Domino's Pizza, Inc. (DPZ) Earnings Call Transcript & Summary

Okay. Thank you, everyone. I am Brian Mullan, restaurant analyst at Piper Sandler. We're very happy to have the Domino's team. Joe Jordan is with us, President of the U.S. business; Sandeep Reddy, CFO; and Ryan Goers runs the IR function at Domino's. Thank you, everyone, for joining us today.

Just -- Joe, maybe just to kick it off, just give a little background in case investors aren't as familiar. How long have you been with Domino's? Maybe you could just take us through the progression of roles you've served at the company.

Great. Good morning, everyone. My name is Joe Jordan. I've been with the company for 12 years. I started in the marketing function, was in that for 8 years. The last 4, I served as CMO of our U.S. business. And then for the last 5 years, I ran our international business at our Amsterdam office over 90 markets around the world and then came back just about 18 months ago at this point to run the U.S. business and some of our global services.

Thanks, Joe. So yesterday, the company announced the launch of the new rewards program. It would be great if you could just talk a little bit through this new -- this development. What are the main changes? What were some of the insights that led to this? And then why is the company excited in particular on the carryout opportunity? And Joe, since we have you, I know you were CMO during early -- yes, the initial. So to the degree you want to talk about the experience and how that was levered towards the delivery customer then just would be great to hear.

Yes. We purposely lined up the launch so that we could talk about it in this conference.

I appreciate that very much.

Really excited about the news that came out yesterday. This is something we've been working on for a long time. The initial launch back in 2015, the program was designed from the beginning to drive orders, incremental orders. That's how we drive incremental, sustainable profitability for our franchisees, which is the lens that we look at all our programs. Some loyalty programs, you'll see are more about driving ticket. You didn't see an earned per dollar for us, you saw an earned per occasion from the beginning. And it worked really well for us. Back then in 2015, '16, '17, there were 2 main drivers on the business. It was loyalty. And it was the beginning of the growth of -- really the beginning of the growth of the carryout business for us. We knew when we launched the loyalty program at that point, as with any loyalty program, we need to continue to evolve. Otherwise, it can become just a tax on the business. So what we've done, taking the data that we've gotten from the customers over the last 8 years or so, is understand how they're interacting with the program. And one of the big unlocks was many of our lighter volume customers were not able to redeem as frequently as we would have hoped. So in the initial program, you needed to buy 6 times to get a free pizza. Many of our consumers have less than 6 occasions a year. That's not really a very engaging program, particularly some of our carryout customers. So there's 3 things we ended up doing. One is we lowered the earned threshold. Previously, you had to spend at least $10. We took that down to $5. One of our top national coupons is a week-long carryout coupon that's the $7.99 coupon, not particularly fair to those consumers, to have them engage in that occasion and not be able to earn some points. The second key thing we did was change some of the burn redemptions, how you could actually use the points. Previously, it was 60, you could get a pizza. Now we've got 20, 40 and 60-point tiers. So after just 2 occasions, you can begin to redeem. So we think redemptions are going to go up quite a bit. Some of the redemption costs will go up in our stores. But the incremental occasions that we're going to drive are more than going to offset those costs. And then the last piece of the program is it's going to allow for a bit more personalization than the current program. And a great example of that is we launched pep stuffed cheesy bread -- pepperoni stuffed cheesy bread a couple of weeks ago. We want to get trial for -- of that product. We're really excited about how it's performing so far. How can we continue to push new trial? Well, normally, that would be a 40-point redemption. It's going to be a 20-point redemption during the initial launch. So here's a -- if you think about that consumer value, here's a product that sells for $6.99 or up on our menu and after 2 occasions of $5 or more, you can have a free pepperoni stuffed cheesy bread. So we're really excited about how that's going to drive the business both for carryout and delivery customers.

It's very helpful. And then I think there's some work going on our -- ongoing work in web redesign, app redesign. It feels a little separate but related to loyalty. So could you just talk about what's going on there? What has you excited? The company already does a great job with this. So how does it get even better?

Yes. It's part of just reinvesting in our owned channels and our owned experience. I'm sure we'll end up talking a little bit about 3P this morning. But we need to make sure that our own channels are as sticky as possible as we do that. So our e-com site in terms of conversion, in terms of the ability to drive revenue for the business, when you think about 80% plus of our business being digital right now, is industry leading, but it can be better. We've had essentially the same platform for a long time. Our business has changed during that time. Think about we were predominantly delivery when we launched that platform. Carryout consumer is looking for a little bit of a different flow through that. It's designed a bit more for delivery right now. How can we make that a little bit easier, a bit more seamless? And how can we take advantage of all the data we have from both the existing e-comm as well as loyalty to drive more personalized occasions in that new website.

And you were correct. I was going to ask about 3P. So, I think when that was announced by Domino's, I think maybe some in the investment community were surprised. Some thought it was inevitable, maybe it's a mix. But while we have you, Joe, it would be great to get your take on why now? Why was now the right time for Domino's to do something like this?

Yes, I think there were -- there's 2 key reasons. One is, I talked about the fact that I had the opportunity to work in our international business. We have, for years now, particularly in the last 3 to 4 years, we've engaged in a pretty meaningful way in order aggregation. Again, not delivery aggregation. We deliver our own pizzas. But in order aggregation internationally, we're selling over $1 billion worth of pizza in the trailing 12 months through order aggregator channels. As we went through that process, we really understood how it could be incremental for our business overall, it could be profitable for our business overall. And in some cases, it could actually even be incremental to our order count on own channels as customers got introduced to the brand, and we always ensured both internationally and we will in the U.S. that the best value is on our owned channels. So the most value-conscious consumers are going to have an incentive to come over to our owned channels. The second piece of that was particularly in the U.S. And you've heard us say that we didn't want to be on aggregators for a long time, but we were the delivery leaders. We didn't want to help them develop their business. Their business is developed at this point. When we look at the overlaps of the market leaders, we look at UE, Uber and DoorDash, our customer overlaps have relatively flattened, if not slightly declined in recent quarters. So the risk of us driving our customers over there is significantly lower than it would have been had we worked with them when they were first ramping up.

That's really helpful. And then maybe how has the domestic franchisee community reacted to this announcement? Are they excited? Do they have any concerns at all? And then related just from a practical blocking and tackling perspective, presumably, there's going to be an influx of delivery orders. How are you getting them or helping to get them ready for that?

Yes. It's been overwhelmingly positive. They're very glad that they are continuing to own the experience. We talk about our franchisees are not outside investors. They came up through the brand. They feel a pride in the passion for giving our customers a great experience. So I think the feedback from many of them it would have felt a little bit unnatural to give that out to someone else. But they're viewing this as another order channel. And our delivery order counts have declined, certainly from pandemic highs, they want those orders. The -- we are a high-volume business. They're eager to get them. We spent the whole summer going through what we call summer of service, which was a focus on getting our delivery times back down. We had a lot of pressures last year. Obviously, inflation, but labor was a big one as well, and our service suffered. The focus this year, we brought every franchisee into Ann Arbor to develop individualized plans for their franchise on how to improve service times. We've seen service times come down 2 minutes this year. So it's beginning to pay dividends, and it's helping us get ready for those orders that we know are going to come. I'd say that the question -- as we work towards a launch later this year, the question I've got more than anything else is how can it be a part of the pilot. They're eager to get into this and get those orders.

That's good to hear. If you're able to talk about it, how do you -- how will you test this? When is the pilot, where is the pilot?

Yes. So we're beginning to test in a great part of our business is we do have the TUSA corporate store business. So we'll begin to test that in Vegas. We have actually begun to drop some orders into stores in both Michigan and New York already this month. We'll begin to roll that out to consumers in Vegas in the coming weeks. That will go to additional corporate markets and then some franchisee markets through out October and November with the goal of being on all of our stores nationwide by the end of the year.

And then another sticking with this line of questioning, just the topic of pricing, a lot of questions around that. I think you said on the most recent earnings call, the best prices -- the best offers will still be on your own channels. It implies higher prices on the marketplaces. So is that similar to how your competitors do it? And then whether it is or isn't you're the leader, so how are you going to approach this in your own unique way?

Yes. It's -- one thing we won't be offering any of our national offers or local coupons will not be offered on the aggregator, so already that value will not be there. But what most of our competitors do and what we will be doing to start is actually having a premium versus menu on this channel. This is a less price-sensitive consumer. In many cases, they are membership customers who have paid to have free delivery. So they see a value there, and it's a bit of a trade-off and slightly higher menu prices for the free delivery. So we'll learn over time. And this is something, again, we've done over the 50-plus markets in international, where we are working with order aggregation. We found over time how to find that sweet spot for our consumers where we're still offering value within this virtual food court that aggregators are without pulling customers from our own channels.

And then I believe there's the ability to actually spend ad dollars on an aggregator channel as if you're the advertiser. I think my understanding is, in some ways, it's not different than advertising on other digital channels, you can measure the return. Are there differences, though, are there nuances and do you feel like you have the in-house capabilities to advertise in that channel well? I know we'll see when it starts. But how are you preparing for that?

Yes. And we will spend within the platforms. So that's an important distinction. Our -- we will not be using our ad dollars to drive our customers to [ Uber ]. Our intent in this partnership is to drive our share and the consumers already on that platform and to keep customers that we already have on our own platform. Within that platform, we're fortunate in that we do have one of the heaviest digital spends within the industry, we have a lot of experience. We're augmenting that by bringing in some new hires as well on the analytics side, on the marketing side, you have more experience with 3P as well, and are very confident that as we look at the return that we'll have on advertising spend that we'll be able to measure that and deploy those dollars accordingly.

I'm going to pivot over to the topic of menu innovation. You recently launched pepperoni stuffed cheesy bread. Maybe just any insights behind that particular product and then if you'd be willing to talk about how that's going? And just combine 2 questions in one. The company got -- there's a thought that the company got away from menu innovation a little bit in recent years. It would be great to get your perspective. If you agree with that, why that happened and where you see opportunities going forward?

Yes. Yes. So pep stuffed cheesy bread launched a couple of weeks ago, not the most complicated product. It's basically taking our #1 side, which is stuffed cheesy bread. That's our highest incident side with our highest incident topping. Makes it super easy for the stores, scores through the roof with consumers in initial testing in terms of craveability. And that's something we need to make sure we continue to come back to as a brand or sometimes talked about as a technology brand. But we're a technology brand in service of great pizza experiences. It's always got to come back to the food. And I think sometimes, we may have gotten away from talking about the food and romancing the food as much as we can and should. So you are going to see more of that going forward. You saw 2 product innovations from us this year. Tots earlier this year, which did well. Pep stuffed cheesy bread, which is doing well. That's our #1 side, and that's now pep stuffed cheesy bread is the #1 variant within that platform for us. So doing very well. We haven't launched 2 products in a single calendar year in over 5 years. You're going to see more of that from us going forward. Whether it's brand-new products like tots or whether it's twists on existing platforms like stuffed cheesy bread or even back to core pizza. You will see more of that in both our innovation and in our communication going forward.

And then Sandeep, on the last earnings call, you shared something I thought was very encouraging. You're expecting franchisee EBITDA per store to be at least $150,000 last year. That's up -- excuse me, this year. That's up meaningfully for 2022, $139,000 per store. As we understand it, this is before any kind of benefit from the UberEATS partnership or any other potential 3P partnerships. So do I have that right? And if you hold all else constant, would that be additive? And maybe you could opine on what that could potentially do for the development outlook in the U.S?

Yes. I think exactly right because the $150,000 expectation was well before we contemplated anything from UberEATS. And as we've talked about, these are expected to be incremental transactions and very profitable incremental transactions and accretive frankly, to margins as well, because they're going to be not inclusive of the national promotions, which are in our own channels, which are probably less margin flow-through relative to those that are going to be on menu and menu premium as appropriate. So from a profitability standpoint, I think it's going to really accelerate profit growth in '24 and beyond once we actually are fully live on the aggregator platform. The -- from a development standpoint, I think even before this, we were expecting to start seeing an inflection in the fourth quarter moving into 2024. This just creates even more incentive for development to accelerate beyond that. And so we are super bullish on the combination of where things were going even before on the back of all of our other programs, plus with this aggregator platform opportunity, big upside possibility.

Is there any sense -- or do you get any sense in the franchise community, even though they're positive in terms of -- on the 3P, which is a big change that they -- from a development perspective, they might want to wait and see how this goes and pause. Is that something that investors should be contemplating? Or is it -- they're separate and they're thinking EBITDA per store, that's going very well, and we should think about the 3P as a separate issue?

I think you've got to look at it as a separate issue. It's a very good opportunity. But in the end, the EBITDA per store is what the franchisees are going to be focused on. They anticipate it's going to be incremental, but they probably want to see it actually play through and we learn as we go. But we feel that given the natural momentum even before the 3P came in was just moving in the right direction. So this is just [ carry ] on, okay.

Understood. So you've said stabilized and then accelerate maybe around the fourth quarter this year, to your point, before 3P. One thing we don't have the sense it's just the magnitude of what you expect and not asking for guidance now, but we can go back and look at history, 4% to 5%. How do you think about -- is there any reason or is anything structurally different in the country where if everything goes, how you hope Domino's will look much different?

Yes. I think what we really don't want to get into is guidance today, for sure. But what I would say is we would start seeing an acceleration, which is going to be relatively meaningful that starts in the fourth quarter. But I think trying to get to numbers that were historic highs is not something that we're really going to be focused on. We want to be really focused on steady unit acceleration as we move forward. And I think we just want to make -- be very mindful of it as we move forward. And we'll talk more about this during Investor Day. So you'll have more clarity at that time.

Just wanted to talk about the carryout opportunity in the U.S. In the last call, you shared something pretty interesting or powerful whatever the right word is. If you simply get the same share in U.S. carryout that you have in delivery, U.S. delivery, it will be another 10 points of market share, it would equate to another $2 billion of retail sales. If you get to 8,000 units, is that simply all you'd have to do? Or is there some assumptions in there that you gave because it's a -- very again, positive thing that you gave? Are there some other assumptions on comp or loyalty? Just wondering how you got to those.

Yes, I think it's more steady state, right, where the size of the market is today, and that fair share includes us getting the extra $2 billion. But it includes the normal components of same-store sales growth, which I think is there with all the initiatives we're talking about, plus unit development. And I wouldn't really focus on the 8,000 store outlook that is out there as a key driver or nondriver of this. We're just looking at the opportunity to actually gain sales as we go through this.

The math behind 10 points, I understand, okay.

So to reinforce that, it's -- there is significant incremental carryout opportunity in the current footprint. We can grow that business.

Understood. And then, Joe, I wanted to kind of -- there's been a lot of menu price running through all restaurants in recent years. If we kind of filter to QSR pricing this year, it seems like Domino's has -- is underpricing this year. I'd love your perspective on a multiyear basis. Have you actually used this time? And do you think you've widened the value gap either within pizza or within QSR? And how does that serve you as we look forward?

Yes. We did take some significant pricing last year. We had been on our $5.99 deal for over a decade at that point. So when you think about where the customers were and when you think about a percentage increase, the $5.99 to the $6.99, which again is actually 2 [indiscernible] offer. So that's actually about a $2 increase on that ticket. That was a pretty meaningful increase and probably relatively in line with what was going on in the rest of the industry. I think we've now -- and we've been very careful with our franchisees, with the profitability that Sandeep just talked about is we got that back and it was the right thing to do to make those changes. We looked at -- we knew what it was going to do to order count when we made those changes, but it was the right thing for the store level EBITDA. But as I started in the very beginning with loyalty, the sustainable profit growth strategy is orders, not ticket. We've been working very closely with our franchisees on trying to hold pricing, hold delivery fees this year. And as we've seen the competition continue to price, we're very comfortable with where our relative value is netting.

To pivot over just on the fee development, but on the international front. This year, some closures above average, but you've maintained that the gross openings are very strong and you feel positive about that looking forward. So just as we have you up here today, as we look forward next year, anything investors should be contemplating from a, I guess, a closures perspective or a gross openings perspective versus -- I know we have a long-term guidance out there. So is it contained to specific markets is really what I'm trying to ask in.

Yes. I think the growth momentum on the international markets is very strong when you look at the gross openings. And honestly, I think we talked about in the last earnings call, we said like we're going to be pressured this year with some of the closures that we saw, I think particularly Domino's Pizza prices that is expected to have some closures. But I think the underlying health of the different markets in which we operate is very good. And I think that a leading indicator tends to be the same-store sales comps that we're seeing. We're up about 3% last quarter, where I think Domino's Pizza Enterprises, which is where some of the closures are actually happening. We talked about the 6-week trend, and that was also a positive 3%, give or take. So that's all very good because from a profitability standpoint, this is really going to drive the momentum case going forward. So we're very confident.

I know you have opportunities for growth internationally in many markets around the world, but China seems pretty important. Dash Brands is now public. Would love to just get a high-level -- an update on that partnership. I think there was an investment -- your degree of optimism in the growth there. And from an operational perspective, how does it look in China right now?

I think Dash Brands is an amazing investment for us, and we're very really pleased about the momentum that we're seeing in the business over there. They just reported a few weeks ago in their first half and they updated their expectations for store growth to accelerate even further next year. I think they talked about 240 stores next year. And look, I mean, the great news for us is it's relatively underdeveloped relative to capacity, and there's a significant runway when you look at other brands, other QSR brands in China. China is definitely very well developed, and we have a lot of opportunity to grow over there. So excited. I think it's going to be one of the big growth engines of the international markets. Both China and India, I think, have a lot of growth potential that is untapped at this point. And they're showing tremendous signs of being able to realize those.

One, just a quick add on China. I was fortunate enough to serve as the DPV representative on the Dash board when we made that investment. That management team, as I've worked in the international business [ pound-for-pound ] when you look at store count is one of the best that we have in the world when you think about operational execution and development discipline. I'd put that leadership team against any we have in the world. So I share Sandeep's optimism.

And then Joe, given the international background sticking to international development, I don't mean to single out individual markets too much, but India is another place with a lot of people, and I think a lot of growth ahead. So would love your perspective on the opportunity there. How you feel about your partner?

Jubilant has been a fantastic partner for us through the years. It's the #1 market outside the U.S. for store count. The majority of years has been the #1 market opening around the world. China will challenge them in years ahead, and that's a healthy competition that we encourage. What that team and the Bhartia's have done is pretty remarkable. And there are some unique nuances to the business in India, where we will have a bit more of an individual occasion. And they have particularly an individual eater product that is a very low entry price point. They really -- it's taking what's central to our business, the dose of and cheese and customizing it for the need of the market. They've done that really well, and that's enabled them to develop into regions, into towns and cities where there really is not another QSR player. It's why we are the #1 QSR player in India at this point.

Okay. Thank you. Well, I think we are actually up on time, unfortunately. So I really appreciate the team being here very much. Thank you.

Thank you.