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

Great. We are starting. So I'm Andrew Charles. I'm the restaurant analyst at TD Cowen. Really thrilled today to be joined by Domino's Pizza. From the company, we have CEO, Russell Weiner; as well as CFO, Sandeep Reddy. And so guys, thanks so much for joining me on stage today.

Thanks for having us.

So maybe we can kick off on the heels of your Analyst Day, I'm looking at the screen right now and I'm hungry for more. Russell, you unveiled this plan last month. Maybe you can help just provide the 2-minute overview of the key changes the new plan brings in particular, how the plan intends to drive more U.S. delivery traffic?

Yes, sure. Well, thanks, everyone, for coming. I can't see any of you because I'm blinded by the light but you've never looked better. So -- great seeing you all. Yes, when we launch Hungry for More, I think it's important for folks here to know Hungry for More is not just a tagline. It's essentially a strategy, and it's a moniker for what it is that we're going to deliver over the course of the next 5 years and that's more sales, more stores and more profit. On the sales side, we're seeing total retail sales of 7% plus. So 7% is the floor, but this team is Hungry for More, so we're going to try to deliver more. You take the low end of that 7% and you look at it over the next 5 years, that's $7 billion. And so that's akin to taking the #10 restaurant in the U.S. and adding that to the size of Domino's today. So it's a big number, and we're doing similar to -- from a store and profit perspective. So those are the what we're in to deliver. How we're going to deliver it, are through our 4 Hungry for More strategies, right? M is most delicious food. We know we have the most delicious food in the industry. But it's time to talk about it more, it's time to show it more, it's time to come up with new products. Operational excellence, you're only as good and you're only as delicious as your operators can deliver, and we're working on that every day with in-store and with technology. The R stands for a renowned value. We've always been known as a value player from a price standpoint. But I want you to think about volume in a little bit different way as we go into next year. Actually, we're in next year as we go into this year. And we're already seeing in the restaurant industry transactions maybe being negative ticket being up. So when we talk about value for Domino's, we go into 2024 with a barbell customer strategy, right? With our existing customers that may be a little bit more value-oriented, lower income, while we've got our $6.99 Mix & Match. We have our brand-new loyalty program, which I'd love to talk about if we've got time. But then on the other side, we've got higher-income customers, younger customers that have access to Domino's for the first time as part of our partnership with Uber. And so that in a nutshell is what Hungry for More is all about.

Awesome. It's a great segue. I want to talk about lower income consumer, which has been pressured for the better part of 2023 from elevated inflation, low consumer confidence and frankly, a bunch of other macro factors that are working against that group. And I would just echo what you just said that the work that we've done and the data we've seen is just that Uber is going to cater more to that incremental customer who is younger as well as higher income. So can you talk about the plan to provide more value to this low-income group, especially if you need to protect traffic in 2024?

Yes, sure. I think the best answer to that question is to let you know that we're already doing it, right? So Uber certainly is going to be a place for incremental customers, and we're -- our data shows probably 65% of those customers are going to be incremental. What I was really excited about that we talked about during Investor Day, was before you even take -- bring in Uber, if you look at -- we got 2 businesses. Our carryout business has been on fire up double digits over the last 2 years. But our delivery business, which has been pressured, delivery from a sales perspective and an order perspective was positive in Q4. And so what that means is before we -- and that's before you even bring in Uber. So that means before Uber with our customer base, which tends to be lower income, we are turning things around. We're turning things around really for a couple of reasons. One is our operations, right? the O in more. We are delivering back to levels that we delivered in 2019. Our staffing is as good as it was back in 2019. But what we're also doing is we've got this great loyalty program that's really engaging new customers. So let me talk a little bit about the change in the loyalty program because we launched our original loyalty program in 2015. What we did was we looked at -- we got 30 million to 32 million customers in our loyalty program, active customers. We've got another 40-plus million that used us and stopped using it. And so we talked to them and we talk to other customers who didn't come to Domino's. And what do they tend to be? They tended to be lower frequency customers and they tended to be carryout customers. And so we made the program better for those 2 customers. So the minimum order used to be $10 to get points in our program. Our national offer on carryout is $7.99. So all these carryout customers who are value-oriented customers who weren't getting points. We lowered that to $5. It used to be that you have to buy 6 times to get a free pizza. Now you can buy as few as 2 times and get a free pizza. And so essentially, for this lower-income customer, we've made the brand more accessible. You don't have to buy as much as you used to. And so what that means is more transactions in a time that they're looking for value, we're delivering more value.

Russ, maybe you can expand on that too, what are the opportunities become more dynamic with reaching out to these folks that are lapsed. I mean you guys obviously have a ton of data, you're showing the loyalty program that you want to engage more with consumers. Is there a way that you can -- if someone's lapsed, hey, we haven't seen in a while come in for either extra 10 points the loyalty program. What are the efforts there to just expand the reach as well in that.

Yes. Well, the good news is we're already doing that today. So we have lapsed user programs that are kind of below the line programs that I know you don't see it because you're not a lapsed user, but if you were, you would see them. We're really excited about this next year with the launch of kind of the new website, is the ability to go even deeper on personalization. And to go almost kind of hyper personal from a personalization standpoint. So yes, maybe we would -- why should we serve you up a $6.99 offer, if you don't want it. But maybe you're vegetarian, why do you need to see a pepperoni pizza. And so our ability to drive personalization is also a big part of that. But we're already doing a lot of these programs today.

Yes. And by the way, I got my emergency pizza on Saturday for my son, so I could [indiscernible] about that. Yes, exactly.

You do. All right. Good, good.

Maybe just another one on loyalty. What have been the early learnings since you've revamped the program in September. In particular, can you help give us a better understanding to the impact to order counts and ticket to that base of loyalty users that you were trying to get better connectivity with since you put in place the program.

I think two pieces of information there. One is if you look -- our investor meeting was December 7. So if you look back 12 months, over those 12 months, we gained 2 million new customers to our loyalty, they may have been lapsed, but they're new customers, some of them to the program. A million of them came between September and December with the new program. So it gives you a sense of what the slope looks like when the new program came on. I think that also that plus the emergency pizza, that's why the trajectory of our delivery business changed. We showed -- as I said, we talked about having positive sales and positive transactions in Q4, and that was a big part to the new loyalty program.

And what I'd add is, the benefit from the loyalty program is twofold. One is on the delivery business and also on the carryout business. So we saw the same trends from a transaction and ticket standpoint on both businesses through the time of Investor Day.

Great. And talking a bit about the emergency pizza. Russell, there's perhaps some folks in the rooms that looked at the October emergency pizza promotion, which I'll let you explain more what that is. But there seems to be some minority of folks that look at this as a glass half empty view that it's a low-margin way to generate traffic. Can you help dispel this narrative?

Yes, well, look, to be honest, I'm a glass half empty person, too. So if an idea gets by me, that means it's really overflowing kind of the way I would describe emergency pizza is people talk to me a lot about innovation. And we talked at Investor Day that we need to scale up to a number of new products we do every year, and we're going to do that. But you can be innovative in technology and you can be innovative in promotions. All emergency pizza is, it's a buy 1, get 1 free. But it's actually better than a buy 1, get 1 free. Because the get-1-free is leader. And you have to use your free emergency pizza within a month. And so guess what, it's most likely going to be an incremental purchase and you're definitely going to be adding to that pizza, especially if you're a delivery customer. And so this is a -- you will see emergency pizza again because it's a positive order count driver because of that repeat, and people add items when they come back. So it's a good one. It's an innovation for a buy 1, get 1 free.

Very good. One more question on the business, and then we can -- want to talk more about Uber. You mentioned today and you mentioned at the investor meeting that U.S. delivery traffic had turned positive in 4Q ex the Uber partnership for the first time since 2Q '21. What do you attribute that to when you move back to it.

It's a few things. It's service. We've got our service back to where it was prior. We talked about that both delivery times and staffing. It's our loyalty program. I mean it's not surprising we launched a loyalty program. We're seeing these numbers. And things like emergency Pizza, just the Hungry for More strategy, we may have launched on December 7. But we started to execute well before that, and you're seeing the results of that in Q4, and I expect you'll see that moving forward as well. Because remember, again, that was before attributing any Uber volume. And most of that, you should know as I'm sure this is going to be a question, you come up with next is what's going on with that relationship right now. We're kind of ending the pilot stage right now that should be done. We're 90%, 95% plus of our markets now have Uber. The marketing will be turned on starting kind of at the end of January, and then we'll just continue to increase throughout the year, their marketing and our marketing. So we expect kind of sales from Uber to continue to follow that trajectory increasing throughout the year kind of backloaded towards the end.

Yes. Let's talk more about it. For those not close to the story, Domino's went live about a month ago with multi-country partnership with Uber that includes the U.S. And so maybe just first, can we get the background of how this came together after years of, choose the verb you guys want to use, I would say, avoiding third-party delivery. So clearly, this was a good deal for you guys to obviously come to the table on. But curious about the background and why now in terms of the timing...

Yes. Well, sure. One thing is everyone in this room needs to know if there's an opportunity that's a good business opportunity for Domino's, this team is going to be looking into it. And if it's the right thing to do, we're going to do it. And so the question may be, hey, well, what took you so long? And I'm relatively new to the CEO job 1.5 years going on 2 years. But I've been with Domino's for 15 years. And so I was part of the company during all of those decisions. And what I can tell you is prior and the reason we were against doing this hopefully makes a lot of sense to you, which is -- well, better it will make a lot of sense to you. We're the #1 pizza company in the U.S. We're the #1 pizza company in the world. Aggregators were just starting off. Their new customers would have been our customers if we work with them. And we remember -- I think you all remember, you probably cover them what the financials look like when they first joined or when they first started. And so our feeling was why give oxygen to that. Now the pandemic, who knows what happened if the pandemic didn't come. Maybe what happened, would have happened 3 years later, maybe it would never happen, but the pandemic happened. And all of a sudden, everyone was home and they were ordering delivery. So that's now $5 billion worth of pizza is sold in the United States through that channel. We'd be idiots. Now not to do it because we're not building their business. Now actually when we look at the numbers, by participating in the aggregator platform, 65% of those customers, which were not built off our brand, 65% of them are incremental. And so that's just another channel for us. So there's the scope and then obviously, the deal itself. So it's a different -- and we're -- I'm sorry, one more thing. We're in a different position. Because if you remember, a while ago, we were talking coming out of the pandemic, we had some capacity issues. So maybe that would have been a great time to turn on an Uber or another aggregator. But why would you turn them on if you couldn't handle your own volume. Now that's fixed. So we went from kind of the stages where why help build them. They got scale, but we don't yet. And now we're ready, and we've -- we're leaning in on the time when the business is positive from a transaction standpoint on its own.

Very good. Sandeep, feel free to jump in for this one. You guys have talked about 35% overlap between Uber and Domino's digital users or said differently, there's probably about 65% incrementality. How did you arrive at that estimate? It's talking other pizza operators, it's a difficult number to triangulate, curious about your methodology.

Yes. I mean I think we took a look at the data basically on customer transactions and work with the different aggregator parties, including Uber and looked at transactions on Uber and the overlap with the transactions on our platform, and we did see the overlap was relatively limited in the 35% range. And actually, that drove our quantification of the opportunity on actually getting out of the platform because you take a $5 billion business that Russell talked about. You take about 1/3 share of that and a 65% incrementality that gets to $1 billion. And what we've actually talked about during the Investor Day as well is, over 3 years, we expect to get to that $1 billion but it will take getting on all of the different players and the aggregator platforms in the U.S.

And then Russell, curious about the advertising efforts you mentioned a minute ago that you're putting into this as well. Forever and still to this day, Domino's is very focused on building your own digital channel. Certainly get the data sharing from Uber. So that's clearly a positive here. But curious about what you're looking to do from an advertising perspective to build awareness of the Uber partnerships.

Yes. I can tell you, 0% of our advertising is going to be spent outside of Uber, right? 0% of our Uber related advertising. So once someone is within their kind of their walled garden, we're going to do everything we can to get that customer because we think we have the best proposition to deliver to them. But we are not doing anything outside of Uber to drive people to Uber, number one. Now Uber will probably be doing that. But we have the ability to put the kibosh on anything. So for example, if I'm just making something up. But if they wanted to give a free pizza away on Super Bowl, we'd say no for 2 reasons. One is we're busy. But two is we don't want any Domino's customers that are loyal customers to us, we don't want them to have any reason to go there. And so there will be things that's driving people to Uber, but we have the ability to help control what they are because we want to keep this an incremental proposition for us.

Yes. And Russell, I know that the agreement obviously is under locking key, but maybe just at a high level kind of yes or no, [ my word and I quote ]. Is Uber offering you some new benefits that kick in, if you stay exclusive with them for 15 months, for 18 months. You guys have obviously talked about your desire to work with other partners. Obviously, we know that Uber is exclusive for a year. You guys are not committed on the timing, of course, around when new partners will come in. Are there benefits that kind of kick in later. What I'm trying to do is help people understand, is this more than just a 1-year benefit in sales as you're likely to get from them?

Yes. There is -- and the important thing to know about the Uber relationship is that the 1 year is kind of the minimum. But at our decision yea or nay, it can go further into the future. I'm not going to get into the specifics, but I will tell you what that helps us do is quantify what it would take for someone else to have to buy out that exclusivity, right? And that gives us some bargaining power as well, even though as Sandeep said, we're eventually going to be on all platforms.