That puts a little bit more pressure on the store level than we had been expecting. We're working hard on that. It's an important focus for us.
While we are primarily franchised, our health as a business over the longer term, or really even over the medium term, is going to be driven by the health and success of our franchisees. It's something we watch carefully. We've got terrific visibility on what's going on based on the point-of-sale system and kind of the back-of-house that we've got supporting that. We're working hard to find those areas that we can take a little bit without affecting the overall customer experience.
Speaker 0
Pricing.
Speaker 4
The last question was pricing. I think the answer is, we launched a new promotion yesterday, which, you know, two medium, two tops for $5.99, which is going to sound very familiar to everybody out there. The answer is it does very well for us at the top line. It's why we've come back around to it, because we've got confidence in it. At the same time, I think where the opportunity might be for very modest price increases is on kind of the coupons that surround that. Typically a national promotion is going to drive kind of 15% to 25% of the orders or so. It's kind of a normal range. You've still got 75% plus of the business that can be set on other pricing around that.
The goal is, keep those customers coming in, keeping the order counts healthy, but look at whether there are opportunities to be a little bit more efficient on pricing around it.
Speaker 0
Okay, very good. Thank you. Congratulations.
Speaker 4
Thanks, John.
Speaker 6
Your next question comes from Jeffrey Bernstein with Barclays.
Speaker 1
Great, thank you. A couple of questions. Just first, Patrick, on the labor side of things. I know this quarter you saw some leverage and down north of 150 basis points for your company stores. Just wondering, I mean, considering that you lapped very strong leverage pretty much through all of 2010 as well, just wondering perhaps how much of that is wage tip credits? I think you talked about recently you were expecting that to potentially decrease in terms of less leverage as we move through the year. Just wondering if we can get some color on the labor outlook for the back half and into 2012.
Speaker 4
The impact of the tip credit continues to be significant, but as we said before, would decline over the year. This quarter actually had some very good efficiencies in the corporate stores, and that made up a significant piece of the 150 basis points that you mentioned. While we had good volumes last year, we were still running slightly inefficient because we'd had a big run-up in our order counts. We've gotten much better at handling the volume. We also have had significant growth in the carryout business this quarter, and that also helped some of our labor efficiencies. It was a combination of both the rate and the efficiency that gave us the benefit. To your question, you'll see the rate impact probably moderate a little bit as we flow through the rest of the year.
We did see nice leverage in terms of kind of hours per order, hours being run in the stores in the quarter. The team's doing a nice job there of running the stores more efficiently. That should hopefully continue, but you will see some of the rate gains kind of moderate over the course of the year.
Speaker 1
Gotcha. On the commodity basket, obviously you bump it up 100, 150 basis points for the full year of the basket. I think you said you thought cheese would come down from where it is now, but not much. I'm just wondering what is your specific back half of the year cheese forecast based on what you see today?
Speaker 4
I think we'll kind of stick with what we said, which is, we do see it easing off here. I don't think we're seeing it coming off a lot. Going back to historical averages of $1.40, we are not seeing it getting back to those levels before the end of the year. We do expect that we're going to see it coming down below $2 again before the end of the year, but probably still somewhat higher than the typical range.
Speaker 1
Got it. Lastly, Patrick, I know in the past you've given some color on sequential trends, whether it be throughout the quarter or into the next quarter. I know we're obviously looking at kind of a resurgence, which I think you guys saw last year in the third quarter from a comparison standpoint. Just wondering, any insight into trends through the second quarter into the third quarter, or perhaps whether you even look at it on a comparison basis from a year ago or whether looking at year ago in terms of trying to forecast future sales trends is not even a good predictive measure anymore.
Speaker 4
I think the only time I've done that is if there was a move that was so significant that we felt that we needed to disclose that. I guess what I would say on that is, we were clearly very pleased with the second quarter comps, both domestically and internationally. As we had said many times around the first quarter comp of 2010, it included a lot of initial trial. The color I would give is, our two-year comp in the second quarter domestically was stronger in the second quarter than it was in the first quarter. That was now a somewhat more normalized number. The number that we're just very pleased with is the two-year comp for both domestic and international was the same, and it's a 13.6% increase for both international and domestic on a two-year basis. We're very, very pleased with that.
Nothing in terms of internally within the quarter that we're going to get into. I would tell you that we're certainly very pleased with kind of the overall momentum. While we really like the 4.8, we like even more kind of the 13.6 for the two-year number.
Speaker 1
I can understand that. Congratulations. Thanks.
Speaker 4
Thanks.
Speaker 6
Your next question comes from Joe Buckley with Bank of America.
Speaker 2
Thank you. First, a question on the franchisee profitability. Are they experiencing the same wage rate declines, or had they moved to the tip credit before the company stores?
Speaker 4
Most of them had moved earlier than we did, so they're not getting as much of that, if any of that, this year. There may be a few that are picking up some of that, but for the most part, that is more a corporate store effect this year than a franchise store effect.
Speaker 2
Okay. Question on the carryout business. I know you're featuring a $7.99 price Monday, Tuesday, Wednesday. Was that featured throughout the second quarter as well as currently, or is that relatively new?
Speaker 4
I think it was about the last eight weeks of the second quarter. It was most of the second quarter, but not all of it.
Speaker 2
Okay. Mike, just a question. Does anything change with the restricted cash as you approach the refinancing?
Speaker 4
I've been instructed I'm not supposed to say anything at all related to the refinancing, so I have to stick with that.
Speaker 2
Okay. I thought that might be on the outer bounds of maybe you could answer, but I understand.
Speaker 4
Sorry.
Speaker 2
Okay. Thank you.
Speaker 6
Your next question comes from Cynthia Headen with Domino's Pizza Inc.
Speaker 3
Thank you. My question is back on the domestic comps here. Clearly, there's a huge retention that you had from last year, and you'd mentioned that there's an increased frequency. Can you give us a little color on new customers coming in or lapsed users that you're seeing come back in, and how related is that to some of these carryout specials that you're running?
Speaker 4
Yeah, the answer on carryout is always going to be a little bit harder to give than on delivery because when it's a delivery customer, we always know who they are. When it's a carryout customer, if they walk in and buy, we may not know exactly who that carryout customer is. Sometimes we get the name and phone number if they've ordered ahead of time, but sometimes we do not. It's not quite as exact an answer there as it may be on the delivery business. I guess what I would say overall is the growth in this business, really now going back five quarters, has been driven far more by increased retention and frequency than by increases in the number of new customers or returning last customers.
That's, frankly, as we've been indicating on these calls going backward, what's given us kind of the ongoing confidence that we have something pretty special going here because this is about customers being happier with the pizza and happier with their overall experience. That's a more sustainable thing than simply getting excitement around something new when you generate a lot of customers, but you don't have as much visibility on whether they're going to be coming back around again. The answer stays very consistent with where it's been, which is this is really about better customer loyalty, better retention, better frequency, more than being driven by new customers coming into the franchise. We certainly get some of that, as we always do on an ongoing basis, but the real increases are being driven from increased customer loyalty.
Speaker 3
Okay. Can you give us an idea of how to think of store-level margins here? You guys were at 25% of sales with online ordering, you guys were starting to be able to leverage some efficiencies in labor there. Now, as carryout seems to be taking up a big chunk of sales too, are those efficiencies kind of getting offset as you have to keep maybe another hand or two at the front of the store?
Speaker 4
No, I mean, if anything, because we don't have a delivery driver, you know, on a carryout deal, you're actually going to help that a little bit with carryout. No, you know, if anything, it's a little bit of a positive. It's going to have a little bit lower ticket, but it's still a very profitable customer because you don't have the cost of delivering the order to the person's home.
Speaker 3
Okay. Lastly, I know you'd mentioned adding a couple personnel to international. Can you give us a better sense of the size or scope of that and how you feel about the infrastructure in place to continue growing international at this pace?
Speaker 4
I guess what I'd say is, you know, the business is clearly growing very, very quickly. We're getting a lot of margin leverage, as you've seen, out of the international business. That's going to continue. We want to continue to fuel that growth. I think you're going to continue to see some modest increases in the support that we're giving that business just based on the sheer numbers of stores getting opened and the continued growth in that business. I would expect to continue to see leverage on the overhead there. We're growing very quickly. It's becoming a very, very big part of the overall Domino's Pizza story.
Speaker 3
Great, thanks.
Speaker 6
Your next question comes from Alvin Concepcion with Citi.
Speaker 1
Hi, good morning. Congratulations on a great quarter as well. Just wanted to get a little more color on the Domino’s app. From what you've seen so far, is it mostly replacing online orders done over the computer, or is it converting people who normally call in? Are you seeing it drive incremental transactions? Just generally, what kind of things are you seeing there so far?
Speaker 4
Yeah, it's pretty early in to kind of get quite that granular. Certainly, what we've seen from our international markets that have been operating with apps for a while is there's some incrementality to it. There's a reason we've got it out there, and it's performing well. We're real pleased with where we are. If you look at the ratings on apps, I think we're right now at a four-star rating from the people using it, and our competitors, I think, are both at three stars. We think we've got a better experience for our customers. We're getting some recognition on that. I think there was something out this morning that was on Street.com that was talking about it as a top 10 app for companies. It's something we're excited about. We think there's a real opportunity there.
I think there is going to be some incrementality, but you're looking at something that's been launched now for maybe eight weeks. More to come on that as we see it operating for a longer period of time.
Speaker 1
Great. I was wondering what you're seeing in the pizza category, maybe just some thoughts on the health of the category and the competitive environment.
Speaker 4
We're clearly leading, particularly when you look at a two-year basis. Pizza Hut domestically was negative a couple points in the second quarter, but they were rolling over a positive from the previous year. I think their two-year comp was a plus 6%. We like being up more than everybody else, than our competitors. We are clearly up more than the category. We like the signs of a little bit of health that we see in the category. It's still certainly not strong, but it's a little bit better than it has been. I guess the other thing I would say is I think we continue to believe that where you're seeing some pressure out there is on the regional chains. Our performance and some of our large competitors' performance, I think we're taking share out of some of those regional chains. We certainly are at Domino's.
Speaker 1
I think they're taking share from frozen pizza as well at this point.
Speaker 4
I'm sorry, from what?
Speaker 1
Frozen pizza, at-home pizza.
Speaker 4
That's something we talk about a lot. We get that question a lot. Frozen right now is negative year over year. We really don't believe, when it's been up, I've told you I don't know that there's a lot of trading behavior between frozen and our category. I'll give you the same answer when they're down. I really don't think there's a lot of consumer trading behavior between frozen pizza and a hot fresh delivered pizza. I think there is simply more trading between frozen pizza and frozen macaroni and cheese or frozen lasagna or whatever else may be in the frozen aisle there. It is awesome, I think, right now year over year. I don't know that I would necessarily tie those two things together.
Speaker 1
Great, thank you very much.
Speaker 6
Your next question comes from Mark Smith with Southall and Company.
Speaker 1
Hi guys, this is Sean Bitsen sitting in for Mark Smith. Can you give us an update on your commodity contracts?
Speaker 4
We are, as we've talked about before, we're fairly locked in on our chicken, locked in on our wheat into partway into next year. The biggest commodity that we have, of course, is cheese, and our agreement there kind of helps cap the ups and the downs, but it's not a fixed price contract. We've also got some agreements on conversion cost on meats, but our meats do have the base cost of meats does flow with the market. Our sauce is also something that's fixed up through the end of this year.
Speaker 1
Are there any global regions showing extraordinarily strong strength or weakness in all your markets?
Speaker 4
It is really broad strength right now. We're just very, very pleased. There's certainly always going to be a little bit of relative strength or weakness out there. The one that I highlighted today in my script was Mexico, and that's one that we've talked about having lagged a little bit over the course of the last 18, 24 months. They started picking up in the fall last year, and they're performing very nicely now. Overall, it is really very, very broad geographically. Clearly leading the industry there as well, both in terms of the comps that we're putting up, but also in terms of store growth.
Speaker 1
Thank you.
Speaker 6
Your next question comes from Peter Saleh with Chelsea Advisory Group.
Speaker 3
Great, thanks. Just wondering if we could go back to the market share question. Do you have any more specifics in terms of market share data, in terms of how much you've gained over the past maybe year or two?
Speaker 4
It's a big category, right? You're at kind of $35 billion or so in the category. If you work through our retail sales, I don't have that number off the top of my head. If you look at, domestically, a 13.6% number for us on a retail sales base north of $3 billion here, you're looking at a pickup of $400 million or so. You're looking at a point in terms of the overall category. It's not dramatic. That gives us a lot of confidence in our growth potential. While we are taking some shares out there, we're doing it tenths at a time. It is a very, very big category. That's the order of magnitude that you're looking at, a share gain of a point or so over the course of the last 24 months.
Speaker 3
In terms of lunch versus dinner, is there any shift or any change there?
Speaker 4
Not dramatic. We continue to see nice movement in our lunch business and are pleased with the progress that we're making there. Dinner is clearly still dramatically bigger for us than the lunch business overall, but lunch is developing nicely.
Speaker 3
Great, thank you.
Speaker 6
We do have a follow-up question from Mitch Spicer with Buckingham Research.
Speaker 1
Great, thanks very much. As we think about the third quarter, the comps comparisons do get a little more difficult. Can you discuss now, you know, looking back a year, second quarter, I guess, dipped off a little bit last year, third quarter upticked. Was there anything in particular now that you've studied the data to just to comment on that trend over the second and third quarter last year?
Speaker 4
Yeah, we had a really, really good advertising campaign out in the third quarter last year. I think, as we even said then, the third quarter relative strength last year to the second quarter was a bit of a surprise for us at the time. The fact that it actually accelerated exceeded our expectations. You're right, just straight numbers, the comp is a little bit tougher to roll over in third quarter than second quarter. We like where we are. We like the repeat and frequency we're getting with our customers, and we'll take them one at a time.
Speaker 1
Great, thanks. Just on cheese, you mentioned a cheddar recall in the second quarter. Is that supply back? My first question on cheese.
Speaker 4
Certainly, the direct impact of the recall is gone now. I believe that that producer was not a supplier to us, didn't have anything directly to do with us, but I think it was, Mike, was it $30 million pounds or so that came out from that, that were recalled. I think that's kind of been absorbed through. Our expectation was that was going to be a four to six-week event, and we'd see things starting to move back down again. I think what you're seeing now is more a function of both domestic and global demand on cheese. Combined a little bit in terms of that global demand with the dollar being relatively weaker, it's making it a little more attractive, I think, for people to pull out of the U.S.
I think what you're seeing now is a little more kind of normal market-based movement on the cheese block than anything to do now with the recall.
Speaker 1
Great, thanks. Just my last question, now that you have the iPhone app, should we expect an Android app?
Speaker 4
We want to be everywhere our customers are. Stay tuned. We want to make sure that we're giving people the absolute best experience. We're very pleased with where we are with the Domino’s app, and we believe our strategy has been the right one, which is to make sure that we've got things right and that it's going to be a real positive customer experience. We like where we are on a relative basis compared to our competitors on this.
Speaker 1
Great, thanks very much.
Speaker 6
The last question comes from Jon Tower with Morgan Stanley.
Speaker 1
I just had a couple of questions. First, on that incremental G&A spend in the back half of the year, are you targeting any specific markets with that investment, China, for example?
Speaker 4
No, you're just seeing some general growth in the team over time as the business continues to grow. No, it's not specifically geographically focused.
Speaker 1
Okay. I was hoping you could comment a little bit on the demographic of your customer base in the U.S., really, since you've introduced online ordering and now obviously mobile apps. What's happened with the overall customer base?
Speaker 4
I don't know that we've seen a kind of dramatic move on that. I guess what I'm saying is, when we rolled out online ordering, one of the surprises to us, frankly, was it was broader demographically than we had even expected it was going to be. We certainly saw college towns having relative strength. I would tell you that there are less demographic differences in the use of online ordering than I think you would expect on the surface. It's a very good question because I think our minds were kind of going the same place that yours is, which is, okay, you're rolling this out and this is going to drive a higher income, higher education level demographic more. There may be a little bit of that, but not a lot of that. It's really quite demographically broad.
It's simply a better way to do business with us, and everybody is figuring that out.
Speaker 1
Thank you.
Speaker 6
At this time, there are no further questions.
Speaker 4
All right. I want to thank all of you for your time and your questions. We will send out a notice for our future call regarding our announced debt deal once that process is concluded. I thank you all once again.
Speaker 6
This concludes today's conference.