Domino's Pizza, Inc.

Good morning, ladies and gentlemen, and welcome to the Domino's Pizza Incorporated fourth quarter year end 2020 earnings webcast. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your text or telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Speaker Chris Brandon, Director, Investor Relations to Levy. Please go ahead.

Appreciate it, Nora, and good morning, everyone. Thank you for joining us for our conversation today regarding the results of our fourth quarter and full year 2020. Today's call will feature a commentary from Chief Executive Officer Rich Allison and Chief Financial Officer Stu Levy. As this call is primarily for our investor audience, I ask all members of the media and others to be in a listen-only mode. I want to remind everyone that the forward-looking statements in this morning's earnings release and 10-K also apply to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecast. And for more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call. Our request to our coverage analysts, we, as always, want to do our best to accommodate all of you today. So we encourage you to ask only one one-part question on this call if you would, please. Thank you. Today's conference call is being webcast and is also being recorded for replay via our website. With that, I'd like to turn the call over to our Chief Financial Officer, Stu Levy.

Thanks, Chris, and good morning, everyone. We're excited to discuss our fourth quarter and annual results with you today. Overall, we had a very strong Q4 and full year 2020, despite the ongoing global challenges presented by COVID-19. Before we jump into the numbers, I would first like to remind everyone once again that our fourth quarter included an extra week this year, which also included New Year's Eve and New Year's Day, both of which are typically major sales days. We have an extra week in our fiscal year every five or six years, depending on how the calendar falls. Typically, Our fiscal year consists of three 12-week quarters and a 16-week fourth quarter. But in 2020, our fourth quarter consisted of 17 weeks. In the earnings release we filed this morning, the impact of this additional week has been adjusted out of our 2020 results as an item affecting comparability. The next time this will happen is in 2026. Turning to our results. Overall, our team members and franchisees around the world generated strong operating results, leading to a diluted EPS of $3.85 for Q4 and $12.39 for the full year. Our diluted EPS, as adjusted for the extra week in our fiscal year, was $3.46 for Q4 and $12.01 for the full year. Here's some additional detail on the components of our earnings. In Q4, global retail sales grew 21.7% as compared to Q4 2019. As a reminder, global retail sales growth includes both comp growth and unit growth, which I'll break down for you in a moment. Our global retail sales in Q4 were benefited by the extra week and also by a weaker dollar. When excluding the extra week and the positive impact of foreign currency, global retail sales grew 12%. For the full year, our global retail sales grew 12.5%. When excluding the extra week, and the negative impact of foreign currency, global retail sales grew 10.4%. Breaking down our global retail sales growth, our US retail sales grew 22.8% during Q4 and 17.6% for the full year. When excluding the extra week, US retail sales grew 14.3% in Q4 and 15% for the full year. Our international retail sales grew 20.7% during Q4 and 7.5 percent for the full year. When excluding the extra week and the impact of foreign currency, international retail sales grew 9.9 percent for Q4 and 5.9 percent for the full year. During Q4, we continued to see positive momentum in our international business, including a reduction in temporary store closures and other operating restrictions, which contributed to sequentially stronger same-store sales performance and an increase in net units, which I'll discuss in more detail momentarily. Turning to comps. During Q4, we continued to lead the broader restaurant industry with 39 straight quarters of positive U.S. comparable sales and 108 consecutive quarters, or 27 years, of positive international comps, both truly remarkable achievements. Same-store sales in the U.S. grew 11.2% in the quarter, lapping a prior year increase of 3.4%. And same-store sales for our international business grew 7.3%, rolling over a prior year increase of 1.7%. As a reminder, our same-store sales growth is not affected by the extra week. Breaking down the U.S. comp, our franchise business increased 11.4% in the quarter, while our company-owned stores were up 8.1%. The U.S. comp this quarter was driven by a healthy mix of both ticket and order growth. Within that mix, our ticket growth was driven by an increase in items per order, and a higher delivery mix, which often comes with an associated transparent delivery fee. The 7.3% international comp was driven by ticket growth. Similar to in our U.S. business, that ticket growth was driven by both a higher item count and a higher delivery mix. Shifting to unit count, we and our franchisees added 116 net stores in the U.S. during the fourth quarter, consisting of 118 store openings and two closures. For the full year, we and our franchisees opened 229 net US stores. Our international business added 272 net stores during Q4, comprised of 328 store openings and 56 closures. For the full year, we added 395 net international stores. In total, we and our franchisees opened 624 stores globally in 2020. We're very pleased with our ability to continue to grow units during the pandemic and particularly encouraged by our strong growth in Q4. However, we do still face some challenges opening stores in certain markets, including delays in construction and permitting, which we will continue to monitor moving forward. Regarding revenues and operating margins, total revenues for the fourth quarter were $1.4 billion and were up $206 million, or 17.9% from the prior year quarter. Total revenues for the year were $4.1 billion and were up $499 million, or 13.8% from prior year. The extra week increased revenues by an estimated $88 million. The remaining increase was driven by higher global retail sales, which in turn drove higher revenues across all areas of our business. Changes in foreign currency exchange rates positively impacted our international royalty revenues by $0.4 million in Q4 as compared to Q4 2019, and negatively impacted our royalty revenues by $3.9 million for the full year as compared to 2019. Our consolidated operating margin as a percent of revenues increased to 39.5% from 38.9% in Q4 2019 due primarily to higher revenues from our U.S. franchise business partially offset by investments made related to the COVID-19 pandemic. Company-owned store margin as a percent of revenue decreased to 21.9% from 24.4% in Q4 2019 and was negatively impacted by higher COVID-related labor costs. As we announced in December of 2020, we paid a special bonus to our frontline workers to thank them for their contributions throughout the pandemic. Supply chain operating margin as a percent of revenue increased to 11.6% from 11.1% in Q4 2019, driven by operating efficiencies and reduced fuel expenses. G&A expenses increased approximately 19 million in Q4 2020 as compared to Q4 2019. For the full year, our G&A was 407 million, an increase of approximately 24 million as compared to prior year. We estimate that 6 million of these expenses were incurred as a result of the extra week this year. The remaining increase primarily related to higher variable performance-based compensation expense and professional fees and was partially offset by lower travel expenses. Net interest expense increased approximately $8 million in the quarter as compared to Q4 2019. We estimate that $3 million of this increase was driven by the extra week this year. The remaining increase was driven by a higher weighted average debt balance resulting from our 2019 recapitalization transaction and was partially offset by a lower weighted average borrowing rate. Our weighted average borrowing rate decreased to 3.9% from 4.0% in Q4 2019 due to the lower interest rates on the debt outstanding in Q4 2020 as compared to Q4 2019. Our reported effective tax rate was 19.9% for the quarter as compared to 17.8% in Q4 2019. The reported effective tax rate in Q4 2020 included a 1.8 percentage point positive impact from tax benefits on equity-based compensation as compared to a 3.9 percentage point positive impact in Q4 2019. We expect to see continued volatility in our effective tax rate related to these equity-based compensation tax benefits. When you combine all of these elements, our fourth quarter net income was up 22.6 million, or 17.5% over Q4 2019. For the full year, our net income was up 90.6 million, or 22.6 percent over 2019. We estimate that the 53rd week positively impacted net income by 15 million in the fourth quarter and for the full year due to the additional week of sales and the associated operating leverage, which is included as an item affecting comparability in our earnings release. Our diluted EPS in Q4 was $3.85 versus $3.12 in the prior year, an increase of 23.4%. Our diluted EPS as adjusted in Q4 was $3.46 versus diluted EPS as adjusted of $3.13 in Q4 2019, an increase of 10.5%. Breaking down that 33 cent increase a bit, most notably, our improved operating results benefited us by 34 cents. Our lower diluted share count, driven by share repurchases during 2020, benefited us by 16 cents. I'll provide more detail on share repurchases in a moment. Higher net interest expense, resulting primarily from the higher average debt balances I mentioned earlier, negatively impacted us by 10 cents. And finally, our higher effective tax rate, resulting primarily from lower tax benefits on equity-based compensation, as I mentioned previously, negatively impacted us by 7 cents. For the full year, our diluted EPS was $12.39 versus $9.56 in the prior year, an increase of 29.6%. Our diluted EPS as adjusted for the full year was $12.01 versus diluted EPS as adjusted of $9.57 in 2019, an increase of 25.5%. Shifting to cash. Our economic model remains strong, and it continued to generate significant free cash flow throughout the quarter. During full year 2020, we generated net cash provided by operating activities of approximately $593 million. After deducting for CapEx, we generated free cash flow of approximately $504 million. Regarding our capital expenditures, we spent approximately $89 million on CapEx in 2020, primarily on our supply chain centers and technology initiatives. During Q4, we also repurchased and retired approximately 568,000 shares for $225 million, or 396 per share on average, bringing our 2020 total repurchases to 305 million. Subsequently, we've also repurchased an incremental 66,000 shares for $25 million year-to-date in Q1 2021. Related to our repurchases, we're also pleased to announce that, as you saw in this morning's earnings release, Our Board of Directors has approved a new $1 billion share repurchase program, which has replaced the remaining authorization under our existing program. Additionally, during Q4, we returned $61 million to our shareholders in the form of two $0.78 quarterly dividend payments, bringing our 2020 total dividend payments to $122 million. As we move into 2021, We're excited to announce that our Board of Directors has declared a quarterly dividend of $0.94 per share to be paid on March 30th, an increase of 21% over the previous quarter's dividend. When you add the share repurchases and quarterly dividends, the cumulative impact is that we returned more than $425 million to shareholders in 2020. Before wrapping up the financial update, I'd like to walk you through the impact of the COVID-19 pandemic on our Q4 results, as we have done in previous quarters. During Q4, the estimated total impact from safety and cleaning equipment, enhanced sick pay and other compensation for our team members, and support for our franchisees and our communities was $7 million. As we look ahead, we would like to remind you of the 2021 outlook items that we communicated in mid-January as well as provide you with a longer range outlook. We currently project that the store food basket within our U.S. system will be up 2.5% to 3.5% as compared to 2020 levels, and we do expect some volatility around that range quarter to quarter. We estimate that foreign currency could have a $4 million to $8 million positive impact on royalty revenues in 2021 as compared to 2020. We anticipate our gross capex investments to be approximately $100 million as we continue to invest in strategically growing our business, including in technology, innovation, new stores, and supply chain capacity. We expect our G&A expense to be in the range of $415 to $425 million. Keep in mind that G&A expense can vary up or down depending on, among other things, our performance versus our plan, as that affects variable performance-based compensation expense, as well as other areas such as corporate store advertising. In addition, in this morning's earnings release, we also announced our two- to three-year outlook of 6 to 10 percent global retail sales growth excluding foreign currency impact and 6 to 8 percent global net unit growth. We anticipate providing additional outlook measures if and when we have the appropriate visibility into the broader environment such that it would be meaningful for the investment community. In closing, Our business continued its strong performance during the fourth quarter and for the year, and we remain in very good shape financially. Obviously, we will continue to closely monitor all aspects of our business operations given these uncertain times. And finally, as I intend to do in each of these calls, I want to take a minute to thank our incredible team members and franchisees around the world. They're the reason our brand is able to generate these results. Thank you again for joining the call today, and I'll now turn it over to Rich.