Dominos Pizza Inc (DPZ) — Q3 2017 Earnings Call Transcript

Thank you, Adam. And hello, everyone. Thank you for joining us on the call today about our very busy third quarter 2017. As you know, this call is primarily for our investor audience, so I kindly ask that all members of the media and others be in a listen-only mode. In the unlikely event that any forward-looking statements are made, I refer you to the Safe Harbor statement you can find in this morning's release. As always, we will start with prepared comments from Domino's Chief Financial Officer, Jeff Lawrence, and from Chief Executive Officer, Patrick Doyle, followed by analysts' questions. With that, I'd like to turn the call over to our CFO, Jeff Lawrence.

Thank you, Tim, and good morning, everyone. In the third quarter, our positive global brand momentum continued, as we once again delivered solid results for our shareholders. We continued to lead the broader restaurant industry with 26 consecutive quarters of positive U.S. comparable sales and 95 consecutive quarters of positive international comps. We also continue to increase our store counts at a healthy pace, which we believe is more evidence that our brand is strong and growing. Our as-adjusted diluted EPS, which excludes the impact of our recapitalization completed during the quarter, was $1.27, which is an increase of 32.3% over the prior year quarter. This increase primarily resulted from strong operational results, as well as a lower effective tax rate. With that, let's take a closer look at the financial results for Q3. Global retail sales, which are the total retail sales at franchise and company-owned stores worldwide, grew 14.5% in the quarter. When excluding the impact of foreign currency, global retail sales grew by 14.2%. The drivers of this retail sales growth included strong domestic same-store sales, which grew by 8.4% in the quarter. Our U.S. franchise business and our company-owned stores were both up 8.4%. These comp increases were driven primarily by order count or traffic growth, as consumers continue to respond positively to the overall brand experience we offer them. Our Piece of the Pie loyalty program continues to contribute significantly to our traffic gains. To a lesser extent, ticket also increased during the quarter. The hurricanes in Texas and Florida negatively impacted our Q3 company-owned store comp by approximately 1 percentage point, and negatively impacted our Q3 U.S. franchise comp by less than half a point. As a reminder, we operate company-owned stores in both the Houston and Miami markets. We also have franchise operations throughout the impacted areas. As of today, operations have resumed in significantly all of our stores, both corporate and franchise. More importantly, none of our team members or the team members of our independent franchisees were injured in the storms. On the unit count front, we are pleased to report that we opened 53 net domestic stores in the third quarter, consisting of 55 store openings and two closures. Our international division had a solid quarter as same-store sales grew 5.1%, lapping a prior year increase of 6.6%. Our international division also added 164 net new stores during Q3, comprised of 176 store openings and 12 closures. As a reminder, we converted approximately 100 stores in Q3 2016, which significantly impacts the year over year comparison. On a total company basis, we opened 217 net new stores in the third quarter and 1,182 net new stores over the trailing 12 months. By far, the best in the pizza category. Turning to revenues, total revenues were up 13.6% from the prior year quarter. This increase was primarily a result of increased global comps and store comp growth, which also drove higher supply chain volumes. Currency exchange rates did not materially impact international royalty revenues versus the prior year quarter. For the full fiscal year, we now estimate that the impact of foreign currency on royalty revenues could be flat to negative $3 million year over year versus our prior 2017 guidance of negative $8 million to negative $12 million. As you know, there are many uncontrollable factors that drive the underlying exchange rates, which does make this a harder part of our business to predict. Moving on to operating margin. As a percentage of revenues, consolidated operating margin for the quarter increased to 30.8% from 30.7% in the prior year quarter, driven by our global franchise business. The operating margin in our company-owned stores decreased to 23.1% from 23.5% driven primarily by increased labor rates. Lower transaction-related expenses as a percent of sales benefited the operating margin and partially offset this decrease, as did continued strong sales growth. Supply chain operating margin decreased to 10.9% from 11.1%, driven primarily by increased labor and delivery costs. Lower food costs as a percent of sales benefited the operating margin and partially offset this decrease. Market basket pricing to stores increased approximately 2% this quarter. We currently estimate that the domestic stores market basket cost will be up approximately 2% for the full year 2017 from 2016 levels. Before we leave operating margin, I’d also like to note that franchisees in the U.S. continue to share in our success with record profit-sharing checks that they have earned alongside us with great execution and performance. As I’ve mentioned before, we expect to make additional investments in supply chain in the near to medium term to keep up with our rapid growth. Let's now shift to G&A. General and administrative expense increased by $8.4 million in the third quarter versus the prior year quarter, driven primarily by our planned investments in technological initiatives, including investments in e-commerce, our point of sale system and the teams that support them. Please note that these investments are partially offset by fees that we received from our franchisees, which are recorded as franchise revenues. Additionally, G&A increased due to higher advertising expenses at our company-owned stores, which increased as a result of our positive sales growth and continued investments in other strategic areas. These increases in G&A were partially offset by lower performance-based compensation. Based on our strong performance and outlook for the rest of the year, we now estimate that our G&A will be in the range of $350 million to $355 million for the full fiscal year 2017. Keep in mind, too, that our G&A expense for the year can vary up or down, among other things, depending on our performance versus our plan, as that affects variable performance-based compensation expense. As I just mentioned, we charge a transaction fee to stores to recoup a portion of our IT investments, which support our digital ordering platform and related innovation. This arrangement with our U.S. franchisees has been an important and meaningful one. Fundamentally, it has allowed us to create a best-in-class technology experience for our consumers and produce best-in-industry economics for our independent franchise businesses. Our franchisees understand and support us by continuing to partner with us in these investments, and the returns have been outstanding for all parties involved. Quite simply, we have built the best technological platforms in our industry together. With that in mind, we will be increasing this technology fee from $0.21 to $0.25, effective January 1, 2018. We will continue to invest aggressively in the technological arena and hope to deliver great consumer experiences, great franchise economics and strong returns for our shareholders. Moving down the income statement, interest expense increased $8 million in the third quarter, driven by $5.8 million related to our recapitalization, which has been adjusted out as an item affecting comparability. We also had a higher net debt balance during the period. Our weighted average borrowing rate in the third quarter decreased to 4.1%. Our reported effective tax rate was 33.3% for the quarter. There was a $3.5 million decrease in our third quarter 2017 provision for income taxes as a result of excess tax benefits on equity-based compensation. This resulted in a 4.2 percentage point decrease in our effective tax rate. We expect that we will continue to see volatility in our effective tax rate. When you add it all up, our third quarter net income was up $9.1 million, or 19.3% over the prior year quarter. Our third quarter diluted EPS as reported was $1.18, versus $0.96 last year, which was a 22.9% increase. Our third quarter diluted EPS as adjusted for the 2017 recapitalization transaction was $1.27 versus $0.96 last year, which was a 32.3% increase. Here is how the increase in diluted EPS as adjusted breaks down. Our lower effective tax rate positively impacted us by $0.08, including a $0.07 positive impact related to excess tax benefits on equity-based compensation. Lower diluted share counts, primarily as a result of share repurchases, benefited us by $0.04. Higher net interest expense resulting from a higher net debt balance during the period negatively impacted us by $0.02. And most importantly, our improved operating results benefited us by $0.21. Now, turning to our use of cash. During the third quarter, we received and retired approximately 4.6 million shares in connection with our previously announced $1 billion accelerated share repurchase program. The ASR program was completed yesterday and final settlement will be on Friday. At that final settlement, we will receive and retire an additional 659,807 shares. In total, we will receive 5.2 million shares which will result in an average price paid of approximately $192 per share. We now have $250 million remaining on our $1.25 billion Board-authorized share repurchase program. We also used cash to repay $910 million of our 2012 notes in connection with our recapitalization, and we returned $22.4 million to our shareholders in the form of a $0.46 per share quarterly dividend. All in all, our strong momentum continued and we are very pleased with our results this quarter. And with that, I will turn it over to Patrick.

Thanks, Jeff. And good morning, everyone. While our fundamentals have taken over a decade to truly develop and solidify, our strategy and approach related to the business remains quite simple. And my third quarter commentary will follow suit. The quarter can be best described as us continuing to execute our established approach, and simply do what we do best, remaining steady in our long-term strategy and proven foundation, aligning with the domestic and international franchise base that continues to prove it is second to none, and refusing to compromise when investing in our innovative forward-thinking brand, which we believe has led to us selling more pizza in the U.S. and around the world during the third quarter than any other pizza brand. No catalyst or unique shift in approach is part of our continued strong global performance. Instead, we continue to heavily lean on the foundation built over time, fundamentals that our company and franchisee leadership have all come to fully trust. The ability to rely on this has certainly taken time. A great deal of homework goes into our occasionally difficult but always calculated decisions. But this long-term leg work and the many moves and risks that followed have positioned us for the fundamental strength that remains at the forefront of another outstanding quarter. Our strategy remains simple: a single-minded focus on continually improving every aspect of the experience for our customers and funding those investments by skipping the flavor of the month activity so common in our industry. Our U.S. results in the face of our second highest quarterly comp lap in the past seven years were tremendous. In addition to very strong sales, store growth continued to progress in the right direction as our focus on unit level economics and franchisee profitability continues to support this strong alignment and provide the key factor to maintain domestic store growth momentum. We were also excited to announce the expansion of our Piece of the Pie rewards program to customers who order through any method, now including phone and in-store in addition to digital. The loyalty program has continued to provide a meaningful impact on sales, and we will continue, as with this most recent expansion, to assess and evolve the program to keep it top of mind. To help this later in the quarter, we will launch a new national TV campaign around Piece of the Pie, as we continue to grow awareness around the simple and focused program. As we’ve noted, it continues to benefit top-line business performance, and most importantly, our loyal and frequent customers. For all of these reasons, I'm particularly proud of our 26th consecutive quarter of positive same-store sales, and the continued execution and energy of our domestic franchisees, managers, and operators. Their unwillingness to show complacency or rest on past success motivates me and my leadership team each and every day. It is a unique and special collection of business owners that we are privileged to call teammates. There’s no better example of this than the response of many of our affected franchisees from the recent hurricanes and natural disasters. I wanted to take a moment to say a big thank you to so many within our system for taking action and supporting your neighborhoods. Domino’s continued its historical tradition of so often being the first to reopen to provide food and support for those who need it most, a practice we as a company and a collection of local entrepreneurs ingrained within their communities have taken much pride in for over half a century. In Texas, store general managers had to evacuate their own homes, yet still worked hard to make and donate pizzas for first responders, as soon as they could. Along with other stores throughout the South, our Texas locations also raised over $120,000 for the Salvation Army and Red Cross in a single day. Within our International group, I want to acknowledge franchisee John Caputo, who managed to open his store in St. Maarten and feed people when literally no one else could. John bartered for generator fuel and salvaged food from the neighboring grocery store to cook and feed people who hadn’t had food or fresh water in days. I thank John, who, along with many others who made similar efforts, showed during an incredibly difficult time for his business and community what Domino’s is all about during times of need. The unfortunate events have continued with the recent earthquakes in Mexico and the hurricane in Puerto Rico and the fires in California. We continue to hear the amazing tales of heroics and support involving people reaching out to one another in the neighborhoods we serve. Our master franchisee in Mexico, Alsea, activated a fundraising campaign to help those affected and committed to turning locations into collection centers and going forward helped rebuild affected areas as soon as they are able. Following the tragedy in Las Vegas last week, we fed first responders, local fire and police, and those waiting in line to donate blood. Our operators don't do this for publicity or notoriety, but because it's just what we do. I personally just want to thank so many in our system for everything you’ve done during these difficult times. It is truly inspiring to me and our entire team in Ann Arbor. To wrap up, there's really not much more I could say about our U.S. results other than I am extremely pleased and proud of the hustle and focus of so many that are making it all happen. Moving on to international, I would like for you to think about how old you were 95 quarters ago. Even though you are all very good at math, I’ll help you out a bit. It was nearly 24 years ago. That is now how long it's been since our last quarter of same-store sales that weren't positive, which is pretty amazing. Our third quarter results were back well within the long-term guidance we’ve provided, and certainly back in line with what we’ve all come to expect from this terrific model. Improved results in the U.K., terrific results in Canada, Turkey, and the Netherlands are highlights, and store growth continued to be very strong, keeping in mind the impact of last year's conversions that Jeff touched on. The dialogue with all markets continues, and my confidence in the best international model in QSR has only strengthened from this interaction, as this segment continues to perform at very high levels with the third quarter being no exception. On that thought, it was another forward-thinking and innovative quarter on the global technology front. We now have over 70% of international stores on PULSE as our point of sales system continues to get closer to being a truly worldwide platform, which will benefit our entire global system greatly. We have surpassed 1,000 stores in our global online ordering program, and we continue to work with markets both big and small on the opportunities adopting our platform could present in the future. In the U.S., there were two major announcements that are very exciting. First, the ability on Amazon Alexa, which is becoming our most popular anywhere ordering platform, to now order from scratch without the need of a preset profile or saved easy order. This is a tremendous development, demonstrating next phase flexibility within these platforms and giving customers more customization and choice during the ordering process on these pioneering, not to mention very cool, ordering platforms, all still unmatched within our category. Second, partnering with Ford on the first-ever meaningful test of self-driving vehicle delivery. The attention and the interest from media, customers, industry experts, and investors on this was tremendous. We’re very excited to be the first to explore and likely first to report our findings as this very exciting partnership and intriguing study takes shape in the near future. We will continue to invest to grow our digital lead. We are just as committed to keeping our lead as we were to achieving it, and this philosophy will very much continue to drive our approach to all things technology. In closing, I couldn't be more pleased with the third quarter. We continued to do what we do, and our performance was truly a result of staying committed to our sound strategy and relying on the best people in the industry to carry the business forward and help turn in yet another outstanding quarter of results across the board. Thanks, and we'll now open it up for questions.

I had two questions. The first one was just I think the last time you had a fee increase, you helped size up the magnitude of that impact. And I know that's on a gross basis and not net of the investments, but any help on sort of what the magnitude on that change, the $0.04 change is to your revenue?

We’re not actually going to be giving guidance on the actual dollar amount, but you’ll start to see a flow through in the first quarter of 2018.

And then maybe just on the franchise revenue over franchise sales, I think the domestic business basically had a slowdown in terms of that line, and I know there's some lumpiness, but the international business had a pick up. I mean, what drove the lumpiness? And I guess is some of it on the international side, just big franchisee sign-up on the PULSE business? Or is it maybe more of an ongoing step up?

I mean, the dynamics you have on the U.S. side for franchise kind of effective percentages are more around store opening incentives that we provide in certain circumstances. That sometimes can bring that down from the general 5.5% contractual rate that is paid. On the international side, you do have fees coming in on the technology, on our global platform which is in now more than 30 markets around the world. That can help it. The thing that kind of hurts that a little bit in the last year or so has been all the conversions that we’ve done. So a little bit of puts and takes there, but that’s going to bounce around a little bit as that map plays out.

Is the conversion drag done? Are we done with that?

No, the conversion incentives that we give so that they have the capital to reinvest in the brand and put up the leaseholds and the signs and such can generally last a couple years or so, and it starts to ramp back up to the normal rate. So that’ll have a little bit more time to get back to where we need it to be.

Patrick, the strong same-store sales results obviously speak for themselves. But I just want to ask your perspective on the competitive front as you look forward. As you manage this business, what really has your attention the most? Is it people within the pizza space trying to improve on the leverage that they already have? Or is it the countless players outside the pizza space trying to get into delivery?

Yes, Brian, the real answer is that we’re watching all of those things, and we’ll continue to watch all of those things. We don't generally react to them, and as you’ve heard me say in the past, specific pricing initiatives or promotions from competition just don't have that much relative effect on our results. A lot of that just has to do with the level of fragmentation in the pizza category, which remains far more fragmented than other restaurant categories. A specific customer or somebody new coming in is going to have less effect simply because there's still so much more share that can be taken. So we watch all of those things, but ultimately, the decisions on how we run our business are going to be made off of the data that we’re collecting on our own customers' research that we’re doing, and that's really going to drive our actions. We certainly are watching everything else as changes are made, but decisions are being made based on our own customers and what we think is going to give them a better experience.

And that just kind of segues into the next question where you talked about the same store sales strength being mostly tied to the loyalty. I’m just wondering how you understand that, and how you know that. Does that mean that all the increased frequency is simply coming from loyalty customers? Is that kind of what you mean by that?

No.

And what percent of your base is loyalty at this point?

So first of all, we didn't say that most of it came from loyalty. We said that it was significant. And so I want to clarify that first. It certainly has been an important part of our results over the course of the last couple of years since we launched loyalty. Beyond that, we are not yet giving specifics around our loyalty program metrics. In terms of how do we know the effect that it's having, we have pretty extraordinary data based on our model and used that actively to model out our business. We understand pretty clearly what is driving our business and how each of the components of the things that we’re doing are kind of feeding into that. So we know pretty precisely what's driving our business. We are not going to share that because we don't want to help our competition make better decisions around their business. But clearly, loyalty has been helping. It’s been significant, but I didn't say that it is most of what's been driving the results.

I just wanted to ask about the G&A guidance. If I heard you right, I think it's going up about $5 million to $10 million for this year. Just wondering what’s changed versus earlier this year on your G&A? Is this a pull forward from next year or is this just straight up an increase for this year?

Peter, this is Jeff. It's really just the continuation of the investments that are planned plus the additional expense that you get when quite frankly you grow sales as fast as we do. We have things that are variable in G&A that correlate directly to sales growth. So as we continue quarter after quarter to put up the kind of results we’re seeing, at some point we’re compelled to update that guidance. We believe the $350 million to $355 million number is the right number with kind of three months to go. That’s why we are raising it at this point.

And then just on the tech fee increase, the $0.04 increase, did the franchisees have to vote on this at all, or was there any pushback on this increase, or was there generally speaking a lot of buy-in on this increase?

No, they don't have to vote on it, but we are continuing to produce the results that we are because we’ve got great relationships with our franchisees and a lot of trust between us. They are very excited about the investments that we’ve been making in technology and understand that if we’re going to continue to grow our lead, or at least maintain our lead in technology, we're going to need to continue to invest there. And so they’re very supportive of this increase. I think it's been about three years since we have changed the fee. We still are the best deal in the industry, and they recognize that as well. But we've got a great partnership with them, and so a specific vote wasn't required, but we're very cautious and we worry as much about their financial results and their ROI as we do about anything else. And so we recognize and are going to be very careful about how we take increases over time.

And in the past, you’ve talked about growth rates in delivery versus carryout, and just given investments, especially that you’re making now and have been making to your physical assets domestically. So I’m curious if you could just speak to kind of how those two businesses are doing. And then also, what that mid-term growth might look like internationally where it makes sense.

Yes, it's continuing to grow nicely on both fronts domestically. Over time, we've gotten a little more growth out of carryout than out of delivery, but we’re getting traction on both fronts domestically. I think the same is really true overall internationally, though that's going to vary a little bit market to market. But we're seeing strength on both.

And one quick follow-up, if I could, on Jeff, I believe a comment you made about lower performance-based comp. I was just curious, with the results that you put up, why that may be the case.

We have set very ambitious internal goals and are not complacent about our previous achievements. When we meet with our board to discuss these goals, they tend to be quite challenging. Even though we believe we had an exceptionally strong quarter, our performance was slightly lower compared to the previous year when comparing Q3 to Q3. Consequently, when you consider all of this, our overall performance is a bit less than expected.

I have a multipart question. First, I want to ask about your current advertising, specifically the blood, sweat, and teardowns. I'm trying to understand who that is aimed at. Is it directed toward customers regarding your assets, or is it meant for franchisees or potential franchisees? What is the overall message? If it is for customers, is it related to carryout? Additionally, I have a question about the competitive environment.

Sara, yes, it is absolutely for the customers, and it's about carryout. The environment in our stores is better now. All the people in those ads are franchisees in our system. They’re all good friends, and they’re proud of their stores and the way they’ve rebuilt them, and they are excited to show them off to customers.

And the second question is just you mentioned that you don't react to competitor actions. But it looks like maybe there’s been some more price point competition about specific price points, like $7.99. So I guess I'm curious, are you seeing more price point competition? And even if you’re not, when you think about how your customers choose Domino's, obviously technology is a huge advantage, but 40% of your sales aren't digital. So maybe just talk a little bit about the factors that go into that, in light of what may be resurgent price competition.

Well, consistency matters on pricing to our customers. We’ve had basically the same national offer for seven, eight years, nine years now. People know the value that they’re going to be able to get from Domino's, and that has continued. And I guess what I would repeat is that short-term moves in pricing from competitors generally don't have that much effect because the category is so fragmented. Our largest competitor in the U.S. in total is all of the locals and mom and pops and regional chains. Their pricing in the aggregate doesn't move that much because it's a lot of individual decisions. This goes back to what I said in my script about we don't follow a flavor of the month. We don't use pricing and new products each month to kind of attract attention. We invest our resources to generate a better experience for our customers today than it did a year ago. So that's the answer, we stay very focused on what we're doing and the consistency that people get from us ultimately drives the results.

In commentary on the comp drivers, this is, I think, the first time in a while that you’ve mentioned ticket, versus really emphasizing traffic as the driver. And I’m just curious what’s driving that. Is that lapping maybe some of the headwind from loyalty? Are you doing better on suggestive selling on sort of digital orders? I know you’ve talked about rolling out some more customization and personalization there. Just any help you can offer.

Yes, there was significant growth in order count during the quarter. However, we did see some changes in the average ticket amount. As we've mentioned previously, understanding ticket metrics in our business involves various factors, including the balance between carryout and delivery, as well as digital, phone, and walk-in orders. Several elements contribute to this. One factor that might have influenced this change is that over a year ago, we introduced a full week carryout special, which was priced more aggressively. As we move past that promotion and it becomes more consistent, other aspects may impact the overall ticket. There’s nothing major happening with pricing; we’ve maintained consistency there. The variations are mostly about the different components, with some areas growing more than others.

Just a couple questions. One, on the franchisee margins, obviously, it's been tough out there from a labor standpoint. We’ve got a bit higher fee now. Is there any sense of how long you can stay on this $5.99 value promotion? Or is there maybe some thought that you’d have to move off of that at some point?

We’re not going to give forward-looking guidance on pricing. We certainly aren't going to give our competition kind of a heads up on that. I guess I would just repeat that the consistency of what we do is pretty powerful. You did say on the digital increase, and we haven’t had a digital increase yet, and our digital orders are more profitable on average than our non-digital orders. The $0.04 increase would have a nominal effect on that. They will still be more profitable for our franchisees than non-digital. Overall, we’re still pretty bullish on franchise profitability.

And then on the international side. The unit openings there came in a little bit below, I think some estimates, and I know you guys don't guide quarterly, but you mentioned India making a strategic change perhaps. Can you talk a bit about going forward, is it getting a bit more difficult internationally to maintain such high levels of unit growth? Is there any sense that maybe things are flattening out at this sort of pace of unit growth? Or how we should be thinking about that, or if there was a timing issue maybe in the quarter? Thanks.

No, also the timing issue in the quarter is simply some of the conversions that we’ve had out there. We’ve kind of rolled off of that now. Those were going to be lumpy, and it's certainly not something that you can expect on a regular basis from us. The 6% to 8% guidance on net unit growth remains the same for us, and so that is ultimately where we think we are going to be most of the time. India is still growing store counts and the business in India is doing well. You saw their latest results. They had a nice step up in their comps. We're really the dominant player in India. A new CEO came in, and we agree with the decision that they took the foot off the gas a little bit. With the demonetization from a year ago, and I guess we’re just coming up on a year now, and then the imposition of GST not long after that, his view, which we totally agree with, was, you know what? Let's slow down the pace of growth a little bit while we kind of adjust around the new realities of the marketplace. But the business in India continues to do very, very well. We’re getting comp growth. We’re getting store growth. The store growth is just at a little more measured pace than it was in the past. That’s the real primary difference in kind of the organic growth. But all of which is within the context of continuing to believe that our long-term guidance around 6% to 8% is correct.

On the international comp., I know there’s a lot of markets that factor into that, so it might not be best to generalize the drivers, but last quarter you talked about improving value in some markets and also discussed store splitting as being a drag on the comp. How much of that sequential step up do you feel were improvements in those issues that you’d brought up with value and store splitting relative to one-off impacts or headwinds, calendar shift technology issues and things like that in the quarter that may have depressed that International comp?

Yes, any effect from splits continues to be very, very consistent. The balance of growth, that 6% to 8% growth in net store units and how much of that is coming from splits versus greenfield has stayed relatively constant. I think we got ourselves into better shape in the U.K. That was certainly a big focus last quarter from people, and my statement at the time was it's fixable, and it was fixable. They had a very good quarter. They released a couple of days ago, and that renewed momentum in that business. The U.K. is 20-ish% of our retail sales in our international business, so they matter a lot in our overall comp. The acceleration that they had in the third quarter certainly is a big part of the overall move in our third quarter.

How significant is the difference in digital ordering between carryout and delivery customers in relation to the technology fee? I'm curious if the economics are less favorable for you as a franchiser without the technology fee, considering that many carryout orders are likely placed verbally rather than digitally. Was the mix of orders a factor in your decision to raise the technology fee, or do you believe the improvements in features justify the increase?

No, actually no on both of those. We're not charging more because the features have improved. We increased it because we want to invest in making it better going forward. A higher percentage of our delivery orders are placed digitally than our carryout orders, but that's not really factoring into how we’re thinking about that fee.

A couple of quick questions. In the U.S., first off, of course, you mentioned loyalty being a bigger driver this quarter. Could you talk about maybe some of the things you’re doing from an advertising or marketing standpoint to drive that higher impact from loyalty that you saw in 3Q?

So, yes, we didn't say that it was bigger in the third quarter than in previous quarters. We just said that it continues to be a significant part of our comp growth. What we did just say in my script is that we are going to be advertising it again this quarter. A lot of the support for it is coming from digital advertising, and I'm not going to go into specifics of how much of what we’re doing digitally is playing into it. The biggest thing we've done in terms of the loyalty program is change it so that you can earn anywhere. People can earn points if they’re ordering over the phone or if they’re ordering if they walk into the store. They will still have to redeem digitally at the end of the process, but they’re going to be able to earn points by any order that they take. I don't know that there's a significant shift in how we’re promoting in the third quarter, but you are going to see it on television in the fourth quarter.

And just a quick housekeeping item, as far as the hurricane impact, thanks for breaking out what that was in 3Q. Is there any impact from that that could bleed into fourth quarter or is all that pretty much taken care of by the end of fiscal 3Q?

Yes, Alton, this is Jeff. We expect it to be immaterial for Q4.

And I wanted to ask the last one just on the international side of things. Of course, quite a strong recovery sequentially into your SACs versus 2Q. Could you just maybe give some more color on, particularly in the U.K., sort of what drove that recovery versus 2Q?

Yes, it really was more about getting the value equation right, and it just had gotten a little bit out of line. It was very fixable and they fixed it. We got some momentum again. It's not deep discounting at all, but it was just getting that equation a little better as I think they had missed it a bit during the second quarter.

Two questions, just one following up on the discussion of delivery across the industry. I’m just wondering, as you examine your own results, do you see a range of comps across the U.S.? Is it a divergent range? I know last quarter you talked about you’re really just not seeing it with the 11 major metro markets or kind of small, suburban markets in terms of trying to get a read for whether delivery competitors are having an impact on you, or maybe you have an international market or two where you think that they’re further along in terms of competitive delivery set that you use as a proxy. I’m just wondering if you have any read or believe that that’s going to have any traction, or whether you’re just not seeing it at all?

So certainly if there's going to be an impact, it’s going to be in the major metro areas more than in the smaller markets. It’s going to be tough. As we understand the economics of some of these providers, their economics are certainly better in big cities than they are in smaller towns. So to the extent to which there's an effect, you’re certainly going to see it more in the major metros than somewhere else. We continue to track it very closely. If there is an effect from it, it's in the one-point range. There's not certainly a big effect, but if there is, it is certainly going to be more in the major markets than in the smaller markets. But it is still a limited effect.

And are there certain international markets that you talk to just for kind of intelligence, in terms of, we saw that a few years before you, and this is the progression of it, or is there really no specific market that you’d use as a proxy?

The market where it is most developed is China, and we’re doing great in China. There was certainly a lot of discussion after the second quarter as to whether or not this was really about aggregators in the U.K. I think you saw that third quarter was pretty darn good in the U.K. So what I would say is we continue to monitor it very closely. There is not a significant effect. If there is, as I said, it's pretty limited. In terms of the markets where it's more developed, our results in China are strong and our results in the U.K. are strong.

Patrick, in your remarks, you briefly mentioned self-driving cars and your early testing. Could you share any initial insights or a time frame for when we might see progress? It seems like it could provide significant labor savings for franchisees. I'm curious if there's anything we might not fully grasp about this topic, so any early insights or expected timeline would be appreciated.

The good news is that at Domino's, we need to comprehend how customers will engage with self-driving vehicles and ensure we are prepared when that time comes. Companies like Ford and others, along with the government, will be crucial in determining when this technology will be widely available. Ford has mentioned plans to deliver a considerable number of these vehicles in the 2021 model year. I anticipate that adoption will start to significantly affect operations within three to ten years. This process will require time, and many stakeholders will have more influence than our pizza company based in Ann Arbor. Our responsibility is to figure out how we can adapt this technology for our customers, how it will integrate into our business, and how we can stay ahead of the curve. I liken it to our rollout of voice ordering on our app about four years ago. We recognized the potential impact and the growing importance of technology in customer interaction, and we started using it before anyone else, capturing commercial orders through natural voice. This decision has given us a competitive edge as voice interaction has become increasingly prevalent. We are equally confident that self-driving vehicles will significantly affect transportation, and we must understand our role in that arena. That’s why we are allocating resources to study how it will influence our customers and alter their behaviors. The exact timeline remains uncertain, and it's not something that government entities will inquire about. However, we are confident that this technology will materialize, and we need to understand how to leverage it for competitive advantage when it becomes available.

Hopefully I'm not re-asking the same questions. I’ll try to ask it in a different way. The increase in the digital ordering fee from $0.17 to $0.21 to $0.25 are pretty small increases over a period of time. I mean, it's averaging just over $0.01 a year basically. So just put that into context as to why the increase is so small? I guess in two different things. One, as you benchmark third party delivery orders or just third-party orders that are offered to competition, probably local competition, what is Domino's basically as a percentage of the average ticket relative to what your competitive peers are from what you can see in the independent markets? And then secondly, can you comment about your relatively small $0.04 increase about what we hear as one of your competitors that’s doubling the digital fee increase to its franchisees?

Thanks, John, and the answer is as a percentage of our ticket, we’re kind of in the range of 1 point. A bit over a point at $0.25, but it is still in that range of 1%. If you look at Grubhub, which is today the largest kind of straight order aggregator in the U.S., I think they have said that their average is about 15% right now. Our approach to this is if you give our franchisees a 14% cost advantage, we're going to win on value. We want to give them the best deal. We want to have the best technology. Topline growth in our business is going to be the best way to generate value for our shareholders over time. We are very aligned with our franchisees about the approach that we’re taking to the business and how we’re going to create value for them and for our shareholders. Doing this with moderate incremental increases allows our franchisees to maintain a real value advantage over people who are paying dramatically more. We think that's important. Our strategy is borne out in far better growth than pretty much everybody, and that’s kind of the thinking going into it. Sure, we can always take it up more and have a quick bump out of that, but that's not our goal with technology. We are doing this for our franchisees to create competitive advantage in the marketplace, and they are sharing the cost of developing that.

And I guess your perspective is as we think about longer term in the model, even in the next five years, is just to expect these levels of very moderate increases. And that’s no step functions up, but just the overall theme is maintaining low cost operator advantage and winning for the topline. Is that fair to characterize?

I'm not going to get into projecting pricing going forward. But certainly, we feel very good about our strategy and how we’re approaching this. This is an area where our scale allows us to spread our investments over a very big store base. It is a place where we can leverage big investments being made centrally across a very large group of stores, domestically and around the world. That's an advantage that we’re bringing to the marketplace for people who are part of the Domino's system.

Thanks very much. 95 quarters ago, I was 116 quarters old. So you can do that math.

We have a winner!

Well played. Well played.

Two questions. First question is just UberEATS and McDonald’s did actually run fairly significant promotion during the quarter. Did you feel that all? Was there any evidence that that impacted your business?

I guess what I’d say, I’d repeat what I was before. If there is an effect and I’d say if there was an effect, you’re looking at it being relatively modest.

That's helpful. And then just on this technology fee increase. Jeff, maybe you can size this for us just so we can get the right numbers in the increases that U.S. or there’s some international markets. And it sounds like you’re going to be spending against it incrementally. So is it a net wash when you look at your business from a P&L or are you just recapturing some costs that you had already accumulated over time?

We won't provide the exact dollar amount for your model. However, I can share that it's based on all the U.S. stores multiplied by their digital orders, with an increase of $0.04 for the year. You can estimate a dollar amount from that, but we won't give specific guidance on it. Additionally, we aim to increase the digital mix over time, which adds to the increment. As Patrick mentioned, we have our innovation technology plan and teams ready to deliver that value. This process is ongoing; historically, we've raised the fee every couple of years to maintain our competitive edge and provide the best value in the industry, which we believe we do. They aren't directly linked, so I won’t state whether it's a net zero or not.

Could you talk about the domestic in-store execution and your satisfaction with your operator's ability to handle the big increase in volume going through your domestic stores? And it's been a number of years now of big growth. Have you come across any challenges keeping up with the production demands in terms of equipment, labor, and such?

Overall, they’re doing a terrific job. Our service levels to customers are now better than ever. I want to recognize our supply chain team for effectively managing the volume growth. This is why we’ve discussed the need for increased investments in that area. Our stores are not only keeping up but also continuing to improve, which is a key reason for the growth in the number of stores being built. If you look back at our sales growth three or four years ago, it was entirely driven by same-store sales growth with flat store counts. Now, there’s a better balance in our overall business growth. Currently, we’re seeing around 4% growth from an increase in store counts on a trailing 12-month basis. It’s crucial to evaluate our performance by looking at overall retail sales growth alongside same-store sales growth. One method our franchisees are using to maintain or enhance customer service levels is by opening more stores to accommodate the increasing volume. Overall, they’re doing a fantastic job, and this contributes to the sustained growth of stores in the U.S. and globally.

Yes, good morning. I wanted to ask about the increase guidance to the $350 million, $355 million range. Is that inclusive of any potential share compensation, share-based compensation, or is that on a separate line?

So, Steven, this is Jeff. The updated guidance on general and administrative expenses we provided is the GAAP number, raising it to a range of $350 million to $355 million for the full fiscal year. Even though we have a couple of months left, this figure encompasses all gross G&A costs, including corporate store advertising and performance-based compensation. It also covers ongoing investments, particularly in technology and analytics, to effectively drive the business. So, this is a comprehensive number.

Thank you, everyone. We look forward to seeing many of you at our 2018 Investor Day in early January, and discussing our fourth quarter and year-end 2017 results on Tuesday, February 20. Thank you all.