Domino's Pizza Inc

Thank you for standing by and welcome to Domino's Pizza's first quarter 2023 earnings conference call. At this time, all participants are in a 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 Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Thank you for joining us today for our conversation regarding the results for the first quarter of 2023. Today's call will feature commentary from Chief Executive Officer, Russell Wiener, 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 10Q also apply to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call. Our request to our coverage analysts, we want to do our best this morning to accommodate as many of your questions as time permits. As such, we encourage you to ask only one one-part question on this call. Today's 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 Weiner.

Thank you, Ryan. And good morning, everybody. Thanks for joining us on today's call. I'd like to start this call where we finished our last one, looking back on what we said we were going to do. I am really proud of the actions that our team and our franchisees have taken and the positive results that they delivered. You'll recall that there were three themes we discussed last quarter. The first one was the continued evolution of the Domino's brand, from a U.S. delivery business to a global pizza company with leadership in both delivery and carryout. We continue this progress since our last call. Let me start off with China. We're proud to welcome our partners, DPC Dash, our master franchisee there, to the growing list of public companies that are developing and operating Domino's pizza stores across the globe. On March 28th, CEO Eileen Wang and her team completed their IPO on the Hong Kong Stock Exchange. We have got tremendous potential in China, where the Dash team believes they've just scratched the surface of their total opportunity with stores operating in only 17 cities in China. Now, speaking of public companies, as of the end of Q1 2023, six of the top 20 public QSRs in the world, as measured by market cap, are part of the Domino's family. DPZ is joined by our master franchisees, Jubilant Foodworks, Domino's Pizza Enterprises, Alsea, Domino's Pizza Group, and Alamar, all in the top 20. This, to me, exemplifies an important strength of our brand. We've got a diverse portfolio of more than 90 markets around the world. So our international business has both scale and balance. And what this affords us is the ability to weather any short-term headwinds in certain markets should they come up. We've seen this dynamic play out in Q1 with markets performing exceptionally well, balancing out others that are facing more pressures. All of this, though, resulted in positive international same-store sales growth for the first quarter. Now on to the U.S. In the U.S., we believe that the QSR pizza delivery and carryout businesses continue to be incremental to each other with limited overlap. We're number one in both segments and believe we've strengthened our position during the first quarter. The balance we have in our stores with carryout contributing around half the orders and 40% of sales has allowed us to mitigate the more recent macro headwinds in the delivery category. The second theme we discussed in our last call was the need to maintain value in what is a competitive marketplace, where our customers decide every day where to spend their hard-earned dollars. Value has to do with the right balance of price and service. Our U.S. business delivered on both of these things in Q1, and I'll start with pricing. On pricing, I mentioned that we and our franchisees have got to be mindful that value on our menu exists outside of our national offers. Menu prices and delivery fees were relatively stable throughout Q1. That means most of the menu pricing increase we saw in the first quarter versus prior year was carryover from changes that were made in 2022. On service and capacity, our stores and our franchisees continue to make progress on both fronts. Estimated average delivery times in the first quarter were over a minute better than the first quarter of 2022. While our goal is to get back to and improve on our delivery service levels from 2019, I'm really encouraged by the continued improvement we and our franchisees have made in this critical measure. Our system understands that to be the best, you need to beat the best, even when the best may be yourself. And that's why we're launching an important initiative. We're calling it our Summer of Service Training Program. We're inviting all of our US franchisees to come to Ann Arbor to be part of one of the largest system training efforts in our history. Look, we've driven significant improvements in our back of house technology and our circle of operations over the last few years, and we've got more coming. The Summer of Service program will allow us to share best practices with our franchisees who we expect will leave Ann Arbor with specific plans that they create to positively impact service for every one of their stores. I think these changes will also improve the experience for our customers and our team members in our corporate and franchise stores. Our third theme from the last call was around the need to drive more innovation. While new products are certainly one way to do that, our brand has a history of bringing news to all aspects of the business. We dialed up innovation over the last few months and anticipate this will continue throughout the year and into the future. Let's start with product innovation. On the product side, we're really pleased with the launch of our Loaded Tots. For consumers, Loaded Tots offer a craveable potato side that delivers extraordinarily well. nicely into our mix-and-match menu, providing great value and even more variety when consumers build their orders. For franchisees, tots drive healthy tickets, given they've been largely incremental and have a strong margin profile. Early signs point to Loaded Tots performing even better than our last two product launches, Distant Twist and the Chicken Taco and Cheeseburger Specialty Pizza. To drive news and ordering convenience in our carryout business, we launched a convenient way for consumers to place their orders while they're on the go with Apple CarPlay. This innovation allows customers to place and track their orders on CarPlay via our iOS app. CarPlay ordering is a great alternative to drive-through because it allows customers to avoid long lines by placing their orders while they're on the go so their food is hot and fresh and ready when they arrive at their local Domino's. As important as the ordering platform is itself, CarPlay ordering will help drive what we call our techquity, short for technology equity. We've got a history of leveraging technology to improve customer experiences, and Domino's CarPlay ordering continues that tradition. On the delivery innovation side, Domino's fleet of electric vehicles has been expanding. We announced on our last calls that the initial order by our corporate stores and franchisees made us the largest electric fleet of pizza delivery vehicles in the country with 800 cars. Today, Domino's has committed to over 1,000 EVs and counting. The EV fleet is great for our stores and the environment, all while growing the potential pool of drivers by offering opportunities to individuals that may not have access to a car. All of this news contributed to positive U.S. same-store sales growth in Q1 and will provide momentum for Domino's into the future. Now, for more detail on the quarter, I'd like to turn it over to our CFO, Sandeep Reddy. Sandeep.

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. First, on pricing architecture. During the first quarter, the average year-over-year price increase that was realized across our US system was 6.2%. This included the year-over-year benefit of national pricing changes made in 2022. As a reminder, delivery mix and match was updated to 699 in March of last year, with carryout mix and match updated in October. As we have lapped the delivery mix and match national pricing update in March, we expect our second quarter realized year-over-year pricing impact to moderate. Second, efficiencies in our cost structure as we continue to drive recovery in margin. We saw year-over-year improvement in our operating income margin, which grew by 100 basis points versus Q1 2022. This was despite foreign exchange rates having a negative year-over-year impact on operating income margin of approximately 40 basis points during the quarter. Third, we had positive same-store sales growth excluding foreign currency impact in both our U.S. and international businesses for the second consecutive quarter, which also contributed to improving our operating income leverage. Now for our financial results for the quarter in more detail. When excluding the negative impact of foreign currency, global retail sales grew 5.9% due to positive sales comps and global net store growth over the trailing four quarters, lapping 3.6% global retail sales growth excluding FX for Q1 2022. Breaking down global retail sales growth, U.S. retail sales increased 5.1%, rolling over a prior decrease of 1.4%. International retail sales, excluding the negative impact of foreign currency, grew 6.5%, rolling over the prior increase of 8.4%. Turning to comps, during Q1, same-store sales for the US business increased 3.6%, rolling over a prior decrease of 3.6%. The increase in US same-store sales in Q1 was driven by an increase in ticket, which included the 6.2% in pricing actions I mentioned earlier, partially offset by a decline in order counts. The Q1 comps were aided by the Omicron overlap from 2022, as well as the benefit from a boost week in 2023 that we did not run in Q1 last year. Neither of these tailwinds will aid us for the balance of the year as Omicron receded as its headwind, and we ran boost weeks in every quarter last year, starting in Q2. Now I'll share a few thoughts specifically about the U.S. carryout and delivery businesses. The carryout business was strong in Q1, with U.S. carryout same-store sales 13.4% positive compared to Q1 2022, rolling over a prior year increase of 11.3%. We are very pleased at the strength of our carryout business, but we do expect a moderation in growth rates for the balance of the year as we lap accelerating growth in 2022. The delivery business remains more pressured. Q1 delivery same-store sales declined by 2.1% relative to Q1 2022, rolling over a prior decline of 10.7%. The delivery business is still challenged by two factors that we discussed in our last call. First, a migration of demand from the delivery channel to the sit-down channel as the reversion to pre-pandemic consumer behavior continues. Second, constrained budgets for households with relatively lower disposable income, particularly when factoring in fees and tips. prompting them to shift their delivery occasion to cooking at home. We are closely monitoring the evolution of growth in real personal consumption expenditures as a consistent inflection in that trend could result in relief on the second headwind to our delivery business. Shifting to unit count. We and our franchises added 22 net new stores to the U.S. during Q1, consisting of 25 store openings and three closures, bringing our U.S. system store count to 6,708 stores at the end of the quarter, which brought our four-quarter net store growth rate in the U.S. to 1.7%. As mentioned on our last call, we expected the U.S. store development pipeline will continue to be pressured by permitting and store construction supply chain challenges before seeing a gradual recovery starting in the second half of the year, marked by stabilization first before an inflection in trend. Domino's unit economics remains strong relative to the many pressures faced throughout the year, including staffing challenges and a high-inflationary environment for food and labor. We have completed our analysis of estimated average U.S. franchisee store profitability, with the final amount coming in at $139,000 for 2022, up from the $137,000 estimate provided on our last call. As previously mentioned, estimated average store profitability was higher in Q4 2022 than Q4 2019, as franchisees are seeing the flow through benefits of the mix and match national pricing increases for both delivery and carry out. We expect this improvement in profitability to continue in 2023 with the margin flow through from loaded tots being an additional tailwind during the first quarter. We will need further time to evaluate if loaded tots will provide an incremental margin dollar lift over the course of the year. Also, as we have completed our analysis on 2022 build costs for stores, relative to our average build costs in 2019, we saw an approximate build cost increase of 20% in 2022. Even with these increased build costs, franchises are looking at roughly three-year paybacks on new store openings for 2023 and beyond. Before we transition to discussing our international business, I would like to briefly touch on our technology costs. To fund additional investments in technology innovation, including a redesign of our e-commerce platform, The technology transaction fee charged to U.S. franchisees will be increased to 39.5 cents from 31.5 cents effective the beginning of the second quarter. The technology transaction fee increase covers investments split roughly evenly between G&A and capital expenditures. These investments are included in the annual guidance measures of 425 to 435 million dollars in G&A spend, and $90 to $100 million capital expenditures for fiscal year 2023. At the same time, a 25 basis point temporary reduction on contributions to the national advertising fund will go into effect. The net impact of these two changes on the increase in technology fee and the 25 basis point reduction of franchisee advertising contributions should be relatively neutral to the estimated average U.S. franchisee store profitability in 2023. Turning to our international business, same-store sales excluding foreign currency impact for our international business increased 1.2%, rolling over the prior increase of 1.2%. 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. This was the last full quarter of the negative year-over-year impact with the UK VAT relief program being in place through March 31st, 2022. Our international business added 106 net new stores in Q1, comprised of 143 store openings and 37 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 that market, as well as some closures in Russia. International store openings in the first quarter were also impacted by the timing of fiscal periods of some of our master franchisees that caused a significant number of openings to shift into the first week of our second quarter. These additional 106 net stores brought our current trailing four-quarter net store growth rate in international to 6.7%. When combined with our U.S. store growth, our trailing four-quarter global net store growth rate was 5%. Turning to EPS. Our diluted EPS in Q1 was $2.93 versus $2.50 in Q1 2022. Breaking down that 43-cent increase in our diluted EPS, our operating results benefited us by 36 cents. Changes in foreign currency exchange rates negatively impacted us by 9 cents. Our lower effective tax rate positively impacted us by 4 cents. lower net interest expense benefited us by six cents, and a lower diluted share count driven by share repurchases over the trading 12 months benefited us by six cents. We continued to generate sizable free cash flow. During the first quarter, we generated net cash provided by operating activities of approximately $115 million. After deducting for capital expenditures of approximately $19 million, which consisted of investments in our technology initiatives and supply chain centers, we generated free cash flow of approximately $96 million. Free cash flow increased $29 million from the first quarter of 2022, primarily due to the positive impact of changes in working capital and higher net income. During the quarter, we returned over $30 million to shareholders through share repurchases. As of the end of the quarter, we had approximately $380 million remaining under our board authorization for share repurchases. In the first quarter, the allocation methodology for certain costs with support internally developed software was updated on a prospective basis. The change in allocation methodology resulted in an estimated increase in U.S. store segment income of $10 million. and an estimated increase in international franchise segment income of $2 million, fully offset by a decrease of other segment income of $12 million. Finally, I would like to provide an update on a few of our annual guidance measures that we previously communicated. We expect a year-over-year market basket increase of 3% to 5% in 2023. Changes in foreign currency rates could have a $2 million to $6 million negative impact on international royalty revenues in 2023. And our tax rate, excluding the impact of equity-based compensation, is expected to range from 22% to 24% in 2023. Based on current trends, we expect each of these measures will come in towards the low end of their respective ranges. We continue to expect our global retail sales growth and global unit growth in 2023 to trend to the low end of our unchanged two- to three-year outlook. Thank you all for joining the call today, and now I'll turn the call back to Russell.

Thanks, Sandeep. Before we close out the call, I want to touch on a couple of areas that are important as we move forward in 2023. The first one is store growth. As Sandeep mentioned in his comments, we expect that The U.S. store development pipeline will continue to be pressured by permitting and store construction supply chain challenges before seeing a gradual recovery beginning in the second half of the year. In my conversations with franchisees and discussions with our team on new commitments to store growth by our system, I'm confident that we will see an inflection in trend towards the end of the year and into 2024. Domino's franchisees came out of a challenging 2022 with estimated store EBITDA of almost $140,000. This proves to me, and more importantly to them, that building a Domino's store remains one of the best investments in the restaurant industry. The second point I want to highlight is innovation, giving you a little bit of insight into our e-commerce pipeline. It's not a comprehensive list, but it should help you understand that We're bringing news to our customers while also improving our ability to drive loyalty and a more personalized experience, leveraging our robust customer database. As I mentioned on our last call, we'll be refreshing and improving our piece of the pie loyalty program. When we launched it back in 2015, we were more of a delivery company with our carryout business still gaining momentum. So naturally, our loyalty program was designed more around the delivery customer. One of the key objectives of the refreshed Piece of the Pie program will be to explicitly cater to the carryout customer in addition to the delivery customer. We're excited to add more value and rewards for everybody. We've also started to work on a redesign and rewrite of our entire e-commerce platform. This work will continue into 2024, and we will update you on progress along the way. Our digital ordering clients and tech stack have been a huge part of our strategy and a competitive advantage for us over time. So we need to invest in these forms to ensure we remain in a leadership position. In closing, when I look back on the first quarter, I can't help but be encouraged by the resilience of our business model and the competitive advantage that our franchisees and team members bring to Domino's Pizza. I remain bullish on our future and look forward to telling you more of our story and our long-term strategy at our investor day, which will be held in late Q4. With that, we'll open the call to questions.

Certainly. One moment for our first question. And our first question comes from the line of Brian Bittner from Oppenheimer. Your question, please.

Thank you. Good morning. Just first a clarification question from you, Sandeep. As it relates to your outlook in 2023 for total retail sales to be at the lower end of the 4% to 8% range, can you talk to us about what the implied same-store sales outlook embedded in this guidance is? And then, Russell, my main question to you, just as it relates to delivery and the ongoing weakness in this segment, I appreciate the macro pressures that you outlined during this call and previous calls, but are you currently taking market share and can you just further elaborate on actions that you are taking inside the company to improve your competitive advantage within delivery to set that business up for a strong turn when these macro pressures recede?

So, good morning, Brian, and thank you for the question. I'll take the first piece and I think Russell will cover the second piece that you asked. So in terms of the outlook, I think you're asking about the global retail sales outlook of 4% to 8% rating that's still expected to be at the low end for 2023. And I think when we go back to what we said last time and again, what we're saying this time, not really changing the narrative of what we said drove that adjustment in the first place, which was the challenges that we were seeing in the U.S. delivery business was the primary driver of the of the lowered estimation of the global retail sales outlook. So we feel very confident more broadly about the business because the carryout business has been great. The international business, as you just heard from Russell, did extremely well as well, notwithstanding the UK VAT impact that we were rolling over. So we feel really good about the overall business, but I think Until we come through the delivery challenges, and that's what you asked Russell about, we basically believe that the outlook is appropriate.

Thanks, Adib. Morning, Brian. On the delivery side, it really is, to answer your question, really in two parts. First, we grew delivery QSR pizza market share last year. We're continuing to do that in Q1. And so the point that you ask is, what can we do in addition to drive that? And it's kind of the same basic things we outlined on the same call. It's driving value. Delivery service, we're a minute better than we were a year ago. Innovation in all areas, not just product, but we have actually delivery innovation out there now with the electric vehicles. We're up to 1,000 vehicles. This new loyalty program is going to do a really good job in driving transactions. And then the majority of our delivery customers order online. And so I think what you're hearing When we're talking about redoing our e-commerce platforms, that's certainly going to help there as well.

Thank you. Thank you. One moment for our next question. And our next question comes from the line of Peter from BTIG. Your question, please.

Great. Thanks. Russell, I want to ask about the decision to reduce the marketing spend by 25 basis points. I understand it's pretty much an offset to raising the digital fees, but can you just give us a sense on how much total impressions would be down this year with that reduction in spend?

Sure. I mean, the point at the end of the day is we take a holistic look at the franchisees P&Ls. And we just think that this is a better investment over the course of the next year because of where we are in our marketing budget. So I don't expect an impression decline. I just think that this is a great overall use of their money for the year.

And Peter, I'll just add a little bit to that because I think it's very important to think about this strategically and holistically for both the financial standpoint and kind of what we're looking at. And we were engaged in deep discussions with our franchisees before we actually made this move. And I think over the course of the pandemic, we've actually built up the ad fund reserve to a point where we believe that the resources that are in the ad fund are more than enough to cover the demands that we have from an advertising standpoint this year. And at the same time, as we looked at innovation and the need to invest in technology, our franchisees and us believe that this was the right way to redeploy investment And so we've done it very clearly with a view to the long term. And this is, as we said, been a one-year adjustment that we made. So we'll take a look at it in one year's time and decide what to do.

Great. Thank you very much.

Thank you. One moment for our next question. And our next question comes from the line of Sarah Santor from Bank of America. Your question, please.

Okay, thank you. A question and a quick follow-up. You said the boost week, you know, won't be continued tailwind. You know, your outlook on same-store sales in general strikes a note of caution. I was wondering if you can quantify what you think that tailwind was. I'm just trying to understand what the underlying run rate might be or what the drivers that Russ highlighted, the magnitude of those might look like as we go forward. And then just a quick follow-up on the comment about shifting back to dine-in, you know, delivery across the industry is a lot higher than it was as a share of sales pre-COVID. So do you have any thoughts on how long this shift might last? I would expect dine-in probably ends up as a lower share of the total mix, but trying to, again, understand, you know, how long that headwind persists in your view. Thanks.

Hi, Sarah. Quite a few questions in there, but I'll take them. I'll take them in sequence. So I think you're first talking about some of the things that I pointed out to you in the prepared remarks on the benefits that we got in the first quarter on the comp from the tailwinds that we had from lapping Omicron and also the fact that we had a boost week in 23, which we didn't have in 22. And I'm not going to unpack the details of exactly how much that was, but Definitely those were two tailwinds, and there's actually a third tailwind also, if I think about it, because we have now lapped the national pricing update on delivery, and I think we definitely got that benefit of that pricing impact that actually was embedded in Ticket as well. So when you think about all these different elements, there is going to be an expectation that there will be some deceleration relative to that, because those were tailwinds that we had uniquely in the first quarter. And that's why we actually pointed those out. And then I think the broader topic of shifting to Dynan, I think our point when we actually did the Q4 call was we'd seen throughout 2022 a shift back into Dynan. And I think when we looked at the values of where Dynan had reached, we were still well below 2019 levels for Dynan. And so the expectation that we had when we set up our outlook for the two to three year time frame, and particularly on 2023, was to continue to see that shift happening over the course of 2023. Thanks.

Thank you. One moment for our next question. And our next question comes from the line of Dennis Geiger from UBS. Your question, please.

Thank you. Russell, you spoke to stepping up the pace of innovation and you gave some good examples. Just wondering if you could touch a little bit more on what that means, perhaps how long it takes to kind of get innovation going to where it was a few years back and anything more you can share in thinking about innovation across menu and technology. And if I could flip a related part in there, is there any update with respect to how you think about third-party aggregator relationships as we think about technology and evolution of the brand. Thank you.

Hey, Dennis. Good morning.

Let me maybe take the second question first and talk a little bit about third-party. We've got a billion-dollar business internationally with aggregators, and we're learning there every day. And I think the number one thing that we've learned is Whoever you work with or whoever you compete with, Domino's is better when we're a stickier brand, when we have more to make consumers when they decide where they're going to order to order from us. And stickiness is getting the value right, is getting service right. You talked about innovation, so I'll get to that in a second. I think stickiness is also this new loyalty program. The updated loyalty program will make us stickier. as well as recognizing that it's time to upgrade our e-commerce site. And so if we're a stickier Domino's pizza, no matter who we compete with or work with here, we'll be in a place that we can win. Secondly, or firstly, I guess would be, that was your first question, the question on innovation. I would really ask that folks take a broad definition of innovation. And that's not to couch and say we're not going to be doing a lot of product innovation and stepping up that, and we're not going to be doing carryout or delivery innovation. But let me give you an example of something that people maybe wouldn't think of as innovation, which is carryout tips. Carryout tips, the majority of companies, what they call it is a bounce-back coupon. And what our marketing people did, they did a great job, and they said, you know what? Instead of calling it a $3 bounce-back coupon, we're a delivery company. In this case, customers are delivering our pizza. Let's call it a tip. They get the $3 the next week, and it's an incremental purchase, and that's an innovation. So I think you've got product innovation with TOTS, value innovation. I don't think anyone talks about value innovation the way we do. Apple CarPlay is a carryout innovation. EV is delivery innovation. All of those types of innovations are things you should see on a quarterly basis, I expect to be able to update you on these calls.

Thanks.

Thank you. One moment for our next question. And our next question comes from the line of Gregory Frankfurt from Guggenheim. Your question, please.

Hey.

Excuse me. Russell, just can you talk about what you think the competitive differentiation is of the Domino's business today and if that's changed from four or five years ago? I think aggregators have figured out the profitability a little bit better, but can you maybe help us understand the reasons for why you have kind of competitive differentiation versus those platforms and if that's changed over the last four or five years or not? Thanks.

Yeah, sure. Good morning and thanks for the question. Actually, I think when we talk about broadness and competitiveness, what I'd like to start out with is carryout. We talk a lot about the fact that there's not a lot of overlap between delivery and carryout, historically about 15%. And so if you look back at the last three years on our U.S. carryout business, it's up almost 30% in same-store sales. So to think that that's a very incremental piece of growth for our business is should hopefully help you understand how we think about diversifying and differentiating and growing ourselves as not only a pizza delivery company, but as a total restaurant. And I think, you know, on the delivery piece, again, I'll point to, you know, we are growing pizza delivery market share, but we think we can do more. And a lot of it is because certainly the competition is different. But I think we've learned a lot, Greg, over the last few years. You know, you think of what we learned through COVID. We went through some capacity constraints. We went through driver availability issues. And, you know, they say necessity is the mother of invention. And that's why we're doing this Summer of Service program here. We're inviting our franchisees up because we've made significant improvements and innovations because of all of this learning. We will now be better in our circle of operations and in our technology. And these are substantial enough that it's not something that we can train people in a video. Every single Domino's franchisee is coming up here to Ann Arbor for this training, and they will leave with individual plans that they're putting together for their stores when they go back. And at the end of the day, in order to really step change ourselves, when these macro things go away, it's going to be stepping up service. And I think hopefully this is an example of how we're leaning in there.

Thank you one moment for our next question. And our next question comes from the line of Chris Carrell from RBC Capital Markets. Your question, please.

Hi. Thanks, and good morning. So on pricing, Sandeep, you noted the laughing of delivery mix and match pricing in March. And with that, pricing should moderate here in the 2Q. But appreciating your continued focus on value here. If transactions were to remain stable or potentially improve, how open are you to taking further pricing, particularly if you do see those service levels begin to improve with all the initiatives you have in place? Thanks.

Hi, Chris, and thanks for the question. I think when we talk about pricing options and value, I think that's a constant. It's not this last year. It's been over the last decade or more that we've been doing this. And so we'll continue to evaluate. pricing relative to competition and kind of what the macro environment will actually yield from a demand standpoint. Because we always are going to do the work, but I don't think we're particularly inclined to say what we're going to do or not going to do, because it's going to be the outcome of the work.

Thank you. One moment for our next question. And our next question comes from the line of Brian Harvard from Morgan Stanley. Your question, please.

Yeah, thank you. Good morning. One thing I was curious about just talking about innovation is could you talk about your market share at different day parts and whether you think that there's specific opportunities to lean into one or two of those where you perhaps don't have as much share as the others and can that be a source of product innovation perhaps?

Brian, are you on there?

Yes, hello? Can you hear me?

Yeah, sorry, we had a blip and we lost your question. Do you mind repeating the question, please?

Sorry about that. I was curious just about if you could talk about day parts and how your market share might differ by day part and whether you think that that's kind of an innovation opportunity as well to target different day parts differently.

I don't think we're going to go into, by the way, sorry, good morning. I don't think we're going to go into the detail of the specific numbers of our day parts, but the answer to your question is absolutely. Finding incremental drill sites has been key for this brand. I remember when I joined in 2008, the majority of our stores weren't open for lunch. We gave them a product with sandwiches and then later pasta. And now that's a pretty significant piece of our business. We also weren't a big carryout company and obviously now carry out half of the orders that come through Domino's. So what our job is to do every day is to find incremental drill sites and day parts are absolutely one of those areas that we look.

Thank you. Thank you. One moment for our next question. And our next question comes from the line of David Palmer from Evercore ISI. Your question, please.

Thanks. Just a follow-up on the previous question about third-party sites and marketing and collecting orders from those in the U.S. You noted how you do it overseas, but your previous answer, you said you were looking for stickier sales, and you found that those have the highest value. Is that your way of saying you're kind of closing – the book on this and that you've kind of made up your mind, or are you evaluating this still? And if you are evaluating it still, what sort of factors and timing should we be thinking about that you're thinking about? Thanks so much.

Yeah, I think maybe the way to interpret what I said before is there are opportunities and there are also potential issues with competing with folks or working with folks. And we're not going to think about going into anything unless we're our best dominoes. And the best dominoes, we're getting there every day. We're improving our service and we talked about some of the tech and loyalty pieces. And then we'll be in a better place to compete with or work with anybody.

So this is something you haven't closed the book on, but perhaps some changes that you're making might enable you to pursue that path. Not that you're committing at this point, but it's something that you haven't closed the book on.

Maybe I'll refer back to the prior questions. We're always looking for drill sites. If there are incremental drill sites that are smart for us, and this is one of them, you're never going to hear that this team closes the book on things. Right now we're focused on making ourselves a better dominance.

Thank you. Thank you. One moment for our next question. And our next question comes from the line of Joshua Long from Stevens. Your question, please.

Great. Thanks for taking my question. Excited to hear more about the Summer of Service program, understanding that all the franchisees are going to be walking away with an individualized plan. That is certainly exciting, but curious if you could talk a little bit more about some of the big pieces that have either already been in test, maybe what you've learned from that, and just help us kind of contextualize what franchisees could be walking away with as they all come up to Ann Arbor later this year.

Morning, Josh. I think the best way to answer that question is to invite you to come up and join us for our Investor Day in Q4. We are really excited to show you what we show our franchisees, which are – takeaways on the things that we've learned through some of these capacity issues, driver availability issues, and then more importantly, how that is leading to ideas to reinvent our circle of operations and improve technology to help circle of operations, but also help at the end of the day, the product the customer gets to be as hot as it can be, and also improve what it's like to work at a Domino's Pizza. So maybe if there were videos, and I'd be able to show you stuff a little bit more, but this is an old school phone call. And so you're going to have to come up to Ann Arbor. And we look forward to seeing you.

Understood. Thank you. Thank you. One moment for our next question. And our next question comes from the line of Chris O'Cullen from Stifel. Your question, please.

Thanks. Good morning, guys. Sandeep, you mentioned comparison benefits in the first quarter that won't benefit the second quarter, but I was under the impression that transaction declines were also just as weak in the second quarter last year, implying the comparison should continue to be favorable. And I'm just wondering if that was true. And then if you could just help us understand how meaningful the ticket growth should slow in the second quarter, that would also be helpful. Thank you.

Yeah. So, Chris, you are right that transactions did decline last year in the second quarter as well. So I think that piece is consistent between Q1 and Q2. What is not necessarily consistent is the fact that we had the Omicron tailwind. We had one boost week in Q1 of this year, which was not there in Q1 of last year. And I think you asked the second part of your question was about pricing in the national pricing lab. We're not going to really get into the detail at this point, but clearly it was a pretty significant increase to 699 from 599. So you can do the math and look for how much that's going to be, but I think it is enough of an impact for me to call it out in terms of that being moderating in Q2.

Thank you. One moment for our next question. And our next question comes from the line of Andrew Charles from Cowen. Your question, please.

Great. Thank you. It's very encouraging to hear you guys talk about confidence in U.S. performance. But perhaps just from the outside, it looks like trends did deteriorate on a four-year basis by about 200 base points from 4Q to 1Q. And you guys are also talking about the low end of long-term retail sales growth, guys, in 2023. So can you just help contextualize what's driving the encouragement that externally may not perhaps be as obvious?

Yeah, so Andrew, I think thanks for the question. And like I said on the last call, we're not going to look at stacks as a way of measuring our business. And I think it's fair enough that you can actually ask the question. But really what we want to look at is some things that are more near term. And that's why we've really talked about the current year comp and the comparison that we're overlapping. So what we really see is a terrific carryout business, a really terrific carryout business. And to basically be lapping 11% last year to be doing 13.5% or 13.4% this year was a great result for us. And look, delivery, there's a number of things that we're working on. You heard all about the initiatives on value and service and innovation that we're working on. So we are doing everything within our control to drive an improvement in the performance on that part of the business. And even there, look, sequentially it improved from minus 6.6% in Q4 to minus 2.1%. in Q1. We're not happy with negative comms. We want to actually inflict the positive comms. So we're going to keep on working on that. And we have talked about the macro. It's not gone away. And that is impacting us to some extent. But we don't want to keep making excuses about the macro. We want to focus on what's in our control. And that's why we're really putting our foot forward and actually driving all of those initiatives to get to the outcome that we need. So super bullish on the long term. I think we just have to work through some of these short-term issues.

Thank you. One moment for our next question. And our next question comes from the line of Lauren Sieberman from Credit Suisse. Your question, please.

Thank you. Over the past few years, there's been the shift in delivery carryout mix and differences in performance between the channels. Can you just help us understand the differences in average order size as well as profitability per order between the two? And then just more recently, have you seen any changes in check management across either of the channels? Thank you.

Yeah, so Lauren, thanks for the question. I think on the delivery carrier business, they're both really good businesses with different margin profiles, but very good businesses. And I think when we look at the profitability to the franchisees, they're both very, very accretive to their profits. And I think that's why When we actually look at the shift that's occurring between delivery and carryout, the franchisee profit is not impacted in a significant way because of just the shift. Both businesses are super important, so you don't want to actually decline in delivery like, unfortunately, we did last year. But I think overall from a check size, I'm not going to quantify how big the ticket is on average for delivery versus carryout, but typically delivery ticket is going to be higher than carryout. but I think the cost of delivery is a little bit more labor intensive for obvious reasons because you have a driver cost in particular. So the flow through on that in terms of dollars is good, but I think the cost profile is higher and therefore the margins are smaller on a delivery transaction versus a carrier transaction.

Thank you. One moment for our next question. And our next question comes from the line of Saraj Gokhale from JP Morgan. Your question, please.

Hi, thank you. It's John Ivanco. I did, in the spirit of innovation, want to ask about where we are in the personalization journey. It's something we've been hearing about from the better data-driven companies, which you are certainly the top of, the ability to customize promotions to customers to really elicit a specific behavior. So, Where are we in that journey? Is there any kind of significant functionality that can come as part of your new loyalty program, maybe some backend work that you're doing around Pulse 2.0? Just give us a sense of where you are and where you think you will go in the relatively near to medium term. Thanks.

Hey, John, that's a great question. We are making improvements in called it kind of the tweaking of it through A-B testing, multivariate testing, things like that. I think the reason we're leaning into a new loyalty program and a redo, I don't think I know, and a redo of our e-commerce business is there are certain things that we want to be able to do that we're not doing right now. And this will really let us lean into personalization in a much bigger way. So great question, and the timing is perfect.

Thank you. One moment for our next question. And our next question comes from the line of Zach Fadum from Wells Fargo. Your question, please.

Hey, good morning, guys. This is John Park. I'm for Zach. Thanks for taking my question. I mean, I guess, again, you guys talked about the lower income demo kind of shying away from delivery a bit given the macro pressures. Can you just provide some color on how that different income cohorts kind of performed within delivery versus takeout?

Yeah, so I think on this, what we pointed out from the macro standpoint was on the last call more particularly than this call. But what we also noted, if you go back to my prepared remarks, I did say that we're going to have to continue to monitor real disposable income and the trends in that and kind of how that's evolving. Because what you're seeing right now is inflation is on a downward trend. trend, but wage growth seems to be holding up in the U.S. economy. But I think it cuts a little bit differently depending on income strata. So I think over time, you're going to basically see potentially a change in the dynamic. But as of now, we still see this being a pressure point.

And I think what I'd add to that is, you know, a lot of times we're asked on these calls, do you see any trade down from delivery to carry out? I talked earlier about how there's really little overlap between the two. We're seeing a lot of trade-out from non-dominoes carryout into dominoes carryout, and I think it's those consumers we're talking about. So certainly, from a delivery standpoint, there are macro pressures, but I think that's actually an advantage for us on the carryout side.

Thank you. One moment for our next question. And our final question for today comes from the line of Todd Brooks from Benchmark. Your question, please.

Hey, thanks for squeezing me in. Just on the unit growth side, I know Sandeep, you talked about just timing of fiscal quarter and versus some international openings. Is there any way that you can maybe size how many of those openings did occur in the first couple weeks of the quarter here? Any commentary about what gives you confidence that the frictions on the U.S. construction side will ease in the second half? And then do you continue to be comfortable with at least reaching that low end of that 5% to 7% unit growth guidance? Thanks.

So a few things that I want to unpack in your questions. And I think let's start with the international unit growth question that you had. There was... pretty much a timing issue between our fiscal calendar and our master franchisees, which is going to be a noise factor, frankly, for many quarters in the year. You'll see quarter to quarter noise. But I think overall, when we look at the pipeline of where our master franchisees are projecting their unit openings are going to be, we feel pretty good that we're on track for a full year basis. And that's really incorporated into our global unit growth estimation. And so I think then I will talk about the U.S. store growth in particular. Look, we've been saying since the beginning of the year that we expected to see a first half be pressured by the same issues, which is permitting supply chain construction challenges that we're going to get through. But you heard Russell say it himself, which is we've been talking to the system, we've been talking to franchisees, we've been talking to our own internal teams, really digging in because Our pipeline is very, very robust. And frankly, the appetite for store openings is very strong. And that's why we feel that, yeah, first we'll see a bit of a stabilization in the second half, and then we're going to see that inflection. And as Russell said, it's into 2024, because we have a pipeline that goes beyond 23 right now. And that's why we have so much confidence. And I'm going to actually bring in another piece, which you didn't ask, but I want to say that this is a very critical element. I talked about the inflection and profits for the franchisees in the fourth quarter. If anything, that inflection is accelerating right now based on our first quarter results. And if you look carefully at the food basket guidance, we're now going towards a low end. All that flows through. And I think overall the franchisees are in a very good place from a profit standpoint relative to how they started off Q1 of last year. There's a number of tailwinds that actually will reinforce that confidence that the system is showing in our unit growth projections.

Thank you. All right. Well, we'd like to thank everyone for joining us this morning, and we look forward to speaking to you in July to discuss our Q2 results. Until then, talk to you soon.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.