Domino's Pizza, Inc.

Thank you for joining us today for our conversation regarding the results for the first quarter of 2022. Today's call will feature commentary from Chief Executive Officer Rich Allison and from our new CFO Sandeep Reddy and incoming CEO Russell Wiener. 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 10Q also apply to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 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 would like to accommodate as many of you as time permits. So we encourage you to ask only one one-part question on the call. 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 CEO, Rich Allison.

Thank you, Jenny, and thanks to all of you for joining us this morning. Before getting into the details of the first quarter, I would like to publicly welcome our new CFO, Sandeep Reddy, to the Domino's leadership team. Sandeep officially joined us on April 1st, and we are thrilled to have found such an accomplished finance leader. You'll hear from Sandeep in a few minutes. You'll also hear from Russell Wiener on today's call. Russell will officially step into the CEO role three days from now on May 1st. With Russell and Sandeep in place alongside our outstanding leadership team, I have enormous confidence in the future of this company and of our great brand. Let's now turn our attention to the first quarter. As you saw in our release this morning, Q1 was a challenging quarter, particularly on the top line for our US business. We got off to a slow start in January due to the Omicron surge, which impacted our stores and supply chain centers, further limiting our capacity to serve customer demand, particularly in the delivery channel. After a return to modestly positive US same-store sales in February, we turned negative again as we began to overlap the impact of the 2021 federal government stimulus in March and have continued to face that overlap in April. While we saw momentum continuing to build in Q1 in our U.S. carryout business, and in particular digital carryout, we are disappointed in our Q1 delivery results and still have a lot of work to do to restore growth in that important channel. I will also acknowledge that we are not satisfied with the sales or the margin performance in our corporate store business in the first quarter. Our team is fast at work on a comprehensive assessment and recovery plan to restore that business to the leadership role in our US system that we expect it to play. Consistent with our communications during our prior earnings call, we faced significant inflationary cost increases across the business in Q1. Those cost pressures, combined with the deleveraging from the decline in U.S. same-store sales, resulted in earnings falling short of our high expectations for the business. While the quarter was certainly challenged, we also saw the solid foundation of the Domino's brand and business model on display. As evidenced by our robust global store growth, it continues to demonstrate the strength of the Domino's operating models. along with our franchisees' ongoing commitment to investing and growth. During the quarter, we reached another significant milestone with the opening of our 19,000 global store. We have action plans in place that are designed to address the issues in our U.S. business, as well as other initiatives that we are developing. But that work will take some time, and we believe that we will continue to face pressure, both on the top line for our U.S. business, and on our bottom line earnings over the next few quarters. While we remain very optimistic about our ability to drive long-term profitable growth, in the near term, 2022 is shaping up to be a challenging year. Now, with that as a backdrop, I'll share a few additional observations on the U.S. business, followed by a brief review of our international performance. We have completed our analysis of U.S. franchisee P&Ls from 2021 and are pleased to share that our average estimated 2021 U.S. franchisee store level EBITDA came in at $174,000. With our strong four-wall economics, we remain bullish on the long-term unit growth potential in the U.S., and we maintain our conviction that the U.S. can be an 8,000-plus store market for Domino's. but we believe it may take some time to accelerate the pace of U.S. store growth beyond the current four-quarter run rate, given some of the continued development, supply chain, staffing, and inflationary headwinds we expect to continue to see in the quarters ahead. Staffing challenges continued during Q1, resulting in reduced operating hours and other service-related challenges in many stores across the U.S. business. To give you a sense for the magnitude, when we add up all the lost operating hours during the first quarter, U.S. stores were cumulatively closed the equivalent of almost six days across the entire U.S. business. As I shared last quarter, we believe it is instructive to break our U.S. stores into quintiles based on staffing levels relative to an essentially fully staffed store. When we compare sales performance across the quintiles in the first quarter, it gives us a sense for the magnitude of the impact that staffing continues to have on our U.S. business. Looking at Q1 same-store sales, stores in the top 20%, those that are essentially or close to fully staffed, on average outperform stores in the bottom 20%, those that are facing the most significant labor shortages by 12 percentage points. When we look across the U.S. business, we continue to believe that consumer demand for Domino's remains very strong across the country. It is our current capacity to serve that strong demand, particularly for delivery customers, that has continued to be our greatest near-term challenge. Now, I'll share a few thoughts specifically about the carryout and delivery businesses. The carryout business was very strong in Q1. with U.S. carryout same-store sales 11.3% positive compared to Q1 2021, driven by both ticket and order growth. On a three-year basis, our carryout same-store sales were up over 24% versus Q1 2019. As of January 31st, our $7.99 national carryout offer is now available online only. This supports a balanced approach of bringing value and a great experience to our customers online and is aligned with our goals of growing the digital carryout business and enhancing the profitability of our carryout orders. Online carryout orders generate a higher ticket and require a lower cost to serve than phone carryout orders. In addition to driving digital engagement and the opportunity to add members to our loyalty programs, Thus far, we are very pleased with the initial results in our carryout business, with positive impacts on order counts, ticket, store-level margins, and in particular, digital penetration. During the quarter, we began a strategic campaign to support a transition to online carryout for our customers by offering a $3 tip for each online carryout order. This approach also aims to drive repeat purchases as the tip comes in the form of a coupon that the customer can use on their next order, which must be used the week after the initial purchase. Tying back to my comments earlier around the staffing quintiles, it's useful to note that we saw almost no difference in carryout same-store sales performance across the quintiles in the first quarter. We believe the relatively low labor intensity associated with carryout has largely insulated this business from the staffing challenges we see impacting delivery. Turning now to the delivery business, Q1 delivery same-store sales declined by 10.7% relative to Q1 2021, driven by order count declines offset in part by higher ticket. Looking at the business on a three-year stack, Q1 delivery same-store sales remained almost 6% above Q1 2019 levels. When we look at the same quintiles relative to the delivery business, we see the stark impact that staffing had during the first quarter. We saw a 17 percentage point gap in delivery same-store sales between stores in the top 20% and those in the bottom 20%. It is this disparity in delivery performance that is driving the overall contrast in performance across our U.S. business. The gap between our top performers and our bottom performers has widened over the past year, and we are keenly focused on lifting up the underperforming stores. On March 14th, we evolved our long-running $5.99 mix and match offer for the first time in over 12 years. Our delivery mix and match offer is now $6.99 each for any two or more items on the mix and match menu. We believe that $6.99 is still a great relative value for our delivery customers, offering variety, great taste, and a competitive price, while also reflecting the increased costs inherent in a delivery order. This approach can allow our franchisees to achieve balanced growth across ticket and orders, which is key to driving profitable long-term growth for their businesses. We are also bringing more value to our customers by adding three great products to the mix-and-match menu, 32-piece Parmesan bread bites, 6-piece wings, and 3-piece chocolate lava cakes. Customers can now have even more variety with more than a dozen items to choose from as they assemble their meals. We made these changes in part to manage through the significant cost inflation facing the business, and we did it using the same balanced approach we have successfully executed over the last decade by offering great value to our customers while giving our franchisees the tools to profitably grow their businesses over the long term. As we just implemented these changes to mix and match on March 14th, the new offers were only in place for two weeks of the first quarter. It is still very early, but so far results are fairly consistent with our expectations. Russell will be able to share more with you on the Q2 call in July. I'll turn now to our international business. It was another strong quarter of performance for our international business. I'm pleased to report that this was our 113th consecutive quarter of positive same-store sales growth in our international business. We are also encouraged that growth during the quarter was driven by a mix of ticket and order count increases, as franchisees continue to provide great value to their customers globally. A clear highlight for the quarter was the outstanding store growth momentum that continued to build across our international business. When combined with our U.S. store growth, our trailing four-quarter global net store growth of 7% aligns squarely within our two- to three-year outlook range of 6% to 8%. Forty international markets opened at least one new store during the first quarter, demonstrating the broad and balanced growth across the business. I'll now highlight a few international markets of note. India once again led our international markets in store growth and opened their 1500th store during the quarter. This was accompanied by continued same-store sales growth. We also continue to see strong sales and store growth from China. And I'd like to congratulate Alamar Foods, our master franchisee across 11 markets in the Middle East and North Africa, on the opening of their 500th store during the first quarter. Other markets of note with strong growth in the quarter included Mexico, Spain, Turkey, Taiwan, Iceland, and Guatemala. our master franchisees across the globe continue to show resilience and a strong belief in the future of the Domino's brand in their markets. The combination of our global brand and systems with their local expertise gives me great confidence in both the long and short-term growth prospects in international. And with nearly 96% of the global population and 75% of the world's GDP residing outside the U.S., We are just getting started. I'll turn it over now to Sandeep, who will take you through the details of the quarter. And after that, Russell will share his views on the road ahead and the actions we and our franchisees are taking to drive growth in the U.S. business. Sandeep, over to you.

Thank you, Rich, and good morning to everyone on the call. I'm thrilled to now be a part of the Domino's team. Having had the privilege of working with many great brands over my career, This opportunity to work with such an iconic global brand with enormous growth potential is very exciting to me. I look forward to partnering with Russell and the leadership team as we craft a roadmap to continued value creation. To start with, I would like to comment on one of my initial observations in the past few weeks as I start to learn the business. Given the softness and comparable sales trends in the U.S., and the resulting contraction of operating income as a percentage of sales in the first quarter, we expect margins for the rest of 2022 to be pressured. However, we are already actively working on several initiatives to drive improved profitability. These include, number one, exploring further optimization of our consumer pricing architecture in the United States. Specifically, This covers our many levels of pricing, which includes our standard menu pricing, national offers, local offers, and delivery fees to enable both our company-owned and franchisee stores to better cover the cost increases we are facing in both the food basket and labor market. Number two, efficiencies in our cost structure as we seek to ensure that revenues consistently grow faster than expenses. Number three, actions to accelerate our capacity to service the demand we see and generate incremental sales growth. Once implemented, we expect the initiatives I just covered to enable annual operating income margins to recover to pre-pandemic levels post-2022. I will now review our financial results for the quarter in more detail. global retail sales increased 0.3% in Q1 2022 as compared to Q1 2021. When excluding the negative impact of foreign currency, global retail sales grew 3.6% due to sustained positive momentum in our international business, lapping 14% growth in Q1 2021. As we've discussed in the past, we believe it remains instructive to look at the cumulative stack of sales across the business anchored back to 2019 as a pre-COVID baseline and will continue to do so for as long as we believe it is useful in understanding our business performance. Looking at the three-year stack, our Q1 2022 global retail sales, excluding foreign currency impact, grew 23.5% versus 2019. Breaking down total global retail sales growth, international retail sales, excluding the negative impact of foreign currency, grew 8.4%, rolling over a prior increase of 12.8%, and are up 28% on a three-year stack basis relative to 2019. U.S. retail sales declined 1.4%, rolling over a prior increase of 15.3%, and are up 18.8 percent on a three-year stack basis relative to 2019. Turning to comps, during Q1, same-store sales for our international business grew 1.2 percent, rolling over a prior increase of 11.8 percent, and were up 14.5 percent on a three-year stack basis relative to 2019. The international comp in the quarter was driven by both ticket and order count growth. Same-store sales for our US business declined 3.6%, rolling over a prior year increase of 13.4% and were up 11.4% on a three-year stack basis relative to 2019. Breaking down the US comp, our franchise business was down 3.2% in the quarter, while our company-owned stores were down 10.5%. We believe the difference in the top-line performance in our company-owned stores as compared to our franchise stores continues to be driven by more substantial operational challenges combined with more conservative price increases as compared to our franchise stores. The decline in U.S. same-store sales in Q1 was driven by a decline in order counts which were pressured by the very challenging staffing environment, which had certain operational impacts, such as shortened store hours and customer service challenges in many stores, both company-owned and franchised. The decline in order counts was partially offset by ticket growth, resulting from higher menu prices, as well as more items per transaction and increases to our average delivery fee. Shifting to unit count, We and our franchisees added 37 net stores in the United States during Q1, consisting of 40 store openings and three closures. We also completed the purchase of 23 franchise stores in the Detroit DMA during Q1, bringing our total company-owned store count to 400 as of the end of the quarter. The purchase of these stores allowed us to consolidate the market along with higher-performing franchisees and should unlock growth in the Detroit DMA. We believe there will be some markets where corporate stores can unlock growth and others where franchisees can optimize the market, as was the case with the sale of our New York corporate stores to franchise partners in 2019. We believe leveraging our corporate portfolio to unlock growth will be an important strategic use or source of capital in the United States going forward. Our international business added 176 net stores in Q1, comprised of 217 store openings and 41 closures. More than half of the closures were in Brazil, where our master franchisee remains highly committed to the Domino's brand while making strategic decisions to get out of some underperforming locations to focus resources and grow stores in other areas. This brought our net global store openings in the quarter to 213. Turning to revenues and operating income. Total revenues for the first quarter increased approximately $27.5 million, or 2.8%, from the prior quarter, driven by higher supply chain revenues resulting from higher market basket pricing to stores. This increase was partially offset by declines in our company-owned stores and U.S. franchise revenues due to the decline in retail sales I mentioned earlier. Changes in foreign currency exchange rates negatively impacted international royalty revenues by $4.3 million during Q1. Our consolidated operating income as a percentage of revenues decreased by 270 basis points to 16.3 percent in Q1 from the prior quarter, primarily driven by food basket and labor increases in excess of pricing increases, as well as G&A deleverage due to the decline in same-store sales in our U.S. business. Our dilutive EPS in Q1 was $2.50 versus $3 in the prior quarter. Breaking down that 50-cent decrease in our diluted EPS, our operating results negatively impacted us by 36 cents. Changes in foreign currency exchange rates negatively impacted us by 8 cents. The gain on our investment in Dash in Q1 of last year negatively impacted us by 5 cents. Our higher effective tax rate negatively impacted us by $0.04, higher net interest expense negatively impacted us by $0.15, and a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.18. Although we faced operating headwinds in Q1, we continued to generate sizable free cash flow. During Q1, we generated net cash provided by operating activities of approximately $79 million. After deducting for capital expenditures of approximately $12 million, which included investments in our technology initiatives, such as our next generation point of sale system and investments in our supply chain centers, we generated free cash flow of approximately $66 million. We invested $6.8 million in purchases of franchise operations in our Detroit DMA. We repurchased and retired approximately 101,000 shares for $47.7 million, or an average price of $473 per share. As of the end of Q1, we had approximately $656 million remaining under our current board authorization for share repurchases. And subsequent to the end of the first quarter, we also returned $40 million to our shareholders in the form of a $1.10 per share quarterly dividend payment. In addition, we would like to update the guidance we provided in March for 2022. Based on the continuously evolving inflationary environment, we now expect the increase in the store food basket within our US system to range from 10 to 12% as compared to 2021 levels. Changes in foreign currency exchange rates are now expected to have a negative impact of $12 million to $16 million compared to 2021. We anticipate that we will continue to see fluctuations in commodity prices, including wheat and fuel costs, and foreign currency exchange rates resulting from geopolitical risk and the impact on the overall macroeconomic environment. GNA is now expected to range from $420 million to $428 million as we cancel or delay some of the investments originally planned for 2022 and prioritize those projects we believe will be more near-term drivers of growth. CapEx is not expected to change from the $120 million projection we provided in March. Finally, while our global retail sales growth, excluding the impact of foreign currency in 2022, will likely drop below the low end of our 6 percent to 10 percent two to three-year outlook, we are confident that the long-term growth algorithm is still very much intact, and we expect to recover back to that range starting in 2023. Our practice has been to not comment on short-term sales trends in the business, and we do not plan to make a habit of doing so. However, based on the very unusual and volatile operating environment we and others are experiencing, we are making an exception in this case. On future investor calls, plan on us sticking with our two- to three-year outlook as the best indicator of our expected global retail sales trends. Thank you all for joining the call today, and now I will turn it over to Russell.