Dominos Pizza Inc (DPZ) — Q2 2019 Earnings Call Transcript

Thank you, Sonia, and hello, everyone. Thank you for joining us for our conversation today regarding the results of our second quarter 2019. The call will feature commentary from Chief Executive Officer, Ritch Allison; and Chief Financial Officer, Jeff Lawrence. As this call is primarily for our investor audience, I ask all members of the media and others to be in listen-only mode. In the event that any forward-looking statements are made, I refer you to the Safe Harbor statement you can find in this morning’s release, the 8-K and the 10-Q. In addition, please refer to the 8-K to find disclosures and reconciliations of non-GAAP financial measures that may be used on today’s call. Our request to our analysts is that we want to do our best to accommodate all of you today, so we encourage you to ask only one question on this call, if you would please. And with that, I’d like to turn it over to Chief Financial Officer, Jeff Lawrence.

Thank you, Tim, and good morning, everyone. In the second quarter, our positive global brand momentum continued as we delivered solid results for our shareholders. We continue to lead the broader restaurant industry with 33 straight quarters of positive U.S. comparable sales and 102 consecutive quarters of positive international comps. We also continued to increase our global store count at a healthy pace as we opened 200 net new stores in Q2. Our diluted EPS was $2.19, an increase of 19% over diluted EPS as adjusted in the prior year quarter, which excluded the impact of our recapitalization transaction completed in 2018. With that, let’s take a closer look at the financial results for Q2. Global retail sales grew 5.1% as compared to the prior year quarter, pressured by a stronger dollar. When excluding the negative impact of FX, global retail sales grew by 8.4%. This global retail sales growth was driven by both increases in same-store sales and the average number of stores opened during the quarter. Same-store sales for the U.S. grew 3%, lapping a prior year increase of 6.9% and same-store sales for our international division grew 2.4%, rolling over a prior year increase of 4%. Breaking down the U.S. comp, our franchise business was up 3.1%, while our company-owned stores were up 2.1%. The comp this quarter was driven by ticket growth. We continue to experience pressure on the U.S. comp from our successful fortressing strategy, as well as from aggressive marketing of third-party aggregators. On the international front, our comp for the quarter was also driven by ticket growth. On the unit count front, we opened 42 net U.S. stores in the second quarter consisting of 45 store openings and three closures. Our international division added 158 net new stores during Q2 comprised of 171 store openings and 13 closures. We are very happy with the rate and pace of our net store growth during the first half of 2019 and note that we have opened 50% more units globally than at the same point last year. We have opened approximately 100 net units per month over the last 12 months, which we believe demonstrates the broad and enduring strength of our four-wall economics combined with the efforts of the best franchise partners in the restaurant industry. Turning to revenues, total revenues for the second quarter were up $32.2 million or 4.1% from the prior year, resulting primarily from the following. First, higher U.S. franchise retail sales, resulting from both same-store sales and store count growth drove increased supply chain and U.S. franchise revenues. Higher international retail sales resulted in increased international royalty revenues but were partially offset by the negative impact of changes in foreign currency exchange rates. FX negatively impacted international royalty revenues by $3 million versus the prior year quarter due to the dollar strengthening against certain currencies. These increases were partially offset by lower company-owned store revenues, resulting from the previously disclosed sale of the 59 corporate stores in our New York market to existing franchisees during the quarter. This transaction will help us accelerate fortressing the New York market and further allows us to remain focused on fortressing our remaining corporate store markets. Moving on to operating margin, as a percentage of revenues, consolidated operating margin for the quarter increased to 39% from 37.7% in the prior year quarter and was positively impacted by the New York sale. Supply chain operating margin was up 0.6 percentage points year-over-year and was positively impacted by procurement savings and lower insurance costs, but was negatively pressured by higher labor costs. Company-owned store operating margin was up 0.9 percentage points year-over-year driven by the New York sales. We continue to experience labor rate pressures in many of our remaining company owned store markets. G&A cost increased $2.7 million as compared to the prior year quarter, driven in part by a $2.4 million loss on the New York sales. Interest expense decreased $2.2 million in the second quarter, driven by $3.3 million of incremental interest expense recorded in the prior year related to our 2018 recapitalization. Our reported effective tax rate was 12.9% for the quarter, down 2.2 percentage points from the prior year quarter. The reported effective tax rate included a 9.2-percentage-point positive impact from tax benefits on equity-based compensation. We expect to see continued volatility in our effective tax rate related to equity-based compensation for the foreseeable future. When you add it all up, our second quarter net income was up $15 million or 19.3% over the prior year quarter. Our second quarter diluted EPS was $2.19 versus $1.78 in the prior year, which was a 23% increase. As compared to our prior year diluted EPS as adjusted for the 2018 recapitalization of $1.84, our second quarter diluted EPS increased 19%. Here is how that $0.35 increase breaks down. Our lower effective tax rate positively impacted us by $0.09, primarily related to higher tax benefits on equity-based compensation. Lower diluted share count resulting primarily from share repurchases over the past 12 months benefited us by $0.06. Higher net interest expense resulting primarily from slightly higher interest rates negatively impacted us by $0.02. Foreign currency negatively impacted royalty revenues by $0.05. And most importantly, our improved operating results benefited us by $0.27. It is important to note that operating results do include a $0.04 negative impact from the loss recorded on the New York sale. Now turning to cash, I would like to take a moment to highlight the continuing strength of the Domino’s financial model, in particular our cash flow generation. During the first half of 2019, we generated net cash provided by operating activities of more than $200 million. After deducting for CapEx, free cash flow generated for the first half of the year was more than $175 million. Over the past 12 months we have generated more than $330 million in free cash flow. I highlight our cash flow story not only to demonstrate our outstanding financial model and performance but also to remind folks of our long-term commitment to returning cash to shareholders. During the second quarter, we repurchased and retired $3.3 million worth of shares at an average purchase price of $269 per share bringing our year-to-date total repurchases to $11.5 million and our total share repurchases over the past 12 months to more than $280 million. We also returned $26.7 million to our shareholders in the form of a $0.65 per share regular quarterly dividend. As always we will continue to evaluate the most effective and efficient capital structure for our business, as well as the best way to deploy our excess cash to the benefit of our shareholders. Overall, our solid consistent momentum continued and we are pleased with our results this quarter. We will remain focused on relentlessly driving the brand forward and providing great value to all of our stakeholders, including our customers, franchisees, team members and shareholders. Thank you for joining the call today and now I will turn it over to Ritch.

Thanks, Jeff, and good morning, everyone. Overall, I am pleased with our second quarter performance. As we discuss the quarter, I will try to put things into context of what matters on our long game journey to drive profitable growth for the Domino’s brand and our franchisees. We continue to lead the pizza category and we continue to gain share around the globe, but we are a work-in-progress in brand, there have been and always will be plenty of areas where we can improve. With that context, let’s talk about the quarter. Starting with the U.S. business, our retail sales performance was once again driven by a balance of same-store sales and solid net unit growth. Our same-store sales performance for the quarter came in toward the lower end of our three-year to five-year outlook, as we continue to navigate through headwinds related to aggressive activity from third-party delivery aggregators. I do not expect this activity to ease in the near term. We also continue to put some pressure on our comps through our own fortressing strategy. As we have discussed in the past, this is an investment that we and our franchisees are happy to make for the long-term growth and profitability of the business. During the quarter, our comp was mostly ticket driven, which does not signal a shift in strategy away from driving order counts, but it does reflect the franchisee flexibility being utilized at the store level related to menu price and delivery charge, having more of an impact. Make no mistake, we remain focused on utilizing data with our franchisees to drive transaction growth coupled with smart ticket opportunities where possible. It is the strategy that got us here, the strategy that is sustainable and the strategy that will help us navigate through challenges in the future. Our Points for Pies promotion extended into the second quarter and while it was a solid sales driver, I am most pleased by the progress toward our additional objectives related to app downloads, awareness and reengagement tied to the Loyalty program. I continue to be pleased with the pace of unit growth in our U.S. business, a solid quarter of 45 openings and only three closures, once again demonstrated our industry-leading unit economics. Fortressing continues to be the right long-term answer for the brand and I am pleased with the strong support for this strategy within our franchise system. Our data-driven approach to territory assessment has created a meaningful educated conversation around how we can best continue to win the long game by establishing closer proximity to households, driving carryout, shrinking delivery areas, improving service and lowering cost per delivery for franchisees. This approach is also creating meaningful opportunities for our franchisees to grow their enterprise profitability. We remain excited about this initiative and its positive impact on unit growth and retail sales for the remainder of 2019 and beyond. Fortressing is a critical component of our efforts to improve service to our customers, but it is not the only component. Our operators must continue to push harder every day to improve service, getting to the door consistently on time with great tasting pizza. As a brand, we will also continue to invest in technology to help our franchisees and operators. I am pleased to announce today that our GPS tracking technology will be launched by the end of 2019. This will be an innovative step that will bring even further transparency to the experience of tracking an order and I am pleased that we will be getting it off the ground very shortly. During the quarter, we announced our new pilot program in partnership with Nuro, as we continue to expand the self-driving delivery learnings that bring us closer every day to the technology that could truly revolutionize the way we do business. We will be testing this in the Houston area this fall. We will also continue our multimarket testing of DOM voice order taking, now in over 40 company-owned stores. Across these and other initiatives, rest assured that we will not slow down. We will continue to invest and innovate aggressively to stay at the forefront of our industry. For the U.S. business, as we look forward, we will remain focused on our long-game approach to balanced growth via volume-driven retail sales, strong unit economics, and franchisee health. I want to thank our U.S. franchisees for continuing to dig in during what has recently been a unique operating and competitive environment. Beyond all other things, my top priorities remain your profitability, your long-term growth potential and staying aligned on what matters as we head into the back half of 2019. Moving on to international, it was another very solid quarter for unit growth. While near-term challenges continue in getting comps back to levels we are used to, our retail sales performance showed a blend of units and comps leading to a healthy result. This blend may shift over time, but so long as there is balance coupled with our strong fundamentals related to unit economics and market share, I remain confident in our proven international model. During the quarter, net unit growth of 158 stores was a strong improvement over Q2 of 2018, demonstrating the strength of our unit economics and the terrific commitment of our international master franchisees. Unit openings were strong across all regions. Same-store sales were ticket driven and we continue to stress the importance of data analytics and insights with our master franchisees, and helping to make smart decisions related to pricing and promotional strategy. During the quarter, we gathered our international master franchisees from around the world in Amsterdam for a week of best practice sharing and learning. We discussed many of the successful strategies and tools that have been developed in our leading markets around the world. It is one example of how our various centers of excellence are engaging with and supporting our international partners. Our international model and our partners are very strong. However, it is not lost on me that our comp performance over the last three quarters has come up short of our three-year to five-year outlook. While we may be near the low end of our target for a period of time, our international business remains healthy and poised to contribute meaningfully toward our 8% to 12% global retail sales outlook over time. All in all, as I look across the global Domino’s business, I am pleased with the first half of 2019. I am as encouraged by our many successes as I am by our passion and our focus on addressing the areas where we can improve. We will never stop striving to get better. And with that, we are happy to take some questions.

Hi. Thanks for the question. Can you talk about where you see the greatest opportunity to drive same-store sales? Is that from your existing customer base, whether that would be higher ticket incremental orders or attracting new customers to the platform? Thanks.

Yeah. Lauren, it’s Ritch. Thanks for the question. We see opportunity honestly across both of those, both in terms of attracting new customers into the brand and also driving incremental sales with those existing customers. And during the second quarter, we continued our Points for Pies program which was all about continuing to do both of those things. Number one, driving increased number of royalty program enrollments, resulting in additional customers coming into the brand and purchasing for the first time, but also continuing to expand our engagement with our existing customer base. As we discussed back in January, we have more than $20 million active members in that Piece of the Pie rewards program. So as we look forward, we see opportunity on both of those fronts.

Hi. Thanks. It’s Mike Tamas on for Brian. I think we are sort of all just kind of wondering, what changed in the same-store sales trajectory from last quarter? You mentioned third-party delivery headwind probably peaked last quarter and then you kind of said this quarter is keep going and you don’t see any let up there. So did something change there or with the fortressing headwind that sort of changed the trajectory of your traffic or how do we think about that? And then how do you think about reaccelerating your traffic going forward just in your overall sales trends? Thanks.

Certainly. In Q2, we observed no significant changes in the challenges affecting our same-store sales in the U.S. Our fortressing strategy is progressing as planned, and we've communicated the consistent downward pressures on our comparable sales from this effort, which tend to remain stable quarter-over-quarter. Additionally, we faced noticeable pressures from third-party aggregators during Q2, with extensive discounting aimed at increasing market share. There has also been a considerable investment in advertising, which affects our visibility in the market, leading to a similar situation as we experienced in Q1 regarding pressures on our comparable sales. Looking ahead, the approach to improving our comps will resemble what has successfully brought us to this point over the years. Key factors will continue to be important in this competitive environment, including delivering outstanding products to our customers daily, maintaining a strong focus on value, and addressing cost pressures. We, along with our franchisees, remain committed to our $5.99 mix and match deal, our delivery hero offer, and our $7.99 carryout offer. Consistent, high-quality service and delivery must be prioritized, and we are dedicated to enhancing our capabilities in this area through technology investment. I am particularly enthusiastic about the upcoming rollout of GPS, which will enhance customer transparency regarding their pizza orders and provide valuable data to our restaurant operators for improving delivery efficiency.

Great. Thanks.

Yeah. Thanks. Ritch, I know you talked a lot about the several technology tests and initiatives later this year like the GPS tracking, but are you considering any menu or value messaging changes? I understand you might want to elaborate on it. Is there anything else you’re considering in terms of the business to address the transaction declines and then I have a follow-up?

So, we are going to stay consistently, Chris, focused on value without question. As we have talked about in the past, we very regularly use our research and our analytical tools to make sure that we fully understand what the right value offering in the marketplace is to drive transaction growth over the long-term. We will continue to do that and the answer continues to come back that the platforms that we have out there and now the $5.99 and the $7.99 are still very strong and competitive value platforms in the marketplace. As it relates to menu, we don’t like a lot of other restaurant brands roll out LTOs on a regular basis. We just don’t like the economics and the operational complexity of doing that. That said, we do recognize that we are in the food business and menu innovation is important over the long-term. So we are constantly looking at new menu items and platforms that we might bring forward to our customers. We are testing those on an ongoing basis. In fact, I was personally in the test kitchen just about a week and a half ago looking at the number of different items. And so as we develop and test and prove out those items with customers, then we’ll launch them as the opportunities arise. For a product to come onto our menu, it’s got to drive incremental, not only incremental transactions, but also we are very mindful of the profitability of those items to our franchisees' P&L. So we will not launch items just to drive short-term comp, we want to make sure that any new items are contributors over the long-term to our franchisees' profitability.

Thanks. And then, historically, the pizza category struggled to raise prices without affecting transactions. Do you think Domino’s has more pricing power now because of delivery fees being charged by aggregators or is it critical for the company to reverse transaction declines soon?

So I think the pricing power in the category is in the hands of the customer. There are very few QSRs that have pricing power and I don’t see a lot of that in the pizza category. A big part of our success over the last decade has been the fact that you can still get a Domino’s pizza for the same price you were paying nine years or ten years ago and we don’t see any near-term signs of that changing. It’s really kind of early to tell around what impact these third-party aggregators are having on kind of setting pricing in the marketplace. There has been so much discounting that even though some of the stated fees for food delivery are quite high relative to the underlying cost of the product, you probably get the same push notifications I get all of the time and emails from these aggregators with significant discounting to try to entice you to order. So we are keeping an eye not only on our traditional competitors as we always have with respect to their pricing practices but we are also keeping an eye on these new set of competitors, these third-party aggregators and we will see over time. But our experience has certainly shown that remaining focused on value is the way to drive long-term transaction growth in the business.

Great. Thank you.

Hi. Good morning. Ritch, just a follow-up on the last question. I think in the past you have talked about the third-party aggregators potentially creating a lot of trial with these offers that might not be sustainable. And I guess as you get further into what they are doing and see the trend. Do you still have that view? Do you think this is maybe a temporary phenomenon related to the discounting they are doing? And then, I guess, secondly, you mentioned that you are not expecting the environment to change much in the near-term. I am just wondering if you would comment on your degree of confidence in maintaining comps kind of near or above the low end of your 3% to 6% target, given this environment? Thanks.

Got it. So, David, it's still a bit early to determine how sustainable the trial-driving activities are. There is still a high level of discounting in the market from third-party aggregators, along with significant advertising spend. This group of aggregators has captured a considerable share of the advertising landscape related to food delivery. We expect this trend to persist for some time. While the long-term economics of the business are still uncertain, the current activity suggests that investors are willing to incur losses in the short term to drive trial and market share in these businesses. We are closely monitoring the situation and analyzing our own data to better understand customer behavior over time, without any signs of a slowdown in the short term. Looking at our business, our three to five-year outlook remains at 3% to 6% same-store sales with no changes expected. I see considerable opportunities to continue driving solid transaction growth. We consistently produce outstanding, industry-leading advertising that raises brand awareness, supported by the largest advertising budget in the pizza industry. We are also developing excellent technologies for our customers and stores to enhance operations, while emphasizing service excellence. As we move into a future where delivery options are vast, we need to be not only the most economical delivery provider but also the most reliable, ensuring timely deliveries every time. We are making a strong internal effort to elevate our service level, with exceptional operators in the U.S. and around the world setting new standards for on-time delivery performance. Additionally, our fortressing strategy is helping us improve service quality while strengthening the underlying economics of each delivery as we refine our delivery areas.

Thank you. Just wanted something clarified then I do have a question. I think there was a mention early on about the same-store sales being driven not by traffic but by check in within that context some delivery charges, was there a change in the quarter as far as franchisees on aggregate taking up delivery charges, just curious if that had an effect on the traffic? And then, I just want to know if you could speak a little bit more about the change in your tone about the respect that you are hearing now or we hear now more for the third-party guys. What changed? Is it the additions of the fast-food brands on those platforms? Is it their new regional expansion? Is it the level of discounting that they are doing? So maybe that’s temporary and when that goes away it goes away, just want to understand better sort of the anatomy of how their competitive intrusion is impacting the Domino’s brand? Thank you.

Sure, Matt. Regarding your first question about the increase in ticket prices in the second quarter, this was due to both rising delivery charges and some menu price increases that various franchises implemented during the quarter. The increases in delivery charges are quite noticeable, and the menu price hikes are particularly evident in areas experiencing significant wage increases, primarily driven by ongoing minimum wage hikes in various states and municipalities across the country. As for your second question regarding our perspective on third-party aggregators, we maintain the same concerns we've always had about the economic sustainability of that model. There is still a significant amount of investor subsidy being funneled into customer discounts and additional advertising efforts. We also continue to question the sustainability of the business model for the restaurants and franchisees using these third-party delivery services. If you examine the growth rates and transaction numbers within the restaurant industry, there has not been a notable increase in the growth rate since the emergence of these delivery aggregators. While there is a shift in customer behavior, with more people opting for delivery instead of dining in or picking up food themselves, we do not see a genuine growth in overall demand. We believe that these third-party platforms are ultimately taking profitability away from the restaurant industry. Although brands that partner with these platforms may experience topline sales growth that benefits their royalties, the key question remains whether the franchisees are actually earning more or less money by joining these platforms. We still have many of the same questions surrounding the overall business model. When I mention that we don’t foresee the pressure from third-party aggregators easing in the near future, it's because we haven’t observed any reduction in their discounting pace or their investment in marketing and advertising. While their behavior might appear irrational at first glance, it can be understood as quite rational from their perspective. Some participants in this business will survive, while others may not, and I believe the current strategy of aggressive spending to capture market share will be seen as irrational behavior in the short term as each player aims to be one of the few that ultimately survives.

Thank you. Thank you very much for that answer.

Thank you for the question. I would like to shift the focus to operating expenses for a moment. Could you discuss the store level margin performance for the quarter and how New York City might be influencing that? It would be helpful to understand the implications for lost EBITDA and margin benefits in the coming quarters. Additionally, I noticed the proceeds were considerably lower than I anticipated. Does this indicate that the profitability of these stores is quite low? Any insights on how to interpret the multiple paid for the business and how profitability may change moving forward would be appreciated.

Hey, Greg. It’s Jeff. On the New York sale, we got market price for those assets. I am really excited to get those into the hands of those franchisees who have committed not only to run those stores but also to continue to fortress that market. We are going to take that money and continue to look at the best opportunities for that, but we are definitely all in on fortressing and that includes the remaining corporate store markets where we compete and what markets those are. When you think about the operating margin change quarter-over-quarter for the corporate stores that we reported, we were up almost a 100 basis points year-over-year, all that in New York, while New York was certainly a good and profitable market, the operating margin percentages there weren’t quite as high as some of our other even better performing market. So a little bit of a math problem there. As we continue to move forward, as Ritch mentioned earlier, labor pressures continue to persist regardless of where you are operating in the U.S. franchise versus corporate East Coast versus West Coast versus the Heartland, whether government mandated or just economically mandated. We are paying more to really attract and retain great team members who continue and not to be missed we continue to take material share in the U.S. business in ‘19 just as we have for this decade or so. As we look forward, our operators, we do have the right operator, we have the right business partners, we are getting technology into their hands to allow them to better compete with both the traditional and the upstart competitors. And how much they will make for 2019, we will report to you in early 2020. But what I would tell you is, there is every opportunity in the last six months of the year just as they have had six months in the bag already to put up hopefully another record year and dollar profitability. That’s up to us and our operators to go and execute. But we have all the opportunity in the world. It’s the best economic model out there and we feel good about where the brand is going.

Hey, guys. This is actually Niall on for Will. Thank you for taking the questions. So, regarding unit growth internationally, as you mentioned opening growth nicely year-over-year. Could you give us a little more detail there in terms of what markets seem to be accelerating at this point or if there any market that could be stolen a bit to me a little more attention?

Niall, it’s Ritch. Yeah. We are very pleased with unit growth in our international business. The 158 net units were a really nice increase over the second quarter last year and trailing four-quarter net store growth in the international business at 939 we are very pleased with that. When we take a look across, we had strong unit growth across all of our regions around the world, and in particular really pleased to see terrific unit growth in our BRIC markets, which have continued to accelerate back in January. At Investor Day, we spoke with you about the potential that we see in the business in the BRIC markets. We had strong growth there. But then we also saw some very strong growth in some of our more mature and established markets as well. As a number of those markets are also implementing some similar fortressing strategies that we have been working on in the U.S. business as well. So, all in all, I am very pleased. When I take a look at what drives that growth, it’s the same thing that has driven our growth in the U.S. and has driven what is remarkably low number of store closures both in the international business and in the U.S. business and that is that we have terrific unit economics. The four-wall economics in these Domino’s Pizza boxes in the U.S. and around the world remain incredibly strong. So, I am really pleased with the unit growth and the very healthy contribution that gave us to our global retail sales growth, which ex-FX was 8.4% for the quarter, 9.8% in the international business. So very pleased with that 9.8%.

Perfect. Thank you.

Hi. Thank you. We have discussed competition for customers extensively during this call, but I would like to know your current thoughts on the competition for drivers. Are there specific markets that are particularly competitive for drivers, and do you feel this has affected your performance in any way? Additionally, I believe this ties into something else: some of your third-party competitors have started separating delivery fees from service fees. Do you see this as an opportunity, and if so, could the potential benefits for drivers be enhanced due to their franchisee status?

Thanks, John. I’ll take that one. There is indeed significant competition for delivery drivers in the current market. The low unemployment rates in the U.S. and the increasing presence of third-party delivery services in restaurants, groceries, and other sectors have intensified this competition. We are collaborating with our franchisees daily to enhance our service. Proper scheduling and staffing are essential. While we don’t often discuss the backend technologies we are developing, we have made considerable progress with our store scheduling algorithms, leading to improved service at our corporate stores. By optimizing labor usage, we ensure that employees are scheduled during peak times, and our franchisees are equally focused in this area. We are exploring additional strategies to address driver shortages. The U.S. market is unique for Domino’s, as nearly all pizzas are delivered via personal vehicles, unlike other global markets. Therefore, we are investigating alternative delivery options. In some cities, we’ve started using bicycles for deliveries and have also deployed E-bikes in certain markets, including our corporate stores. This not only reduces delivery costs but also expands our workforce since not everyone possesses a car, particularly younger individuals aged 18 to 28, many of whom are driving less. We are also set to conduct further autonomous delivery testing with Nuro in October to lessen our reliance on the labor market and reduce delivery costs. Regarding your question about third-party delivery services separating their fees, we consistently analyze the fees charged in the marketplace, alongside those of our pizza competitors. We use this data to inform our delivery fee structures on a market-by-market basis across the country. We are continuously monitoring and adjusting with a focus on avoiding short-term profit strategies that could compromise long-term transaction growth. Balancing these aspects is always our goal.

Thanks. I wanted to ask about the international markets you said there were near-term challenges for comps to continue. I think in the past Domino’s has maybe disagreed with the licensees about what the source of those challenges might be with respect to whether it’s value proposition or something more pervasive regarding aggregators and the fortressing. Do you have any I guess color or any update on your thinking or the changes that there are being made, because it feels like it is taking some time and I would have thought that if they show value that could be lever you could push pretty quickly. So if you could talk a little bit about what the sources are and whether there is any risk to unit growth if those comps do not improve? Thanks.

Thank you for the question. There isn't a single answer to the short-term challenges we've faced over the past three quarters regarding international comparisons. The issues vary by market. We are working closely with our markets to ensure we make informed decisions about products, pricing, and other factors, but these efforts take time to reflect in our results. Just last month, we gathered all of our international master franchisees, bringing a significant part of our leadership team and experts from Ann Arbor to Amsterdam. We had a productive week of sharing best practices, utilizing tools from the U.S. and other leading markets to leverage Domino's intellectual property globally as we strategize for growth. Nonetheless, we recognize that our recent comparisons have fallen short of the desired range over the last three quarters, and we certainly need to improve on that front. However, overall retail sales growth remains strong at 9.8% for the quarter, and we continue to gain substantial market share in the global pizza category. The quarter also showed notable unit growth, with 171 international openings against 13 closures, highlighting the robust economics of our international business. Despite the challenges with comparable sales in recent quarters, I have immense confidence in our master franchise partners, the profitability of our operations, and our strong market share positions in many key pizza markets worldwide. We will address these challenges collaboratively with our master franchisees, and the overall health of the business remains exceptionally strong.

Okay.

I wanted to revisit the earlier comments about the Points for the Pies program. Ritch, you mentioned your satisfaction with the reengagement in the loyalty program and its positive impact on the business. However, overall order counts did not aid comp growth in the U.S. during the period. Could you elaborate on the behavior of the members entering through the Points for the Pies program and whether they are utilizing the brand as you had anticipated when you launched this program earlier in the year? Thank you.

Yeah. Thanks, Jon. Yes. So I will start my answer to your question just to kind of once again reinforce the purpose of that program, Points for Pies, when we established it back in late 2015 we went through a lot of different iterations as to how we might build that program. And if you look at loyalty programs across brands, some are designed to drive spend, some are designed to drive transactions and engagement. Ours is absolutely designed to drive transaction growth over time. It is why it’s very simple that if you order from us basically six times you are going to get a free pizza. So, taking that then to Points for Pies, we entered the year with an active member base and loyalty program of over 20 million active users. We know that those members order more often than the average customer. So the goal of Points for Pies really do a couple of things. Number one, once again raise awareness of that program, if they do it in a kind of, oh, yes, we did kind of manner, because nobody gives points for buying things from a competitor, right, only Domino’s would do that. So it was a great message out there in the marketplace, great advertising that raised awareness. Then gave us an opportunity to engage and get more customers to come in and download our app, which we know once we give that app on the customer’s phone that real estate is incredibly valuable going forward. Then the enrollment in the program, getting folks in the program for the first time and then ultimately orders coming after that and we have seen nice movement across all of those metrics, across awareness, across downloads, across enrollments and then across customers ultimately ordering once and then twice and going forward. And a loyalty program like ours is something that you do have to feed over time. So there is a need to periodically have news in the marketplace and something interesting to kind of refuel those enrollments over time.

Okay. Thank you.

Thanks for the question. Ritch, wondering if you could talk a bit more about the U.S. carryout business given the increased focus there in recent quarters and then given I assume it could be better insulated from the aggregate risk, at least at a high level. Can you at least talk about the performance of carryout, how it has trended perhaps, maybe just beyond fortressing, any opportunities to support that business over the near- and longer term? Thanks.

Thanks, Dennis. Yes. The carryout business is still a critical component of our strategy over time and as we have talked about it we effectively operate two businesses inside the same box. We have got a delivery business and a carryout business, and as we look at them, we designed pricing, promotion, advertising for each of those individual businesses. We have seen healthy growth in our carryout business. Fortressing does play an important part of that when we open new units, the vast majority of that carryout business is incremental and its business that we weren’t getting before. So when I think about how we drive carryout going forward that will continue to be a component of it, but also you will continue to see our carryout advertising on TV. We are going to continue to support that platform on an evergreen basis. And we do look at it as a piece of the business that is more insulated relative to some of the new competition in the marketplace. So, no slowdown in focus or let up on the carryout business going forward.

Great. Thank you. Just a broader question maybe on the global unit growth, I know, Ritch, you have been encouraged about the strong first half growth, but that it is more difficult to read these numbers on a quarterly basis and I know you therefore focus on annual. So does your bullish comment indicate you accept up to full year unit growth guidance for I guess the 6% to 8% long-term, I suppose your both the U.S. and international comps seem to be below plan, and I guess, I asked that question more so focused on the U.S. I am just wondering whether you think your smaller mom-and-pop franchisees are more motivated by the long-term franchise profit that keeps increasing every year versus maybe they will be more cautious by the directional short-term comp trends, any color on that broader unit growth will be great?

On global unit growth, we don't provide a full year outlook or guidance, but we remain positive about our 6% to 8% unit growth outlook over the next three to five years. This is largely based on a couple of factors, particularly the underlying unit level economics. With an EBITDA of $141,000 per unit in 2018 and considering the low cost to open a Domino’s Pizza store, along with the incentives we offer to franchisees, this represents an attractive investment for them in the U.S. Consequently, we have seen strong performance in growth over the past couple of years and a lot of optimism about franchisees continuing to want to invest in the business. The same principles apply internationally; while individual markets may experience fluctuations, our portfolio across over 85 countries shows very healthy unit economics. Last month, I met with the vast majority of our international master franchisees and can confidently say that the optimism around the brand remains incredibly strong.

Yes. Thank you. Actually I just had a question for Jeff just on the buyback front, obviously, of course, the pace of buyback has slowed here, and of course, first half versus what you had done over the prior 12 months to 18 months period. Could you just remind us how opportunistic you are with that program i.e. would you use and move like today’s downward move as an opportunity to bolster up your buyback program just maybe not so much what guys are doing today but just kind of in theory as to what your thoughts are behind that?

Thanks, Alton. We currently have $150 million remaining from our Board's authorization for the buyback program. As you all know, we have a strong and consistent track record of returning our substantial free cash flow to shareholders through buybacks and dividends, following our investments in the business. I wouldn’t place too much emphasis on the rate and pace of the first six months as there were various factors at play. We paid down our revolver by $65 million year-to-date, and with over a $1 billion balance sheet, there are fluctuations to consider. Additionally, last year, we executed about $135 million in buybacks from our recap process, which we did not do this year. Once again, I wouldn’t overanalyze the current rate and pace; we remain dedicated to generating exceptional free cash flow and returning it to you in the best ways possible.

Great. Thanks. I just wanted to ask about the commitment to the $5.99 price point. I recognize you are still committed to value. But in the past you said that the $5.99 platform really only works if you are driving a positive transaction growth and it seems like this quarter your comp has really been driven by ticket. So are you seeing or hearing pushback from the franchisees at that price point and do you expect that you may change that price point if they start pushing back on that level given it has been the same price for the past decade?

Hey, Pete. It’s Ritch. We still got strong commitment in the system to the $5.99 price point and I would not read a single flat quarter on traffic as any more than it is which is a quarter. If you take a look at our performance over any period of time since we launched that $5.99 platform we have driven significant and sustained transaction growth in the business and there is no slowdown on our part relative to the commitment to continuing to drive transactions. Our franchisees understand that that is a long-term healthy way to grow their businesses and to grow their profitability. We have looked at time and time again and proven that sales and profits over the long-term are correlated with transaction growth so the commitment remains.

All right. Thank you very much.

Hey. Thank you. If I could just follow up on the third-party question, and hopefully, I will ask it a different way. Ritch, you mentioned all the discounts push notifications, emails that we all see the same thing. I think what is still unclear at this time is when those third party campaigns level out, they dry up or just become less marginally impactful. How that market resets or how quickly customers revert. I know you mentioned Ritch that you don’t expect it anytime soon, but the customer response the email number 100 is likely not the same as email one or two. So I wonder if you could share some insight on comp trends in those higher trade areas that have been battling against promotions for two years or more versus those in restaurants and trade areas that have been battling third parties for about six months. Maybe you can talk about the life cycle if you see one of customer response and what would convince you that the playing field in delivery is more permanently worked?

Certainly, Jeremy. That's a great question. I'll discuss what we see so far, although there is some uncertainty about future developments. It seems that there is a trend with third-party penetration where in locations where these services have been available for a long time, their growth tends to plateau. You raise a valid point about the effectiveness of the initial promotions; the $100 coupon might be less appealing than subsequent ones. We observe and monitor this dynamic across the various DMAs we operate in across the U.S. However, we still don't know what the demand will ultimately look like once customers have to pay a price that surpasses the cost of the service. This remains unclear, especially with the ongoing significant discounting, and we are watching this closely. It may take some time before we understand the true demand from customers. Additionally, we still don't have clarity on the supply aspect in the market. Many brands, both large and small, are rushing to partner with third-party aggregators, but these brands and their franchisees need to see genuine incremental benefits or profitability from these services. There are still many uncertainties for restaurant operators about whether this approach is truly beneficial or if they are merely switching from higher-margin to lower-margin transactions. Until we see what the landscape looks like regarding both demand and supply, the true balance of how much business is available through these third-party platforms remains uncertain.

Yes. Just wanted to go take a little different track and discuss your new point of sale system. I know this has been something that has been under test and so I wanted to ask for an update on this test and whether you still see next year as a possible implementation date?

Yes. It's Ritch here. We are diligently working on our next-generation point-of-sale system with the aim of having a test operational by the end of the year. The rollout will take time, as we currently have over 13,000 stores on our common point-of-sale system. I don’t have an update for you just yet, but we will keep you informed as the project progresses.

Listen, thanks to everybody. We certainly look forward to discussing our third quarter 2019 results with you on Tuesday, October 8th.