Dominos Pizza Inc (DPZ) — Q2 2021 Earnings Call Transcript

Thank you so much. And thanks to everyone for joining us for our conversation today regarding the results of our second quarter 2021. Today's call will feature commentary from Chief Executive Officer, Ritch Allison; and from the Office of the CFO, Jessica Parrish. As this call is primarily for our investor audience, I ask that 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 on the call 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. We encourage you to ask only one-part question on this call if you would. Today's conference call is being webcast and is also being recorded for replay via the website. With that, I'd like to turn the call over to our CEO, Ritch Allison.

Thanks, Jenny, and thanks to all of you for joining us this morning. Overall, I am very pleased with our results this quarter, which once again demonstrated the strength of the Domino's brand around the world. We are still navigating the COVID pandemic across the globe. Throughout the last 18 months, our franchisees have continued to step up to the challenge in service to their customers, their community, and their team members. I continue to be extremely proud of our global franchisees and their extraordinary efforts to provide outstanding food through safe and reliable delivery and carryout experiences. You've heard me often speak about the importance of global retail sales growth and how that drives our business model. During the second quarter, we delivered 17.1% global retail sales growth excluding foreign currency impact, driven by a powerful combination of growth in U.S. same-store sales, international same-store sales, and global store accounts. The second quarter marked our 41st consecutive quarter of U.S. same-store sales growth and our 110th consecutive quarter of international same-store sales growth. We also reinforced our leadership position in the pizza category with a very strong quarter of global store growth highlighted by the opening of our 18,000th store. We celebrated this terrific milestone with the opening of a beautiful store in La Junta, Colorado. The pace of net store growth has accelerated significantly during the first half of this year. When you look at it on a trailing four-quarter basis, our pace of net store growth has increased from 624 in Q4, 2020 to 884 in Q2, 2021. During the quarter, we also completed our $1.85 billion refinancing transaction, lowering the cost of our debt and giving us the capacity to return $1 billion to our shareholders through our recently completed accelerated share repurchase transaction. Overall, the Domino's brand continues to deliver as our strong same-store sales, store growth, and resulting retail sales growth deliver great returns to our franchisees and our shareholders. I'll turn the call over now to Jessica Parrish, our Controller and Treasurer. She will take you through the details of the quarter. And then after that, I'll come back and share some additional observations about the quarter and some thoughts around how we are approaching the business going forward. Jessica, over to you.

Thank you, Ritch, and good morning everyone. We are excited to share our strong second 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 $3.06 for Q2. Our diluted EPS, as adjusted for certain items related to our recapitalization transaction completed during the quarter was $3.12. In Q2, we continued to see positive momentum in both the U.S. and International businesses in both same-store sales performance and net unit growth leading to strong global retail sales growth. Global retail sales grew 21.6% in Q2 as compared to Q2, 2020. When excluding the positive impact of foreign currency, global retail sales grew 17.1%. Breaking down total global retail sales growth, U.S. retail sales grew 7.4% and international retail sales grew 39.7%. When excluding the positive impact of foreign currency, international retail sales grew 29.5% rolling over a prior year decrease of 3.4%. The prior year decrease in international retail sales excluding foreign currency resulted primarily from temporary store closures, changes in store hours and service method disruptions in certain international markets as a result of the COVID-19 pandemic. Turning to comps. During Q2, we continued to lead the broader restaurant industry with 41 straight quarters of positive U.S. comparable sales and 110 consecutive quarters of positive international comps. Same-store sales in the U.S. grew 3.5% in the quarter, lapping a prior year increase of 16.1%. Same-store sales for international business grew 13.9% rolling over a prior year increase of 1.3%. Breaking down the U.S. comps, our franchise business was up 3.9% in the quarter, while our company-owned stores were down 2.6%. As we noted on our Q1 call, we continue to observe a larger spread between the top-line performance of our franchise stores and our company-owned stores than we have historically seen. We believe this is primarily a function of the heavily urban and higher-income footprint of our company-owned store markets relative to the more diverse mix across our franchise space. The U.S. comp this quarter was driven by ticket growth due to increases in items per order and our transparent delivery fee, as well as the mix of products we sell. Order counts on a same-store basis were consistent with Q2, 2020 levels, which were higher than Q2, 2019 levels as a result of customer ordering behavior during the pandemic. The international comp was driven by order growth due to the return of non-delivery service methods, the resumption of normal store hours, and the reopening of stores that were temporarily closed in certain of our international markets in Q2, 2020. Shifting to unit count. We and our franchisees added 35 net stores in the U.S. during the second quarter, consisting of 39 store openings and four closures. Our international business added 203 net stores comprised of 217 store openings and 14 closures. Turning to revenues and operating margins. Total revenues for the second quarter were up approximately $112.4 million or 12.2% 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 foreign currency exchange rates positively impacted our international royalty revenues by $4 million in Q2, 2021 as compared to the prior year quarter. Our consolidated operating margin as a percentage of revenues increased to 39.5% in Q2, 2021 from 38.8% in the prior year due primarily to higher revenues from our U.S. franchise business. Company-owned store margin as a percentage of revenues increased to 24.5% from 23.1% primarily as a result of lower labor costs partially offset by higher food costs. Recall that we incurred additional bonus pay in the second quarter of last year for team members on the front lines during the COVID-19 pandemic. Supply chain operating margin as a percentage of revenues decreased to 11% from 11.9% in the prior year quarter resulting primarily from higher insurance and food costs, as well as higher fixed operating costs driven by depreciation and our new supply chain facilities opened last year. These increases were partially offset by lower labor costs. G&A expenses increased approximately $12.3 million in Q2 as compared to Q2, 2020 resulting from higher labor costs, including higher variable performance-based compensation and non-cash compensation expense partially offset by lower professional fees. Additionally, as we discussed on our Q1 call, we completed our most recent recapitalization transaction during the second quarter in April. In connection with the recapitalization, we incurred approximately $500,000 of pre-tax G&A expenses for certain professional fees, which is included as an item affecting comparability in this morning's earnings release. Net interest expense increased approximately $6.7 million in the quarter driven by a higher average debt balance. This increase in interest expense also includes $2.3 million of pre-tax incremental interest related to the recapitalization transaction, which has been adjusted out as an item affecting comparability in this morning's earnings release. Our weighted average borrowing rate for Q2, 2021 was 3.8%, down from 3.9% in Q2, 2020. Our effective tax rate was 19.6% for the quarter as compared to 4.7% in Q2, 2020. The effective tax rate in Q2, 2021 includes a 2.3 percentage point positive impact from tax benefits on equity-based compensation. This compares to an 18.5 percentage point positive impact in Q2, 2020. This decrease was due to significantly fewer stock option exercises in Q2 of this year. 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 second quarter net income was down $2 million or 1.7% versus Q2, 2020. On a pre-tax basis, we were up $20.6 million or 16.5% over the prior year. Our diluted EPS in Q2 was $3.06 versus $2.99 in the prior year. Our diluted EPS, as adjusted for the impact of the recapitalization transaction was $3.12, an increase of $0.13 or 4.3% over the prior year. Breaking down that $0.13 increase in our diluted EPS as adjusted, most notably, our improved operating results benefited us by $0.53. Net interest expense adjusted for the impact of the items affecting comparability I discussed previously, negatively impacted us by $0.08, a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.12. And finally, our higher effective tax rate resulting from lower tax benefits on equity-based compensation negatively impacted us by $0.44. Shifting to cash. Our strong financial model continued to generate significant cash flow throughout the second quarter. During Q2, we regenerated net cash provided by operating activities of approximately $143 million. After deducting for CapEx, we generated free cash flow of approximately $126 million. Regarding our capital expenditures, we spent approximately $17 million on CapEx in Q2, primarily on our technology initiatives including our next-generation point-of-sale system. As previously disclosed, during Q2, we also entered into an accelerated share repurchase transaction for $1 billion. We've received and retired approximately 2 million shares at the beginning of the ASR. The ASR settled yesterday and we received and retired an additional 238,000 shares in connection with this transaction. In total, the average repurchase price throughout the ASR program was $444.29 per share. Additionally, and as noted in this morning's release, subsequent to the end of the quarter, our Board of Directors authorized a new share repurchase program for up to $1 billion of our common stock. We also paid a $0.94 quarterly dividend on June 30th. Subsequent to the end of the quarter, our Board of Directors declared a quarterly dividend of $0.94 per share to be paid on September 30th. In closing, our business continued its strong performance during the second quarter, and we are very pleased with the results our franchisees and team members around the world delivered. Thank you all for attending the call today. And now, I will turn it back over to Ritch.

Thanks, Jessica. And I'll begin my comments with a look at our U.S. business. For months now, many of you have been asking how we would lap the tough comparisons from Q2 of last year? My answer has always been that we're not focused on managing to a 12-week quarter. We are focused on building the business for the long term. And that long-term focus on great product, service, image, and technology is precisely why we were able to deliver a terrific quarter, highlighted by 7.4% U.S. retail sales growth, lapping 19.9% from Q2, 2020. Turning to same-store sales. Perhaps the thing I'm most pleased about when I look at the 3.5% U.S. comp, is the fact that we were able to hold orders flat while overlapping the big gains from Q2, 2020. I'm also pleased that our ticket growth was driven by a very healthy balance of more items per order and modest menu price and delivery fee increases. We achieved positive comps in both our delivery and carryout businesses with delivery driven by ticket and carryout driven by a balance of order count and ticket growth. We continue to see strong growth across our business in the quarter. You've often asked if our sales growth might be weaker in markets that had more fully reopened. But to the contrary, the opposite trend emerged through the second quarter where we saw higher levels of sales growth in the second quarter in the markets with fewer COVID-related restrictions. Similar to Q1, we saw that comp growth in rural areas outperformed urban areas, and less affluent areas outperformed more affluent areas. These differences combined with the impact of more aggressive fortressing accounted for much of the same store sales gap between our corporate store and franchise store businesses. We saw sales benefits during the quarter from the federal government stimulus, particularly the checks that were delivered back in March. It's difficult to quantify the magnitude of the impact of the one-time distributions and the ongoing unemployment and other government payments to consumers, but we believe they do continue to have some positive sales impact on our business. Due to the strong sales throughout the quarter, we once again elected not to run any of our aggressive boost week promotions, but instead remain focused on providing great service and offering great value to our customers every day. As we continue to experience COVID overlaps, we believe it will be instructive to continue to look at the cumulative stack of comparable U.S. same-store sales anchored back to 2019 as a pre-COVID baseline. At 19.6% for Q2, we saw a material sequential improvement of the two-year stack when compared to the first quarter. Beyond the comps, when you look at the absolute dollars, our second quarter same-store average weekly unit sales in the U.S. exceeded $27,000, another sequential uptick from the levels seen in the first quarter. Now turning to the other critical component of our retail sales growth, new store openings. Our addition of 35 net stores was softer than we expected. We have a very strong pipeline of future openings, but had a number of stores delayed due to store level staffing challenges as well as construction permitting or equipment delays. We hope to accelerate the pace of openings during the second half of the year as some of the delays in unit growth may subside. I'll turn and speak now about the carryout and the delivery businesses. We saw the return of carryout order growth in Q2 and we continue to build awareness of Domino's Carside Delivery. We ran a brief 49% off Carside Delivery awareness campaign during the quarter. And just recently launched a campaign highlighting our Carside Delivery, two-minute guarantee. This campaign hits on two key elements of the Domino's brand, service and value. Our franchisees and operators have fully embraced Carside Delivery and we are consistently averaging below two minutes out the door and on our way to the customer's cars. This is a great technology-enabled way to serve our customers 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-through oriented customer going forward. For the delivery business, I was also very pleased to see positive delivery same-store sales growth during Q2, while facing very difficult overlaps. We brought back The Noid to highlight our partnership with Nuro for autonomous delivery. This campaign hits on our technology and innovation leadership while having a little bit of fun with our old nemesis, The Noid. We continue to learn as we pilot a true autonomous pizza delivery experience to select customers in the Houston market. Now turning to staffing. I'll reiterate something I said back in April. We continue to operate in a very difficult staffing environment for our stores and our supply chain centers. The combination of COVID, strong sales, the accelerating economic growth across the country, and the ongoing government stimulus continue to result in one of the most difficult staffing environments that we've seen in a long time. And frankly, this led to higher margins in our corporate store business than we would like to see. The reality is that we were operating during the quarter with fewer team members than we would like to have in many of our stores. This puts pressure on our operators to meet demand while continuing to deliver great service. In the back half of the year, we expect to implement additional wage increases across certain corporate store markets and positions. In the face of these challenges, I want to thank our U.S. franchisees and corporate store operators for their ongoing efforts to attract and retain great team members in a very tight labor market. And as we look forward in the U.S. business, we will continue to make the necessary investments to drive retail sales growth into the future. We recently announced our plans to build another supply chain center in Indiana, which we expect to complete by the end of 2022. We are making solid progress on the rewrite of our POS, point-of-sale system and we'll continue that multi-year investment along with additional investment in our enterprise systems to support the business. We will continue to invest in technology, operations and product innovation to support our carryout and delivery businesses. We are continuing to raise wages and invest in our hourly team members. And, of course, as always, we will remain focused on value for our customers. So I'll close out our discussion of the U.S. business by simply saying that the Domino's brand has never been stronger. And I remain confident in our ability to drive sustainable long-term growth. Now let's move on to international. It was an outstanding quarter of performance for our international business. Our 29.5% international retail sales growth excluding foreign currency impact was supported by an exceptional 13.9% comp, continuing the momentum we had in the first quarter. As I discussed earlier with our U.S. business, we're also watching the two-year comp stacks for international anchoring back to pre-COVID 2019 and will continue to do so throughout 2021. Q2 represented a 15.2% two-year stack, a sequential improvement over the first quarter. I'm particularly pleased with our strong momentum on store growth as international provides a significant push toward our two to three-year outlook of 6% to 8% global net unit growth. Our 203 net stores in Q2 increased our trailing four-quarter pace of international store growth to 653 net stores. Our accelerated store growth continues to be driven by our outstanding unit level economics and the strong commitment of our international master franchise partners. During the quarter, COVID continued to have a significant impact on many of our international markets, and we expect COVID to remain a challenge in many parts of the world for some time to come. At the end of the quarter, we had fewer than 175 temporary store closures with many of those located in India, which has been hit particularly hard by COVID. And I want to take a minute here to thank Jubilant Food Works, our master franchisee in India for their outstanding commitment to their team members during this very difficult time. The company mounted a series of initiatives to support their employees and families through this unprecedented crisis. This included a cross-functional team that provided employee assistance 24x7, as well as several COVID isolation centers with oxygen concentrator banks. Jubilant mounted a massive vaccination drive for all their employees and dependent family members. Challenging times always bring out the best in Domino's franchisees and I could not be more proud of our leaders in India and how they have responded to this crisis. I'd also like to highlight a few international markets that drove terrific growth during the quarter. China passed the 400-store milestone during Q2 and once again Dash, our master franchise partner delivered outstanding retail sales growth for the brand. China is without question one of the most exciting businesses in the Domino's system with significant long-term runway for growth. Japan reached the 800-store milestone in the weeks following the close of our second quarter and continued the outstanding performance under master franchisee Domino's Pizza Enterprises ownership. The U.K., Germany, Mexico, and Turkey were also large market highlights in a strong quarter of performance across our international business. I am proud of our master franchisees and their operators for their great work thus far in 2021. And I remain optimistic about our international retail sales growth opportunity over the long term. So in closing, I'm very happy with our Q2 results. Great franchisees and operators combined with outstanding unit level economics place us in an enviable position within our industry and give us a strong foundation for future growth. There is absolutely no question that Domino's is the global leader in QSR Pizza. But there is still so much opportunity ahead of us to drive global retail sales growth and to grow market share around the world in both our delivery and carryout businesses. As we look to the back half of the year and beyond, you can be confident that we will remain focused on winning the long game. So thank you again for joining us today. And we'll now be happy to take some of your questions.

Thanks. Good morning, congratulations. Ritch, you highlighted the importance of paying attention to the two-year same-store sales trend both in the press release and on this earnings call. And that trend obviously accelerated meaningfully in the second quarter? Is pegging this two-year trend relevant in your mind for the rest of the year including the fourth quarter, because sustaining it would imply a pretty big jump in the one-year same store sales in the fourth quarter. And I just think in general, folks remain a bit confused, how this accelerated business performance that Domino's is generating is able to occur in this reopening environment? You actually suggested that more reopen footprints are outperforming. So can you just put some insights into the core drivers of this dynamic that you're seeing within your business?

Thank you for the question, Brian. We believe it's helpful to compare our business to the pre-COVID benchmark of 2019. There have been many changes in the past 18 months that are important for us to understand internally and to share with our investors. We are not making any statements or projections about the third or fourth quarters of this year; instead, we are sharing insights on how trends are developing quarter by quarter. Many factors are influencing our business, including those we can control and external factors that are harder to predict, such as the ongoing impact of COVID and government interventions in the economy. These elements will continue to influence our comparisons and performance over time. Regarding the dynamics in reopening markets, we have been closely monitoring the situation. It's important to recognize that while we are a delivery business, we also have a strong carryout segment. The shutdowns negatively affected our carryout business, but as markets reopen, we are starting to see positive momentum in that area. Our delivery business has also shown positive growth, even with reopening, as we remain focused on providing value to our customers. We will continue to analyze and share insights on our performance across both segments as the year progresses.

Great. Thanks. Ritch, I wanted to ask about the competitive environment. Now that it seems like the economy is somewhat reopened or mostly reopened. How do you feel the competitive environment is looking right now? Especially with respect to independents. Do you feel like independents are stronger today or weaker post-COVID? Just trying to get a sense on if you feel like you guys are taking share from independents or where those market share gains are coming from?

Thanks, Peter. As the market continues to evolve, there are still many factors at play. We tend to be cautious about making definitive statements regarding market share changes until we have a few quarters to analyze. However, current indications suggest that the larger chains are driving most of the growth in the pizza category, while independent operators are either stable or declining. From what we can gather, the market is growing, with larger chains gaining share, and as the largest chain, we are certainly securing some of that share.

Thank you very much. Ritch, I wanted to revisit your comments regarding the labor and wage environment. You mentioned the pricing adjustments being made at company stores; could you provide more context on that? How are franchisees responding to this? You noted that they are making moderate pricing adjustments; is this also reflected in your company comparisons, assuming the same applies to the franchisees? Does this lead to a discussion about what the appropriate price points should be at Domino's in light of the current market conditions? Are you somewhat restricted to the 5.99 and 7.99 price points? Is there increased resistance around this conversation considering labor costs? If so, how do you respond to questions from franchisees concerning pricing?

Thank you, John. This is definitely a topic we constantly consider. Regarding your first question, we observe that wages are consistently rising over time. Some of this increase is due to changes in minimum wage laws, which had another adjustment in July. Additionally, the supply and demand dynamics in the labor market are contributing to rising wages. We are committed to investing more in our hourly team members in our corporate stores to ensure we remain adequately staffed and able to serve our customers. To manage these wage increases while maintaining a strong economic model, pricing is one tool we have available. At the local level, we implement this in our corporate stores, and our franchisees have the flexibility to do the same for their businesses. We have adjusted our single transparent delivery fee, which varies by market, and this is a strategy we and our franchisees have employed. Our franchisees also control menu pricing, and in markets with higher wages, you will generally see higher menu prices at Domino's. Regarding our promotions, such as the 599 and 799 offers, we routinely test different options not only to boost revenue but to ensure we achieve the best four-wall EBITDA for our stores. These price points have consistently come out on top among the many offers we evaluate. However, if we identify an alternative offer that yields higher profitability for our franchisees, we would consider that change. The focus is always on providing value to the consumer, as this drives order counts, which are ultimately linked to sales and profitability at the store level. It's a continuous conversation we have with our franchisees.

Hi. Thanks for the question. It's a little bit of a follow-up on some of the previous questions as it relates maybe to the competitive landscape. We've seen a little bit more menu innovation maybe from some of the larger direct pizza LSR competitors recently, maybe over the last six months or so. And I think the consumer is seemingly willing to pay more for some offers now and for some more maybe surprise and delight. So I wanted to get a sense of how you're thinking about menu innovation going forward? Obviously, like the operations and the simplicity of everything makes sense from a franchisee economics perspective. But wanted to get a sense of how you're thinking about innovation from here?

Sure, Jared. Appreciate the question. Our overall philosophy and approach really hasn't changed around menu innovation. We are constantly testing a robust pipeline of new products and platforms for the menu. But we hold it to a pretty high standard in terms of what ultimately gets on our menu. Because we're not just looking to put things on the menu to drive sales for a limited amount of time. So that's you don't see us use limited-time offers and you shouldn't expect to see us using those into the future. What we are looking for are products that can drive incrementality in revenue and in profit. So we test products not only for where they would mix on the menu, but more importantly once you take into effect the potential cannibalization from other menu items, are we delivering incremental revenue and profit at the store level? You asked a little bit about premium and customers willing to pay more. When we introduced our two new specialty pizzas, the chicken taco and the cheeseburger, those were all about bringing some more premium products to that specialty line, which gives the franchisee an opportunity for some incremental revenue over and above our more traditional products that are offered on the 599 menu. So, we'll continue to look for opportunities there. And when we introduce something like those two specialty pizzas, it's not just to drive sales of those two pizzas, but we also see that that elevates sales of the specialty line in general, which is a more premium line. So as we look forward you should expect to see us continue to roll out new products. As has been the past, you probably won't see us rolling them out or as fast or in as significant quantity as some of the other players in the industry, simply because we've just got a different strategy in terms of how we look at it. And I suspect it goes without saying. But a big part of that strategy is also just managing the level of change and complexity on our operators in our 6,000 plus stores across the country.

Hi. Thanks for taking the question. I'm curious how your conversations more broadly are going with franchisees at the moment. I guess, it wouldn't surprise me if kind of going into this period against the tough compares. There was maybe a little bit of uncertainty among the U.S. franchisees. But now obviously that you're demonstrating the performance against those comparisons, I'm just curious how those conversations are unfolding? Has it kind of unlocked anything with respect to the development pipeline or anything else with those conversations?

Sure. Sure. Thanks for the question. It's something that we're always actively engaged in discussions with our franchisees and those relationships. And frankly, one of the best things about the second quarter for myself personally is that I've been out on the road a lot. Out in stores and visiting with our franchisees as we've gotten ourselves vaccinated and are able to get out there and interact a lot more. And franchisees, I think certainly pleased with the top-line growth that we've seen in the business. And the fact that we've seen the sustained levels of sales that we've had here in the first and second quarters of the year. You won't be surprised to hear that franchisees are just as we are concerned about staffing, about labor rates, and where those are going over time, thinking about commodity costs, and where those are going. All the things that you would expect restaurant operators to be concerned about. But when we take a look at the business in total, the four-wall economics of the business are still incredibly strong, the cost of entry or what it takes to get a Domino's Pizza opened relative to other QSRs still very modest. So the cash-on-cash returns in the business are still very strong. And that's really what drives the appetite for development. So I still see a strong appetite for development. And that's not just true in the U.S. business but it's around the globe. And really kind of tying back some of the comments I made earlier on this call. The real gating factor right now in terms of getting stores open is not the desire to do so. It is some of those other factors around staffing and just having teams ready to be in those stores day one when they open, given some of the labor constraints. But also, we have seen some continued delays in construction and permitting. And then also just in some specific equipment categories they go into our stores, you probably won't be surprised to hear that there are still some significant supply chain disruptions out there and some of those have hit some of the equipment that we use to build out a Domino's Pizza store.

Thanks. Ritch, just to follow-up on the labor side, is the company able to monitor franchisees staffing levels? And what's the company doing to kind of help franchisees with staffing, so that it doesn't become a service issue?

Sure. Chris, we don't monitor our franchisees staffing levels or really have any say or direction in what they do with their own people outside of the brand standards. So what we try to do is lead by example with what we do inside our corporate store businesses. And so, one of the most important things about running corporate stores is that we're out there across the country feeling exactly what our franchisees are feeling. And so, when they're feeling pinched on staffing and wages and other things, we feel it in our own business as well. And it allows us to maintain a level of alignment that it's just impossible to have if you've sold all your corporate stores over time. And so, we communicate what we're doing in the corporate store business and do our best to lead by example with respect to the things that we're trying to do around hiring and wages and other things that we've got going on out there in the marketplace. But ultimately, they're going to make their decisions about how they choose to pay and staff their stores.

Hi. I would like to address a topic that is not really a question but rather a concern. First, Ritch, could you discuss the senior level turnover that has been significant and occurred in waves? I'm curious about the challenges and opportunities this may present as you consider Domino's over the next five to ten years. Secondly, your app provides valuable data that others might be interested in. Some of this data likely indicates that customers abandon their orders when faced with long delivery times. Can you talk about how big of an issue this has become? Is there a way to estimate how much sales you could potentially recapture or even grow if you could significantly improve service levels, which I assume would require increasing your delivery driver staffing? Thank you.

Sure, John. Your question shows good insight into a relevant topic. Regarding the first part, we've experienced some turnover in our management team. However, this also opens up opportunities for capable leaders we have ready to advance and elevate our operations. When I consider our team—not just my direct reports but the broader senior management within the company—I'm confident that we are performing stronger than ever. While there are still a few positions we need to fill, I feel very positive about the leadership at Domino's Pizza. Our successful results are a testament to this strong leadership. On the second point about service, we've faced staffing challenges that have hindered our ability to achieve the service improvements I would have liked to see this year. As a result, we've experienced slight delays in delivery times. This is a key focus area for us moving forward. We have the data that shows improved delivery times lead to higher sales per household in our delivery areas, indicating a clear opportunity for growth by reducing service times. Restoring our staffing levels is part of the solution, but we're also exploring ways to enhance efficiency in our stores and improve delivery times, even with the same number or fewer drivers. This involves addressing wasted time, ensuring drivers spend all their time delivering pizzas rather than on other tasks. This approach not only enhances delivery times for customers but also increases the number of deliveries per hour for drivers, leading to better tips for them. We know that higher earnings boost driver retention rates. So, we are focused on these improvements, as we understand their long-term value.

Hi. Good morning. Ritch, could you share your thoughts on the current status of U.S. carryout sales compared to pre-pandemic levels? Additionally, how do you believe the Carside Delivery option is impacting that business and its growth potential moving forward?

Thank you, David. If we look at carryout, the key metric is the number of carryout orders per store. In Q2, we were nearly back to our 2019 levels for carryout orders, showing slight growth. The rise in average order size has contributed significantly to ticket growth, with second-quarter orders reaching pre-COVID numbers. However, when we compare carryout to delivery, we are still a bit short of pre-COVID figures, mostly due to our delivery counts being substantially higher than in 2019. We're in the early stages of anticipating and pushing for growth in carryout orders. Regarding Carside Delivery, this was already a part of our strategy before the pandemic, intended to help Domino's compete for drive-through business. The COVID-19 situation accelerated its rollout, making it a safer and contactless option for customers. We believe Carside is an excellent way to compete with drive-throughs, especially since we cannot implement 100% pickup windows in all Domino's locations. I’m thrilled with how our franchisees have embraced Carside, particularly leading up to our Two-Minute Guarantee campaign. We're averaging under two minutes to serve pizzas, which offers a great customer experience compared to lengthy wait times at other quick-service restaurants. Another advantage of Carside is that these orders are placed and paid for online in advance. This not only helps increase the average order size, thanks to our technology enhancing the customer experience but also reduces transaction time in-store, allowing us to serve customers more quickly and efficiently. Additionally, the digital aspect aids in inviting these customers into our loyalty program. We're still in the early phases of Carside, but I'm pleased with its adoption across our network and the potential it holds for future growth as we compete for more customer occasions.

Thank you, Ritch. I wanted to delve deeper into customer loyalty and the acquisition of new customers that you're currently experiencing. Could you elaborate on your strategies moving forward? Specifically, I'm interested in the opportunities available to attract new customers and retain the ones gained over the past 15 months. I understand there are several factors at play, but I'd appreciate your insights on what you consider the most significant, whether it's service level, new menu offerings, value promotions, or something else. I'm curious about your observations and your perspective on the potential in this area. Thank you.

Sure. That's happy to touch on that. As you take a look really over the course of the last year or so, the bulk of the growth in our business really has come from existing customers. And that customer retention and purchase frequency and even more concentrated within our loyalty customer base, that 27 plus million active loyalty members that we have at Domino's. So, I'm really pleased with what we've been able to do as the pandemic has unfolded in terms of driving customer retention, staying relevant and keeping those orders, that order frequency up over time. When I look forward, I think we do have more opportunities to continue to prime the pump further around customer acquisition. Some of the most important tools that we've used historically to do that have been some of these periodic boost weeks that we've used. And we haven't run any of those for quite some time, so that's certainly an arrow in the quiver that we have going forward. Product introductions, certainly another opportunity to invite new customers in. And we do have some robust products in the pipeline. So you should expect to see some news from us on that in the quarters to come as another potential opportunity. And then what I would tell you also, just kind of underlying all this it's not a specific action or a catalyst for driving customer acquisition, but I fundamentally believe that staying focused on value is perhaps our greatest customer acquisition vehicle over time. Because as you see prices being raised significantly at a number of other restaurant chains around the country and as we start to see some of this government stimulus come away as we go into the back half of this year, I think it's going to be really important for the families that we serve to stay focused on value. And I think that's always a consistent message from us and an opportunity to continue to bring new customers into the fold.

Thanks for the question. So within the context of the current labor environment, can you talk about some of the in-store technology or back of house technology that you're testing or recently launched to enhance the in-store operating model? And then related digital represents 75% of sales now, increased about 5% each year over the last several years. So, how are you thinking about how high that penetration can go? Could it be 90%, 95% just given some of the labor benefits?

Thank you, Lauren. Regarding the labor environment, we are actively developing technologies and operational procedures to enhance the efficiency of our stores while reducing labor needs. One specific improvement involves our delivery drivers; we aim to relieve them of tasks that distract from their primary role of delivering pizzas. For instance, we used to require drivers to pre-fold boxes, a practice that was frustrating for many years. Now, over 2,000 of our stores in the U.S. no longer have this requirement, which has not only reduced workload but also improved the cleanliness and overall atmosphere of the store. Additionally, we've implemented GPS software that our drivers now use on their smartphones, allowing them to become familiar with delivery areas significantly faster than before. Previously, this could take two to three months, but with our GPS capabilities, we are better at routing and delivering. We are also utilizing machine learning to refine our scheduling and staffing processes. This helps us predict sales more accurately and match the workforce to business needs effectively. Moving on to your second question about digital sales, approximately 75% of our sales currently come from digital channels, and I believe this figure will exceed 75%. We look to China as a benchmark, where over 95% of orders are placed digitally, which motivates us to keep striving for higher penetration. I won't stop pushing until we approach 100%.

Great. Thanks. So returning to the theme of competition, Ritch, just curious to get your latest thoughts on third-party delivery competition. And your latest thoughts and how they're shifting dynamics around the reopening will drive the next phase of delivery competition just broadly, that would be great? Thanks.

First on third-party, I mean, I don't think there's any question at this point that third-party delivery is here to stay. You can pretty well get any type of food delivered anywhere in the county. And frankly now, broadly just about across anywhere in the world today. So we don't think that competition is going away. And in fact in many ways, we look at that as our primary competitive set. As the leader in the pizza category, obviously we still continue to look at the pizza competition. But frankly, the biggest competition over the long term for us in delivery is that third-party aggregator channel. So, when I think about what we got to do. So let's assume, regardless of where their economic sit today, we believe they're going to be here for the long haul. So we have to continue to make sure that we are the best value both for the consumer and for the restaurant operator. So we continue to believe that our owned fleet for us and our corporate stores and for our franchisees and their stores having our own delivery drivers running point-to-point back and forth to the store, we continue to believe that's the most efficient operating model and gets even more efficient as we continue to fortress our markets. And so having a very efficient model is important in order to put us in a position to continue to offer a very competitive delivery fee and overall value proposition to the customers. We also believe that the fact that we use a single transparent delivery fee, we think over time is an important competitive advantage. When I was a third-party delivery, I have to really get my calculator out to figure out what I've actually paid to have that food deliver, because maybe I got a discount on the delivery fee, but maybe I paid a service fee, maybe I have paid the small order fee, maybe I have paid a fee because I happen to be in a city where they were charging an incremental city fee. We very much believe around a single transparent delivery fee over time. We think it will be important to customers. And then back on the other side of equation, staying is the best value for the restaurant operator. We charge for a digital order, we charge our franchisees just a little bit over 1% a ticket. That's a $0.275 digital order fee. That is so much lower than what you're going to see in terms of what third parties are charging restaurants out there. So we think that gives us a competitive advantage in terms of continuing to make sure that we've got great four-wall economics for our operators. Because that's the only way we grow the business over time and they open more stores as if the four-wall economics continue to be strong. So, I think, Chris, we don't exactly know yet how all this ultimately shakes out and what all of the dynamics that may shift over time. But we're really focused on maintaining a competitive position with both of those groups, the customers and the restaurant operators.

Thanks. I think this one touches on some of the things you've been talking about with regard to a third-party delivery. But you mentioned sales trends were best in less affluent and less dense population areas. And I wonder if you could give us your best thinking about why that might be. And in your answer, if you could really catch on the influence of third-party deliveries competition. And I don't want to leave the witness too much. But I'm thinking that the restaurants and the third-party players themselves may be passing along particularly rapid menu price inflation lately, which is perhaps less accepted in the less affluent areas. And that third party may also be pulling back in service levels in these less profitable, low-density markets. But I'm just guessing there and you might have better data on this? Thanks.

Thank you, David. To start with the comparison between less affluent and more affluent areas, it’s clear that if third-party delivery fees become more complicated and rise over time, customers with less disposable income will definitely feel the impact more. Given the size of Domino's, many of our customers are not very wealthy, making value crucial for them. I believe that in many less affluent areas, we offer significant value when it comes to having food delivered for family meals. In contrast, in more affluent areas, people may be less sensitive to higher delivery charges, especially if they’re placing larger orders. We are monitoring this situation as it develops, and I think our views align reasonably well with your hypothesis. Regarding urban versus rural locations, in rural areas where customer density is lower, our delivery cost model may be particularly effective, as we can keep drivers busy with point-to-point deliveries from our stores. We will continue to observe these trends as they change. We appreciate your time today, and we look forward to our next meeting in October to discuss our third-quarter 2021 results.