Dominos Pizza Inc (DPZ) — Q3 2019 Earnings Call Transcript

Thanks, Sonia, and hello, everyone. Thank you for joining us for our conversation today regarding the results of our third 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, we want to do our best to accommodate all of you today, so we encourage you to ask only one-part question on this call, if you would please. With that, I’d like to turn the call over to Chief Financial Officer, Jeff Lawrence.

Thanks, Tim, and good morning, everyone. In the third quarter, our positive global brand momentum continued as we delivered solid results for our shareholders. We continue to lead the broader restaurant industry with 34 straight quarters of positive U.S. comparable sales and 103 consecutive quarters of positive international comps. We also continue to increase our global store count at a healthy pace as we opened 214 net new stores in Q3. Our diluted EPS was $2.05, an increase of 5.1% over the prior year quarter, primarily resulting from strong operational results offset in part by a higher tax rate. With that, let's take a closer look at the financial results for Q3. Global retail sales grew 5.8% as compared to the prior year quarter, pressured by a stronger dollar. When excluding the negative impact of foreign currency, global retail sales grew by 7.5%. This global retail sales growth was driven by both an increase in the average number of stores opened during the quarter and higher same-store sales. Same-store sales for the U.S. grew 2.4%, lapping a prior year increase of 6.3%, and same-store sales for our international division grew 1.7%, rolling over a prior year increase of 3.3%. Breaking down the U.S. comp, our franchise business was up 2.5%, while our company-owned stores were up 1.7%. The comp this quarter was driven entirely by ticket growth. While we continue to grow our overall delivery business, we continue to experience pressure on the delivery business comp from our successful fortressing strategy as well as from aggressive competitive activity. Our carryout business continues to grow at an impressive rate. On the international front, our comp for the quarter was also driven primarily by ticket growth. On the unit count front, we opened 40 net U.S. stores in the third quarter consisting of 43 store openings and three closures. Our international division added 174 net new stores during Q3, comprised of 203 store openings and 29 closures. We’ve opened 1,174 units over the past 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 third quarter were up 4.4% from the prior year, resulting primarily from the following: first, higher U.S. franchise retail sales, resulting from both store count and same-store sales 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 $1.5 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 second quarter. Moving on to operating margin. As a percentage of revenues, consolidated operating margin for the quarter increased to 38.5% from 37.6% in the prior year quarter and was positively impacted by the New York sale and higher revenues from our global franchise business. Supply chain operating margin was up 0.1 percentage points year-over-year, while our company-owned store operating margin was up 2.8 percentage points year-over-year, driven primarily by the New York sale. G&A cost increased by $3.4 million as compared to the prior year quarter. G&A was benefited by the New York sale. As a reminder, we recorded a pre-tax gain of approximately $6 million on the sale of 12 company-owned stores in the prior year, which was recorded in G&A. Our reported effective tax rate was 21.7% for the quarter, up 6.4 percentage points from the prior year quarter due to lower tax benefits on equity-based compensation. The reported effective tax rate included a 1.1 percentage-point positive impact from tax benefits on equity-based compensation in 2019. 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 third quarter net income was up $2.3 million or 2.7% over the prior year quarter. Our third quarter diluted EPS was $2.05 versus $1.95 in the prior year, which was a 5.1% increase. Here is how that $0.10 increase breaks down. Lower diluted share count resulting primarily from share repurchases over the past 12 months benefited us by $0.05. Foreign currency negatively impacted royalty revenues by $0.03. Our higher effective tax rate negatively impacted us by $0.14. Most importantly, our improved operating results benefited us by $0.22. Now turning to cash. During the first three quarters of 2019, we generated net cash provided by operating activities of approximately $325 million. After deducting for CapEx, we generated free cash flow of more than $280 million. On average, that is more than $1 million in free cash flow generated per day. 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. To that end, we repurchased and retired $94 million worth of shares at an average purchase price of $244 per share during Q3, bringing our year-to-date total repurchases to $105 million and our total share repurchases over the past 12 months to more than $267 million. We also returned $26.9 million to our shareholders during Q3 in the form of a $0.65 per share quarterly dividend. On average, over the last 12 months, we’ve not only generated more than $1 million per day in free cash flow, but when you add our share repurchases and dividends together, we’ve also returned more than $1 million per day to our shareholders. We are also excited to announce today that our Board of Directors has approved a new $1 billion share repurchase program which will replace the remaining authorization under our existing program. Before I turn it over to Ritch, I wanted to give you some commentary and update to our previously issued financial guidance for full-year 2019. We’ve provided guidance of a 2% to 4% increase for store food basket pricing in our U.S. system as compared to 2018 levels. We now expect we will be near the low end of this range. We’ve provided guidance of a negative $5 million to $10 million impact of foreign currency on royalty revenues as compared to 2018. We now expect we will come in closer to negative $10 million. We’ve provided guidance of $110 million to $120 million for CapEx investments. We now expect that our CapEx investments will be in the range of $95 million to $100 million. This reflects our ongoing disciplined approach to prioritizing and investing in the projects that will get us to dominant number one. We’ve provided guidance of $390 million to $395 million for G&A expense. We now expect that our G&A expense will be in the range of $380 million to $385 million for full-year 2019. This update reflects the impact of the New York store sale and more importantly our continued prioritization around investments. 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. Good morning, everyone and thank you for joining us on the call today. I’m going to do things a little bit differently this morning than we typically do. I will take a few minutes to walk through some highlights from the third quarter. But then I want to turn our attention to the revised outlook that we released to you early this morning, and after that, we will take some time for some Q&A. Let's start with the U.S. business and a few highlights there. It is an evolving competitive and operating environment in the U.S. right now. But I continue to feel that our fundamentals are solid and that the priorities that we have around the business are all in the right place. We remain, as always, steadfastly focused on delivering value to our customers and best-in-class unit economics to our franchisees. The quarter yielded strong growth in our carryout business. This was driven by great value, terrific advertising, and also great-looking stores. We continue to build more stores around the U.S. as we work to get closer to our customers. This not only improves our delivery service and economics but also brings a significant number of incremental carryout orders into our stores. When we look across the U.S., we now have over 90% of our U.S. system in our modern pizza theater image. This has truly elevated the carryout experience for our customers. Turning to our delivery business, we continue to feel some pressure from the entry of many non-pizza QSR players, who were enabled by the third-party aggregators. September started with the programs that we shared with many of you last month, all with a focus on driving traffic and order count gains. I will share a few highlights from that. We launched our delivery insurance campaign, which some of you may have seen in our advertising on TV over the last couple of weeks. This is a spinoff of our successful carryout insurance campaign. It reinforces our commitment to delivery with new features that enable customers to give us real-time feedback and also showcases our commitment to making every delivery a great delivery. One of the things I particularly love about this advertising is that it features two of our fantastic franchisees. Second, we introduced a campaign adding additional crust types to our $7.99 carryout deal. We believe that adding more variety at that $7.99 price point will not only drive orders but also ticket to this rapidly growing part of our business. Our carryout business in the U.S. is now approaching 45% of our total orders, helping us diversify our business into this carryout segment, which, as we discussed with you in the past, is significantly larger than the delivery segment today. Finally, we're bringing additional value to the late-night daypart with our 20% off late-night deal. This really is the first time that we've introduced incremental value dedicated to this daypart, 9 PM and later. And then beyond that, we’ve got many more exciting things happening as we look out toward 2020 and we shared some of these things with you just a month ago. We're continuing to progress in the test kitchen on menu innovation products. I personally just did another tasting last Friday afternoon and I am excited about some of the things that we may be able to bring to the market in 2020. Service, as always, continues to be a major focus in our business, enabled by technology like GPS and also additional platforms that we are bringing out to our stores with the goal of making the day-to-day running of the business easier for our franchisees and our general managers. And then finally, as always, investments and programs to keep us top of mind with both digital and loyalty across both of our key businesses, delivery and carryout. As I close off on the discussion of the U.S. business, I just want to highlight 6% retail sales growth in the third quarter. With that level of growth, we are clearly continuing to gain share in the pizza category and more broadly growing at a pace that exceeds most estimates of the restaurant industry growth rate for sure. Let's turn our attention now to the international business. We had another solid quarter of retail sales growth in the international business driven by strong unit growth around the globe. We opened 174 net stores in the international business during the quarter. This reflects terrific unit economics that we continue to enjoy in many markets around the globe. And to that end, I'd like to highlight a couple of our emerging markets that I'm excited about, that are leading the way on growth. During the third quarter, we opened 20 stores in China. And when we look at our retail sales growth year-on-year, the third quarter demonstrated 45% retail sales growth in China versus last year. Another one of our emerging markets, Brazil, opened 17 stores during the quarter. Growth there continues to accelerate under new ownership. We also have some of our larger and more established markets that are continuing to demonstrate strong retail sales growth. Japan and India are two more terrific examples where the brand is growing around the globe. While all five international regions were positive, our international comps certainly still are a work in progress and remain an area of tremendous focus for us around the world. But as I wrap up international, I do want to highlight the retail sales growth rate of 9.1%. Once again, we are clearly gaining share in pizza and growing at a pace that exceeds the broader restaurant industry. So as we wrap up the quarter globally, our strategy is around fortressing value and best-in-class economics for our franchisees are progressing very nicely. The third quarter once again demonstrated the strength of the Domino's business model. We once again delivered strong retail sales growth, strong EBITDA growth, and strong EPS growth even in the face of comps that, frankly, were below some of our historical averages. And when I look out at our franchisees around the world, I continue to be incredibly impressed with their focus and the competitive nature that they bring to their stores each and every day. I'm also really proud that during the quarter, despite a lot of distractions, our team remained focused on the things that really matter, franchisee profitability, our franchisees' overall economic health, and their ability to maximize the operational performance and their business. We are doing our part to support them with undoubtedly one of the strongest economic opportunities in all of QSR. I also want to highlight what we’ve been doing to continue to build our brand in the direct relationship that we have with our customers. We now have more than 23 million active users in our loyalty program. When we look at our broader database of customers, we now have 85 million active users of the Domino's Pizza brand. We have always and we will continue to value this direct relationship that we have with these customers. So that's a bit about the quarter. I’m going to turn my attention now to the revised outlook that we shared with you in our earnings release this morning. Many of you were here with us just a few weeks ago for our Investor Open House. During that event, I spoke at length about where we are today, how I believe we’re positioned for the future, and some of the important things that we’re working on both for the near-term and also over the longer term. I realize that some of you weren't able to join us. If you weren't, that webcast is still available to you, it's out there at biz.dominos.com and I’d invite you to listen in to hear some of our thoughts about these exciting developments in the business. I will tell you that since that Open House, my views on the health of our business and on the long-term growth potential of the Domino's brand certainly have not changed. So why then you might ask that we changed our approach to the forward outlook? What we believe is that the evolving market conditions and the resulting uncertainty have reduced the relevance of a 3 to 5-year outlook. In our view, the market is more dynamic now than it has ever been. The reality is that we don't have visibility into exactly how long some of these new entrants into the quick service delivery segment are going to benefit from the financial support of aggregators who are seeking to buy market share. These players are currently pricing below the cost to serve, offering free delivery or other deep discounts that are currently enabled by investor subsidy. So when we take all that into consideration, we no longer believe that a long-term outlook with a 3 to 5-year time horizon is that instructive to our investors. Therefore, we will be using a 2 to 3-year time horizon for our outlook ranges for global retail sales growth, comparable unit sales in the U.S., comparable unit sales in our international business, and also global unit growth. I want to be very clear, this is not a reactive decision, but a proactive one to make our guidance more meaningful and more relevant to our investors in light of the current competitive landscape. With all that said, our updated 2 to 3-year outlook is the following: 7% to 10% retail sales growth to be driven by 2% to 5% U.S. comps; 1% to 4% international comps; and 6% to 8% unit growth. Let me talk a bit about each of those in turn. The international comp. Our updated international comp reflects longer than expected weakness in some of our markets, recognizing that we've fallen below the previous outlook for four consecutive quarters. While some of this weakness is driven by the ongoing competitive pressures, I want to be clear that there are many opportunities for improvement that we and our master franchisees can influence. We are working alongside them every day through our centers of excellence, but these efforts are going to take some time to unfold. When we look at the U.S. comp, the updated range for our U.S. comp reflects two things. First, the continued pressure from competitors who are pricing delivery below the cost to serve; and second, the comparable sales drag as we plan to further ramp up our fortressing program. I want to talk about that for a few minutes. You might ask, why do we intend to get even more aggressive in building new stores? Well, the answer here is twofold. First, these fortress store openings continue to be a compelling economic opportunity, that’s both for us and for our franchisees. Second, we’ve got a unique opportunity right now to solidify market share gains for the long-term as our competitors retreat and as these third parties fundamentally alter the economics of many players in the restaurant industry. We believe that a significant shakeout is coming to the industry and there has never been a better time for Domino's to fortress. Our U.S. system is financially strong. We have terrific four-wall economics and very healthy franchisees who will generate approximately $1 million each in average EBITDA this year. We believe that our franchisees are aligned with the strategies and they continue to invest in stores and invest in their people. I am, as always, grateful for their partnership. So in closing, we’re playing the long game at Domino's. For our investors and most importantly for our franchisees, we firmly believe that now is the time to go on offense and to take advantage of our continuing strength to drive profitable growth to expand our market share against the competition and to further solidify Domino's as the dominant Domino's Pizza brand. So with that said, we are happy to take your questions.

Thank you. Good morning. Question on the guidance. I assume all of us on this call completely understand the philosophy around changing the structure of how you’re communicating your same-store sales guidance. But just a little more color on how you're approaching this 2% to 5% range. It's really not a dramatic change from what you were communicating and as you know people are going to be using that range to evaluate your performance from here quarterly and annually. So just a little more color on what that 100 basis point change on both sides of the equation is directly attributable to?

Sure, Brian. Thanks for the question. Listen, as we take a look at it, it really is twofold, as I described in my earlier remarks. As we take a look at the U.S. business, first, there is just a level of uncertainty in the near term around some of these competing delivery offers in the marketplace. We know that has an impact on the comp and therefore felt that we needed to adjust that range down a bit. We also, as we look forward over the next couple of years, we are moving aggressively to continue our fortressing program and this is not just with our franchisees but also in our corporate store book business. We believe in this so adamantly that we have, as we look at the seven markets that we still play in with our corporate store business, we intend to fortress those seven markets completely within the next 3-year time horizon. And we know that will also create some drag on additional drag on the comp in the near term. So it really is those two factors that led us to: A, restructure the timeframe around the comp; and then, B, to set the ranges at that 2% to 5%.

Thank you.

Thank you. We are starting to see some of the QSR competition receiving deals that are actually very favorable to the restaurants. And so whether or not the third-party providers can sustain subsidies at that level is a theoretical question, but certainly in the near-term, those deals are going to allow those QSR burger players, particularly, to become incrementally more and more competitive. And so, I guess the question is, in the near-term, what's the plan to compete both on value and around menu innovation?

Yes. So, as we highlighted just a few weeks back, we’ve got some opportunities we believe to continue to not only reinforce value in the marketplace but also to reinforce the Domino's Pizza service and the delivery expertise that we’ve been known for now, almost 60 years. So, in the near-term, it is staying focused on our $5.99 and $7.99 hero price points, aggressively continuing to push on service, working with our franchisees to make sure that we are providing great delivery service to our customers, and putting our money where our mouth is on that as you see with our delivery insurance campaign that we have on TV now. We know that two of the main frustrations that consumers have around any delivery are the cost of it and getting their food on time every time. And so, we're trying to make sure that we continue to address both of those. As it relates to the menu, we are talking now on air about variety with our crust types, but also we’ve got the team working very hard on menu innovation as well. Just as of last Friday, I tasted some more terrific products. I think we will have some great news coming out in 2020 that I think our customers will find exciting. And then broadly to the opening point of your question around the deals that are out there in the marketplace now, I think the restaurant companies have gotten smart and they’ve realized that aligning with one delivery partner probably doesn't make a lot of sense. If you go out there and get two or three of them, you can get them to beat each other up and give you a better deal, so not surprising to us at all that that’s happening in the marketplace. And then long term, we're not sure how sustainable some of those economics are for the third parties, which is part of what drives the near-term uncertainty around the 2- to 3-year outlook. So, we're going to continue obviously to keep a close eye on what's happening in the competitive environment, but to really stay focused on the things that we can do and that we can control to drive value and service for our customers.

Thank you.

Thanks. Good morning. Ritch, my question is about the decision to ramp up fortressing. What gives you confidence that U.S. franchisees will execute this plan, especially if comps are expected to slow. It would seem that slower comp performance would eventually weigh on their willingness to develop units, but maybe I'm wrong.

Yes. So, what really drives unit development is the cash on cash return for those new units, both the individual unit but then also the overall cash on cash return for the cluster or the area of stores that impacts. What we continue to see in the business is that we’ve got very strong cash on cash returns, and I talked a little bit earlier, we're going to put our money where our mouth is on this as well with respect to our corporate store business. We are getting terrific returns in our corporate stores and therefore we’re going to push aggressively over the next three years to fortress the territories that we operate in there. We’re hearing the same from our franchisees. The results around this are not only the near-term financial returns, but how this reinforces their relationships with their customers locally because of the great service that they provide. I was just looking at some numbers this morning. One of the things that we’d love to do is give you over time some examples from around the business. We’ve talked to you about Seattle in the past, and we talked to you about what we were doing in Las Vegas, and we talked to you about Roanoke, Virginia, and some of the things we're doing there. I’m looking at our Dallas-Fort Worth DMA, and if you lived in Lewisville, Texas last week, where we’ve got three stores, the worst-performing store on delivery last week in Lewisville averaged a 16.5-minute average delivery time with zero deliveries over 45 minutes. So, when we go out there and fortress, not only do we create great economics for our stores, our franchisees, and for the drivers that are delivering these pizzas, but also this is just an unmatched experience around customer service. So these are the kinds of things when our franchisees see this and when we see it with our corporate store business, it gives us more conviction that the right thing to do while we are playing in a position of great strength here with our unit economics is to go faster and to take advantage of this disruption in the marketplace.

Thank you. Ritch or Jeff, your comments imply somewhat of an unchanged outlook for the profit growth. I was wondering if: a, can you help us reconcile that with the lower same-store sales outlook, the model's ability to sustain EBITDA growth ahead of retail sales? Are there G&A belt-tightening opportunities on an ongoing basis? And then, b, if you could sort of tie that into from a franchise perspective, the $141,000 per store with a lower same-store sales outlook, are there the net benefits still from seeing better carryout and that higher margin sale opportunity? Is that able to offset maybe the headwinds from a lower same-store sales outlook?

Hey, Matt, it's Jeff. I appreciate your question. First, I want to emphasize that franchisees are poised to earn significantly more than others in the QSR pizza industry in the United States, and we are confident about that. With three months left in the period, there’s plenty of pizza to sell and profits to earn. We’re in a strong position overall, with nearly $1 million in operating cash flow per independent franchise partner. This provides a solid foundation for reinvesting in our brand, which we have been actively doing. We’ll update you on the specific figures early in 2020, though minor variations in those numbers won’t change our overall business strategy. Regarding our G&A costs, in my earlier remarks, I mentioned our guidance for capital expenditures and G&A for 2019. Moving forward, we will present updated figures for 2020 once we finalize our plans. This approach reflects our commitment to being disciplined and prioritizing essential investments to maintain our leading position in the market. Lastly, although we adjusted our 2019 CapEx and G&A guidance slightly down, I assure you that all critical projects and investments in technology, branding, and product development are proceeding as planned from a position of strength. We are investing thoughtfully while recognizing current circumstances, but we are committed to ensuring that we fund everything necessary to secure our position as the dominant leader, and our franchisees share this confidence.

So from a G&A perspective, would it be correct not to assume that you're just shifting maybe some $19 into $20 and that there is an implied ramp-up into $20 to make up for the $19 or what you're cutting or finding the savings in $19 is something sustainable through $20?

Yes. I mean, we will give you a 2020 guide when we get into 2020 on G&A and CapEx as we’ve always done. But the $19 guide changes are just a result of running at little bit more disciplined, a little bit more prioritized. But the important part there isn't the $19 versus $20 thing. The important part is we're investing in all the things we need to do is to get the dominant number one.

Thank you so much.

Yes. Thanks, guys. Just wanted a quick update on some of the more recent initiatives such as the 20% off late-night, the delivery insurance, which seem to be more directly going after delivery competition. Just curious how that affected your late-night and delivery business as you launch those? Thanks.

Hey, Will, it's Ritch. We just launched those in September, so really in the fourth quarter, so we can't really comment on results from those initiatives yet. Certainly, the advertising, we think is terrific. So we're optimistic about the programs, but no comments on the results today.

Yes. Just to piggyback — thank you, guys. Just to piggyback a little bit on the last comment. I’m just curious about the timing of the guidance change following the confidence in the prior Investor meeting of 32 days ago. I can understand that you don’t want to get into the dynamics of what’s going on in the fourth quarter. But you did mention that the guidance, new guidance range is proactive and not reactive, and so can you just confirm that there is nothing in the performance of the first 30 days of 4Q that did in fact provoke the lower guidance?

You know, Matthew, we don't talk about the current quarter. I will tell you that there's no real magic to the timing. It's not a reactive decision. It's a proactive decision to change the structure of the guidance all in an effort to make it more meaningful and relevant to our investors.

Thanks.

Thank you and good morning. Just wanted to ask about your comments, Jeff, that it was a very competitive quarter. Is that a sign that we're seeing even more competition coming from third-party providers, or was that level of competition unchanged in your view in 3Q versus the second quarter?

Alton, it's Ritch. No real major change in the level of competition that we see out there. Still a pretty heavy stream of advertising and discounting out there in the marketplace that we see, but no significant ramp-up or down from prior.

Hi. Thanks. Ritch, I appreciate the detail on the carryout business and how large it's gotten relative to the delivery business. Can you dimensionalize how the relative comps are doing in those two businesses, if not absolutely maybe just on a relative basis? Is carryout just growing so much faster that that’s really the story right now on a comp basis and that’s why you’re legging into fortressing? If you can kind of help us understand where delivery is versus the carryout business? And also advertising spend, I think you noted a couple of quarters ago, aggregators are spending more on advertising. Others have also noted that and that’s sort of elevating them relative to traditional brands? What can you do about that? Is there ways you can shift advertising dollars back to reinforce your message in the marketplace versus what’s going on now?

Thanks, John. On your first question around the carryout business, absolutely, we're getting terrific growth in the carryout business overall and then also on a same-store basis. When we look at the delivery business, the delivery business continues to grow overall. We had some pressure on the comps, but overall delivery sales are higher than they were a year ago when we look at it in total across our system. But certainly a more rapid pace of growth in the carryout business. Then to your next question around the share of voice in the advertising, we are fortunate on two dimensions. One is to have a pretty hefty warchest for advertising. And second is to have some really smart folks who run the analytics about how we spend that money on behalf of our franchisees on an ongoing basis. So we are constantly running our media mix models and tweaking the mix of spend both across channels but also with respect to how that spend goes across the various messages that we are communicating, be that carryout or delivery, for example. So it is a constant thing that we manage on a very active basis.

Thank you.

Great. Thank you. I was hoping if you could kind of comment on the cadence of the quarter, in particular, help contextualize both on the carryout and on the delivery business, the impact that some of the more promotions that you ran during the quarter had, that would be helpful. Thank you.

Katie, no real comments kind of intra-quarter on the cadence of things. We continue to actively manage the calendar against both of our businesses, the carryout and the delivery business, but no real highlights to call out based on the cadence within.

Maybe another way to ask it is, when you look at your customer data, are you seeing that these promotions are driving frequency, or are new customers on to the platform?

So we're constantly running programs to drive both with an all-out effort around traffic. We have certain things that will often bring new customers into Domino's. One of the things that you see is that we run — periodically we will run a 50% off delivery for a week or we will run a carryout special during the course of a week. Those are great vehicles to bring new customers into the Domino's brand. Then we’re also using this incredible database that we have of 23 million active members of our loyalty program and 85 million active customers in total. So we are constantly looking at ways that we can use the power of that data to help us reach out to customers that we've already acquired and identify ways to drive increased frequency. So the answer for us really is both. Our teams are constantly working on both of those levers to drive sales growth in the business.

Hey, thanks for the question. Ritch, I think earlier in the Q&A you talked about why the economics don't work for third parties or restaurants that are partnering with third parties. Can you talk a little bit about why the economics work for Domino's, but they don't work for the aggregators? Just maybe explain some of the differences and I don't know if it's brand density or product life or anything like that, just in terms of what the major differences are in terms of why your delivery orders are profitable and your competitors are not? Thank you.

I will leave it to you analysts to assess the profitability of third parties, but I will focus on our business. We have a strong business model that I will describe holistically, especially regarding the delivery component. We build boxes that cost about $350,000 each on average. We operate two complementary businesses through these boxes: a carryout business and a delivery business. While the dynamics of these two businesses differ, they work together to create a highly profitable pizza production system, which also enables us to provide delivery. In any business, some delivery orders will be more profitable than others. For instance, a large order just 200 yards from the store will be very profitable, whereas a $15 order located nine minutes away—where labor costs $15 an hour—won't be profitable for delivery. However, because we manage significant volume through this box in both the carryout and delivery channels, we can provide strong economic benefits for the franchisee while also offering great value to the customer. We believe that this integrated system is a far more efficient business model compared to one where a restaurant operates separately from a third-party delivery service.

Helpful perspective. Thank you.

Hello. Can you hear me?

Hi, Sara, we can hear you.

Sorry. I have a question about the international markets. You mentioned that the competitive landscape is different, but I assume there are other challenges as well. Can you elaborate on those? You've referred to value in previous discussions. Additionally, some of your licensees are collaborating with aggregators. Is that beneficial for them, and does it suggest that this could be a suitable strategy for the U.S. market as well? Thank you.

Yes, on your first question about what we're seeing in some international markets, the challenges vary by market. We have a well-diversified portfolio internationally, and while some markets are achieving significant sales growth, others face difficulties. Often, these challenges relate to how we position our value in the marketplace. In some international markets, we don't have the same analytical capabilities that we do in the U.S., which help identify optimal price points. Over the past year, we have set up centers of excellence where teams work alongside our international franchisees. It takes time to gather data, perform analytics, and implement changes in these markets. I remain very optimistic about the long-term success of our international business, which is something I deeply care about, having spent over seven years leading that part of the company and visiting more than 70 countries where we operate. We have excellent master franchisees dedicated to their growth. Regarding the second part of your question about third-party delivery, we do not allow third parties to deliver our food in any international markets. We firmly believe in maintaining our customer relationships and ensuring quality and safety when delivering our products. However, some international markets do work with third parties to generate orders due to structural differences; China is a key example, as third parties are quite dominant there. Even though our business in China is growing rapidly, we still have relatively few units compared to the market. Third parties play an important role in order growth there. In some other markets, our franchisees have successfully partnered with third parties, but in some cases, we haven't seen significant growth from those platforms. This is something we continually discuss with our franchisees. The advantage of having a diverse set of markets is that we can learn from them, which may be relevant to the U.S. If I identify lessons that could benefit the U.S. market, we would consider them seriously. However, given that we have 85 million active users in our database, over 23 million in our loyalty program, and advanced technology that we've invested heavily in, I believe we are better off protecting that data and not sharing it with third parties. Additionally, we aim to preserve our franchisees' economics; while some recent deals with aggregators may be favorable for certain restaurant companies, our franchisees benefit from paying only $0.25 per order that we send them, which is just over 1% of the ticket price. It's challenging to find third parties willing to deliver orders for that low of a percentage.

Thank you.

Thanks for the question. I wanted to ask a bit more about the ticket contribution in the quarter and just generally how much of that contribution is from the higher delivery fees and then from pricing and how much of it is from what you're doing to drive mix through things like smart tickets? And I guess more importantly, just looking ahead, how you are thinking about those components at a high level and what kind of opportunities you still have with that smart ticket as you think about the size of your loyalty program and all your digital capabilities? Thanks.

Hey, Dennis, appreciate the question. This is Jeff. First thing on the ticket for the U.S. business in the quarter, certainly, some franchisees on balance taking some menu price, also some delivery fee there. They use the data that we work with them obviously to try to make a good decision there and as we mentioned a couple of times today, when you have 85 million active customers in your database, you have a lot to work with when you try to tackle the real thorny issue of pricing in every neighborhood. Always trying to also sell more food, obviously, more mix. I think as Ritch mentioned earlier, with cross variety that we're talking about, we've done the more than pizza television ad mostly during Q3, which really highlights the broad menu for our pizza company, always trying to get additional food in the ticket as well. Having talked about ticket doesn't change our primary focus, which is the hard stuffed. It is a little bit harder right now, given the dynamism in the industry that especially around the delivery business, traffic is a little harder to get than it was two or three or four years ago, but we remain focused on driving traffic we think we will get back to that spot. But right now, you're seeing a little bit more ticket during the third quarter than traffic, but it doesn't change the overall philosophy of what we're trying to chase.

All right. Thanks, Jeff.

Hi. Good morning, Ritch, I wanted to revisit the targets for the comps in the U.S., and I appreciate that you've been running inside that range year-to-date. But if I look at the six quarters, the comp trend has been in a gradual mode of deceleration. So I wanted to ask, I think if you think about the targets to be achieved, you need to I guess stabilize this trend of deceleration. So wondering how you're thinking about your ability to do that and what's needed, whether you think that's inside the control of what you have planned or are you assuming that the environment or competitive environment gets better. I guess how are you thinking about your ability to sort of stay above 2% in the near term relative to your targets?

Thank you for the question, David. We examine both the aspects we can influence and the external factors affecting the marketplace. Regarding uncertainty, we still see it present. There hasn’t been a significant change in aggregator pressure from the third quarter compared to the second. Our primary focus remains on the aspects we can manage. Looking ahead, I'm optimistic about the programs we've developed for 2020, which will reinforce our priorities. First, we will maintain our emphasis on value. We are implementing technology and operational initiatives focused on service for both our delivery and rapidly growing carryout businesses. I prioritize value and service because consumer research indicates these are the key factors that influence customer satisfaction with delivery. We will continue to address these areas. Additionally, I mentioned earlier that we have some exciting innovations planned in our food offerings. While we haven’t launched new products in some time, we believe that updates in this area will be well received by our customers. Taking everything into account, we have several controllable factors that can help sustain growth in same-store sales and expand our store presence because the economics are favorable. Overall, we are positioned to continue increasing our market share, which will support our goal of establishing ourselves as the leading pizza brand and a significant player in the market.

Great. Thank you.

Thank you, Ritch. You mentioned new menu innovations and product news for 2020. It seems like it’s been a while since you introduced a new product, and typically, these launches happen in the second half of the year. Could you clarify if this upcoming launch is planned for the first half of the year, or should we expect to wait again? Are you planning to stick to the usual pattern of launching in the second half? Any details on potential entrées, desserts, sides, or anything of that sort would be appreciated. Thank you.

Pete, really, nothing I can share with you on the call this morning about the timing or the items. Really, from a competitive standpoint, that's information that we would like to keep close to the vest.

Hi, thank you. I wanted to follow-up on the comments about service being a major focus. Even market-by-market, have you seen any difficulty of attracting and retaining drivers? That’s kind of the first point. And secondly, something that at least we've heard and some of this may be anecdotal as to how has been an increase in "late orders," orders that are arriving later than at least what consumers perceive a Domino's order should take. Has there been any decrease at all as you guys look at the empirical evidence, not the anecdotal evidence, service levels that may have slipped over the past couple of years and that actually may be an opportunity going forward for you to improve that?

Thank you for the question, John. First, regarding the drivers, the current labor market is indeed very tight, with U.S. unemployment at 3.5%, the lowest it's been in about 50 years. This situation makes it challenging to find talent, especially drivers, across the country. However, I've noticed that franchisees who prioritize their teams and invest in their development are fully staffed and providing excellent delivery service. Unfortunately, we still have open driver positions in many markets where we need to improve. During my travels, I've heard stories of drivers returning to us after exploring gig economy jobs, realizing those opportunities may not be as great as they seemed. We work to ensure these drivers recognize the unique opportunities at Domino's Pizza that other jobs may not offer. A significant percentage of our U.S. franchisees started as drivers, and we have a franchise management school in Ann Arbor that develops new franchisees from within our ranks. The recruitment challenge continues, but I believe our franchisees are rising to meet it. On the topic of service, we've increased our focus on managing late orders, as these contribute significantly to negative consumer perceptions. We emphasized this area in 2019 and will maintain that focus moving forward. While I can't say we've observed significant negative trends in service, progress isn’t happening as quickly as I’d like. We're seeing notable improvements in certain markets, but it's not consistent enough across the entire system for my satisfaction.

Thank you.

Thank you very much. I wanted to follow up on your comments about the technology initiatives, particularly the new plan sales system and the recent supply chain automation efforts. I'm curious to know what insights you've gained from the new location in Edison, New Jersey, and how you've applied those lessons to the older supply chain facilities. Additionally, I would like an update on your new point-of-sale test.

Sure, Stephen. We are definitely continuing our investments. As Jeff mentioned earlier, despite tighter management around capital expenditures and expenses, we are fully funding all key technology initiatives within the company. Our next-generation point-of-sale system is progressing very well. I had the opportunity to work in the lab, where I was able to enter an order script myself with no prior training. This demonstrates that we are not only creating a more robust system but also one that will allow for quicker training of our team members, which is essential. We are on track to pilot this system in a store by the end of the year, and we have plans for a multi-year rollout. Currently, this system is implemented in over 13,000 of our more than 16,000 stores worldwide. Regarding supply chain technology, we've gained significant insights since opening our center in Edison, New Jersey, where we first utilized these new technologies in the U.S. We have learned a lot and will apply the best practices in our next two centers, which will be established in South Carolina and Houston. I am personally excited about the direction of our supply chain team and their efforts to ensure we have the capacity to support the strong growth of our franchisees.

Hey, thanks for the question. Historically, the mix of digital sales in the U.S. seem to grow at 5% annually year-after-year. It seems like we have been near the 65% level for a few years now. I know it was about 60% at the end of '16. So I'm wondering, has this digital mix been increasing as you expect, or if it has been a little slow in recent years, why would that be?

Yes. Alex, it does continue to increase, but as you might guess, once you start getting up to more than two-thirds of your orders already on digital, that kind of year-on-year pace — it's hard to add 5 percentage points and 5 percentage points again and again. But we are pushing up close to 70% in the U.S. And it's interesting in some of our international markets as well, we see incredible numbers. China, over 90% of our delivery business is digital today. So continuing to see great movement there in the U.S. and across the globe.

Great. Thank you very much. Ritch, just a broader question, I guess, on the industry. One, I'm just wondering whether you think you're seeing slippage across the pizza category, whether all will be feeling kind of these third-party delivery pressures equally or whether maybe you are perhaps feeling it for some reason differently than others. And if you could just clarify your comment on the supply/demand outlook. I know you talked about significant shakeout to come. Just wondering whether you're talking specifically about the pizza category or the broader industry. I don't know if you've seen the evidence of that already, but any color on that front would be great. Thank you.

Thank you, Jeff. First, in the pizza category, we are still gaining considerable market share both in the U.S. and globally. In the U.S., our 6% retail sales growth significantly exceeds the growth of the category, and when adjusted for currency, our 9.1% growth internationally also outpaces the category. We remain committed to strengthening our presence in the markets we serve as we believe there is still substantial pizza market share available to capture, and we will not slow down in that effort. Regarding your second question about the shakeout, we are observing that some pizza competitors are facing challenges, as seen by closures, especially in markets with higher labor costs in the U.S. Our business model benefits from operating at a volume that surpasses most competitors on a per unit basis. As labor costs continue to rise, it's increasingly difficult for businesses in the QSR pizza sector to compete without high volumes. Additionally, in the pizza delivery sector, it's harder to compete if you aren’t reducing the delivery radius, as wage rates are a critical factor. It is essential to enhance the number of deliveries per driver per hour over time. The industry is under pressure from rising labor costs while shifting volume from dine-in to delivery, amidst a lack of overall growth in the restaurant industry. Many restaurant companies are transitioning orders from more profitable channels to less profitable ones while facing increasing wage rates. Therefore, when we refer to an impending shakeout, it's important to note that this industry typically does not have 40% profit margins, meaning limited capacity for some players to concede margins to third parties while simultaneously facing rising labor costs.

Thank you.

Thank you. Good morning, everyone. Looking at the impressive numbers, with 23 million active members and 85 million overall loyalty and email members, do you notice any differences among these various groups? Additionally, do you believe it's necessary to change your communication strategy for the most loyal members or the remaining 60 million? We've observed competitors enhancing their engagement with loyalty members and beginning to see positive results. Is there anything you can do differently? Are there insights we might be missing? Any additional information would be appreciated. Thank you.

I think there are quite a few things that we can do over time to take more advantage of this incredible asset that we have, which is this database of customer information that we have. We've challenged our teams here to think about how can we get closer and closer to those customers. So how do we — I guess the ultimate thing that everybody strives for is people use the term one-on-one marketing. Well, we've still got a long way to go between where we are today and that point over time. So it's something we think about quite regularly. With the data that we have that gives us a chance to really look at how customers' purchasing behavior evolves over their life cycle with Domino's, we've got an asset here that I think can help us in the months and years to come.

Great. Thanks. Just hitting on the third-party delivery stuff again. Can you discuss what you've learned about the stickiness of those customers that have tried the third-party delivery services? I guess I'm trying to go back to your comments about the lower fees or promotional activity driving a lot of the shift in demand in the market right now away from perhaps pizza. But if fees move higher, what are you guys seeing that suggests they're going to come back to the pizza category over time? Thank you.

Hi, Jon. It's tough to really assess. We look at it hard, as you might guess. What we don't know yet, however, is how will the behavior evolve for customers that are now placing some number of orders through the third parties. As the full cost is — or at least some measure of the cost is borne by the customer over time, what will ultimately happen to their behavior? We don't know the answer to that yet. But what we do know is we know a whole lot about the elasticity of demand in the pizza category. We've got — with 6,000 units around the U.S. and with franchisees around the U.S. who have the ability to set their own prices for delivery charges and their own menu prices, we have a pretty darn good idea about what the elasticity curves look like in the pizza category. Now we've — and we know that pizza and we believe QSR, more broadly, is a pretty elastic category. So what we expect over time is that there will be some equilibrium. Once the cost to get food delivered to you has to fully support the effort that it takes to get it there, we'll only know ultimately where this thing falls. But I do not expect the same number of customers to use third-party delivery once they have to pay for it as the number as that use it when it's free. If you offer to mow my lawn for free, I'm going to say yes. When you come and charge me for it, I might just go out there and push the mower around myself.

All right. Thank you.

Well, listen, thank you once again for taking the time to join us this morning. We look forward to getting back together with you in February and to sharing the results of the fourth quarter. Thanks so much.