Dominos Pizza Inc (DPZ) — Q1 2021 Earnings Call Transcript

Appreciate it, Samantha, and good morning, everyone. Thank you for joining us for our conversation today regarding the results of our first quarter 2021. Today's call will feature commentary from Chief Executive Officer, Ritch Allison; and Chief Financial Officer, Stu Levy. As this call is primarily for our investor audience, I ask all members of the media and others to be in a listen-only mode. I want to remind everyone that the forward-looking statements in this morning's earnings release and 10-Q also apply to our comments about today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8-K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call. Our request to our coverage analysts. We want to do our best this morning to accommodate as many of you as time permits. So we encourage you to ask only one-part question on this call, if you would, please. Today's conference call is being webcast and is also being recorded for replay via our website. With that, I'd like to turn the call over to our Chief Financial Officer, Stu Levy.

Thanks, Chris. Good morning, everyone. We're excited to share our strong first quarter results with you today. Overall, Domino's team members and franchisees around the world generated impressive operating results, leading to a diluted EPS of $3 for the first quarter. Global retail sales grew 16.7% in Q1 as compared to Q1 2020. As a reminder, global retail sales growth includes both comp growth and unit growth, which I'll break down for you in a moment. When excluding the positive impact of foreign currency, global retail sales grew 14%. Breaking down that global retail sales growth, our US retail sales grew 15.3% and our international retail sales grew 18%. When excluding the positive impact of foreign currency, International retail sales grew 12.8%. We continue to see positive momentum in both our U.S. and international businesses in Q1, leading to both strong same-store sales performance and net unit growth. Turning to comps. During Q1, we continued to lead the broader restaurant industry with 40 straight quarters of positive U.S. comparable sales and 109 consecutive quarters of positive international comps. Same-store sales in the U.S. grew 13.4% in the quarter, lapping a prior year increase of 1.6%. Same-store sales for our international business grew 11.8%, rolling over a prior year increase of 1.5%. Breaking down the US comp a bit further. Our franchise business was up 13.9% in the quarter, while our company-owned stores were up 6.3%. We observed a larger spread than we've historically seen between the top line performance of our franchise stores and our company-owned stores, which we believe was primarily a result of the heavily urban and higher income footprint of our company-owned stores relative to a more diverse mix across our franchise base. The corporate store comp was also disproportionately impacted by store splits resulting from our fortressing efforts as we opened more new corporate stores as a percent of the total corporate store base than we did franchise stores in 2020. The US comp this quarter included a healthy mix of both ticket and order growth. The ticket growth was driven by both an increase in items per order and a higher delivery mix, which also includes a transparent delivery fee. The 11.8% international comp was driven by ticket growth. Similar to our US business, that ticket growth was driven by a higher delivery mix and an increase in items per order. Shifting to unit count. We and our franchisees added 36 net stores in the US during the first quarter, consisting of 37 store openings and the closure of one of our corporate stores. Our international business added 139 net stores comprised of 160 store openings and 21 closures. We're very pleased with our net unit growth during Q1, which was an increase over the prior year quarter. Turning to revenues and operating margins. Total revenues for the first quarter were approximately $984 million, and were up approximately $111 million or 12.7% over the prior year quarter. The increase was driven by higher global retail sales, which generated higher revenues across all areas of our business. Changes in international royalty revenues by $2.1 million in Q1 2021 as compared to prior year. Our consolidated operating margin as a percent of revenue increased to 39.6% in Q1 2021 from 39% in the prior year due primarily to higher revenues from our US franchise business. Company-owned store margin as a percent of revenues increased as a result of strong sales leverage. This was also up sequentially from 21.9% in Q4 2020, driven by lower labor costs as a percent of revenue in Q1 2021. Supply chain operating margin as a percent of revenues decreased to 10.5% from 11.5% in the prior year quarter. As a reminder, in 2020, we opened two new supply chain centers in South Carolina and Texas, respectively, as well as a new pressed product line in New Jersey, which increased our overall fixed operating costs as a percent of revenue. G&A expenses increased approximately $2.8 million in Q1 as compared to Q1 2020, resulting from a combination of higher advertising expenses and labor costs, partially offset by travel. Net interest expense increased approximately $0.9 million in the quarter, primarily the result of lower interest income. As previously disclosed, in Q1 2021, we invested an additional $40 million in Dash Brands, our master franchisee in China following their achievement of previously established performance conditions. Accordingly, we remeasured the original $40 million investment we made in Q2 of last year due to the observable change in price from the valuation of the additional investment. This $2.5 million gain was recorded in other income in the first quarter of 2021. Our effective tax rate was 21.3% for the quarter as compared to a negative 3.7% in Q1 2020. The effective tax rate in Q1 2021 includes a 0.6 percentage point positive impact from tax benefits on equity-based compensation as compared to a 26 percentage point positive impact in Q1 2020. This decrease was due to significantly fewer stock option exercises in Q1 of this year. And we expect to see continued volatility in our effective tax rate related to these equity-based compensation tax benefits. Combining all of these elements, our first quarter net income was down $3.8 million or 3.2% versus Q1 2020. On a pretax basis, income before provision for income taxes was up $32.3 million or 27.6%. Our diluted EPS in Q1 was $3 versus $3.07 in the prior year, a decrease of 2.3%. Breaking down that $0.07 decrease. Most notably, our improved operating results benefited us by $0.61. The gain on the Dash Brands investment benefited us by $0.05. Net interest expense negatively impacted us by $0.02. A lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.03. And finally, our higher effective tax rate resulting from lower tax benefits on equity-based compensation, as I mentioned previously, negatively impacted us by $0.74. Shifting to cash. Our economic model continued to generate significant cash flow throughout the quarter. During Q1, we generated net cash provided by operating activities of approximately $153 million. After deducting for CapEx, we generated free cash flow of approximately $136 million. Regarding our capital expenditures, We spent approximately $17 million on CapEx in Q1, primarily on our technology initiatives. As previously disclosed, during Q1, we also repurchased and retired approximately 66,000 shares for $25 million. As a reminder, in February, our Board approved a new $1 billion authorization for future share repurchases. We also paid a $0.94 quarterly dividend on March 30. Subsequent to the end of the quarter, our Board of Directors declared a quarterly dividend of $0.94 per share to be paid on June 30. As it relates to our capital structure, on April 16, we refinanced our debt to keep pace with our growing business. We're very pleased with our gross issuance of $1.85 billion which includes $850 million of 7.5-year 2.662% fixed rate notes and $1 billion of 10-year 3.151% fixed rate notes. We used a portion of the proceeds to retire our 2017 floating rate notes in our 2017 5-year fixed rate notes to prefund certain interest payable and to pay transaction fees and expenses. We expect to use the remaining proceeds for general corporate purposes, which may include distributions to holders of our common stock, other equivalent payments and/or stock repurchases. This recapitalization will reduce our weighted average borrowing rate from 3.9% as of the end of the first quarter to approximately 3.7%, and it will return our leverage to approximately 6x EBITDA, consistent with our leverage model following previous recapitalizations. Additional information on this transaction is included in our Form 10-Q, which was filed this morning. Since the onset of the pandemic in previous earnings calls, we've provided updates on the impact of COVID-19-related expenses, including safety and cleaning equipment, enhanced sick pay and other compensation for our team members, and support for our franchisees and our communities. The estimated impact of these items in the first quarter of 2021 was not material. In closing, our business continued its strong performance during the first quarter. And while we continue to closely monitor all aspects of our operations in these ever-changing times, we're confident in the strength and resilience of the Domino's brand and of the Domino's franchisees, their team members and our corporate teams worldwide. Our results would not be possible without their tireless efforts each and every day, and we sincerely appreciate them. Thank you, again, for joining the call today, and I'll turn it over to Ritch.

Thank you, Stu, and thanks to all of you for joining us this morning. Overall, I am very pleased with our results this quarter and our strong start to 2021. We are now more than one year into the COVID pandemic, the most challenging operating environment we've ever experienced as a brand. I continue to be extremely proud of our global franchisees and their extraordinary efforts around product, service, image and day-to-day execution. We remain focused on providing outstanding food through safe and reliable delivery and carryout experiences. And as a brand, we are also proud to continue our position as an industry leader on value at a time when our customers need it the most. Today, I'll keep my comments rather brief, as I highlight the first quarter results for our US and our international businesses. And then after that, Stu and I will be happy to take some of your questions. Let's start with the US business. Our US business performed extremely well during the quarter, highlighted by 15.3% retail sales growth and a 13.4% comp. This marked our 40th consecutive quarter of positive US same-store sales growth. We continue to see strong growth across our business in the first quarter, and we did not witness any material differences between those markets that have largely reopened versus those that have remained more restricted. We certainly saw some sales benefits from the federal government stimulus at the beginning and at the end of Q1, which were partially offset by the negative impact of the significant winter storms in February that impacted such a large portion of the country. Due to the positive sales impacts from the stimulus, we elected not to run any of our aggressive boost week promotions during the quarter, but instead, we remain focused on providing great service and offering great value to our customers every day. Now like many of you, we are also watching the 2-year stack on US same-store sales. At 15% for the first quarter, we saw a slight sequential improvement of the 2-year stack when compared to the fourth quarter of 2020. Given the COVID overlaps, we will continue to look at the business through both the 1- and 2-year lenses as we report to you throughout 2021. Now beyond the comps, when you look at the absolute dollars, our first quarter same-store average weekly unit sales in the US exceeded $26,000. I am also quite pleased with our performance in the first quarter on the other critical component of our retail sales growth. That's new store openings. Our addition of 36 net stores was a nice improvement over Q1 of 2020, and we anticipate a strong pipeline of future openings. I want to highlight that we had only one corporate store closure in the US during Q1, and we had zero US franchise store closures, an impressive testament to the continued health of our US system. On many occasions, you've heard me say that net unit growth and by extension store closures are one of the most important ways to measure a brand's health within our industry. A single store closure in the quarter on a base of over 6,000 units demonstrates the elite economic proposition that we offer to our franchisees. And on that note, I'm thrilled to report yet another record-setting year of franchisee profitability. With our final 2020 estimated average EBITDA number for US franchise stores coming in at just over $177,000, the highest in our history. While this result was certainly aided by the COVID demand tailwind, it clearly demonstrates not only the power of the brand, but also the incredible work of our US franchisees and operators and their relentless efforts throughout an incredibly busy 2020. Our fortressing strategy continues to build best practice case studies showcasing franchisee enterprise growth and ROI, which is a big part of the momentum and excitement behind the strategy. But equally as important, it sets us up extremely well to compete in 2021 and beyond as we continue to drive lower relative costs, better service, higher runs per hour and therefore, better economics for drivers, along with meaningful incremental carryout within our stores in fortress territories. While carryout order count remained pressured in Q1 as it was throughout the last year, we continue to grow awareness of Domino's Carside Delivery. This has created a new option to serve our customers effectively during COVID and will remain an important part of our strategy as we continue to evolve the carryout experience. Not only to enhance the loyalty of our current carryout customers but also to reach a new, different and largely untapped drive-thru oriented customer going forward. On the advertising front, I'm excited about the national TV campaign we launched this week highlighting our very exciting partnership with Neuro. We are delivering a true autonomous pizza delivery experience to select customers in Houston today, demonstrating our forward-thinking approach to innovation as we build and evolve the brand for the future. We also brought back our old nemesis, The Noid, in this ad campaign, and it is already generating some incredible buzz around the Domino's brand. Now the final thing I'd like to acknowledge is we close out the discussion on our Q1 results in the US is the very difficult staffing environment that we are in today. The combination of COVID, strong sales, the broader economy reopening and the high level of government stimulus is creating one of the most difficult staffing environments that we've seen in a long time. This puts pressure on our operators to meet demand while continuing to deliver great service to their customers. I thank our US franchisees and our corporate store operators for the work they are doing to attract and retain great team members in a very tight labor market. As we close out our discussion on the US business, I would simply highlight that the Domino's brand is strong as it has ever been, and I remain confident in our ability to drive long-term growth. Let's move on now to the International business. It was an outstanding quarter of performance for our international business. Our 12.8% retail sales growth was supported by a very strong 11.8% comp, continuing the momentum we saw towards the end of last year. Q1 also marked our 109th consecutive quarter of positive same-store sales in international, a tremendous accomplishment by our international franchise partners. And in fact, the Q1 comp was the strongest result we've seen in more than a decade in that business. As I discussed earlier with our US business, we are also watching the 2-year comp stacks for international and will continue to do so throughout 2021. Q1 represented a 13.3% 2-year stack, which was a 430 basis point improvement versus the fourth quarter of 2020. We also continue to build momentum on store growth in our international business. Our 139 net stores in Q1 was a 100-store improvement versus the first quarter of 2020. We expect that COVID will continue to have a significant impact on many of our international markets for some time to come and will bring ongoing challenges to new store openings. But this acceleration in growth speaks to our outstanding unit-level economics and the perseverance and commitment of our international master franchisees. We continue to have temporary store closures around the world, but those have come down dramatically over the last few quarters, and we're below 100 at the end of the first quarter. Now I'd like to highlight a few markets that drove terrific growth during the quarter. India, China and Japan, once again, led our system in net unit growth. And I'd like to highlight another market, Guatemala that also delivered terrific store growth. China, Japan, Turkey, Colombia, Germany and France all drove impressive retail sales growth during the quarter. So once again, I am very proud of our master franchisees and their operators for a great start to 2021. They are the best in the business, and that's why I continue to be bullish about our international retail sales growth opportunity over the long-term. So in closing, I'm very pleased with our quarter one results. Our incredible base of franchisees and operators, combined with outstanding unit-level economics, place us in an enviable position of strength within our industry. Q1 reinforced our position as the global leader in QSR pizza, but there is still so much opportunity ahead of us to drive global retail sales growth and to capture additional meaningful share within the category. As we look ahead to the rest of 2021 and beyond, we will, as always, stay focused on winning the long game and we remain confident in our 2- to 3-year outlook of 6% to 8% annual net store growth and 6% to 10% annual global retail sales growth. So thank you, once again, for joining us today. And at this time, Stu and I will now be happy to take your questions.

Thank you. Good morning. Good morning, Ritch, good morning, Stu. Obviously, the US business continues to be a phenomenal engine and the long-term outlook there is pretty clear. But the topical question that I must ask is related to the US business as it begins to lap the meaningful upswing in strength from last year that really began around this time. As we kind of sit here and we analyze your two-year trends in the first quarter, it does suggest actually an improving likelihood of successfully lapping that strength, at least with maybe the ability to perhaps hold on to those gains more than we all thought originally. Can I get your reaction to that thought? And what specific weapons do you have in your arsenal that you plan to deploy over the rest of the year to fight this lap? Thanks.

Hi, Brian, and thanks for the question. And you're absolutely right. We've got some pretty strong laps ahead of us from the second and the third quarters of last year. But what we're really focused on are continuing to make the investments to drive long-term growth in the business. And as I look out across the rest of the year, we are really in an enviable position. We've got a fantastic advertising war chest. We have not deployed some of the tools this year so far that we've used in the past around our boost weeks to drive incremental customer acquisitions. So we have those in our arsenal. And I think very importantly, the carryout business, which on a relative basis, when you look at order growth during 2020 was weak, relative to its historical run rate. And so we've got an opportunity to continue to drive that carryout business, along with some day and day parts during the week as well. As it relates to last year weekends and late night were relatively weak versus weekdays and the earlier in the dayparts from last year. So as customer patterns continue to change, as the economy continues to open up, we feel confident that we've got a set of tools to allow us to continue to grow our business.

Thank you.

Great. Thanks. Ritch, I think you mentioned that the store level EBITDA was about $177,000 per store, which I think that number was almost $20,000 higher than the original estimate that you guys provided back in January. Could you just give us a little bit of sense on maybe what the difference is between the original asset and the new figure that you guys actually reported this morning?

Sure, Pete. When we give the original estimate, which comes back in early January is based on a pretty limited sample of the franchisee P&Ls that come in. And over the course of the first quarter, as those begin to roll in, we collect them and rarely does it move this much from the original estimate to the final number, but just the way the sample played out over time, the result ended up coming in quite a bit stronger. And when I think about where we sit within the industry today, that $177,000 in store-level EBITDA really puts our system in an incredible position of strength. And when you see it, you're not surprised that we only had one store that closed in the US throughout the entire quarter.

Very impressive. Thank you.

Great. Thank you very much. I just had a quick question, I guess, about some of the commentary about carryout versus delivery in the US. I guess in terms of the strength of the business, you said you're not really seeing any variability across US markets, but I would have associated sort of softer carryout with mobility restrictions. I'm trying to kind of reconcile those to that overall, I would think carryout might be affected by restrictions but those vary across markets. And maybe if you can just talk about the share within the carryout versus with delivery within pizza; that category, so I can sort of understand what might be going out on between those 2 businesses. Thank you.

Sure. We observed continued pressure on carryout order counts overall in the US. However, when we analyzed the situation on a state-by-state basis, we found that there were no significant differences in our business across the country. We believe there remains substantial potential for carryout to grow and recover as mobility improves nationwide. Additionally, we haven't been as proactive in promoting our carryout services as we have been in the past. This presents further opportunities for us as we move through the rest of the year.

Could you discuss the international business and the trends over the past two years? How much of the change can be attributed to the increased international lockdowns? Do you have any insights on whether the underlying business trends are generally strong, or if it’s mainly the lockdown markets that are benefitting? Additionally, could you highlight some of the key factors that contributed to the significant growth in the international markets?

Sure. John, thanks for the question. The performance is still quite mixed across the international markets, as the dynamics related to COVID vary significantly around the world. However, as we were able to reopen our markets throughout 2020, you may recall that this time last year, we had over 2,000 units temporarily closed. Since reopening those units and resuming new development and marketing efforts in the international businesses, we have observed a strong resurgence in sales in many markets where we operate. Moving forward into 2021, we anticipate variability from market to market because some regions will compare against very weak retail sales from last year, while others will be comparing against strong numbers from the previous year.

Thank you.

Thanks for taking the question. Actually a follow-up on that prior question on international. Several years ago, Ritch when you took over, you came in from the international business. And I wanted to get a sense from you if you think that there are any sort of structural changes that are happening in some of these key international markets, be it maybe Japan or Australia or India for that matter has talked about unit opens there that we should be thinking about the level of comps and unit growth in those markets remaining at a higher level over the kind of the medium term?

Yes. As I look across the globe, Jared, we still see so much opportunity for continued growth and share gain in that international business. So, while it's grown rapidly, certainly over the last decade, you're still looking at an international business in total that grows in that kind of low to mid-single-digits. And then you've got much share gain opportunity as well. Our share in the international business in total is significantly less than where we are in the US today. So, as I look at it now, I still see a significant amount of opportunity to continue to grow the business. We're hitting scale in some of the key markets around the world. If you look at the places where we've been really strong, recently, like Japan, like India, we're starting to get there in China. We've started to hit some really nice scale points in some of those markets as well that give us the wherewithal and the ability to invest at a high level in the business going forward. And then finally, I would just highlight, once again, as we talk about all the time, the growth really comes back to the unit level economics in the business. And while we still got some challenges in a few places around the globe, by and large, the unit level economics remain really strong across the world and with COVID loosening up certainly in some places, not as much in others. As it loosens up, it really gives those franchisees the opportunity to release some of that pent-up demand for unit level investment and growth.

Thanks for the color.

Hey, good morning. I was hoping you could share some color or maybe some metrics on the frequency and retention of newer lapse customers that you gained during the pandemic here in the US now that the environment is starting to normalize with the vaccine rollouts, et cetera. Are you seeing higher retention and the CRM initiatives driving frequency the way you would have expected? Thanks.

Yes, as we mentioned back in February when we released the fourth quarter results, the dynamics in the first quarter have remained consistent in that we are seeing more growth from retained customers rather than newly acquired ones. Additionally, we have scaled back some of the aggressive promotions that typically drive customer acquisition. I am happy to report that our active loyalty membership continues to grow, and we are also observing strong and steady order frequency among those loyalty customers. This indicates strong engagement and sales from our existing customers, and I believe we have opportunities to increase new customer acquisition as we progress through the year.

Yes. I mean when you look at our loyalty numbers over the course of the last year and having not run some of those boost weeks and the things that we've traditionally done to attract new customers. Obviously, pleased that the loyalty numbers continue to grow. But when you look at that relative to our sales, that obviously had to come from more repeat business and greater frequency from our core loyalty base.

Thanks. Good morning guys. Ritch, it was my understanding that the carryout pizza segment overall grew at a pretty healthy pace last year. I’m just curious why you think Domino's is struggling to grow that business, especially in light of the systems marketing efforts, not just recently, but over the past few years and just the fortressing strategy. Curious if you feel like there needs to be any changes in the approach to going after that business?

Thank you for your question, Chris. We are still experiencing sales growth in the carryout segment. However, we faced pressure on order counts in this segment during the first quarter and last year. We continue to capture growth, primarily through higher ticket sales as customers add more items to their orders. As I mentioned earlier, we haven't been very aggressive with our marketing for carryout, mainly due to the challenges of operating during the COVID environment. However, we see significant opportunities this year to ramp up our efforts. Our new service method, Domino's Carside Delivery, is crucial for this strategy. We introduced it to address customer safety concerns about picking up food during COVID, but long-term, it will be an essential tool in competing for carryout business against other quick-service restaurants with drive-thru options.

The other thing just to keep in mind, and this is a very COVID unique thing, but all of that demand that was dine-in for a lot of restaurants, their choice was to figure out how to do carryout or delivery. So you've got players in carryout, players in delivery that we're all still wondering whether they stay there permanently, whether they shift back into dine-in, how they split their dining rooms, etc. But it essentially changes that market in terms of the group of players playing in there as well, which is one of the reasons you see that increase in the carryout market.

It’s helpful. Thanks.

Hi, thank you. The question is on U.S. labor. And I'd like to ask it, one in terms of supply chain and your ability to have people that work in the commissaries themselves and also distribution. And if you have a pricing mechanism with the franchisees to cover those costs, I think you're doing commodities but mention whether you do on labor. And then secondly, Ritch, something that we've talked about in calls before is things like service levels to the U.S. consumer. Can you talk about the current labor market is changing some of the service levels, in other words, lengthening delivery times that you're seeing the pendulum swing in an unfavorable direction and if there's anything you can do to continue to improve the service times that I think we used to discuss on a pre-COVID basis. Thanks.

Yes, thanks for the question. Let me start with the supply chain. We don't specifically price our franchisees based on a breakdown of costs like labor and food. As I mentioned earlier, while we aim to increase our overall profit in the supply chain, we are not doing so at the cost of our franchisees. Instead, we are looking for growth together with our franchisees. We are absorbing some of the labor cost increases instead of passing them on immediately, just like we do with food cost inflation. At the store level, everyone is currently facing challenges with labor and hiring, as you can see in the news. We believe that service is crucial for enhancing customer engagement and loyalty. One structural approach we take to maintain service quality is fortressing, which helps us connect better with our customers and serve them more effectively. Additionally, we are investing in technology at the front end and working on back-end improvements to boost labor efficiency in stores. We aim to optimize the labor force so that they can focus on various tasks, whether through tools related to the make line or other initiatives to increase throughput and reduce hourly labor needs. This issue is very much on everyone's mind right now, but we don't think sacrificing service is the right solution.

Definitely not. As Stu described, a significant portion of our efforts regarding technology and the store operating model is aimed at keeping drivers engaged and moving continuously, with the long-term objective of ensuring they remain in their cars and are consistently delivering pizzas, rather than engaging in other tasks that were necessary in the previous operating environment.

And if I may, I mean have the service times materially changed to the customer from the time that they order to the time that they get their pizza. And I guess, is that a risk or an opportunity at this point?

Yes. John, no material change, which for us, is not good enough, because they've got to continue to get faster. And so, that's really what we're focused on. We've absorbed the volume without any material change in the service times, but we got to get faster.

Hi. Good morning. My question is for Stu, on the capital allocation. Now that you've done your refinancing transaction, I think a lot of excess cash on the balance sheet and you have a big buyback in place. But I guess I don't want to assume anything. So could you just kind of walk us through what you're thinking in terms of capital allocation, and how quickly you might deploy that cash that you have?

Yes. I mean, there's no fundamental change to our strategy from a capital allocation perspective, and we were pretty upfront about this even as we went through our recapitalization, we will deploy that capital for investments in the business and then generally speaking, in one form or another, returning that to shareholders over the course of time. But we don't have an intention of sitting long term with a huge amount of excess cash on the balance sheet.

Okay Thank you.

Sure.

Great. Thanks for your question. Ritch, I wanted to ask a bit more about your comments on taking market share going forward. And just kind of curious how you're thinking about share gain opportunities in US this year and perhaps over the next few years, if you care to kind of segment it, delivery versus carryout. Stu, I know you kind of mentioned some players are kind of coming in and out of different channels. Just kind of any latest thoughts on maybe where that share comes from, whether it's independent small chains, continues or if it's larger players, Curious to the latest thoughts there.

Sure, Dennis. Thanks for the question. I guess I'll start by saying we're relatively agnostic as to where the share gain comes from. And we see opportunities to continue to take share across the category. And it's why we – why we're so focused on retail sales growth as the key metric not only because it drives all the economics in our business, but obviously, that's how we ultimately gain market share over time. As I look this year and ongoing, fortressing is going to continue to be a big part of that strategy to gain share. As we've talked about in the past, we are still relatively underpenetrated in terms of share in the carryout business specifically. And fortressing gives us an opportunity to go out and grab that largely incremental carryout business. And then on the delivery side, we believe that we've got to continue to offer great value to our customers and terrific service to continue to gain share on the delivery side. And we've talked about how fortressing helps that over time. We're going to continue to invest in our technology initiatives and operating practices, procedures to continue to help us do a better job of service with our customers as well. And then you combine that with fantastic unit-level economics, which allow franchisees to invest in service and an incredible war chest in terms of our advertising fund to go out there and drive customer awareness and acquisition, and we feel like we're in a very strong position to continue to grow.

Thanks so much.

Thanks for the question. Ritch, appreciate your commentary on staffing. Part of the labor challenges certainly seen transitory nature given the environment stimulus. How do you think about the longer-term structural headwinds given more optionality for delivery drivers, whether that be ride-share or food delivery, at least the perception of these alternatives could offer a bit more flexibility?

Yes, Lauren, that's a great question. We think a lot about both the availability and cost of labor, particularly the challenges we face with drivers. We are focused on making the job appealing by offering competitive earnings compared to other available options. We have several strategies in place, including optimizing delivery workloads to increase drivers' earnings per hour. We're also developing technology and practices that allow drivers to remain in their cars, such as delivering pizzas directly to them and enabling them to promptly take on the next order. This approach aims to enhance their work efficiency and income potential. Additionally, one of the key aspects that sets Domino's apart is the opportunity for drivers or pizza makers to eventually become entrepreneurs. Our efforts, along with those of our franchisees, involve emphasizing this opportunity, considering that the majority of them started as drivers or insiders. Lastly, labor will continue to present challenges, not just for Domino's but for the entire industry, particularly with varying minimum wage laws across different markets. This variability imposes different pressures that we must factor into our national marketing and promotional plans throughout the year.

Thank you very much.

Good morning. Ritch, you mentioned the strong pipeline for store openings earlier when discussing the US business. So could you provide a little bit more detail around the composition of the pipeline? Are you seeing a step-up in demand from existing franchisees on the back of the very large increase in average store EBITDA that you highlighted earlier? I presume you're also seeing more demand from potential new franchisees as well. So curious to hear more – about what the pipeline looks like moving forward?

Sure. Great question. And it really is, it's a mix of both. So certainly a lot of demand within our existing franchisee base given the economics of our stores today, And also the fact that the stores have gotten a lot busier. That creates a lot of ongoing opportunity for fortressing territories that are operated by existing franchisees. You've also got here in 2021 some pent-up demand that wasn't satisfied in 2020 as we had so many more restrictions around construction and permitting and everything else. And then what you add to that is a healthy number of new franchisees coming into the system every year. And one of the things that makes us a little different from the rest of QSR and of franchising is that, those new franchisees all come from within our system. So they could be corporate employees. They could be team members of our franchisees. But we've got a steady pipeline of folks that want to become Domino's franchisees who already have the skills necessary and the experience necessary to run our stores.

Thank you.

Thanks. Thanks for your comments, too, on the two-year trends, and I do think it makes sense to track those going forward. Perhaps you can help us think back to 2019, if we're going to look at those two-year trends and compare what you saw back then, what you did back then to what you're seeing in terms of your internal plans this year starting in the second quarter. I know last year was a weird year in terms of maybe not doing as many boost weeks and then, of course, the innovation has not been as robust as you might have had been doing lately and what we're seeing from your competitors lately. So perhaps you can talk about how much thunder you're going to be making in your business over the next few quarters versus what you did in 2019 as a benchmark? Thanks.

In 2020, we made significant changes to our approach compared to 2019 due to COVID. I previously mentioned some of these changes, like reducing our focus on the carryout business. At the start of 2020, we had an advertising campaign called Pie Pass, which allowed customers to see their names on a screen when picking up pizzas, but we had to halt that immediately when we restricted store access. Throughout the year, we focused on developing safe service methods for carryout but didn’t promote this business as vigorously as we had in 2019 and prior years. Additionally, we stopped our aggressive promotions that we typically included throughout the year, which we had run in 2019. These adjustments hint at strategies we can reinstate in 2021 as we move toward a more normal operating environment. We also plan to continue exploring new product developments and relevant news to engage customers more effectively. Although we achieved some innovation in 2020, we are eager to introduce more in 2021.

So summing it all up, you'd say that it feels like it will be relatively comparable in terms of the energy on boost weeks and innovation the remainder of the year versus 2019, remainder of the year?

Things are still evolving in real time, and there are many factors we consider when planning for the future. We are still benefiting from the wave of government stimulus affecting not just Domino's but the entire economy. Additionally, we are still managing the challenges posed by COVID. While vaccinations are progressing well in the U.S., there is still much to accomplish. One of our key approaches is to remain flexible and adaptable. We have various strategies at our disposal to drive the business as we look ahead, depending on how the situation develops.

Thank you.

I wanted to follow-up on the comment you made earlier about not seeing sales deterioration in markets that are more fully opened. Given there were a lot of puts and takes throughout that first quarter, including weather stimulus and many other factors, can you share anything about more recent trends given that we're seeing a real spike in dine-in behavior? And it also puts a little more distance between us and those stimulus checks. I mean have you seen any impact on your more recent average weekly sit in light of that reopening?

James, we won't be commenting on anything beyond the first quarter today. However, as I mentioned in my prepared remarks, the first quarter was quite uneven. At the beginning and end, we saw stimulus impacts, and in the middle, there were significant weather events in some regions. Additionally, the country was reopening at different rates. There were many factors influencing the first quarter. We are keeping a close eye on the situation, not just weekly but daily and hourly. We'll provide more updates about the second quarter when we meet again in three months.

Thank you for taking the question. Just a quick clarification and then a second question on clarification, the franchisee EBITDA of $177,000 per store, does that include any benefit from government support like PPP loans? And then secondarily, following up on the loyalty conversation, with others in the limited service space kind of adding programs later this year, do you plan to alter some of the new loyalty member acquisition tactics, or perhaps change the rewards programs to some of the rewards themselves to ensure that the high level of engagement you have today doesn't slip.

Hey Jon, regarding your question about the $177,000, we do not include any government funding in that figure. That amount reflects the EBITDA from operating Domino's Pizza locations. Throughout the pandemic, our company, DPZ, did not utilize any government funds. As for our loyalty program, it needs to evolve over time. We've been running it for just over five years, having launched it in 2015. We are consistently exploring different strategies to enhance the program and draw in customers while keeping them engaged. We focus on how customers earn and redeem points over time. We also learn from market observations and conduct extensive research on our customers. We've been happy to see that active enrollment in the program continues to increase, indicating it resonates well with new customers. Additionally, as I mentioned earlier, we are pleased that the order frequency among active loyalty members has remained stable. Once you have 27 million active members like we do now, a significant portion of that value stems from the continuous engagement and activity of those customers.

Great. Thank you very much.

Great. Thank you. Ritch, you guys have previously spoken about the ad fund surplus in 2020 from the better-than-expected sales performance that would likely be deployed in 2021. And I recognize that you were on air 52 weeks last year and presume will be on 52 weeks this year. But how are you thinking about deploying that surplus across the year? And in particular, are you concentrating in 2Q and 3Q when the toughest compares are lapped?

Andrew, thanks for the question. I won't comment on quarter-to-quarter and how we're going to deploy it, really for competitive reasons, if you will. But we are in a fortunate position to have a very strong war chest and surplus going into the year. And that gives us an opportunity as we look out across the year and we see what happens with sales trends in the business, it really does allow us to put a little bit more muscle against things when and where we need to.

Thank you for joining the call. You've shared a lot about technology and innovation over the years. Can you provide more clarity on how much of your current discussions are actionable versus just talk? How can you take these innovations and translate them into greater efficiencies that impact sales and operations? While initiatives like Nuro are promising and show a forward-looking approach, they may not have a significant impact in the near term. What is your perspective on this overall framework? Thank you.

Sure. Brett, it's a great question, and one that, when we sit down every year and make our investment decisions around technology, we are always trying to invest against a portfolio both of near-term things that can have immediate value, but then also some of the longer-term investments that may not drive any immediate value, but that we want to make sure that we're out in the forefront on. When I think about the near-term component of that, we've got a significant amount of technology investment that is going to our stores today and improving the efficiency with which we operate our stores. When you think about what some of the kind of the key pinch points or constraints are in the business, right now. It is labor, it is availability and labor costs at the store level. So we're focusing a lot of time and energy on running more efficient stores, such that we can drive higher order counts and higher sales per labor hour. So there's a lot of effort there and a number of things that are rolling out through our system today. And then on the longer term, Nuro is a great example of that. We are doing some autonomous deliveries as we speak, in Houston, right now, but it's going to be a while before autonomous delivery is broadly deployed across the Domino's system, but we want to make sure that we're investing and learning today, in particular, how the customer will interact with the robot and how the robot will interact with our operations at the stores. And those are the key learnings that we're trying to drive now, such that when we are able to more broadly deploy the technology, we're ready and have a good understanding of how it can impact our business and our customers.

Great. Thank you very much. I just wanted to ask about unit growth. We know that 2020 was a tough year, ultimately sub-4% versus, I think, your guidance two, or three-year guidance for 6% to 8% growth thing like COVID caused a one-year setback for you guys and others as well. But I'm just wondering whether there's any lingering effects in terms of sites or I think you mentioned permitting and construction delays. You would think the pent-up demand would be huge and the big uptick in the store level EBITDA would obviously help. But I'm just wondering whether you think 2021, it's reasonable to assume you get back within that range whether you have any color on the US or more importantly, on the international. Whether or not that hiring issue comes into play. We know that you're obviously struggling as everybody is to hire. I'm wondering whether any franchisees are talking about slowing down growth just because they need to staff those stores or whether they have creative ways to get labor in the stores. Thank you.

Sure, Jeff. You know, on the unit growth, we have already seen an acceleration in the pace. If you look at last year, we had 624 net openings for the year. And if you look in the first quarter of this year, when you look back trailing four quarter was 730. So that pace has already accelerated up by more than 100 units. And when we look at the pipeline in the US and we look at the pipeline in our international markets, we see a really strong pipeline ahead and an opportunity to continue to accelerate that pace of unit opening. The unknown for us as we look out across the year, still relates to COVID. And you turn the news on, you'll see there are some places around the world where COVID is really still raging and in some places, getting worse. To what extent that impacts our pace of unit growth, we're still monitoring and still have some uncertainty around that. But the good news for the brand is that the unit economics are incredibly strong, the demand for franchisee investment is there, and we expect to continue to see the pace of unit growth accelerate. The final part of your question was around the staffing and that’s always a challenge but one that we are franchisees feel comfortable that we can manage overtime. Part of the beauty, particularly as it relates to the US of opening these new stores is that the majority of these are opening in our – as part of our fortressing program and giving us an opportunity to do two things. One is to shrink the territory, so we get more deliveries per – per hour of delivery driver labor, but also you get that incremental carryout business, which is a much less labor-intensive business for our stores, which is one of the reasons we want to continue to grow and build that business.

The other thing I would just add to that is – and you've seen the increase in the growth, particularly Q4 last year in terms of new units. There is the unfortunate practical reality of even if you have the ability to grow, you have the demand or desire to grow, just the sheer bandwidth of trying to get that done, you don't – it just takes a while to make up for what stopped last year. You can't – our franchisees, our master franchisees internationally can't just double their numbers because they want to. They need the resources to go build it, the time to go build it. So it's going to take a while, while we continue to accelerate. It's going to take some time before we make up for the period of time that we lost last year.

Understood. Thank you.

Hey, good morning. Thanks for squeezing me in. We spent some time on the call talking about arrows in the quiver to kind of drive traffic against this period of tougher compares coming up. We've talked about Boost weeks, talked about focusing on carryout. I'm wondering with the incremental advertising dollars that you're carrying into the year? Just wondering about anything you can share about shifts in tactics, whether more personalized marketing, more one-to-one marketing or through CRM platforms really trying to simulate frequency at the individual level. Are more resources going to that versus broader medium and getting the message out that way, when you look at kind of the mix of your spend in fiscal '21?

Hey, Todd, thanks for the question. And it's stuff that we think about all the time because the vast majority of the dollars in that advertising fund are franchisees dollars. So we spend it with great care. And it's one of the areas also – we talk a lot about how we use analytics to make decisions at Domino's. It's an area where we've got terrific analytics in terms of understanding the return on spending those dollars across a range of different channels or opportunities that we have to invest them on the part of our system. And so, we are constantly looking at that and managing the dials to use that investment for the greatest return for our system.

Okay. Great. Thanks Ritch.

Thank you very much, and thanks to all of you for taking the time to join us on the call this morning. We look forward to speaking with you again in July to discuss our second quarter 2021 results. Have a great day.