Domino’s Pizza - Q2 2024

Transcript

Operator (participant)

Thank you for standing by, and welcome to Domino's Pizza's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. If your question has been answered and you'd like 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, Greg Lemanczyk, Vice President of Investor Relations. Please go ahead, sir.

Greg Lemenchick (VP of Investor Relations)

Good morning, everyone. Thank you for joining us today for our second quarter conference call. Today's call will begin with our Chief Executive Officer, Russell Weiner, followed by our Chief Financial Officer, Sandeep Reddy. The call will conclude with a Q&A session. The forward-looking statements in this morning's earnings release and 10-Q, both of which are available on our IR website, also apply to our comments on the call today. Actual results or trends could differ materially from our forecasts. 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 our non-GAAP financial measures that may be referenced on today's call. This morning's conference call is being webcast and is also being recorded for replay via our website.

Andrew Charles (Research Analyst)

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 one question only. With that, I'd like to turn the call over to Russell.

Russell Weiner (CEO)

Thank you, Greg, and good morning, everybody. Our second quarter performance demonstrated once again that our Hungry for MORE strategy is delivering positive results. For the second straight quarter, we drove U.S. comp performance in the healthiest way possible: through profitable order count growth, positive order counts in our delivery business, positive order counts in our carryout business, positive order counts across all income cohorts. We also continued to see improvement in our international comps and generated earnings that were in line with our expectations. As a result of our strong results year to date and expectations for the back half of the year, we remain on track to achieve our guidance for annual global retail sales growth of 7% or more and operating profit growth of 8% or more. I wanna provide an update on our net store growth guidance, which we temporarily suspended this morning.

Andrew Charles (Research Analyst)

First, I wanna reiterate that our U.S. pipeline is strong, and it continues to grow. We continue to expect 175 or more net new stores annually in 2024 through 2028 in the U.S. We now expect to fall below our net store growth target for international in 2024 by approximately 175-275 stores, primarily as a result of challenges in both openings and closures faced by Domino's Pizza Enterprises, DPE, one of our master franchisees. We're partnering closely with DPE as they work through this process. Now, it's important to note that our largest expected growth markets of China and India remain on track to deliver on their growth potential.

In China, DPC Dash announced they'll open store number 1,000 by the end of this year, and then they'll increase their net openings per year to between 300 and 350, starting in 2025. Back in May, Jubilant, our master franchisee based out of India, increased its total store count potential to 5,500 over the medium term in the six global markets in which it operates. When you think that it took Domino's over 60 years to open 5,500 stores in the United States, Jubilant's goal exemplifies the Hungry for More mentality our global system is taking on. Now let's look at our second quarter results through the lens of our M-O-R-E, Hungry for More pillars, which continue to drive our business. As you know, M stands for the most delicious food.

We know we've got the most delicious food in the industry and are focused on showcasing that with more mouth-watering food photography in all of our marketing and our sales channels. We launched our New York Style Pizza in Q2, and it's what we call innovation with intent. When we launch a new product, it's got a specific role, and it's intended to stay on the menu permanently. New York Style Pizza is another example of that. It's got a crust that's thinner and more foldable than our traditional crust. It was designed to appeal to pizza lovers whose idea of deliciousness is a little bit different than Domino's Pizza offerings in the past. The result has been a high mix of sales within our pizza offerings.

In addition to being a product that showcases deliciousness in a different way, New York Style Pizza is available as part of our Mix & Match offer. Domino's Rewards members can also redeem 60 points for a free medium, two-topping New York Style Pizza. This new offering drives more than just deliciousness. It drives value, and it drives more customers into our loyalty platform, and that's why we call it innovation with intent. The O in Hungry for More stands for operational excellence. This is how we'll deliver on our promise to have the most delicious food, by consistently driving a great experience with our product. As I shared on our last earnings call, in 2024, we're rolling out a new service program we're calling More Delicious Operations.

This is a series of three product training sprints focused on our dough, how we build and make our products, and then how we cook them. In Q1, we embarked on our first sprint, which focused on our dough and are now rolling out our second sprint around ingredients and product build. These product sprints and last year's Summer of Service are working together with our DomOS technology to drive improvements in our delivery times. In fact, estimated average delivery times were nearly 10% better in Q2 of 2024 than they were in Q2 of 2022. And we're doing all of this while our stores are handling more orders. So I wanted to congratulate our franchisees and operators, whose commitment to service allows us to deliver on the promise we're striving to make in our marketing, that Domino's has the most delicious food.

Our third Hungry for More pillar is R for Renowned Value. As I've said before, it's not just about having the lowest price in the market, it's about providing value that's innovative and memorable. Renowned value breaks through the sea of sameness discounts you see in the marketplace. Now, Domino's Rewards is an example of that Renowned Value. It continues to perform well and was the key driver of our strong US comp performance in Q2. You'll recall our objectives for the program were to drive new users, particularly carry-out customers, and increase the frequency of light users. I'm happy to report that Domino's Rewards continues to deliver on those objectives. Our active members are up significantly year to date through Q2, showing that the program is continuing to build.

Redemptions across both the delivery and carryout channels are also increasing, which is contributing to the transaction growth we're seeing in each of our businesses. For example, in our carryout business, orders with a loyalty redemption in the first half of 2024 are twice as high, 2x, as they were in the first half of 2023 under our old loyalty program. So as Americans continue to look for value, Domino's is providing Renowned Value and doing it profitably for our franchisees. National promotions are another way we're driving Renowned Value. In Q2, we had two Boost Weeks, both of which were very successful in driving transactions and customer acquisition. As it relates to our promotional cadence in 2024, you can continue to expect around six Boost Weeks.

While providing renowned value through our own channels is one part of our barbell strategy, tapping into the aggregator marketplace is the other, and our launch into this space remains on track to exit the year at 3% or more of sales coming through Uber Eats. Everything we do at Domino's is enhanced by our best-in-class franchisees. They are the E in our Hungry for More strategy. In early May, we hosted our largest Worldwide Rally with almost 9,000 franchisees and team members in attendance. This year's event was appropriately themed, Hungry for More. We brought the strategy to life across our global system, and the results showed. This was our most highly rated rally of all time.

To close, I couldn't be more energized by the future of Domino's Pizza, and seeing the excitement of franchisees at our rally really brought that to life for me and the leadership team. Our results show that our strategy is resonating with customers and our system. All of this gives me great confidence that we can continue to drive significant long-term value creation for our shareholders. With that, I'll turn things over to Sandeep.

Sandeep Reddy (EVP and CFO)

Thank you, Russell, and good morning, everyone. Our second quarter financial results were right in line with our expectations. Our strong start to the year has resulted in profit dollar growth versus 2023 for our U.S. franchisees. We remain on track to achieve our target of $170,000 or more average U.S. franchise store profit for 2024. Excluding the impact of foreign currency, global retail sales grew 7.2% in the quarter due to positive U.S. and international comps and global net store growth. U.S. retail sales increased 6.8%, and international retail sales grew 7.7%, excluding the impact of foreign currency. During Q2, same-store sales for the U.S. came in at 4.8%, which was in line with our expectations.

Andrew Charles (Research Analyst)

Our strong comps in the quarter for carryout of 7.9% and delivery of 2.7% were once again driven primarily by transaction growth. Our U.S. same-store sales continued to be primarily driven by transaction growth from our new loyalty program and our strong marketing programming. We also benefited from 1.5% of pricing, which was inclusive of high single digits in California. Our sales mix from Uber grew to 1.9% for the quarter. The incrementality of Uber sales continues to be in line with our expectations. Our comp tailwinds were partially offset by a higher carryout mix, which carries a lower ticket than delivery. Shifting to U.S. unit count, we added 32 net new stores in line with our expectations. This brings our U.S. system store count to 6,906.

We remain on track to achieve our 175 or more net store growth target in the United States in 2024, and we anticipate opening our 7,000th store by the end of the year. Shifting to international, where comp results were generally in line with expectations for the quarter, same-store sales, excluding foreign currency impact, accelerated to 2.1% in the quarter. The improvement from Q1 was broad-based, as we saw improvements in our Europe, Asia, and Middle East markets.... Store counts increased by 143 net stores as we finished the quarter with more than 14,000 international stores. Our net store openings were impacted by softness in DPE on gross new store openings and closures. Income from operations increased 1.7% in Q2, excluding the negative impact of foreign currency of $2.7 million.

This increase was primarily due to higher franchise royalty revenues resulting from global retail sales growth. This was partially offset by higher G&A, which was primarily driven by higher labor expenses, as well as the company's worldwide rally expense, as communicated on our last quarterly call. I expect the return on this expense to be extremely high, as everyone across our system left engaged, inspired, and ready to drive our Hungry for More strategy. Lastly, our margin rate was impacted by 0.3% headwind in Q2 from the tech fee being reduced to $0.355 and our ad fund contribution rate increasing, increasing back to 6%, as previously communicated. Now, turning to our outlook. We continue to expect 7% or more global retail sales growth, excluding the impact of foreign currency, based on the following key items.

First, our 2024 U.S. comp to be above the 3% or more long-term guide as a result of catalysts in Uber and loyalty for the full year, and we expect comps to be 3% or more in Q3 and Q4. Specific to Q3, we expect comps to be slightly below what we saw in Q2 on a one-year basis, as we're expecting one less Boost Week, partially offset by a continued ramp in Uber. Second, sales through Uber to increase as marketing and awareness grow, and we are expecting to exit the year with an overall sales mix of 3% or more. Third, international comps to accelerate to 3% or more long-term guidance in the back half of the year. As Russell noted, we now expect to fall below our 1,100 or more net new store number for 2024.

This is due to challenges in our international business, primarily related to DPE. As we get further visibility into the full effects of DPE's store opens and closures, we will provide an update on the impact to our long-term outlook for 2025 and beyond. We continue to expect an 8% or more year-over-year increase in operating income, excluding the impact of foreign currency. To highlight some of the components: First, for the year, you can expect operating income margins to be relatively flat compared to 2023 and to be down slightly in Q3. As a reminder, we are not expecting to see cost leverage in 2024, primarily due to investments we are making in consumer technology, store technology, and supply chain capacity to support future sales growth.

Second, we are now expecting supply chain margins to expand compared to the prior year due to some favorability in the food basket and slightly higher procurement productivity. We are forecasting to come in below the midpoint of our food basket range of 1%-3% for the year. In Q3, expect supply chain margins to be roughly flat compared to the prior year and down in Q4. Third, the favorability in supply chain margin is being partially offset by pressure within G&A due to slightly higher investment levels. We continue to expect our G&A as a percentage of global retail sales to be approximately 2.4%. And lastly, we are now expecting the impact of foreign currency to be approximately 1% of operating profit dollars in 2024. We expect this will impact our year-over-year operating profit margins by roughly 20 basis points.

As was noted in our disclosure this morning, we did not repurchase any shares in the second quarter. We continue to maintain flexibility due to the volatility of the interest rate environment as we evaluate our upcoming debt maturity in October of 2025. Thank you. We will now open the line for questions.

Operator (participant)

Certainly. As a reminder, ladies and gentlemen, if you have a question at this time, please press star one one on your telephone. Our first question comes from the line of Dennis Geiger from UBS. Your question, please.

Dennis Geiger (Senior Research Analyst)

Great. Morning, guys. Thank you. Appreciate it. Wanted to ask, a little bit more on the, the loyalty, what you're seeing there and, and sort of, as we go into the back half of the year, and maybe even into 25, how you guys are thinking about that, that loyalty program, given the contribution you've seen already this year and what you're expecting kind of, again, balance of the year, into year two, how you think about marketing it, promoting it? Thank you, guys.

Russell Weiner (CEO)

Morning, Dennis. Thanks for the question. Yeah, I'll tell you, loyalty for us this year has just been tremendous. If you think about the objectives that we outlined in our Investor Day, we said with the new loyalty program, we wanted to drive light users and frequency there. Check. We wanted to continue, obviously, to drive our delivery customers. Obviously, we're doing that. But we also wanted to engage our carryout customers. Check there. So it really is doing every single thing that we had hoped it would. We'll give a number at the end of the year as far as new users, but I can tell you that the number of new users is increasing.

Andrew Charles (Research Analyst)

I gave a number in my opening remarks that just to me is indicative of how this is going. So remember, one of the things we said we were gonna do is really use loyalty to drive carry-out. So orders from a carry-out perspective, orders with loyalty redemptions in the first half of this year are twice as high as they were under the old program in the first half of last year. You know, Sandeep talked about how our carry-out business is doing, and this is one of the big reasons. So just really on all of the objectives, the loyalty program is delivering what we had hoped.

Sandeep Reddy (EVP and CFO)

And one thing I'll add to that, Dennis, is we've talked about this previously, but this is a multi-year driver of comps for us. So this year is just the beginning, and as we did in Piece of the Pie Rewards when we launched it in 2014, we saw over three or four years, continuous compounding of comps based on the launch of the program. We expect a similar kind of cadence as we go through this program as well.

Russell Weiner (CEO)

Yeah, when you think about the health of this quarter and how order counts came in so strong, all of those customers are going into the flywheel of this loyalty program. So today's orders are really tomorrow's sales, and that's why we're so excited about how the loyalty program is working with everything else that's firing on the business right now.

Operator (participant)

Thank you. Our next question comes from the line of Brian Bittner from Oppenheimer. Your question, please.

Brian Bittner (Managing Director and Equity Analyst)

Thank you. Good morning. As it relates to the unit growth guidance, I understand that the shortfall is primarily related to pressures you're witnessing at DPE, but can you dive into this dynamic a bit more? It just seems like a lot has changed versus when you initiated the long-term outlook at the end of last year. So just trying to better understand how the surprise came about so suddenly versus what you were expecting seven, eight months ago.

Sandeep Reddy (EVP and CFO)

Yeah, Brian, it's Sandeep. So I think when you go back to the Investor Day back in December, I think one of the process that we went through was working with all of our master franchisees, including DPE, on the expectations that they had for the business. And then we basically calibrated to that for both 2024 and the five-year horizon as well. And at that time, we were completely aligned. So then actually, we got into the end of the Q1 call, and then we got into the second quarter, and we started seeing that relative to our expectations and cadence, both new store openings as well as closures really started increasing from DPE.

Andrew Charles (Research Analyst)

As we saw that, we continued to engage with the DPE team to validate the forecast that we had for the year. It became pretty clear as we actually went through that conversation and discussion that there was not only the risk to the second quarter that we were seeing, but clearly the outlook was going to be impacted as well. In fact, just yesterday, I think, DPE put out a release with a number of closures that they outlined in the Japan and France market in particular, which they're targeting for their first half, which is our second half, which therefore will land in this fiscal year. So apart from what we've seen in second quarter, we expect to see more pressure in the second half of this year.

So I think when you take the collective of all of that, it was a pretty material update that we were gonna see in the numbers for this year, and we felt it appropriate to update our guidance for 2024. And also, you will notice the range is 175-275. Why is the range that big? Because I think as we go through the process of not just the closures, but the potential openings, the timing of it could potentially shift between our fiscal 2024 and fiscal 2025. And that's why we're temporarily suspending guidance on the long-term outlook as well, apart from this year. So that's kind of what went on in the background, Brian, so you understand that.

But I think one of the things I want to just come back to is when we look at our long-term guide, I mean, we're talking about maintaining our GRS growth of 7%+ and our operating income guide of 8%+. And the reason for this is, the store closures that we're talking about are very low volume stores. So when you actually put it all together, the aggregate impact to operating income is really immaterial in the grand scheme of things. And so that's why we're very confident in our operating income guidance, and we are reiterating that, as you saw this morning.

Russell Weiner (CEO)

Yeah, and Brian, I would just add to that. I think, you know, what this shows me is how many levers we have to grow this business. And so, you know, certainly we're working with DPE, but let me just put some of this in perspective. So our sales and stores are still on target for the 7%... I'm sorry, our sales and profit for the 7%+ and the 8%+. And with those headwinds in DPE, that means we have a lot of other things firing. And so just maybe I'll start with development. So at the same time as we have this DPE news, we have news that China and India are increasing their outlook.

Andrew Charles (Research Analyst)

We've got today, you know, 14,000 stores, half of those stores we've opened since 2015. And so the momentum we have on our way to 40,000 stores, which is a lot more room for us, is tremendous. Then when you think about our development in the US, obviously we're, as Sandeep said in his remarks. 175 plus is still our target this year that we're gonna hit. And when you think about the strength of development, openings are really important, so are closings. And in the trailing twelve months in the US, we've closed, you know, only seven stores out of a total of about 7,000. And so development, I think, overall is pretty healthy.

And like I said, we've got these other things firing at the same time, which is why our sales and profit numbers are still coming in at forecast.

Operator (participant)

Thank you. Our next question comes from the line of David Tarantino from Baird. Your question, please.

David Tarantino (Senior Analyst)

Hi. Good morning. My question is a follow-up, Russell, on your comments about the outlook for the year being unchanged. You know, I guess, you know, you know, we've seen signs that consumer spending is slowing, and certainly in parts of the restaurant industry, and it feels like the degree of difficulty in the U.S. has increased. So I just wanted to ask you to give some commentary on why you're so confident in holding those targets for this year, and whether you think the degree of difficulty is higher or unchanged versus what you were thinking previously. Thanks.

Russell Weiner (CEO)

Yeah. Thanks, David. You know, to me, the best predictor of the future, even though I have a lawyer in the room who probably tells me I can't say this, is what's happened. And you know, you're right about consumer spending slow. But let's think about what's happened, with that as a backdrop, is we've grown orders in our delivery business, our carryout business, every income cohort. We haven't talked about international, but we've grown order count in international. And so that's what's going on in an economy where folks are kind of maybe struggling to decide what to buy. And so if order counts are positive in that scenario, then as the momentum, you know, swings eventually, I expect our momentum to continue.

Andrew Charles (Research Analyst)

What you do when times are tough, to me, that talks about the strength of the brand. That's why I just could not be more excited about how we delivered the results for the quarter.

Operator (participant)

Thank you. And our next question comes from the line of Andrew Charles from TD Cowen. Your question, please.

Andrew Charles (Research Analyst)

Great, thank you. Sandeep, you talked about how the 3Q comps in the US are expected to trail 2Q levels, and just given the easier comparisons, I'm curious if that reflects what you're observing, so far this quarter, or, if it's more just forward looking around your expectation, just given one less boost week in 3Q?

Sandeep Reddy (EVP and CFO)

Andrew, thanks for the question. You know, I think, no, it's more about what I talked about in the prepared remarks, which is we do have one less boost week. We do have the ramp in Uber, but on a net basis, it's slightly below what we saw in Q2 is our expectation for Q3. But I'll go back to Russell's previous answer. We are seeing tremendous performance in terms of transaction growth for the entire first half, and we're expecting to see that same performance in the entire second half. And so we're very confident in the ability of our business to deliver the kind of momentum that you've seen already in the first half, in the back half, including Q3.

Operator (participant)

Thank you. Our next question comes from the line of David Palmer from Evercore. Your question, please.

David Palmer (Senior Managing Director and Head of Restaurants Equity Research Team)

Thanks. Good morning. I guess the question is about... I'll make it a kind of a two-parter. It looks like the sales trends are pretty volatile in the U.S. from the data that we see. You know, for example, things looked like they were weaker in April when you didn't have sort of a value-forward message, like Emergency Pizza or the $3 tip. Could you kind of reflect on the quarter and what you're seeing in terms of the consumer response to stuff? And maybe, you know, give us a sense of what you think is working and not working in the U.S. And then separately, I think people are gonna be concerned about the fourth quarter.

Andrew Charles (Research Analyst)

If the third quarter is worse than this quarter, maybe, you know, let's say you do a 4% in the third quarter, I think people are gonna be concerned about you holding that 3%+ in the fourth quarter, given the comparison. So maybe you can address both of those. Thanks.

Russell Weiner (CEO)

Yes, sure. I'll maybe give it a shot, and Sandeep, if I miss anything. You know, as far as the volatility in the short term, I think, you know, we look at, you know, quarters, not days, and obviously years as well, and there are always some bounciness based on everything from, you know, weather to what we put out there. So I like the second part of your question, which is kind of big picture, what's working and what's not working. What's working is the Hungry for More strategy. And I'll give you an example, maybe using, you know, one of the things we are doing this year, as we talked about, was we're gonna launch two new products. So we just launched the New York Style Pizza.

Andrew Charles (Research Analyst)

New York-style pizza is all about the most delicious food. It's an innovation with intent. There are, believe it or not, some people out there who don't love our traditional crust, so this is an incremental crust, more foldable, hopefully bring new people in the fold. At the same time, that new product is delivered in better delivery times than it was two years ago. That's operational excellence. It's part of our Mix & Match promotion. It's also part of our loyalty program, Domino's Rewards. So what we're doing, David, is really tethering all these things together. There's never anything that's firing one cylinder on its own. There truly is a domino effect of connectivity between all the programs we have going on right now.

From a not working perspective, I mean, we're always hungry for more. That's kind of the bumper sticker of this company. But I've been here 15, 16 years, and I know what drives the business. It's orders, it's stores, it's market share. And the orders that you've seen, the stores that you're seeing are. Just think about what traditional growth has been for the pizza category. We are gonna be big winners from a share perspective. And once you do that, everything grows. Your franchisee profitability grows, your advertising fund grows, you get a moat, and our moat is filled right now with orders and stores and franchisee profits.

Sandeep Reddy (EVP and CFO)

David, I'll just tag on, on just clarifying a couple of the points. When you asked about volatility in sales trends in the U.S. We didn't see any volatility. We saw a very steady cadence. And the steady cadence of sales is really driven by the flywheel that Russell talked about on the loyalty program and the frequency that's continuing to build from there. We've seen that pretty consistently across the year, frankly, including the second quarter. So, we don't see the volatility at all. And I think the other question that you asked was the confidence in the Q4 comp. And as I said in the prepared remarks, we expect both Q3 and Q4 to be above the 3%.

Andrew Charles (Research Analyst)

So, but we just explained that Q3 may be slightly below Q2 because the timing of the boost weeks offset by Uber's ramp. Now, going to Q4, one of the things we talked about earlier was that loyalty is going to be a multi-year driver for us. So sure, we're lapping in Q4, the loyalty program launch, but we still expect to be seeing tailwinds and the compounding impact from the loyalty program in Q4. In addition, Uber continues to build. And so as with both those drivers, there's every case to look at 3% or more as very, very much within reach in the fourth quarter, and we are always hungry for more. So the more we do, the better it is. So we're really confident.

And because this is all transaction driven, it's really driving very strong economics. So franchisee profitability continues to grow, and I think that's actually driven by a significant performance on the supply chain side also, which you're seeing on the supply chain financials, that's going into the franchisee profits. So overall, very confident of our outlook for the back half of the year.

Operator (participant)

Thank you. Our next question comes from the line of Lauren Silberman from Deutsche Bank. Your question, please.

Lauren Silberman (Director and Equity Research Analyst)

Thank you very much. I wanted to ask about the value strategy. So you talked about the one boost week in the third quarter that leads to, I believe, one in the fourth quarter, clearly driving strong performance. Given the value focus in the industry, excuse me, what flexibility... What flexibility do you have to further increase promotional activity? And then are you seeing any increase in value mix, and how much is going through deals?

Russell Weiner (CEO)

Yeah, Lauren, thanks for the question. I think what we're doing in value is very special, and it's very different than what you're seeing in the industry right now, which, you know, I think folks, it's clear that, you know, there's been price taken, and folks are dealing back kind of individual items, telling customers, "Hey, this is what you can get on value." What we've done, and we've done this since, you know, 2009, when we launched Mix and Match. Our Mix and Match offer, value is two things: Value is the price, but it's the price for what you want. If the price for what you want is high and the price for something you don't want is not high, that doesn't really do much.

Andrew Charles (Research Analyst)

And so when you think about all of our platforms, you think about pizza, you think about pasta, sandwiches, desserts, salads, breads, chickens, all of those things consistently have been part of our promotional value plays since the end of 2009. And having that consistency, when people wake up in the morning and decide where they want to order, they know that they can trust Domino's. That trusted value is leading to the order count you're seeing, and then they become part of that loyalty flywheel. And so I just, I think it's important to make sure we explain our approach to value is not just price. It's about, price for what, people actually, you know, want to order. And that's, as you've seen over this time period, a very sustainable way to grow.

Operator (participant)

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

Gregory Francfort (Senior Analyst)

Hey, Russell, I love the domino effect reference there. But I just had a question on the incrementality of Uber and just some of the commentary there. I think you guys, you've had it in for about 9 months. Can you talk about what you've learned and maybe how you're changing some of the marketing message over the last maybe 3 or 6 months? And then any update on thoughts on DoorDash into next year? Should we still expect something on that and maybe what the timing would look like? Thanks.

Russell Weiner (CEO)

Thanks, Greg, and we're gonna send you the domino effect bumper sticker after this, so you wanna, you wanna look out for that. You know, Uber is performing as we thought it would. It's doing so in a little bit of a different way, and I talked about it last quarter, but I think it's worth bringing up again. So first, from a sales perspective, you know, it's about 1.9% of sales, and, you know, we're tracking towards our goal this year of 3% of sales. How it's coming is a little bit different, and what we've seen is really an uptick more in a high-low strategy. Originally, you know, our approach was, okay, if we have a kind of an everyday low price, not compared to our channels, right?

Andrew Charles (Research Analyst)

Still the lowest price loyalty program in our channel. That would be the way to win. But actually, it's whether it's how customers shop or part of the algorithm or a little bit of both, starting out with a slightly higher price that you can discount from is a way to get more eyeballs. And so, you know, we've continued to test and pivot that way, and you're seeing it in the results. So again, we're the year is folding like we thought it would. And so what that leaves us with, your question about DoorDash is, the current exclusivity with Uber runs through Q1. At that point, whether or not we renew is our choice, and so we'll be looking at the economics and potential at that point.

But that would be the time to think about, do we stay exclusive or do we open up to, you know, a DoorDash or other aggregators? We've talked about the billion-dollar opportunity for us is really our fair share on all of the aggregators, which in about, you know, three years or so, is what we hope to get to.

Operator (participant)

Thank you. And our next question comes from the line of John Ivankoe from JP Morgan. Your question, please.

John Ivankoe (Managing Director and Equity Research Analyst)

Hi, thank you. You know, it's especially in the context of closures, you know, in France and, you know, in Japan, I ask about impacts of store splits in the U.S. You're currently at around a 2.5% store growth rate, you know, in the U.S., which is actually high for a fairly mature brand. So, you know, talk about what you see as net, you know, I guess cannibalization, whatever you wanna call it, what negative impact on same store sales from store splits? And is there any learning, you know, on, I guess, either side of the Atlantic or either side of this, the Pacific, as it may be, in terms of who is learning for who—who is learning from who in terms of how markets can be penetrated?

Andrew Charles (Research Analyst)

Is it that they didn't necessarily follow the same site model that you do, or do you have any opportunities to kind of look, you know, look at them in terms of how densely markets can be penetrated? I just wanna, you know, I guess, have a sense of, you know, your, you know, level of risk acceptance in terms of, you know, hitting your U.S. store targets without, overly encroaching on your existing current asset base. Thank you.

Russell Weiner (CEO)

Yeah, John, I'll take that. And, maybe I'd start with the fact that, I remember when we used to actually, disclose what, headwinds of splits were. So the fact that we're not disclosing them anymore can give you a sense of, how material, they are. The great thing about the Domino's model and us, you know, leaning into carryout, you know, about a decade ago, is 80%, when you split a store, 80% of the carryout volume is incremental. And so, you know, that right away, when you're splitting a territory, you're getting all these customers. So look, customers, they don't wanna drive past four pizza places on their way to a Domino's.

Andrew Charles (Research Analyst)

So the more Domino's we have, the more carryout business we drive, and you can see how on fire carryout is. The number that Sandeep took you through was same store sales for carryout. That has nothing to do with all the carryout sales we're driving from new stores. Then what happens when you split these stores, not only does your carryout business get better, but remember I talked earlier about our delivery times being 10% better than they were two years ago? Sure, it's a lot of the programs that we're driving with our franchisees, but it's also when you split stores, you get closer to your customers. When you have more consistent delivery, those customers come back more. So it really is a, it, it's a wonderful cycle when it's really going well.

Actually, one, what I'd say is, because you'd asked about international learnings, one that DPE was one of the first folks to do in Australia. You know, they got a 50% market share in Australia, and a lot of it was through, you know, penetration with new stores and obviously tightening their delivery areas, growing their carryout business. What they talked about that they saw in Japan was they probably they probably split a little too fast. But doing it strategically over time has been a winning formula. They've shown it, and I think that's been a huge driver of our market share.

Operator (participant)

Thank you. Our next question comes from the line of Sara Senatore from Bank of America. Your question, please.

Sara Senatore (Senior Finance Executive)

Thank you. I have actually sort of one just clarification, and then a question on the new restaurant growth. So if the clarification was just quickly on the pricing versus cost inflation, and whether franchisees are seeing something similar. Obviously, you're still on track for the franchisee profitability targets, but, you know, pretty modest price increase that clearly didn't cover inflation for labor insurance. Is that kind of the dynamic that we should expect to see broadly going forward, or was there any, anything kind of one time in this quarter, that, you know, specifically perhaps around insurance? But then the question on net restaurant growth is about-... You mentioned, you know, strength in China and India.

Andrew Charles (Research Analyst)

Could you just maybe in broad strokes talk about what volumes look like in different parts of the world? So, you know, a closure in Australia presumably is, you know, a higher volume or let's say lack of openings in Australia, more of a hit to volumes for retail sales overall than perhaps openings in China and India. I mean, that would be my guess, but perhaps that's not accurate. Thanks.

Sandeep Reddy (EVP and CFO)

So, Sarah, let me start with the clarification on pricing versus cost inflation. I think you're talking about the corporate stores particularly. Really, if you look at what happened on the corporate stores, and we had an insurance charge in the quarter that actually resulted in margins contracting, and if you actually strip out that insurance charge, margins were roughly flat and profit dollars grew. Really speaking, when we look at our franchisee profitability, that's pretty much the dynamic. We're looking at profit dollar growth, and that's exactly what we're expecting to see. And frankly, we expect to see that in corporate stores as well as we actually go through the year. We continue to expect to see both margin improvement as well as profit dollar growth on the corporate stores as well.

Andrew Charles (Research Analyst)

And then I think, specific to restaurant growth in China and India, and in your comment on the size of the stores, the closures that we're talking about essentially are very low volume stores. So from that perspective, I think, they're not necessarily comparable to the averages across all the different markets. And so, I think the drag is relatively small with the closures that we're talking about, specifically in Japan and France. And the growth opportunities continue to be robust. And the China stores, they've actually put out releases talking about their new store openings and the kind of record sales they're generating over there. So very exciting to see the growth coming from China.

Russell Weiner (CEO)

And I'd add to that, Sara, for us, and I think really for the industry, when you think about the best way to cover cost inflation, assuming margins are, you know, in the area of where they should be, the best way to do that is by driving order count versus price. And so cost inflation, for some folks, may be a negative thing. For us, given our scale, because we can drive more order counts, if we can get away with doing that without pricing and getting frequency, we're gonna do that all day, and that's what's happened. And I look—I just wanna give a nod to our insights team, because, you know, one of the questions earlier was about, you know, pricing in this environment right now and headwinds with the customer.

Andrew Charles (Research Analyst)

Well, through our research, we knew we figured out when it was time to take price, and we also figured out when it was time not to take price. And all of those decisions are what's leading into the results you see now, and it will continue to drive what we decide to do moving forward. Now, the best piece of it, too, is, you know, the research, a lot of it is, you know, it's numbers, but then it gets translated to real life when you put it down to the stores. And then what you do is you watch what consumers do, and you watch what your franchisees do.

And what's been great is obviously the order counts, so consumers are happy, but franchisees are sticking with the recommendations, not only obviously on their national offer, but local offers and menu pricing. And so this is something that I think is proprietary for us and has worked and will continue to work over time.

Operator (participant)

Thank you. Our next question comes from the line of Danilo Gargiulo from Bernstein. Your question, please.

Danilo Gargiulo (Restaurants Senior Analyst)

I was wondering if you can give a little bit more color on what you think, at least in your view, what is causing the softness in unit opening by DPE? And more specifically, also, if you can share what is your level of confidence that international store openings and closure pressures is going to be limited only to DPE, and that we're not gonna see another potential reduction in the guidance later on with other master franchisees coming in softer versus your original expectations? Thank you.

Russell Weiner (CEO)

Yeah, Danilo, I'll let DPE's release kind of speak to what they're thinking about those closures. So they talked about Japan being a little bit aggressive in openings, and now they're seeing kind of the results of that. What gives me confidence about the rest of the piece of the algorithm is, you know, as an example, I said earlier, DPC Dash and Jubilant, they're gonna be 40%-50% of our openings, and they each increased their outlook. And so the beauty of being in over 90 countries around the world is, look, I'm not trying to look away from what clearly was a miss on one part of the business, but a good business is able to kind of handle that.

Andrew Charles (Research Analyst)

And that's what being in 90-plus markets helps us do. And all of these levers that end up leading to the 7%+ on the sales basis and the 8%+ on the profit basis really show how that is made up in times like this. Anything to add?

Sandeep Reddy (EVP and CFO)

No, that's great.

Russell Weiner (CEO)

Okay.

Operator (participant)

Thank you. And our next question comes from the line of Peter Saleh from BTIG. Your question, please.

Peter Saleh (Managing Director and Restaurants and Food Distributors Analyst)

Yeah, great, thanks for taking the question. I wanted to ask about the. You know, you guys mentioned positive order counts in both delivery and carryout in the U.S.

Andrew Charles (Research Analyst)

... Can you just talk a little bit about, are these new customers, are these lapsed users? And just any thoughts on that, call it, lower income consumer are you seeing? I know you said you were seeing growth across all income cohorts, but any thoughts on what you're seeing there? Is that accelerating? Is it stable? I guess that's my first question. And just to follow up on that, on the store closures from DPE, Sandeep, you said they're very low volume. Is there any way to give us an order of magnitude of how low these stores are in terms of volumes, just so that we understand? Thank you very much.

Russell Weiner (CEO)

Yeah, maybe, Sandeep, you can, the other way to look at that is just talk about the profit impact.

Sandeep Reddy (EVP and CFO)

Yeah, no, I think, so on, on this, let me start with the second part of the question, right? Which is the store volumes and, and what's, what's gonna happen. Very low volume in relative terms to the rest of the fleet and rest of the market, in all the stores that are closing in Japan and France. So the impact is so immaterial to the profit number, it's, it's in a, in a few million dollars, I mean, and on a forward basis for 2025, and will have a very limited impact even on 2024, considering we're only halfway through the year. So, very small, to, to answer your question, from that piece.

Russell Weiner (CEO)

Yeah, Peter, just on the first question, you know, what I'd say about the order count, and I try to stress this by giving the specifics of delivery and carryout in every income segment, is we've got some of the most balanced order count I've ever seen. And I believe that's also true for the not only in our history, but also just in the industry right now. Your specific, you know, question on the lower income customer, yeah, the order count there is positive as well. And part of that was intent, not only from our pricing, but as we put the loyalty program together. Remember, you used to have to have two things: You had to buy $10 worth of food to get any points.

Andrew Charles (Research Analyst)

Now it's $5, so that hurdle's a little bit easier. You used to have to buy 6 times to get something free. Now you can buy, get some free after 2 orders, which is great for the customer, actually great for our franchisee, too, because the margin on the 20- and 30-point item is much better on, on those orders than the 60. So it's not like we just kind of fell into, um, this. This was intent in both the design of our pricing and the design of our loyalty program, and it's, it's not going away.

Sandeep Reddy (EVP and CFO)

The beautiful thing, Pete, is it's so balanced across all income cohorts, and I think it really reflects what Russell's talking about. And that consistency has been seen all through the first half of the year.

Operator (participant)

Thank you. Our next question comes from the line of Chris O'Cull from Stifel. Your question, please.

Chris O'Cull (Consumer and Retail Equity Analyst)

Yeah, good morning, guys. Russell, just given the success of the New York-Style Pizza, can you talk more about this innovation with intent strategy? And it's just part of that answer, can you maybe touch on whether the innovation you expect to launch later this year will leverage that approach?

Russell Weiner (CEO)

Yeah, sure, Chris. Well, I'll tell you, the one thing that did not drive New York-style Pizza was the guy in the spot, which, for those of you who don't know, was me. Sandeep keeps telling me I have a face for radio, so we'll see when it's time for your performance review, how that works out. But yeah, so New York-style Pizza, this idea of innovation with intent, if you look back the last 15, 16 years at Domino's, there are, I can't think of more than two products that we've launched that we've taken off the menu. Launching a new product takes a lot of money, takes a lot of time, and so there needs to be a strategic role in it. Whether or not you are successful is whether or not those items are still there.

Andrew Charles (Research Analyst)

So you think about ... Well, I'm not gonna really give you any forward looking of it to say, you know, we're gonna continue to do two a year. New York-style pizza, right? We talked about this is a customer that may not like our, our traditional crust as much, so there's a reason for doing it. If you think about what we did last year with Pepperoni Stuffed Cheesy Bread, okay, putting pepperoni in something is probably not the most innovative thing in the world. But guess what? It reminded people that we had stuffed cheesy bread. And when you have all of these platforms, and, and, and remember, Chris, 40% of what we sell is not pizza. You got to figure out a way to continue to talk about pizza, but continue to remind people that you have these platforms.

And so, you know, maybe those are two good examples of intent. One is going after a customer that probably doesn't frequent Domino's, and the other is reminding people of a platform that when they add to their order, increases the ticket and is more profitable for our franchisees.

Operator (participant)

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

Brian Harbour (Equity Research Analyst)

Yeah, thanks. Good morning, guys. If I could just follow up on some of the comments about store margins. So if you kind of set aside that insurance impact, I mean, is this mostly just about there being still pretty significant wage inflation? Do you think that's kind of the case through the balance of this year? Obviously, you did have, you know, order count growth, right? But it sounds like that's kind of being offset on the labor side. And I don't know if maybe there's, you know, any sort of product mix dynamics that have also affected that. Could you just talk more about, you know, the store margin dynamics?

Sandeep Reddy (EVP and CFO)

Yeah. So, Brian, I think the thing that the company stores is essentially it's a much smaller data set, right? Because we've only got about 60 MAs in which we're operating. And yes, there was some wage pressure that we were actually dealing with as we went through the first half. But we're getting closer to lapping some of those the wage pressures that we took. And overall, when you look at the economics of the stores, they're actually, on a first half basis, still pretty good and definitely ex the insurance adjustment still expanding and growing. We expect that to continue to happen. That's why I said for the full year on the company stores, I still expect our margins to be better and our profit dollars to grow.

Andrew Charles (Research Analyst)

And I think what I want to emphasize is we shouldn't view company stores as an analog to what's happening on the franchisee stores because the data set is so limited in relative terms. On the franchisee stores, we're seeing very, very balanced profit growth across the business, and that's what gives us confidence that the $178,000 or more is definitely on track.

Russell Weiner (CEO)

Yeah, and I'll just maybe build on that. You know, the question on the lap just reminds me of an earlier question we had about Q4 and Emergency Pizza and how we're gonna lap that potential headwind. And I guess what I'd say there is, we are in the business of creating headwinds. I love the questions on headwinds because that means we did something really successful, that folks are wondering, "Oh, how are we gonna lap?" Well, we're in the business of creating headwinds, and we're in the business of beating those headwinds. And so I'm not concerned about that, and I know what the team has going, and they're up for the challenge.

Andrew Charles (Research Analyst)

And if you think about Emergency Pizza, during this time now, where you are seeing a lot of price out there from folks, I think, you know, who has what price point is gonna be, as I always talk about at consumer savviness, how are you gonna know when an ad is over, you know, who owned this particular price point? Everyone in the country knows who owns Emergency Pizza, and so we have things like that, Carryout Tips, You Tip, We Tip. That's renowned value. And so there are. As you see more and more discounts to customers, as I think different restaurants are adjusting to pricing, I believe there's gonna be a lot of noise in that. And what our team does really breaks through that noise.

Operator (participant)

Thank you. Our next question comes from the line of Todd Brooks, from The Benchmark Company.

Todd Brooks (Equity Research Analyst)

Hey, good morning. Thanks for taking my question. Just a quick follow-up on loyalty. Sandeep, I think when you talked about loyalty last quarter, that you talked about the 20- and 40-point reward tiers being the majority of redemptions. Wanted to see if that trend is continuing to go going forward. And with enough time passing, do you have a sense that somebody that redeems at a lower point level tends to continue to do so? So it's almost a faster frequency flywheel coming from loyalty, if those customers stick at those lower redemption tiers. Thank you.

Sandeep Reddy (EVP and CFO)

So, Todd, you asked the question and answered it yourself. Really, it's exactly that. We have been seeing very consistent trends in terms of the redemption of the 20 and 40-point levels, and it is driving that frequency flywheel as we go along, because they're continuing to transact and redeem. That's what we're very confident on continuing as we move forward into a multiyear flywheel.

Russell Weiner (CEO)

Yeah, and, you know, back to the question before, Todd, that reminds me of the innovation with intent. Innovation with intent is not just new products. It's a loyalty program and how you put your renowned value together. So with Emergency Pizza, if you recall, you buy a pizza, you can get a free one in a month. Well, you do that, all of a sudden, you're part of our loyalty program. You're at 20 points, you're getting a free item. With our tipping program, either carryout or delivery one, if you buy one, you're part of the program. You then use your tip, you've got a second item if you're part of the loyalty program, and you're redeeming.

Andrew Charles (Research Analyst)

The most important thing about our new loyalty program is getting people to understand how easy it is to earn. The programs that we're putting out there aren't just driving sales, they're driving that clarity for folks about, "Wow, I can get stuff really quick.

Operator (participant)

Thank you. And our next question comes from the line of Christine Cho from Goldman Sachs. Your question, please.

Christine Cho (VP and Equity Research Analyst)

Hi, thank you. So, I know you have just had the worldwide rally in May, so really curious to hear some of your key, key takes from the event. What were any surprises? What were the areas that your franchisees around the world are most excited about, most worried about? Any common strategic priorities that have come up there will be great. Thank you.

Russell Weiner (CEO)

Yeah, Christine, this was a fantastic rally. And it's not just me saying it. Here's, I'll give you some numbers on it. You know, we do quantitative studies on everything here at Domino's, so we do it on our rally. It was the highest rally we've ever had as far as people, but the scores of attendees, we've never had a higher one. And this one blew my mind. I'll get you out later if I'm sharing something I shouldn't. But one of the things we ask people is, did you take away the key message? And the results there were 98% took away a key message. We've never had numbers anywhere like that. And the cool thing was people were leaving the rally...

Andrew Charles (Research Analyst)

You know, a lot of times you do these rallies and whatever they're called, you know, like the bumper sticker, you know, we're gonna send out earlier, it really is more, what does the T-shirt look like? Or what do people shout? Hungry for More is more than that. Folks came away knowing what jobs they needed to do. And so the really cool part for me were, for example, the U.S. franchisees leaving and saying: I got it. I'm responsible for the M and the O, making sure the food we make it delicious, and we deliver it the right way. We had international franchisees saying, "Ah, this idea of renowned value is really, really interesting." And what happened?

We went back and, you know, you've seen changes in the marketing in a lot of our international markets because of Hungry for More. And so, I just believe it not only talks about the strength of our system, it's nice to have, you know, profitable franchisees all in one place. They're all pretty happy. But when they come away talking about the future, is what makes us really excited.

Greg Lemenchick (VP of Investor Relations)

Thank you, Christine. That was our last question of the call. I want to thank you all for joining our call today, and we look forward to speaking with you all again soon. You may now disconnect.

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!