Domino's Pizza Inc

Q4 2022 Earnings Conference Call

2/23/2023

spk14: Thank you for standing by and welcome to Domino's Pizza's fourth quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. To remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Ryan Goers, Vice President, Finance and Investor Relations. Please go ahead, sir.
spk01: Thank you, and good morning, everyone. Thank you for joining us today for our conversation regarding the results of the fourth quarter and full year 2022. Today's call will feature commentary from Chief Executive Officer Russell Wiener and Chief Financial Officer Sandeep Reddy. As this call is primarily for our investor audience, I ask all members of the media and others to be in a listen-only mode. I want to remind everyone that the forward-looking statements in this morning's earnings release and 10-K also apply to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecast. 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. I 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 for replay via our website. With that, I'd like to turn the call over to our Chief Executive Officer, Russell Wiener.
spk13: Thank you, Ryan, and thanks to all of you for joining us this morning. As we end 2022 and look back to the beginning of the pandemic, I'm encouraged by the incredible work done by Domino's team members and franchisees. Since the beginning of 2020, we and our franchisees have grown by 2,860 new stores around the world, when many restaurant brands closed doors. or struggle to grow through an extremely difficult time for store development. Domino's is in over 90 markets and should hit 20,000 stores as a system in 2023. In the U.S., the QSR pizza category grew over the last three years, with sales up almost 10% versus pre-pandemic levels. Domino's service deck rose, resulting in a gain of approximately three share points in the QSR pizza category since 2019, according to NPD. We continue to grow our carryout business. Carryout now comprises approximately half of the orders and about 40% of sales in the U.S. Carryout remains highly incremental to delivery for us. And in cases where it's not incremental, customers are moving to a service method with significantly lower costs for our system. Our delivery business experienced both headwinds and tailwinds over the past three years. our team focused efforts on finding solutions at every turn. Now to the fourth quarter. In the fourth quarter, our results were mixed, particularly with the challenges in the U.S. delivery business that we previewed during our Q3 call. During that call, I pointed to a couple of dynamics we were watching in the broader restaurant category that have since played out. First, as consumers return to many of their pre-COVID eating habits, some of the sit-down business that was a source of volume for restaurant delivery orders returned to that channel. Second, inflation impacted delivery due to the added expenses of fees and tips in that channel. Our research shows that a relatively higher delivery cost during inflationary times leads some customers to prepare meals at home instead of getting them delivered. We believe this dynamic will continue to pressure the delivery category in the short term as long as consumers' disposable income remains pressured by macroeconomic factors. Despite these pressures, U.S. delivery sales for Domino's in 2022 were more than half a billion dollars higher than the pre-COVID baseline in 2019. Domino's delivery business was not alone in facing these challenges. According to NPD data, the entire QSR delivery category was down high single digits for fiscal year 2022. Not surprisingly, according to NPD, pizza delivery was down as well. Given these industry-wide headwinds, we're encouraged that while our delivery business was challenged in 2022, Domino's saw a moderate increase in QSR pizza delivery share. On the topic of delivery, while there's more work to do on staffing that part of the business, we feel like answers to this challenge exist within the Domino's system. Staffing has improved at all positions in our corporate restaurants, including drivers. Continuing to leverage internal best practices around delivery service, as well as innovations in this area like our new electric delivery fleet, should help continue to improve this critical measure. I am proud of the work that we and our franchisees have done to address labor constraints in the delivery business and know we have more to do. A consistent positive throughout 2022 has been the continued evolution of the Domino's business. This helped offset some of the macro challenges on the delivery side. In the U.S., we are a more complete restaurant company than ever, running two businesses out of our stores. We are number one in the U.S. in both the delivery and carryout pizza segments of QSR. The carryout business continues to be a strength with tremendous momentum. In fact, U.S. carryout retail sales for full year 2022 were more than $1 billion higher than pre-COVID levels. More importantly, we still have a long runway for growth in this important segment of the business. To give you a sense of the current scale of our U.S. carryout business, if it were a company of its own, Domino's carryout would be counted amongst the top 20 QSR brands in America based on consumer spending, obtained by NPD for the year ending December 2022. To support the growth of the business, we opened a new supply chain center in Merrillville, Indiana in September. As you know, we have invested significantly in our supply chain, opening four new centers since 2018. During the fourth quarter, I visited our new center in Indiana. It has the latest in technology, automation, and new operational procedures. Merrillville represents an incredible testing ground for the future of Domino's supply chain. And we look forward to bringing the best parts of what we learned in Indiana to other centers around the country over time. 2022 was a strong year for global store growth. We and our franchisees had nearly 1,300 gross openings around the world in 2022. For context, that's about 3.5 new store openings per day on average while operating in a difficult environment for development. This is a testament to the strength of the Domino's brand around the world. Our team members and franchisees have continued to show the agility and perseverance required to operate and grow Domino's footprint in a volatile macroeconomic environment. Looking specifically at our international business, the 1,135 gross openings outside of the US were the highest organic openings in our history. meaning they were achieved without any of our master franchisees conducting a large-scale conversion of another pizza chain. One of my personal highlights during the quarter was the opportunity to be in market with one of our largest master franchisees, Jubilant Foodworks. In December, I met with their team in New Delhi, where they reiterated their goal to grow to over 3,000 stores in India over the next five years, which would further cement Domino's position as the leading QSR brand in this critical global market. Additionally, Jubilant is inspiring our global system to raise the bar on service with their new 20-minute delivery zones. I was able to see these in action when I was touring stores. Service has always been a key differentiator for the Domino's brand, and Jubilant is extending its delivery service advantage in India. How are they able to do this? With incredible operations enhanced by a global fortressing strategy. When we and our franchisees build more stores, we can get closer to customers and improve delivery and carry out service. Now for more detail on our Q4 results, I'd like to turn it over to our CFO, Sandeep Reddy. Sandeep.
spk00: Thank you, Russell, and good morning to everyone on the call. I'll begin my remarks with updates on the actions I've previously outlined to improve our long-term profitability. We are continuing to examine and evolve our pricing architecture. During the fourth quarter, the average year-over-year price increase that was realized across our US system was 6.3%. The realized pricing for full year 2022 was 5.4%. Second, efficiencies in our cost structure as we seek to ensure that revenues consistently grow faster than expenses. We saw another sequential improvement in year-over-year operating income margin as a percentage of revenues as margins expanded 130 basis points in Q4 versus the 160 basis points contraction in Q3. Even if you exclude the 150 basis points benefit to operating income margin from the $21.2 million dollar re-franchising gain recognized in the quarter, The contraction in year-over-year operating income margin as a percentage of revenues in the quarter sequentially improved by 140 basis points versus Q3. Third, we had positive same-store sales growth excluding foreign currency impact in both our U.S. and international businesses for the first time since Q4 2021, contributing to improving our operating income leverage. Now, our financial results for the quarter in more detail. When excluding the negative impact of foreign currency, global retail sales grew 5.2% due to positive sales comps and global store growth over the trailing four quarters, lapping 9% global retail sales growth excluding FX and the 53rd week impact in 2020 in Q4 2021. As we have discussed in the past, we believe it has been instructive to look at the cumulative stack of sales across the business anchored back to 2019 as a pre-COVID baseline. With the evolving macroeconomic conditions, we do not currently believe it will be relevant to anchor back to 2019 going forward and anticipate returning to evaluating the business on a one-year comp basis in 2023. Looking at the three-year stack, our Q4 2022 global retail sales excluding foreign currency impact grew over 26% versus Q4 2019. Breaking down total global retail sales growth, U.S. retail sales increased 2.7%, rolling over a prior increase of 4.6%, excluding the impact of the 53rd week in 2020. and are up more than 21% on a three-year stack basis relative to Q4 2019. International retail sales, excluding the negative impact of foreign currency, grew 7.5%, rolling over a prior increase of 13.2%, excluding the impact of the 53rd week in 2020, and are up more than 30% on a three-year stack basis relative to Q4 2019. Turning to comps, during Q4, same-store sales for the U.S. business increased 0.9%, rolling over a prior increase of 1%, and were up 13.1% on a three-year stack basis relative to Q4 2019. This represented a sequential deceleration of 4.5% from Q3 on a three-year stack basis, as we saw clear evidence of softening demand from delivery customers in particular, given the challenging macroeconomic environment during the holidays. The estimated impact of fortressing was 0.5 percentage points during the quarter across the U.S. system. Going forward, we will only update the impact of fortressing if the change in impact is material. The increase in US same-store sales in Q4 was driven by an increase in ticket, which included a 6.3% in pricing actions I mentioned earlier, partially offset by a decline in order counts. As we have previously shared, we believe it is instructive to break US 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 Q4 same-store sales, stores in the top 20%, those that are essentially close to fully staffed, on average outperform stores in the bottom 20%, those that are facing the most significant labor shortages, by less than two percentage points. This is down sequentially from the approximate six percentage point gap we saw in Q3. Now, I'll share a few thoughts specifically about the U.S. carryout and delivery businesses. The carryout business was strong in Q4, with U.S. carryout same-store sales 14.3% positive compared to Q4 2021. On a three-year basis, Carryout same-store sales were up 31% versus Q4 2019. The gap for carryout between the top and bottom quintiles based on staffing levels remained small during the quarter. The delivery business continued to be more pressured. Q4 delivery same-store sales declined by 6.6% relative to Q4 2021. Looking at the business on a three-year stack, Q4 delivery same-store sales were 3.3% above Q4 2019 levels. When we look at the same quintiles relative to the delivery business, the gap between the top and bottom quintile stores closed considerably. We saw only a two percentage point gap in delivery same-store sales between stores in the top 20% and those in the bottom 20%. This represents a sequential improvement from the eight percentage point gap in the third quarter. The two percentage point gap is in line with the expected gap in performance in a normal operating environment, and we believe is no longer a significant driver of sales performance. We do not intend to continue disclosing the performance by staffing quintiles in the future. Our U.S. carryout business is going from strength to strength, and our pizza QSR carryout market share is up close to 200 basis points in 2022 and up close to 500 basis points since 2019. Our market share in total pizza QSR, which includes delivery, carryout, and sit-down, continued to hold steady over the past year and is still up close to 300 basis points versus three years ago. Before I conclude my comments on market share, I would like to touch on channel dynamics for pizza QSR versus non-pizza QSR based on data we received from NPD. As Russell mentioned earlier, delivery in 2022 was done in both pizza QSR and non-pizza QSR, while sit-down was up significantly in both. In the case of pizza QSR, this was driven more by a shift from delivery to sit-down and cooking at home. In the case of non-pizza QSR, growth in sit-down was potentially driven by a shift from delivery but also from carryout. Domino's business model in the U.S. has historically been focused mostly on the delivery and carryout channels, so the shift to sit-down hurts us relative to others in the non-pizza QSR, who historically have had business models that included sit down and carry out, but have now added delivery to their distribution channels. We expect this dynamic to continue to play out in 2023, as sit down, despite recent growth, is still below 2019 levels. Shifting to unit count, We and our franchises added 43 net new stores in the U.S. during Q4, consisting of 50 store openings and seven closures, bringing our U.S. system store count to 6,686 stores at the end of the quarter, which brought our four-quarter net store growth rate in the U.S. to 1.9%. This deceleration in growth was expected in light of the permitting and store construction supply chain challenges we have faced all year. While we expect the first half of the year for U.S. store openings to continue to be challenging due to a continuation of these same factors, based on our current pipeline, we expect a gradual recovery starting towards the second half of 2023. Domino's unit economics remain strong relative to the many pressures faced throughout the year, including staffing challenges, and a high inflationary environment for food and labor. The average Domino's store in the US generated more than $1.3 million in sales during 2022. We currently estimate that our 2022 average US franchisee store EBITDA was close to $137,000, not much below the 2019 estimated EBITDA of $143,000. In fact, estimated average store profitability was higher in Q4 2022 than Q4 2019. We will update the final number on our Q1 call. With our continued strong four-wall economics, we remain bullish on the long-term unit growth potential in the U.S., and we maintain our conviction that the U.S. can be an 8,000-plus store market for Domino's. New store openings paybacks remained strong with stores opened in 2019, averaging around three-year paybacks, similar to the 2018 vintage. Same-store sales excluding foreign currency impact for our international business increased 2.6%, rolling over a prior increase of 1.8%, and were up nearly 12% on a three-year stack basis relative to Q4 2019. We continue to face the headwind of the negative year-over-year impact of the expiration of the 2021 VAT relief in the UK, our largest international market by retail sales. The fourth quarter impact was around half the magnitude of the second and third quarter, as the UK VAT relief was reduced from 15% to 7.5% in 2021 on October 1st. The year-over-year impacts of expiration of the UK VAT relief will continue while we lap the reduced rates that were in place through March 31st, 2022. Our international business added 318 net new stores in Q4, comprised of 406 store openings and 88 closures. Our closures were driven by another round of closures in Brazil as our master franchisee there continues its work to optimize the store base in the market, as well as some closures in Russia where our master franchisee, as previously announced by them, continues to explore opportunities to exit the business in that market. This brought our current four-quarter net store growth rate in international to 7.4%. When combined with our U.S. store growth, our trailing four-quarter global net store growth rate was 5.5%. The 5.5% is impacted by a significant increase in international closures this year as compared to our historical run rate, including in Brazil, Italy, and Russia. Turning to EPS, our diluted EPS in Q4 was $4.43 versus $4.25 in Q4 2021. Breaking down that $0.18 increase in underused EPS, our operating results benefited us by $0.27. Changes in foreign currency exchange rates negatively impacted us by $0.22. Our lower effective tax rate positively impacted us by $0.20. driven by the discreet impact from the reversal of a tax reserve based on a recent tax law change related to one of our foreign subsidiaries during 2022. Lower net interest expense benefited us by 4 cents. The re-franchising gain recognized from our fourth quarter store transaction benefited us by 46 cents. The unrealized gain recognized on our re-measurement related to our investment in Dash in 2021 negatively impacted us by 68 cents. And the lower diluted share count driven by share repurchases over the trading 12 months benefited us by 11 cents. Transitioning to the full year, I would like to hit on a few financial highlights for 2022. Global retail sales grew 3.9% for the year, excluding the impact of foreign currency. Same-store sales in the U.S. declined 0.8%, and international, excluding FX, grew 0.1%. We and our franchisees opened 1,032 net new stores during the year, despite significantly higher closures this year in our international markets, as previously discussed. Our food basket for the year was up 13.2%, reflecting the strong impact of inflation. Our GNA for the year was $417 million, down 2.8% versus $428 million in 2021. Operating income was down $12 million versus 2021, including the $21 million impact of the re-franchising gain. Operating income margin was positively impacted by 50 basis points due to the re-franchising gain, but this was fully offset by the negative impact from foreign currency. If foreign currency remains at current levels or increases as a headwind going forward, we expect that this will be a barrier to recovering to our pre-pandemic operating income margins. Although we face operating headwinds in 2022, we continue to generate sizable free cash flow. During 2022, we generated net cash provided by operating activities of approximately $475 million. After deducting for capital expenditures of approximately $87 million, which consisted of investments in our technology initiatives and supply chain centers, we generated free cash flow of approximately $388 million. Free cash flow decreased $172 million from 2021 due primarily to changes in working capital, including accrued liabilities and income taxes, as well as higher advertising fund spend and lower net income. During the year, we returned over $450 million to shareholders through share repurchases of $294 million and dividends of $158 million. As of the end of the year, we had approximately $410 million remaining under our current board authorization for share repurchases. Our board has also approved a 10% increase from our prior quarterly dividend to $1.21 that is payable on March 30th of this year. Looking forward to 2023, we would like to provide our annual guidance measures for the year. We currently project that the store food basket within our U.S. system will be up 3% to 5% as compared to 2022 levels. We expect the first quarter food basket increase to be higher than the rest of the year. We estimate that changes in foreign currency exchange rates could have a $2 million to $6 million negative impact on international royalty revenues in 2023 as compared to 2022 if foreign exchange rates remain at current levels. The negative impact of currency is expected to be higher in the first half of the year based on current rates. We anticipate our CapEx investments will be between $90 million and $100 million as we continue to strategically invest in our business and prioritize our spend. We expect our G&A expense to be in the range of $425 to $435 million. Our tax rate, excluding the impact of equity-based compensation, is expected to range from 22% to 24%. Finally, given the current macroeconomic headwinds that are impacting our U.S. delivery business in particular, we are updating our two- to three-year outlook from 6% to 10% global retail sales growth to 4% to 8% global retail sales growth and unit growth, from 6% to 8% global net unit growth to 5% to 7% global net unit growth. We expect 2023 to come in towards the low end of the ranges for both metrics. We look forward to providing more details at an investor day we will hold before the end of calendar 2023. Thank you all for joining the call today, and now I will turn it back to Russell.
spk13: Thank you, Sandeep. The Domino's system has a lot to be proud of, and we also have opportunities to address. We pride ourselves on being a work in progress brand, and there's no better way to describe this period in our history. As we saw in the last recession, delivery moves with the economy, especially for customers with lower disposable income who represent a significant portion of our business. As it was in Q4 of 2022, we expect the economy to be a headwind for our delivery business in 2023. While we expect to continue to grow QSR Pizza delivery share, we also expect that delivery sales will be challenged. Every day, delivery customers will be deciding where to spend their hard-earned dollars. So we need to maintain value and continue to improve our service. On the subject of value, moving the 599 mix and match offer we launched in December of 2009 to $699 in 2022, was the right decision for our brand. That said, we and our franchisees must be vigilant to make sure value exists across our entire menu, not just in promotional offers. We also need to drive more innovation. When I look back at my 14 years at Domino's, we were at our best when we brought big ideas to market. These ideas helped us tell great brand stories. Coming out of COVID, we became more transactional with our customers than I would have liked. This was understandable as our team needed to pivot and react to some of the labor constraints we discussed earlier in the year. I'm encouraged at the way we ended 22 and have begun 2023. We and our franchisees reinforced our position as the delivery leader by introducing a fleet of 800 electric delivery vehicles. Domino's now has the biggest electric fleet of pizza delivery vehicles in the country. In carryout, we brought back our innovative carryout tips promotion, which continues to drive value and news in that segment. We launched Loaded Tots in early 2023. Adding a potato side to our menu has been a goal for many years, but it was difficult to find a product that delivered well and didn't end up in customers' homes cold and soggy. Loaded Tops delivers, literally and figuratively, and continues our innovation strategy of adding platforms that are incremental to our menu. In 2023, we will also refresh and improve our Piece of the Pie loyalty program. We finished last year with approximately 30 million active members in the program and over 77 million total members in our loyalty database. We launched Piece of the Pie in the fall of 2015. There is an opportunity to innovate and grow this program further by unlocking value to an even wider base of customers. Domino's has been called many things over the years. A pizza company, a delivery company, a marketing company, a technology company. All of those are true. But when we are at our best, we're also an innovation company. Product, service, and technology innovation with a very specific purpose. to give our customers and store team members the best possible pizza experience, to tell one-of-a-kind brand stories, and to over-deliver on expectations. This is what you have come to expect and should continue to expect from Domino's Pizza.
spk14: With that, we'll open the call to questions. Certainly, as a reminder, ladies and gentlemen, if you have a question at this time, simply press star 11 on your telephone. One moment for our first question. And our first question comes from the line of Brian Bitter from Oppenheimer. Your question, please.
spk15: Thank you. Good morning. My question is on unit growth. Just first on the two- to three-year algorithm change, moving to five to seven from six to eight. Can you just help us understand the drivers that force this change? Is it primarily because of the decelerating U.S. outlook, or is there other factors that maybe you'd like to take this moment to unpack for us. And second to that, Sandeep, you said in 2023 unit growth should be at the low end of this new range, kind of near the 5% area. Can you just paint the scenario for us where you accelerate from the bottom of this range? Is there a catalyst that you see emerging following 2023 that we should be thinking about that makes the midpoint of this range more of a base case? for unit growth moving forward? Thanks.
spk00: Good morning, Brian. Thank you for the question. And so let me start first with the rationale for the unit growth update from 6 to 8 percent to 5 to 7 percent. As we said in the prepared remarks as well, I think the U.S. delivery business and the constraints that we see in front of us on the U.S. delivery business are a big driver of the decision to actually slow down the expectations from a unit growth standpoint. And as you also noted from my prepared remarks, the headwinds that we saw throughout 2022 are expected to continue into the first half of 2023. And that is going to put pressure on the unit growth that we expect to see as we go forward in 2023. And I think in terms of of what the catalyst would be. The answer is a little bit in terms of what I talked about on the US growth itself and the cadence. So the first half of the year is going to continue to be pressured for the same reasons that it was pressured in 2022. But as we move into the second half of the year, the pipeline that we have for 2023 looks really encouraging. And I think this is on the back of economics that continue to be very compelling. We're delivering $137,000 in EBITDA with all the the pressures that we face from an inflationary standpoint on food costs, labor, and just general costs in the P&L. And that's literally within $6,000 of 2019 levels. And most encouragingly, the exit rate from Q4 had the EBITDA levels that we're estimating above 2019 levels. This is really a manifestation of the price increases that we took on the national offer of a mix and match in the fourth quarter in particular for carryout beginning to flow through. The flow-through benefits for the franchisee P&L are very compelling, and we feel that if this continues, this cadence as we move forward in 2023, notwithstanding the 3% to 5% food basket increase that they're looking at, franchisees are in a very good place to continue improving their profitability. And that's why we feel so confident with the pipeline that we're seeing in 2023 economics back it up. Paybacks continue to be very strong at roughly three years.
spk14: Thank you. Thank you. Thank you. One moment for our next question. And our next question comes from the line, Peter Saleh from BTIG. Your question, please.
spk04: Great. Thanks. Russell, you alluded to some changes to the rewards program in 2023. I was hoping you could add a little bit more color to that. That feels like it could be a meaningful driver as it's been a driver for you guys for several years in the past. So just any update on that would be beneficial. Thanks.
spk13: Sure. Good morning, and thanks, Peter. As I said during my remarks, we've been pleased with this program. We launched it in 2017. We've got over 30 million active members, 77 million total members. And really, at this point, as we think about the evolution of the rewards program, It is about taking the best and keeping the best of what we have and then continuing to dial up on where the opportunities are. And so, and we're not going to talk to the specifics of it now, but I think when you see us launch it later on this year, you'll see those who are joining the program continue to, are going to continue to enjoy the positives of it. And probably some of our less frequent customers are going to be incented to do more. And I should tell you, I'm sorry, I misspoke there. The launch of the loyalty program was 2015, not 2017.
spk04: Thanks. And then just one follow-up for Sandeep. Is it possible to get restaurant-level margins for the franchisees back to, you know, 2020, 2021 levels with this mix of carryout delivery, or do you really need delivery to resurge here to get back to those types of margins? Thanks.
spk00: Thanks, Peter, for that question. In terms of where we were in terms of restaurant-level margins on the franchisee side, what you did see from a cadence standpoint was the profitability had really went up pretty significantly between 2019 and 2021 from 143 to 174, I believe, in 2021. But I think the cost increases that have actually come through have been really significant. And I think until that kind of beds in and the price increases that we've taken basically start normalizing, it's going to take some time. Over time, of course. I think we get back to those levels of profitability in absolute dollars. But I think in the short term, we're looking at small steps. And I talked about Q4 specifically because we're now inflecting. We're now inflecting the trend. And I think with the adjustments that we've made on the pricing architecture, we're in a good place with the franchisees. And we hope that as we move into 23, this continues to accelerate and helps them actually see even better profitability in 23.
spk14: Thank you. One moment for our next question. And our next question comes from the line. One moment. From Sarah Senator from Bank of America. Your question, please.
spk06: Yes. Can you hear me? Thank you. I wanted to ask about sort of comments on the comp and the macro environment. You know, we're really not seeing very much softness or evidence of price sensitivity across the rest of the industry. And I understand delivery might be different, but I guess the question is twofold. One is, is there any reason to think that maybe your pricing could be higher? You seem to be lagging the industry by two to four points, and that's roughly as where your comp gap is, I would say. So as you think about pricing, is there room to maybe take more on the menu and perhaps less on delivery fees? And then separately, does this increase the likelihood or the attractiveness of partnering with aggregators, not delivery as a service, but as a marketing platform? Virtually everybody who has done that has suggested that the income cohort is higher on aggregator platforms. And and that it's incremental to whomever may be ordering through the proprietary ordering. So I'm just trying to piece together everything that's happening in the context of pizza being a very good value in absolute, but the lag versus the overall industry and maybe some drivers. Thanks.
spk13: Yeah, thanks, Sarah. It's a great question. I think what I'll do is take a little step back and just give perspective on our business. As you said, it's a unique one. 60% of our sales are delivery. When we talked in our comments about the QSR delivery category down, the pizza delivery category was down, Domino's actually gained share. So it's not the prettiest way to gain share, but in a macroeconomic time where the entire delivery QSR category is pressured, we grew share in the pizza category. That's 60% of our business, and when that's 60% of your business, you're going to see the numbers fall out the way they did. Now, what I like to think about when I talk about the present and future of Domino's is how much more diverse we are than we were years ago. So think about our carryout business that's not encumbered by any of those headwinds, was up 14 to 15 percent in Q4, over 30 percent over the last three years, a billion dollars over the last three years. You know, that's really a business that's on fire. And then Internationally, we open more organic stores than we ever have in our history. And so I think you just need to have that perspective of looking at our entire business, how we're performing in delivery, how that performance is actually making us better. So when we come out of this, we're going to be a better delivery company, but how the more complete Domino's is in a better place as we head through these tougher times. So if I were to take that as a backdrop to your second question on aggregated for delivery, again, like I said, we're continuing to grow share of delivery pizza here. We do work with aggregators globally. We've got a billion dollars in sales outside of the US where we're learning, you know, every day. And while we do that, we're doing things like continuing to improve our ordering experience and improving the loyalty program, as I spoke about, to make sure our delivery ordering experience is better than everybody else's. Thank you.
spk14: One moment for our next question. And our next question comes from the line of Jeffrey Farmer from Gordon Haskett. Your question, please.
spk11: Good morning. You guys stated that you're proud of the work that you've done with franchisees to address labor constraints and delivery business. Can you just elaborate on what you've done there to sort of shore up some of the driver need? And do you believe that staffing shortfalls are no longer having a material impact on your relative same-store sales performance?
spk13: Yeah, thanks for the question. Look, we're satisfied with the improvement. We're never going to be satisfied until every delivery is there as expeditiously as we can get it. So we're satisfied, but what I'd say is we have more work to do. So our service times are better. They're not better than they were in 2019, and that's a place we need to go. When you look at our corporate stores, I was trying to think about that as a proxy for what's going on in the rest of the business. Corporate stores, our hires are at pre-pandemic levels now. Turnover is down. Job applications are up, and we're getting people through the system faster on applications. We talked about call centers. We didn't really mention it on this call, but about half our stores are on call centers right now. Not every single call goes through the call centers, but they're there to help, and that makes the job easier for our team members. We have a lot of operation simplification processes that we've put into place that we're really excited sharing with you guys when you come in for Investor Day. And then something that I'd point to that we just launched was this EV fleet. So we have an EV fleet of 800 vehicles. But that actually is part of a larger kind of strategic shift you're starting to see with our franchisees and corporate stores and purchasing vehicles. And what that enables us to do is attract folks who've got driver's licenses but maybe don't have access to vehicles. So when you put all that stuff together, you're seeing a more efficient inflow of people, more efficient operations, new pools of driver. That's why you're seeing the sequential improvement in the first and fifth quintile. And that's why, you know, we got another boost week coming up back to the regular cadence as we said we would do in Q3.
spk14: Thank you. One moment for our next question. And our next question comes from the line of Brian Mullen from Deutsche Bank. Your question, please.
spk12: Hey, thank you. Just a question on the carryout business in the U.S. In the quarter, same-store sales were up 31% versus 19%. It's very, very strong on an absolute basis. It sounds like that trend versus 19% did decelerate a little bit, 200 base points versus the 35% on the third quarter. I just wonder if you could speak to what dynamics you think were at play in the quarter in carryout and what might have been behind that deceleration, if anything worth noting.
spk00: Brian, good morning. I think, look, a carrier business, when we look at it, when we look at three-year stacks of 31% on a business that has actually grown over a billion dollars over the last three years, you get to a point where the sequential change is sometimes going to be off a little bit, but I don't think it really reflects on the underlying business. The underlying business is extremely strong. We are really pleased about what we're seeing in the carrier business, both as we look back on 2022 and as we look forward into 2023. So super happy with what we've seen. Thank you.
spk14: One moment for our next question. And our next question comes in the line of Dennis Geiger from UBS. Your question, please.
spk10: Great. Thank you. I wanted to ask another one on the U.S. delivery challenges and how you address those biggest issues there. Russell, you just mentioned a focus on making the order experience better than everyone else's. And I think at the end of your prepared remarks, you gave a bunch of points of focus for sales going forward. But can you talk just a bit more about the biggest opportunities to address the delivery pressures right now, just how difficult it is to overcome them? this kind of macro pressure, but again, ultimately how you can do that within your brand. Thank you.
spk13: Yeah, sure. Look, I mean, I think part of the answer to your question was in your question. The delivery pressures are a macroeconomic thing. And so, like I said, while it's not a pretty way to grow share, When you're growing share in a category that has got headwinds, that means you're kind of outperforming the rest of the category. Now, that's not what we like to see in our overall numbers, but you're really talking about macro pressures. And so what I look at is all the things that we're doing now to get better in delivery with hiring folks, with having a tighter circle of operations, with innovating, with technology, all of these things. So that what is now a share increase in a category that's got headwinds, when those headwinds will subside, and look, I joined during a time during the last recession, we boomed out of that recession. Because I think as we said last time, we knew this, delivery, because of delivery fee and because of tips, they're going to have extra headwinds during these economic times. So I like to look at how are we performing during these times? Are we getting better during these times? So when that pressure is gone, you should see us accelerate.
spk14: Thank you. One moment for our next question. And our next question comes from the line of Andrew Strolczyk from BMO. Your question, please.
spk02: Hey, good morning. Thanks for taking the question. Mine is actually a follow-up to your prior answer. And I guess, you know, my question is about balancing kind of maybe being more aggressive and kind of creating a bridge through the macro challenges instead of maybe what sounds like a more incremental approach is kind of how I'm understanding what you're talking about. It kind of incremental steps and then a real acceleration as the macro improves. So how do you think about potential opportunities to be more aggressive to smooth out that cadence rather than kind of the dip and the boom? Thanks.
spk13: Yeah, Andrew, great question. And that's kind of what I was talking to, you know, really at the end. Look, during COVID, we were clear during the pandemic that we had capacity issues. And so the type of delivery innovation there, you were seeing more on things like, you know, car side delivery or contactless delivery. And so I'm not going to talk to innovations moving forward, but that's an important piece for us. If we want to break out of the category, then we need to break out of the category from an innovation standpoint. And that's, you know, we'll talk product later. I could talk tots all day. But there are innovations that are going to help us in addition to EV fleet on the technology side that should help us break away from the crowd.
spk14: Thank you. One moment for our next question. And our next question comes from the line of Gregory Frankfurt from Guggenheim. Your question, please.
spk08: Hey, thanks for the question. Russell, you talked a little bit about broadening value from the national coupon offers to maybe the rest of the menu. Can you expand on what that looks like and maybe what customer feedback you're getting that's driving you to or franchisees to reassess that? Thanks.
spk13: Yeah, sure. Thanks. Well, I just want to reiterate our positive look to the change we made in our mix and match moving to $6.99, both delivery and carryout, it was absolutely the right thing. You know, as you know, our franchisees and local stores control their own menu pricing and delivery fees and things like that. And all the models in the world, all the experience in the world with the headwinds and changes in food costs and labor and things like that come at folks pretty quick. And I think if we were to look at some of our stores, things that are not on promotion, so menus and maybe some case delivery fee, price may have got a little bit of a head. We need to be of value, not just in our national offer. Sometimes people want medium to top pizzas. A lot of times they want medium to top pizzas, but sometimes they want other things too. And it's just making sure that we have the right value across the other pieces of our menu. We'll be working with our franchisees on that.
spk14: Thank you. One moment for our next question. And our next question comes from the line of Lauren Silberman from Credit Suisse. Your question, please.
spk05: Thank you for the question. I appreciate all the commentary on franchise EBITDA and payback. Can you just level set where development costs are running today? I think they were around $350,000 or so in 2019. Just trying to figure out where that stands now. And then Sandeep, I think you might have said franchise the EBITDA could actually grow in 23 versus 22. Did I understand that correctly?
spk00: Yeah, thanks, Lauren, for the question. And I'll start with the last part, then we'll go back to the first part. So I think in terms of franchise EBITDA, we expect 23 to be improved versus 2022 for sure, given the pricing changes that we made towards the back half of the year and the lowering pressure from food basket and costs that we anticipate in 23. But I think in terms of the development costs, the answer is it kind of varies. It depends on where exactly we're building stores and there's a big range in terms of development costs around the country and and so as we're coming out of this constrained environment where we had permitting and store construction issues um we we are basically seeing that there is some cost pressure for sure but i think getting into specifics on what that number is is probably not right until we see this play out over the course of 23 and i think at the right time we'll be in a position to give you a better update in terms of where things are at but Essentially, from a payback standpoint, the three-year range of payback is still very much what franchises are looking at, and that's why they're making the investments they're making.
spk14: Thank you. One moment for our next question. And our next question comes from the line of John Ivanko from JP Morgan. Your question, please.
spk03: Hi. Thank you. A two-parter. First, U.S. unit development, 1.9%. you know, you've talked about splits of around 50 basis points. So that would, you know, suggest something like, you know, 25% on average of a splits store, you know, comes from existing stores. And I wonder, you know, as you kind of think about the footprint going forward to 8,000 stores, if there'd be a way to reduce the sales impact from those splits, because obviously to the most nearby stores, it would be much greater than 25%. So that's the You know, first part of the question, then secondly, um, I think it's been some time since we talked about, you know, the test or some initiatives that you were specifically doing in the Houston market. If I remember correctly, is there anything to share that you're seeing there that I guess, you know, in theory we could see publicly, we could see publicly if we went and found, you know, that selection of stores, you know, that maybe has some application, you know, to the domino system from a efficiency or effectiveness in store delivery, whatever. you know, we can maybe get a little preview of some of those initiatives on this call. Thank you so much.
spk00: So I'll start off on the impact on unit growth and the split impact of fortressing, basically, that you're referring to, John. As you – we started really updating again during the course of 22, and if you saw, we went from, I think, 0.7 percent of fortressing impact in the second quarter to 0.5 percent now. The impact from Fortresync is becoming less and less in terms of what effect it's got on the same store sales. We don't see it being a very, very significant impact as we move forward. But as we said, again, we can update if it really deviates from that. There's plenty of growth still that we actually see in our runway. We have the opportunity mapped out by our internal teams. and we know that we can definitely go after that. And the pipeline that we have from franchisees is on the back of knowing what that opportunity looks like, the economics that they see coming out of it, and so I think we feel pretty good that we're the right balance on that.
spk13: Yeah, and I would just add, John, we're transforming this company right now. Obviously, the delivery business is a hot topic today, but You know, carryout pizza, carryout QSR is significantly bigger than delivery QSR. And so what we see is every time we open up a new store, not only do our delivery times get tighter, and hot pizza is actually hot food in general, by the way, which is why we're launching our tots, because people want hot potatoes, pun intended. Delivery times get tighter, but also the carryout volume is very incremental. Consumers don't want to – customers don't want to walk that far, drive that far to get their pizza. So part of the transformation of this brand into a more complete company is absolutely continuing to drive this store growth. As far as some things that we were doing in Houston, I think rather than me trying to describe things over a call, I would really invite you to come to our meeting later this year where we're going to show that stuff live. It's just super hard to describe, but I would say at the end of the day, these are processes that enable us to get a hot pizza to customers, obviously in a safe, but faster way, but also improve the experience in the store for our team members and the resulting quality of that product. So hopefully that's enough to wet your whistle to come to Ann Arbor.
spk14: Thank you. One moment for our final question. And our final question for today comes from the line of David Tarantino from Robert W. Baird. Your question, please.
spk09: Hi, good morning. My question's on the margin outlook, and Sandeep, I was wondering if you could help to frame up how you think the EBIT margin will progress if you hit the low end of your targeted range in 2023.
spk00: Sandeep Sahota- Yeah, so that's a great question, David. So, look, I mean, as far as we're concerned, the guiding principles that we've actually outlined is Revenue should be growing faster than expenses. So when you look at our guidance range on global retail sales and you look at our guidance range on GNA, you can see that essentially even at the low end, our GNA is basically below that in terms of growth at the midpoint. And so I think straightaway that gets you into a place where you can be margin accretive. So that's point number one. Point number two is We actually experienced a lot of headwinds this past year from foreign exchange, and I think that actually had a 50 basis point negative impact on our operating margin in 2022. Unfortunately, given where we are, we still see a little bit more headwind, but not in the same magnitude given where current rates are. And so that would be an offset to some of that operating improvement. But from a mixed standpoint, with the corporate store sales that have actually happened, We'll now get three more full quarters from that. That helps our margins. So I think overall, when we look at the margins, my expectation for margins is that margins will improve. But I think when we talked about pre-pandemic margins or 2019 margins, with the currency headwinds that we experienced in 22, that's probably further away than 23. But it's not something that we're saying is unattainable. It's more a question of time and some of the other factors that hit the P&L.
spk14: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Russell Wiener for any further remarks.
spk13: Well, thank you, and thank you, everybody, for joining the call this morning. Sandeep and I look forward to speaking with you in April to discuss our first quarter results. Until then, we'll talk soon.
spk14: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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