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

Hi, everybody. I'm Brian Bittner, the restaurant analyst at Oppenheimer, and welcome to our 2024 consumer conference. We're thrilled to have Domino's Pizza back at our 2024 Consumer Conference. Domino's is the world's largest pizza company with nearly 21,000 stores in 90-plus markets. And at Oppenheimer, we have elevated Domino's to one of our top picks, and we did so in the second half of '23, and we have reiterated this stock as one of our top picks for 2024 with a $580 price target. While Domino's has a strong track record of impressive growth, we actually believe there remains an attractive opportunity for AUV expansion and powerful unit growth particularly as the core business is showing signs of operational improvements and the company takes advantage of accretive opportunities out there like carryout third-party and relaunching the loyalty program. And we are really excited to have from the company Sandeep Reddy, the Chief Financial Officer, who joined Domino's team in April '22 as well as Greg Lemenchick, Vice President of Investor Relations. Thank you both for being with us today. We greatly appreciate your time.

Thank you. Thank you, Brian, for having us here. Very excited to have this conversation.

Great. I would like to begin the conversation by really zooming out high level here. We're clearly in an operating environment where the industry is feeling the need to get more promotional and value-focused in an effort to bring back that low-end consumer. And it seems like Domino's price value perception, particularly in carryout, has really improved relative to traditional quick service. And I just like you can start out by helping us understand what your views are of the current consumer environment? And how do you believe the Domino's brand is positioned to compete? And what arguably is going to be a more value-focused competitive environment moving forward?

Yes. No, I think it's a great question, Brian. And if we go back to the last earnings call, we did just a few weeks ago, one of the things that I think came out through our conversation was, we've seen very strong transaction growth across all income cohorts in the first quarter of the year. And this was not really about what had happened in the first quarter specifically, but it's really a combination of a value and a pricing strategy that has actually been in operation for the last couple of years. So we talked specifically about some of the spot pricing that we take in '22 and '23 and how that's really coming to bear in '24, specifically, in '22 with the outsized inflation that actually taken place, we had updated the price of our Mix & Match, our national offer to $6.99 from $5.99 after a very long time, I think about 12 years. And I think once we did that, we did see naturally transactions getting impacted in early '23. And so we were very, very focused right through '23 in holding the line on pricing and really having conversations with our franchisees about how important that was to sustain profitability growth. Sure enough that discipline paid off because transaction growth really sound inflecting by the time we got into the fourth quarter, and I think from a pricing perspective, we were in a good enough place already from a pricing and flow-through perspective to drive $23,000 in improvement in profit in '23 for the franchisees in the United States. And as we move into '24, the disciplines that we had in '23 haven't gone away, they're still applying them. But what has ended up happening is, I think if you've taken pricing in excess of disposable income anywhere in the industry, that has actually had an impact in terms of what transactions trends have been in the first quarter of the year and so far in the year across the industry. But because we've been in the right place from a price value perspective, our customers are very happy with what value we're delivering. And our expectations is for continued transaction growth for the balance of '24. And frankly, Hungry for MORE is constructed around transaction growth, and that's the way we'll keep on approaching it.

That's great. In staying high level, a lot has changed with the Domino's investment story since you presented at this conference last year. You held an Investor Day in December of 2023, where you did unveil your Hungry for MORE strategy and you communicated annual financial targets for at least 7% or more retail sales growth which include 3% plus same-store sales growth, 1,100 net new unit growth and all this translates into 8% or more operating profit growth. These are impressive base case assumptions to communicate to the investment community. Can you just remind the audience maybe the building blocks that drive your confidence in putting out this type of an algorithm.

Yes. No. I think it's in a great question, Brian. So I'll take it in 2 halfs. I'll take the U.S. first, and let's come to the international business after that. But I think on the U.S. side, specifically, we had two significant catalysts that were already kind of in line and in play by the end of last year. The first is the loyalty program we launched at -- that launched in the fourth quarter of 2023. And similar to the first time we launched the loyalty program in 2014, we expect this to be a multiyear catalyst. And I think this one that we've just launched in September of 2023 has a significant enhancements, especially for the carryout customer. And I think because of that, I think we're accessing a lot more members into the loyalty program and driving a lot more frequency from those members. And I think that will have the long tail in a good way for us as we go along. The second is, I think the conversation we had about the aggregated marketplace. And we launched with Uber in the fourth quarter of last year. And I think what we expected to do was not just do Uber, but over a 3-year time frame, participate with all players in the aggregator marketplace in the United States and that will include DoorDash, Grubhub and everybody else over time. And I think that also should be a multiyear catalyst in terms of retail sales growth. So those pieces really are the core of what we talked about. And I think, obviously, the strategic pillars that we define with the more pillars, more delicious food, operational excellence within our value and enhanced by franchisees will all be foundational to driving that growth with these catalysts. The international business has a similar kind of thought process where you will have the more pillars enabling that business too, but specifically there, I think 3% or more same-store sales is where we expect to be running over the 5-year time period. We did start a little bit challenged in the first half of '24. Well, we did say that we expected that to happen because of the headwinds on the European business as well as the Middle East crisis that should -- that are expected to weigh on the first half of the year. And I think from a store count perspective, we were expecting to do 1,100 stores per year. About half of the growth was expected to come from India and China, which makes a lot of sense. India has just had the recent earnings call, the Jubilant team, our partners there, just had an earnings call where they announced updated targets for India on a medium-term basis, and China has been going from strength to strength. And so overall, I think those are big parts of our growth drivers from a top line perspective. And the thing about the operating income guidance of 80% or more is -- in my mind, this is very healthy growth because it's driven by retail sales growth and transaction-driven retail sales growth, which is really important for it to be sustainable. And that's why our investments that we're making in the P&L are really structured to drive that long-term sales growth and share gain that comes along with it.

Since the last conference, you had shown turnaround-like improvements in the business from where you were in 2022 in the first 3 quarters of 2023 and you're now guiding 2024 for same-store sales above the long-term target, you're seeing positive traffic across all income cohorts at a time where the industry is negative. And you talked about some of the drivers of this turnaround. I want to follow up on some of those. And the first is on the loyalty relaunch. The rewards relaunch appears to be paying dividends is driving accelerated membership growth, increased frequency amongst existing users. It's bringing in the core carryout customer. Can you just maybe touch on a little more help investors understand why this relaunch can have a positive impact for multiple years. I know investors are already worried about the 4Q lap this year when you launched it. How could this relaunch have benefits into '25 and even beyond?

It's a great question, Brian. And it's actually something that I've actually -- I really welcome the opportunity for you to answer this question. So I'm going to go back to the first loyalty program, right? We launched it 2014. So in 2014, we were already on a pretty strong trajectory because of New and Inspired kind of a few years before that, our digital footprint continued to really accelerate, and we had a comp on 7.5% in 2014 before we launched the loyalty program for the first time. Guess what happened? The year after the loyalty program, we accelerated from 7.5% to 12%. That was the first year after the launch. And so after the first year of the launch, you would expect that, oh, you now have tougher comps. But I guess what happened in the second year, 2016, we had comps of 10% or more on the back of 7.5% and 12%. And so you saw a second leg in terms of growth, compounding the previous growth. And not just in -- not that here, but year after that, they were 8% on more. And so there was a compounding impact from that loyalty program launch which lasted over multiple years. And I think similar to that program, which was structured around mostly the delivery customer because at that time, our carryout business was ready flexing. This time, the loyalty program is structured around both the delivery as well as the carryout customer with some significant enhancements because we now have redemption tiers that, a, provide much more options in terms of product redemptions; and b, different tiers. You can redeem at 2 transactions, 4 transactions before you get to the previous 6 transactions. And we're seeing acquisition as well as redemption accelerate on the back of it. So there's plenty of juice left in the loyalty program once we lap the Q4 launch of last year. And that's why we're saying this is a multiyear story. We believe that, and we're seeing evidence of that and hence the commentary.

And another meaningful development since you were here last year is the announcement and the implementation of UberEATS partnership. You have a specific goal to be at least 3% mix of sales by the end of this year. And you talked a lot about what you think the incrementality of that is. Can you just talk to the audience about your confidence in getting to this specific target, maybe particularly as marketing has now turned on and maybe becomes more impactful?

Yes. And I think the 3% mix was an important milestone to set for investors to understand what the expected cadence was going to be. And what I would say is, if you go and look at us, the launch quarter was Q4 where we initially started, we had 0.4% mix in Q4. We ended up with a 1.4% mix in Q1. And we did say we're going to build steadily as we continue to ramp up the marketing towards a 3% exit rate at the end of the year. And we feel that we're on track. I mean all the plans that we had in the beginning of the launch period, we are chasing it materialized. And I think as we go along, we'll actually evaluate how things are going and what tweaks to make, if any. But what I would say is the 3% was more a mix input that we provided to investors to help everybody to model and think about it. But really what's most fundamental to our story is the algorithm. We're very focused on the 7% retail sales growth and 8% operating income growth. And how this 3% mix plays into that is good. But it's less relevant than the algorithm itself. It's 7% retail sales growth 8% operating income growth, and we'll continue to toggle back.

And just a follow-up on last question on third party. You do have a long-term goal of getting to about $1 billion of system sales coming from that channel. And you talked at the beginning about how that includes all partners. And assuming DoorDash is obviously a big part of this. Can you help us understand the dynamics around the timing and the opportunity to add additional partners following the UberEATS launch? When can we expect more on the third-party side?

Yes. I think the exclusivity arrangement that we had with Uber gets to its 1-year anniversary mark during the first quarter of '25. At that point, we have the option to extend the exclusivity arrangement with Uber or partner with others. And I think we will take the call as we look at the economics as we get closer to that time and decide exactly how we'll move forward past that. But we've said, as you rightly pointed out as well that eventually, we're going to be on everybody -- in the marketplace. So -- and it's really more of a question of when and not if.

And I want to now talk about the carryout business. Domino's Pizza has evolved in the U.S. from a delivery business to a total pizza powerhouse. Everyone knows that you've always been the #1 share in delivery over many years, but now Domino's is also the #1 leader in carryout. In fact, over 50% of your orders in the U.S. are now coming from carryout. Can you explain to the audience how you strategically think about the long-term carryout opportunity moving forward? And why are you so confident that carryout does represent such an incremental and separate growth opportunity for your business relative to delivery?

Yes. No, I think -- a great question, Brian. I think carryout has definitely had tremendous traction in the last few years, and we're thrilled to see where we are. But as much as the growth has been phenomenal on the carryout business over the last few years, last 5 years, I would say, what has actually stood out to us is even with all that very strong growth, our share in carryout is just 1 in 5, give or take, 20%. Our share in delivery is 1 in 3. Why can't we be 1 in 3 in carryout as well? And why should 1 in 3 be the ceiling of what share could go to? And that's really the mindset that is actually driving when we go back to our Investor Day, you heard from Russell, you heard from Joe, talk about getting our fair share. Our fair share starts at 1/3 from the carryout business perspective, and there's probably room above that, both on carryout as well as delivery. And I think what we've been seeing is with the value proposition that we offer our customers and the tremendous product attributes that we are able to offer as well, we are in a place where we can continue to gain share at a very rapid pace. And we took 9 points of share over an 8-year time frame. There is no reason why we can't see very significant share gains over the next few years with the plans that we've outlined. We just do the calculations and we assume 1.5% to 2% growth on pizza QSR, which has been the historical way of growth. Inevitably, this means that we continue to gain significant share in the marketplace and carryout will be a big piece of that.

And when we think about the delivery business, a big catalyst to that business is improving service and you now have the intense staffing challenges that you dealt with, the last couple of years, arguably behind you for the most part, and you're really starting to see some tangible service improvements. I think you talked about being 1 minute better year-over-year in your last earnings call. Can you help us understand how you think about what's left in the tank on improving service, particularly as it relates to delivery?

Yes. No, I think another great question because I think, two different things. One is delivery service has improved. Timing differently has improved. And we delivered that service with growth because we actually grew transactions for two consecutive quarters on the delivery business. And I think staffing is in a really good place. And we don't just have the staffing we need. We have every confidence as demand continues to grow, we'll have the staffing to fulfill that demand. And that's a really good thing. But the layer actually add to this is, the service level is not just about time. It's about consistency. And I think Joe Jordan, our President of the U.S. kind of laid that up. And a lot of what we're talking about under the MORE strategy, when you look at the operational excellence piece, is about delivering that consistent experience to the customer. And I think it's not just the delivery time, it's the consistency of the delivery time. It's the quality of the product in the box when it gets to the customer, all of it put together, which includes the preparation in the store as well as the delivery experience to get it to the customer's hands. And that, by the way, doesn't just extend to the delivery business, it's the carryout business as well. So all of it kind of goes into that equation. And I think that's why I think when you think about the strategy, it really was meant to talk about both delivery and carryout at the same time, and that's what we come to see.

Great. And I know we're going rapid fire here jumping around. But I want to talk about digital real quick. It's now over 80% of your sales best-in-class in the industry, but you're making changes. You obviously refreshed the loyalty program, which we talked about. And you're making other investments into your e-commerce platform as well, partnering with Microsoft, changing the plumbing of the e-commerce platform. Can you maybe help us understand how impactful these new type changes could be? And how do you expect those to pay dividends, maybe separate from the loyalty relaunch moving forward?

Yes. I think the single biggest thing that I think is going to be very impactful is the update to the e-commerce platform. And the reason I say that is, while we were at the forefront of the digital transformation in the company's consumer experience about a decade ago like we talked about earlier, that e-commerce platform really hasn't had much more than small patches and updates had to it over the last 10 years or so, or more than 10 years now. And that e-commerce platform is going to be upgraded and development have actually completed by the end of this year, and we'll be rolling it out as we go to '25 and beyond. And I think that is going to be significantly improved experience for the customer. And the reason it's going to be significantly improved is when you have a platform that is about 10 or 12 years old like we do right now, and you actually put patches on it, sometimes what happens is the customer experience ends up being a little bit slower than ideal because there's a latency in the experience when you're actually navigating the website, that latency is going to get fixed with this update that we're making. And then -- but there are certain product features that are already being rolled out in the existing e-commerce platform. So there are little nuances that you may not even perceive, but they've already been implemented. So it's not like it's going to be a big bang at the end of '24, where you see a completely new website. It's going to be rolled out in phases where it's-- where you have an existing customer, you don't want to disrupt them completely in their experience. You just want to subtly enhance their experience, so they have less friction as they go through it. So that I'd say is the biggest showpiece. And I think this hasn't been talked about as much but -- if you think about the loyalty relaunch that we did in September of last year, one of the coolest things that I think was done, which wasn't talked about quite as much was the digital wallet for the Domino's rewards customers, the loyalty customers. And you actually have all of your points that are automatically populated there and a much more easy experience in being able to redeem those points for different products and redemptions as you go along. That was this huge, huge change, which really didn't get showcased quite as much, but I think I'd really like to talk about it as an example of how we can actually bring technology to bear to remove customer friction. And then, I think the other things that we talked about and Kelly Garcia, our Chief Technology Officer, talked about during Investor Day is we've been doing AI for years. We continue to be doing it. So it's happening for sure, and the consumer-facing piece is 1 piece of it, but I think the back of house and store technology is the other piece of it, where we've actually been using it in a big way. Working with Microsoft is to bring that innovation both to the front of the house as well as the back of the house by partnering those with tremendous know-how about the Domino's customer with those with great technology know-how in Microsoft, they can actually partner to actually bring in better solutions both to the customer experience as well as the store experience for the team members in the stores. More to come on that. That's something that's still in the early phases, but all of this will become very meaningful. I'll give you the example of how you can get benefits. The digital experience that the customers had over the last decade and 12 years, had a huge impact in terms of unlocking labor efficiencies in our stores. And that was a big driver of why profitability went up so much. Similarly, these technology experiences will take work out of the stores, and make them more effective in meeting and delighting customer experiences. And so I think over time, all of this is a connected network of tools and techniques. We have to drive long-term franchisee P&L profit.

One more thing I want to touch on as it relates to driving traffic in the U.S. and then we'll move to international is, innovation on the product side? Russell has highlighted that menu innovation now represents an important theme moving forward. he has promised 2 new impact for new products a year seems to be a shift a little bit from management's historical view on using that as a catalyst. What is it about your data and your insights has informed you at Domino's that this actually needs to be a part of the core sales strategy now moving forward?

Yes. I think it's really, Brian, one of those things where what we realized is that newness and freshness on the menu is very important to continue to keep excitement high from a consumer perspective. And so last year, you saw a couple of innovations in '23, right? You saw loaded tots, which is a completely new platform that came out. But then you saw pepperoni stuffed cheesy bread in the second half of the year, which was really a renovation of an existing product, but with a really the pepperoni stuffed cheesy bread was the innovation. Stuffed cheesy bread already was there, but the was the innovation. This year, you've seen the New York style pizza, which addressed a request for a crust that was foldable but a little bit lighter, but still with the body, and sure enough, we've actually gone and done the reformulation of the that you're seeing over there. But that's 1 of 2, and there's more to come. And what we've realized is that newness is exciting for the customer, and we see a significant mix into that. But we're also not shy of taking items off of the menu to keep down operational complexity in the stores. We've done that in the past and we may do that in the future as well, just to make sure that the newness doesn't just proliferate and we don't have a lot of waste building into the menu as we go through this -- to maximize franchisee profitability again.

Great. I'd like to touch on international before maybe diving into overall unit growth, just talk about international by itself. It's an area where you've experienced great success internationally over a number of years. You're now approaching 14,000 international stores, up from 5,000 stores 10 years ago. What gives you the confidence that you can accelerate units to this 925 or more pace that you've guided long term to. You've highlighted markets such as China and India, to drive about half of that growth. But there are also some macro challenges around the globe, which could arguably put pressure on that target. Just help us understand why international remains such a powerful and confident growth engine for you moving forward?

No, I think it's really a great question, and you've already answered the question partially yourself, which is India and China are a big piece of this equation as you go and with a pretty significantly compounding growth rate in those markets as those markets grow and our share grows there. But I think in the long term, there's plenty of potential, we are 90-plus markets, and we have significant master franchisees across our network. In the short term, though, I think you touched on the fact that there are micro challenges. And specifically, I would say, are two pieces that I would highlight. The first I think more material piece, is our biggest master franchise is Domino's Pizza Enterprises. And they've talked more publicly recently as well about some of the challenges that they're having in their markets. And I think that puts some pressure on us in the short term, which we'll have to deal with. But it doesn't change the long-term trajectory of the business and the equation of where we can actually take the business. So overall, we feel pretty good about it. But I think that piece is something that we need to be cognizant of is that there is risk and we should be aware of that. And the other piece is the Middle East, right? The Middle East, we talked about at the beginning of the year, is going to be a drag, and it has been a drag from a comp perspective. And it's part of the macro noise. And I think you could have some headwinds from that as well as we go through the rest of the 2024. But longer term, I think we're very confident markets in which we are operating. We actually have a great presence in. We have our share gain possibilities, which are very significant in most of the markets in which we operate. And that will come through unit growth.

And speaking with that international as it relates to same-store sales growth piece on the international side, you do expect same-store sales to remain soft in the first half of '24. And then accelerating to your 3% plus target in the second half of the year. Can you just remind the audience what's driving this acceleration and the confidence behind getting to this 3% pace of comp growth in the second half of the year for the international business?

Yes. No, I think, again, one of the things that we talked about is we actually are hiring execution of the MORE strategy across all the international markets. And Australia was one of the first ones out there, which actually went after the -- from a product innovation perspective and embraces back last year, and they've been seeing great trends to the first quarter of the year. We expect more of that kind of thing as we go through the rest of the year across most of our large international masters. But I think the additional thing is that we're, renowned value pillar, the third pillar that we talked about. We've had most [indiscernible] that were launched in Mexico and Canada. More of the same as we go through the year. We could expect to see much more on the promotional side and I think those levers could also help accelerate as we move into the back half. So a lot of plans were being put into place but hadn't really been executed yet in the first and the second quarter, but more of that should come in, in the back half, which will enable us to reaccelerate back to the 3%.

Great. And just going back to unit growth for the company, goal is to grow about 1,100 units per year. We talked about how 925 of that will come internationally. The other 175 plus is coming from the domestic side, which is very impressive. As it relates to your domestic unit growth piece, it seems like you have a lot of confidence in the pipeline driven by the fact that you have a record number of up-and-coming franchisees organically graduating through your internal systems, eager to open units and build their businesses. Can you maybe explain the unit growth piece domestically in a little greater detail in the confidence behind that, particularly at a time where I think a lot of the companies are having a hard time expanding in the U.S.

Yes. No, I think you're absolutely right, Brian. The visibility of the pipeline has been very good since the beginning of the year. And it continues to be very good. Our plans that we communicated are very much in place. First half of the year, relatively flat in absolute number of units to be opened relative to last year and a slight acceleration in the back half. And all this comes from really good economics and accelerating economics in the stores. And I think our franchisees are extremely bullish. We just had our worldwide rally a few weeks ago. I can tell you, the excitement on -- from the franchisees on the potential growth is just incredible. The energy was very high. The demand is very high. We have a lot of confidence in the U.S. business and the potential for our unit growth there over the next 5 years.

Yes. I mean EBITDA per store levels at record levels, I guess, clearly helps that. And we had only a couple of minutes left. I just want to touch on corporate-wide profitability for a second. Sandeep, you said since day 1 coming into the company over 2 years ago that you bring a sharp focus to profitability, the G&A leverage, et cetera, which I think we all appreciate very much. You've talked about 2024, specifically being a year of more flattish EBIT margins despite above-average same-store sales growth in the U.S. at least. Can you just remind the audience some of the dynamics on margins this year and around the flattish guidance. I know there's some tech investments, supply chain capacity investments are a piece of this. Can you just unpack it a little more for us?

Yes. I think you answered the question a little bit on the last part there, Brian. I think it's consumer technology, store technology investments and as well as supply chain capacity to actually make sure that we have enough resources to basically fulfill the demand that we're expecting to see incrementally. Demand coming from both the same-store sales transactions as well as incremental units that we are expecting to continue to grow. And so those are the investments that they really weigh on margins a little bit in 2024, but we're expecting to continue margin expansion past '24. And that's why I said, I think at the early part of the call, I love the algorithm because it's really healthy growth. It's really driven by retail sales growth, which is transaction driven that drives profit growth. And that's why I think it's very sustainable that we do it that way. But you got to make the investments to drive the returns. And I think '24 is a year that we're choosing to make those investments to make sure that we'll have fuel for the next few years.

Well, I think that's a perfect way to end it. We're also out of time. And I want to thank Sandeep and Greg, for being with us today, that's Domino's Pizza, one of our top picks at Oppenheimer. Thank you so much for being here. We appreciate your time.

Thank you, Brian.

Thanks, Brian.