Dominos Pizza Inc (DPZ) — Q4 2023 Earnings Call Transcript

Good morning, everyone. Thank you for joining us today for our fourth quarter conference call. Today's call will begin with our Chief Executive Officer, Russell Weiner; followed by our Chief Financial Officer, Sandeep Reddy. The call will conclude with a Q&A session. The forward-looking statements in this morning's earnings release and 10-K, both of which are available on our IR website, also apply to our comments on the call today. 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. This morning's conference call is being webcast and is also being recorded for replay via our website. We want to do our best this morning to accommodate as many of your questions as time permits. As such, we encourage you to ask one question only. With that, I'd like to turn the call over to Russell.

Thanks, Greg. I thought you were going to sing the opening as we discussed, but I guess we’ll let that pass today. Welcome to your first call here at Domino's, and good morning to everyone joining us. Our strong Q4 demonstrated that our Hungry for MORE strategy is already delivering results. Our positive U.S. same-store sales and transaction growth in both delivery and carryout underscore the strength and momentum that we're building in our business. These results and the initiatives that I'll cover today give me confidence in Domino's ability to continue to drive meaningful value for shareholders. We're excited to share an update on the business through the lens of our Hungry for MORE strategy. Now as a reminder, Hungry for MORE is our new strategy around what we're going to do to deliver over the course of the next five years, more sales, more stores, and more profits. We're going to accomplish this through our four more pillars, MORE, that I'll share a brief update on. Let's start with M. M is for the most delicious food. We know we have the most delicious food in the industry, but it's time to talk about it more. It's time to show it more, and we're already doing that. We're currently on air with Pan Pizza advertising for the first time since 2014. We call Pan Pizza our best-kept secret. It's time to change that. Pan Pizza is a delicious product made with fresh, never frozen dough. It also showcases the variety of crust we have to offer. You're probably also noticing a shift in our advertising as we're beginning to romance the product more to showcase the deliciousness of our food. You can expect this to continue throughout the year. The O in Hungry for MORE stands for operational excellence, and this is how we're going to deliver on our promise to have the most delicious food. By consistently driving a great experience with our products. As we've noted before, we made meaningful strides operationally in 2023 with our Summer of Service program, resulting in service times being back to pre-COVID levels. But we're never satisfied, and we want to continue to get better; our operators and our franchisees are Hungry for MORE. In 2024, we're rolling out a new service program. We're calling that MORE Delicious Operations. This program will be a series of three product training sprints focused on our dough, how we build and make our products, and how we cook them. All of this is being done with a keen focus on driving more consistency in our food by providing the proper teaching, tools, and processes for our team members to succeed. Our third pillar is R for Renowned Value. We've always been known as a premier value player, and we believe this can continue to be a differentiator for us in '24 through our improved loyalty program, our national promotions, and our rollout on Uber. Domino's Rewards is off to a great start and was a key driver of our strong comp performance in the fourth quarter when we saw positive sales and transactions in both our U.S. delivery and carryout businesses. We've also seen an uptick in active members. We are up 3 million active members in 2023, with over 2 million since our relaunch in September. Domino's Rewards ended the year with approximately 33 million active members; a significant driver of the increase in active members and the early success of the program was our Emergency Pizza promotion, which was an innovative marketing initiative that drove increased order counts and customer acquisition into Domino's rewards. We're seeing more redemptions than ever before, and we're seeing them at those lower tiers that we implemented. We know that this program has driven incremental profit dollars for our franchisees. Customers are getting more, and franchisees have earned more profits - truly a win-win. Finally, we're seeing more carryout users and light users in the program than we were prior to the relaunch. So Domino's Rewards is working as we intended. National promotions will also be another way we will drive renowned value in '24. Right now, we're on air with our perfect combo promotion. We believe this is the best deal in the QSR industry to feed the family, highlighting the depth we have in our menu. We also brought back our carryout special boost week in January for the first time since January 2020, and this performance exceeded my expectations. Clearly, customers want value, and we are driving it profitably for our franchisees. While providing value through our own channels is one part of our barbell strategy, tapping into the aggregator marketplace is the other. We're very excited about this new sales layer, which we believe is different and largely incremental to the customers we had not been able to reach in the past. Our entrance into this marketplace with Uber is on track as we are now fully rolled out across our U.S. system. We've gone live with the marketing and formally kicked off our one-year exclusivity period in Q1. Sales are building in line with increased marketing, which has been great to see, and we expect those orders to continue to grow throughout the year. Sandeep will share more about our sales expectations in 2024 for Uber in his comments. Everything we do at Domino's is enhanced by our best-in-class franchisees; the E in our Hungry for MORE strategy. In 2023, we continued to enhance our U.S. franchisee base by adding more than 60 new franchisees to the system, the most in 15 years. Every one of these new franchisees started with Domino's either as a delivery driver or from within our system. This remains the secret sauce to our success. We ended 2023 slightly ahead of our expectations on U.S. store growth and profits, adding 168 net new stores and finishing the year with estimated average franchisee profitability per store of $162,000. This highlights the momentum we expect to continue into 2024. I couldn't be more excited about 2024 and beyond for Domino's Pizza. Our foundation has never been stronger, and our vision has never been greater. We made a ton of progress in 2023, and our strong start to '24 gives me confidence in our ability to win with customers and drive return for Domino's franchisees and shareholders. Now with that, I'll turn things over to Sandeep.

Thank you, Russell, and good morning, everyone. As a reminder, in the third quarter, we closed the remaining 143 stores in the Russia market. The 2023 global retail sales growth measures exclude the Russia market and are calculated as a growth in retail sales, excluding retail sales from the Russian market from both 2023 retail sales and the 2022 retail sales pace. Now for our fourth quarter financial results. Excluding the impact of foreign currency, global retail sales grew 4.9% due to positive U.S. comps and global net store growth. U.S. retail sales increased 4.5%, and international retail sales, excluding the impact of foreign currency, grew 5.2%. During Q4, same-store sales for the U.S. business saw an increase of 2.8%. As Russell noted earlier, our strong comps in the quarter were driven by both delivery and carryout, which were up 2% and 3.9%, respectively. For the year, delivery represented 48% of our transactions and 58% of our sales, while carryout represented 52% of our transactions and 42% of our sales. The weight of sales and transactions shifted slightly more to carryout in 2023. The increase in U.S. Q4 same-store sales was driven by transaction growth from our new loyalty program, inclusive of a benefit from Emergency Pizza, pricing of approximately 1%, and a 0.4% sales mix from Uber. It will take us some time to determine just how much of that Uber mix is incremental. More to come on that as we move through 2024 and into 2025. These tailwinds were partially offset by a slightly lower average ticket due to a higher carryout mix. Shifting to unit count, we added 92 net new stores in the U.S., bringing our U.S. system store count to 6,854 stores at the end of the year. For the year, we added 168 net new stores, which was a strong increase over the 126 net stores we opened in 2022. U.S. company-owned store gross margin decreased 1.6 percentage points in the fourth quarter of 2023. Excluding the impact from higher insurance costs and an increase in our loyalty liability, due to the change in point structure following the relaunch of the Domino's Rewards program, margins would have expanded slightly. Domino's unit economics remained strong with continued EBITDA growth for our U.S. franchisees. We expect our average franchisee profitability per store to come in at $162,000 in 2023, up $23,000 from the prior year. Shifting to International, same-store sales, excluding foreign currency impact, increased 0.1%. The deceleration from the third quarter is being driven primarily by pressures in Europe and geopolitical tensions in the Middle East. Please note that the Middle East represents a relatively small portion of our profits at less than 3% of our operating income. Our international store count increased by 302 net stores in the fourth quarter. For the year, our net store growth internationally was 702 units, excluding the Russia closures. In total for the year, we grew 870 net stores across the globe. Income from operations increased $8.4 million or 3.4% in the fourth quarter. Excluding the impact of the $21.2 million prior re-franchising gain that we are lapping, income from operations would have been approximately 13% in the fourth quarter and up approximately 10% for the full year. Now turning to our 2024 outlook, which remains in line with what we shared at Investor Day in December. Our guidance calls for the following in 2024: 7% or more of global retail sales growth excluding the impact of foreign currency. We expect our 2024 U.S. comps to be above the 3% long-term guide as a result of our expected outsized catalysts in Uber and loyalty. As we have communicated previously, we expect our sales with Uber to increase throughout the year as marketing and awareness increase, and we expect to exit the year with an overall sales mix of 3% or more. We expect sales with Uber to start ramping up after Q1, which will have only a partial tailwind from marketing. In the U.S., we are planning for a modest price increase in the low-single digits. This includes California, where we're expecting to take pricing above that to offset the wage impacts from AB 1228. We expect our international comps to remain soft in the first half of the year due to a continuation of the trends we saw in the fourth quarter, but expect them to accelerate to our 3% or more long-term guidance in the back half of the year. Now shifting to net stores, where we are expecting 1,100 or more, which will be driven by 175 in the U.S. and 925 in international. There was a meaningful uptick in our U.S. net store growth in the fourth quarter, which was slightly ahead of our expectations, and the pipeline continues to build. We expect net unit growth in the U.S. to be relatively flat to 2023 in the first half of the year and to accelerate slightly in the back half based on current visibility. Internationally, we expect to increase net store growth each quarter over the prior year as we lap the one-time closures we had in 2023 and to step up significantly in the back half of the year. As previously communicated, we expect slightly less than half of our growth to come from China and India. On profits, we are expecting an 8% or more year-over-year increase in operating income excluding the impact of foreign currency. We do not expect the impact of foreign currency to have a material impact in 2024 based on current FX rates. A few additional points of color on some of the profit components. We expect our food basket to be up 1% to 3%. This has been driven by continued moderation on cheese prices. From a meeting's perspective, we expect the Q1 food basket to be deflationary as we lap the only quarter from 2023 when the basket increased followed by moderate increases for the remainder of 2024. We expect our supply chain margins to be roughly flat for the year, barring any unforeseen shifts in the food baskets. We expect an increase in year-over-year supply chain margins in Q1 due to the expected negative food basket, followed by a slight moderation for the balance of the year. We expect supply chain margin dollars to grow in line with transaction growth throughout the year. We estimate that rate inflation across the system, inclusive of California, will be in the mid-single digits, and this has been primarily driven by minimum wage increases. We expect our G&A as a percentage of retail sales to be approximately 2.4%, which is in line with 2023. We also wanted to provide an update on our technology fee for 2024. In Q2 2023, we increased this fee to $39.5 and temporarily lowered our advertising fund contribution percentage by 0.25% to 5.75% for a 12-month period. Starting at the beginning of Q2 2024, we are lowering the technology fee to $35.5 and increasing the ad fund back to 6%. As previously communicated, we are expecting operating income margins to be relatively flat compared to 2023. We do not expect to see cost leverage in 2024 due to investments we're making in consumer technology, store technology, and supply chain capacity to support future sales growth in the U.S. We are expecting Q1 margin expansion due to lower inflationary pressures, as previously noted, on our food basket, and we expect the Q2 margin rate to be down because of the timing of G&A spend, which will be partially driven by our worldwide rally, a gathering of our U.S. and international franchisees that takes place every two years. We expect margins in the back half of the year to be flat. As I conclude, I wanted to note that we announced a 25% increase in our dividend and increased our share repurchase authorization by $1 billion. All of this is being done in line with our capital deployment priorities. Thank you. We will now open the line for questions.

Thank you. Good morning. Clearly, your underlying core business is showing very nice signs of improvement, positive traffic in both the carryout business and delivery business prior to any Uber benefits. And I understand improvements in the core business can continue moving forward, maybe even perhaps accelerate, and they remain important. But now you are fully rolled out with Uber. And our conversations with the investment community suggest that expectations for Uber mix currently are still relatively low, maybe in that 1% to 1.5% range. And you talked about getting to 3% by the end of the year. So can you talk about how this improvement should unfold as the year unfolds and maybe unpack the marketing that's being turned on? How is that bolstering your expectations for where the Uber mix will go? Thank you.

Good morning, Brian. How are you doing? Let me talk a little bit about what we're seeing regarding the cadence of the flow of orders from Uber. Sandeep talked about the 0.4 in Q4, and we're seeing a meaningful uptick in Q1 as we just turned the marketing on, so essentially what we expect to see as awareness grows is that percentage of sales will grow. We feel like we're still in line for the 3% exit rate that we spoke about.

Thank you very much. Congrats on the quarter. I wanted to ask about value in January; you ran the week-long carryout promo, which I haven't seen before. Can you talk about the rationale behind that? Any commentary on how you saw that perform and to the extent that you're willing to talk about January, just given a little bit of noise across the industry? And then more broadly, how you're thinking about value and any incremental value offers through '24? Thank you very much.

Yeah. Lauren, when you think about our Hungry for MORE strategy, renowned value is a big piece of it. The carryout special isn't something new; it's something we brought back. I think the last time we ran it was 2020. Frankly, that's going to be part of our portfolio moving forward as well as 50% off as well as our mix and match deal. Value is a key component not only price but also value from a loyalty standpoint and value in the aggregator space. The week-long carryout wasn’t anything new, but I will tell you it performed extraordinarily well. I’m really happy with the way it went.

Hey. Thanks for the question. Just looking at the unit growth this quarter, the domestic side, really strong pickup in terms of openings, international, maybe a little bit on the softer side. As you look out to next year, can you talk about your confidence in that accelerating on a global basis next year and what that looks like from a domestic and international standpoint? Thanks.

Yeah. We still feel really strongly about the guidance we gave, the 1,100 plus stores and the 5,500 over the next five years. You saw some nice momentum at the end of the year in the U.S. in 2023. We expect to see more at the end of the year in 2024. Internationally, I think we've got a lot of closures behind us; that was probably one of the things that was driving down the numbers this year. But those closures really focused on three areas: Domino's Pizza Enterprises, and they talked about their number, Russia, and Brazil. Those three were over 80% of our closures and no other market closed more than five stores. As we look forward, we feel really confident about openings. I'm sure someone will ask a little bit later, but when you look at the profitability of our U.S. franchisees, the fact that we had more new franchisees in 2023 than we have in the last 15 years, they're bullish about Domino's Pizza, and they're spending their money that way.

And Greg, I'm just going to add something in terms of the international store openings in particular. We provided some milestones to say that every quarter we're expecting to actually grow against last year, as we lap the closures, and then significantly accelerate more in the back half of the year. So, very confident in where we are with store openings internationally. We’ve been talking to our master franchisees and have good visibility to our expectations there.

Great. Thank you. Russell, within guidance for outsized ‘24 or U.S same-store sales, can you talk about your expectations for core traffic growth or what 2024 same-store sales will look like when you exclude the 3% mix for Uber and the low-single digit pricing? What I'm trying to get at is do you believe similar to 4Q that you can drive positive carryout and delivery transactions, excluding the impact of Uber? Thanks.

Yeah, Andrew, absolutely. When I think about 2023, it was kind of a tale of two stories for us. The first part of the year was all about addressing the base and fixing things like delivery times and getting delivery times back to where they needed to be, getting franchisee profitability back where it needed to be, so that in Q4, we were able to really lean into the Hungry for MORE strategy, and you saw it all in action. You saw most delicious food with innovation. You saw renowned value from a promotional standpoint with loyalty. All of those things are going to be able to continue throughout 2024 with this improved base that we've got, so I expect both carryout and delivery orders to be positive.

Great. Thanks. Good morning, guys, and thanks for all of the color on the loyalty program. I was wondering if you could talk a little more about loyalty in the U.S. and sort of expectations for the program looking ahead. I think recently, you've kind of talked about that as being the biggest contributor to U.S. same-store sales growth this year. Curious if that expectation still holds. Thank you.

Yeah, Dennis. The loyalty program was just off to a great start. I'll just repeat numbers that we had in the opening remarks because I just like them so much. We added 3 million folks last year, with 2 million of them coming with a new program. It’s important to know because I'll talk about Emergency Pizza in a second and the effect on loyalty there. The loyalty program out of the gate, before even Emergency Pizza, was doing exactly what we needed it to do, which was engage lower-frequency users and carryout users. Then we brought in this powerhouse of Emergency Pizza that continued to inflect those numbers. We have ideas like that in the future that will be able to drive; there will be advantages and there are advantages to being a Domino's Rewards customer. The program is doing exactly what we thought it would, which is driving frequency, especially among lower frequency customers, as I said before, also the carryout customers. Even though we have these lower tier levels, we're down to two purchases now can get you a free item. Due to the food cost at these various tiers, it’s actually positive for the franchisees – really, a win-win, a better program that’s more engaging to customers and more profitable for our franchisees.

Thanks. Good morning. Great update. I’m getting some feedback as I'm asking, so I'll try to get through this. Wanted to ask you about a couple of profit drivers for this upcoming year, that being company-owned stores and supply chain. In the company store line is probably the only area of the P&L that was slightly disappointing on the quarter. But for the year, it looked like the company stores profitability was down maybe 10%. Your franchisees did a lot better than that; they were up double digits this last year. So any sort of callouts you would make in the quarter and for the year and more importantly, how are you thinking about margins for company stores long term? They had been as high as 23.5% or so; consensus for '24 is more like 18%. So I'm just wondering how you're thinking about company-operated and then supply chain. Any comments there? Obviously, very strong on the supply chain in the fourth quarter. How you're thinking for '24? Thanks.

Thanks for the question, David. On the company stores, I called out a couple of impacts in the fourth quarter, which actually impacted our margins. One of them was higher insurance costs, and the other one was the accrual because of the points generated with the new loyalty program. When you take out those two impacts, our margins expanded. The good thing is that the loyalty program has worked extremely well from a transaction perspective for company stores. We expect this to significantly drive profit dollars, and we expect to revert to margin expansion in 2024. Frankly, I think we expect to continue to build on our margins as we move forward, even beyond 2024. I would go to the supply chain profit. We're really happy about our supply chain profitability that we generated in the fourth quarter. A big driver of supply chain profitability all year was the productivity improvements driven specifically by procurement and food cost. This was a big element of what we saw. As we pivot to 2024, the expectation on supply chain is going to be supply chain profit dollars because it's going to be driven by our transaction growth. As Russell talked about earlier, we expect to see transaction growth before and after the impact of Uber. All of that is going to fly through the supply chain P&L and expect that to actually drive significant profit dollar growth for the Supply Chain business.

Yeah. I'd just add that those same transactions also add up to low fees and online ordering fees as well.

Hi. Good morning. Very nice to see the order counts in both delivery and carryout, but I wanted to ask specifically about the Emergency Pizza promotion and whether you could try to frame up how much of a lift that might have caused for the transaction growth. I know there's a component about customer acquisition in there, so just wanting to sort of get a sense of how you're thinking about the trend coming out of that promotion, which ended, I think, recently? Thanks.

David, I'll start, and maybe Sandeep can give some color to this one, too. Emergency Pizza was a resounding success. It really was. When I look back and just, again, giving compliments to our marketing team, this is your traditional buy one get one free, marketed in such a way that it really breaks through. We've done buy one get one free before, but not like this. I think Emergency Pizza not only drove order count; it also drove people into the loyalty program because you need to be a loyalty member to get your Emergency Pizza. Last we have a new thing in our arsenal. Boost weeks have worked really well for us. Emergency Pizza is something we can leverage in the future as well.

Yeah. I think what Russell is saying is exactly right. Emergency Pizza is a brilliant marketing innovation. The broader construct of it is thinking about Domino's Rewards, our loyalty program, creates a key platform to our third pillar, renowned value. At the beginning of the quarter in the fourth quarter, we had pepperoni stuffed cheesy bread, which was a special offer connected to the loyalty program. After that, we got Emergency Pizza and there's a number of different promotions we can continue to bring along to Domino's Rewards. Rather than looking at Emergency Pizza by itself, it's really about how much Domino's Rewards can drive transaction growth for us; this is a significant pillar for our delivery and carryout in 2024.

That was a big learning from us from the first loyalty program we had. With Piece of the Pie rewards, we advertised on TV to highlight our rewards program. What we learned over time is the best way to promote it is to have a compelling promotion, whether it's a new product or something like Emergency Pizza. The only way to get it is if you sign up for the program. Once you’re in the program, you're in a frequency-driving loop that we've never had before. Emergency Pizza was a highlight, and as Sandeep talked about, this type of mechanism driving people into the loyalty flywheel is something we’re going to continue to run.

I apologize. Can you hear me now?

Perfect. All right. You're on speaker, but this will work. First, in terms of some of the slowdown that we've seen, the brands observed in Continental Europe, were there any learning lessons that you could apply there, perhaps as Europe potentially being a leading indicator to the U.S. of how you could get in front of some economic changes that would allow the brand to perform better in the U.S. than it has in Europe, at least in the last quarter? That's the first good question. Secondly, obviously there's no direct P&L impact in advertising allocation, but there is a direct P&L impact in terms of the online ordering fee. In terms of reducing that online ordering fee or cutting it at least marginally relative to what it was in '23, what was the reasoning behind that? Was that franchise driven? Obviously, the economics at the franchise level would suggest they could bear that higher fee, but I just wanted to have a sense of why you felt that reduction was necessary to make? Thank you so much.

Good morning, John. I'll take the first question; maybe Sandeep will take the second one. Our European business is really strong, and we believe some of the pressures we're seeing there are generally transitory in nature. If you listen to the call from DPE, Domino's Pizza Enterprises, our master franchisee over several markets, especially France, there have been challenges, and that's one of our larger markets in Europe. We're partnering closely with them right now on those challenges. The good news is there are green shoots in many of the markets where they're leaning in. For example, Australia and New Zealand, the numbers there have been fantastic because they're leaning into the most delicious food part of Hungry for MORE. I don’t think anyone is doing it better than they are right now. I don't know if anyone would like to comment on Germany and how that seems to have turned a corner. As we work on France together, that's certainly a business that needs to turn.

Yeah. I think Russell is exactly right. We think it's all tied back to the Hungry for MORE strategy being applied across the entire system with the international markets. Learnings from markets like Australia have been applied to DPE and essentially all other markets as well, and those learnings should enable us to offset any other headwinds as we go back to our long-term guidance. Specifically to your question on the advertising fund and the online fee. Let's go back to about a year ago. A year ago, franchisee profitability was not in the best place. We came off a big decline in franchisee profits in '22. We saw an opportunity because of the buildup in the reserves of the ad fund to take a 25 basis point, 12-month hiatus from the advertising fund contributions, but we did want to continue investing in our technology solutions. We did take up the technology fee by $0.08. View that as a temporary increase and an offset between the ad fund contribution and the technology fee. Now that we've come to the point where we think it needs to restore the ad fund to 6%, we have adjusted the technology fee to $35.5. Another way to look at it is we went up from $31.5 to $35.5. If you look back at our history, we’ve consistently increased our technology fee because we're making investments in technology for our franchisees, which drives the flywheel for their growth and drives global retail sales and our royalty dollars as well. That is the rationale, and we feel very good about it.

Thanks. Sandy, could you break down how much of the $23 million of the year-over-year supply chain profit dollar growth came from the productivity improvement versus the volume growth? Do you expect any productivity improvements to continue in that segment into '24?

Thanks, Chris. A significant portion of the profit dollar growth we saw in '23 came from the productivity improvement that was pretty outsized. It was, it is probably a function of where the markets were, especially after the outsized inflationary period in 2022. We were able to get such significant improvements in '23. As we move forward in '24, this is definitely going to be a focus, but it's not going to be as outsized as it was in '23. We do expect to get some benefits; however, we also have to make investments in capacity, like I talked about, both at Investor Day and earlier on the call today. As we look at '24, really expect profit dollar growth to be driven by transaction growth and productivity improvements, which could offset some of the investments we're making in the business.

But the nice thing about what our supply chain team has done, the productivity we gained in 2023 isn't going back. I would think about that as kind of accruing forward. So well done by Sandeep and the team.

Great. Thanks for taking the question. I want to come back to the loyalty conversation. Russell, I think you mentioned 2 million plus new loyalty members since launch, and I think at the Investor Day, in early December, you mentioned there was about $1 million incremental. I’m curious if you could comment if there was a meaningful acceleration in new loyalty members in December. Do you expect that trend to continue in '24? Is there any way to parse out how many of those are coming from carryout customers versus traditional delivery?

Yeah, Peter. There are a couple of meaningful moves in the loyalty program. The first was just the launch of the loyalty program, right? We saw a significant increase, and that's what we talked about in December. Then, on top of that, we had more momentum driven by Emergency Pizza. We’re still very happy with the way that’s growing, and we have programs like the ones Sandeep talked about earlier that we will continue to drive that business. The objective here was to engage carryout customers and light users. We are absolutely doing that with the program. We can see that even right out of the gate.

Thank you. I have a clarification and then a question. Just a clarification is Sandeep, you said company margins would have been up slightly excluding insurance and loyalty liability. I guess given transaction growth and lower commodity costs and the shift to carryout, which I think is typically higher margin rate, I would have thought up more than slightly. So I guess as we think about that business, we should be focused now, I guess, increasingly on profit dollar growth as opposed to margin rate expansion, similar to how you think about supply chain? Or maybe my interpretation of up slightly is not quite right? And then the question is about the industry and the pizza segment. You often have better insights into the competitive dynamic than I do. Was any of this category improvement finally seeing perhaps green shoots in the category? Thank you.

Thanks, Sarah. The way to look at this is it’s the appropriate accounting treatment if we expect more redemptions, and that’s the adjustment to the breakage accrual. However, our Domino’s Rewards program is working as we intended. More transactions are expected to come in, and the loyalty program is driving that. I think there is an opportunity to expand margins in addition to driving profit dollar growth as we leverage the fixed cost structure of the company stores. Look for both profit and margin expansion on company stores is my answer.

On the state of the industry, I think even looking forward to 2024, we expect pressure on orders and transactions in QSR. We don’t expect that to be the case with Domino’s, and I think will be unique in that area in 2024.

Yeah. Thanks. Good morning. I wanted to ask about your international sales outlook as well. How much of this do you think is market-specific execution issues? I'm referring to just some of the countries that have been a little bit slower versus macro pressures. As you have your outlook for improvement through the year, does that depend on some of those macro pressures easing, for example, in India? Can you comment on some of the other markets you didn't address before?

Yeah. I'll start out talking about India because I was speaking over the weekend to Hari Bhartia, the Chairman of Jubilant. That’s a great example of both dynamics you mention. Obviously, they're pushing the business there; there are some headwinds, but Hari talked about what's going on in the rest of the industry and why he's bullish about the future. They're talking about 200 new stores to grow in 2024 because he's growing share. I love that our franchisees are future-focused, similar to our approach in India. The second half of the year is projected to return to the 3% growth we talked about.

Russell is exactly right. We think it all ties back to the Hungry for MORE strategy applied across the international markets. Learnings from markets like Australia are being applied across DPE, essentially to all other markets as well. This approach should enable us to offset other headwinds as we go back to our long-term guidance.

Thank you. I have a quick clarification and then a question. So the clarification is, Russell, you mentioned that you're expecting some real pressures in the industry, but not for Domino's. Can you clarify whether the increase in transactions you've seen in the fourth quarter is across all income cohorts? And then the question is, can you talk about the speed of delivery in the overage channel versus your own channel, understanding that you're using your own drivers anyway? How does the delivery timing compare versus your peers today?

On the transactions piece, we believe that our transactions being positive is unique in the industry. We'll get more share information as that comes out; we'll certainly share that with you. On speed of delivery, the biggest comparison we have is versus ourselves. Every day, we expect to get better than the day before. We're happy that we're back to 2019 levels. We’re now moving more volume into that delivery network. We ensure delivery times are where they need to be. More importantly, we haven't talked a lot about this: the quality is paramount.

Great. Thank you very much. Just following up from the Investor Day, you guys talked about your Pulse 2.0 technology. I think you mentioned there will be a complete overhaul throughout 2024 in conjunction with your Microsoft partnership, discussing AI tools. I'm wondering if you could talk a little bit about the greatest changes or the most likely incremental benefits to the front or the back of the house and the timeframe to see those benefits. It's been a long time coming with this major overhaul, so just trying to get a sense of what we're going to see in '24. Thank you.

Thanks for the question. It's a good time for me to clarify that. The future benefits of Pulse is actually now. We talked about focusing on areas within the circle of operations that make the biggest difference in our business. Next-generation pulses are in stores now, while some will roll out to a bigger degree later in 2024. The most important element, those will drive operational efficiencies, improved atmosphere for team members. We're working with Microsoft on generative AI in two areas, consumer ordering and store side improvements. You’ll see something in both areas in 2024.

Hi, this is Joe Zinski on for Andrew Strelzik. Thanks for taking the question. I'm curious how you would characterize the current competitive environment and what you're seeing from a promotional standpoint. I was wondering if you could provide any incremental details regarding product innovation and the two new products that you are planning to launch this year? Thank you.

Sure. I don't like to talk a lot about competitors. Our competitor is ourselves; we try to get better than ourselves every day, which reflects in our Q4 results. I think this will be a year less about order count. I didn't quite hear your second question. Can you repeat the second question? About products. Thank you very much. On the product side, a couple of things: we're really happy that we have our pan pizza out there now. But that’s not a new product, and you should know that is not counted among the kind of two plus new products we're going to have this year. It’s something we haven't talked about since 2014. While it's not counted on my list of new products, it's something that many people are hearing about for the first time.

Hi. Thanks. Good morning. So Russell, you mentioned the U.S. system added more than 60 new franchisees. I think that was the most in 15 years, you said. On the back of this, how are you thinking about the evolution of the domestic franchisee base and just the balance of openings coming from new franchisees versus longer tenured franchisees going forward? Thanks.

Thanks a lot for the question. When we have calls like this, I tell people if you want to know how Domino's Pizza is going to do in the future, look at what your franchisees are doing. Franchisees are profitable now, and in 2023, we opened up more stores heavily at the end of the year when things became clear. We're positive that we're going to beat that number in 2024 and hit our 175 plus algorithm. The 60 new franchisees represent the most we've had in 15 years, showing they see a positive future. We already have 170 new potential franchisees in or graduated from our management school; we have 50 waiting on openings or transfers in the system. That momentum is going to continue.

Yes. Hi. I know we've spoken about it a number of times in terms of the loyalty program. Given the mention of the liability, the loyalty liability from the relaunch, is there a way or how would you suggest we sort of track that and look at the breakage levels and see where that may be going in the future and how we should sort of map that out? Obviously, as you mentioned, it's a positive thing, so. Thank you.

Yeah, Meredith. Thank you for the question. The way to look at this is it’s the appropriate accounting treatment if we’re going to expect to see more redemptions, and that’s the adjustment to the breakage accrual. The point is our Domino's Rewards program is working as we intended, more transactions and redemptions are expected. Look for profit dollar growth in addition to margin expansion, especially on the company stores in 2024. We’ll continue to provide disclosure as we move forward, but that’s how I would measure performance on this.

Thank you for your question. I wanted to follow up on Domino's advertising on Uber. I understand it's just beginning and will increase throughout the year. Can you share any insights you've gained? Is it performing as expected? Have there been any surprising results in terms of its effectiveness, either good or bad? I'm curious about this strategy, especially since it’s a new initiative for Domino’s, though I know you've been preparing for it.

Yeah. Thanks, Brian. There are two advertising efforts for Domino’s on Uber: one is Domino’s and the other is Uber. What we’re seeing on that platform is very promotionally driven, and that’s the sweet spot. The nice thing is when you think of marketplaces and our ability to excel there, whether it’s a Google marketplace or in this case, Uber, and so it’s going how we would expect, very promotionally driven. We are confident that a percentage of sales from Uber is going to increase to that 3% exit rate we talk about.

Great. Thanks. I appreciate it. Quick clarification on a question. Clarification, the loyalty liability: I'm assuming that was just a onetime true-up; if you can clarify, that would be great. The question is on frequency shifts you're seeing in the loyalty program. Any way you can give us some sort of benchmarks as to where some of the more loyal customers were spending last year, and what it’s looking like so far since you made the shifts in late '23?

So I'll take the first part of the question, John. It is a onetime thing because the significance of the change of the new program was what triggered it. It doesn't mean it's never going to happen; we need to monitor breakage and if you do need to make a true-up, you will do so. But given the new program launching, I think this was much more of a onetime event. Regarding frequency shifts, Russell will take the question.

Yeah. What I can tell you is that macro or frequency is really still bubbling. We've seen light customers engage with us as expected. When we have more information, we'll certainly share that with you because loyalty programs are not just about first use or second use; they’re about lifetime value and use over time, so we'll keep you posted as we gather more insights.

Thanks, John. That was our last question of the call. I want to thank you all for joining our call today, and we look forward to speaking with you all soon. You may now disconnect. Have a great day.