Domino's Pizza Group plc (DOM) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining the Domino's Pizza Group Q3 Call. My name is Becky, and I'll be your operator today. [Operator Instructions] I will now hand over to your host, Andrew Rennie, CEO of Domino's, to begin. Please go ahead.

Thank you very much. Thanks, everybody, for joining the call this morning for our Q3 statement update. I'm joined by Edward Jamieson, our CFO; Will McLaren, our Head of IR. I'm just going to give a brief overview and statement of the release that we sent out this morning, then we'll do Q&A, the normal drill. So first of all, as you can see, we have really good great momentum in the business, which really reflects all the hard work of our franchisees and our 38,000-odd team members really focusing on customers, focusing on customer service, focus on value for our customers. And the good thing is that the customers are rewarding us with their patronage, and we're accelerating growth in delivery orders and return to positive like-for-like sales. The positive trading momentum has continued into Q4, you'll see because I'm sure some people thought that maybe the euro had an effect on the Q3 results, but it was only a couple of weeks' worth. It had a very small impact to be fair. Q3 total orders were up 3.5%, great strengthening in delivery orders of 6.6%, which I'm really proud about. And you think about the fact that our franchisees really started going after delivery service after our rally back in May. And ever since then, they've really been focused on making sure that our customers get amazing service. So they've done a fantastic job. Collection orders are down a little bit. There's also a little bit of that is coming through from some delivery customers are moving across to delivery because of the value we're offering. But we remained focused on collection, and we think that we will grow that again. Again, that's had a big step up post the COVID year. So we don't think there's an issue there. We think that's actually still an opportunity. Total system sales up 3%, a big step up from the first half. And as we said, back at the start of the year, there was going to be a year of 2 halves. First half was going to be tougher, second half will be much easier. That certainly has been the case and has played through. Like-for-like [indiscernible] 0.7%. And the reason that's not up more is because we're consistently offering greater value to our customers, consistent value particularly to our delivery customers. Therefore, we're getting more order count growth, which is what we want. Probably we want to bank customers this year because we know with what's coming towards next year is that there'll have to be a bit of price taken but we've actually been able to pay the customers before that's happened, unlike a lot of others. So we're very proud of that. We're focused on growing our like-for-likes in a sustainable way. And I think that's the key word is sustainable here, driven by order count growth, not pricing mean lower ticket prices for customers and sustainable like-for-like sales growth driven by volume. So real growth, real under core growth. Execution of key initiatives. We're really focused on value, right, value for our customers, our Weeknight Steal GBP 8, GBP 10, GBP 12 or GBP 4 Lunch are just a few of those offers. And you've got to back that up with great service because I've always said that no matter how -- what price you sell a pizza for if [indiscernible] cold and late, it's really irrelevant what you pay for the product. And our franchisees really are doing great work. And if you look at last week, which is typically one of the toughest weeks from a delivery point of view with Halloween, et cetera, the franchisees absolutely wiped out the service. So I'm so proud of what they've done. Really, really impressed with -- I just talked to the team this morning, now at 9.5 million apps, really got to make sure that we focus on getting to our goal of 10 million app customers in the next sort of 3 to 6 months. And I think that's important because that becomes our own media channel as well, not only our own channel for ordering, but also being able to communicate with customers at no cost. So I think that's also a really, really powerful sort of bit of infrastructure we have there inside our own ecosystem. 34 new store openings. This is probably one area of a little bit of noise. We've certainly had some challenges. That some of them are landlord related, sometimes utility related, but it's the world we live in, unfortunately. The good news is still going to do somewhere between 50 and 60. We've got a bunch of stores that are under construction now, and it doesn't change our outlook on our store targets. We will hit our 1,400 store next year, which I think is a huge milestone when you think about the size of our business in the U.K. And it's going to be in our 40th year, which I think is -- if you look at the success this brand has enjoyed for 40 years consistently growing. I keep coming back to the word that's sustainable and consistency, and we really want to set the business up for that next 30, 40 years of growth as well. So positive trading momentum has also continued. I think that's also important in Q4 with 5.8% in the first 5 weeks. So we're really proud of that, but it's not just -- we're just talking about quarter here, we're talking about momentum that runs through the whole half. All this means our full year expectations are unchanged. We've had constructive discussions continue with our franchisees with the MAU, we feel like we're getting [indiscernible]. So we'll update you as more comes to the hand. But certainly, the discussions are in a good place. It's an uncertain environment, right? There's no doubt that there's lots of different macro things coming our way. But I really feel that we're probably one of the best placed brands to deal with these macro changes, a, because the business has been in 40 years has been through many of these things before. I personally have been through these types of challenges before in many other countries. And I think we -- given where the franchisee profitability is, which is up again on last year, even after rolling over the large national living wage increase this year, which actually was greater than the one that's coming next year. So we do have the ability to roll these things quite convincingly and still grow customer count. So I feel very good about that. We continue to assess additional value-enhancing opportunities, build a larger, more cash-generative business, which is strong and consistent returns. And I look at updating shareholders for our future strategic progress for the full year unless we have anything else to sort of update between now and then. With that, I'd like to throw over the Q&A. I'm sure there's a few questions there. So over to the floor.

[Operator Instructions] our first question is from Douglas Jack from Peel Hunt.

Just a couple of questions from me at the moment, if that's all right. The first one is just in terms of the budget. And I suppose 2 parts to it, the minimum wage, living wage increase and the employer NI. Obviously, it doesn't affect you as much as it will affect the franchisees. But are there any views about how it might affect them versus their competition going forward from April next year? That was the first one. And the second one is just on costs, other costs you have and in particular, cheese price and what we're looking at in terms of that environment at the moment.

Yes. Thanks, Douglas. Yes, look, we don't think of it as it certainly hurts the franchisees. We think it as one family. So whatever hurts the franchisees that hurts us as well. So we think of it as one solution. The good thing is, as I said before, our franchisees are incredible, right? They've been through this many, many times. Most of them have been around decades. And the good news is that we had to roll over the national living wage this year, which was actually a greater number than what it is next year, right? So we've been able to successfully do that and still improve franchisee profits by GPB 5,000 to GPB 8,000 by the end of this year, we believe. So there's good evidence that we know how to do this. And we've done an environment where we've actually taken less price and we've actually driven more customer growth. So that's the first big thing that we've done successfully this year. Next year, obviously is a bit more challenging, why? Because we don't have the rebasing of food that we had this year, which helped that process. We do have cheese going up next year. There are some other things slightly coming down, but it's a net increase next year for sure. The reason why I feel good about it is we have so many levers we can pull within our toolbox, if you like, particularly through our digital environment, particularly through the way that we can talk to customers through election, through lunch, through delivery. And I think the trick will be just staying consistent with our messaging. I can't disclose all the things we're working on, but I can assure you the team have already got a few different scenarios of things that we'll do. We'll be discussing those with the franchisees in the next few days or few weeks. And we've got plenty of time to organize ourselves for that. You are correct in the fact that I think we're better placed than our competition to deal with simply because of the volumes that we have, the profitability that we have, the balance sheet that we have compared to our competition. So I think we'll be a net beneficiary. I also think that the customer based on my previous experience in other parts of the world is that the core customer of ours will have more money in their pockets, and we typically see that flow through to us in terms of sales. So I see this as an opportunity to run at it and be counterintuitive to what others will do because I've seen these mistakes made before. So I feel like we're well placed. Are we taking it lightly? No, we're taking it very seriously. But I can assure you that our franchisees are equally as focused as we are working as one team to knock down the park again next year like we have this year. Hope that answers your question. Doug?

Our next question is from Glenn Brown from [indiscernible] Liberum.

Can you just talk me through you mentioned, obviously, that you're offering better value, and that's a key driver of the growth. But obviously, the headline prices in the quarter, I think, were up 2%. So can you just bring that up to life for us a little bit more as to what do you mean by offering better value? And is this part and parcel of the franchisees part taking in more promotions, more marketing? Or is it more to do with the mix of the product that people are buying? If you can just kind of just bring that to life for us a little bit more would be really helpful. And then just lastly, on kind of, let's call it, the [indiscernible] or let's call it the market dislocation in some of your competitors, the budget is clearly an important inflection point in 2025, which may necessitate franchisees to push prices, et cetera. But can you just give us your view as to considering how weak your competitors are, what is your big picture view of what could happen next year from a market share perspective because clearly, this could potentially drive a greater weight between you and your competitors?

Yes, sure. Thanks, Wayne. So first of all, I think headline prices, our customers only spend -- 2% of our customers buy on a headline prices on our menu pricing. So it's really quite irrelevant. What actually matters is what customers are buying in actuality. And the actuality is that things like our Weeknight Steal GBP 8, GBP 10, GBP 12 or GBP 4 lunches and a bunch of other deals, et cetera, that particularly through the app, we can offer to our customers, franchisees continue consistently to recognize and honor those and support those, right? Support those through their own local market. Yes, and through also through top line marketing from the national level. And the consistency of that message has just continued to play through. Our customers are telling us now that they're seeing us as better value than they've seen since 2020. And I think that grows, right? Consistency is so important here because as you know, our customers only buy on average once a quarter. So what we talk about and think about every single day for them is like I thought about that 13 weeks ago, 12 weeks ago. So the support from franchisees on making sure that we support those everyday high-quality offers are important, and that's what's been working. So that's the first point. Next point is you're right. I think pretty well everyone will have to take some price next year. There's no doubt about that. I think the [indiscernible] ones will take all of it in price, and that will hurt them. That's what I've seen in the past. They will have severe order count declines, and I think we will be the beneficiary of that. We think we can be smart on that. We will take some pricing for sure, but I think we'll be elegant and smart around that because there's so many different levers we can go with. And we think that will place us well for order count growth, albeit may be slightly smaller and may not be, may not be because others will be pushing them towards us. But certainly, the key underlying part of all of this is great service because what will happen is people start cutting back on staff, cutting back on delivery drivers, service times will go out to 30, 40, 50 minutes, colder pizzas or products in general. We're too disciplined to do that. And again, that will push people back towards us. And other countries I've been in where brands did this when this happened, those brands sort of cease to exist sort of 3 or 4 years later. So I wouldn't be surprised if that happens, particularly when they're coming from such a low base of sales per store and a very low base of profitability. It will be very difficult. But I'm more focused on what we do and making sure that we get our franchisee profitability, maintaining it at least, which will be a combination of -- there's about 12 different levers that we'll be pulling to achieve that. So I feel pretty confident about that. Did I miss any other points?

Our next question is from Hai Huynh from UBS.

So my first one is on store openings. When you say -- can you go a bit into more detail on what store openings is? It's lower this year? Is this also for the whole market? And when you say you reach 1,400 by FY '25, are you indicating towards the end of FY '25 or somewhere within half 1, Q2, something like that for 1,400 stores? And my second question is on -- Sorry. Yes, second question is on just a bit more color on the loyalty program and would be rollout for a digital site. Are you still expecting to roll out a loyalty program in FY '25? And again timing on that? Is it beginning of the year, end of the year? And any more color on Uber Eats rollout contribution so far?

Okay. So there's 3 questions there. So first of all, your question around store opening. So look, there's a myriad of things. There's no one region, right? We've got sometimes landlords just not lending in terms of like a building might be falling down. And I'll give you an example. We've got a roof falling down on one of the sites. We're opening space, open in a few weeks' time. And he'd like us to pay for and he wants to us to take for a full liability for the apartments above the store. Now we're not stupid and we don't need to take stores for the sake of it. So we walked away from that site. Another one where there's an issue with the plumbing, like severe issue is going to take 6 months to fix. It wasn't -- you couldn't pick that until you got in and start passing the floor up. Another one where we're waiting for electricity and gas to be connected and then slow planning. So sometimes these things can typically take 3 months and all of a sudden, they're short of staff and they take 6 months. So they're the sort of things that happened to us, unfortunately. I've seen this in every country in the world that I've worked in. Again, it doesn't change our long-term view. I mean 10 stores, we've opened -- I think this -- we've opened 12 stores in 1 day in the U.K. before. So these things can swing around pretty quickly. But we feel good about picking those back up next year. And your point around next year about when do we open the 1,400 stores, look, I don't have that in front of me. It's sometime next year. Again, because of the planning environment, something that could be planned to open in Q2 today may fall into Q3 next year. What I can say is the pipeline looks very good for next year. It's actually very healthy. We actually have quite a new team in place who are doing a fantastic job, one of the best teams I've seen actually. And they're really gathering a body of steam for next year. So already the outlook for '26 looks very healthy, which is why I feel so confident about the 1,400 store, but I can't tell you which quarter will open in. On loyalty, yes, look, so far, really happy with the results, the learning that we're getting every week, we're learning something new. Still early days. That's why it's a test phase. We do feel like we'll go to a bigger version of it next year for sure. Exactly when, again, I can't tell you. At some stage next year, but it's more likely to be in the earlier half rather than the back half. But that could be Q2, towards the end of Q2. So I say midyear just to be conservative. But we're very encouraged by the numbers we've seen so far, that's for sure. So early days, but positive. [indiscernible] are going really well. Really happy with the relationship there. Our franchisees are embracing it. It's a win-win for both sides. So yes, we feel really good about it and feel like it's contributing. It's still -- I mean you put it all together, I mean, Uber is still talking single-digit type numbers, right, where it's not a major part of our business. We still drive our own apps, still drive people to our own network that still is the best ecosystem for us. But a nice addition. So we see it as an add-on particularly in certain places. So I think hopefully, that answers your question, Hai.

Our next question is from Richard Taylor from Barclays.

Can I just understand better, please, what's going on with like-for-like pricing? You show that the price is plus 2% overall year-on-year, but that's a total number, isn't it? So just trying to square the circle between the around 4% order growth and like-for-like of about 1%, depending on whether we see the reported or comparable numbers. That's the first question. The second question, clearly encouraging to see volumes up year-on-year. But can you help us understand whether they're on a like-for-like basis? Again, there's been space growth. And just to understand how pleased you are with that performance in the context of a tougher macro backdrop, but also in terms of where you'd like the business to be overall?

Sure, Richard. Let me comment on that. We're not breaking out our like-for-like volumes, so that's the change made earlier on this year. But what I would point out is that you can see that volume is back in growth on the total sales basis, and that's because we're focused on sustainably driving total sales and like-for-likes through volume. And if you think about it, that applies on a sort of mature estate as much on the sort of new stores. So in terms of the focus around sort of like-for-likes, I think the overall indicators patterns that you see in the total system sales, you think about them similarly for like-for-likes. If you look at ticket, it's slightly down, and that's because, again, we're providing better value to customers, which is why they're coming more often or more people are coming. So we're really focused on that order count growth rather than just putting the price up, which is actually masking declining order counts. So that's important to us. Does that answer your question, Richard?

Yes, I just trying to work out the overall impact of falling prices in some of the commodity items and what's happening on pricing? Because I realize that if prices are coming down for the franchisees, then it is all about volumes, clearly, but just trying to understand how much this is you focusing on volume versus maybe a more promotional environment driving people to put lower like-for-like prices through. That's really what I'm trying to understand better.

Yes. Well, I think maybe you're thinking. But at the end of the day, we just want more customers to order from us more often, and that's what they're doing, right? And yes, they might be spending a bit less because we're offering a better delivery deal, right? So GBP 8, GBP 10, GBP 12, people accessing that more than what they were a year ago, which means if a factor that they may be spending less on that ticket, but they're coming more often. And all I want customers to come more often or I want new customers to come to us that haven't been coming to us in the past. And in the environment where commodities have come down, we've been able to do that and do that in a profitable way, particularly for our franchisees. Next year, the environment is different, right, is that you've got commodities slowly going upwards, you've got labor going upwards. So therefore, it's going to be a different environment. But we put ourselves in a great position to manage that for next year. And to your earlier question, how do we feel about it? I feel bloody good about it, right? At the end of the day, I mean, in an environment where people are showing like-for-like, but actually, when you look underneath the cover, actually, there's no order count growth, it's all pricing, right? So it's actually masking the fact that less people are coming to our business. We've got the option. We've got more people coming to our business, which is fantastic because you can't make more profits from customers you don't have, right? So we feel -- I feel very good about it. I'm really proud of what the franchisees have done. And don't forget service plays a big part of this. Franchisees have really worked hard to make sure they're giving great service. I know to you guys, I mean it's going to be big bloody deals. When you're doing over 50 million deliveries a year, saving a minute, which actually takes 2 or 3 minutes over the last couple of years is actually massive because every minute has an impact on customer repurchase intent, which has been shown globally. So that's not easy to do. We really feel proud about the numbers we run compared to others in the market. It's not -- we're not talking a few minutes better than others. We're talking 10, 20 minutes better than others. So it's another reason why the moat around our business continues to get bigger. And I think with the budget, that actually may lean into our favor because of our system and our structure we have. And therefore, our moat may get bigger, which is what I've seen in the past. So hope that answers your question, Richard. If it does, then let's take it offline and have a more one-on-one, if you like. happy to sort of go deeper if you like.

Our next question is from Richard Stuber from Deutsche Bank.

Just one question from me now. In terms of your collection business, I think you were slightly down in the third quarter. Could you say when you plan to return that collection to growth? And do you see sort of collection as a more competitive market than delivery, I guess, given the alternative value offerings from competitors like McDonald's and Greg's?

Yes. Thanks, Richard from Deutsche, Numis. I would say that there's a couple of reasons that, Richard, this one is we haven't purposely gone harder in chasing collection. We think that we're against just being sustainable there and consistent in the messaging has been good for us. A portion of that are those customers coming into delivery, which we're happy about. So we have no problem with that. Is it a competitive environment in that collection value space? Yes, definitely, right? There's no doubt it is. But I don't think we've necessarily lost there. I think it's because we're not really putting massive focus or marketing dollars or or aggressive pricing to try and get the customers across at this stage. If we wanted to, and we may do a bit more of that next year, and that may be one of the levers that we pull to help balance the leisure with labor costs. It's not hard to do, right? I've done that before many, many times. That's not a big issue. But I expect that probably by H2 next year, you'll see collection in the positive area. And I'd like to think that we can keep deliveries to the positive as well. The idea is having both positive because 90% of the time, they are a different customer. There is about a 10% overlap. And I think you're seeing part of that 10% overlap has moved from collection to delivery because we've been offering that better delivery value than the past, which is why some of those collection customers elected and no wonder with the weather in this country, elected to go into delivery, which I fully get it, and we like it. So we're happy with that.

Our next question is from Ross Bordfoot from RBC.

A couple of questions from me. Great to see the strong order growth in delivery. Can you comment on the extent to which that was driven by new customers? And second question, the commentary on the new stores, I think, implies a slightly greater focus on Virgin stores rather than split. So what should we read into that?

Yes. Thanks, Ross. Two good questions, actually. Look, I would say, based on the last numbers I saw, it does fluctuate around a fair bit, but there's a fair chance of a balance of increased frequency and returning customers and the balance of new customers. So it's a good healthy amount of both. And we're seeing a reduction in churn. So therefore, because of the better delivery service, less people are churning. So they may be very, very happy. They are the sort of metrics I look at regularly. So that's that part A. And Virgins and splits, not too much to read into it except for 2 things. One is Virgins have great ROIs. They're very profitable very quickly. So franchisees do like going there. The other one is just availability of spaces. You can't underestimate how hard it is to get an R1 in the right location rather than just taking any location. We're very specific about where we go. It's -- so quite often it is availability in the right locations. I mean some of our franchisees have waited 5, 6 years for the right location to come along. And when it comes, you grab it. But it is a way you get the right location. What I can say is the stores are opening extremely happy with the sales. I mean some of the stores, we had a store open on Monday night did GBP 11,000 on a Monday night. I mean, quite incredible for a brand-new store. So the quality of the openings have been very high. And again, franchisees is really doing a great job there. And our own corporate network and our own corporate stores in Ireland, et cetera, doing an exceptional job as well. So we're really seeing some fantastic numbers and [indiscernible] is doing really well and our influence over there, we'll probably have a record organic opening in Ireland this year across the island of Ireland, which we'll be able to report in March. But yes, I feel really confident about what's happening over there as well. So I think that answers your question.

We currently have no further questions. So I'll hand back to Andrew for closing remarks.

Yes. Look, thanks for everyone for putting the time in chat to us. I really appreciate it. I am proud of where we are. Look, it's -- we're in a long game here. This is not -- for me, I don't like to think about quarter-by-quarter. What I'd like to think about is the next 2 years, 6 years, 10 years, to be fair, and it looks good, right? There's no mistake why this business has been around 40 years, and we're going to make sure we get around at least another 40. So yes, it's been a team effort and the franchisees and the 38,000 team members do an incredible job every day with these delivery times that underpins the rest of it. But I'm feeling great about the fact that customers are voting with their feet. That's most important. Not that we're just taxing them more with more costs, but they're coming because they want to come to us for the great value and the great service. So thank you very much, and look forward to seeing you all again in March if I don't reach out before for some great reason. Thank you.

This concludes today's call. We appreciate your attendance. You may now disconnect your lines.