Domino's Pizza Inc

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2021 Domino's Pizza, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After this speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Chris Brandon, Director, Investor Relations. Thank you, and please go ahead.

Appreciate it, Samantha, and good morning, everyone. Thank you for joining us for our conversation today regarding the results of our first quarter 2021. Today's call will feature commentary from Chief Executive Officer Rich Allison and Chief Financial Officer Stu Leavies. 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-Q 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 forecasts. 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 want to do our best this morning to accommodate as many of you as time permits. So we encourage you to ask only one one-part question on this call, if you would please. 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. Good morning, everyone. We're excited to share our strong first quarter results with you today. Overall, Domino's team members and franchisees around the world generated impressive operating results, leading to a diluted EPS of $3 for the first quarter. Global retail sales grew 16.7% in Q1 as compared to Q1 2020. As a reminder, global retail sales growth includes both comp growth and unit growth, which I'll break down for you in a moment. When excluding the positive impact of foreign currency, global retail sales grew 14%. Breaking down that global retail sales growth, our U.S. retail sales grew 15.3% and our international retail sales grew 18%. When excluding the positive impact of foreign currency, international retail sales grew 12.8%. We continue to see positive momentum in both our U.S. and international businesses in Q1, leading to both strong same-store sales performance and net unit growth. Turning to comps. During Q1, we continued to lead the broader restaurant industry with 40 straight quarters of positive U.S. comparable sales and 109 consecutive quarters of positive international comps. Same-store sales in the U.S. grew 13.4% in the quarter, lapping a prior year increase of 1.6%. Same-store sales for our international business grew 11.8%, rolling over a prior year increase of 1.5%. Breaking down the U.S. comp a bit further, our franchise business was up 13.9% in the quarter, while our company-owned stores were up 6.3%. We observed a larger spread than we've historically seen between the top-line performance of our franchise stores and our company-owned stores, which we believe was primarily a result of the heavily urban and higher income footprint of our company-owned stores relative to a more diverse mix across our franchise base. The corporate store comp was also disproportionately impacted by store splits resulting from our fortressing efforts as we opened more new corporate stores as a percent of the total corporate store base than we did franchise stores in 2020. The U.S. comp this quarter included a healthy mix of both ticket and order growth. The ticket growth was driven by both an increase in items per order and a higher delivery mix, which also includes a transparent delivery fee. The 11.8% international comp was driven by ticket growth. Similar to our U.S. business, that ticket growth was driven by a higher delivery mix and an increase in items per order. Shifting to unit count, we and our franchisees added 36 net stores in the U.S. during the first quarter, consisting of 37 store openings and the closure of one of our corporate stores. Our international business added 139 net stores comprised of 160 store openings and 21 closures. We're very pleased with our net unit growth during Q1, which was an increase over the prior year quarter. Turning to revenues and operating margins, total revenues for the first quarter were approximately $984 million and were up approximately $111 million or 12.7% over the prior year quarter. The increase was driven by higher global retail sales, which generated higher revenues across all areas of our business. Changes in foreign currency exchange rates positively impacted our international royalty revenues by $2.1 million in Q1 2021 as compared to prior year. Our consolidated operating margin as a percent of revenue increased to 39.6% in Q1 2021 from 39% in the prior year. due primarily to higher revenues from our U.S. franchise business. Company-owned store margin as a percent of revenues increased to 23.9% from 22.4%, primarily as a result of strong sales leverage. This was also up sequentially from 21.9% in Q4 2020, driven by lower labor costs as a percent of revenue in Q1 2021. Supply chain operating margin as a percent of revenues decreased to 10.5% from 11.5% in the prior year quarter. As a reminder, in 2020, we opened two new supply chain centers in South Carolina and Texas, respectively, as well as a new pressed product line in New Jersey, which increased our overall fixed operating costs as a percent of revenue. G&A expenses increased approximately $2.8 million in Q1 as compared to Q1 2020, resulting from a combination of higher advertising expenses and labor costs partially offset by travel. Net interest expense increased approximately $0.9 million in the quarter, primarily the result of lower interest income. As previously disclosed, in Q1 2021, we invested an additional $40 million in Dash Brands, our master franchisee in China, following their achievement of previously established performance conditions. Accordingly, we remeasured the original $40 million investment we made in Q2 of last year due to the observable change in price from the valuation of the additional investment. This $2.5 million gain was recorded in other income in the first quarter of 2021. Our effective tax rate was 21.3% for the quarter as compared to a negative 3.7% in Q1 2020. The effective tax rate in Q1 2021 includes a 0.6 percentage point positive impact from tax benefits on equity-based compensation as compared to a 26 percentage point positive impact in Q1 2020. This decrease was due to significantly fewer stock option exercises in Q1 of this year. and we expect to see continued volatility in our effective tax rate related to these equity-based compensation tax benefits. Combining all of these elements, our first quarter net income was down 3.8 million, or 3.2 percent, versus Q1 2020. On a pre-tax basis, income before provision for income taxes was up 32.3 million, or 27.6 percent. Our diluted EPS in Q1 was $3 versus $3.07 in the prior year, a decrease of 2.3%. Breaking down that $0.07 decrease, most notably, our improved operating results benefited us by $0.61. The gain on the Dash Brands investment benefited us by $0.05. Net interest expense negatively impacted us by $0.02. A lower diluted share count, driven by share repurchases over the trailing 12 months, benefited us by 3 cents. And finally, our higher effective tax rate, resulting from lower tax benefits on equity-based compensation, as I mentioned previously, negatively impacted us by 74 cents. Shifting to cash. Our economic model continued to generate significant cash flow throughout the quarter. During Q1, we generated net cash provided by operating activities of approximately $153 million. After deducting for CapEx, we generated free cash flow of approximately $136 million. Regarding our capital expenditures, we spent approximately $17 million on CapEx in Q1, primarily on our technology initiatives. As previously disclosed, during Q1, we also repurchased and retired approximately 66,000 shares for $25 million. As a reminder, in February, our board approved a new $1 billion authorization for future share repurchases. We also paid a 94-cent quarterly dividend on March 30th. Subsequent to the end of the quarter, our board of directors declared a quarterly dividend of 94 cents per share to be paid on June 30th. As it relates to our capital structure, on April 16th, we refinanced our debt to keep pace with our growing business. We're very pleased with our gross issuance of $1.85 billion, which includes $850 million of 7.5-year 2.662% fixed rate notes and $1 billion of 10-year 3.151% fixed rate notes. We used a portion of the proceeds to retire our 2017 floating rate notes and our 2017 five-year fixed rate notes, to pre-fund certain interest payable, and to pay transaction fees and expenses. We expect to use the remaining proceeds for general corporate purposes, which may include distributions to holders of our common stock, other equivalent payments, and or stock repurchases. This recapitalization will reduce our weighted average borrowing rate from 3.9% as of the end of the first quarter to approximately 3.7%, and it will return our leverage to approximately six times EBITDA, consistent with our leverage model following previous recapitalizations. Additional information on this transaction is included in our Form 10-Q, which was filed this morning. Since the onset of the pandemic, in previous earnings calls, we've provided updates on the impact of COVID-19-related expenses, including safety and cleaning equipment, enhanced sick pay and other compensation for our team members, and support for our franchisees and our communities. The estimated impact of these items in the first quarter of 2021 was not material. In closing, our business continued its strong performance during the first quarter, and while we continue to closely monitor all aspects of our operations in these ever-changing times, We're confident in the strength and resilience of the Domino's brand and of the Domino's franchisees, their team members, and our corporate teams worldwide. Our results would not be possible without their tireless efforts each and every day, and we sincerely appreciate them. Thank you again for joining the call today, and I'll now turn it over to Rich.

Thank you, Stu, and thanks to all of you for joining us this morning. Overall, I am very pleased with our results this quarter and our strong start. to 2021. We are now more than one year into the COVID pandemic, the most challenging operating environment we've ever experienced as a brand. I continue to be extremely proud of our global franchisees and their extraordinary efforts around product, service, image, and day-to-day execution. We remain focused on providing outstanding food through safe and reliable delivery and carry out experiences. And as a brand, we are also proud to continue our position as an industry leader on value at a time when our customers need it the most. Today, I'll keep my comments rather brief as I highlight the first quarter results for our U.S. and our international businesses. And then after that, Stu and I will be happy to take some of your questions. Let's start with the U.S.

business.

Our U.S. business performed extremely well during the quarter, highlighted by 15.3% retail sales growth and a 13.4% comp. This marked our 40th consecutive quarter of positive U.S. same-store sales growth. We continue to see strong growth across our business in the first quarter, and we did not witness any material differences between those markets that have largely reopened versus those that have remained more restricted. We certainly saw some sales benefits from the federal government stimulus at the beginning and at the end of Q1, which were partially offset by the negative impact of the significant winter storms in February that impacted such a large portion of the country. Due to the positive sales impacts from the stimulus, we elected not to run any of our aggressive boost week promotions during the quarter, But instead, we remain focused on providing great service and offering great value to our customers every day. Now, like many of you, we are also watching the two-year stack on U.S. same-store sales. At 15% for the first quarter, we saw a slight sequential improvement of the two-year stack when compared to the fourth quarter of 2020. Given the COVID overlaps, we will continue to look at the business through both the one- and two-year lenses as we report to you throughout 2021. Now, beyond the comps, when you look at the absolute dollars, our first quarter same-store average weekly unit sales in the U.S. exceeded $26,000. I am also quite pleased with our performance in the first quarter on the other critical component of our retail sales growth. That's new store openings. Our addition of 36 net stores was a nice improvement over Q1 of 2020, and we anticipate a strong pipeline of future openings. I want to highlight that we had only one corporate store closure in the US during Q1, and we had zero, zero US franchise store closures, an impressive testament to the continued health of our U.S. system. On many occasions, you've heard me say that net unit growth and, by extension, store closures are one of the most important ways to measure a brand's health within our industry. A single store closure in the quarter on a base of over 6,000 units demonstrates the elite economic proposition that we offer to our franchisees. And on that note, I'm thrilled to report yet another record setting year of franchisee profitability with our final 2020 estimated average EBITDA number for US franchise stores coming in at just over $177,000, the highest in our history. While this result was certainly aided by the COVID demand tailwind, it clearly demonstrates not only the power of the brand, but also the incredible work of our U.S. franchisees and operators and their relentless efforts throughout an incredibly busy 2020. Our Fortressing Strategy continues to build best practice case studies showcasing franchisee enterprise growth and ROI, which is a big part of the momentum and excitement behind the strategy. But equally as important, it sets us up extremely well to compete in 2021 and beyond as we continue to drive lower relative costs, better service, higher runs per hour, and therefore better economics for drivers, along with meaningful incremental carryout within our stores in fortress territories. While carryout order count remained pressured in Q1, as it was throughout the last year, we continue to grow awareness of Domino's car-side delivery. This has created a new option to serve our customers effectively during COVID and will remain an important part of our strategy as we continue to evolve the carryout experience, not only to enhance the loyalty of our current carryout customers, but also to reach a new, different, and largely untapped drive-through-oriented customer going forward. On the advertising front, I'm excited about the national TV campaign we launched this week, highlighting our very exciting partnership with Neuro. We are delivering a true autonomous pizza delivery experience to select customers in Houston today, demonstrating our forward-thinking approach to innovation as we build and evolve the brand for the future. We also brought back our old nemesis, the Noid. in this ad campaign, and it is already generating some incredible buzz around the Domino's brand. Now the final thing I'd like to acknowledge as we close out the discussion on our Q1 results in the U.S. is the very difficult staffing environment that we are in today. The combination of COVID, strong sales, the broader economy reopening, and the high level of government stimulus It's creating one of the most difficult staffing environments that we've seen in a long time. This puts pressure on our operators to meet demand while continuing to deliver great service to their customers. I thank our U.S. franchisees and our corporate store operators for the work they are doing to attract and retain great team members in a very tight labor market. As we close out our discussion on the U.S. business, I would simply highlight that the Domino's brand is as strong as it has ever been, and I remain confident in our ability to drive long-term growth. Let's move on now to the international business. It was an outstanding quarter of performance for our international business. Our 12.8% retail sales growth was supported by a very strong 11.8% comp, continuing the momentum we saw toward the end of last year. Q1 also marked our 109th consecutive quarter of positive same-store sales in international, a tremendous accomplishment by our international franchise partners. And in fact, the Q1 comp was the strongest result we've seen in more than a decade in that business. As I discussed earlier with our U.S. business, we are also watching the two-year comp stacks for international and will continue to do so throughout 2021. Q1 represented a 13.3% two-year stack, which was a 430 basis point improvement versus the fourth quarter of 2020. We also continue to build momentum on store growth in our international business. Our 139 net stores in Q1 was a 100 store improvement versus the first quarter of 2020. We expect that COVID will continue to have a significant impact on many of our international markets for some time to come, and will bring ongoing challenges to new store openings. But this acceleration in growth speaks to our outstanding unit level economics and to the perseverance and commitment of our international master franchisees. We continue to have temporary store closures around the world, but those have come down dramatically over the last few quarters, and were below 100 at the end of the first quarter. Now, I'd like to highlight a few markets that drove terrific growth during the quarter. India, China, and Japan once again led our system in net unit growth. And I'd like to highlight another market, Guatemala, that also delivered terrific store growth. China, Japan, Turkey, Colombia, Germany, and France all drove impressive retail sales growth during the quarter. So once again, I am very proud of our master franchisees and their operators for a great start to 2021. They are the best in the business, and that's why I continue to be bullish about our international retail sales growth opportunity over the long term. So in closing, I'm very pleased with our quarter one results. Our incredible base of franchisees and operators, combined with outstanding unit level economics, placed us in an enviable position of strength within our industry. Q1 reinforced our position as the global leader in QSR pizza, but there is still so much opportunity ahead of us to drive global retail sales growth and to capture additional meaningful share within the category. As we look ahead to the rest of 2021 and beyond, we will, as always, stay focused on winning the long game, And we remain confident in our two- to three-year outlook of 6% to 8% annual net store growth and 6% to 10% annual global retail sales growth. So thank you once again for joining us today. And at this time, Stu and I will now be happy to take your questions.

Ladies and gentlemen, as a reminder, if you would like to ask an audio question, please press star, then the number one on your telephone keypad. and we ask that you limit yourself to one question. Your first question comes from the line of Brian Bittner with Oppenheimer.

Thank you. Good morning. Good morning, Rich. Good morning, Stu. Obviously, the U.S. business continues to be a phenomenal engine, and the long-term outlook there is pretty clear. But the topical question that I must ask is related to the U.S. business as it begins to lapse, the meaningful upswing in strength from last year that really began around this time. As we kind of sit here and we analyze your two-year trends in the first quarter, it does suggest actually an improving likelihood of successfully lapping that strength, at least with maybe the ability to perhaps hold on to those gains more than we all thought originally. Can I get your reaction to that thought and and what specific weapons do you have in your arsenal that you plan to deploy over the rest of the year to fight this lap? Thanks.

Hi, Brian, and thanks for the question. You're absolutely right. We've got some pretty strong laps ahead of us from the second and the third quarters of last year. But what we're really focused on are continuing to make the investments to drive long-term growth in the business. And as I look out across the rest of the year, we are really in an enviable position. We've got a fantastic advertising war chest. We have not deployed some of the tools this year so far that we've used in the past around our boost weeks to drive growth. incremental customer acquisitions. So we have those in our arsenal. And I think very importantly, the carryout business, you know, which on a relative basis, you know, when you look at order growth, you know, during 2020 was weak, you know, relative to its historical run rate. And so we've got an opportunity to continue to drive that carryout business, along with some, you know, some day and day parts during the week as well. You know, as it relates to, you know, last year weekends and late night were relatively weak versus weekdays and the earlier in the day day parts from last year. So as, you know, customer patterns continue to change, as the economy continues to open up, you know, we feel confident that we've got a set of tools to allow us to continue to grow our business.

Thank you.

Your next question comes from the line of Peter Saleh with BTIG.

Great. Thanks. Rich, I think you mentioned that the store level EBITDA was about $177,000 per store, which I think that number was almost $20,000 higher than the original estimate that you guys provided me back in January. Could you just give us a little bit of sense on you know, maybe what the difference is between the original estimate and the new figure that you guys actually reported this morning?

Sure, Pete. You know, when we give the original estimate, which comes back in early January, is based on a pretty limited sample, you know, of the franchisee P&Ls that come in. And, you know, over the course of the first quarter, as those begin to roll in, we collect them. And you know, rarely does it move this much from the original estimate to the final number, but just the way the sample played out over time, the result ended up coming in quite a bit stronger. And, you know, when I think about, you know, where we sit within the industry today, you know, that $177,000 in store-level EBITDA, you know, really puts our system in an incredible position of strength. And When you see it, you're not surprised that we only had one store that closed in the U.S. throughout the entire quarter.

Very impressive. Thank you.

Your next question comes from the line of Sarah Senator with Bernstein.

Thank you very much. I just had a quick question, I guess, about some of the commentary about carryout versus delivery in the U.S. I guess In terms of the strength of the business, you said you're not really seeing any variability across U.S. markets, but I would have associated sort of softer carryout with mobility restrictions. So I'm trying to kind of reconcile those two that, you know, overall I would think carryout might be affected by restrictions, but those vary across markets. And maybe if you can just talk about the share, you know, within the carryout versus with delivery restrictions. you know, within pizza, that category, so I can sort of understand what might be going on between those two businesses. Thank you.

Sure. You know, Sarah, what we saw, you know, across the U.S. was continued pressure, you know, on carryout order count in total. But when we broke it down and looked, you know, state by state at the different pace of reopening across the country, there really were no discernible differences in our business overall. So we still see a lot of opportunity for carryout to continue to grow and come back as mobility increases broadly across the country. And I can also tell you that we've not been as aggressive as we've been in the past on promoting that carryout business also. And so there are opportunities there for us as we look across the rest of the year as well. Thank you.

Your next question comes from the line of John Glass with Morgan Stanley.

Talk about the international business and you think about, you know, those two-year trends, those materially inflected. how much of that was just a result of maybe the increased international lockdowns? Do you have any anecdotes? Is this, you know, is there underlying business trends just broadly strong or is it really just those lockdown markets are getting a benefit? And maybe if you, if you want to just highlight a few of the key drivers, I know you talked about development, but just on a comp perspective, what really contributed to that significant acceleration in the international markets?

Sure. You know, John, thanks for the question. And, you know, it really is. It's, it's, you know, performance is still quite mixed, you know, across the markets within the international businesses, you might guess that, you know, the dynamics, you know, as it relates to COVID, are still, you know, quite different, you know, depending upon what parts, what parts of the world that, that we're in. But what we what we have seen is, as we were able to over the course of 2020, reopen our markets, you may recall this time last year, we, you know, we were gosh, 2,000 plus units that were temporarily closed. And as we've been able to get units reopened and then to get the pipeline of new development going and turn the marketing back on across the international businesses, we've seen a strong, you know, resurgence in sales in many of the markets that we operate in. And it's going to continue to be, you know, choppy market by market as we look out across 2021. Because in some places, we're going to be lapping very weak comps and retail sales from last year. And in other places on the planet, we're going to be lapping very strong numbers from last year.

Thank you.

Your next question comes from the line of Jared Garber with Goldman Sachs.

Thanks for taking the question. I actually wanted to follow up on that prior question on international markets. You know, several years ago, Rich, when you took over, you came in from the international business, and I wanted to get a sense from you if you think that there are any sort of structural changes that are happening in some of these key international markets, be it maybe Japan or Australia or India, for that matter, as you talked about unit opens there, that we should be thinking about, you know, the level of comps and unit growth in those markets, you know, remaining at a higher level over the kind of the medium term.

Yeah, well, you know, as I look across markets, you know, the globe, Jared, we still see so much opportunity for continued growth and share gain in that international business. So, you know, while it's grown rapidly, certainly over the last decade, you know, you're still looking at, you know, an international business in total that, you know, grows in that kind of low, you know, the market overall that grows in that kind of low to, you know, to mid single digits. And then you've got much share gain opportunity as well. You know, our share in the international business in total is is significantly less than where we are in the US today. So as I look at it now, I still see a significant amount of opportunity to continue to grow the business. We're hitting scale in some of the key markets around the world. If you look at the places where we've been really strong recently, like Japan, like India, we're starting to get there in China. we've started to hit some really nice scale points in some of those markets as well that give us the wherewithal and the ability to invest at a high level in the business going forward. And then finally, I would just highlight once again, as we talk about all the time, the growth really comes back to the unit level economics in the business. And while we've still got some challenges in a few places around the globe, you know, by and large, the unit-level economics remain really strong across the world. And with COVID loosening up, certainly in some places, not as much in others, you know, as it loosens up, it really gives those franchisees the opportunity to release some of that pent-up demand for unit-level investment and growth.

Thanks for the call, Eric.

Your next question comes from the line of Andrew Strelzyk with BMO.

Hey, good morning. I was hoping you could share some color or maybe some metrics on the frequency and retention of new relapse customers that you gained during the pandemic here in the U.S. now that the environment is starting to normalize with the vaccine rollouts, et cetera. Are you seeing higher retention and the CRM initiatives driving frequency the way you would have expected? Thanks.

Yeah, I think as we mentioned, you know, in the Back in February, when we released the fourth quarter, dynamics remained pretty consistent in the first quarter in that we're getting a lot more of the growth out of retained customers versus newly acquired customers. And again, we've turned down some of the more aggressive promotions, which drive a lot of customer acquisition. What I am pleased to see is that our active loyalty membership continues to grow. And also, we continue to see, you know, really strong and steady order frequency among those active loyalty customers. So, you know, strong continued engagement and sales from our existing customers. And, you know, we've got some opportunities, I think, as we look out through the course of the year to really turn the volume back up on new customer acquisition as well.

Yeah, I mean, when you look at our loyalty numbers over the course of the last year and having not run some of those boost weeks and the things that we've traditionally done to attract new customers, obviously pleased that the loyalty numbers continue to grow. But when you look at that relative to our sales, that obviously had to come from more repeat business and greater frequency from our core loyalty base.

Your next question comes from the line of Chris O'Cool with Stifel.

Thanks. Good morning, guys. Rich, it was my understanding that the carryout pizza segment overall grew at a pretty healthy pace last year. I'm just curious why you think Domino's is struggling to grow that business, especially in light of the system's marketing efforts, not just recently but over the past few years, and just the fortressing strategy there. curious if you feel like there needs to be any changes in the approach to going after that business.

So, Chris, thanks for the question. You know, we are continuing to grow sales in the carryout segment. It really is, you know, the order counts in the carryout segment that were under more pressure, you know, in Q1 and then also looking back into last year. So we're still capturing growth in that segment, but it's come more from ticket through customers adding more items per order for the first quarter and also back into last year. As I mentioned earlier, we have not been as aggressive in our marketing of the carryout segment, just given some of the challenges around operating in the COVID environment. But we see a lot of opportunity as we look across this year to continue to crank that back up. And Our new service method of Domino's car side delivery, you know, we see as a critical weapon to do that. You know, we brought that forward to address, you know, the safety concerns that customers had around picking up their food in a COVID environment. But over the long term, that's really a great tool for us as we compete for carry out business against the drive-through lanes of other QSR concepts.

The other thing just to keep in mind, you know, and this is a very COVID unique thing, but all of that demand that was dine-in for a lot of restaurants, their choice was to figure out how to do carry-out or delivery. So you've got players in carry-out, players in delivery that we're all still wondering whether they stay there permanently, whether they shift back into dine-in, how they split their dining rooms, et cetera. But it essentially changes that market in terms of the group of players playing in there as well, which is one of the reasons you see that increase in the carryout market size.

That's helpful. Thanks.

Your next question comes from the line of John Ivanco with J.P. Morgan.

Hi, thank you. The question is on U.S. labor, and I'd like to ask it one in terms of supply chain and your ability to have people that work in the commissaries themselves and also distribution. And if you have a pricing mechanism with the franchisees to cover those costs – I think you do on commodities, but mention whether you do on labor – And then secondly, Rich, something that we've talked about on calls before is things like service levels to the U.S. consumer. Can you talk about if the current labor market is changing some of the service levels, in other words, lengthening delivery times, that you're kind of seeing the pendulum swing in an unfavorable direction, and if there's anything you can do to continue to improve the service times that I think we used to discuss on a pre-COVID basis? Thanks.

Yeah, John, I'll grab that. Thanks for the question. You know, let me start on the supply chain side. You know, we don't explicitly price with our franchisees based on, you know, a breakdown that says, well, this piece is labor and this piece is food. And as I've mentioned previously, you know, while we're trying to grow our overall profit dollars for the supply chain business, we're not trying to do it at the expense of our franchisees. We're trying to do it with our franchisees through the overall growth. So we're absorbing a piece of that labor increase versus passing that automatically through, the same that we do with food cost inflation. In terms of store level, certainly I think everybody right now, you see it in the news everywhere, is challenged from a labor perspective and a hiring perspective. We still believe that when all is said and done, you've got to be focused on service. Service is where you drive your differential customer engagement, drive that loyalty. One of the structural things that we do which helps us from a service perspective, because we don't want to take our eye off that ball, is fortressing. And we've obviously talked a lot about fortressing. but you get closer to your customers and you have the ability to serve them better. The second thing that we do is, you know, I think everybody sees a lot of the technology investments that we make on the front end. There's a lot that we do on the back end to try and improve the efficiency of the labor in store, take some of the labor out of stores and enable that same labor to be doing other things. So whether it's, tools related to the make line or other initiatives that we're doing to try and drive throughput in the stores and trying to reduce the labor required on a, you know, daily, hourly basis. You know, it's at the forefront of everybody's mind right now. But I don't think sacrificing service is the way to do it.

Definitely not. And as to describe, John, you know, some A good bit of the work that we're trying to do around tech and around the store operating model is basically to keep drivers moving 100% of the time, you know, with the long-term goal that they never get out of their cars or delivering pizzas constantly as opposed to other tasks and other activities kind of that they had to perform in the old operating environment.

And if I may, have service times materially changed to the customer from the time that they order to the time that they get their pizza? I guess is that a risk or an opportunity at this point?

John, no material change, which for us is not good enough because they've got to continue to get faster. And so that's really what we're focused on. We've absorbed the volume without any material change in the service times, but we've got to get faster.

Understood. Thank you.

Your next question comes from the line of David Tarantino with Baird.

Hi. Good morning. My question is for Sue on the capital allocation. Now that you've done your refinancing transaction, I think a lot of excess cash on the balance sheet and you have a big buyback in place. But I guess I don't want to assume anything. So could you just kind of walk us through what you're thinking in terms of capital allocation and how quickly you might deploy that cash that you have.

Yeah, I mean, you know, there's no fundamental change to our strategy from a capital allocation perspective, and we were pretty upfront about this even as we went through our recapitalization. You know, we will deploy that capital for you know, investments in the business and then, you know, generally speaking in one form or another returning that to shareholders over the course of time. But, you know, we don't have an intention of, you know, sitting long-term with a huge amount of excess cash on the balance sheet.

Great. Thank you.

Sure.

Your next question comes from the line of Dennis Geiger with UBS.

Great, thanks for the question. Rich, I wanted to ask a bit more about your comments on taking market share going forward and just kind of curious how you're thinking about share gain opportunities in the U.S. this year and perhaps over the next few years if you care to kind of segment it, delivery versus carry out. Stu, I know you kind of mentioned some players are kind of coming in and out of different channels. Just kind of any latest thoughts on maybe where that share comes from, whether it's independent, small chains, continues or if it's larger players. Curious about the latest thoughts there.

Sure, Dennis. Thanks for the question. I guess I'll start by saying we're relatively agnostic as to where the share gain comes from. And we see opportunities to continue to take share across the category. And it's why we're so focused on retail sales growth as the key metric You know, not only because it drives all the economics in our business, but obviously that's how we ultimately gain market share over time. You know, as I look this year and ongoing, you know, fortressing is going to continue to be a big part of that strategy to gain share. As we've talked about, you know, in the past, we are still relatively underpenetrated in terms of share in the carryout business specifically. And Fortressing gives us an opportunity to go out and grab that largely incremental carryout business. And then on the delivery side, we believe that we've got to continue to offer great value to our customers and terrific service to continue to gain share on the delivery side. And we've talked about how Fortressing helps that over time. We're going to continue to invest in... in our technology initiatives and operating practices, procedures to continue to help us do a better job of service with our customers as well. And then you combine that with fantastic unit-level economics, which allow franchisees to invest in service, and an incredible war chest in terms of our advertising fund to go out there and drive customer awareness and acquisition And we feel like we're in a very strong position to continue to grow.

Thanks very much.

Your next question comes from the line of Lauren Silberman with Credit Suisse. Thanks for the question.

Rich, appreciate your commentary on staffing. Part of the labor challenges certainly seem transitory in nature, given the environment and stimulus. How do you think about the longer-term structural headwinds given more optionality for delivery drivers, whether that be ride-sharing or food delivery, at least the perception that these alternatives could offer a bit more flexibility?

Yeah, Lauren, it's a great question and something we think about a lot, you know, is both the availability, you know, and the cost of labor, right? And in particular, the real pinch point in the business is drivers. So part of what we're doing and working on is trying to continue to make that a great job with the best economics for drivers relative to the other alternatives that they have out there. And we've talked about a number of strategies around that. We continue our work around fortressing to give drivers more deliveries per hour, which translates into higher wages. We're working on technology and operating practices that keep drivers in their cars. So imagine a world where they don't come back into the store. We run the pizzas out to their cars and they go and take the next order. So we're trying to work on those economics for our drivers to keep them busy and earning higher level wages. And then also a big part of What makes Domino's different and has made us different over time is that being a driver at Domino's or a pizza maker inside the store is an opportunity to become an entrepreneur over time. And so a big part of our job and our franchisees' jobs also is to sell the opportunity going forward because 90-plus percent of them started off as drivers or insiders. And then the final thing I'd say about labor that will present an ongoing challenge, not just for Domino's but for others across the industry, is just the changes in minimum wage around the country, as that moves differentially from one market to another, certainly it puts pressures in some places and not in others. And as we operate as a national brand, we always have to take those things into account as we plan our ongoing marketing and promotional calendar over the course of the year.

Thank you very much. Your next question comes from the line of Chris Carroll with RBC Capital.

Hi, good morning. Rich, you mentioned the strong pipeline for store openings earlier when discussing the U.S. business. So Can you provide a little bit more detail around the composition of the pipeline? Are you seeing a step up in demand from existing franchisees on the back of the very large increase in average store EBITDA that you highlighted earlier? I presume you're also seeing more demand from potential new franchisees as well. So curious to hear more about what the pipeline looks like moving forward.

Sure. Great question. And, you know, it really is – It's a mix of both. So certainly a lot of demand within our existing franchisee base. Given the economics of our stores today and also the fact that the stores have gotten a lot busier, that creates a lot of ongoing opportunity for fortressing territories that are operated by existing franchisees. You've also got here in 2021 some pent-up demand that wasn't satisfied in 2020 as we had so many more restrictions around construction and permitting and everything else. And then what you add to that is a healthy number of new franchisees coming into the system every year. And one of the things that makes us a little different from the rest of QSR and of franchising is that those new franchisees all come from within our system. So they could be corporate employees. They could be team members of our franchisees. But we've got a steady pipeline of folks that want to become Domino's franchisees who already have the skills necessary and the experience necessary to run our stores.

Great. Thank you.

Your next question comes from the line of David Palmer with Evercore ISI.

Thanks. Thanks for your comments, too, on the two-year trends. And I do think it makes sense to track those going forward. Perhaps you can help us think back to 2019 if we're going to look at those two-year trends and compare what you saw back then and what you did back then to what you're seeing in terms of your internal plans this year. starting in the second quarter. I know the last year was a weird year in terms of maybe not doing as many boost weeks. And then, of course, the innovation has not been as robust as you might have had been doing lately and what we're seeing from your competitors lately. So perhaps you can talk about how much sort of thunder you're going to be making in your business over the next few quarters versus what you did in 2019 as a benchmark. Thanks.

Sure, David, we have a lot of things did change, you know, in our approach in 2020, you know, relative to what we were doing back in 2019, you know, driven by COVID. And, you know, I talked about some of those a little bit earlier on the call, you know, some of the things that we kind of turned the volume down on a little bit, you know, with the carryout business being one of them, you know, you might recall back at the beginning of 2020, you know, we were running a advertising on TV called, you A campaign called Pie Pass, where folks would walk into the store and see their name up on the screen as they picked their pizza up. Well, we had to turn that off immediately when we couldn't allow customers to come into our stores. And then throughout the remainder of the year, we were developing new safe service methods for carryout, but we weren't pushing that business as hard as we had pushed, not just in 19, but in the years, the five or six years that preceded that. Secondly, you know, we turned off the more aggressive, you know, promotional weeks that we had typically peppered across the annual calendar. You know, we ran those in 19. We didn't run those in 2020. So, you know, those may give you a little bit of a sense for some of the things that, you know, arrows that we have in the quiver, if you will, that we can bring back and deploy in 2021 as we get to a more normal operating environment. We'll also continue to look at new product development and other relevant news to bring out to the market to attract customers into the brand. We actually did do a little bit of that in 2020 and looking forward to doing some more of that here in 2021.

So summing it all up, you'd say that it feels like it'll be relatively comparable in terms of the energy on Boost Weeks and Innovation Weeks this remainder of the year versus 2019 remainder of the year?

Well, we've still got, you know, David, you know, things are still evolving, you know, on a real-time basis. And there's a lot of factors that we bring into play when we think about, you know, what we're, you know, what we're going to deploy going forward. We're certainly still, you know, as a, not just at Domino's, but across the economy, still riding a bit of the wave of government stimulus. And then we've still got COVID to deal with. We're making good progress with vaccinations across the U.S., but there's still a lot of work to be done there. So one of the things that we always look to do and that we have the ability to do here is to be flexible and to be adaptive. And we've got a number of arrows in the quiver, as I mentioned, to drive the business as we look out across the year, depending upon how things unfold.

Thank you.

Your next question comes from the line of James Rutherford with Stevens, Inc.

I wanted to follow up on the comment you made earlier about not seeing sales deterioration in markets that are more fully opened. Given there were a lot of puts and takes throughout that first quarter, including weather stimulus and many other factors, can you share anything about more recent trends, given that's when we're seeing a real spike in dine-in behavior And it also puts a little more distance between us and those stimulus checks. I mean, have you seen any impact on your more recent average weekly sales in light of that reopening?

You know, James, we're not going to comment today on anything, you know, post-Quarter 1. But, you know, we did, you know, during Quarter 1, as I mentioned a little bit in my prepared remarks, you know, we certainly saw, you know, a quarter that was not an even quarter. You had stimulus on the beginning and on the end. And then you had some rather extreme weather events in certain parts of the country in the middle. And then alongside all of that, you had the country reopening at different speeds all around. So a lot of moving parts in the first quarter of the business. We obviously continue to stay on top of it, not weekly, but daily and hourly. And we'll have more to share, obviously, about the second quarter when we get together again in three months.

Okay, thank you.

Your next question comes from the line of John Tower with Wells Fargo.

Just a quick clarification and then a second question. On clarification, the franchisee EBITDA of $177,000 per store, does that include any benefit from government support like PPP loans? And then secondarily, following up on the loyalty conversation, With others in the limited service space kind of adding programs later this year, do you plan to alter some of the new loyalty member acquisition tactics or perhaps change the rewards programs to some of the rewards themselves to ensure that the high level of engagement you have today doesn't slip?

Hey, John, you know, on your first question on the 177, you know, we don't – count any government money in that number. That's the EBITDA from running Domino's pizza stores. And as a company, DPZ, we didn't take any government money through the course of this, through the course of the pandemic. And then on loyalty, the loyalty program has to be a living thing over time. We're a little over five years into our loyalty program. We launched it back in 2015. And so we are constantly looking at different ways that we can turn the dials on that program to attract customers into the program, to keep them engaged. So constantly thinking about how customers earn and burn points over time. And we do learn from what we see out there in the marketplace, as well as continuing to do an extensive amount of customer research on our own customers. We've been very pleased to see that the active enrollment in that program has continued to grow. So it's continued to have appeal for new customers coming in. And then also, as I mentioned earlier, we've been pleased to see that the order frequency of active loyalty members has continued to remain steady. Because once you get your program to 27 million active, as we have today, a big part of that value comes from just the ongoing and continued engagement and frequency of those customers.

Great. Thank you very much.

Your next question comes from the line of Andrew Charles with Cowan.

Great. Thank you. Rich, you guys have previously spoken about the ad fund surplus in 2020 from the better than expected sales performance that would likely be deployed in 2021. And, you know, I recognize that you were on air 52 weeks last year and presume will be on 52 weeks this year. But how are you thinking about deploying that surplus across the year? And in particular, are you concentrating in 2Q and 3Q when the toughest compares are lapped?

Andrew, thanks for the question. I won't comment on quarter to quarter and how we're going to deploy it, really for competitive reasons, if you will. But we are in a fortunate position to have a very strong war chest and surplus going into the year. And that gives us an opportunity as we look out across the year and we see what happens with sales trends in the businesses. It really does allow us to put a little bit more muscle against things when and where we need to.

Your next question comes from the line of Brett Levy with MKM Partners.

Thanks for taking the call. You've talked a lot on this call and over the years about technology and your innovation. Can you give us a little bit more clarity into that? how much of what you have right now is more about talk and how much you can really start to put into play and drive greater efficiencies and show up more in the sales and the operational numbers. Obviously, things like Nora are good. They showcase your forward-looking, but for right now, it's probably not something that's going to be material for some time. Just how are you thinking about that framework? Thanks.

Sure. You know, Brad, it's a great question, and When we sit down every year and make our investment decisions around technology, we are always trying to invest against a portfolio, both of near-term things that can have immediate value, but then also some of the longer-term investments that may not drive any immediate value, but that we want to make sure that we're out in the forefront on. When I think about the near-term component of that, we've got a significant amount of technology investment that is going to our stores today and improving the efficiency with which we operate our stores. When you think about what some of the key pinch points or constraints are in the business right now, it is labor and it is availability and labor costs. at the store level. So we're focusing a lot of time and energy on running more efficient stores such that we can drive higher order counts and higher sales per labor hour. So there's a lot of effort there and a number of things that are rolling out through our system today. And then on the longer term, Neuro is a great example of that. We are doing some autonomous deliveries as we speak in Houston. right now, but it's going to be a while before autonomous delivery is broadly deployed across the domino system. But we want to make sure that we're investing and learning today, in particular, how the customer will interact with the robot and how the robot will interact with our operations at the stores. And those are the key learnings that we're trying to drive now, such that when we are able to more broadly deploy the technology, we're ready and have a good understanding of how it can impact our business and our customers.

Your next question comes from the line of Jeffrey Bernstein with Barclays.

Great. Thank you very much. I just wanted to Ask about unit growth. We know that 2020 was a tough year, ultimately sub-4% versus, I think, your two- to three-year guidance for 6% to 8% growth. Seems like COVID caused a one-year setback for you guys and others as well. But I'm just wondering whether there's any lingering effects in terms of sites or I think you mentioned permitting and construction delays. You would think the pent-up demand would be huge and the big uptick in the store level EBITDA would obviously help, but I'm just wondering whether you think 2021 it's reasonable to assume you get back within that range, whether you have any color on the U.S. or, more importantly, on the international. Whether or not that hiring issue comes into play, we know that you're obviously struggling, as everybody is, to hire. I'm wondering whether any franchisees are talking about slowing down growth just because they need to staff those stores or whether they have creative ways to get labor in the stores. Thank you.

Sure, Jeff. You know, on the unit growth, you know, we – We have already, you know, seen an acceleration, you know, in the pace. If you look at, you know, last year we had 624 net openings, you know, for the year. And if you look, you know, in the first quarter of this year, when you look back, trailing four quarter, you know, was 730. So that pace has already accelerated up by more than 100 units. And when we look at the pipeline in the U.S. and we look at the pipeline in our international markets, We see a really strong pipeline ahead and an opportunity to continue to accelerate that pace of unit opening. The unknown for us as we look out across the year still relates to COVID. You turn the news on, you'll see there are some places around the world where COVID is really still raging and in some places getting worse. To what extent that impacts our pace of unit growth, we're still monitoring and and still have some uncertainty around that. But the good news for the brand is that the unit economics are incredibly strong. The demand for franchisee investment is there, and we expect to continue to see the pace of unit growth accelerate. The final part of your question was around the staffing, and that's always a challenge. but one that we and our franchisees feel comfortable that we can manage over time. Part of the beauty, particularly as it relates to the U.S., of opening these new stores is that the majority of these are opening as part of our Fortressing program and giving us an opportunity to do two things. One is to shrink the territory so we can get more deliveries per hour of delivery driver labor. But also you get that incremental carryout business, which is a much less labor-intensive business for our stores, which is one of the reasons we want to continue to grow and build that business.

The other thing that I would just add to that is, and you've seen the increase in the growth, particularly Q4 last year in terms of new units, there is the unfortunate practical reality of, even if you have the ability to grow, you have the demand or desire to grow, just the sheer bandwidth of trying to get that done, it just takes a while to make up for what stopped last year. Our franchisees, our master franchisees internationally, can't just double their numbers because they want to. They need the resources to go build it, the time to go build it, So it's going to take a while while we continue to accelerate. It's going to take some time before we make up for the period of time that we lost last year.

Understood. Thank you.

Your next question comes from the line of Todd Brooks with CL King and Associates.

Hey, good morning. Thanks for squeezing me in. We spent some time on the call talking about arrows in the traffic against this period of tougher compares coming up. We've talked about boost weeks, talked about focusing on carryout. I'm wondering with the incremental advertising dollars that you're carrying into the year, just wondering about anything you can share about shifts and tactics, whether more personalized marketing, more one-to-one marketing or through CRM platforms, really trying to simulate frequency at the individual level or more resources going to that versus... broader medium and getting the message out that way when you look at kind of the mix of your spend in fiscal 21?

Hey, Todd, thanks for the question. And, you know, it's something we think about all the time because, you know, the vast majority of the dollars in that advertising fund are our franchisees' dollars, so we spend it with great care. And It's one of the areas also, you know, we talk a lot about how we use analytics to make decisions at Domino's. It's an area where we've got terrific analytics in terms of understanding the return on spending those dollars across, you know, a range of different channels or opportunities that we have to invest them on the part of our system. And so we are constantly looking at that and managing the dials to use that investment for the greatest return for our system.

Okay, great. Thanks, Rich.

There are no further questions at this time. I would now like to turn the call back over to Rich Ellison for any additional or closing remarks.

Thank you very much, and thanks to all of you for taking the time to join us on the call this morning. We look forward to speaking with you again in July to discuss our second quarter 2021 results. Have a great day.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.