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spk18: Good day, and thank you for standing by. Welcome to Domino's Pizza Q2 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the 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. I would now like to hand the conference over to your speaker today, to Ryan Gores, VP of Finance and Investor Relations. Please go ahead. Thank you, Dylan.
spk12: And thank you for joining us today for our conversation regarding the results of the second quarter of 2022. Today's call will feature commentary from Chief Executive Officer Russell Weiner and Chief Financial Officer Sandy Freddie. 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 applied to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 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 analyst, we want to do our best this morning to accommodate as many of your questions as time permits. As such, we encourage you to ask only one one-part question on this call. Today's conference call is being webcast and is also being recorded to replay via our website. With that, I'd like to turn the call over to our Chief Executive Officer, Russell Wiener.
spk08: Thank you, Ryan, and thanks to all of you for joining us this morning. As Rich Allison and I communicated back in April, we expected the second quarter to be challenging. We continue to navigate a difficult labor market in the U.S., especially for delivery drivers, in addition to inflationary pressures combined with COVID and stimulus fuel sales costs from the prior two years. Our results for the quarter were consistent with the challenges we outlined at that time. However, the strength of our franchisees and team members, along with the strategies we're putting into place, make me feel confident that we're on the path to overcome these short-term obstacles to make the Domino's brand and business stronger than ever. Back in May, my team and I gathered with more than 8,000 of our franchisees and team members from around the globe at our 2022 worldwide rally. Due to COVID, we had to cancel our last rally. So it was our first time back together as one global team in four years. We use this time to share best practices, align on goals, and commit to continued growth that will drive meaningful value creation for all of our stakeholders. The energy, the commitment, passion for the brand, and confidence displayed at this year's rally was truly inspiring and reinforces my belief that our best days lie ahead. I can assure you that nobody at Domino's is happy with our recent performance. However, I have tremendous confidence in the team that we have assembled to leverage some of our current successes, address our current pressures, and proactively work to mitigate the negative impact of those external factors that we can't control. As always, we will make disciplined decisions and we'll focus on doing what is right for our customers, our franchisees, and our brand. This approach has served our stakeholders well over many years, and I don't see any reason to diverge from this proven approach. We have high expectations for what we can achieve, and we will hold ourselves accountable for meeting and often exceeding those objectives. I plan to provide you with more specifics on the strategies and plans we have for the business after our CFO, Sandeep Reddy, walks through the results of the quarter. Sandeep.
spk13: Thank you, Russell, and good morning to everyone on the call. Before I get into the details of the quarter, I wanted to share some of my initial observations after my first full quarter as Domino CFO. I see some exciting opportunities to improve our long-term profitability. First, while we continue to explore options to further optimize our consumer pricing architecture in the United States, It is important to highlight that the average price increase we realized in the second quarter across our US system was nearly 6%. We have successfully pulled many pricing levers, including our standard menu pricing, our national offers, our local offers, and our delivery fees. This has helped us cover some of the cost increases we are incurring in both the food basket and labor market, while also ensuring we continue to deliver terrific value to our consumers. Our work continues on right pricing our product while keeping a compelling value proposition for our consumers with more opportunities to pursue. Second, efficiencies exist in our cost structure as we seek to ensure that revenues consistently grow faster than expenses. We saw a sequential improvement in the year-over-year contraction of operating income from 270 basis points in Q1 to 180 basis points in Q2. We need to continue this trend. Third, as a result of the actions we are taking to increase our capacity to meet demand, we realized a sequential improvement in U.S. same-store sales declines from minus 3.6 percent in Q1 to minus 2.9% in Q2. Now, our financial results for the quarter in more detail. Global retail sales decreased 3% in Q2 2022 as compared to Q2 2021. When excluding the negative impact of foreign currency, global retail sales grew 1.5% due to sustained positive store growth momentum over the trading four quarters, lapping 17.1% of global retail sales growth, excluding FX, in Q2 2021. As we have discussed in the past, we believe it remains instructive to look at the cumulative stack of sales across the business anchored back to 2019 as a pre-COVID baseline, and will continue to do so for as long as we believe it is useful in understanding our business performance. Looking at the three-year stack, our Q2 2022 global retail sales excluding foreign currency impact grew nearly 27% versus Q2 2019. Breaking down total global retail sales growth, international retail sales excluding the negative impact of foreign currency grew 3.7%. rolling over a prior increase of 29.5%, and are up almost 30% on a three-year stack basis relative to 2019. U.S. retail sales declined 0.6%, rolling over a prior increase of 7.4%, and are up almost 27% on a three-year stack basis relative to 2019. Turning to comps, during Q2, Same-store sales, excluding foreign currency impact for our international business, declined 2.2%, rolling over a prior increase of 13.9% and were up 13% on a three-year stack basis relative to 2019. Order growth was slightly positive during the quarter, demonstrating continued global demand. However, this growth was more than offset by declines in ticket driven by the year-over-year impact of expiration of the 2021 VAT relief in the UK, our largest international market by retail sales. This resulted in a negative comp for the quarter for international versus a slightly positive comp without this unfavorable UK VAT impact. The year-over-year impact of expiration of the 2021 UK VAT relief will continue while we left the reduced rates from 2021 to the rest of the year. Fees to sales for our U.S. business declined 2.9%, rolling over a prior increase of 3.5% and were up 16.7% on a three-year stack basis relative to 2019. representing a sequential 5.3 percentage point improvement from Q1 on a three-year stack basis. Breaking down the U.S. comp, our franchise business was down 2.5% of the quarter, while our company-owned stores were down 9.2%. We believe the difference in the top-line performance in our company-owned stores as compared to our franchise stores continues to be driven by more substantial operational challenges in our company-owned stores that Russell will address later on the call. The estimated impact of fortressing was 0.7 percentage points during the quarter across the U.S. system. This impact will continue to trend lower as our U.S. store base grows. The decline in U.S. same-store sales in Q2 was driven by a decline in order counts, which continued to be pressured by the challenging staffing environment, which had sudden operational impacts such as shortened store hours and customer service challenges in many stores, both company-owned and franchised, along with tough COVID and stimulus fuel comps from the prior years. The decline in order counts was partially offset by ticket growth, which included nearly 6% in pricing actions I spoke about earlier. We saw a similar trend on a three-year stack basis with a 16.7% growth in same-store sales driven by growth in ticket and partially offset by a decline in order count. As we have previously shared, we believe it is instructive to break our U.S. stores into quintiles based on staffing levels relative to a fully-staffed store to give a sense for the magnitude of the impact of staffing. Looking at Q2 same-store sales, stores in the top 20% those that are essentially fully staffed on average, outperform stores in the bottom 20%, those that are facing the most significant labor shortages, by seven percentage points. This is down sequentially from the 12 percentage point gap we saw in Q1 between the top and bottom quintiles, showing improvement in the lower quintile stores' ability to meet consumer demand. Now I'll share a few thoughts specifically about the carryout and delivery business. The carryout business was strong in Q2, with U.S. carryout same-store sales 14.6% positive compared to Q2 2021. On a three-year basis, our carryout same-store sales were up 33% versus Q2 2019. The gap between the top and bottom quintiles based on staffing levels remained small during the quarter, highlighting both strong consumer demand and the lower cost to serve relative to delivery orders. We are incredibly pleased with our carryout momentum, especially considering carryout is a much larger segment of QSR, giving us a significant runway for growth in the future. The delivery business continues to be more pressure. Q2 delivery same-store sales declined by 11.7% relative to Q2 2021. Looking at the business on a three-year stack, Q2 delivery same-store sales remain more than 8% above Q2 2019 levels. When we look at the same quintiles relative to the delivery business, we continue to see a more pronounced difference in performance. We saw an 11 percentage point gap in delivery same-store sales between stores in the top 20% and those in the bottom 20%. While we continue to see a significant gap in performance between the top and bottom quintiles, this does represent a sequential improvement from the 17 percentage point gap we observed in the first quarter. Shifting to unit count, we and our franchisees added 22 net new stores in the US during Q2, consisting of 24 store openings and two closures, bringing our US system store count to 6,619 stores at the end of the quarter. With our strong formal economics, we remain bullish on the long-term unit growth potential in the United States, and we maintain our conviction that the U.S. can be an 8,000-plus store market for Domino's. The pace of U.S. store growth may decelerate slightly from the current four-quarter runway to 3% the rest of the year or until the headwinds subside, given some of the continued development, supply chain, staffing and inflationary headwinds. Our international business added 211 net new stores in Q2, comprised of 249 store openings and 38 closures. This brought our current four quarter net store growth rate in international to 9%. When combined with our US store growth, our trading four quarter global net store growth of nearly 7% continues to fall within our two to three-year outlook range of 6% to 8%. Turning to revenues and operating income. Total revenues for the second quarter increased approximately $32.7 million, or 3.2%, from the prior quarter, driven by higher supply chain revenues, resulting from a 15.2% higher market basket pricing to stores. Our market basket pricing is up approximately 20% on a three-year basis now. The increase in supply chain revenues was partially offset by declines in our company-owned stores' revenues. Changes in foreign currency exchange rates negatively impacted international regulatory revenues by $5.9 million during Q2. Our consolidated operating income as a percentage of revenues decreased by 180 basis points to 16.7% in Q2 from the prior quarter, primarily driven by food basket and labor cost increases. These impacts were partially offset by pricing actions and G&A leverage. A diluted EPS in Q2 was $2.82, so $3.06 in Q2 2021, or $3.12 when adjusted for the six-cent impact of the recapitalization transaction in the prior year. Breaking down that 30 cent decrease in our diluted EPS as compared to our adjusted diluted EPS, our operating results negatively impacted us by 14 cents. Changes in foreign currency exchange rates negatively impacted us by 12 cents. Our higher effective tax rate negatively impacted us by 14 cents. 9 cents of which was driven by changes in tax impact of stock-based compensation. Higher depreciation negatively impacted us by 2 cents. Higher net interest expense negatively impacted us by 2 cents. And a lower diluted share count, driven by share repurchases over the trading 12 months, benefited us by 14 cents. Although we faced operating headwinds, we continued to generate sizable free cash flow. During the first two quarters of 2022, we generated net cash provided by operating activities of approximately $153 million. After deducting for capital expenditures of approximately $33 million, which included investments in our technology initiatives, such as our next generation point of sale system and investments in our supply chain panels, we generated free cash flow of approximately $121 million. Free cash flow decreased $142 million from the first two quarters of 2021, primarily due to changes in working capital as a result of the timing of payments of accrued liabilities and receipts on accounts receivable and low and end income. During the quarter, we repurchased and retired approximately 148,000 shares for $50 million at an average price of $337 per share. As of the end of Q2, we had approximately $606 million remaining under our current board authorization for share rate purchases. Before I close, we would like to update the guidance we provided in April for 2022. Based on the continuously evolving macroeconomic environment, we now expect the increase in the store food baskets within our US system to range from 13% to 15% as compared to 2021 levels, an increase from the 10% to 12% we were expecting in April. Changes in foreign currency exchange rates are now expected to have a negative impact of $22 million to $26 million compared to 2021, an increase from the $12 million to $16 million we were expecting to see in April. We anticipate that we will continue to see fluctuations in commodity prices, including wheat and fuel costs, and foreign currency exchange rates resulting from geopolitical risk and the resulting impact on the overall macroeconomic environment. Thank you all for joining the call today, and now I will turn it back to Russell.
spk08: Thank you, Sandeep. I'm going to start my comments with the U.S. business. the performance during the quarter started slow as we were laughing fuel comp on a one and two year basis these dynamics eased throughout quarter as we move further away from the government payments distributed march of 2021. During the quarter, we continued innovative ways to engage with our consumers through our carryout tips promotion, where we rewarded our carryout customers with a $3 tip good for the purchase of another carryout order within the next week. We also launched our Mind Ordering app, which created a fun ordering experience for customers coming into the new season of Stranger Things, one of the most popular shows on TV and streaming. In addition, the second quarter marked our first full quarter since we evolved our national offers to include $5.99 mix and match for carryout customers and $6.99 delivery mix and match. On the last call, I laid out some of the action plans that we're taking to meet customer demand, including returning to core hours, utilizing call centers to ease constraints in the stores, and bringing back to the suite promotions. I'D LIKE TO TAKE SOME TIME TO PROVIDE ADDITIONAL COLOR ON EACH OF THESE ACTIONS. IF YOU RECALL, OUT OF NECESSITY, MANY STORES HAVE HAD TO FLEX THEIR HOURS OF OPERATIONS BECAUSE OF LABOR CONSTRAINTS FROM THE STAFFING CHALLENGES AND OMICRON SURGE EARLY IN THE YEAR. DURING THE FIRST QUARTER, WHEN WE ADDED UP ALL THE LOST OPERATING HOURS, WE ESTIMATED THAT THE U.S. PUNITIVELY CLOSED THE EQUIVALENT OF ALMOST SIX STAGE ACROSS THE ENTIRE U.S. BUSINESS. During the second quarter, this number improved to a little over four days. This stores primarily flexing hours that could be closed during non-peak times. The impact on orders was less than the number of days closed as a percentage of the total days in the quarter. While we and our franchisees continue to make progress on a full return of all stores to core hours, as we start to lap the service disruptions from last year, this metric will become less meaningful as a driver of year-over-year sales performance. Another key action is utilizing call centers to take phone orders. This allows team members to focus on making and delivering pizzas without having to worry about answering phones, especially during the busiest times in the store. At the end of the quarter, around 40% of our U.S. stores were utilizing call centers in some capacity. As a result, headwinds from unanswered calls were lower than we experienced during the first quarter. The third action is bringing back boost weeks. We promised we would bring back these important customer acquisition and loyalty enrollment activities this summer, and as you saw, we ran our first boost week in more than two years in early June. I am extremely proud of our franchisees, team members, and supply chain for executing at a very high level during what was our busiest week of the year. Consumer reaction was strong, and we plan to do another boost week by the end of the summer before we evaluate future cases. Turning now to corporate store performance, our corporate stores continued to lag franchisee performance during the second quarter. As I mentioned during the last call, we are committed to restoring our corporate store's leadership position among the U.S. system of stores. As such, we have put into place an operations recovery plan with 30, 60, and 98 milestones. Last month, we made a leadership change designed to positively impact our corporate store business. Frank Garrido, our Executive Vice President of Operations, who also led corporate stores before taking on his current role in February of 2020, will have that team report directly to him so he can more closely assess and address the needs of this business. We will continue to provide updates on the progress of our corporate stores and look forward to them resuming their leadership role among our U.S. system of stores. Finally, I'd like to provide an update on our ongoing delivery labor market deep dive. We continue to believe that many of the answers to the labor shortages we are facing are already in our system. We see that our top quintile stores, they can meet the demand and outperform the system. We also saw the gap in performance between our top and bottom quintile stores improve during the second quarter. We know from our work that one of the key issues for delivery drivers is flexibility. For many, this is even more important than compensation. Flexibility includes the ability to work shorter shifts, fewer hours in a week, and sign up for shifts with short lead time. These are the areas where we are continuing to evaluate and evolve our practices. The question remains, can we close the gap in performance and get back to fully meeting demand, utilizing our current delivery model as it has evolved over many decades? Until we fully answer this question, all options will remain on the table. Now let's turn to international. The international business displays strong fundamental growth, opening over 200 net new stores during the quarter, as well as positive order count growth. During the second quarter, 44 of our international markets opened at least one net new store, demonstrating the strong demand for Domino's around the world. As Sandeep mentioned, there were some short-term pressures from the UK VAT relief overlaps that drove the comp to go negative in the quarter, snapping our long-running streak of consecutive quarters with positive same-store sales growth. I remain confident, extremely confident, in the long-term growth potential for our international business. Opening more than 1,000 net stores over the trailing four quarters is an outstanding accomplishment by our team and our international master franchisees. I'll now highlight a few international markets of note. I'd like to congratulate DPC Dash, our master franchisee in China, for opening their 500th store during the second quarter. Also, as you may have seen, Dash Brands recently made its A1 filing for a listing on the Hong Kong Stock Exchange. We saw strong sales growth in the Middle East, especially in Saudi Arabia. Also, Alamar Foods, our master franchisees across 11 markets in the Middle East and North Africa, announced its intention to go public through an IPO on the Saudi Stock Exchange. Other markets of note with strong growth in the quarter included India, Mexico, Spain, Turkey, and Guatemala. We have a long runway for growth in the U.S. and around the world in both our delivery and our carryout businesses. We will continue to mitigate challenges within our control and take steps to proactively confront external factors we can't completely control with strategies and plans to minimize their impact. We're now happy to take some questions.
spk18: Thank you, sir. As a reminder, to ask a question, you will need to press star one on your telephone. Due to the essence of time, we ask that you please limit yourselves to one question. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Brian Bittner from Oppenheimer. Please go ahead.
spk06: Thank you. Good morning. Question on the same-store sales in the U.S. Your same-store sales in the second quarter, as you said, accelerated by over 500 basis points. The first quarter, when we look at it on a three-year stack basis, so clearly a meaningful improvement in the quarter. Can you just unpack the drivers of this improvement in a little bit more detail and help us understand maybe how much of this improvement came from improved staffing levels through the quarter versus maybe some other sources of improvement just so we can understand the underlying health of this improvement in the second quarter. Thanks.
spk13: Good morning, Brian. Thanks for the question. I think a lot of it is actually in some of the prepared remarks that we went through, but I'll just really try to split it up a little bit for you because the answers are really a sequential acceleration for sure in the carry-on business where we went from 11% increase in the first quarter to 14.6% increase in the second quarter. So definitely that momentum that we saw, in fact, on a three-year stack basis, it went from 24% to 33%. So significant acceleration and strength in the carrier of business, very exciting. I think on the delivery business, if you look at what happened in the quarter, we were up against much more significant overlaps last year. Even though we had 11.7% decline on a three-year stack basis, we're up 8% compared to the plus 6% that we had last quarter. And so, sequentially, a lot of the initiatives that we talked about on the last earnings call started playing in, and delivery did improve sequentially. We have more work to do, but we definitely had some progress that we saw in the quarter. So, set another way, the sequential improvement of 530 basis points was driven by both carry out and delivery with both making meaningful progress.
spk09: Thank you.
spk18: And Aisha, our next question comes from the line of David Palmer from Evercore ISI.
spk07: Please go ahead. Thanks. First, just maybe a two-parter here. You mentioned customer service issues and that being a drag. I wonder, what does that look like? What is the customer experiencing? Any numbers that describes what that is and how you measure the impact on the business? And then, relatedly, it sounds like you're still in an evaluation phase with regard to other options to alleviate pressure to labor in the delivery sense. You know, could you talk about some of the things that you're most evaluating at this point, maybe things that are in test right now? Thanks so much.
spk08: Sure. Thanks, and good morning. On the customer service side, really, at the end of the day, what we like is things have gotten sequentially better in the second quarter for the first quarter. capacity things we're dealing with, but at the end of the day, demand is strong and our ability to serve that capacity is getting better. To your second question on the evaluation, what I tell you is we are 100% committed to getting this done ourselves. We think the answers to some of the capacity issues lie within the system. And until we get, though, where we need to be, Our responsibility is to understand all the options available, and that's what we're going to do.
spk09: Thank you.
spk18: And I see our next question comes from the line of David Tarantino from Barrett. Please go ahead.
spk04: Hi, good morning. I had a question on the carryout versus delivery business. I guess, first, if you could maybe give us an update on what the mix of businesses today, given the big changes you've seen in the carryout business. And then, I guess, secondly, on the carryout business, the strength that you saw in the second quarter was very impressive. And I'm wondering if if you could at least offer some thoughts on the sustainability of that, or whether you think it was just a great promotion with the, you know, the offer that you ran there, or if you think that this is a more durable layer of sales with new customers or new occasions. Thanks.
spk13: Thanks, David, for the question. It's a really good one. I think there's, we'll take it in two parts. Russell will cover the second piece, and I'll just talk about the carryout versus the delivery dynamic that you asked about. So I think overall, when we look at carry-up as a delivery from a mix standpoint, clearly with the comps, actually, with an acceleration in carry-out mix, carry-out comps, once the delivery is declining, the mix is shifting towards carry-out. We typically update only at the end of each year, and I think we will give you a further update at the end of the year because things are moving around quite a bit. What we're really thrilled about is the momentum on the carryout business because, as we said in the prepared remarks, it's an accelerating trend on a business that is a significantly larger business and in the QSR space. So there's a lot of runway for growth for us on that business. And then, Russell, do you want to talk about sustainability?
spk08: Yeah. Thanks, David. We have seen sustainability and continued momentum and continued growth in carryout, not just Over the last 3 years, but over the last decade or so, since we decided to really focus in on that area. 1 of the reasons that's so important for us is it's very incremental to delivery. We see maybe 15% or so overlap between carry out occasions and delivery occasions. Interestingly enough, the carryout sourcing of volume we have is less so from pizza on a percentage basis and more so from other QSRs. So it enables us to not only grow in the larger carryout pizza segment, but the larger carryout QSR segment.
spk09: Thank you.
spk18: And I show our next question. It comes from the line of Brian Mullen from Deutsche Bank. Please proceed with your question.
spk05: Hey, thank you. Just a question related to domestic development. As you think about restoring the pace of growth, domestic unit growth, back up to that 4% to 5% rate, what are the most important factors for investors to consider right now in regards to the pipeline for next year? Do you think you can get back to that pace in 2023, or is this going to be a little bit of a longer path to the pre-COVID run rate in your view? And if it's a little longer, what are kind of the key gating factors right now?
spk13: So, Brian, thanks for the question. I think when we look at the U.S. potential, I think Russell just touched on something really important with the carryout momentum and the acceleration that we're seeing there and the opportunity that we have in terms of the QSR space and how we can actually penetrate into that. So then I'm going to actually go back to what we've talked about previously as our goal for the US of 8,000 stores. Relative to that, we have 6,619 stores already, so the gap is not massive. And as we've talked about this year from the beginning, I think on the last call itself, Rich mentioned that we were probably going to see some headwinds, basically, in terms of the space of development. Because of supply chain problems, just been fishing environment, et cetera. This continues to be the factor. And I think even though we are the trading 12 months of. 3%, we see some potential deceleration relative to that in the short term until all of these headwinds subside. Doesn't change the long term trajectory of where we can take this, but I think we need these. these headwinds to subside before we can accelerate. And I think from our franchisees, they have a really fantastic industry-leading profitability. Their returns are very compelling. They average three years in terms of cash-on-cash payback. And they see the potential path to future growth. So we're really confident that the 8,000-unit objective is definitely very achievable, and especially with the momentum that we're seeing. on the carrier business, we actually have been more upset with our purchasing strategy. And that gives us a lot of upside in one way in terms of unit development.
spk18: Thank you. And I show our next question. Our next question comes from the line of John Glass from Morgan Stanley. Please go ahead.
spk11: Hi, thanks very much. Why did you run a boost week during a time when you had constraints still? I mean, I would think that would risk disappointment of customers. Was that a signal that toward the end of the quarter you just were getting better? I mean, maybe what was it like when you still have capacity constraints and already too much demand to deal with?
spk08: Thanks, John, for the question. You know, I just also want to reiterate the success of that boost week. It was the biggest week for us for the year, and on the carryout side, it was our biggest week in history. And so when you think about a boost week, it's not just about the delivery business. It's also about the carryout business, and we did an incredible job doing it there. Look, we have the best franchisees in the business, and we gave them enough time and our supply chain enough time to prepare for this thing, we were ready. I think you're also right. It is showing that we're making some of the things that we're doing are improving. Sandeep talked about the sequential decline and the difference between our top and bottom staff quintile. So we wouldn't have done this if we didn't think we could handle it. And I think our system did a great job.
spk18: Thank you. Thank you. And I show our next question comes from the line of John Ivanko from Morgan Stanley.
spk14: Please go ahead. Hi. Thank you from J.P. Morgan. I think I heard in your prepared remarks that the U.S. would see, I guess, a downtick in development for the next 12 months relative to this last 12 months. Could you just clarify that I heard that? And then secondly, you know, if you're willing to give, you know, that, I guess, soft guidance for the U.S., I mean, can you do something similar on international, especially with, you know, the negative same-store sales, you know, in the second quarter comps are very often a leading indicator of development. You know, should we expect the next 12 months of international to be, you know, same, higher, or less than what, you know, the 1,000 or so stores that you hit in the previous 12 months? Thanks.
spk13: Thanks, John, for the question. So I think what you did here on the prepared remarks was, yes, we expect to see a slowing down of the trade in 12 months unit growth, definitely through the balance of the year and as long as we see the headwinds. So I didn't say 12 months, but we said 12 until the headwinds subside. But I think in the international business, we're super excited because it's a plus 9% 12 months growth, and that's very, very solid. And I think if you look at the quarter and you unpack it, it was really driven by this UK VAT impact and the overlaps. And in fact, if you include it, basically, it would have been a slightly positive call for the international division. And so what I would say is look at the three-year stacks on international. It's 13%, very healthy, and we're very confident with that. And so I think We're very comfortable with the range that we provided, the 6% to 8% on average across the global footprint of growth, and internationally at 9%. We've demonstrated that with all these comps, we've been able to deliver very strong unit development, and we see no reason for that to change.
spk08: Yeah, I think to Sandeep's point, just a little context on the development side. First, I'm just so proud of our system. If you look back at the last five years, and you look both in the pizza industry and the QSR industry, as far as actual number of Nest stores and percentage, Domino's is a leader in that. And still with these numbers, we're going to continue to be a leader. So just some context there. Well, also, I think what that tells me is while we continue to lead in development, our franchisees are doing exactly what they need to do, which is balancing the capacity needs between the current stores they have and stores they need to open.
spk11: Thank you.
spk18: Thank you. And I show our next question comes from the line of Andrew Charles from Callen & Company. Please go ahead.
spk01: Great, thank you. I wanted to follow up on an earlier question. U.S. same-store sales accelerated by an impressive, I think you said, 530 base points from 1Q to 2Q on a three-year basis. And I know you guys called out 6% price in 2Q, and first, it's very helpful. Thank you for disclosing that. But, you know, we estimate nearly 5% price was taken at the end of 1Q back when the mix-and-match platform for delivery orders was raised from $5.99 to $6.99. You know, we know the 10Q called out a higher number of items per order in addition to that higher pricing at the end of 1Q. So I'm curious if you can speak to the sequential change in traffic from 1Q to 2Q on a three-year basis that RMAT suggests was perhaps flat, perhaps deteriorated. Some encouraging updates that you guys shared on staffing and carryout.
spk13: A lot to unpack in the question itself. But I'd say overall, let's start with pricing. Now, pricing, we have multiple levels on pricing. Mix and Match is one of them, and it's part of the national office. But I think there's menu pricing. which I think would have been activated well before any of the changes on national offer that we talked about. There's the national offer updates that were made in the first quarter. And then I think local pricing is actually an option that the franchisees have at their disposal. And delivery fees are something that has been activated all the time with the franchisees. So all of those elements would have gone into pricing effectively both in the first quarter as well as the second quarter. And it's not just national pricing. So the average of all of that was about 6% in the second quarter. So that's That's one thing I would actually take away from that. And so I think when we look at pricing and ticket versus order count, what we had in the second quarter was order count was definitely down. And I think when you look at the pressure that we actually faced, the pressure was really significantly more the delivery side. And then when I look at the overall offset, we saw ticket offsetting all the time declines to end up with the minus 2.9% that we saw in the quarter. Even though we have these headwinds, I think sequentially sales did accelerate to the point that we made. And I think we're very happy because from a sequential standpoint, it's clear that the actions that we're taking to address the issues in terms of capacity to serve and the delivery business are helping us. And we're seeing the demand coming through, and that's why we saw the acceleration, because it's reflected both in the order count as well as the ticket and the combination of both. So happy with what we're seeing, but I think as we go through the subsequent quarters, we'll have more information on all the drivers that we've been talking about all year.
spk18: Thank you. Thank you. And I show our next question comes from the line of Jared Garber from Goldman Sachs. Please go ahead.
spk16: Good morning. Thanks for the question. I wanted to revisit the U.S. unit growth commentary. I know it's been asked a couple of times, but if we look back historically, the unit growth annually has certainly continued to decelerate, even if we look back to, you know, several years ago into the 2018 or 19 timeframe. Can you just help us understand what gives you the confidence that pace of development can re-accelerate? Maybe it's after it's a 2024 kind of timeframe, given some of the headwinds you talked about. Maybe there's a way to frame what the pipeline of demand looks like from franchisees. And then as a follow-up, just as we think about the carryout opportunity, is that changing how the discussions are going with franchisees, maybe in terms of site location making those a little bit more accessible to consumers versus, I think, the base delivery business is one that doesn't necessarily need to be main and main to drive that delivery business, but that may change, but carry out as a greater focus going forward. Thanks.
spk13: So, Jared, thanks for the question. There's two pretty significant components in that. So let me stop for a second, and I'm going to go to the first, because From a carryout momentum standpoint, I think Russell talked about it earlier in one of the previous answers as well. The carryout business and the delivery business are two separate businesses. What we are seeing is very significant acceleration in the carryout business, which is very encouraging for us because we basically are able to penetrate a new market, and I think a significantly larger market in addition to the delivery business. The delivery business, one in three pizzas, like Russell told you last time, is delivered by us. So we have a very strong position in that. So the thesis in terms of unit development is based on both businesses being fulfilled from the box. And the potential that we have continues to be very strong. If anything, this actually gives us even more runway in terms of unit development versus what was there before. But in no way is this a trade. between carryout and delivery. They're two separate businesses. The carryout should be incremental to the delivery business, and we're doing all the work that we're doing on the delivery business. So in terms of U.S. unit growth and the deceleration that's been happening, there's a few puts and takes that are going on over there. I think it's a few years ago we had the reclass of Hawaii and some of the market that's basically out of the United States into, out of international into the United States. which helped the United States. That was the one year it picked about 5%. But other than that, it's been in the four-ish range pre-pandemic. And I think the trading 12 months of three is more reflective of some of the headwinds that we've been seeing since the pandemic started in terms of economic factors, including staffing. So overall, I think once we get past these headwinds, there's no reason we can't get to a normalized unit development growth, especially given the drivers I just talked about, this carryout business being an incremental opportunity that we seem to be seeing gathering steam as we go along, and the delivery business being what the baseline thesis was about anyway. So that's answering both of your questions, and I hope we gave you enough information on that.
spk08: Yeah, Sandeep, I think I would just add, there is every incentive for our franchisees to continue to build. Obviously, the EBITDA per store is still a very strong place. The returns on a new store are still in a very strong place. When we look at the top quintile stores on delivery, the ones that are really doing well, those are the ones that have fortress the most. And so what happens when you're Fortress is you get closer to your customers. Getting closer to your customers from a delivery perspective during a capacity-constrained, labor-constrained environment helps delivery. We also know the majority of the carryout line, the overwhelming majority of carryout line when you open up a new store is incremental. So there's every incentive financially and also in helping us deal with capacity to go ahead and continue to do that.
spk18: Thank you. Thank you. And I show our next question comes from the line of Andrew Strithick from BMO Capital Markets. Please go ahead.
spk15: Hey, good morning. Thanks for taking the question. I just wanted to follow up on a comment, Cindy, that you made in your prepared remarks about after the first full quarter, excuse me, seeing a lot of efficiency opportunities. Can you elaborate a little bit on what you're seeing, maybe where the biggest opportunities are and the timeline to which we might see that start to come through the P&L? Thanks.
spk13: Yeah, Andrew, thanks for the question. And so I think the opportunities are multifaceted, right? So I think we talked about three different components. On the first one, we talked about the consumer pricing architecture. And I think There, it's really about looking at, given the different cost pressures that we're dealing with, how do we make sure that we deliver terrific value to the consumer, but at the same time, taking our price where it makes sense, and it still delivers that value to the consumer. And so we'll keep on looking at that as time goes along. The second was just making sure that operating revenues are growing faster than expenses. And from an operating margin standpoint, we did see some sequential improvement. We went from a 270 basis points decline in Q1 to 180 basis points decline in Q2. So that includes some G&A discipline as well that we talked about. And you saw that we lowered our guidance for the year on G&A based on that. And it's really about prioritizing our expenses to make sure that we're making investments in opportunities that are driving year-term growth and actually continuing to invest in critical areas like technology and supply chain, which we have over the years. We'll keep doing that. But it's that prioritization that is critical. But the most important thing, honestly, is the third one that I talked about, which is How do we accelerate our capacity to serve the demand that we see? And that's what Russell talked about earlier in the call. And I think that's been very encouraging to see the progress that we've actually made in the last quarter. We continue to work on similar drivers in the coming quarters as well. So as much as we can make progress on that, I think we'll be able to get to a much better place.
spk08: Yeah, I would just add to Sandeep's talk about efficiency answers your question from a financial standpoint. I would maybe do that also from to have some color on the operations standpoint. Essentially, on the delivery side, efficiency is what we need to drive. Simplification is what we need to drive. So our folks in stores are focused on the most added value parts. And if you think about a couple of the programs we talked about last quarter and we continue to give some input on here, for example, one of those things is taking calls out of the store. We ended last quarter with 29% of our stores on call center. We ended this quarter at 43%. Our operations simplification project, there are many of them. One we spoke about last time, which is eliminating multiple box folding times within a store, which doesn't sound like a lot. It actually adds up to 40 hours a store a week. And that program is now in 90% of our stores around the country. So efficiency on the operations standpoint leads to an unlock of capacity, and then that flows down through the financials.
spk03: Great. Thank you very much.
spk18: Thank you. I show our next question. It comes from the line of Dennis Geiger from UBS. Please go ahead.
spk17: Great. Thanks for the question. I appreciate all of the commentary on your efforts to address the driver staffing challenges and sort of a lot of the metrics that you provided as a result there. I'm just wondering if you could speak a bit more to sort of where you are on the journey to address the challenges. Is the plan to address the driver situation internally, is that finalized, or are you still kind of tinkering with different opportunities internally to address that? And I guess really the question is if you could kind of frame up what inning you think you're in with respect to addressing those challenges internally, maybe before you look at other options, if there's a way to frame that up. Thank you.
spk08: I don't know about anything, Dennis. It's the all-star break. Although my Yankees, Mr. Stanton won the MVP, so we're pretty happy there. We are a work-in-progress brand, and we are never going to be satisfied. with our ability to fulfill capacity until we can fulfill every single order that is coming our way. So in that case, we will never be in the final three innings as far as I'm concerned because we can always get better. we did say we do think in our first part is to try to fulfill this stuff internally we have a lot of stores who are doing that a lot of franchisees are doing that we are 100% committed to getting this done ourselves and we're seeing improvements but you know until we get where we need to be it you know we will continue to explore all options and but our big focus there is for us to be able to serve our own customers
spk03: Thank you very much. Go Yanks.
spk18: Thank you. And I show our next question comes from the line of Lauren Silverman from Credit Suisse. Please go ahead.
spk00: Thanks for the question. I'd want to boost the boost week. So one was ran in early June, and I think you talked about plans to do another one by the end of the summer, which I believe is more frequent than historical. So can you talk about how you're thinking about the cadence of Booth Week promotions from here? And is there any read-through on underlying demand? Or do you see this more as a catch-up from not running promotions over the last couple of years? Just trying to understand how that all plays out.
spk08: Yeah, no, I mean, if you look historically, we ran, you know, call it three to four boost weeks a year. Obviously, we are planning one at a time. And so we want to work with our franchisees. Obviously, everyone thought the last one went well. We're going to see how the next one goes. And, you know, we will announce anything further, you know, after that happens. So nothing more than just, you know, one step at a time, one piece at a time.
spk09: Thank you.
spk18: And Aisha, our next question comes from the line of Chris Carroll from RBC Capital Markets. Please go ahead.
spk02: Hi. Good morning. Thanks for the question. And thanks for the detail and thoughts on pricing so far. Following up on those earlier comments, though, can you tell us how you're thinking about pricing power today? Do you see greater risk to any potential further pricing actions? given that there is more pressure on the consumer today, or do you see yourself as well-positioned should you pull that pricing lever if necessary?
spk13: So it's a great question, and I think it really ties back to what I talked about in the prepared remarks, which is, in the end, pricing in itself is fine, but it's about making sure there's a terrific value to the consumer. And that really is the key threshold for us. And so we continue to do testing. And by the way, the testing has been done for the last decade, not just the last quarter. And that's a process that is always going on inside the company. And look, when the macroeconomic situation is as volatile as it is, things keep on shifting. And we continue to do consumer testing to ensure, based on the shifting sands, what makes sense and what doesn't make sense. we're pretty clear that there is definitely an increasing cost environment. So there's a balance between making sure that terrific value is being delivered to the consumer and then making sure that from a profitability standpoint, our franchisees are able to make the profits on their stores to deliver the paybacks they need from a long-term perspective. And we and our franchise partners basically look at it from a long-term perspective, because most of them have been with us for decades or a number of years and signed long-term commitments with us, and it's a shared journey. So we work on it together with them, and I think that thoughtfulness will continue to go into what we do.
spk08: Yeah, I just add to that, you know, to Sandeep's point on balance. You know, the balance for us, if we go into this quantitative testing, like he said, we've done this over a decade, is essentially the balance, how do we operate? But also, how do we optimize value to the customer? And all of those inputs just help us get to where we want to be. We know at the end of the day, though, order counts are much more correlated to profitability than tickets, so it's about driving order counts. When we talk about the macro environment, to me, I started at Dow and I was right in the middle of a recession about 14 years ago. This is a category where for folks who want to continue to eat out when times are tough, they will maybe down switch from a sit down or what have you into pizza. So we actually think, you know, where our concept, our business is strong as we maybe go through more difficult times. Thank you.
spk18: Thank you. Our last question will come from the line of Mr. John Tower from Citi. Please proceed with your question.
spk03: Hello?
spk18: Mr. Tower, your line is open.
spk03: There we go. Sorry, you cut out for a minute there. Yeah, I appreciate you taking the question. First, a clarification and then a question. I'm curious if you could clarify or at least explain perhaps the check differences between in the carryout business versus the delivery business and what that might mean for your same store sales just in a normalized environment. Then I guess the question is, you did the Stranger Things promotion this quarter and I believe it's the first time since, I want to say, Batman in 2008 that you've done anything with really any other brand, at least in the TV or streaming businesses. I'm curious to know if this is a one-off or if you believe this is something that could persist with other TV shows or whatever in the future.
spk13: Yeah, so John, I'll go to the clarification question and then Russell will definitely answer the question of the Stranger Things question that you had. So I think from a check difference standpoint, always, I think, between the delivery fee and other components of the cost to serve, the delivery ticket tends to be higher than the carryout ticket. There's a few other dynamics in terms of some of the natural alpha changes that we made as well that go into it. But that is pretty much what we would say. It is a higher ticket than carryout. But I think it also is pretty obvious when you look at the relative trends of delivery versus carryout. Carryout had a 14.6% same-store sales increase in the quarter. Delivery was down 11.7% and comps were down minus 2.9%. So you can actually make the conclusion from that too.
spk08: Yeah, and on Stranger Things, you have an amazing memory. My first day, I remember looking at that Batman box and stuff. Wow, that's pretty amazing. You know, you're right though. Interestingly enough, we have not done a tie-in in a big way since then. And that's because, you know, I believe, we believe that we really don't have any interest in getting lost in a laundry list of brand tie-ins. And most of the time nowadays, whether it's with sports or with, you know, movies or what have you, that's what it is. At the end of the day, I'm not sure if anyone knows what brand is associated with what. I think you just get lost there. And I think that was one of the reasons why this promotion was so strong, because we don't do it a lot. And Netflix, and particularly the Stranger Things property, they don't do that a lot. And so when two brands that are really strong brands in and of itself without being borrowed equities come together and do something, this is so powerful. And so we have an opportunity like this comes around. Again, you can see us do this, but our logo will not be pasted at the bottom of a dozen others in a partnership.
spk18: Thank you. This concludes our Q&A session. At this time, I'd like to turn the call back to Russell Weiner, CEO, for closing remarks.
spk08: Hey, thanks so much, everybody, for joining the call this morning. Sandeep and I look forward to speaking with you in October. to discuss our third quarter 2022 results. Third quarter 2022 results. Have a great.
spk18: This concludes today's conference call. Thank you for participating.
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