Dominos Pizza Inc (DPZ) — Q4 2019 Earnings Call Transcript

Thanks, Katherine, and hello, everyone. Thank you for joining the call today about the results of our fourth quarter and full year 2019. Today's call will feature CEO, Ritch Allison, who will be joined by Chief Financial Officer, Jeff Lawrence. As you know this call is primarily for our investor audience, so I kindly ask that all members of the media and others to be in listen-only mode throughout the call. In the unlikely event that any forward-looking statements are made, I refer you to the Safe Harbor statement you can find in this morning’s release, the 8-K and the 10-K. We will start with prepared comments from CFO, Jeff Lawrence and then from CEO Ritch Allison followed by analysts' questions. As always, we ask that you limit yourself to one-part question this morning. And with that, I'd like to turn it over to Jeff Lawrence.

Thank you, Tim, and good morning, everyone. In the fourth quarter, our positive global brand momentum continued as we delivered solid results for our shareholders. We continued to lead the broader restaurant industry with 35 straight quarters of positive U.S. comparable sales and 104 consecutive quarters of positive international comps. We also continued to increase our global store count at a healthy pace as we opened nearly 500 net new stores in Q4. Our diluted EPS in Q4 was $3.12, an increase of 19.1% over the prior year quarter, primarily resulting from strong operational results. As previously disclosed, we also completed a $675 million recapitalization transaction in Q4, increasing our leverage to match our growing business and locking in a long-term favorable fixed interest rate which lowered our cost of capital. We also returned nearly $650 million of cash to shareholders during Q4 comprised of share buybacks and dividends. With that, let's take a closer look at the financial results for Q4. Global retail sales grew 6.9% 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 7.6%. 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 3.4% lapping a prior year increase of 5.6% and same-store sales for our international business grew 1.7% rolling a prior year increase of 2.4%. Breaking down in the U.S. comp, our franchise business was up 3.3%, while our company-owned stores were up 3.9%. The U.S. comp this quarter was driven by both ticket and to a lesser extent order growth. Both our delivery and carryout businesses continued to grow overall. And our carryout continues to grow at a particularly impressive rate. Our delivery comp was positive in Q4 and up sequentially over Q3 demonstrating resilience in the highly competitive food delivery marketplace. Our international comp for the quarter was also driven by both order and ticket growth. On the unit count front, we opened 141 net U.S. stores in the fourth quarter consisting of 146 store openings and five closures. Our international division added 351 net new stores during Q4, comprised of 382 store openings and 31 closures. We opened 1,106 units in 2019, an acceleration over 2018 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 fourth quarter were up 6.3% from the prior year, driven primarily by higher U.S. franchise retail sales and higher international retail sales which drove higher supply chain and global franchise revenues. The increase in international royalty revenues was partially offset by an $800,000 negative impact of changes in foreign currency exchange rates versus the prior year quarter due to the dollar strengthening against certain currencies. These increases were also 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 of 2019. Moving on to operating margin, as a percentage of revenues consolidated operating margin for the quarter increased to 38.9% from 38.2% in the prior year quarter and was positively impacted by the New York store sale and higher revenues from our global franchise business. Supply chain operating margin was down 0.1 percentage points year-over-year while our company-owned store operating margin was up 1.3 percentage points year-over-year driven primarily by the New York store sale. G&A cost decreased approximately $2 million as compared to the prior year quarter. G&A was benefited by the New York store sale and a pretax gain of approximately $2 million on the sale of three company-owned stores to existing franchisees in Q4. These decreases were partially offset by higher performance-based compensation. Our reported effective tax rate was 17.8% for the quarter up 0.8 percentage points from the prior year quarter. The reported effective tax rate in the quarter included a 3.8 percentage point positive impact from tax benefits on equity-based compensation. We expect to see continued volatility in our effective tax rate related to tax benefits on equity-based compensation. When you add it all up, our fourth quarter net income was up $17.7 million or 15.8% over the prior year quarter. Our fourth quarter diluted EPS was $3.12 versus $2.62 in the prior year, which was a 19.1% increase. Our fourth quarter diluted EPS as adjusted for our 2019 recapitalization transaction was $3.13, which was a 19.5% increase versus the prior year. Here's how that $0.51 increase breaks down. Lower diluted share count resulting primarily from share repurchases over the past 12 months benefited us by $0.08. Higher net interest expense resulting primarily from a higher average outstanding debt balance resulting from the 2019 recapitalization negatively impacted us by $0.03. Our higher effective tax rate negatively impacted us by $0.02 and most importantly, our improved operating results benefited us by $0.48. Transitioning for a second from Q4 to the full year, I would like to hit on a few financial highlights for 2019. In a more challenging and dynamic competitive environment, we were able to grow our global retail sales 8% when holding currencies constant, same-store sales for the U.S. grew 3.2% and same-store sales for our international division grew 1.9%. We also opened our 17,000 store globally during 2019. Our continued sales growth and improved discipline around our G&A investments led to healthy growth in our diluted EPS year-over-year and strong and consistent free cash flow generation. We are pleased with our performance for the year, including our ability to continue to fund critical strategic investments while driving efficiencies throughout the business. Now turning to cash. During full year 2019, we generated net cash provided by operating activities of nearly $0.5 billion. After deducting for CapEx, we generated free cash flow of $411 million, which was a 50% increase over our 2018 free cash flow. On average that is more than $1 million in free cash flow generated per day, which we believe demonstrates our outstanding financial model and performance. We also completed a recapitalization transaction in Q4, which included the issuance of $675 million of new 10-year fixed rate notes with a 3.668% pre-tax interest rate. We are very pleased to have locked in as additional low rate debt well into the future. Our strong free cash flow generation and net proceeds from our recapitalization transaction allowed us to continue our long-term commitment of returning cash to shareholders during 2019. For the full year, we repurchased and retired approximately 2.5 million shares for $699 million or $280 per share on average, including $594 million repurchased in Q4. We also repurchased an additional $80 million worth of shares in Q1 of 2020 as we have exhausted the net proceeds from the recapitalization. As a reminder, we now have approximately $327 million remaining under our board authorized share repurchase program. For the full year, we also returned $106 million to our shareholders in the form of $0.65 quarterly dividends, including two dividend payments totaling $52 million that were paid during fiscal Q4. On average, during 2019 we have not only generated more than $1 million per day in free cash flow, but when you add share repurchases and dividends together, on average, we have also returned more than $2 million per day to our shareholders or $805 million in total. As we move into 2020, we are pleased that our Board of Directors just yesterday declared a quarterly dividend of $0.78 per share, an increase of 20% over the previous quarter's dividend. Before I turn it over to Ritch, we would like to remind you of the 2020 annual outlook items that we communicated in mid-January. First I would like to remind everyone that 2020 is a 53-week fiscal year. We currently projected the store food basket within our U.S. system will be up 1% to 3% as compared to 2019 levels. We estimate that the impact of foreign currency on royalty revenues in 2020 as compared to 2019 could be flat to negative $5 million. We expect growth CapEx investments to be in the range of $90 million to $100 million as we continue to increase supply chain capacity as well as invest in technological innovation. We expect our G&A expense to be in the range of $400 million to $405 million based on a 53-week fiscal year. Keep in mind that G&A expense can vary up or down depending on among other things our performance versus our plan as that affects variable performance-based compensation expense as well as other areas such as corporate store advertising. Overall, our solid consistent momentum continued and we are pleased with our results for the fourth quarter and full year 2019. We will remain focused on relentlessly driving the brand forward and providing great value to all of our stakeholders including customers, franchisees, team members, shareholders, and the communities we serve. Thanks for joining the call today and now I'll turn it over to Ritch.

Thanks Jeff, and thanks to all of you for joining us this morning. On the call this morning, I'd like to do a few things. First, I'll share some reflections on our performance during the quarter and for 2019 in total across both our U.S. and our international businesses. And then, I'll discuss some of the things that we're focused on as we look forward into 2020. Following that as always, we'll be happy to take some Q&A. So with that as our roadmap for this morning, let's get started with our U.S. business. I am extremely proud of the commitment and the passion demonstrated by our U.S. franchisees, not just during the quarter, but throughout all of 2019. As we discussed on prior calls, 2019 marked an unprecedented acceleration of competitive activity across restaurant delivery. It was a year where our alignment and our focus as a system was more important than ever as we fought back against a new group of competitors that we believe were not bound by the constraints or requirements associated with running a profitable business model. While delivery grew rapidly across the restaurant landscape as we reviewed a variety of third-party industry research, we saw no observable inflection in restaurant industry transactions. Now certainly some players benefited with incremental customer occasions, but many more restaurant brands who aggressively pursued delivery produced flat or declining traffic. With that as a backdrop, the alignment and unified focus of the Domino's system really shone through as we continued to grow at a faster pace than the restaurant industry and took meaningful share within our pizza category. We delivered our 35th consecutive quarter and tenth consecutive year of positive same-store sales in the U.S. During the quarter, I was also pleased to see the sequential improvement in the comp versus our Q3 results. U.S. retail sales grew at 6.8% for the quarter and 6.9% for the year, significantly faster than the restaurant industry. And while same-store delivery orders were slightly negative for the year, overall, U.S. delivery order account increased 1% in 2019. Carryout growth was strong throughout the year and was driven by traffic. Our carryout order count was 3.9% positive during 2019 on a same-store basis and 8.1% positive in total across the U.S. system. Store growth was also once again a significant contributor to our retail sales growth in the U.S. Our franchisees both new and existing alike continued to invest in their businesses resulting in 250 net new stores for the year. During the fourth quarter, we also passed the 6,000 store milestone in the U.S. As we look back over the last five years, we have opened over 1,000 net new stores in the U.S. And this kind of sustained growth only happens with strong unit level economics. Those economics also drove a remarkably low level of store closures. In 2019, we closed 15 stores in the U.S. and over the last five years we closed fewer than 100 stores in total across the U.S. business. I'm going to repeat that one. Fewer than 100 stores in total across the last five years have been closed in our U.S. business. I'd also like to share a few highlights from our ongoing digital efforts. We reached a milestone in 2019 with 25 million active loyalty members. We now have over 40 million enrolled in our program and over 85 million customers in our database. We ended the year at a run rate of 70% digital sales in our U.S. business. And our corporate store business, which is more concentrated in urban markets, hit a run rate of 75% digital sales in the final period of the year. Overall, we finished the year strong as evidenced by a good quarter of top-line sales growth. While we still have plenty of work to do in getting back to consistent traffic-based comps, order count in the fourth quarter showed sequential improvement in its contribution to the overall same-store sales mix. As we look back on the quarter, it does appear to us that while we see continued headwinds in delivery that are difficult to forecast, aggregator pressure appeared to level off on our delivery orders in Q4, while carryout traffic was outstanding during the quarter as our strategy to grow that business continues to pay off. You will always hear me say that we are an imperfect and a work in progress brand with plenty of areas to get better. But with that said, I'm happy with another strong year of growth and profitability for our franchisees and our operators. As I look ahead to 2020 in the U.S. business, I'd like to highlight a few areas of focus for us. First, we're going to continue to fortress our markets. Our strong four wall and enterprise profitability for franchisees should continue to position them well for continued growth. We continue to see favorability in key metrics for our fortress stores and territories as we compare them to our non-fortress territories. We see faster and more consistent service, lower delivery costs, better economics for our drivers and incremental carryout traffic. Fortressing will continue to drive overall store growth in 2020 including for our company-owned markets where we plan to further accelerate our investment in store growth. We're also opening three new supply chain centers in 2020. We opened a new center in Winnipeg in January. Our Columbia, South Carolina center will open in the first half of the year. Our Katy Texas center will open in the second half and we're also adding a thin crust line to our existing Edison New Jersey supply chain center and that is also scheduled to open in the second half of 2020. We're also excited to deliver some new menu news this year and look for that to come this summer. Value's always top of mind for us as you know, more than ever as we navigate through the current landscape value matters and I'm pleased with our continued discipline and unquestioned position of value leadership within the QSR pizza segment. We're ramping up our focus on service in 2020. Getting our pizzas to our customers hotter, fresher, and more consistently than ever before. Fortressing will help us position the business for success through tighter delivery zones, but that's only part of the battle. We're doubling down on training, communication and connection points with our operators. This is a very high priority for me in 2020. We'll also continue to roll out technology to our stores to help our operators get pizzas in the oven and out to our customers. Innovation has been and will remain a key investment area for us in 2020. We recently rolled out our GPS technology and it's already in use in over half of our U.S. stores. You may have seen the ad that we're running now highlighting our GPS technology with a really fun take on the movie Risky Business. Our Pie Pass technology is also in stores and went on air earlier this week. This brings personalization to the carryout customer greeting them by name on our digital menu boards. You may have seen Norm from Cheers in our commercials, if you've seen him, if you've been watching a little TV this week. We also continued to make progress in areas related to autonomous delivery. Dom order taking and other behind-the-curtain technologies that will help our store-level talent operate more efficiently. Now the last focus area I want to highlight is franchisee profitability. Jeff shared our 2019 store-level EBITDA estimate with you in January. And we'll share the final number with you on our earnings call in April, but we now expect to land more towards the high-end of the $136,000 to $139,000 per store range that Jeff shared with you in January. Now, while we are pleased that our unit-level profitability and cash-on-cash returns remained strong by any comparison within the industry, we recognize that some of our franchisees are under intense cost pressure in their markets. The labor market is very tight right now and minimum wages continue to rise across the country. Fixed costs such as rents and insurance also continue to increase and a number of other above-store level costs continue to bring added pressure. My team and I recognize these challenges and we remain intensely focused on helping to drive efficiency and profitability at the store and enterprise level for our franchisees just as we are for our corporate markets. So all in all, I'm happy with our U.S. performance in the fourth quarter as well as for the full year. We will continue to play the long game and we will remain focused on what matters, the fundamentals, our franchisee health and making disciplined decisions. I'll move on to international now where we had another solid quarter of retail sales growth driven by unit growth, positive performance from our regions and a meaningful improvement in order growth relative to the first three quarters of the year. Same-store sales in our international business were positive for the 104th consecutive quarter. That's a remarkable 26-year run in this terrific business. Our 351 net store openings in the quarter and 856 for the full year reflect the terrific unit-level economics we continue to enjoy in many markets around the globe. We only closed 83 international stores for the full year on a base of almost 11,000 when you add that to our U.S. number, it's less than 100 closures for our 17,000 store global brands. And now for a few market highlights, we opened for the first time in three new countries, Bangladesh, the Czech Republic and Luxembourg welcoming these great new teams to the Domino's family. We passed the 17,000 store milestone globally and we hit some important milestones in several of our key markets I'd like to give a shoutout to those teams now. 800 stores in Mexico, 500 in Canada, 400 stores in France, 300 each in Germany and Spain and we opened our 200th store in Russia. I also want to highlight the outstanding year we had in two of our emerging markets, China and Brazil. Both had breakout years in store grow with 80 net new stores in China and 60 net new stores in Brazil. Among our more established markets, Japan and India delivered exceptional growth, 117 net new stores in India surpassed 1300 total stores more than any other Domino's market outside the U.S. and an outstanding 92 net new stores in Japan surpassed 600 total in that market during 2019. Our teams in France, South Korea and the Netherlands celebrated their 30th anniversary as Domino's markets. And while we continue to address the opportunity for same-store sales improvement in international, our 9% retail sales growth, excluding the foreign currency impact during 2019 shows that our business is very healthy and fundamentally sound. We're actively working with our international partners to help reverse the recent softness in same-store sales in certain markets and that will be necessary to take an already outstanding business to new heights. So I continue to feel confident that our global terrific group of operators combined with our corporate support and best practice sharing will produce the desired results to help the international business reach its full potential. In closing, Domino's is now a $14 billion global brand with the vast majority of our stores owned and operated by an incredible collection of franchisees around the world. I'm proud of the way we continue to operate with passion and offer a homegrown opportunity for store team members to fulfill their dreams of business ownership as a Domino's franchisee. I'm proud of the way our franchisees are committed to be number one in each of their respective neighborhoods. I'm proud of the way we continue to innovate aggressively across all aspects of our business, including GPS, e-bikes, AI in-store technology, great food, and an always evolving digital experience. That's second to none. I'm proud of our track record of profitable growth and our long-standing commitment to franchisee economics. With a disciplined operating model and a focus on the long-term, we've demonstrated as a system that you don't have to choose between top-line growth and bottom line results, Domino's delivers both. And with that Jeff and I will be happy to take your questions.

When I examine your 3.4% comparable sales for this quarter, it stands out, especially considering it marks the first acceleration in six quarters. The fourth quarter has traditionally been a tougher period for you. You mentioned that the driver of this quarter's acceleration was sequentially improving traffic. Can you elaborate on that? Was the increase in traffic mainly due to a reduction in competitive delivery externally, or would you attribute it to internal factors such as enhanced loyalty or changes in your marketing strategies?

It's Ritch. Really a combination, but I think more driven by the things that we were proactively doing in the marketplace. So, as I first look at the external side, we certainly still saw a lot of aggregator promotion and advertising activity out there, both on your televisions but also digital. So while we felt like that leveled off a bit, you know, relative to Q3, the pressure was certainly still there and quite intense. When I think about the things that we did proactively to drive the business and we discussed some of these things with you when you were here in September at our innovation garage. We launched our delivery insurance program in the fourth quarter, which really resonated with our customers. Our customers think about Domino's as a brand that is transparent and as a brand that takes accountability when we make mistakes. So this campaign resonated well with them. We also were promoting the carryout business throughout the quarter and in particular bringing to light the crust variety that we have on our menu. And that also resonated and drove terrific results on the carry outside of the business. As always, I'm also going to be transparent with you about some of the things that didn't work as well. We talked a lot about launching our late-night promotional program and that did not drive a lot of incremental sales across the business in total, but in certain markets around the country was really effective. So we've dialed that back a bit overall but are using it now more selectively in some key markets around the country. So that's really how I look at it, Brian. External, kind of a lot of pressure still there, staying flat, but it'd be a lot of things we did internally, worked nicely in the quarter.

Thank you. And lastly, Jeff, your EBITDA growth basically grew twice as fast as your system sales growth in the fourth quarter. Is that mostly the product of a heavier focus on flow through or was there any unique benefits that happened in the quarter that we should be aware of? I know you talked about the small gain on refranchising, but anything else?

Yes. So there was a little bit of a noise in the G&A that I mentioned in my prepared remarks around again on a couple stores sales. Certainly, the New York sale being done earlier in the year helped you a little bit on the G&A line, but make no mistake, we leaned in real heavy on additional financial discipline during 2019. And I think you see the flow through really coming through both in EBITDA and free cash flow. We were able to ratchet down CapEx a little bit more than we thought we were going to originally. But having said all that, I think the most important thing is that Ritch and the other leaders in the business, we still all invested in all the strategic initiatives that we really think will continue to drive the long game in the business. So we took advantage of where we thought there was opportunity. We squeezed it down a little bit, but the level of investment and the seriousness at which we will continue and have continued to invest in supply chain capacity, technological innovation and really a customer-centered great experience that hasn't slowed down in 2019 and I don't think you'll see that slow down going forward.

I appreciate the insights on the digital growth and carryout options. How should we interpret the 70% metric? Specifically, what does the breakdown look like between carryout and delivery, considering that delivery is likely higher and carryout lower? Is there a way to leverage technology in-store to enhance digital options for carryout as well?

Hey Matt, it's Ritch. The delivery aspect of our business definitely has a higher digital percentage compared to carryout. One of our goals as we expand carryout is to increase that digital percentage. You may have noticed our Pie Pass technology in the commercial we started running this week. To use it, customers need to order digitally ahead of time to be greeted in the store and speed up the pizza pickup process. This is one innovation aimed at increasing customer engagement with our digital offerings. Our teams are exploring and investing in additional strategies because we believe there is significant potential to boost not only order volume but also smarter upsell opportunities, contributing to increased ticket sizes. So, we see this as a valuable opportunity moving forward.

Excellent. And then could you also just give us an update you talked a lot in September about some of the new technologies, specifically the Houston test and the driverless cars. How is that going and is there any sort of, what's the timeline on that or the expansion of those tests perhaps?

Yes, so we are working hand in hand with Nuro on that. Matt, as we talked about a bit in September, testing is going well so far. And I'm going down there personally this month to have a look at it myself but so far so good. And you may have seen, there was an announcement out within the last week or so around, some of the regulatory approvals that they received to conduct deliveries down in Houston. So we're excited about where we are with the partnership to-date and looking forward frankly to learning a lot from this and helping it shape our approach to autonomous delivery going forward.

Ritch, I appreciate, probably don't want to share many details about new products, but can you help us understand what you're hoping to accomplish with the new product? Meaning, are you focused on addressing a certain customer needs state or a competitive threat? And then also could you talk about the testing process you go through to evaluate the likely success of any new products?

Sure, Chris. When it comes to new product development, our decision-making revolves around the added value for our franchisees. This means we consider not just the extra sales but also the increased profits for them. It all starts with identifying products that appeal to consumers. However, many brands assess a new product's success based on its sales mix after launch. We approach it differently; we focus on the incremental profit generated by the new product. For instance, when we introduced salads, it wasn't just to sell salads; it was to boost pizza sales, and the salads ultimately increased profitability in our stores, primarily through pizza sales. So, our testing processes begin with understanding consumer appeal, but we really want to know how this will affect overall customer behavior. Will it increase traffic to our stores? Will it lead to larger purchases that enhance franchisee profitability? This is why we don't introduce many new products. In our test kitchen, we encounter numerous products that taste great and attract consumers, but if they don't add incremental sales and profits for our franchisees, we won’t complicate operations without significant benefits. That’s our strategy. I’m looking forward to sharing some updates this summer that I believe will be exciting for both our consumers and franchisees.

That's helpful. And then, just quickly on the international unit openings, it was down a little bit year-over-year. Can you provide some color as to why that may have been the case and then should we anticipate fewer openings in 2020 as a result of the Coronavirus? I think you mentioned China was a big source of openings this past year.

If you look at the entire year, our international unit openings were actually higher than last year. The fourth quarter saw a decrease, but remember that in the fourth quarter of 2019, we experienced a boost in openings due to the conversion of Hallo pizza stores in Germany, which we heavily promoted during that time. I remain optimistic about our projected global unit growth of 6% to 8% over the next two to three years, driven by the strong economics of our international business. Regarding the impact of the Coronavirus, China currently represents a small portion of our overall portfolio in terms of store count and retail sales. As I mentioned earlier, China significantly contributed to store growth in 2019. Amid the ongoing situation with the Coronavirus, I'm proud of how Dash Brands is managing the circumstances. Our number one priority right now is the well-being of our team members and customers, rather than sales or store openings in China. At the moment, fewer than 20 stores are temporarily closed, with none permanently closed. However, there will be a slowdown in store openings early this year due to the virus, which is expected. Nonetheless, I do not foresee this having a long-term impact on our business. Our thoughts are with the people in China and our team members there as we hope for a resolution to this virus, but I anticipate only a temporary impact without long-term consequences.

I want to just clarify a comment you made about the aggregator pressure leveling off. I don't want to split hairs, but I guess are you saying sales growth is stable or aggregator dollar sales look to be stable? I'm trying to understand if we're in sort of steady state now, why is 2% to 5% the right constant rate for you? Why not? Why shouldn't it be sort of we accelerating back to where it was before we saw this real heavy step up in an aggregator pressure? Is it fortressing or is it just sort of how I'm interpreting your comments about leveling off?

Hi, Sarah. I'll try to clarify a bit. When I mention leveling off, I'm referring to the period between the second half of 2018 and the first half of 2019, during which we observed a significant influx of aggregators entering new cities, substantial spending on both traditional and digital advertising, and notable increases in discounting in the market. All of those factors are still present. However, we haven't seen a further ramp-up like we witnessed in previous quarters. Think of it this way: the pressure is still there; it just hasn't intensified for us compared to Q3. As for 2020, we’re uncertain about how these companies will operate. The best way to describe the situation is that they seem to be in a precarious position, continuing to advertise and discount because they might feel they have no other option. While we’re not caught in the crossfire, we could experience some minor impacts along the way. We can't quantify that yet, which is why we project a 2% to 5% outlook—it’s a two to three-year perspective. We're not adjusting it quarter by quarter. If we can maintain that range, we believe we have a solid business model capable of providing growth and profits for our franchisees while also benefiting our shareholders.

Just to clarify, was the sequential acceleration in comps all attributable to the delivery segment? And then on GPS tracking, what percentage of the U.S. system currently has it and in store that have implemented the technology? Can you provide any color on what you're seeing across relevant metrics, whether that be delivery times, customer satisfaction, labor saving?

Hey Lauren, it's Jeff. I'll take the first one and then I'll kick it over to Ritch on the GPS. As far as the comp in Q4, the carryout business just was on fire in a greater way. We leaned into that strategically given our franchise operators the tools and the technology to really make the most of it. And as Ritch mentioned earlier, really advertising heavily behind it. It's what a big cross-section of our customers really want. We're getting better at carryout every day that we focus on it and really saw a big surge in the comp for carryout. On the delivery side, tougher competitive environment there. It did sequentially improve over Q3. So we definitely feel like the value that we can provide to our delivery customers in that segment remains very, very strong. And we were pleased to see the resiliency in that business. So I'm glad we're in both of those businesses. Going to continue to invest heavily behind them in advertising technology. The consumer experience but carryout did a little bit better than delivery date in Q4 and I'll kick it over to Ritch on the GPS commentary.

Yes. I have been visiting several stores in the past few weeks, speaking with our franchisees and store managers as we introduce the GPS technology, and the response from our operators has been extremely positive. This technology is assisting them in managing the complex process of getting food to customers. By knowing exactly where the drivers are and when they are returning to the store, we can prepare pizzas more efficiently and ensure they leave quickly. We are already seeing some reduction in turn times, although it's still early, particularly in stores that have fully embraced the new technology. Looking ahead, there are two aspects to the GPS. One is the consumer side, which, to be frank, is fairly standard as competitors like Uber and Lyft also use it, and it's essential for customer satisfaction. However, the significant advantage of GPS lies in its impact on our internal operations and the delivery process for our managers and drivers. Traditionally, a driver needed three to six months to become familiar with the delivery area, but with GPS, we can speed up their training. They will already know the fastest routes to deliver pizzas to customers. There's more to share on this as we progress, but I am excited about our current position.

I think you mentioned you're aware of the pressure the franchisees are under due to rising wages. Could you discuss some of the efficiencies you are implementing, besides GPS tracking, to help reduce costs and improve margins within the stores?

Sure. So yes, there are a lot and as you guys look across the restaurant landscape, I'm sure all of you see a lot of labor cost pressure out there in the marketplace and it's not uniform as you know. It is concentrated along the coast and in states where we've seen significant minimum wage increases over time. So our franchisees just like restaurant operators across the industry are dealing with those cost pressures. In terms of efficiencies, there are a number of things that we're working on. GPS is one of them that we were just talking about whereby we're trying to shrink the turn time on orders, which provides labor efficiency. We have been piloting in our corporate store business some AI-based labor scheduling algorithms to try to make sure that we are using the right number of hours in each of our stores and there is a lot of inefficiency in our system today if we're honest with ourselves about that. So, a lot of things that are going on there. We're taking a look at with our Innovation Garage which some of you were able to come see. We're looking at every aspect of how we set up and operate our stores, because it is a game of steps and pennies and seconds and we're trying to focus on all of those as we look for ways to help our operators be successful.

Ritch, I think you mentioned that one of your biggest focus areas for the U.S. business in 2020 is on operations or execution of service. And I was wondering if you could give us some context on whether you see the current service levels as an issue relative to where you've been in the past or is this more opportunistic. Anything you can offer there would be helpful. Thanks.

Yes, David, be happy to. What I can tell you is, on our delivery service today, we're as good as we've ever been on delivery. But we're not good enough for the future. This is how I would describe it. So, business was founded on this kind of 30-minute promise decades ago. Well, I think as we look forward, when you can get anything, food or otherwise delivered, we've got to be the absolute best at it. And so we're working with our franchisees, fortressing is obviously a part of that and fortress stores we see a reduction of about 2 minutes on average in delivery time versus those non-fortress territories. But that's not all of it. It's using technology like GPS. We now have technology in our stores that enable us to get pizzas in the oven much faster based on what customers are ordering digitally. So we're taking a look at every aspect of it. Paramount to all of that obviously is safely getting that product to the customer. But, we're looking at ways to take out time through every step of the process from the time you open that app to the time that pizza shows up at your door.

And just a follow-up related to that, when you do make progress on this, do you see a pretty good immediate correlation to the sales in the market, when you see this type of improvement?

The connection between average delivery times and sales per household is very strong, which effectively indicates customer repeat purchases. Yes, we have several operators across the U.S. currently achieving average delivery times of under 20 minutes. When delivery times drop below 20 minutes, the change in trend is significant.

There were some articles last night indicating that the largest franchisee of your biggest competitor in the U.S. is likely facing bankruptcy. Do you have any insight on how much overlap you have with that system? Is that something you've considered? Additionally, if I may ask a second question, what is your average franchisee leverage standing today? That would be great. Thanks.

So, on the first question, Greg, I won't speculate on NPC. It is a really tough operating environment out there in the restaurant industry as we talked about earlier from a cost standpoint. And I can tell you that if we were not growing our sales, profit would be declining. As we talked about, we had pretty good same-store sales growth in 2019. And we expect our store level profits to be roughly flat. So you've got to grow in order to continue to compete and thrive in the business. Given our footprint 6,000 plus stores across the U.S, certainly, we've got territories that overlap with that franchisees units. But, we don't focus this pretty much specifically on one franchisee of a competing brand or frankly even one competing brand, we're out there 5 per share in every community that we operate in across the country. I'm going to let Jeff take the second question around the franchisee leverage.

Good morning, Greg. Regarding the franchise leverage in the U.S., we are fortunate that nearly 800 independent franchisees regularly provide us with their profit and loss statements and balance sheets. This gives us a solid understanding of their financial status. I can assure you that we don’t see this as a significant risk for our U.S. operations, not just because they benefit from the best model and economics we've developed together, but also because we believe they use leverage responsibly. Therefore, we don’t view it as a major concern as we aim for 25,000 units globally.

So how much incremental opportunity is there in your view to highlight Domino's value proposition in your advertising, maybe particularly from a delivery perspective relative to aggregator delivery. Will that be a greater part of your messaging going forward?

Yes, Chris, this has been a central part of our message for a decade. Since we first introduced 599 and then strengthened our focus with 799 around the carryout business, it will continue to be essential. An important aspect to consider is how we compete with third-party services, particularly regarding delivery fees compared to what they charge customers. There has been significant promotional activity, such as free delivery for first orders. We haven’t fully seen the long-term effects of this yet. However, when we evaluate the value of feeding a family of four with Domino's, including delivery costs, we believe it compares very favorably to what you would pay for nearly any other food delivered through a third party.

A question here about the mix on carryout this quarter, both in terms of ticket and of sales. And then with the increased messaging around carryout, are you guys seeing any accelerating trend in the fortress stores relative to the non-fortress stores? And in fortress stores itself, if you could comment on if you're seeing cannibalization to the delivery business or more messaging out there on carryout is bringing in incremental customers or potentially stimulating delivery as well? Thank you.

Hey. Thanks for the question. This is Jeff. I'll take a shot at this one. On the mix of the two businesses in Q4 again, carryout is just performing extraordinarily well for us. We're in our 60th year of existence in a lot of ways. We were kind of an accidental carryout company for maybe the first 50 years or so. But with the strategic insight around where the pizza industry was going, really trying to address better the consumer needs about that separate occasion, and they are separate occasions. I think people sometimes conflict the two, but our research says, I think our results show that a carryout customer is absolutely different from a delivery customer. Off lean and into that, as Ritch just mentioned we're many, many years now into the 799 large three-topping carryout special, which is all we can get every day of the week. Customers really like it and it's really helping to drive some outperformance that you're seeing drop to the bottom in the total comp. On the delivery side of the business, obviously highly competitive food delivery marketplace it's very dynamic over the last year plus there, but our franchisees in our corporate stores are holding their own there. The value proposition really shines through with the 599 Mix & Match offer and as Ritch mentioned multiple times over multiple calls, the focus on service and making sure that we're delighting our customers really helps us capture that long-term value of the customer. So we were super excited to see the sequential improvement Q4 over Q3 on delivery. So that's what I'd say overall on that. As it relates to fortress stores versus the stores that have kind of been split with our territory, it's really the same stuff that we've told you. The carryout in the new store, the fortress store almost 100% more than 90% incremental. That's what the data shows; we are reaching customers that simply weren't enjoying the Domino's brand there. So that's a really important part of the financial equation to get those franchisees excited about the investment opportunity. The delivery side of the business, certainly we are picking up new addresses, but the addresses that are shifting from an old store to a new store, were simply getting it safely to the customer and better service time there. So, it's really gelling together, our franchisees remain super excited about it and we're going to continue to grow as fast as we can on that strategy.

Can you just maybe talk about the impact of the loyalty program had on 2019 as we sort of think about the year that's just passed. How has the membership grown, how has the impact on sales grown or what the impact has been? And I guess importantly, I think there must have been some discussion of remembering correctly about maybe at some point changing it right from a visitation to more points or something else that might enhance that continue to help it grow. Is that something you're contemplating in 2020?

Hey, John, it's Ritch. So we were pleased with the growth in the loyalty program. As you'll recall, in 2018 we passed the 20 million active member mark and in 2019, we passed the 25 million mark. So it continues to grow and resonate with customers. The tailwind impact on sales that you get for loyalty does decline over time. So in '19 its nowhere near what you would have seen in '16 and '17 right after we launched the program. And we're always looking at ways that we might be able to enhance it over time. We ran our Points for Pies campaign in the first part of this year to find another way to give value to our customers and we're going to keep looking at ways to grow and enhance it, because any loyalty program does have a bit of a half-life to it and you have to keep feeding it for it to continue to deliver results.

Just to be clear, would it be the kind of change read actually shift though the value of point or the way you earn them or would it be more in evolution as you talked about Points for Pies or some other sort of idea that would get people more reengaged in the program on a near-term basis or short-term basis.

Well, one thing that won't change, John, will be the purpose behind the loyalty program, which is to drive order count growth in frequency over time. It's the way it's structured. It's why it's a transaction-based program where you order 6 times and you get a free pizza as opposed to a spin-based program. So we're going to remain focused on driving transactions with it because we know transactions drive sales, which drives profits in our business. So with that context, we're constantly running research and taking a look at different ways that we can enhance the program. So, I can't tell you today, what will be different about it a year from now, but I can tell you that we're not going to do anything that gives us away from trying to drive transactions through customer frequency.

Just following up on the franchise system a little bit, kind of been trying to ask this a little bit differently. You've talked about a number of things that you're doing for the franchisees, but you've also talked about some of the pressures that they're under. What are you hearing right now both domestically and internationally as the biggest asks from you that you're not already doing and also, are there any areas where you're getting any push back from them? Thank you.

Yes. So, franchisees, Brett, continue to ask for help around technology and that's something that we brought to the system time and time again. I mean, ultimately it is the franchisee's job to serve their customers to hire and staff their teams, to motivate and grow and develop their team members. But we as the brand overall can bring technologies to bear that help them run their businesses more efficiently. So that's why you see, GPS as an example that we've rolled out, that's something that franchisees were hungry for and eager for us to bring to bear. Ultimately franchisees want to grow sales and profits. So our dialog with them outside of specific things like technology is always around how do we work together to continue to grow the system in a healthy and profitable way.

Richard or Jeff, just another one on the strength in the U.S. carryout business and the opportunity. In addition to the fortressing, the service levels, the Pie Pass and some of the other tech that you mentioned. Could we also see greater marketing and promo efforts even beyond the 799 carryout given the success you've seen recently? And I guess particularly given some of your competitors are shifting more towards a delivery focus, does that potentially present an even greater opportunity for you to pick up even more carryouts here? Thank you.

I'll try to take that one. The answer on carryout around, are we going to do more to drive that business? The answer is absolutely because we see it as a huge opportunity for us. The trends on a transaction basis, it's 2.5x the number of transactions that are in the delivery segment in the U.S. And I think we've got more opportunities to drive it. We started with this 799 hero offer. We expanded that toward the end of last year to include all five of our crust types that really resonated. So we are definitely thinking about what are the other products or opportunities that we could roll into what is already a great value offer for our customers. We're working hard on technologies to take friction out of the carryout experience. We've got more than 600 of our stores in the U.S. now that have pickup windows, where a customer can pull right up to the window and have the pizza handed through to them as opposed to getting out of the car potentially with the kids and trying to come into the store and pick them up. So we're looking for more and more ways to make it seamless. Pie Pass lets them jump the line, get up to the front, get the pizza handed to them and everybody likes to see their name on a screen. If I'm feeling lonely, I'd order carryout and I go into Domino's and I love to see Ritch up on the screen in the store. And then to the second part of your question and it is a really interesting question about this competitor shift. So what we see happening in the industry is a huge increase in delivery, but no incremental restaurant transactions rolling in. So sure there is shift across some brands, there is most certainly shift across channels. And if you look at that, particularly in the high wage markets in the U.S., if you're trading drive-through business for pick up business for delivery business, then you are moving your customers to a higher cost channel to serve. So when we think about how we're going to grow our business and continue to have a very profitable base of franchisees; we got to hold serve and defend that delivery side of the business, but we are pushing hard on carryout, because as you approach $13, $14, $15, $16 an hour labor, that carryout business becomes the profit engine over time.

First, just a very specific question, and I know that you guys don't normally like to talk about it. But quarter-to-date, we have had very unusual restaurant trends, especially on the casual dining side, probably a lot of that driven by weather? Good weather, warm weather and lack of snow isn't necessarily a good thing for you, is there anything that you'd like to call out specifically in the first quarter because expectations could obviously really change based on what you reported in the fourth? And I have a follow-up?

John, we'll talk about Q1 in April.

I got it. In your prepared remarks and I think you touched on this in a few different ways but I would like you to revisit it. You talked about driving efficiency and profitability both at franchisees and corporate. Certainly, I understand about GPS being part of that but what other big structural, just not managing pennies and nickels maybe finding bigger ideas do exist that we might be able to see within the U.S. store system and following up on that, what type of efficiencies might exist on the corporate side, that we haven't necessarily talked about?

Yes, John, great question. We're spending a lot of time on this. And it's one of the main reasons we built that Innovation Garage in our backyard over here, so that we could accelerate some of these operational efficiency initiatives. I talked about GPS a bit, our AI work and machine learning around team member scheduling, which we've been working hard on in our corporate stores to more efficiently schedule, not only to get improvements, and in the pilots, we've done, not only does it result in lower labor costs, but it also results in better service levels. So there is a win-win there on having the right number of team members in the store at the right time. We're also looking at other things that we've done for years and years in our business and asking ourselves if we need to keep doing them? And some of these things are lessons that we learned from our international markets. We've got more than 1,000 stores outside the U.S. that don't pre-fold any pizza boxes. For example, which requires a pretty decent amount of labor in the store to do that and we're taking a look at things like that and testing them in our corporate store business. We're looking at the equipment that we use and how that equipment is positioned in our stores, how we think about preparing our stores for the rush which comes at us at dinner time, every night. So we're breaking down every aspect of the operation to try to find opportunities for efficiency because we know that labor costs are only going up over time. I'm willing to bet that in my business career no state or municipality is going to lower minimum wage. So we got to be prepared to operate in an environment where costs are going to go up and the customers' willingness to pay does not go up linearly with your cost to provide them with that service.

Just a question on the loyalty program. I think you mentioned active now north of 25 million. I was wondering if you'd share any color in terms of whether it's average usage versus a non-active or whether or not you've pushed any greater emphasis on one-to-one marketing in the fourth quarter kind of trying to dial into the benefit of having that loyalty program. And ultimately how do you incentivize greater adoption. I know you mentioned 85 million I guess, total customers in your database. I'm wondering how you go about pushing that 25 million having gone from 20 million to 25 million even higher from there to help increase usage per household? Thank you.

Yes. So certainly our active loyalty members buy from us a bit more often than our non-active. So that's a big driver of why we want to get them into the program. I think we've got a lot of opportunity to continue to drive the program particularly around this growing carryout side of our business, which as I mentioned earlier, digital is not as entrenched in that business as it is with our delivery customers. So we're looking for ways to make the carryout experience digital, experience more helpful and more convenient to our customers as we try to continue to drive adoption that way. You also asked a bit about how do we use the data, how do we get more targeted? This is an area where we're early stage right now, but spending a lot of time and energy. Looking at that data set, not just of the 25 million active, but the 40 plus that are enrolled and the 85 plus in our database to say how can we be more surgical and more relevant and how we present offers and opportunities to our customers. And I think we're on the very early stage of becoming effective in that area Jeff.

In the last month, the largest domestic carryout only pizza concept launched National delivery through a third-party platform. And I'm curious what gives you the confidence that you can defend against short-term headwinds? Your delivery traffic is an incremental 4,000 Pizza restaurants are now aggressively promoting the value of their delivery offering versus yours, which is unusual as obviously we all kind of know the third-party delivery usually is more expensive versus your ticket?

Yes. Andrew, it's Ritch. We take every, every competitor that enters very seriously. And I think for us, it just further reinforces that we and our system have to stay very focused on value. And as we take a look at what the all-in delivered cost of the Domino's Pizza is, we still feel very good about the value that we can offer our consumers relative to any of the pizza players that have been or are now in delivery. But most certainly, we take every competitor seriously that comes into the business.

As we look at maybe the international store base and the slowing of same-store sales performance across 2019. Can we talk about, is it a relatively homogeneous slowing across most of the international partners or are there a few discrete markets that you would call out as being a bit of a headwind to the international same-store sales. Thank you.

Yes, Todd. What I would tell you is that, it's not uniform across the 90 countries that we operate in. And if you start to break it down in the quarter, our emerging markets outperformed our more mature markets. So if you wanted to try to draw a line of distinction there always of course exceptions, but by and large, the emerging markets tended to outperform the more mature markets during the quarter.

Thank you, analysts, and thanks everybody. We really appreciate you joining the call this morning. Jeff and I look forward to speaking with you in late April as we discuss our first-quarter 2020 results. Thanks.