Dominos Pizza Inc (DPZ) — Q2 2024 Earnings Call Transcript

Good morning, everyone. Thank you for joining us today for our Second 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-Q, 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 our 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. And with that, I'd like to turn the call over to Russell.

Thank you, Greg. And good morning everybody. Our second quarter performance demonstrated once again that our Hungry for MORE strategy is delivering positive results. For the second straight quarter, we drove US Comp performance in the healthiest way possible through profitable order count growth. Positive order counts in our delivery business, positive order counts in our carryout business, positive order counts across all income cohorts. We also continue to see improvement in our international comps and generated earnings that were in line with our expectations. As a result of our strong results year-to-date and expectations for the back half of the year, we remain on track to achieve our guidance for annual global retail sales growth of 7% or more and operating profit growth of 8% or more. I want to provide an update on our net store growth guidance, which we temporarily suspended this morning. First, I want to reiterate that our US Pipeline is strong and it continues to grow. We continue to expect 175 or more net new stores annually in 2024 through 2028 in the US. We now expect to fall below our net store growth target for international in 2024 by approximately 175 to 275 stores, primarily as a result of challenges in both openings and closures faced by Domino's Pizza Enterprises, one of our master franchisees. We're partnering closely with DPE as they work through this process. Now, it's important to note that our largest expected growth markets of China and India remain on track to deliver on their growth potential. In China, DPC Dash announced they'll open store number 1,000 by the end of this year, and then they'll increase their net openings per year to between 300 and 350 starting in 2025. Back in May, Jubilant, our master franchisee based out of India, increased its total store count potential to 5,500 over the medium term in the six global markets in which it operates. When you think that it took Domino's over 60 years to open 5,500 stores in the United States, Jubilant's goal exemplifies the Hungry for MORE mentality our global system is taking on. Now let's look at our second quarter results through the lens of our MORE, Hungry for MORE pillars, which continue to drive our business. As you know, M stands for the most delicious food. We know we've got the most delicious food in the industry and are focused on showcasing that with more mouth-watering food photography in all of our marketing and sales channels. We launched our New York Style pizza in Q2, and it's what we call innovation with intent. When we launch a new product, it's got a specific role, and it's intended to stay on the menu permanently. New York Style pizza is another example of that. It's got a crust that's thinner and more foldable than our traditional crust. It was designed to appeal to pizza lovers whose idea of deliciousness is a little bit different than Domino's Pizza offerings in the past. The result has been a high mix of sales within our pizza offerings. In addition to being a product that showcases deliciousness in a different way, New York Style Pizza is available as part of our mix-and-match offer. Domino's Rewards members can also redeem 60 points for a free medium two-topping New York Style pizza. This new offering drives more than just deliciousness. It drives value and it drives more customers into our loyalty platform, and that's why we call it Innovation with Intent. The O in Hungry for MORE stands for Operational Excellence. This is how we'll deliver on our promise to have the most delicious food by consistently driving a great experience with our product. As I shared on our last earnings call, in 2024 we're rolling out a new service program we're calling MORE Delicious Operations. This is a series of three product training sprints focused on our dough, how we build and make our products, and then how we cook them. In Q1, we embarked on our first sprint, which focused on our dough, and are now rolling out our second sprint around ingredients and product builds. These product sprints and last year's Summer of Service are working together with our DMOS technology to drive improvements in our delivery times. In fact, estimated average delivery times were nearly 10% better in Q2 of 2024 than they were in Q2 of 2022. And we're doing all of this while our stores are handling more orders. So I wanted to congratulate our franchisees and operators whose commitment to service allows us to deliver on the promise we are striving to make in our marketing that Domino's has the most delicious food. Our third Hungry for More pillar is R for Renowned Value. As I said before, it's not just about having the lowest price in the market; it's about providing value that's innovative and memorable. Renowned Value breaks through the sea of standard discounts you see in the marketplace. Now Domino's Rewards is an example of that Renowned Value. It continues to perform well and was the key driver of our strong US comp performance in Q2. You will recall our objectives for the program were to drive new users, particularly carryout customers, and increase the frequency of light users. I'm happy to report that Domino's Reward continues to deliver on those objectives. Our active members are up significantly year-to-date through Q2, showing that the program is continuing to build. Redemptions across both the delivery and carryout channels are also increasing, which is contributing to the transaction growth you're seeing in each of our businesses. For example, in our carryout business, orders with a loyalty redemption in the first half of 2024 are twice as high as they were in the first half of 2023 under our old loyalty program. So Americans continue to look for value, and Domino's is providing Renowned Value and doing it profitably for our franchises. National promotions are another way we're driving Renowned Value. In Q2, we had two Boost weeks, both of which were very successful in driving transactions and customer acquisition. As it relates to our promotional cadence in 2024, you can continue to expect around six Boost weeks. While providing Renowned Value through our own channels is one part of our barbell strategy, tapping into the aggregator marketplace is the other. And our launch into this space remains on track to exit the year at 3% or more of sales coming through Uber Eats. Everything we do at Domino's is enhanced by our best-in-class franchisees. They're the E in our Hungry for MORE strategy. In early May, we hosted our largest worldwide rally with almost 9,000 franchisees and team members in attendance. This year's event was appropriately themed Hungry for MORE. We brought the strategy to life across our global system, and the results showed. This was our most highly rated rally of all time. To close, I couldn't be more energized by the future of Domino's Pizza, and seeing the excitement of franchisees at our rally really brought that to life for me and the leadership team. Our results show that our strategy is resonating with customers and our system. All of this gives me great confidence that we can continue to drive significant long-term value creation for our shareholders. And with that, I'll turn things over to Sandeep.

Thank you, Russell, and good morning everyone. Our second quarter financial results were right in line with our expectations. Our strong start to the year has resulted in profit dollar growth versus 2023 for our US franchisees. We remain on track to achieve our target of $170,000 or more average US franchise store profit for 2024. Excluding the impact of foreign currency, global retail sales grew 7.2% in the quarter due to positive US and international comps and global net store growth. US retail sales increased 6.8% and international retail sales grew 7.7% excluding the impact of foreign currency. During Q2, same-store sales for the US came in at 4.8%, which was in line with our expectations. Our strong comps in the quarter for carryout of 7.9% and delivery of 2.7% were once again driven primarily by transaction growth. Our US same-store sales continued to be primarily driven by transaction growth from our new loyalty program and our strong marketing programming. We also benefited from 1.5% of pricing, which was inclusive of high single digits in California. Our sales mix from Uber grew to 1.9% for the quarter. The incrementality of Uber sales continues to be in line with our expectations. Our comp tailwinds were partially offset by a higher carryout mix, which carries a lower ticket than delivery. Shifting to US unit count, we added 32 net new stores in line with our expectations. This brings our US system store count to 6,906. We remain on track to achieve our 175 or more net store growth target in the United States in 2024, and we anticipate opening our 7,000 store by the end of the year. Shifting to international, where comp results were generally in line with expectations for the quarter. Same-store sales, excluding foreign currency impact, accelerated to 2.1% in the quarter. The improvement from Q1 was broad-based, as we saw improvements in our Europe, Asia, and Middle East markets. Store counts increased by 143 new stores as we finished the quarter with more than 14,000 international stores. Our net store openings were impacted by softness in DPE on gross new store openings and closures. Income from operations increased 1.7% in Q2, excluding the negative impact of foreign currency of $2.7 million. This increase was primarily due to higher franchise royalty revenues, resulting from global retail sales growth. This was partially offset by higher G&A, which was primarily driven by higher labor expenses, as well as the company's worldwide rally expense, as communicated on our last quarterly call. I expect the return on this expense to be extremely high, as everyone across our system left engaged, inspired, and ready to drive our Hungry for MORE strategy. Lastly, our margin rate was impacted by a 0.3% headwind in Q2 from the tech fee being reduced to $0.355 and our ad fund contribution rate increasing back to 6%, as previously communicated. Now turning to our outlook. We continue to expect 7% or more global retail sales growth excluding the impact of foreign currency based on the following key items. First, our 2024 US comp to be above the 3% or more long-term guide, as a result of catalysts in Uber and Loyalty for the full year, and we expect comps to be 3% or more in Q3 and Q4. Specific to Q3, we expect comps to be slightly below what we saw in Q2, on a one-year basis, as we're expecting one less Boost week, partially offset by a continued ramp in Uber. Second, sales for Uber to increase, as marketing and awareness grow and we're expecting to exit the year with an overall sales mix of 3% or more. Third, international comps to accelerate to 3% or more long-term guidance in the back half of the year. As Russell noted, we now expect to fall below our 1,100 or more net new store number for 2024. This is due to challenges in our international business, primarily related to DPE. As we get further visibility into the full effects of DPE's store opens and closures, we will provide an update on the impact to our long-term outlook for 2025 and beyond. We continue to expect an 8% or more year-over-year increase in operating income, excluding the impact of foreign currency. To highlight some of the components. First, for the year you can expect operating income margins to be relatively flat compared to 2023 and to be down slightly in Q3. As a reminder, we are not expecting to see cost leverage in 2024, primarily due to investments we are making in consumer technology, store technology, and supply chain capacity to support future sales growth. Second, we are now expecting supply chain margins to expand compared to the prior year, due to some favorability in the food basket and slightly higher procurement productivity. We are forecasting to come in below the midpoint of our food basket range of 1% to 3% for the year. In Q3, expect supply chain margins to be roughly flat compared to the prior year and down in Q4. Third, the favorability in supply chain margin is being partially offset by pressure within G&A, due to slightly higher investment levels. We continue to expect our G&A as a percentage of global retail sales to be approximately 2.4%. And lastly, we are now expecting the impact of foreign currency to be approximately 1% of operating profit dollars in 2024. We expect this will impact our year-over-year operating profit margins by roughly 20 basis points. As was noted in our disclosure this morning, we did not repurchase any shares in the second quarter. We continue to maintain flexibility due to the volatility of the interest rate environment as we evaluate our upcoming debt maturity in October of 2025. Thank you. We will now open the line for questions.

Good morning, everyone. Thank you for the opportunity to ask a question. I would like to get more insight into the loyalty program and what you're observing as we move into the latter half of the year and into 2025. How are you approaching the marketing and promotion of the loyalty program, considering the contributions you have seen so far this year and your expectations for the remainder of the year? Thank you.

Good morning Dennis. Thanks for the question. Yeah, I'll tell you Loyalty for us this year has just been tremendous. If you think about the objectives that we outlined in our Investor Day, we said with the new Loyalty program we wanted to drive light users and frequency there, check. We wanted to continue obviously to drive our delivery customers, obviously we're doing that, but we also wanted to engage our carryout customers, check there. So it really is doing every single thing that we had hoped it would. We'll give a number at the end of the year, as far as new users, but I can tell you the number of new users is increasing. I gave a number in my opening remarks that just to me is indicative of how this is going. So remember, one of the things we said we were going to do is really use Loyalty to drive carryout. So orders from a carryout perspective, orders with Loyalty redemptions in the first half of this year are twice as high as they were under the old program in the first half of last year. Sandeep talked about how our carryout business is doing and this is one of the big reasons. So just really on all of the objectives, the Loyalty program is delivering what we had hoped.

One thing I'll add to that, Dennis is we've talked about this previously, but this is a multi-year driver of comps for us. So this year is just the beginning, and as we did in Piece of the Pie Awards when we launched it in 2014, we saw over three years or four years continuous compounding of comps based on the launch of the program. We expect a similar kind of cadence, as we go through this program as well.

Yeah, and when you think about the health of this quarter and how order counts came in so strong. All of those customers are going into the flywheel of this Loyalty program. So today's orders are really tomorrow's sales. And that's why we're so excited about how the Loyalty program is working with everything else that's firing on the business right now.

Thank you. Good morning. As it relates to the unit growth guidance, I understand that the shortfall is primarily related to pressures you're witnessing at DPE, but can you dive into this dynamic a bit more? It just seems like a lot has changed versus when you initiated the long-term outlook at the end of last year. So just trying to better understand how the surprise came about so suddenly versus what you were expecting seven months, eight months ago?

Yeah, Brian, it's Sandeep. And so I think when you go back to the Investor Day back in December, I think one of the processes that we went through was working with all of our master franchisees, including DPE, on the expectations that they had for the business. And we basically calibrated to that for both 2024 and the five-year horizon as well. And at that time, we were completely aligned. So then actually we got into the end of the Q1 call and then we got into the second quarter and we started seeing that relative to our expectations and cadence, both new store openings as well as closures really started increasing from DPE. And as we saw that, we continued to engage with the DPE team to validate the forecast that we had for the year. And it became pretty clear as we actually went through that conversation and discussion that there was not only the risk to the second quarter that we were seeing, but clearly the outlook was going to be impacted as well. And in fact, just yesterday I think DPE put out a release with a number of closures that they outlined in the Japan and France market in particular, which they're targeting for their first half, which is our second half, which therefore will land in this fiscal year. So apart from what we've seen in second quarter, we expect to see more pressure in the second half of this year. So I think when you take the collective of all of that, it was a pretty material update that we were going to see in the numbers for this year, and we felt it appropriate to update our guidance for 2024. And also you will notice the range is 175 to 275. Why is the range that big? Because I think as we go through the process of not just the closures but the potential openings, the timing of it could potentially shift between our fiscal 2024 and fiscal 2025. And that's why we're temporarily suspending guidance on the long-term outlook as well apart from this year. So that's kind of what went on in the background, Brian, so you understand that. But I think one of the things I want to just come back to is when we look at our long-term guide, I mean, we're talking about maintaining our GRS growth of 7% plus and our operating income guide of 8% plus. And the reason for this is the store closures that we're talking about are very low volume stores. So when you actually put it all together, the aggregate impact to operating income is really immaterial in the grand scheme of things. And so that's why we're very confident in our operating income guidance. And we are reiterating that as you saw this morning.

And Brian, I would just add to that. I think what this shows me is how many levers we have to grow this business. And so, you know, certainly we're working with DPE, but let me just put some of this in perspective. So our sales and stores are still on target for the 7%, I'm sorry, our sales and non-profit for the 7% plus and the 8% plus. And with those headwinds in DPE, that means we have a lot of other things firing. And so just maybe I'll start with development. So at the same time as we have this DPE news, we have news that China and India are increasing their outlook. We've got today 14,000 stores, half of those stores we've opened since 2015. And so the momentum we have on our way to 40,000 stores, which is a lot more room for us, is tremendous. Then when you think about our development in the US, obviously we're, as Sandeep said in his remarks, 175 plus is still our target this year that we're going to hit. And when you think about the strength of development, openings are really important. So are closings. And in the trailing 12 months in the US, we've closed only seven stores out of a total about 7,000. And so development I think overall is pretty healthy and like I said we've got these other things firing at the same time, which is why our sales and profit numbers are still coming in at forecast.

Hi. Good morning. My question is a follow-up, Russell on your comments about the outlook for the year being unchanged. I guess we've seen signs that consumer spending is slowing certainly in parts of the restaurant industry. And it feels like the degree of difficulty in the US has increased. So I just wanted to ask you to give some commentary on why you're so confident in holding those targets for this year? And whether you think the degree of difficulty is higher or unchanged versus what you were thinking previously. Thanks.

Yeah, thanks, David. To me, the best predictor of the future, even though I have a lawyer in the room, who probably tells me I can't say this, is what's happened. And you're right about consumer spending slowing, but let's think about what's happened with that as a backdrop. We've grown orders in our delivery business, our carryout business, every income cohort. We haven't talked about international, but we've grown order counts in international. And so that's what's going on in an economy where folks are kind of maybe struggling to decide what to buy. And so if order counts are positive in that scenario, then as the momentum swings eventually, I expect our momentum to continue. So what you do when times are tough, to me that talks about the strength of the brand and that's why I just could not be more excited about how we delivered the results for the quarter.

Great. Thank you. Sandeep, you talked about how the 3Q comps in the US are expected to trail 2Q levels, and just given these are comparisons, I'm curious if that reflects what you're observing so far this quarter, or if it's more just forward-looking around your expectation just given one less Boost week in 3Q.

Andrew, thanks for the question. I think, no, it's more about what I talked about in the prepared remarks, which is we do have one less Boost week. We do have the ramp in Uber, but on a net basis, it's slightly below what we saw in Q2 as our expectation for Q3. But I'll go back to Russell's previous answer. We are seeing tremendous performance in terms of transaction growth for the entire first half, and we're expecting to see that same performance in the entire second half. And so we're very confident in the ability of our business to deliver the kind of momentum that you've seen already in the first half, in the back half, including Q3.

Thanks, Good morning. I guess the question is about, I'll make it a kind of a two-parter. It looks like the sales trends are pretty volatile in the US from the data that we see for example, things look like they were weaker in April, when you didn't have sort of a value forward-message like Emergency Pizza, where the $3 tip. Could you kind of reflect on the quarter and what you are seeing in terms of the consumer response to stuff? And maybe give us a sense of what you think is working and not working in the US? And then separately I think people are going to be concerned about the fourth quarter if the third quarter is worse than this quarter, maybe let's say you do a 4% in the third quarter, I think people are going to be concerned about you holding that 3% plus in the fourth quarter given the comparison. So maybe you can address both of those. Thanks.

Certainly, I'll give it a try. Regarding short-term volatility, we focus on quarters rather than days, as well as yearly trends. There are always various factors that can affect performance, such as weather and our offerings. The second part of your question pertains to the bigger picture of what’s working and what isn’t. Our Hungry for MORE strategy is effective. For instance, this year we launched two new products, including the New York Style Pizza, which emphasizes delicious food and innovation. Interestingly, some customers prefer an alternative to our traditional crust, so this new option aims to attract new customers. Additionally, this product is being delivered more efficiently than it was two years ago, exemplifying our commitment to operational excellence. It is part of our Mix & Match promotion and our Loyalty program, emphasizing renowned value. We are really connecting all these initiatives. There’s no single aspect operating in isolation; instead, there’s a domino effect that links all our current programs. From a perspective of what isn’t working, we're always striving for more growth. After 15 or 16 years here, I've learned what drives our business: orders, store presence, and market share. The orders and store openings reflect traditional growth in the pizza sector, and we expect to gain significant market share. As we achieve this, everything benefits—including franchisee profitability, our advertising fund, and our competitive advantages, which right now are bolstered by orders, store openings, and franchisee profits.

David, I'll clarify a couple of points. You mentioned volatility in sales spend in the US, but we didn't observe any volatility; instead, we experienced a very steady cadence. This steady cadence of sales is largely driven by the flywheel effect discussed by Russell regarding the Loyalty program and the increasing frequency that stems from it. We've seen this consistency throughout the year, including the second quarter. Therefore, we don't perceive any volatility. Regarding your other question about confidence in the Q4 comparison, as mentioned in the prepared remarks, we expect both Q3 and Q4 to exceed 3%. However, I explained that Q3 might be slightly below Q2 due to the timing of Boost weeks, which will be offset by Uber's ramp. Moving to Q4, we previously mentioned that loyalty will be a long-term driver for us. Although we are comparing to the launch of the Loyalty program in Q4, we still anticipate benefiting from the ongoing positive effects of the program during that quarter. Additionally, Uber continues to expand, and with both of these factors, aiming for 3% or more in the fourth quarter is certainly achievable, as we are always striving for more. The more we accomplish, the better the outcome. We're quite confident in this outlook. Since this is all transaction-driven, it is generating robust economics, leading to increased franchisee profitability. This growth is further bolstered by strong performance on the supply chain side, which contributes positively to franchisee profits. Overall, we are very optimistic about our prospects for the latter half of the year.

Thank you very much. I wanted to ask about the value strategy. So you talked about the one Boost week in the third quarter that leads to I believe, one in the fourth quarter, clearly driving strong performance. Given the value focus in the industry, what flexibility do you have to further increase promotional activity? And then are you seeing any increase in value mix and how much is going through deals?

Thank you for the question, Lauren. What we're doing with our value strategy is unique and different from what you see in the industry, especially considering recent price adjustments. Many are reverting back to offering individual items, saying, this is what you can get for value. Since we launched Mix & Match in 2009, our approach has focused on value being two-fold: it's about the price and what you actually want. If the price for what you want is high and the price for what you don’t want is also high, it doesn’t offer much benefit. Our platforms—pizza, pasta, sandwiches, desserts, salads, breads, chicken—have consistently been part of our promotional value strategy since the end of 2009. This consistency means that when people decide where to order from in the morning, they can trust Domino's. This trusted value contributes to the increase in order count and fosters customer loyalty. It's essential to understand that our approach to value is not just about pricing; it reflects the price of what customers want to order. As we've seen over time, this is a sustainable way to grow.

Hi, Russ, I love the Domino effect reference there. But I just had a question on the incrementality of Uber and just some of the commentary there. I think you've had it for about nine months. Can you talk about what you've learned and maybe how you are changing some of the marketing message over the last maybe three months or six months? And then any update on thoughts on DoorDash in the next year? Should we still expect something on that and maybe what the timing would look like? Thanks.

Thanks, Greg. We will send you the Domino effect bumper sticker soon. Uber is performing as we anticipated, although in a slightly different way. I mentioned this last quarter, but I think it's worth reiterating. From a sales perspective, it's currently about 1.9% of our sales, and we are on track to reach our goal of 3% this year. The approach has evolved; we are noticing an increase in a high-low strategy. Initially, we aimed for an everyday low price, which remains the lowest in our channel. However, it seems that starting with a slightly higher price that customers can then discount from attracts more attention. We are continuing to test and adjust our strategy, and the results reflect this. So far, the year is unfolding as we expected. Regarding your question about DoorDash, our exclusivity agreement with Uber continues through Q1. At that point, we will decide whether to renew the agreement and will evaluate the economics and potential at that time. That will be the moment to consider whether we maintain exclusivity or open up to DoorDash or other aggregators. We've discussed a $1 billion opportunity, which we believe is our fair share across all aggregators, and we hope to reach this goal in about three years.

Hi, thank you. Considering the recent closures in France and Japan, I wanted to ask about the effects of store splits in the US. You're currently experiencing a store growth rate of about 2.5% in the US, which is quite impressive for a brand that’s relatively mature. Could you discuss the net impacts, possibly referring to cannibalization, and any negative effects on same-store sales due to these splits? Additionally, are there any insights from either side of the Atlantic or Pacific regarding market penetration strategies? It seems like they may not follow the same site model that you do. Do you have opportunities to assess their approach to market density? I’d like to understand your level of risk tolerance in reaching your US store goals without significantly impacting your existing assets. Thank you.

Yes, John, I'll take that. And maybe I'd start with the fact that I remember when we used to actually disclose what headwinds of splits were. So the fact that we are not disclosing them anymore, I can give you a sense of how material they are. The great thing about the Domino's model and us leaning into carryout about a decade ago is 80%, when you split a store, 80% of the carryout volume is incremental. And so that right away when you are splitting a territory, you are getting all these customers. Those customers, they don't want to drive past four pizza places on their way to a Domino's. And so the more Domino's we have, the more carryout business we drive, and you can see how on fire carryout is the number that Sandeep took you through was same-store sales for carryout. That has nothing to do with all the carryout sales we're driving from new stores. And then what happens when you split these stores, not only does your carryout business get better. But remember, I talked earlier about our delivery time being 10% better than they were two years ago? Sure, it's a lot of the programs that we are driving with our franchisees, but it's also when you split stores, you get closer to your customers. And when you have more consistent delivery, those customers come back more. So it really is a wonderful cycle when it's really going well. And actually, one what I'd say is because you had asked about international learnings, one that DPE was one of the first folks to do in Australia. They got a 50% market share in Australia, and a lot of it was through penetration with new stores and obviously, tightening their delivery areas, growing their carryout business. What they talked about that they saw in Japan was they probably split a little too fast. But doing it strategically over time has been a winning formula. They've shown it and I think that's been a huge driver of our market share.

Thank you. I have a clarification and a question regarding new restaurant growth. The clarification is about pricing versus cost inflation and whether franchisees are experiencing a similar situation. While you're still on track for franchisee profitability targets, it seems that the modest price increase did not fully cover labor and insurance inflation. Is this the trend we should anticipate moving forward, or was there something unique to this quarter, particularly regarding insurance? My question about net restaurant growth pertains to the strength in China and India. Could you provide an overview of volume trends in different regions? For instance, a closure in Australia likely impacts retail sales volumes more than openings in China and India, but I want to confirm if that's accurate. Thank you.

So Sara, let me start with clarification on pricing versus cost inflation. I think you're talking about the corporate stores, particularly. And really if you look at what happened on the corporate stores, and we had an insurance charge in the quarter that actually resulted in margins contracting. And if you actually strip out that insurance charge, margins were roughly flat and profit dollars grew. And really speaking, when we look at our franchisee profitability, that's pretty much a dynamic. We are looking at profit dollar growth, and that's exactly what we're expecting to see. And frankly, we expect to see that in corporate stores as well, as we actually go through the year. We continue to expect to see both margin improvement as well as profit dollar growth on the corporate stores as well. And then I think specific to restaurant growth in China and India and your comment on the size of the stores, the closures that we're talking about essentially are very low-volume stores. So from that perspective, I think they're not necessarily comparable to the averages across all of the different markets. And so I think the drag is relatively small with the closures that we're talking about, specifically in Japan and France. And the growth opportunities continue to be robust. And the China stores, they've actually put out releases talking about their new store openings and the kind of record sales they're generating over there. So it's very exciting to see the growth coming from China.

I would like to add that for us, and I believe for the industry as a whole, the most effective way to address cost inflation, assuming margins are where they need to be, is to focus on increasing order counts rather than raising prices. While cost inflation may pose challenges for some, our scale allows us to boost order counts. If we can achieve this without resorting to price hikes and by enhancing frequency, we will pursue that approach consistently, and that's precisely what has been occurring. I'd also like to acknowledge our insights team, as one of the earlier questions pertained to pricing challenges in the current environment and customer headwinds. Through our research, we've discerned when to implement price changes and when it’s best to refrain from doing so. These decisions have contributed to the positive results we see now and will continue to influence our strategy moving forward. The research encompasses numerical data, but it comes to life in our stores. We closely observe consumer behavior and our franchisees' responses. The results have been encouraging, with consumers satisfied and franchisees adhering to our recommendations for both national and local offers, as well as menu pricing. This methodology has proven effective for us and is expected to continue delivering results over time.

I was wondering if you can give a little bit more color on what you think, at least in your view, will it causing the softness in unit opening by DPE? And more specifically also, if you can share what is your level of confidence that international store openings and closure pressures is going to be limited only to DPE and that we are not going to see another potential reduction in the guidance later on with other master franchisees coming softer versus your original expectation. Thank you.

Yes. Danilo, I'll let DPE's release kind of speak to what they are thinking about those closures. So they talked about Japan being a little bit aggressive in openings and now they are seeing kind of the results of that. What gives me confidence about the rest of the piece of the algorithm as an example, I said earlier DPC China, DASH and Jubilant, they're going to be 40% to 50% of our openings, and they each increased their outlook. And so the beauty of being in over 90 countries around the world is, look, I'm not trying to look away from what clearly was a miss in one part of the business. But a good business is able to kind of handle that. And that's what being 90-plus markets helps us do. And all of these levers end up leading to the 7% plus on the sales basis and the 8% plus on a profit basis really show how that is made up in times like this. Anything to add Sandeep?

No.

Thank you for taking my question. I wanted to ask about the positive order counts in both delivery and carryout in the US. Can you share if these are new customers or returning ones? Additionally, what can you tell us about the lower income consumer? You mentioned growth across all income segments, but are you seeing any acceleration or stability in that area? That's my first question. Also, regarding the store closures from DPE, Sandeep, you mentioned they are very low volume. Can you provide some context on how low these stores are in terms of volumes for our understanding? Thank you very much.

Yes. Maybe Sandeep, you can discuss the profit impact.

Yes. Let me start with the second part of your question regarding store volumes and what to expect. The volumes from the stores closing in Japan and France are very low compared to the rest of our fleet and the overall market. Therefore, the impact on our profit will be minimal, amounting to just a few million dollars projected for 2025, and it will have a very limited effect even on 2024, given that we are only halfway through the year. So to answer your question, it's a very small impact.

Yes, Peter. Regarding the order count, I want to emphasize that we have one of the most balanced order counts I’ve ever seen, both in our company's history and across the industry right now. Specifically for lower-income customers, the order count is also positive. This improvement is partly due to our pricing strategy and the way we've structured the Loyalty program. Previously, customers needed to purchase $10 worth of food to earn points, but now it's only $5, making it easier. They used to need to make six purchases to receive something for free, and now they only need two orders to qualify, which benefits the customer and our franchisees, as the margins on those smaller point redemptions are significantly better. This approach was intentional in both our pricing design and our loyalty program, and it is here to stay.

And the beautiful thing, Pete, is it is so balanced across all income cohorts. And I think it really reflects what Russell is talking about. And that consistency has been seen all through the first half of the year.

Yeah. Good morning guys. Also. Just given the success of the New York Style Pizza, can you talk more about this innovation with intent strategy? And it is just part of that answer, can you maybe touch on whether the innovation you expect to launch later this year will leverage that approach?

Sure, Chris. One thing that did not influence New York Style Pizza was the person in the spotlight, which was me. Sandeep often says I have a face for radio, so we'll see how that plays out during my performance review. Regarding New York Style Pizza, this concept of Innovation with Intent is important. Looking back over the last 15 to 16 years at Domino's, I can only recall a couple of items we've launched that we subsequently removed from the menu. Introducing a new product requires significant investment and time, so it must serve a strategic purpose. The measure of success is whether or not that item remains on the menu. For instance, we're not going to make any forward-looking statements about continuing to introduce two new items a year. We discussed that New York Style Pizza targets customers who may not prefer our traditional crust, which justifies its introduction. Reflecting on what we did last year with Pepperoni Stuffed Cheesy Bread, adding pepperoni might not seem revolutionary, but it reminded customers of our Stuffed Cheesy Bread offering. Since 40% of our sales come from non-pizza items, we need to keep the conversation focused on pizza while also reminding customers of our other offerings. Those are two solid examples of intent: targeting customers who don't usually choose Domino's and reminding customers of a platform that enhances their order, boosting both sales and profitability for our franchisees.

Yeah. Thanks. Good morning guys. If I could just follow up on some of the comments about store margins. So if you kind of set aside that insurance impact, I mean, is this mostly just about there being still pretty significant wage inflation? Do you think that's kind of the case through the balance of this year? Obviously, you did have order count growth right? But it sounds like that's kind of being offset on the labor side. And I don't know if maybe there is any sort of product mix dynamics that have also affected that. Could you just talk more about the store margin dynamics?

Yes. Brian, the company stores operate on a significantly smaller data set since we only have about six DMAs. We faced some wage pressures in the first half, but we're getting closer to overcoming those wage challenges. Overall, the economics of the stores for the first half remain quite strong, and even with the insurance adjustment excluded, they are still expanding and growing. I anticipate this trend to continue. That's why I expect our margins for company stores for the full year to improve and our profit dollars to increase. It's important to remember that company stores shouldn't be compared directly to franchisee stores because the data set is relatively small. In contrast, franchisee stores are showing very balanced profit growth across the board, which gives us confidence that we are on track for $170,000 or more.

Yes. And I'll just maybe build on that question on the lab just reminds me of an earlier question we had about Q4 and emergency pizza and how we are going to lap that potential headwind. And I guess what I'd say there is, we are in the business of creating headwinds I love the questions on headwinds because that means we did something really successful that folks are wondering, how are we going to overlap. Well, we are in a business that are creating headwinds, and we are in the business of beating those headwinds. And so I'm not concerned about that. And I know what the team has going and they're up for the challenge. And if you think about emergency pizza, during this time now where you are seeing a lot of price out there from folks, I think who has what price point is going to be, as I always talk about the sea of standard. How are you going to know when an ad is over, who owned this particular price point? Everyone in the country knows who owns Emergency Pizza. And so we have things like that, carryout tips, You Tip, We Tip, that's renowned value. And so there are as you see more and more discounts to customers as I think different restaurants are adjusting to pricing, I believe there is going to be a lot of noise in that. And what our team does really breaks through that noise.

Hi, good morning. Thanks for taking my question. Just a quick follow-up on Loyalty Sandeep, I think when you talked about loyalty last quarter that you talked about the 20 and 40 point reward tiers as being the majority of redemptions. I wanted to see if that trend is continuing going forward? And with enough time passing. Do you have a sense that somebody that redeems at a lower point level tends to continue to do so? So it is almost a faster frequency flywheel coming from loyalty, if those customers stick at those lower redemption tiers? Thank you.

So Todd, you asked the question and answered it yourself. And really, it is exactly that. We have been seeing very consistent trends in terms of the redemption of the 20 and 40-point levels, and it is driving that frequency flywheel, as we go along because they're continuing to transact and redeem. And that's what we are very confident on continuing as we move forward into a multi-year flywheel.

Yes. To address the previous question, it reminds me that Innovation with Intent encompasses more than just new products. It includes a Loyalty program and how we integrate our Renowned Value. For example, with Emergency Pizza, when you purchase a pizza, you can receive a free one within a month. By doing this, you automatically become part of our Loyalty program, earning 20 points towards a free item. Similarly, with our tipping program, whether you choose carryout or delivery, making a purchase allows you to join the program. When you use your tip, if you’re part of the Loyalty program, you can redeem it for a second item. The key aspect of our new Loyalty program is helping people realize how simple it is to earn rewards. The programs we are implementing are not only boosting sales but also clarifying to customers how quickly they can earn rewards.

Hi, thank you. So I know you have just had the worldwide rally in May. So really curious to hear some of your key takes from the event? Or were there any surprises? What are the areas that your franchisees around the world are most excited about, most worried about any common strategic priorities that have come up there would be great. Thank you.

Yes, Christine, this was a fantastic rally, and I'm not the only one who thinks so. We conducted quantitative studies on this event, and it was the highest turnout we've ever had in terms of attendees. The results were astonishing. I'll share more details later if I'm allowed, but one key takeaway was that 98% of participants reported taking away a significant message, which is unprecedented for us. What was particularly exciting was that attendees left with a clear understanding of their responsibilities. For instance, US franchisees expressed their focus on ensuring our food is delicious and delivered correctly. International franchisees were intrigued by the concept of renowned value, which has influenced our marketing strategies in various international markets. Overall, the strength of our system is reflected in the engagement of our profitable franchisees, who are enthusiastic about what lies ahead.

Thank you, Christine. 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 again soon. You may now disconnect.