Domino's Pizza Inc

Hello, thank you for standing by and welcome to the Q2 2021 Domino's Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll 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, Jenny Foraker, Investor Relations. Please go ahead.

Thank you so much. And thanks to everyone for joining us for our conversation today regarding the results of our second quarter 2021. Today's call will feature commentary from Chief Executive Officer Rich Allison and from the Office of the CFO, Jessica Parrish. As this call is primarily for our investor audience, I ask that all members of the media and others be in 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 these 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 8 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. We encourage you to ask only one one-part question on this call if you could. Today's conference call is being webcast and is also being recorded for replay via the website. With that, I'd like to turn over the call to our CEO, Rich Allison.

Thank you, Jenny, and thanks to all of you for joining us this morning. Overall, I am very pleased with our results this quarter, which once again demonstrated the strength of the Domino's brand around the world. We are still navigating through the COVID pandemic across the globe. Throughout the last 18 months, our franchisees have continued to step up to the challenge in service of their customers, their communities, and their team members. I continue to be extremely proud of our global franchisees and their extraordinary efforts to provide outstanding food through safe and reliable delivery and carry-out experiences. You've heard me speak often about the importance of global retail sales growth and how that drives our business model. During the second quarter, we delivered 17.1% global retail sales growth excluding foreign currency impact, driven by a powerful combination of growth in U.S. same store sales, international same store sales, and global store counts. The second quarter marked our 41st consecutive quarter of U.S. same store sales growth and our 110th consecutive quarter of international same store sales growth. We also reinforced our leadership position in the pizza category with a very strong quarter of global store growth, highlighted by the opening of our 18,000th store. We celebrated this terrific milestone with the opening of a beautiful store in La Junta, Colorado. The pace of net store growth has accelerated significantly during the first half of this year. When you look at it on a trailing four-quarter basis, our pace of net store growth has increased from 624 in Q4 2020 to 884 in Q2 2021. During the quarter, we also completed our $1.85 billion refinancing transaction, lowering the cost of our debt and giving us the capacity to return $1 billion to our shareholders through our recently completed accelerated share repurchase transaction. Overall, the Domino's brand continues to deliver as our strong same-store sales, store growth, and resulting retail sales growth deliver great returns to our franchisees and our shareholders. I'll turn the call over now to Jessica Parrish, our controller and treasurer. She will take you through the details of the quarter, and then after that, I'll come back and share some additional observations about the quarter and some thoughts around how we are approaching the business going forward. Jessica, over to you.

Thank you, Rich, and good morning, everyone. We are excited to share our strong second 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 $3.06 for Q2. Our diluted EPS is adjusted for certain items related to our recapitalization transaction completed during the quarter with $3.12. In Q2, we continued to see positive momentum in both the U.S. and international businesses in both same-store sales performance and net unit growth, leading to strong global retail sales growth. Global retail sales grew 21.6% in Q2 as compared to Q2 2020. When excluding the positive impact of foreign currency, global retail sales grew 17.1%. Breaking down total global retail sales growth, U.S. retail sales grew 7.4% and international retail sales grew 39.7%. When excluding the positive impact of foreign currency, international retail sales grew 29.5%, rolling over a prior year decrease of 3.4%. The prior year decrease in international retail sales excluding foreign currency was resulted primarily from temporary store closures, changes in store hours, and service method disruptions in certain international markets as a result of the COVID-19 pandemic. Turning to comps, during Q2, we continued to lead the broader restaurant industry with 41 straight quarters of positive U.S. comparable sales and 110 consecutive quarters of positive international comps. Same-store sales in the U.S. grew 3.5% in the quarter, lapping a prior year increase of 16.1%. Same-store sales for our international business grew 13.9%, rolling over a prior year increase of 1.3%. Breaking down the U.S. comp, our franchise business was up 3.9% in the quarter, while our company-owned stores were down 2.6%. As we noted on our Q1 call, we continue to observe a larger spread between the top line performance of our franchise stores and our company-owned stores than we have historically seen. We believe this is primarily a function of the heavily urban and higher income footprint of our company-owned store markets relative to a more diverse mix across our franchise space. The U.S. comp this quarter was driven by ticket growth due to increases in items per order and our transparent delivery fee, as well as the mix of products we sell. Order counts on a same-store basis were consistent with Q2 2020 levels, which were higher than Q2 2019 levels as a result of customer ordering behavior during the pandemic. The international comp was driven by order growth due to the return of non-delivery service methods, the resumption of normal store hours, and the reopening of stores that were temporarily closed in certain of our international markets in Q2 2020. Shifting to unit count, we and our franchisees added 35 net stores in the US during the second quarter consisting of 39 store openings and four closures. Our international business added 203 net stores comprised of 217 store openings and 14 closures. Turning to revenues and operating margins, total revenues for the second quarter were up approximately $112.4 million or 12.2% 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 $4 million in Q2 2021 as compared to the prior year quarter. Our consolidated operating margin as a percentage of revenues increased to 39.5% in Q2 2021 from 38.8% in the prior year due primarily to higher revenues from our U.S. franchise business. Company-owned store margin as a percentage of revenues increased to 24.5% from 23.1% primarily as a result of lower labor costs partially offset by higher food costs. Recall that we incurred additional bonus pay in the second quarter of last year for team members on the front lines during the COVID-19 pandemic. Supply chain operating margin as a percentage of revenues decreased to 11% from 11.9% in the prior year quarter, resulting primarily from higher insurance and food costs, as well as higher fixed operating costs driven by depreciation on our new supply chain facilities opened last year. These increases were partially offset by lower labor costs. G&A expenses increased approximately $12.3 million in Q2 as compared to Q2 2020, resulting from higher labor costs, including higher variable performance-based compensation and non-cash compensation expense, partially offset by lower professional fees. Additionally, as we discussed on our Q1 call, we completed our most recent recapitalization transaction during the second quarter in April. In connection with the recapitalization, we incurred approximately $500,000 of pre-tax G&A expenses for certain professional fees, which is included as an item affecting comparability in this morning's earnings release. Net interest expense increased approximately $6.7 million in the quarter, driven by a higher average debt balance. This increase in interest expense also includes $2.3 million of pre-tax incremental interest related to the recapitalization transaction, which has been adjusted out as an item affecting comparability in this morning's earnings release. Our weighted average borrowing rate for Q2 2021 was 3.8%, down from 3.9% in Q2 2020. Our effective tax rate was 19.6% for the quarter as compared to 4.7% in Q2 2020. The effective tax rate in Q2 2021 includes a 2.3 percentage point positive impact from tax benefits on equity-based compensation. This compares to an 18.5 percentage point positive impact in Q2 2020. This decrease was due to significantly fewer stock option exercises in Q2 of this year. 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 second quarter net income was down $2 million, or 1.7%, versus Q2 2020. On a pre-tax basis, we were up $20.6 million, or 16.5%, over the prior year. Our diluted EPS in Q2 was $3.06 versus $2.99 in the prior year. Our diluted EPS, as adjusted for the impact of the recapitalization transaction, was $3.12, an increase of 13 cents, or 4.3%, over the prior year. Breaking down that 13-cent increase in our diluted EPS as adjusted, most notably, our improved operating results benefited us by 53 cents, Net interest expense adjusted for the impact of the items affecting comparability I discussed previously negatively impacted us by 8 cents. A lower diluted share count driven by share repurchases over the trailing 12 months benefited us by 12 cents. And finally, our higher effective tax rate resulting from lower tax benefits on equity-based compensation negatively impacted us by 44 cents. Shifting to cash, our strong financial model continued to generate significant cash flow throughout the second quarter. During Q2, we generated net cash provided by operating activities of approximately $143 million. After deducting for CapEx, we generated free cash flow of approximately $126 million. Regarding our capital expenditures, we spent approximately $17 million on CapEx in Q2 and primarily on our technology initiatives, including our next generation point of sale system. As previously disclosed, during Q2 we also entered into an accelerated share repurchase transaction for $1 billion. We received and retired approximately 2 million shares at the beginning of the ASR. The ASR settled yesterday and we received and retired an additional 238,000 shares in connection with this transaction. In total, the average repurchase price throughout the ASR program was $444.29 per share. Additionally, and as noted in this morning's earnings release, subsequent to the end of the quarter, our Board of Directors authorized a new share repurchase program for up to $1 billion of our common stock. We also paid a $0.94 quarterly dividend on June 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 September 30th. In closing, our business continued its strong performance during the second quarter, and we are very pleased with the results our franchisees and team members around the world delivered. Thank you all for joining the call today, and now I will turn it back over to Rich.

Thanks, Jessica. And I'll begin my comments with a look at our U.S. business. You know, for months now, many of you have been asking, how we would lap the tough comparisons from Q2 of last year. My answer has always been that we're not focused on managing to a 12-week quarter. We are focused on building the business for the long term, and that long-term focus on great product, service, image, and technology is precisely why we were able to deliver a terrific quarter, highlighted by 7.4% U.S. retail sales growth, lapping 19.9% from Q2 2020. Turning to same-store sales, perhaps the thing I'm most pleased about when I look at the 3.5% U.S. comp is the fact that we were able to hold orders flat while overlapping the big gains from Q2 2020. I'm also pleased that our ticket growth was driven by a very healthy balance of more items per order and modest menu price and delivery fee increases. We achieved positive comps in both our delivery and carryout businesses, with delivery driven by ticket and carryout driven by a balance of order count and ticket growth. We continue to see strong growth across our business in the quarter. You've often asked if our sales growth might be weaker in markets that had more fully reopened. But to the contrary, the opposite trend emerged through the second quarter, where we saw higher levels of sales growth in the second quarter in the markets with fewer COVID-related restrictions. Similar to Q1, we saw that crop growth in rural areas outperformed urban areas, and less affluent areas outperformed more affluent areas. These differences, combined with the impact of more aggressive fortressing, accounted for much of the same store sales gap between our corporate store and franchise store businesses. We saw sales benefits during the quarter from the federal government stimulus, particularly the checks that were delivered back in March. It's difficult to quantify the magnitude of the impact of the one-time distributions and the ongoing unemployment and other government payments to consumers, but we believe that they do continue to have some positive sales impact on our business. Due to the strong sales throughout the quarter, we once again elected not to run any of our aggressive Boost Week promotions, but instead remained focused on providing great service and offering great value to our customers every day. As we continue to experience COVID overlaps, we believe it will be instructive to continue to look at the cumulative stack of comparable U.S. same-store sales anchored back to 2019 as a pre-COVID baseline. At 19.6% for Q2, we saw a material sequential improvement of the two-year stack when compared to the first quarter. Beyond the comps, when you look at the absolute dollars, our second quarter same-store average weekly unit sales in the U.S. exceeded $27,000, another sequential uptick from the levels seen in the first quarter. Now, turning to the other critical component of our retail sales growth, new store openings, our addition of 35 net stores was softer than we expected. We have a very strong pipeline of future openings, but had a number of stores delayed due to store-level staffing challenges and construction, permitting, or equipment delays. We hope to accelerate the pace of openings during the second half of the year as some of the delays in unit growth may subside. I'll turn and speak now about the carryout and the delivery businesses. We saw the return of carry out order growth in Q2 and we continue to build awareness of Domino's car side delivery. We ran a brief 49% off car side delivery awareness campaign during the quarter and just recently launched a campaign highlighting our car side delivery two minute guarantee. This campaign hits on two key elements of the Domino's brand, service and value. Our franchisees and operators have fully embraced car-side delivery, and we are consistently averaging below two minutes out the door and on our way to the customer's cars. This is a great technology-enabled way to serve our customers 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. For the delivery business, I was also very pleased to see positive delivery same-store sales growth during Q2 while facing very difficult overlaps. We brought back the NOID to highlight our partnership with Nuro for autonomous delivery. This campaign hits on our technology and innovation leadership while having a little bit of fun with our old nemesis, the NOID, We continue to learn as we pilot a true autonomous pizza delivery experience to select customers in the Houston market. Now turning to staffing, I'll reiterate something I said back in April. We continue to operate in a very difficult staffing environment for our stores and our supply chain centers. The combination of COVID, strong sales, the accelerating economic growth across the country, and the ongoing government stimulus continue to result in one of the most difficult staffing environments that we've seen in a long time. And frankly, this led to higher margins in our corporate store business than we would like to see. The reality is that we were operating during the quarter with fewer team members than we would like to have in many of our stores. This puts pressure on our operators to meet demand while continuing to deliver great service. In the back half of the year, we expect to implement additional wage increases across certain corporate store markets and positions. In the face of these challenges, I want to thank our US franchisees and our corporate store operators for their ongoing efforts to attract and retain great team members in a very tight labor market. And as we look forward in the US business, we will continue to make the necessary investments to drive retail sales growth into the future. We recently announced our plans to build another supply chain center in Indiana, which we expect to complete by the end of 2022. We are making solid progress on the rewrite of our pulse point of sale system, and we'll continue that multi-year investment, along with additional investment in our enterprise systems to support the business. We will continue to invest in technology, operations, and product innovation to support our carryout and our delivery businesses. We are continuing to raise wages and invest in our hourly team members. And of course, as always, we will remain focused on value for our customers. So I'll close out our discussion of the US business by simply saying that the Domino's brand has never been stronger. and I remain confident in our ability to drive sustainable long-term growth. Now let's move on to international. It was an outstanding quarter of performance for our international business. Our 29.5% international retail sales growth, excluding foreign currency impact, was supported by an exceptional 13.9% comp, continuing the momentum we had in the first quarter. As I discussed earlier with our U.S. business, we're also watching the two-year comp stacks for international, anchoring back to pre-COVID 2019, and will continue to do so throughout 2021. Q2 represented a 15.2% two-year stack, a sequential improvement over the first quarter. I'm particularly pleased with our strong momentum on store growth. as international provides a significant push toward our two to three year outlook of six to 8% global net unit growth. Our 203 net stores in Q2 increased our trailing four quarter pace of international store growth to 653 net stores. Our accelerating store growth continues to be driven by our outstanding unit level economics and the strong commitment of our international master franchise partners. During the quarter, COVID continued to have a significant impact on many of our international markets, and we expect COVID to remain a challenge in many parts of the world for some time to come. At the end of the quarter, we had fewer than 175 temporary store closures, with many of those located in India, which has been hit particularly hard by COVID. And I want to take a minute here to thank Jubilant Food Works, our master franchisee in India, for their outstanding commitment to their team members during this very difficult time. The company mounted a series of initiatives to support their employees and families through this unprecedented crisis. This included a cross-functional team that provided employee assistance 24-7, as well as several COVID isolation centers with oxygen concentrator banks. Jubilant mounted a massive vaccination drive for all their employees and dependent family members. Challenging times always bring out the best in Domino's franchisees, and I could not be more proud of our leaders in India and how they have responded to this crisis. I'd also like to highlight a few international markets that drove terrific growth during the quarter. China passed the 400-store milestone during Q2, and once again, Dash, our master franchise partner, delivered outstanding retail sales growth for the brand. China is without question one of the most exciting businesses in the Domino's system with significant long-term runway for growth. Japan reached the 800-store milestone in the weeks following the close of our second quarter and continued the outstanding performance, under master franchisee Domino's Pizza Enterprises ownership. The UK, Germany, Mexico, and Turkey were also large market highlights in a strong quarter of performance across our international business. I am proud of our master franchisees and their operators for their great work thus far in 2021, and I remain optimistic about our international retail sales growth opportunity over the long term. So in closing, I'm very happy with our Q2 results. Great franchisees and operators combined with outstanding unit-level economics place us in an enviable position within our industry and give us a strong foundation for future growth. There is absolutely no question that Domino's is the global leader in QSR pizza, but there is still so much opportunity ahead of us to drive global retail sales growth and to grow market share around the world in both our delivery and carry-out businesses. As we look to the back half of the year and beyond, you can be confident that we will remain focused on winning the long game. So thank you again for joining us today, and we'll now be happy to take some of your questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please limit yourself to one one-part question. Please stand by while we compile the Q&A roster. Our first question comes from Brian Bittner with Oppenheimer and Company. You may proceed with your question. Thanks. Good morning.

Congratulations. Rich, you highlighted the importance of paying attention to the two-year same-store sales trend, both in the press release and on this earnings call. That trend obviously accelerated meaningfully in the second quarter. Is pegging this two-year trend relevant in your mind for the rest of the year, including the fourth quarter? Because sustaining it would imply a pretty big jump in the one-year same-store sales in the fourth quarter. And I just think, in general, folks remain a bit confused how this accelerated business performance that Domino's is generating is able to occur in this reopening environment. You actually suggested that more reopened footprints are outperforming. So can you just put some insights into the core drivers of this dynamic that you're seeing within your business?

Sure, Brian. Thanks for the question. We do feel that it's instructive to take a look at the business comparing back to that pre-COVID anchor, if you will, of 2019, because there's so many dynamics that have occurred over the last 18 months that for us, as we look at the business internally and we think instructive for our investors as well, really understanding what is that longer-term trend and the growth in the business is important. You know, We're not making any, you know, statements or projections today about, you know, the third or fourth quarters of this year, just merely, you know, sharing with you how those trends are unfolding on a quarter-to-quarter basis because there's still so many factors there that are driving, you know, the business. You know, obviously those things that we have under our control, but there are also many factors externally outside of our control that are difficult, you know, to predict. you know, what happens with, you know, as COVID continues to unfold with the Delta variant, you know, for example, you know, what happens with respect to, you know, ongoing government stimulus and intervention in the economy. All of those things will continue to play a factor as we look at what happens, you know, with comps and what that resulting, you know, one and two year comp profile looks like over time. You asked about the dynamics going on in markets that are reopening. Like many of you, we've obviously been watching very studiously what happens as some of these markets around the country reopen. And I think it's important to remember that our business is a delivery business, but it's also a very robust carryout business. And so When markets closed down, and I've talked about this several times over the last year, it had a negative impact on our carryout business. So as we see markets reopen, we get some positive tailwind on the carryout business. And then also, for our delivery business, the fact that we've been able to stay very focused on value for our customers We saw a positive comp in the second quarter on the delivery business as well, even though markets had reopened. So we'll keep tracking the one- and two-year basis, looking across both of those businesses, and as the year unfolds on a quarterly basis, we'll continue to share those insights back with you.

Thank you.

Thank you. Our next question comes from Peter Saleh with BTIG. You may proceed with your question.

Great. Thanks. Rich, I wanted to ask about the competitive environment now that it seems like the economy is somewhat reopened or mostly reopened. How do you feel the competitive environment is looking right now, especially with respect to independence? Do you feel like independents are stronger today or weaker post-COVID? Just trying to get a sense on if you feel like you guys are taking share from independents or where those market share gains are coming from. Thanks.

Sure. Thanks, Peter. As the market continues to unfold here, there's still a lot of moving parts, and so we're always a little careful about to make definitive statements about market share movements until we see a few quarters behind us. But at least some of the indications that we have now are that the larger chains are driving most of the growth in the pizza category right now, with independents kind of more flat to down. So best we can tell, growing market with share being gained by the larger chains and certainly as the largest chain we are taking some of that share.

Thank you very much.

Thank you. Our next question comes from John Glass with Morgan Stanley. You may proceed with your question.

Thanks very much. Rich, I wanted to go back to your comments about the labor and the wage environment. One, you talked about how much you're taking some pricing yourself at company stores, maybe what that is to help contextualize that. And how are franchisees managing that? You said that they're taking moderate amounts of pricing, or there's moderate amount of pricing in your, maybe it's your company comps, maybe assumed that's the franchise as well. Does that open the conversation about what the price point should be at Domino's, given this unique market environment? You're sort of locked into these $599, $799 price points. Is there more friction around that conversation, given the cost of labor? And if there is, how do you answer that question that franchisees might ask about pricing?

Sure. Thanks, John. And this is certainly something that we think about all of the time. To the first part of your question, most certainly when we look at the labor and the wage environment, wages are only going in one direction over time, and that is up. Some of that obviously is dictated by some of the minimum wage changes that are happening, another round of which occurred here in July. But also just the general supply and demand equation in the labor market is causing wages to go up. And we're certainly continuing to invest more in our hourly team members in our corporate store business to make sure that we can remain staffed and serve our customers. When we think about how do we offset those wage increases and still deliver a terrific four-wall economic model, You know, pricing is certainly one of the levers that is out there. And, you know, at the local level, we do this in our corporate stores and our franchisees have, you know, they have the latitude to do this for their businesses. You know, we have taken, you know, some increases in our single transparent delivery fee. You know, we charge, wherever we are, we charge a single fee. It varies significantly market to market, you know, based on the local dynamics. But That's certainly a lever that we and our franchisees have pulled. And then menu pricing. Our franchisees have control of that. And in the higher wage markets, you will find higher menu prices, generally higher menu prices at Domino's. As it relates to the national offers, our 599 and 799 Hero offers, we continue to test those on a very frequent basis not just looking at which offers would drive the most top line, but more importantly, what's going to drive the strongest four-wall EBITDA for our stores. And $599 and $799 have continued to emerge from the many, many offers that we test on a frequent basis. But what I'll tell you is, you know, If we find an offer or if the dynamics change such that a different offer drives higher levels of profit for our franchisees, then we would move to that offer. $5.99 and $7.99 are not sacred. The only thing that is sacred is that we're going to bring value to the consumer because that's what drives order counts and ultimately order counts over time are correlated with with sales and with profitability at the store level. So something we are always looking at, John, and always talking to our franchisees about.

Thanks very much.

Thank you. Our next question comes from Jared Garber with Goldman Sachs. Can you proceed with your question?

Hi. Thanks for the question. It's a little bit of a follow-up on some of the previous questions as it relates maybe to the competitive landscape We've seen a little bit more menu innovation, maybe from some of the larger direct pizza LSR competitors recently, maybe over the last six months or so, and I think the consumer is seemingly willing to pay more for some offers now and for some more maybe surprise and delight. So I wanted to get a sense of how you're thinking about menu innovation going forward. Obviously, like the operations and the simplicity of everything makes sense from a franchisee economics perspective, but wanted to get a sense of how you're thinking about innovation from here.

Sure, Jared. Appreciate the question. You know, we're Our overall philosophy and approach really hasn't changed around menu innovation. We are constantly testing a robust pipeline of new products and platforms for the menu, but we hold it to a pretty high standard in terms of what ultimately gets on our menu because We're not just looking to put things on the menu to drive sales for a limited amount of time. So you don't see us use LTOs, and you shouldn't expect to see us using those into the future. What we are looking for are products that can drive incrementality in revenue and in profit. So we test products not only for where they would mix on the menu, but more importantly, once you take into effect the potential cannibalization from other menu items, are we delivering incremental revenue and profit at the store level? You know, you asked a little bit about, you know, premium and customers willing to pay more. You know, when we introduced our two new specialty pizzas, the chicken taco and the cheeseburger, those were all about, you know, bringing, you know, some more premium products to that specialty line, which gives the franchisee an opportunity for some incremental revenue over and above our more traditional products that are offered on the $5.99 menu. So we'll continue to look for opportunities there. And when we introduce something like those two specialty pizzas, it's not just to drive sales of those two pizzas, but we also see that that elevates sales of the specialty line in general, which is a more premium line. So as we look forward, you should expect to see us continue to roll out new products. As has been the past, you probably won't see us rolling them out as fast or in as significant quantity as some of the other players in the industry, simply because we've just got a different strategy in terms of how we look at it. And I suspect it goes without saying, but a big part of that strategy is also just managing the level of change and complexity, you know, on our operators in our 6,000 plus stores across the country.

Thanks, Rich. Appreciate the caller.

Thank you. Our next question comes from Andrew Stroudick with BMO. You may proceed with your question.

Hi. Thanks for taking the question. I'm curious how your conversations more broadly are going with franchisees at the moment. I guess it wouldn't surprise me if kind of going into this period against the tough compares, there was maybe a little bit of uncertainty among the U.S. franchisees, but now obviously that you're demonstrating the performance against those comparisons. I'm just curious, you know, how those conversations are unfolding. Has it kind of unlocked anything with respect to the development pipeline or anything else with those conversations?

Sure, sure. Thanks for the question. You know, and it's something that we've, we're always actively engaged, you know, in discussions with our franchisees and those relationships. And frankly, one of the best things about the second quarter for myself personally is that I've been out on the road a lot, you know, out in stores and visiting with our franchisees as we've gotten ourselves vaccinated and are able to get out there and interact a lot more. And You know, franchisees, you know, I think certainly, you know, pleased, you know, with the top-line growth, you know, that we've seen in the business and the fact that we've seen the sustained levels of sales that we've had, you know, here in the first and second quarters of the year. You know, you won't be surprised to hear that franchisees are, just as we are, you know, concerned about staffing, you know, about labor rates and where those are going over time. You know, thinking about commodity costs and where those are going, all the things that you would expect, you know, restaurant operators to be concerned about. But when we take a look at the business, you know, in total, the four wall economics of the business are still incredibly strong. You know, the cost of entry or what it takes to get a Domino's pizza opened. relative to other QSRs, still very modest. So the cash on cash returns in the business are still very strong. And that's really what drives the appetite for development. So I still see a strong appetite for development. That's not just true in the U.S. business, but it's around the globe. And really, you know, kind of tying back to some of the comments I made earlier on this call, the real gating factor right now in terms of getting stores open is not the desire to do so. It is some of those other factors around staffing, you know, and just having teams ready to be in those stores day one when they open, given some of the labor constraints. But also, you know, we have seen some continued delays in construction and permitting And then also just in some specific equipment categories that go into our stores, you probably won't be surprised to hear that there are still some significant supply chain disruptions out there, and some of those have hit some of the equipment that we use to build out a Domino's Pizza store.

Great. Thank you very much.

Thank you. Our next question comes from Chris O'Call with people. You may proceed with your question.

Thanks. Rich, just to follow up on the labor side, is the company able to monitor franchisee staffing levels? And what's the company doing to kind of help franchisees with staffing so that it doesn't become a service issue?

Sure, Chris. You know, we don't monitor, you know, our franchisee staffing levels or really have any say or direction, you know, in what they do with their own people outside of the brand standards. What we try to do is lead by example with what we do inside our corporate store businesses. One of the most important things about running corporate stores is that we're out there across the country feeling exactly what our franchisees are feeling. And so when they're feeling pinched on staffing and wages and other things, you know, we feel it in our own business as well, and it allows us to maintain a level of alignment that it's just impossible to have if you've sold all your corporate stores over time. And so we communicate, you know, what we're doing in the corporate store business and do our best to lead by example with respect to the things that we're trying to do around, you hiring and wages and other things that we've got going on out there in the marketplace. But ultimately, they're going to make their decisions about how they choose to pay and staff their stores.

Thank you. Thank you. Our next question comes from John Avenko with JP Morgan. We'll proceed with your question.

Hi. First, it's just I guess a topic I'd like to address, not really a question, but secondly a question. First, You know, Rich, I mean, could you address some of the, you know, the senior level turnover that you've seen? I mean, it has been fairly chunky. I mean, it kind of came in a wave more or less. And, you know, maybe that, you know, some of the challenges, but also opportunities, you know, that that may bring as you, you know, kind of think about, you know, the dominoes over the next five to 10 years. So that's, you know, I guess the first topic would be great to address. And then, you know, secondly, you know, your app, you know, gives you a lot of data that, you know, I mean, others would love to have. And, you know, some of that data may show, you know, customers that abandon their orders once they see a delivery time that has gotten to be quite long. You know, talk about how much of an issue that's become, you know, and if there is a way, you know, for you to think just like how much sales you could actually recapture or, I guess in this case, actually grow, you know, if you were to get service levels, you know, materially down, which I assume would come through increased delivery driver staffing. Thanks.

Sure, John, and that's good creativity around a topic and a question since we said one question. So bravo. To address the first topic, you know, we've had some turnover, you know, among the management team, but what I can tell you is, you know, that also creates opportunity for great leaders that we've had on the bench and who are ready to step up and really take things to the next level. So as I look across our team, and that's not just the direct reports to myself, but also as I look broadly across our senior management team within the company, we've never been stronger than we are today. We like... I'm sure some others out there, we've still got a few positions that we still need to fill, but when I look across, I feel very good about the leadership team at Domino's Pizza, and I don't think we could deliver the kind of results that we've been delivering if we didn't have a great leadership team. The second question around taking a look at service and what we're seeing there in the business, you know, with the challenges that we've had in staffing, you know, we haven't made, you know, the service gains and improvements, you know, that I would like to see, you know, here in 2021. And, you know, we've, you know, we've slipped a minute, you know, or two in some places with respect to the average times in terms of getting food to our customers. And That is a big area of focus for us as we look going forward. We know, because we've got all the data, you know, as you referenced, we know that when our mean delivery times get better and when our standard deviations around delivery times get tighter, we get more delivery sales per household, you know, for those customers that are in our delivery areas. So there's clearly an opportunity to continue to grow delivery by driving those service times down. Some of that will come from getting our staffing levels back to where we need them to be. But also, I can tell you, we are spending a lot of time looking at how we can get more efficient in our stores and, frankly, how we can deliver better delivery times with the same or, in some cases, even fewer drivers. Some of that is you know, examining all of the wasted time that we have. You know, if we want to be as efficient as we can possibly be, then a driver should never get out of his or her car and should spend all of their time getting pizzas to customers. So we're trying to take some of those other things out, some of those other tasks, some of those things that drive inefficiencies so that we can keep the drivers moving That's better for the customer in terms of delivery times, but it's also a lot better for the drivers. If we can get more deliveries per driver per hour, that means more tips for those drivers. And we know that when they earn higher wages, the retention rates get better for us also. So we're working on all of those things, John, to try to continue to drive improvements in service because we know what the value of that is over time.

Thank you so much.

Thank you. Our next question comes from David Tarantino. You may proceed with your question.

Hi, good morning. I was wondering, Rich, if you could comment on where the U.S. business is in terms of carryout sales relative to where you were pre-pandemic. And then in particular, I guess a related question would be, you know, what do you think this car side delivery is? option is doing for you in terms of growing that business and the opportunity going forward.

Great, David. Thanks. If you take a look at where carryout is and the most important metric that we look at around it is where are we in terms of carryout orders per store? And basically, when we take a look at Q2, we were pretty well back to where we were in 2019 on carryout orders, slightly positive. A lot of benefit in ticket growth that we've seen in carryout, really driven by customers ordering more product per order. But we did see in the second quarter that we got back to the pre-COVID levels in terms of orders. In terms of the mix of our business, you know, when you look at carryout orders versus delivery orders, we're still a little bit below, you know, where we were pre-COVID. And that's really driven by the fact that our delivery order counts, you know, on a two-year basis are significantly higher than they were back in 2019. So what I would say is that we are in, you know, kind of the first phase of that carryout order count growth. resurgence that we've been thinking about and forecasting for a while internally. Car side delivery, for us, is something that was on our work plan even before COVID hit because we were looking at car side delivery really as the way at Domino's to compete for that drive-through customer. Now, when COVID hit, we kind of reshuffled our work plan and pulled all of that forward to get it rolled out more quickly because it also provides a safe and contactless experience for the customer, which became so important during COVID. But we look at car side as a fantastic way to compete against the drive-through because while we've got pickup windows in a number of our stores out there, the reality is We're never going to get to 100% pickup windows in Domino's Pizza stores, and so we've got to have a way to get the product out to the customer. I have been incredibly pleased with our franchisees and how they have embraced this, in particular leading up to and now during our two-minute guarantee that we're running on TV. We're averaging well below two minutes across our system of getting those pizzas out the door and You know, I don't know, David, if you've sat in a drive-through line recently, but I've sat in them at some QSRs for five minutes, 10 minutes, 15 minutes. And, you know, if you can pull into our, you know, order ahead, pull into our parking lot, and we can get that pizza in your car in two minutes, I think that's a great customer experience. And then for us, another fantastic benefit of CarSide is the fact that these orders are pre-ordered digitally and they're prepaid. So pre-ordering digitally allows us to drive a higher ticket because we do a much better job of driving ticket for those digital orders because we've got all the technology built in there based on the A-B testing and everything else we do to give the customer a great experience and make sure they get in their basket the things that they would enjoy that even for dinner. And then on the prepayment, that's also great for us as well because it shortens the transaction time in the store and lets us get the customer out the door faster and using less labor. And the digital obviously also gives us an opportunity then to invite those customers into our loyalty program. So early stages of car side, but I'm really happy with the adoption across the system and what this could mean for us as we continue to compete for more occasions with our consumers.

Great. Thank you very much.

Thank you. Our next question comes from Dennis Geiger with UBS. You may proceed with your question.

Great. Thanks. Rich, I wanted to ask you a little bit more about customer loyalty and the new customer acquisition that you're seeing and how you're thinking about the go forward from here. Maybe if you could talk a little more about the opportunities that you have to continue to attract new customers and also keep those that you have gained over the last, let's say, 15 months or so. I'm sure it's a bunch of things, but Any thoughts around kind of what factors are most important for this? If it's that service level opportunity that you mentioned, if it's new menu items, you know, value boost weeks, just curious how you, what you're seeing and how you think about the opportunity. Thank you.

Sure. Sure. That's happy to, happy to touch on that. Well, you know, as, as you take a look, you know, really over the course of, you know, the last year or so, you know, the, the, the, the bulk of the growth in our business, you know, really has come from existing customers and, and that customer retention and purchase frequency, and even more concentrated within our loyalty customer base, that 27-plus million active loyalty members that we have at Domino's. So I'm really pleased with what we've been able to do as the pandemic has unfolded in terms of driving customer retention, staying relevant, and keeping those you know, those orders, the order frequency up over time. When I look forward, you know, I think we do have more opportunities to continue to prime the pump further around customer acquisition. You know, some of the most important tools that we've used historically, you know, to do that have been some of these periodic, you know, boost weeks that we've used. And we haven't run any of those for quite some time. So that's, That's certainly an arrow in the quiver that we have going forward. Product introductions, certainly another opportunity to invite new customers in, and we do have some robust products in the pipeline, so you should expect to see some news from us on that in the quarters to come as another potential opportunity. And then what I would tell you also, just kind of underlying all this, it's not a specific action or a catalyst for driving customer acquisition, but I fundamentally believe that staying focused on value is perhaps our greatest customer acquisition vehicle over time because as you see prices being raised significantly at a number of other restaurant chains around the country. And as we start to see some of this government stimulus come away as we go into the back half of this year, I think it's going to be really important, you know, for the families that we serve to stay focused on value. And I think that's always, you know, a consistent message from us and an opportunity to continue to bring new customers in the fall.

Great. Thanks, Rich.

Thank you. Our next question comes from Laura Silverman with Credit Suisse. You may proceed with your question.

Thanks for the question. So within the context of the current labor environment, can you talk about some of the in-store technology or back-of-house technology that you're testing or recently launched to enhance the in-store operating model? And then related, digital represents 75% of sales now, increased about 5% each year over the last several years. So how are you thinking about how high that penetration can go? Could it be 90%, 95% just given some of the labor benefits?

Thanks, Lauren. First on the labor environment, we're absolutely working on technologies and operating procedures to help us run our stores more efficiently and with less labor. One of those I spoke about earlier as it relates to our delivery drivers, which is that we're trying to take a lot of things off of their plates that cause them to do anything other than being in a car delivering a pizza or on a bike delivering a pizza to a customer. So an example of that that drove me crazy for years was pre-folding boxes. which was often a task that delivery drivers did. We've made enormous strides within our system and now have more than 2,000 of our stores in the U.S. that no longer pre-fold boxes. So that's taken work out of the store. And, by the way, it also makes for a much cleaner and better-looking store as well. Other things that we've been working on, we've rolled out our GPS system. software out to our stores and it's in the hands of our drivers on their smartphones, that allows drivers to get proficient much more quickly. In the old way at Domino's, a driver might take two, three months to learn the delivery area, but with the GPS capability that we have, we can do a better job of routing and getting drivers to the location that they're headed to. We're working on other things as well around how we schedule and staff the stores using machine learning to really help us do a better job of predicting what our sales are going to be and therefore more appropriately matching the number of team members at the store at the times when we need them. So a lot going on there. Your second, around digital. Yes, around 75% of sales. How high is high? I don't know, but I know it's higher than 75%. The benchmark that we use in the Domino's world to kind of inspire everybody else is China, where more than 19 out of every 20 orders come in through digital channels. So that's really the inspiration for us. So I guess until we get close to 100, I'm not going to stop pushing.

Great. Thanks so much.

Thank you. Our next question comes from Chris Carrillo with RBC Capital Markets. You may proceed with your question.

Great. Thank you. So returning to the latest thoughts on third-party competition and perhaps in light of the reopening and the gradual return of in-restaurant dining to traveling restaurants, Hey, Chris, there's a ton of static on your line.

Is this better?

Yeah.

Yeah, that's better. Yeah, we couldn't hear anything you were saying.

Sorry about that. So I guess just returning to the theme of competition, Rich, just curious to get your latest thoughts on third-party delivery competition. And your latest thoughts on how the shifting dynamics around the reopening will drive the next phase of delivery competition just more broadly? That would be great. Thanks.

Sure. You know, first on third-party, I mean, I don't think there's any question at this point, you know, that third-party delivery is here to stay. You know, you can pretty well get, you know – any type of food delivered anywhere in the country and, frankly, now broadly just about across anywhere in the world today. So we don't think that competition is going away. And, in fact, in many ways, we look at that as our primary competitive set. As the leader in the pizza category, obviously we still continue to look at the pizza competition, but, frankly, the biggest competition over the long term for us in delivery is that third-party aggregator channel. So when I think about what we've got to do, so let's assume regardless of where their economics sit today, we believe they're going to be here for the long haul. So we have to continue to make sure that we are the best value both for the consumer and for the restaurant operator.

So, you know,

We continue to believe that our owned fleet, for us in our corporate stores and for our franchisees in their stores, having our own delivery drivers running point to point, back and forth to the store, we continue to believe that's the most efficient operating model and gets even more efficient as we continue to fortress our markets. And so having that very efficient model is important in order in order to put us in a position to continue to offer a very competitive delivery fee and overall value proposition to the customer. We also believe that the fact that we use a single transparent delivery fee, we think over time is an important competitive advantage. When I order a third-party delivery, I have to really get my calculator out to figure out what I've actually paid to have that food delivered, because maybe I got a discount on the delivery fee, but maybe I paid a service fee. Maybe I paid a small order fee. Maybe I paid a fee because I happened to be in a city where they were charging an incremental city fee. We very much believe around a single transparent delivery fee over time we think will be important to customers. And then back on the other side of the equation, staying as the best value for the restaurant operator. We charge... For a digital order, you know, we charge our franchisees, you know, it's just a little bit over 1% a ticket, you know, that 27.5% digital order fee. You know, that is, you know, so much lower than, you know, what you're going to see, you know, in terms of what the third parties are charging restaurants out there. So we think that gives us a competitive advantage in terms of continuing to make sure that we've got great four-wall economics for our operators because that's the only way we grow the business over time and they open more stores is if the four-wall economics continue to be strong. So I think, you know, Chris, we don't exactly know yet how all this ultimately shakes out and what all of the dynamics that may shift over time, but we're really focused on maintaining a competitive position with both of those groups, the customers and the restaurant operators.

Great. Thank you. Appreciate all that detail.

Thank you. And our last question comes from David Palmer with Evercore ISI. You may proceed with your question.

Thanks. I think this one touches on some of the things you've been talking about with regard to third-party delivery. But you mentioned sales trends were best in less affluent and less dense population areas. And I wonder if you could give us your best thinking about why that might be. And in your answer, if you could really touch on the influence of third-party delivery as competition. And I don't want to lead the witness too much, but I'm thinking that the restaurants and the third-party players themselves may be passing along particularly rapid menu price inflation lately, which is perhaps less accepted in the less affluent areas. And that third party may also be pulling back in service levels in these less profitable, low density markets. But I'm just guessing there, and you might have better data on this. Thanks.

Sure. Sure, David. Thank you. I think, you know, if we start, you know, if we start with, you know, less affluent versus more affluent, you know, I think, you know, certainly, you know, to the extent that these third party delivery fees get more complex and increase over time, that less affluent customer is absolutely going to feel more of a pinch on that, and I think is, you know, and, you know, and with a brand the size, you know, of Domino's, you know, a big portion of the customers that we serve out there, you know, are, you know, these are not, you know, super wealthy folks, and value is really, really important to them, and so I suspect that in In many of these less affluent areas, you know, we stack up very favorably in terms of the all-in value of having delivered food, you know, to serve to your family. Whereas in some of the more affluent areas, you know, there may be less price sensitivity to some of these more significant delivery charges and or if those consumers are ordering a higher overall ticket, you know, if they're ordering $75 worth of food, you know, from a casual dining restaurant, then paying the fee is less, you know, less a pinch on a relative basis. So we're still looking at this and seeing how it evolves, but I suspect that, you know, your hypothesis and, you know, and ours there are reasonably well aligned. And then, you know, I think as it relates to, you know, the urban versus the rural situation, I do believe there that in those more rural environments where there is less density, I think the cost model around how we deliver probably shines even more in some of those places where we can keep drivers busy running point to point back and forth from our stores. So we're continuing to watch it and evolve it. You know, there may be some other dynamics, you know, there, David, that we look at, you know, such as some of the just the migration of people, you know, out of some of the urban areas during COVID. And not all of those folks have returned yet, you know, back to the big cities or places where they previously lived. So still watching it. Trends are still evolving. Well, folks, we really do appreciate your time, and thank you all for joining us on the call this morning. And we look forward to getting back together with you again in October to discuss our third quarter 2021 results.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.