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

All right. Good afternoon. Thank you very much for being here today. I am Danilo Gargiulo, restaurant analyst here at Bernstein, and we are very thrilled to have Domino's here at the Strategic Decisions Conference this year. Domino's is the largest pizza company in the world. They have more than 20,500 locations in over 90 markets. They're generating more than $18 billion in global sales, and that is an increase of more than 80% and over 400% total shareholder return since 2015. And with me today, we have Russell Weiner, CEO of Domino's; and Greg Lemenchick, VP of IR. Now Russell has served as the Domino's CEO since May 2022, and then prior to that, he was the COO and President of Domino's U.S. from July 2020 until April 2022, during which he was overseeing Domino's U.S. business in addition to the Global Center of Excellence. Prior to becoming the CEO, Russell served as the President of Domino's U.S.A. from October 2014 to July 2018 after joining the company as an Executive VP, Chief Marketing Officer in 2008. Before I start with some question and answer, I just want to remind everybody that you can submit your questions through Pigeonhole by either scanning the QR code that is shown on your agenda, or by visiting Pigeonhole.at with code SDC2024. I'm going to try to slot in these questions as I go through our kind of prepared questions as well.

So maybe the first question. Russell, this is the first time you're here as a CEO. Can you tell us the biggest learning that you've had so far being a CEO of Domino's?

The thing about when you joined Domino's is you're either a Dominoid for life or you're not. And so I guess my mom likes the title, but I just really consider myself the same person, which is I work with amazing people in the leadership team and our stores all around the world, and I have the privilege of working with them on this great brand. And so yes, to me, it's -- the job is similar than before, which is drive the business, keep the morale where it needs to be. So it's not that different. It's a privilege, but it's not that different.

And what is the most exciting part for you in the business right now?

Yes, the most exciting part -- look, I've been here a long time. So for those -- we talked about -- I started in 2008 at Domino's in -- as our Head of Marketing, and the stock at that point, November of 2008, was about $3. And we did a big pizza turnaround at that point, and we invest a lot in digital and we are where we are today. So it's been a crazy ride, a wild ride. But the last, call it, '22 and '23, were not Domino's years, at least as far as I'm concerned, with our performance, and the stock showed it. And so what we did was we just took a look at our business, what was going well, and we'll talk about it in a little bit, our carryout business has and continues to be on fire, and what was not going well. And we addressed in this new Hungry for MORE strategy that we rolled out in Q4, and the cool thing for me and what I'm really proud of is the results. Q1, which is the first full quarter into the strategy, not only did we have a really positive quarter, but we grew order counts. We grew order counts in every single part of our business, in our delivery business, in our carryout business, against every single socioeconomic demographic as well. And so I'm just proud of the way -- yes, it's been nice to see the stock rebound, but I'm just proud of the turnaround that -- even more on this one than the first one because it's in the entire company, and the first one was really more of a marketing one. This has been operations and supply chain and everyone together. So yes, it's been super satisfactory.

Yes, maybe the first one was also some full element as well, which is something that you are elevating again today. So can you talk about how you're shifting the way that you're seeing marketing at Domino's today? And what kind of parallelism you can draw from 2008?

Yes. Well, it's a great question. I mean, in 2008, we did have a problem with our product. The testing showed it. And so yes, we had marketing idea on how to talk about it, but the pizza had to be really good. If you're going to tell people that the old pizza is not good, and the new pizza's better, it really has to taste good. Today, what we're dealing with, and this is in our Hungry for MORE strategy, the M stands for most delicious food. And the difference between now and 2008, in 2008, we did not have the most delicious food. Today, we have the most delicious food, but people don't think of us for that. And so we need to go about changing it. And we can change it in a few ways. One is the way we depict it. And so you'll be seeing more and more Domino's advertising, you're going to see a brand new website coming out in 2025, and we're stepping it up a notch. We're not changing -- so we're really clear. We're not changing the product. The product still scores amazing. It's a great product. But we can romance it more. And there's a lot -- that's not surprising, I'm sure at some point, we're going to talk about value. And no matter where you look in the restaurant business, folks do really well on value or they do well on taste perception. It's really hard to do well in both. But with Hungry for MORE, we know we're doing well on value. We're going to continue. The R in Hungry for MORE stands for renowned value. But this is us saying, "Hey, you know what, what's good if the pizza tastes great, but people don't know that?" You've got a lot of work to do. And so that's the big difference. We don't have to change the product. We just have to talk about it and show it differently. We need to innovate more. I mean one of the things that I know I come to these a lot, in the past, people say, "Oh, why do you do innovations?" And I was not big into product innovation in the past, frankly, because a lot of what we sell are plain pepperoni cheese, sausage pizzas. And every time you launch something, one is the idea has to be great. So how many great ideas can you have a year? We all like to think we have great ideas, but how many great ideas are there. My wife thinks all my ideas are bad and -- but also -- and this is all of QSR. Think on the turnover of the restaurant. And if you're launching a brand-new product every month or every quarter, with the turnover you have, the quality of that base product isn't going to be good. But also the quality of the pepperoni pizza you're making every day that has to be great, isn't great because they're concentrating on making this new thing. And so I've purposely kept us, even the CMO, away from new products and a lot of the tech stuff that you see, we're known a lot for technology, a lot of the consumer-facing technology is how we've innovated. Well, when this research came back, we looked at it, we said, "Hey, you know what, we're not innovating enough." So now that we do, we need to show our product better, but we've now committed to 2 product innovations a year. We've got our first one, appropriately named after this meeting, that's the New York Style Pizza.

The next one is probably the Bernstein style pizza or...

Yes, yes, that's right. Exactly, exactly. And so we're going to have at least 2 products a year. And with that, when you do products like that, they can have strategic intent. So what's the strategic intent behind the New York Style Pizza is while people now we're #1 pizza company in the world, people love Domino's Pizza, not everyone does. And the folks who don't, we did a lot of research, the folks who don't think our dough is a little bit too thick, and they want a thinner New York Style pizza. And so we launched this pizza, it's -- we think it's going to be incremental because it's going after different customers. And what it's not, it's not a limited time offer. It's going to stay on the menu because if an idea is big enough, it should be able to stay on the menu. And I'm really proud because [ that stayed ] with the company. I think only 2 products we've launched are now off the menu. And so when we launched things, we launch them with strategic intent and they stay on. Because if they're good enough to be launched on the menu, shouldn't they be good enough to stay? And so anyway, that's how we've evolved a little bit on product.

And can you maybe talk about the trade-offs between the operational complexity of adding new platform into the business with incrementality for franchisee profit and especially the New York Style pizza seems to be potentially using just a lower amount of dough compared to kind of the large size for regular dough for Domino's, so maybe there is also some incrementality in profitability for franchisees. So can you help us understand from a platform introduction point, how do you manage complexity with driving interest and traffic?

Yes. No, that's a great point. We innovate for incrementality. I'm sure at some point, value is the big word at this conference that we will be talking value at some point. The best way to raise price is not to raise price, it's to give people something that they want to pay for and then they choose to pay more versus you telling them they need to pay more. And so over time, what we've done year after year is introduce different platforms. So we introduced sandwiches in 2008. We introduced pasta in 2009, and we had desserts and breads and all these other things. And what we find is we just add them to our promotional core offer, this Mix & Match offer. It used to be -- we had an offer that was $5.99 for any 2 of these things. For 12 years, we had it. We just changed it to $6.99. So we've been very consistent with any of these things on our menu, either $5 or now $6.99. What happens when we introduce a new platform is instead of charging people more money, they decide, I want to add this item. And so that lets us drive ticket without charging more. Does that make sense? And when people pay more because they want to pay more because -- versus you're charging them more is just very different. Now you're right with New York Style pizza. When you get a large New York Style pizza, it's a medium dough ball stretched to a large. So if there's any cannibalization over a large pizza is actually -- is margin accretive. And so that's how we think about innovation in general. Not only does it need to do well but needs to be accretive profitably, and we do it through these different platforms.

And maybe before we move into some of the macro questions that you were highlighting, just thinking about your long-term algorithm. And if you were to reflect on your long-term algorithm today, given the evolving landscape that we are seeing, which parts of your long-term algorithm do you feel most confident in for 2024 and maybe 2025, and which other items of your algorithm are you watching a bit more closely?

Look, we -- this is a long-term algorithm, and we're really comfortable with all parts of it. And I'll tell you, the only discussions we had before we came out with the new one, and we did it at an Investor Day in December of last year, we used to have ranges. And what you -- look, we -- like you said, we're almost $20 billion. When you have a range of 3, 4 points, like I said, that's a big difference. It's hard to model on. It's hard to keep people focused on all that stuff. And I think, too, is it gives people excuses. So for example, if I think we can grow 7%, but we're going to do a little bit of a range, Greg here is probably going to say, "Hey, Russell, let's say, like 5% to 9%." But what we said is, no, we're setting a floor. And the global retail sales for us, the floor is 7%, but we're saying it's 7% or more. So we're not giving ourselves an out. And we're not -- 7% is an aggressive numbers. So 7% over 5 years is $7 billion. $7 billion is akin to us taking the #10 restaurants in the United States and adding it to Domino's. And that's, like I said, the floor of the algorithm.

Got it. So okay, let's maybe shift on to some more macro questions. And specifically, one of the themes in this conference has been some low-income consumer pressure. So can you help us understand what you're seeing in your data? And more generally, how do you perceive the value orientation to evolve from here on in the rest of the industry, even outside of your own system?

Yes. Look, I think we saw it last year, a lot of folks were taking pricing last year. We took pricing on our national offers in '22. We didn't in '23, and I had a lot of people asking me, well, hey, inflation is continuing to happen and why aren't you taking price? And 2 reasons. One is we always make our decisions through some really complex testing that we do. And so we test our pricing, other pricing, but we also understand kind of what's going on in the macro environment. And I think with inflation, it doesn't -- it rarely goes negative. And so all these customers, inflation may be going up, but it's never going to go -- prices are ever going to go back to where they were. And so it was clear that we're going to get to a point where things were just too expensive. And when -- and it's not just -- we're here, we're talking about restaurant. I read in the Journal a couple of days ago, just how store brands, kind of private label brands, I think, are about 20% of purchases now in grocery. And so it's not just restaurants that are seeing that. And so it became clear that pricing was going to be an issue, and so we purposely didn't take price last year or this year. Now you might say, well, okay, good. Your value to customers, that's great. Order count's positive, that's great, but you didn't take pricing, what about your profitability? And profitability this year, we're -- it's going to be up. It'll probably be $170,000 or above. And that's because it's great to make a lot of quarters versus $1 or $2. And so by pricing where we are, it's priced for volume. And so there's going to be a lot of volume going through the store at still good cash margins, which add up to best-in-class profitability. It costs about $400,000 to build a Domino's. You're making, on average, $170,000 a year without incentives. That's a great and that number is up versus last year. And so I think as an operator, it's important to understand -- and we tell this to our franchisees, maybe this is an easier way to think about it is, we focus on franchisee profitability. We feel like if the franchisees are profitable, that's the engine that grows Domino's. But what we tell our franchisees is they need to focus on customer profitability, meaning what kind of disposable income do people have? And customers won't likely take advantage of them. You can put a price in, but they're going to quickly tell you if that's too expensive, and so they understand that. And so we're priced for volume, and volume at the prices we have can still result in more profit. And that's the way we run this business since 2009.

And are you seeing any signs of low-income consumer pressure in your business today?

We're seeing it not in our business. So in our business, and this is one of the things I'm really proud of, not only are we growing order count in delivery and carryout, but all income brackets. So even lower income consumers were growing orders. That's not happening, obviously, in the broader QSR industry, but I think that's part of how we set ourselves up, not only through pricing, but one of the other pieces that we did under the renowned value that R of our MORE is we launched our loyalty program, and that was -- that's been and will continue to be a big driver for us. And we looked at how we can improve it. I don't know about you. Whenever I get the letter from the marketing person or the CEO of a company where I'm a loyalty member, they always say, "Oh, we've now made -- we have a new and improved loyalty program." What that means is they made it worse. You get the new program, all of a sudden, you get the free ticket? No, I don't get the free ticket anymore. The cool thing about us is -- and this was done the research, wasn't us deciding to be extra nice. The research actually showed us that we could give more benefits to customers, and because of the volume and the ticket that would come out of it, our franchisees would make more money. And so here's what's happening. We took our old loyalty program. You had to spend $10 to get points. Our carryout offer, and carryout is now 52% of our business or orders, our best carryout deal is $7.99. So if you're buying a carryout deal from Domino's with the old loyalty program, you're not getting points. New program, $5, you're getting points. Old program, you had to buy 6 times to get a pizza free. The new program, you get something free starting at 2 items. Well, so that sounds great for a consumer, how on earth could our franchisees be making money? Well, 2 things. One is you now have more loyalty amongst your carryout customers. And hopefully, if not, I'm going to have him ask me a question on our carryout business at some point because it's on fire. It's all a beautiful cycle. And then our lower frequency customers, because now they can get something free at 2 items, they say to themselves, "Oh, well, I don't have to wait around for 6. Maybe I'll buy Domino's." And here's the beauty of it. When they get the free item after 2 purchases, it's usually a side, which means they buy a center plate item, like a pizza. So actually, the ticket is much higher than when we give them a free pizza and they order the side. And so when you jumble all that together with frequency, the ticket increase and all that, it's actually a win-win for customers and for franchisees. And so that's been addition -- if you think about it, our pricing and our renowned value that I'll talk about in 2 seconds get you into a flywheel now that is this loyalty program that is stickier than ever. And when I talk about renowned value, look, I think we're about to be hit with a slew of price promotions from restaurants. I mean everyone has been talking about it. And I personally, as a former marketer, I think when you do price off, it essentially tells people we've been charging you too much money. And so that's what customers come away with. And that's why we've only changed our national offer twice from $5.99, $5.99 was here for 12 years, and I expect $6.99 to be here for a while. But while everyone is going to be screaming this dollar that dollar, this dollar, that dollar, we took a step back and said, okay, our pricing is right. How can we tap into the broader zeitgeist stuff? Like the broader thinking of what's going on in America right now. And what's going on is people just -- they think they're being ripped off. I was telling Greg, I bought a chapstick the other day. Because I want to look good, I want my lips to look good for this discussion. So that's a convenience store, and I put my credit card in. And for the chapstick, it said, do you want to tip 10%, 15%, 20%? For chapstick. And that's happening everywhere now. And so what do we do with that idea? We said, you know what, people are getting frustrated. They may not be buying, whether it's the Domino's they want or the chocolate chip cookie they want or whatever they want because they feel -- by the way, I couldn't figure out how to not tip. It was 10%, 15%, 20%, there was no 0 in there. And so we said, a lot of people are doing this. So let's take a really a known mechanism, which is, I'll call it a bounce back. If you buy something, you get $3 on your future purchase. We took that mechanism, and we're calling it You Tip, We Tip. If you tip our -- because of all this tipping going on, we understand it's tough. So if you tip our drivers, we're going to tip you back. That tip is $3 on your next purchase. And by the way, because of the time you have to purchase it, it's probably going to be an incremental purchase that you're going to add ticket on to. It turns out to be great for us. All it is, is a bounce back coupon, there's nothing sexy about a bounce back coupon. There's a lot of -- and this is what I -- hopefully, this works. I'd like to say we're trying to bring talk into value, talk value. Not just value, not just price. So people are talking about You Tip, We Tip. Last year, we had something called Emergency Pizza. Emergency Pizza was around because people were saying, "Hey, you know what, maybe I burnt dinner tonight, maybe I got a soccer game or maybe I just went to the ATM, I don't have enough money." And so I -- whenever I need a -- we wanted people to know that we were there for them. And so we created a promotion, you buy a pizza, you get an Emergency Pizza. All it is, is a buy 1, get 1 free, except it's better, because the Emergency Pizza, you don't get right away, so you have to come back and buy it. And when you buy it, there's a ticket with it. And with our new loyalty program, you've gotten your first pizza. The second pizza is your Emergency Pizza, all of a sudden now you've got a free item with the loyalty program. And that's what I'm really excited about. And if you take anything away from renowned -- the difference between value and renowned value is a buy 1 get 1 free versus the Emergency Pizza. And we're just tapping into these tensions that I think -- the talk value is really big. Sorry, I get really excited about this.

No, no. Clearly, it's a great topic of conversation. And it seems like you're deploying some extra levers for Domino's to be able to be well positioned in an increasing competitive environment. But I'm wondering if you're going to be seeing any sort of pressure, incremental pressure, as some of the maybe independent pizza players or some of the larger chains might become a little bit more promotional, as you mentioned before. But even outside of the pizza away from home, there has been greater value being promoted these days. So how do you think this environment is going to be playing out for you? So are you expecting to see kind of a lower share of consumption in pizza because of the greater value that you might be getting from the burger or chicken category? Or what's your thinking?

Yes. Well, one is I fully expect folks to lean more into value. But when I look over at my 16 years at Domino's, what hasn't changed is the pizza category is a big category but doesn't grow a lot. It kind of grows with population. But what we've done is we've been an equal opportunity share stealer, and so if you look back to 2015, over that time period, we're up 9.4 share points. We took 3 share points from our big 3 national competitors, 3 from the local and 3 from regional. And so we've really taken from everyone. Certainly, we compete in a broader QSR business, but at the end of the day, we're in the pizza business. And we don't even sell 1 of every 4 pizzas. And when you think about a $0.5 billion marketing budget, when you think about we're the #1 brand in pizza, we've got the scale and purchasing, no matter what folks do within this category to bring more price or more value, one is we've always been the leader. So we started with $5.99 and people came. So let's just say if somebody does something, we have the ability to go in there and outmuscle, to be honest. So we've had all the share growth, but 40% to 50% of the pizza category is still regionals and kind of up and down the street in places. And so what makes me super excited about the future of Domino's, we can talk about how we're going to do it, but the future of Domino's is we're the #1 player. How many #1 players are here at this conference who have a 25% share of a category, a little bit less than 25% share of a category, right? We said double that. And so we're #1, and we're in a place where 40% to 50% are still these kind of smaller companies. We've shown that we've, over time, grown share from all of them. I think no matter what folks do within this environment, history shows -- and just fair share in the industry shows that we're going to succeed.

Good. What's the expectation in terms of going forward? Are you still going to be like a equal opportunity share stealer? Or are you expecting to see different dynamics in the industry going forward?

So I'm sorry, one more time on the question?

So the question is are you expecting to be an equal opportunity share stealer going forward? Or are you expecting a dynamic of market share gains evolving compared to the past?

No, I really do think we'll be an equal opportunity share stealer. Because the one thing that has kept us from doing that changed in the middle of last year when we decided to sign the agreement with Uber and get into the aggregator business. I think we're -- obviously, we're taking orders from them. We're still delivering ourselves, and that's really important. I'd be happy to talk about that. But that business for us net of what we think cannibalization is going to be is, it's billion dollars once we're on all of these platforms. That is where, I think, the up and down the street folks who previously didn't have an online ordering system, they didn't have a way to deliver. When we were not on that, I think that really helped them. Now we're there. And I think what wins on those platforms is stuff that we're good at. I mean we're best-in-class on digital media buying, and obviously, we talked about value. And so now we're essentially out of a marketplace where what wins, price, brand presence, and so I think we'll be back now that we're on them, being a stealer from everyone. Plus our carryout business, a lot of that carryout business also comes from up and down the street. We've doubled our carryout share from -- more than doubled actually from 2015 to 2023. I can talk all day about our carryout business, but what carryout does is not only lets us take equally from all these players, but it actually lets us open up more stores. And let me -- I don't know how I could explain this without -- I usually have a device. I'm going to show you -- on the camera, right? Okay, you hold it. All right. Let's just say this is a Domino's territory here. And we have a store like right over here. In the past, we wouldn't open up another store because the franchisees would be really happy because he or she would have all of these addresses, "Why should I give up any of these addresses?" Well, a few years ago, we started to realize that, you know what, while everyone is running into this delivery business, then we understand why and we're in it now too with aggregators, no one's really talking about carryout. No one's -- there are tech companies spending millions and millions and billions of dollars into that business. And so why don't we lean into carryout? Because guess what, it's actually bigger than delivery. And so we start doing more promotions and carryout grows and grows and grows. And today, actually 52% of our orders are carryout. Now why is that important for this? Well, first, carryout and delivery, there's very little overlap, 15% to 20% overlap. So the majority of the time, the customer is incremental. Now let me get you back to the store. So this store that's here, customers who shop carryout like their store to be closer to them, for obvious reasons. So whereas in the past, we wouldn't have opened a store, maybe now we're opening up a store over here. And what does that mean? It means, one, a competitor doesn't open up the store. So that helps, because they want a storage from us. But because of carryout, when we split a store, so this is an existing territory, when we split an existing territory, 80% of the carryout volume is incremental. And so essentially, you're opening up a new store and it pays for itself, breaks even with carryout. But then guess what happens. Let's say, Greg's house is in the middle. All of a sudden, the delivery to Greg's house is going to be faster because we now have 2 stores. One is closer to his house than the old one. And so what happens then is our delivery efficiencies get better, which means the margins get tighter, but also service gets better. We're getting to Greg's house faster because we're closer to Greg's House. And so he orders delivery more. And so it's this beautiful cycle where we have this value that takes people into the loyalty program, the loyalty program drives the business, carryout customers drive incremental stores and the incremental stores helped drive our delivery business. And that's why we think we have so many stores we can open. So here's your pad back. Hopefully, you're able to take that away, but it really is this carryout growth, aside from the fact that it's just on fire, actually helps open up new stores.

So my follow-up on this one is, what triggered the carryout business to be on fire today? I mean, I know that it was a growth, it's a multiyear growth for you, but what was the real change inside your decision-making processes that were enabling consumers to have a better appreciation of the carryout business? And then as a follow-up to that, what's the upper limit in terms of mix that you think your stores can be driving on to carryout? You talked about 52%. Can you get to 70%, 80%? And what will that do to profitability of the stores?

Yes. The thing other than just advertising it more, look, as sales go up, you have more money to advertise. So we used to just advertise around delivery, now we advertise carryout. But actually, what's happened as inflation has come is that carryout is becoming a better and better deal. Because prices are increasing, but what happens when you take -- when you do delivery? It's -- you're paying a tip, you're paying fees and all these kinds of things. So I think part of why carryout is growing, it's just it's becoming more and more of a relative value for customers. And I think we're seeing that now. As far as what is the upper limit, it's interesting -- maybe I'll talk to it this way because part of me doesn't want it to be bigger than 52% because I want to continue to drive our delivery business, so I want the denominator to be bigger. But I guess I show it to you this way, is if we deliver 1 out of every 3 pizzas today, why shouldn't we do 1 out of every 3 carryout? Why shouldn't we? And then when you look outside of aggregators, actually, we deliver 40% of pizzas. Why can't we do 40% carryout? These to me are not hard stretches to believe. And so when you -- when I see that growth in carryout, I think all it's doing is it's naturally catching up to what our business should be because of how big we are as a pizza company.

And what would that do into profitability for franchisees?

Well, because it's incremental, 15% to 20% incremental, it's accretive, right? I mean, there may be more dollars to a delivery order. But if the profit is incremental, it's incremental. And if you think about the labor, you're not using any of your delivery, right? And so think about all those times where maybe you've got people lunchtime or before rush where you have people to have to staff the store. Well, without a delivery -- without a carryout business, you got a lot of time people are sitting there doing nothing. And so it also just helps you optimize your labor.