Dominos Pizza Inc (DPZ) — Q2 2020 Earnings Call Transcript

Thanks Katherine, and hello, everyone. This is Jeff Lawrence, CFO of Domino's. Thanks for joining the call today about the results of our second quarter of 2020. As you know this call is primarily for our investor audience. So I kindly ask that all members of the media and others be in a listen-only mode throughout the call. If forward-looking statements are made today, I refer you to the Safe Harbor statement you can find in this morning's release and the 10-Q. We will start with my prepared comments which will be followed by prepared comments from CEO, Ritch Allison, followed by analyst questions. We ask that our analysts limit themselves to one question please during this call. With that I'd like to walk you all through the results for the second quarter, while reminding everyone that we've communicated flat preliminary estimated information for the first eight weeks of the second quarter in a business update that we released on May 26th. As we stated in the last business update, we intend to return to our normally quarterly earnings cadence going forward effective with today's release. Before I dive into Q2 results, I am sure most of you have now seen the announcement this morning that after more than 20 years with the company and five as the Domino's CFO, I've decided to retire from Domino's. Domino's is about opportunity. And in the past 20 years I've had the chance to learn, grow and lead at one of the best brands and companies in the entire world. From a lead role early in my career in our IPO, to traveling the U.S. and to more than 50 countries around the world helping our global franchisees grow to number one to helping the team shape our digital transformation over the past decade. I could not have asked for more and I'm proud of the results we've achieved together. Like anything you cannot do it alone. I want to thank our Board of Directors, Ritch and his leadership team and my global finance team. And I'd like to personally thank all the franchisees and frontline team members worldwide, you are the heart of this great brand. And most of all my wife and my family who've gone along with me on this unbelievable and awesome ride. I've achieved every goal I've set out for myself here at Domino's and I am going to take a well-earned break with my family and see what the next adventure is for us. We are very, very excited. I've agreed to stay on until year end and to assist Ritch and the Board in identifying my successor and know that Domino's will be in great hands and that our best days are yet to come. I'll remain Domino's number one and biggest fan. Thanks to everybody again. With that let's get into the second quarter. In the second quarter, we continue to lead the broader restaurant industry with 37 straight quarters of positive U.S. comparable sales and 106 consecutive quarters of positive international comps. A truly outstanding accomplishment and testament to the strength and resiliency of the Domino's brand globally. We also continue to increase our global store count as we opened 125 gross new stores and 84 net new stores in Q2. Our diluted EPS in Q2 was $2.99, an increase of 36.5% over the prior year quarter, primarily resulting from strong operational results and a significantly lower effective tax rate. With that let's take a closer look at the financial results for Q2. Global Retail sales grew 5.9% 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 8.1%. Retail sales were positively impacted by strong U.S. same-store sales, but were negatively impacted by temporary store closures in our international markets. Same-store sales for the U.S. grew 16.1% lapping a prior-year increase of 3% and same-store sales for our international business grew 1.3% rolling over a prior-year increase of 2.4%. Breaking down the U.S. comp, our franchise business was up 16% while our company-owned stores were up 16.9%. The U.S. comp of this quarter was driven by both ticket and order growth and was significantly impacted by customer ordering behavior during the COVID-19 pandemic. During the pandemic, we have continued to attract new customers to our brand, while focusing on safety, convenience and value. We also note that existing customers, many of whom are part of our best-in-class loyalty program continue to order in larger order sizes. Our delivery comp was also positively impacted by higher order counts in addition to larger order sizes. The accelerated levels of demand we saw during the middle of the second quarter remained elevated through the end of the quarter with no discernible drop-off. The International comp was driven by ticket growth during the quarter. We were particularly proud of our international comp for the quarter as it was positive despite the negative impact on the comp in many markets from partial week openings and closings, abbreviated store hours and limited service methods. Other markets in our global portfolio saw dramatic increases in sales much like the U.S. business. We continue to believe we are well positioned to grow our global market share both during and after this pandemic. On the unit count front, we opened 39 net US stores in the second quarter consisting of 40 store openings and only one closure. Our international division added 45 net new stores during Q2 comprised of 85 store openings and 40 closures. We believe the pandemic has had a net negative impact on store openings globally in part due to delays in approval and government restrictions in addition to general construction delays. Importantly, unit economics remain strong in most markets particularly in the US business and we will continue to work with our franchisees to responsibly grow their businesses. Turning to revenues. Total revenues for the second quarter were up 13.4% from the prior year, driven primarily by higher retail sales which drove higher supply chain and US store revenues. These increases were partially offset by lower international franchise revenues resulting from temporary store closures, as well as pressure from the negative impact of changes in FX. Moving on to operating margin as a percentage of revenues consolidated operating margin for the quarter decreased slightly to 38.8% from 39% in the prior year quarter due primarily to investments made related to the COVID-19 pandemic, partially offset by higher revenues from our US franchise business and the positive impact of the sale of our New York stores to franchisees last year. Company-owned store margin was down year-over-year and was negatively impacted by higher labor costs, partially offset by lower food and occupancy costs. Supply chain operating margin was up year-over-year and was positively impacted by lower delivery costs. G&A expenses decreased approximately $1 million as compared to the prior year, primarily due to lower travel expenses resulting from the COVID-19 pandemic and $2.4 million pretax loss recorded in the prior year related to the New York store sale. These decreases were partially offset by higher professional fees. We continue to see the benefit of improved discipline and focus in this important area, while continuing to invest in strategic initiatives throughout our business. Interest expense increased approximately $6 million in the quarter driven primarily by a higher weighted average debt balance resulting from the 2019 recapitalization and borrowings under our variable funding notes during the quarter. Our reported effective tax rate was 4.7% for the quarter, down 8.2 percentage points from the prior year quarter. The reported effective tax rate in the quarter included an 18.5 percentage point positive impact from tax benefits on equity-based compensation. We expect to see continued volatility in our effective tax rate related to these tax benefits. When you add it all up, our second quarter net income was up $26.3 million or 28.5% over the prior year quarter. Our second quarter diluted EPS was $2.99 versus $2.19 in the prior year, which was a 36.5% increase. Here's how that $0.80 increase breaks down. Our lower effective tax rate resulting primarily from higher tax benefits on equity-based compensation positively impacted us by $0.32. Lower diluted share count resulting primarily from share repurchases in 2019 benefited us by $0.14. Higher net interest expense resulting from higher average debt balances negatively impacted us by $0.11 and most importantly our improved operating results benefited us by $0.45. Let's turn to cash. We continued to generate positive cash from operations through Q2 and as of the end of the second quarter, we had more than $306 million in available cash and an additional $102 million of available borrowing capacity under our variable funding notes. Our financial standing is and remains strong. During the second quarter, we generated net cash provided by operating activities of approximately $116 million. After deducting for CapEx, we generated free cash flow of approximately $100 million. We also invested $40 million in Dash Brands Ltd., our master franchisee in China. For accounting purposes this is an equity investment, recorded their cost and will be adjusted in the future for impairments. We have agreed to invest another $40 million in Q1 of 2021 subject to certain performance conditions being met and may alternatively invest this amount in Q1, 2021 at our option if such conditions are not met. During Q2, we returned $30 million to our shareholders in the form of a $0.78 per share quarterly dividend and finally, we have not repurchased any shares under our authorized share repurchase program since the first week of January. As a reminder, we have $327 million remaining under our Board authorization for future share repurchases. Before wrapping up the financial update, I want to give you current and some estimates we shared with you on the last earnings call. We remain steadfast in our commitment to lead with our values and invest in our team members, our customers and our communities. We had previously estimated that the total Q2 impact from frontline bonuses, safety and cleaning equipment, community giving and enhanced sick pay would be approximately $15 million. The actual Q2 impact for these items came in at $11 million. Separately, we had previously estimated that the total Q2 impact on international royalty revenues from partial store closures would be approximately $5 million. The estimated Q2 impact came in at $7 million. Finally, we continue to estimate that FX for the full 2020 fiscal year could have a $10 million negative impact on royalty revenues. Going forward, we do not anticipate providing additional forward-looking estimates on the aforementioned items. In closing, we remain in very good shape financially and we will continue to closely monitor all aspects of our business as we operate in these uncertain times. We will continue to focus on doing the right thing for our team members and communities today while ensuring we not only survive but are best positioned to thrive coming out of this crisis tomorrow. Thanks again for joining the call today. And now I'll turn it over to Ritch.

Thanks Jeff. You've been a trusted teammate for more than two decades. A true Domino's team member with pizza sauce in your veins. Over the course of your career, you have been a key contributor to the success of our global brand, working across all aspects of the business. As our CFO, you have an outstanding track record of creating strategic value for our great system. Your accomplishments speak for themselves. And I want to thank you on behalf of the entire Domino's global community. We wish you all the best. I also want to personally thank you for staying on through the end of the year as we identify a worthy successor and also for agreeing to serve as an advisor to me personally through the end of the year. All right. Let's now talk a bit about the business. The COVID-19 pandemic set the background for the second quarter, creating challenges that were certainly unlike anything we've ever seen as a brand and unlike anything I've ever seen as a leader or frankly would hope to see again. We operate in over 90 markets and across six continents none of which were spared by this virus. And our hearts go out to those around the world that were directly impacted. Throughout the quarter, our focus as a global brand and the focus of our local operators remain steadfast on serving our customers and our communities and doing that with a convenient, affordable and safe food and service experience. Given the unprecedented nature of the conditions surrounding the quarter. I do want to take a few moments to say thank you. First to our customers for giving us and our franchisees the privilege to serve you around the world. To our franchisees and our operators for your incredible resiliency, your passion, your innovative spirit, willingness to support each other and share best practices and for your commitment to your teams and your communities. And to our corporate teams truly across every aspect of our business from our supply chain to corporate operations to our functional support teams for leading with our values. And for your unyielding commitment to supporting the brand around the world. I have never been more proud than I am today to wear the Domino's logo and to serve as your CEO. I also want to share some of the work that we've been doing as a brand aligned with our purpose and values. Our purpose as a brand is to feed the power possible one pizza at a time. Our values are do the right thing, put people first, create and inspire solutions; champion our customers and grow and win together. During the quarter, this purpose and these values drove us, drove us to partner with our franchisees to feed the need in giving away 10 million slices of pizza in our local communities. Drove us to pay out nearly $8 million in thank you bonuses to frontline hourly team members in our corporate stores and supply chain centers. And drove us to speak out against racism and to commit $3 million over the next three years to make a difference in black communities including $1 million which will be invested to establish the Domino's Black Franchise Opportunity Fund. We sold a lot of pizza in Q2 but I can tell you I'm even more proud of the good that our company, our team members and our franchisees did along the way. Now I'm going to turn my attention to our second quarter results. I'll discuss our US and our international businesses, while weaving in a few additional topics and some perspectives on the dynamics around food delivery and the pizza category in these times, which certainly have been a tailwind for many of us within the industry. We'll share some of the latest updates related to operations and execution as we continue to navigate our way through the pandemic. And also I'll talk about the areas where I believe we can continue to differentiate ourselves from the competition and drive shareholder value over the long term. And following that as always we'll be happy to take some Q&A. So let me get started with a discussion about our US business. The second quarter marked a rather unprecedented acceleration for food delivery in the US and we were certainly no exception. Our 37th consecutive quarter and strongest in that nine-plus year run for same store sales, with evidence of this tailwind in delivery. Beyond the numbers, I'm most proud of our energy and execution at the store level. We absorbed unprecedented volume while maintaining high service levels and continuing to provide tremendous value for our customers. And I can't say enough about our supply chain division, which did a terrific job handling heavy volumes and ensuring continued supply of product to our stores. So while there remains much to sort out and still much left to unfold regarding the future of customer behavior, we realize there's an opportunity to capitalize on the engagement with both new and returning customers. We believe value and convenience are bringing customers to us. And we hope it will continue to bring them back. Nearly 75% of our sales in the US are coming through digital channels. Through the second quarter, this combined with loyalty adoption gives us a good proven chance at driving additional customer frequency. And I am glad more than ever that we have this direct digital and loyalty relationship with our customers and that we're not dependent upon a third party to bring us orders. Beyond anything else executing a terrific delivery and carryout experience will be the ultimate way to convince these customers to come back and to remain Domino's customers for the long term. I'll now turn my attention to operations. We spent much of the quarter retooling almost 60 years of standard operating procedures and doing that over a matter of weeks. Our teams and franchisees have done an outstanding job of implementing many things rather quickly, including protocols around contactless delivery, including the innovation of the pizza pedestal to deliver pizzas to our customers' front doors. The rollout of Domino's car side delivery, which provides an incredibly convenient and contact-free carryout experience for our customers. And many digital enhancements that our teams have developed to make ordering, selecting service methods, paying and tipping even easier. During all of this, our innovation and supply chain teams continue to work on our menu. Just last Monday, we began rolling out a new product. Our new chicken wings with a greatly improved wing and terrific new sauces. We've added these to our $7.99 platform offering a 10-piece wing option in addition to our pizza offerings. And we're promoting the product and the offer today through our digital channels. Wings are a rapidly growing category, as many of you know in delivery and carryout. And as we're honest with ourselves our wings needed to improve. And this is a sign that continued menu innovation doesn't always have to be something brand new but can be a major renovation of existing products that customers have simply told us need to be better. Our customers are mixing and matching within our value platforms more than ever before and our new wings are a nice addition to our $7.99 carryout offer. We're very excited about this launch and we look forward to bringing additional new product news to our customers over the next few months. Let me remind you once again how we think about new products. Now while product innovation is very important for any restaurant brand, at Domino's we don't launch new products just to create news. Our strategy and launching new products focuses on first driving incremental sales and orders and incremental profitability for our franchisees at the store level. We focus on permanent menu items and simple operations. And very importantly whenever possible fitting new menu items into our existing value platforms. Now turning to store growth. The pandemic certainly created obstacles for new store openings during the second quarter, but I'm very pleased that we and our franchisees still managed to open 39 net new stores in the US during Q2. Our development team and our franchisees did a great job remaining focused on smart growth across our markets. And while near-term challenges remain in many cities and towns, I'm optimistic about the medium and long-term opportunity to accelerate unit growth and to take advantage of the certain opportunities that we're seeing in the marketplace. Looking forward, I can tell you that we don't know exactly what the new normal is going to look like in the US. COVID-19 has accelerated some of the trends that we were already seeing in motion around delivery, carryout and digital adoption. And we expect that customer expectations around safety and contactless experiences will remain heightened for the foreseeable future. Now while we don't want have all of the answers on the future, we will continue to focus on the fundamental areas where we know we have to compete aggressively. Value, we talk about value often; it's always important but even more so when we're facing a recession and the high unemployment that we see today. Fortressing and unit growth will continue to be a focus. And the higher sales levels that we're experiencing and the service expectations that we have for our business make this even more important. We will continue to expand our supply chain capacity. We opened our Columbia South Carolina supply chain center in Q2. And we are on track to open another supply chain center in Katy, Texas and a thin-crust manufacturing facility in New Jersey during the back half of this year. Innovation across all areas of our business in digital and delivery and carryout and in food will continue to be important and a focus on service, a constant focus on service with plenty of opportunities still for us to improve is always a focus for us at Domino's. So, in closing for the US business, I'd like to highlight a special recognition we receive this summer for the first time since 2009. We've been recognized as the leader in customer satisfaction for the pizza category as part of the ACSI's most recent restaurant report. That just makes me incredibly proud of our US business leaders, our franchisees and our operators. Turning our attention to International. We've now achieved 106 consecutive quarters of positive same-store sales growth and to be honest with you back in April, I thought this incredible run was in doubt. I'm in my 10th year here at Domino's and I have never observed such wide variations in performance across our international business. During the quarter, we had several markets which saw significant increases in sales driven in part by pandemic-driven changes in consumer behavior. China, Japan and South Korea are leading examples. And these markets are also responsible for pioneering many of the contactless delivery and carryout innovations. The US and dozens of international markets have benefited from the incredible ingenuity and creativity in these markets. However, we've had other markets which have had to deal with complete shutdowns for significant closures across their businesses. France, Spain, New Zealand, Panama and several others were completely closed for a period of time. India and Saudi Arabia and others had significant portions of their markets temporarily shuttered. And dozens of markets had to deal with service method restrictions and business hour restrictions during the quarter. In an environment with so many challenges, I am very pleased with the resiliency and performance of our international business. Our global group of terrific master franchisees once again demonstrated that they are the absolute best in the restaurant industry. At our peak, we had about 2,400 stores closed in the international business as markets and stores have gradually reopened over the quarter and as service methods have resumed we've seen consistent improvement in the business. Now there is still much work left to return the business to where it was pre-pandemic. We are at fewer than 600 stores fully closed as of July the 8th. At the same time, however, many markets are partially closed or still restoring service methods. These factors have continued to pressure retail sales and we expect continued volatility in the international business in the months ahead. In addition to the pressure on retail sales and same store sales, the pandemic has also slowed our international store growth momentum. We opened 45 net new stores in the quarter and that's far below our typical performance. We expect that it will take some time for store growth to ramp back up in the markets that have been most impacted by COVID-19. But with all that said, as I look forward I remain very optimistic about our international business and about the growth opportunity ahead. The pandemic has accelerated delivery adoption around the world and that is good for our business. Good for our business over the long term. We're the clear number one in QSR pizza on a global basis and we're number one in roughly half of the international markets where we compete. And while we're number one in all of those places, we still believe that we have significant room for market share growth within the pizza category around the world. We feel that unit economics, cash on cash returns and franchisee profitability fundamentals are still very strong in the majority of our international markets. Over the recent weeks, I've spoken with many of our international master franchisees and they remain very optimistic and very committed to investing in the long-term growth of their businesses. We've also taken advantage of an opportunity to invest in an international market as Jeff shared with you earlier. We now hold a minority ownership interest in Dash Brands, our master franchisee in China. We're very happy with where the business stands today. We've recently opened our 300 store in China and we are excited about the long-term growth potential there. We believe that we can play a role in helping Domino's China reach that potential and view this as a good long-term investment for DPZ. As I wrap up the discussion on our international business, I just want to say thank you to our incredible master franchisees and to the operators of our more than 1,100 store network outside the US. So in closing, we will likely never forget the second quarter of 2020 as a chapter in our path toward dominant number one. We're rising to the challenge of today and we are looking forward to capturing the opportunities of tomorrow. And that opportunity is driven by the fact that we continue to bring more customers into this incredible brand. Each day we have more opportunities to delight our customers and to convert them into loyal Domino's fans. We're still very much a work in progress brand with plenty of areas to address and improve. And while we cannot predict the future nor will we try to do so. We will do all that we can to come out of this challenging time period even stronger than we've ever been. The resiliency of our brand and our business model, the strength to fortitude of our global franchisees and operators has never been more evident in the 60-year history of our company. And most importantly, we're going to continue to lead with our values and the health and safety of our store team members, franchisees and customers will remain our top priority. And with that Jeff and I will be happy to take your questions.

Thanks. Good morning, guys. Jeff, certainly going to miss your positive energy and definitely going to miss your wittiness. So congratulations on a terrific career at Domino's. Ritch, I understand the tailwind from the pandemic on your business in the US. They make sense but what can you specifically do to take advantage of these tailwinds and retain and convert these new customers and really enable this current strength to pay dividends in the future in the form of future sales gains.

Sure, Brian. Thanks for the question. Yes, we are getting an incredible opportunity today to bring more customers into the brand. As you look at the delivery business in particular we've seen a significant increase in new customer acquisition over the course of the second quarter. And our task there is to take those new customer opportunities and convert them into the second purchase and the third and ultimately loyal customers going forward. We've been working hard on that and the second quarter was our best quarter for driving new active loyalty members. Best quarter we've had since Q1 of 2019 when we ran our Points for Pies promotion. So working hard to convert these customers into loyal customers such that we can continue to earn their business over time.

Thank you. Congratulations Jeff on a great run as well and your next chapter and the time ahead that you get to spend with your family, very envious. I was hoping to learn more about the Dash investment. Can you share with us the percentage of the ownership that it gives you now with Dash? And then also just to clarify your development comments. It sounds like Q2 was obviously a very tough environment for development both domestically and internationally. Is it correct to assume the environments gotten better that Q3 it would be logical to have an environment that could support more growth both domestically and internationally on a net basis? Thank you.

Hey, Matt. It's Jeff. I'll take the China part of that then I'll kick it over to Ritch for the development outlook. We're not disclosing the percentage ownership. It is a minority investment. We put in $40 million. We may be required and/or we have the option to put in another $40 million at the beginning of 2021. And listen; as Ritch said in his prepared remarks, this is just a very exciting growth market for us. Ritch and I have a lot of personal experience spending a lot of time there. And we know that if we want to hit our long-term aspirations as a brand, we have to have China be a thriving market for us. So we're viewing this very strategically in addition to being, what we think will be, a good financial investment. But more importantly, really a strategic investment where we can bring to bear all of our capabilities, our centers of excellence and really partner with that master in just a more intimate and close way to help accelerate the growth long term. So very excited about the investment. We think that it will be great for all of our stakeholders and with that I'll kick it over to Ritch to talk a little bit about development outlook.

Sure. So, Matt, I'll talk about that in kind of two parts. First on the US side of the business, certainly during the quarter we had challenges around the country with construction delays, with permitting delays et cetera driven by the pandemic. But still really pleased with the store growth that we were able to achieve during the quarter and as I look out into the future I expect us to see more and more opportunities to accelerate unit growth in the US. When you look at the increase in the business that we're seeing today and I think also as you look at some of the real estate opportunities that may present themselves that weren't available in the past, I think. We've got a strong opportunity to continue to accelerate that US store growth. On the International side, the situation is very different from market to market. In markets around the world where we did not have significant store closures or trading restrictions, the business has been very, very strong. And those markets have continued to press ahead with their development goals in the near term. And then we've got other markets where we've had significant numbers of temporary store closures where really the near-term focus of those master franchisees is to get those stores open again and re-establish those operations. So I expect on the international side for things to remain choppy here in the near term. But when I think about the medium to the long term, I still have a very high level of confidence around our growth opportunities that we've got outside the US.

Hi. Thanks very much. Any way to give us a little bit more incremental clarification around the new customers you've acquired. Just looking at the digital mix it's not quite clear where those new customers have been coming. So maybe if you could maybe disclose some of the loyalty numbers that would be helpful.

Nick, the new customer acquisition during the quarter was really concentrated around our delivery business which is probably not surprising to many of you as customers sought a contactless experience and an experience where they didn't have to leave their homes to get their food. So more so than in the carryout side of our business where there was a lot of caution out there among customers about going out into public, into places of business during the quarter. So that's really where the bulk of the customer acquisition came in. And then also we saw improvements in our customer retention across the delivery side of the business as well. So a strong quarter really on both fronts as it relates to our delivery business. The digital, in our digital percentage ran about 75% during the quarter popping up as much as 80% in any given week, which has given us yet another opportunity to grow that engagement with our customers and an opportunity to continue to bring them on and into our loyalty program. And as I mentioned earlier in my prepared remarks, Q2 was the best quarter we've seen in over a year in terms of adding active new members to our Piece of the Pie Reward loyalty program.

Great. Thank you and best of luck Jeff. Good luck with everything moving forward. You guys did briefly touch on it but can you compare consumer behavior in some of your largest international markets? I'm thinking about places like India and Mexico just as two examples to do what you're seeing in the US. Just trying to figure out how consumers are behaving there and those important international markets versus what we've seen in the US.

Yes. There are, Jeff, there are a lot of consistent patterns when you look around the world. The desire on the part of customers to have a contactless experience is certainly high and when our international master franchisees do their customer research, they see a lot of the same things that we see in the US, which is safety, has really risen very high in terms of customer needs. The other things that have always been there like value, consistent service, great products still there but safety has risen pretty high on the list. So generally what you do see then is more growth on the delivery side of the business and then in some of our international markets where we had more of a dine-in component and again we don't really do table service anywhere around the world. But we do have in a number of our emerging markets larger dining rooms and a higher percentage of customers choose to sit down and eat their food in our stores. That part of the business certainly saw a lot of pressure in a number of cases where those dining rooms were closed or where customers were just very cautious about going in and eating in a public place. And you take all those things into account and you end up with some, as I mentioned earlier in the prepared remarks, some fairly disparate impacts with some markets really seeing a tailwind as we have had in the US and then some other markets which you've seen a lot more pressure on their business in their comps.

Thanks. Good morning. Jeff, I would also like to offer my congratulations on a very successful career at Domino's. We're going to miss the interaction. Ritch you mentioned additional new products plan for later this year. Is this a change from your original plan for this year? And could you explain maybe why product innovation just seems to become a higher priority for the company.

Yes, Chris, to answer your first question, there hasn't been a change in our plans for this year. We had always intended to introduce several new products in 2020. I'm excited to share that we began rolling out our new wings last week. Additionally, we will have more product updates in the coming months. I discussed in my prepared remarks our approach to new product development. We aim to introduce products that can remain on our menu and provide significant incremental sales and profit to our franchisees. We’ve noticed the rapid growth in delivery over the past couple of years, and we are closely monitoring product categories that customers are increasingly adopting for delivery. Wings are definitely one of the fastest-growing categories. We recognized an opportunity to enhance our wings based on consumer feedback and to offer great value by introducing a ten-piece wing option at our $7.99 price point. Remember that we initially launched our large three-topping pizza at $7.99 and later expanded this across different crust types. Now, we see wings as another excellent opportunity to integrate into this mix-and-match platform. Moving forward, we will remain focused on product development, always with the goal of ensuring it leads to sustained sales and profit for our franchisees.

Thanks, and Jeff, congratulations on next steps. A great tenure at Domino's. You mentioned comps to stay in momentum through the end of 2Q. Are you seeing any differences regionally on how customers are engaging with the brand? And what changes do you see in customer behavior as markets reopen for dine-in? Any shift in carryout or delivery performance?

Yes. So, Lauren, we've not seen honestly a lot of discernible difference when we look across, regionally across the US in the second quarter. I will say that our rural and suburban locations have generally performed better than some of the denser more urban centers around the country. And as all of you know, our brand relative to some of the other restaurant brands is more tilted in terms of our sales coming from more of those rural and suburban locations. And then as it relates to how our business performed in the quarter relative to what was going on with sit-down restaurant reopening and things like that. I would tell you that it's still pretty early to draw any discernible conclusions there. As Jeff said, we didn't see any slowdown in momentum all the way through the end of the second quarter. And that was as a number of states and cities around the country were reopening dine-in. But even with that said, those that were reopening were only reopening at 50% and at most 75% capacity. And as we're all aware some of those things are actually being reversed as we speak and as we have another spike unfortunately in COVID-19 cases. So still a very dynamic and evolving marketplace out there for us.

Great. Thanks and congratulations, Jeff. You'll definitely be missed. I want to ask about the recent announcement regarding a partnership with Vonage. It seems like this might be connected to the voice ordering and delivery capabilities. Could you elaborate on what you're observing there and your expectations for rolling out the voice ordering features?

Hey, Pete. Appreciate the kind words and I'll take a shot at this one. You know that we continue and have for as long as Ritch and I've been here and before that to be very serious about investing in our technological capabilities going forward. I think everybody who follows Domino's knows that we are a believer, a big believer in voice technology generally. You can order obviously on your digital or your mobile phone right now using a voice assistant. And we've been working on phone Dom trying to use artificial intelligence to take a full order. We've made great strides in that. The partnership that you referenced again is just part of our overall strategy to continue to invest and get smarter in this area. But more than that starts to get into kind of future strategic stuff that we're quite frankly not going to disclose because of competitive reasons. But do know that one of the great things that we've been able to do and even during this pandemic is continue to invest with the long-term, the long-term brand in mind. We have not slowed down in our technological investments and in some ways, we've actually accelerated as you've seen us roll out GPS. You've seen us roll out car side delivery. So I think that this crisis has really shown us that we can move faster. We can with our great franchisees execute a little bit faster. And we're meeting the customers where they want to meet us on technology and voice is just part of that. So that would be the color I give you on that. But just know that we are and remain committed to all the technological investments that we talk to you all about, really encouraged by what we've been able to roll out over the last three or four months. And quite frankly gives us a lot of confidence that we'll be able to do some more that in the future.

Hi. Good morning and my congrats to Jeff as well. My question comes back to the strength you're seeing in the US business. And I was wondering Ritch or Jeff if you can help us understand how much of the increase that you saw during Q2 was related to the new customers you're acquiring versus potentially existing customers increasing their frequency or order sizes. So could you help us bucket those two things for us. Thanks.

Hey, David. It's Ritch. We're not going to break down those specific numbers for competitive reasons. But back to some of what I was describing earlier. If you take a look at the delivery business, we saw a significant uptick in new customer acquisition on the delivery side of the business and also very strong retention or repeat purchases from existing customers. If you look on the carryout side of the business, great repeat purchase from existing customers but not as strong on the acquisition side on the carryout business. And that's not surprising honestly when you think about the fact that during the quarter many consumers were very reluctant to go outside of the home and to places of business. Now as we watched those patterns evolve over the course of the quarter, we moved very aggressively to implement our Domino's car side delivery. And we're actually on TV advertising that today you've probably seen our ads. But that is really an effort to number one; create a terrific carryout experience for the customer where they never even have to get out of their car. It is contactless in that our store team members will bring the pizza out of the store and will put it in the customer's trunk or backseat wherever they want to put it. So in the near term it really is all about driving customer acquisition in frequency for the carryout business. But over the long term, it's a great way for us to compete against the drive-through that so many other QSRs have but that we have in a very limited number of our US stores. So just one example of an innovation there that we are focused on not only to address the demand dynamics of the near term. But also as we think about how we position the brand for success in the future.

Thank you very much. Jeff, wow and hats off. And my question, it's really two things. One is how does this pandemic change your view or modify if you maybe on the fortressing strategy, right? This is a moment where deliveries expanding and accelerating. Is it still right to do fortressing? I understand one of the primary reasons purchasing originally was that carry out business. Are you as enthusiastic about that business as you were prior? And Ritch, I'd also be very interested in your comments and thoughts on what's happening in the third-party aggregator business. There have been a couple of acquisitions and transformations in those businesses. What do you think that means for Domino's as that industry gets consolidated, but you also get some new competitors in the US.

Thanks John. First on the fortress thing. I am if anything more enthusiastic about fortressing given what we've seen during the pandemic and the increased sales and momentum that we've had around our delivery business. And carryout has been growing in a very strong way for quite some time also. So when I take a look at it I just see more opportunity to get more stores on the map from a demand standpoint. Also when we think about the real estate environment out there, I also think that we are going to have in the near and medium term a fairly unprecedented opportunity in terms of the availability and affordability of real estate out there. As an unfortunate reality of the pandemic is that there will be a number of retail stores and restaurants that will close, quite a few of which will be in a similar footprint environment to what we look for. And then I think also we may see a more favorable market in terms of rents that we can go out there and get with landlords. So I'm as optimistic as and even more so than ever around fortressing. On your second question around the third-party aggregator market, certainly it has been a very interesting quarter as it relates to news out there about possible consolidation. I've been talking for a long time about the fact that the only way that business gets to profitability is through some form of consolidation over time. Given what has happened recently with a couple of deals that have been announced, frankly, I don't see that change in the competitive dynamic a whole lot. Certainly for the near term I expect those aggregators to still remain very promotional in terms of how they're going out to acquire customers. And I expect them to remain pretty aggressive in particular with how they go out and cut deals with the largest QSRs. So when we take a look at it from Domino's perspective, we expect it to continue to be a highly competitive environment that we will participate in and we expect it to continue to be a pretty tough environment for the third-party aggregators in terms of their ability to drive profitable transactions.

Thanks for the question. And, Jeff, congratulations on a great run and great and good luck. Just wondering if you guys could share any thoughts on how important the enhanced unemployment checks have been on the business. I guess more importantly how you're thinking about any kind of strategy tweaks as and if they roll off. Does this change your strategy with respect to marketing or promotional activity? Anything you can comment there on a high level. Thank you.

Sure. Dennis, I think certainly the initial stimulus checks and additional unemployment I think no doubt have enabled a lot of consumers to continue to eat, to eat out, to order food delivery et cetera. How much of the business is driven by that, we honestly don't know. I can tell you that as we look forward, there's a lot of uncertainties obviously around what that stimulus might look like post July. But we're remaining very focused on value. Frankly, as we always have been because we're going to be in a recession for some period of time here where consumers' pocketbooks are going to be under pressure. And so we've got to have great value with our national offers, great value on our menus and we got to have great value with respect to what we charge customers to deliver that food. And I feel very good about where Domino's is positioned on those fronts.

Thanks. Good morning and, Jeff, congratulations on a great career at Domino's and all the best in next steps. So as a follow-up to John's question on fortressing, given your commentary around real estate opportunities and together with presumably another strong franchisee cash flow year, does the current environment change your thinking at all about the long-term store development opportunity in the US?

Chris, I think if anything it increases potentially the opportunity over time. Obviously, we don't know exactly how long we're going to be in this COVID-19 pandemic. We don't know when we're going to have a vaccine or effective therapeutics. But significant disruptions like this do tend to accelerate changes in market share and create opportunity. And as we take a look at this, we are looking for opportunities to move even more aggressively to get stores open. And so if anything, I see an opportunity that could only grow over time.

Great. Thank you. So, Jeff, congratulations on an impressive tenure and track record at Domino's. Best wishes on your next step. I have a few questions here. So the first is can you help us understand the cadence in the quarter on both the carryout and the delivery business in the US? Given us a split historically and just kind of wondering a few things how was it tracking now? The commentary you gave suggested that delivery was the strongest business and intuitively that makes a lot of sense, but as the economy started to reopen in the back half of the quarter, are you seeing improvements in carryout and also on the delivery side? Did that improvement kind of continue and accelerate as the economy reopened or have you seen some moderation? And I have a follow-up question.

So, Katy, I think we heard you a little bit on that. I'll take a shot at it. What I would tell you is this: customer behavior during the pandemic is really aligning with what we have always offered—great carryout, excellent delivery, a smooth technological experience, and great value. In many ways, this pandemic has just accelerated progress we thought would take longer. Regarding delivery versus carryout, when restrictions are lifted for carryout, we see an increase in carryout sales while still maintaining a strong delivery business. It's less about specific regulations and more about how customers access Domino's. When they have unrestricted access, we have the opportunity to build lasting relationships and drive sales over time. We observed this during Q2, with no noticeable drop-off in demand by the end of the quarter. We are confident that customers will continue to value both delivery and carryout experiences, depending on local and state regulations. We feel that this situation is just us meeting customers where they already were, and the pandemic has accelerated that trend. We've worked to meet customer needs with faster and more efficient innovations. Kudos to our 800 franchise partners in the United States for their outstanding work in updating operational procedures and maintaining high service levels during this pandemic. Overall, we believe we are in the right businesses—carryout and delivery are essential whether there's a pandemic or not. With that, I'll pause and allow you a quick follow-up if you speak up.

Great. Thank you. So on the point you kind of mentioned that. That color by the way is very helpful. You talked about higher tickets being a helpful contributor to the comp. Can you help us understand the extent to which that was helpful? And even if you would dive into delivery versus carryout, do you see the ability to sustain the ticket growth in the US in the coming quarters, maybe that's many innovation; maybe it's bundling or should we factor that in dying down as the recovery plays out?

So, Katy. It's Ritch. The ticket dynamics are a bit different between the two businesses. The growth in delivery is largely driven by an increase in order count along with ticket size, with order count seeing significant growth. In contrast, the growth for the carryout business this quarter is primarily driven by ticket size. In both scenarios, customers are ordering more items, resulting in larger basket sizes. Interestingly, we've noticed that customers are adding more food to their orders to have leftovers for the next day, indicating that they are planning not only for their current meal but also for the following day. We're uncertain about how long this trend will continue post-COVID-19. We are monitoring the situation closely, but given the current state of the pandemic, it's challenging to predict.

Just one question. Congratulations, Jeff, I can't wait to hear what's next. Regarding the comment on Dash, it’s clear that you are investing from a position of strength and accelerating unit development from that same strength. Do you think you might want to hold a majority ownership stake at some point? Also, since this is the first time you’ve directly invested in an international franchisee, are there opportunities for you to provide capital or cash flow assistance to other large franchisees outside of China that could lead to significant equity stakes? Clearly, some operators could benefit from cash flow support for working capital.

Hey, John. It's Ritch. First on Dash, we're pleased to be a minority partner in that business. There is a strong group of partners who own the remaining equity and an excellent management team in place to lead the operation. We see this as a valuable opportunity for DPZ, as well as a chance to collaborate strategically with the Board and management team as we grow the business. Looking at opportunities globally, we've never ruled out investing in international businesses. Dash presented a great chance for us to do so. If other opportunities arise in the future, we may consider them, but the standards are quite high. You’ve only seen us make this type of investment once recently, so don’t expect us to pursue this on a large scale.

Yes. Thanks for the question. And, Jeff, congrats on retirement. I'm definitely going to miss our interactions. Ritch, I had a question for you just there seems to be a lot that's changing with COVID and I'm curious what you think are the biggest changes to the Domino's strategy post COVID versus pre-COVID. I don't know if that's a greater focus on unit growth or focus on the supply chain or focus on value. If you could just kind of comment on what you think is the biggest change and how Domino's is approaching kind of the strategy to grow that would be helpful? Thanks.

Sure, Greg. I believe COVID has accelerated many existing trends in our industry. Digital adoption and the shift from on-premise to off-premise through delivery and carryout have significantly advanced, possibly by a few years. Going forward, we need to focus on strengthening what we're already doing, like enhancing our proximity and convenience for customers. Our investment in digital initiatives hasn't slowed down; we are committed to improving the ordering experience from placing an order to payment and food reception, whether for delivery or carryout. One notable change during COVID has been the increased focus on food safety and contactless services, which we've heavily invested in, as I expect this will remain important to customers for a long time. Additionally, many customers who previously hadn’t ordered delivery are now doing so, making our ability to provide a diverse menu even more crucial in the future. This is why we’ve updated our wings product line, as that category is flourishing during COVID. We're also exploring further menu innovations to cater to the growing demand for delivery and variety. So, Greg, our strategy involves reinforcing our current approaches while also placing greater emphasis on new initiatives to maintain competitiveness moving forward.

Great. Thanks very much. And, Jeff, congratulations. Hard to imagine any future endeavors as much fun or successful as your years at Domino's. My primary question is just on the US delivery business. Ritch, just wondering you commented on the third-party aggregators and perhaps a little bit of consolidation going on here. I'm just wondering whether your thoughts have changed at all in terms of perhaps using an aggregator to generate some incremental sales on different platforms as we've seen their popularity increase, even if you continue to be the one doing the delivery. And just to clarify did you make any mention of, I know you did last quarter you talk about weekday, weekend, lunch, dinner for any third quarter, quarter-to-date momentum, any color would be great. Thank you.

Sure. Jeff, first regarding third parties, my perspective has only strengthened that we don't need to use those platforms. I can't imagine we would have been able to respond as quickly to our customers' needs, as Jeff described, without having full control over the digital experience and the contactless delivery of food. We've experienced strong demand growth without asking our franchisees to pay high fees to a third party. Regarding your second question about meal periods, since Jeff and I last spoke, we mentioned that lunch was growing rapidly while dinner was softer; we've now seen more balance in growth for both lunch and dinner. However, the evening period is still relatively weak in terms of growth compared to what we're seeing in other meal periods, but overall we're continuing to see strong growth at lunch and dinner.

Great. Thanks for taking the call. And, Jeff, best wishes to you. When you think about the franchisees right now obviously they're all, as you said, the profitability is relatively quite strong. What are they asking for right now? What are they thinking you need to do from an investment standpoint aside from just the new product and as you implement more of this technology, is there a need to reassess the digital fee? Thank you.

Yes. Brett, franchisee profitability, as we previously mentioned, was strongest in 2019. We were fortunate to enter the pandemic in a solid position, and this has continued throughout the pandemic. Some franchisees are experiencing higher profits than others based on their location across the country, but the sales growth has remained robust. In response to what franchisees are seeking, it was primarily about assistance in adjusting to the new environment during the second quarter. We have increased our communication with franchisees more than ever in our brand's history, collaborating closely to establish new operating procedures across the business. We have also worked together to implement new technology solutions to facilitate contactless experiences, which franchisees have strongly desired. Moving forward, we will keep investing in technology throughout our business, from the devices in customers' hands when ordering to how we operate within our stores. This will remain a significant focus for us, as our franchisees appreciate ongoing support in running efficient businesses and enhancing their profitability. Yes. I can tell you we're awfully glad that we had already opened our centers in New Jersey and that we got the center in South Carolina opened this year to help us keep up with all of this unprecedented demand. As I mentioned earlier, we're going to open in Katy, Texas later this year. We're going to add some thin crust capacity to our system. We are continuing to look at and our supply chain network and as we've talked about in the past you should expect to see us continue to add centers over time, which is a great problem or opportunity depending on how you want to describe it. We're going to have to continue to add more capacity to support our franchisees around the country.

Great and Jeff, echo everybody else congratulations. I hope you have fun in retirement or whatever it is you decide to do next. I am curious I know you guys aren't necessarily tied directly to any specific sports but we are coming upon a season where pizza consumption seems to be a bit higher fall and winter than the rest of year. And the sports schedule seems to be a bit up in the air. So can you discuss how you plan on attacking this during a period where viewing particularly on the weekends might be gone or significantly lower than it's been in years past?

Yes. Jon, I mean it is so hard to tell is what's going to happen with respect to sports. For us, it doesn't matter if people are sitting in the stands at all, if it's on TV, people will gather and order pizza. So from where we are today, here in the summer I guess there's only upside as we look through the back half of the year as sports come on to TV. It is remarkable what we find ourselves watching on TV now as we crave live action sports. But I wish I knew Jon. I really wish I knew and hopefully we'll get back to more of a state of normal around some of those sports as we work through the fall and winter. Yes. Jon, what I would say is that the stronger you were in digital and the stronger you were in off-prem the better off you're doing. If you go down the scale on both of those two dimensions, I think whether its chains or independence there's more of a struggle. If you are weak in digital and weak in off-prem.

Great. Thank you. And just echo everyone else, Jeff, it's been a pleasure working with you and wish you the best of luck to your next endeavor. And hopefully some time to enjoy the time off. I want to ask question are you able to disclose how many active U.S loyalty members you had at the end of the quarter? And as you look globally, are there penetration levels that you've seen in some international markets on a per capita basis with loyalty program that suggests there is more room for growth in this program and especially opportunities obviously as well from conversion to make these users more active.

Hey, Andrew. We're not going to disclose the number of active members today. We typically provide that information about once a year, and we will continue to follow that practice. Regarding our market penetration, we are the number one pizza player in about half of the roughly 90 international markets where we operate. In several markets, our share is significantly higher than what we hold in the U.S. business. This reinforces our belief that there is a substantial opportunity to grow our business with customers in the U.S. Currently, we serve about one out of every five QSR pizzas consumed, and our market share is considerably better in many international markets, which gives us a lot of confidence. Well, listen, thanks everybody. It certainly has been an eventful Q2 and we really appreciate all of you for joining us this morning. I'll offer one more time my thanks to Jeff Lawrence. Jeff, thank you for everything you've done for the business. And I look forward to speaking with all of you in October when we get together once again to discuss our third quarter 2020 results.