Domino’s Pizza, Inc. (NYSE:DPZ) Q3 2023 Earnings Call Transcript

Domino’s Pizza, Inc. (NYSE:DPZ) Q3 2023 Earnings Call Transcript October 12, 2023

Domino’s Pizza, Inc. beats earnings expectations. Reported EPS is $4.18, expectations were $3.29.

Operator: Thank you for standing by and welcome to Domino’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today’s program is being recorded. And now, I’d like to introduce your host for today’s program, Mr. Ryan Goers, Vice President-Finance, Investor Relations. Please go ahead, sir.

Ryan Goers: Good morning, everyone. Thank you for joining us today for our conversation regarding the results for the third quarter of 2023. Today’s call will begin with our Chief Executive Officer, Russell Weiner; followed by our Chief Financial Officer, Sandeep Reddy. Russell and Sandeep will leave ample time for questions and discussion. As this call is for our investor audience, members of the media and others should be in a listen-only mode. 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 maybe referenced on today’s call. 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 only one, one-part question on this call. Today’s conference call is being webcast and is also being recorded for replay via our website. I’d now like to turn the call over to our Chief Executive Officer, Russell Weiner.

Russell Weiner: Thanks, Ryan, and good morning, everybody. My remarks this morning will focus on several new initiatives that are designed to create significant shareholder value in the months and years ahead. We launched our new loyalty program, Domino’s Rewards on September 12. And here are some of the mechanics that are really meaningful to our current and prospective customers. First, we lowered the spend threshold to earn points from $10 down to $5, and this change will make us even more competitive in the carryout segment where ticket tends to be lower. Our second change was creating more attainable redemption opportunities for lower frequency customers. So in the past, they needed to order six times to get a free pizza.

Our new program features redemptions at 20, 40 and 60 point tiers and offers items from eight different categories on our expansive menu. Joining pizza at the 60-point level, are the big sandwiches, pastas, and lava cakes; at 40-points, we feature our lines of bread twist and Stuffed Cheesy Bread; and at 20-points, we offer single-serve beverages, Parmesan Bread Bites and Dipping Cups. So, more items to choose from with redemption options after just two purchases. While the program just launched, we’ve seen meaningful redemptions at the 20 and 40-point levels. So customers are clearly engaging more with Domino’s Rewards. These strategic improvements will be a significant value driver for our brand and company. We plan to grow active users and order frequency, unlocking continued share growth in both the delivery and carryout segment.

Our second value-creating initiative is entering the aggregator marketplace for delivery orders. Our integration into the Uber Eats platform is proceeding as planned. We’ll achieve our goal of Uber Eats providing delivery orders to all our U.S. stores by the end of the year. We expect this initiative will drive incremental delivery volume from new customers, increase our share of the pizza delivery market and create stronger economics for our company and franchisees. This will begin in a measurable way in the first quarter of 2024. We want to exceed the expectations that the incremental customers will get through Domino’s Rewards and Uber Eats. Now the way to do that is through best-in-class delivery service. And that’s why I’m pleased to announce that we ended Q3 of 2023 back at our pre-pandemic Q3 2019 delivery times.

This improvement was achieved through many of the best practices highlighted with franchisees during our Summer of Service program. This focus is important for us to provide an excellent delivery experience for new customers flowing in from Domino’s Rewards and the Uber Eats channel. We want these experiences to lead to loyal lasting customers who will provide considerable lifetime value for our brand and our company. Now I’ll talk to our renewed commitment to the all-important role innovation plays in the pizza category and our ability to continue to build our brand. We launched pepperoni Stuffed Cheesy Bread on August 28. The Stuffed Cheesy Bread launch is indicative of two things that you’re going to see from us going forward; bringing news to our existing non-pizza platforms and leveraging Domino’s Rewards.

For the launch of pepperoni Stuffed Cheesy Bread, we lowered the redemption points required from 40 to 20. It’s great to see a product and technology innovation work so well together, and this is an example of the kind of purposeful innovation I’ve talked about in the past, innovation that serves many functions. In this case, we’ve got a new product that makes an existing platform top of mind with customers, all the while encouraging customers to sign up for and continue to take advantage of our improved loyalty program. So more customers, more orders and more market share, all leading to more top-line growth and greater profit. Another example of purposeful innovation is the Emergency Pizza promotion we launched just a few days ago. Customers who order Domino’s will have 30 days to claim a free pizza to use in any emergency they see fit, whether dinner was burned or maybe circumstances or making things a bit tougher to afford.

Customers who place an order on our e-commerce platform will automatically earn a Domino’s Emergency Pizza. They’ll have 30 days to redeem their Emergency Pizza and, of course, must be members of Domino’s Rewards to do so. Another innovation designed to drive more customers, more orders and more profit. We’re also driving purposeful innovation behind technology to improve customer service and a team member experience. On October 3, we announced undertaking this challenge with the best in the business, Microsoft. Our two companies will collaborate on Generative AI solutions that will create the next generation of pizza ordering and operations technology. Together, our teams are focused on two important goals: first, transforming customer experiences by enhancing the ordering process through personalization and simplification; and then second, streamlining operations and quality control with more predictive tools.

I couldn’t be more excited to work with Microsoft on this critical endeavor. Finally, I want to address one of the most important topics for all of us here at Domino’s, and that’s profit, profit for our stores and profit for our company. Despite our predicted and previously discussed softness in our U.S. same-store sales, our operating income margin improved as did our estimated franchisee profitability for the year. What that means is that the sales improvements we expect to realize in Q4 and even more significantly in 2024 will flow through a more efficient model for Domino’s and our investors. I am confident about our future, including the more immediate future, here at Domino’s. With that, I’ll turn things over to Sandeep.

Sandeep Reddy: Thank you, Russell, and good morning to everyone on the call. Before I go through our financial performance for the quarter, I wanted to give an update on Russia. Our master franchisee DP Eurasia, announced their process to exit the market, as detailed in our earnings release. As a result, we closed the remaining 143 stores in the market during the third quarter. For the purposes of global retail sales growth and our net store growth, we have removed the Russia business from both the current and prior year. Moving on to updates on our actions to drive the long-term profitability of Domino’s and our franchisees. First, pricing. During the third quarter, the average price increase across our U.S. system was 3.2%.

We now expect average realized pricing to moderate to slightly below 1% in the fourth quarter when we left the carryout Mix & Match pricing change from October 2022 and incorporate the impact of trends we are seeing from our newly launched Domino’s Rewards loyalty program. Second, cost efficiency as we continue to drive margin recovery. We drove an improvement in our operating income margin, which grew by 190 basis points versus Q3 2022. We now expect operating income margins for the year to reach 2021 levels. Third, positive retail sales growth, excluding foreign currency impact in our U.S. and international businesses, drove operating income improvement. Now for our financial results for the quarter. Excluding the positive impact of foreign currency, global retail sales grew 5.1% and due to positive international sales comps and global net store growth.

U.S. retail sales increased 0.9%. International retail sales, excluding the positive impact of foreign currency grew 9.4%. During Q3, same-store sales for the U.S. business decreased 0.6%. The decrease in U.S. same-store sales was driven by order count declines, partially offset by a higher average ticket, including the pricing actions I mentioned earlier. Our U.S. carryout business continued its positive momentum in Q3, with same-store sales plus 1.9% and rolling over a plus 19.6% performance in 2022. The delivery business continued to be challenged in Q3, in line with our expectations stated on the last call, with delivery same-store sales minus 2.3%, rolling over a minus 7.5% in Q3 2022. As mentioned on the last call, we expect delivery orders to have an improvement in trend in Q4, as our updated loyalty program and our Emergency Pizza Promotion have now rolled out.

And that followed by a considerable improvement in 2024, as a result of transaction growth from our Uber Eats partnership and the other initiatives previously shared with you. Including consistent trends versus Q3 in our carryout business, we expect U.S. sales comps to be positive in the fourth quarter. Shifting to unit count. We added 27 net new stores in the U.S. with 28 store openings and one closure, bringing our U.S. system store count to 6,762 stores at the end of the quarter. As we had previously indicated, the U.S. four quarter net store growth rate stabilized during the quarter at 1.8% consistent with the rate at the end of the second quarter. We remain confident the store growth rate will improve during the fourth quarter with further acceleration into 2024.

As of last week, 72 stores are under construction in the U.S., the majority of which are expected to open in Q4. Domino’s unit economics remained strong with continued EBITDA growth for our U.S. franchisees. We are on track to deliver estimated average franchisee store profitability of at least $155,000 in 2023 up from the $150,000 we indicated on the last call. Same-store sales in our international business, excluding foreign currency impact, increased 3.3%. Our international store count decreased by 35 net stores comprised of 190 store openings and 225 closures. Closures were primarily driven by the previously mentioned exit of the Russia market and its remaining 143 stores, along with store closures from Domino’s Pizza Enterprises as mentioned on our last call.

Our current trailing four quarter net store growth rate in international was 5.9%. When combined with our U.S. store growth, our trailing four-quarter global net store growth rate was 4.5%. We expect our global unit growth to track to or slightly below the low-end of our 5% to 7% two to three year outlook. Despite strong gross openings, we will be pressured by elevated store closures this year that we believe are mostly behind us. Since these closures were underperforming stores and certain underperforming markets, we do not anticipate this will materially impact the financial benefit of our new international store openings. Thank you. We will now open the call to questions.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from the line of Brian Bittner from Oppenheimer. Your question, please.

Brian Bittner: Thanks. Good morning. The Domino system clearly has two new drivers in your relaunch of Rewards in the upcoming Uber Eats initiative. And you seem very confident that this is going to drive incremental demand. You even had the Summer of Service initiative earlier this year to get the system ready for higher order counts. And just as it relates specifically to this Rewards relaunch, it happened a month ago. So we’re a month in. And it’d just be really helpful to understand the early reads on this initiative. I know you expect improved comp trends in the fourth quarter. I think you said positive comps. But any incremental color would be helpful on whether it’s driving true incrementality and how it’s behaving relative to your pre-launch expectations for the relaunch.

Russell Weiner: Good morning, Brian, it’s Russell. Thanks for the question. And we’re really – I’d say very excited about how this has come out of the gate. We’ve done two things with the rewards program and both are working, right? Purposely, we took the dollar level down entry level from $10 to $5. That’s really important, especially when you think about our carryout customer. We have a national deal at $7.99. So prior to this change, you couldn’t get the national deal and loyalty points. So this has been a really nice way to bring in lighter users and carryout customers. That’s on the front-end. And then on the back-end, we talked about we have eight different ways, eight different platforms now that you can use your points.

It used to be that you had to buy six times in order to get a free pizza. Now you can buy as little as two times to get free items and what that does is it really plays with frequency of lighter users. So you’re right, that’s what we projected beforehand what I can tell you as we’ve moved in so far, that’s exactly what we’ve seen. We’ve seen a lot of folks doing that with Domino’s Rewards.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Peter Saleh from BTIG. Your question, please.

Peter Saleh: Great. Thanks, and thanks for all the color you guys provided. Russell, I wanted to ask about the Uber Eats partnership, which you guys seem also very excited about, that really kicks into gear next year. But I think you guys have had it in a few markets so far now for either a couple of months or so. Any thoughts or any detail you could provide on the early reads there, or any – how it’s performing versus your expectations, and if you’ve had to make any adjustments so far to the program going forward? Thanks.

Russell Weiner: Yes. Thanks Peter. Obviously, it’s something we’re all really watching closely these pilot markets, and I call it pilot versus test market because we’re really not using any marketing, either outside or inside the Uber platform at this point. This is really more to test out what I call kind of the handshake between two really large platforms I mean Domino’s, we already deliver more pizzas than anyone in the country, and so as we take on these incremental orders, we just need to make sure that technology works. That’s what we’re doing now and then certainly making sure the staffing is right, and we’re working with Uber and our franchisees to do that. So we’ve been in Las Vegas right now. And what I can tell you is things are going as planned, and we’re now continuing that – those pilots moving in over the next – the course of the next few weeks into Houston, Miami, Detroit and Seattle, both corporate stores and franchise stores.

So all is going as we expected, and we’re still on target for a national launch at the end of the year.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Sara Senatore from Bank of America. Your question, please.

Sara Senatore: Great. Thank you very much. I just actually a clarification of the question. I just wanted to make sure I understood that the growth opens in the U.S. are on track to the global numbers on that are more about international closures. But then the question I had was about the loyalty. You said that you’re seeing more engagement. I guess when would you expect to see the increased frequency? If you have these sort of lower frequency customers who are only coming a couple of times a year, might it take a while for you to know the impact of the change in the redemption tiers? Or is there anything you can tell us about frequency, whether it’s average or the low frequency customer that you might be seeing that could give us some color as to what the impact on transactions might look like over time?

Russell Weiner: Sure. I’ll answer both your questions. I think your first question was bout closures in the U.S. In the U.S., we actually – we closed one store this past quarter. And I think Sandeep talked about franchisee EBITDA. And when you think about what drives store opens, and remember, he said that we’ve got visibility into over 70 builds right now. So you’ve got visibility into builds. You’ve got franchisee EBITDA at 155. These stores when they open – stay open. There’s a lot of excitement about building stores at Domino’s Pizza. We’ve been under 20 annual closures in the U.S. since 2017. So we have a strong U.S. pipeline and those stores stay open. On the loyalty side, what I can tell you, obviously, it is really early in, but what we were looking for is lower level redemption levels amongst customers, and we’re seeing that in spades.

So we’ll have more information longer term once we get through a couple of purchase cycles, but pretty much right away, we’re seeing what we wanted to see there.

Sandeep Reddy: And Sara, I’ll just add on, on the global net unit growth. That’s really driven by the international closures that we talked about in the last call, and now we’re seeing it come through in the Q3 numbers as well. And that’s the big driver of the adjustment and the expectations on the ’23 level.

Sara Senatore: Thanks.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Dennis Geiger from UBS. Your question please.

Dennis Geiger: Great. Thank you. I wanted to ask another on the U.S. new open trajectory. And maybe a little more thoughts as it relates to U.S. franchisee demand to open those stores and the expected acceleration into 2024. I guess how much of this is – you’ve got some really compelling sales drivers. The top-line is going to look better. The returns are going to look better. How much of it maybe is the staffing is in a better place than it has been over the last 12 months to 18 months, 12 months to 24 months? If you could just kind of unpack a little bit of the sort of demand shift from what we’ve seen maybe over the last 12-plus months to what you guys expect in 2024 and beyond in the U.S., that would be great? Thank you.