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

All right. Thank you, everyone, for joining. My name is Brian Mullan. I'm the restaurant and food distribution analyst at Piper Sandler. Very happy to have the CFO of Domino's, Sandeep Reddy. Thank you for joining. Just want to kick it off. Domino's has been on a really solid trajectory this year in the domestic business. The last we heard from you, Sandeep, I think you were expecting the transaction growth that you experienced in the first half of the year to continue into the second half of the year. Same-store sales domestically for the third quarter would be slightly below the second quarter, and then remain above the 3% target for the fourth quarter.

So my question would just be if anything has changed with your thinking, which I ask only because of the consumer backdrop.

Yes. I think it's a great question, Brian. And I think we're really thrilled with the first half results that we generated. And I think to see transaction growth in an environment in which we are operating was very reassuring for us and very much in line with the plans that we had at the beginning of the year. To see it really come through, both on the delivery business and the carryout business, was also very exciting. And we said at the time, and I can confirm it, like we're expecting transaction growth in the back half as well in the business, and that's been the strategy. That's what we expect to see. What I would say is that we reported, I think, mid-July, and we're pretty early because of our reporting calendar. And we knew that the environment was going to be tough when we actually started the year, and those expectations have played out by mid-July. But I think, as the other players in the QSR space started reporting over the course of the next 3 to 4 weeks, we realized that not just was the environment tough like we'd expected it, but others, in fact, seemed to be seeing incrementally even more pressure than we'd thought that was out there. And I think that's really more the incremental learning since we reported. But our business is our business, and our plans are our plans.

Okay. You announced an interesting promotion earlier this week titled MOREflation. Maybe you could just take us through what that is, what some of the insights were behind this particular promotion? And was this always the plan? Or maybe is what you just described where some of the competitors, the environment has changed a little bit in their promotion and you want to respond?

Yes. I think MOREflation is so emblematic of our strategy. And I think if you think about the 4 strategic pillars, the third -- the fourth strategic pillar is renowned value. And the key over here is, we can always make sure that we're delivering value to the customer, but we do it in a way that's really resonating with the brand and the consumer tensions at the time. Today, I think with all the inflationary pressures that have been actually coming through the last few years, we've had a number of situations where there's been a lot of shrinkflation going on in the marketplace. And consumers are getting fed up of actually seeing like a smaller portion for the same price. So we thought it was like a great message at this particular time of consumer tensions to come out with MOREflation, which is same price, you get more. You get a large instead of a medium on a Mix & Match special. And that was really the thinking over there in terms of that. And of course, it's a value play. Of course, it actually can generate and deliver that value as well. But we were very confident when we actually talked about the fourth quarter about having a slate of initiatives to actually go and drive this, and here you are. We're in the fourth quarter right now, and it's out.

Understood. And then specific to the domestic carryout business, it seems like the loyalty program changes, in particular, have been very quite impactful. You've made some comments -- the company has made some comments with the loyalty changes. This tailwind could actually be multiyear in nature, which is exciting. I was just hoping you could expand on that a little bit, the mechanics of that. And I'm asking because I know the piece of the pie back in 2014, that was multiyear in nature. But are there any examples you could provide or talk about the reason why this one should be multiyear in nature as well like it was back then?

Yes. No, I think it's another great question. And look, I mean, I think we're really comfortable that this should be a multiyear driver because we've seen our loyalty count -- active loyalty count continue to go up. And I think, through the end of the first half, it was up pretty significantly. And we feel really good about both the acquisition and the retention of the loyalty customers into the database. And what I think we also talked about in the second quarter call is redemptions had actually almost doubled on the carryout customer. So it's clear that customers are coming into the loyalty program. They're using the loyalty program. They're redeeming. That's increasing transactions. And guess what, they're actually so satisfied with continuing to get redemptions, they're going to stay in the program. That's going to build long-term frequency. And that's what makes it a multiyear driver. And I think we are really excited about the fact that it's played out the way it has. It's done very well, definitely, in the carryout business, but it's also been good on the delivery business because we have seen some redemption increases there, too.

At some point, I remember you sharing, I think carryout was still domestically about 52% of the transactions last year in 2023. That's the first time I can remember where there were more carryout orders than delivery orders done. Where do you think that will land this year? Will carryout grow in the mix again? And I'm asking only because you've got great carryout momentum, but you've also have positive delivery counts. And you've launched Uber Eats, so just curious to get your take.

Yes. I think let's look at the first half, right? On the first half, obviously, carryout was growing much faster than delivery, if we then look at it in the sales or transactions. So that weighed in the first half, but actually a mix more towards carryout. I think you're right about the 2 drivers. There's -- Uber continues to be an incrementality opportunity for us. But I think our carryout also does have compelling options that we had there, especially with the loyalty program and that acceleration. So we feel pretty good that both businesses grow. I think we don't need to actually look at the mix impact as more kind of the target. It's more the outcome of strategies and growth in both businesses.

Okay. Understood. And then shifting to the domestic delivery business. The first question is just really on the industry, the QSR pizza delivery industry. Do you think delivery transactions right now are growing from what you can see in your data? I know that Domino's taking share, but how do you -- what are you seeing in the industry data?

Yes. I think it probably goes back a little bit to your first question on the macro environment broadly. I do think when the consumer is pressured, there's probably going to be a bit of pressure on the delivery business. We saw that in the early part of '23 as well where delivery, I think, was a bit more constrained. And so that's probably the case. But so far, you can see our results, and we've been able to grow our retail sales on delivery and in this environment. So I think time will tell. It's -- but our shared data is a little bit choppy in terms of timing and when it comes out in a lag factor. But I wouldn't be surprised if there's a bit of pressure on the delivery market in general.

Okay. And then related to that, when you first announced that the company was going to join Uber Eats 3P, you quantified the QSR pizza channel being delivered on that as about a $5 billion opportunity. Do you think that channel is growing this year? Understood that you're taking share. Maybe it's the same answer as the overall, but just curious on the channel.

Yes. I think, overall, the aggregator platforms have kind of stabilized starting in '23, and we do see that they are expected to be a growing channel. And I don't see that thesis really changing. The data that we have seen so far doesn't indicate a significant shift from the broader trend. But I think that's -- that marketplace is there to stay.

Understood. And then I just want to ask about your experience on the marketplace, specifically the marketing efforts. If you could maybe summarize what has your experience been marketing on the platform so far? What has surprised you in either direction? I know the team at Domino's, you have the ability to test and learn. Everything is on track. But what's the biggest difference between maybe a more traditional digital marketing performance channel? And what have you learned?

Yes. I think, really, the learnings were more in the early days in terms of how the promotional style actually was on the marketplace. We saw that it was a very high-low approach on Uber. And so what we saw was the competitive set was definitely taking more of a price premium and then discounting it. So we just had to adapt our approach. So we did a similar thing to get to the consumer in the structure of the promotion that they wanted. It actually was profit-neutral because we kind of ended up with the same net price after the discount. But I think other than that, and we adapted pretty quickly in Q1 to that, things have been trying to -- pretty much tracking as we expected it to. We expected to build over the course of the year. We are building over the course of the year in the first half. We are already 1.9%. We expect to exit at 3% for the year. And with increasing sales, increasing marketing is expected to come.

Okay. And then the exclusivity with Uber Eats, it will last at some point in the first quarter next year. Maybe just talk about the decision process for maybe joining and the timing on DoorDash. I think it's something probably you want to do eventually. But you've never promised an exact time. I'm sure you want to get the best economics for Domino's and your franchisees. So if we get to the middle of next year and you've joined versus if we get to the middle of next year and you've not joined, what does that mean? And how do you want to approach this?

Yes. I think let me start with joining DoorDash and GrubHub and everybody else in the United States is more a question of when, not if. So that's something that we talked about at Investor Day where we're confirming that that's the plan. And I think, really, as we kind of go through the decision-making process with -- after the exclusivity period in the first quarter, it's the economics, right? So it's a trade-off. And I think the real key for us is to make sure that we're protecting the franchisee profitability and taking -- and by keeping a balanced view on the long-term growth opportunity as well. And I think those economics will have to be traded out. And what it means is if we aren't on, let's say, DoorDash, it's because the economics are better by staying on with Uber Eats. But if the [ convos ] happens with the demand and the opportunity on incremental growth was more important.

Understood. I'm going to pivot over to development, still staying domestic. Things sound really, really good. You're on track for at least $170,000 EBITDA per store franchisee this year. I think you're going to open your 7,000th domestic store before the year's over, very exciting. As you look forward, do you think the pieces are in place to grow EBITDA per store again next year? Not guidance, but just the puts and takes. And do you think things are in place to continue to grow that for your franchisees?

Yes. I think, look, I mean, the key over here, and this is the discussion on economics for Uber Eats versus DoorDash as an example, right? We always take into consideration the entire economic picture for those. Things are in place. I think as long as we're actually committed to driving transaction growth, this really creates a virtuous cycle for the franchisee P&L. Because for the franchisee growth, you have a big opportunity to actually drive supply chain profit in our business model, which we share 50-50 with the franchisees. And that's a big piece of what we expect to continue doing because the approach that we have strategically is really about that. And so as long as we continue to see the catalysts that we've talked about already fueling transaction growth, there is no reason to think that we're not going to see EBITDA growth beyond '24.

Topic of menu innovation. You've done Pan Pizza this year. That was really bringing awareness to an existing product. You've done New York Style Pizza. Are you happy with these efforts overall? And then could you talk about, one thing that comes up is stuffed crust pizza, is that an opportunity? And is there any complexity added with that product if you were to go that route?

Yes. No, I think Pan Pizza is a great example of the arsenal of different products that we have that we can actually bring to life for the consumer. And I think by bringing Pan Pizza on TV and actually -- and putting it into the loyalty program, I think we had an 80-point redemption tier that we added for Pan Pizza. It basically brought life to an existing product, which, except for those who are already consuming it, was new news, but it wasn't the new introduction that we had. The new introduction, obviously, was New York Style Pizza. I'm thrilled with it because I think it's a crust-type that I think consumers were craving. I think it was like the thin crust pizza. You actually had the hand-tossed traditional pizza. We had a Brooklyn-style Pizza, which is a bit different. But this one gives you the body of a pizza that was actually more full, but at the same time, it was much thinner. And I think it was very exciting. The uptake has been fantastic, both through the loyalty program as well as outside the loyalty program. And so we're very pleased with it. And so as we think through the new product introductions, we're talking about 2, right? So we're in the fourth quarter, only one's come out, one more is coming out. And you talked about stuffed crust. Look, stuffed crust is obviously a crust that we have outside of the United States. So it's not that we don't have stuffed crust. But I think as we think through the kind of volume and throughput that we have in our stores, we want to make sure that our operators, from a complexity standpoint, are able to fulfill that demand from an operational excellence perspective that the consumers are looking for. So to do that, we want to make sure that we take out and improve productivity enough to allow for that complexity of our stuffed crust to come in. And an example you saw at Investor Day is we talked about the dough stretcher, which we call DJ, where the time to competence essentially for an operator from 26 shifts goes down to 2 shifts. And that actually creates capacity to actually do other stuff. That's an example. It's not the only example. We've had AI technology tools for a long time that actually drive productivities in stores as well. How do we continue to actually turn the dial on that and actually push greater productivity on those? So the more complexity we can take out of the stores, the more we enable more complex operations like the stuffed crust pizza. So it is definitely part of our thinking. It's not that we are going to do it or not going to do it, but I think we just want to make sure that when we do it, it's completely flawless.

Understood. That's really helpful. And then sticking with menu innovation at the Investor Day, I think, roughly -- pizza is, domestically, roughly 60% of sales. The other platforms are about 40%. As we talk about the other 40%, you talked about that opportunity, too. What's an area or 2, in particular, where you look at that and you'd say, we're just not selling enough or talking about this enough or maybe we haven't innovated? Just where is the focus on the non-pizza?

Yes. I think, look -- I mean, I think the cool thing about the other platforms that we have, within the 40%, you also have other breads, right, the Parmesan Bread Bites alike. But you also have the chicken platforms. So we have specialty chicken, the wings that we do. We have pastas, which, I think, are -- have been there for a while. We have sandwiches which, I think, have been there for a while. So we have all these different platforms that we can actually do innovations from. And that's exactly what we did last year. If you remember, we did a new platform in Loaded Tots. And then we actually brought in, with Stuffed Cheesy Bread, the Pepperoni Stuffed Cheesy Bread. So there's ways to kind of like to toggle it. We don't necessarily need to do a one size and one structure every time, we can mix and match, and then we can see what actually comes from that.

Okay. I'm going to come back to development topic, but pivot over to international now. On the last earnings call, you did -- the outlook for the year came down. You've shared that was predominantly related to Domino's Pizza Enterprises. Since that time, I imagine you've continued to work closely with that team to hear their plans. So is there anything incremental you want to say on that situation, either positive or negative? Just anything worth talking about with that.

Yes. I think like -- what I'll say is that most [ presscons ] will just talk broadly about the international business, and I've come and done the speech, right? So the whole adjustment in terms of store guidance was really driven by, primarily, Domino's Pizza Enterprises. And I think outside of that, there are probably some puts and takes, but by and large, everything is kind of like on track for us to be fairly comfortable with where we are. The Domino's Pizza Enterprises situation, I think they've talked a little bit more. They did a press release the day before earnings call, and they subsequently reported their final results in August. And they talked specifically about a couple of markets in the portfolio, more extensively, Japan and France. That's true. They've actually had some concerns with Japan, in particular, about store openings that may have actually happened too rapidly that they had to close. And then I think in France, they've actually had some operational execution issues in France, which has caused stores to become unprofitable and therefore close. And I think it's -- put some pressure also on the opening because of where store economics are in some of those markets. But when we talk about Domino's Pizza Enterprises, we're not talking about just 2. There's 13 markets in Domino's Pizza Enterprises. And we're looking at all of it, and we've been in conversations with them about all of it. And there's a timing impact because their fiscal year is going to go June to June, ours go in the calendar year. So we just want to make sure that we're very careful with understanding cadence as we go through this and validate that not just is the cadence clear, but also the trajectory of store economics is clear. Because if economics improve, that's great. That puts less pressure. If economics don't improve, well, the opposite happens. So there's a bit of wait and watch to be done. We're working very closely with them. I'm seeing updates every week. We're having conversations every month. And so as we report in the third quarter, we'll actually have more visibility based on what we've learned, and we'll continue to update. We want -- will wait.

Okay. At the Investor Day, not quite a year ago, but last year, China and India were going to represent slightly under half of the projected store growth out through the, I think, it's 2028. Given their importance, could you just talk about -- let's start with China, how you're positioned in the current operating environment. Some other QSR systems are struggling a little bit, but Domino's, I think, is overall doing quite well. And so we'll just talk about what you're seeing in China, the operating environment and your confidence in the store growth.

Yes. No, I think the Dash team just announced their results for the first half a few weeks ago, a couple of weeks ago, and they did really well in the first half of the year. And I think as part of the update, they reiterated their expectations for store growth, both for this year and expectations for next year and beyond. The paybacks they talked about are just like unbelievable. And so those are reality. And I think considering what's been going on in the macro in China, for us to be able to put up the kind of numbers that we have through Dash is just incredible. And the management team there is just absolutely outstanding and executing brilliantly. And I think we actually had them at our worldwide rally in May. And we pretty much swept the awards with all the performance that they've been doing. And I think that some of that was talked about by Aileen Wang in our call. So very excited about China.

And then just on India, just talk about that market, how Domino's is positioned? And what's the competitive landscape? I believe you're clearly #1. But what's the competitive landscape in that market?

Yes. I think in India, it's kind of an interesting situation. Because India is a big unorganized sector of food services or restaurants, essentially, which is transforming into the organized sector, which is branded restaurants. And I think Domino's has been one of the early entrants into the branded restaurant space. We are clearly, by distance, the #1 player in the pizza area, in the pizza sector. But I do think that the opportunity is very significant from transformation of the unorganized sector from a disposal income into the organized sector. So there's a tremendous amount of growth that's going to come just from that share impact. And then I think from a share perspective, we continue to defend our share by really coming up with very compelling products, compelling promotions. I think this year, they made an update to a promotion, where they actually said they're going to waive delivery fees for some transactions in certain areas, and that drove significant volume increases. And the economics in India are not very significant to actually do delivery because of the costs involved over there. So from a profitability standpoint, it still drove very good profits. If you go and take a look at the Jubilant financials that they reported, it is great with all that.

Okay. I'm going to pivot over here. Just a question on the expense side. The current communication for operating margins to be relatively flat this year on a year-over-year basis. I think there's a little mini debate in the investment community whether or not you're being conservative, not being conservative, especially given the strength you're seeing in the domestic business. So just address that. Remind us some of the areas to be aware of in the second half and maybe -- and I should have started with they're running up significantly in the first half of the year you're operating. So just what are the puts and takes for the second half on operating margins?

Yes. I think when we talk about the operating margins, a big piece of what happens to operating margin is because of the supply chain weight in the P&L on the reported sales. It goes with the fluctuation in the commodity food basket and the impact on the supply chain margins. So if you look in the first half of the year, essentially, the food basket was negative, right? So all of that kind of flows into the margins that you see in the first half. Well, our guidance for supply chain margins is 1% to 3% for the year, but slightly below the midpoint is what we're expecting. But to get there, when you're only negative in the first half, you're going to have to see pressure in the second half. So I think that's a big piece of kind of how you think about it. And I think we talked about the third quarter being slightly down or down in margins was the expectation at the time when we did the earnings call. And so things will kind of move along as we see how the commodity basket continues to evolve. But one thing I'll just remind you of is we have a lot of investments planned for the year. So we talked about consumer demand, consumer-facing technology and in-store technology investments. But supply chain capacity is also investments that we talked about that has continued to be planned. So all of those are the puts and takes that are kind of in the P&L. We still feel pretty good. I think, really, as we think about, we're doing the margin conversation more to just help model. But our algorithm is based on profit growth, and we're pretty comfortable with -- 8% or more is definitely on track.

Understood. And then you've been doing some product sprints this year in relation to your focus on operational excellent. I think sprint #2 was ingredients and product builds. How is that going? And then related to that, what is the third and final sprint going to be focused on, if you're able to share? And what might some of the benefits be at the store level for the customers?

Yes. I think, look, I mean, I think the ingredients in those sprint is going well. We will continue to talk more about it when we report the third quarter. And I think there's more to come. But at the end, it's all about the operational excellence. It's all about that consistency of consumer experience. And that really is something we talked about back at Investor Day. We continue to be very focused on it. And I think if we can do a great job on that, that's going to drive incremental frequency, incremental transactions and profit growth that's very healthy and sustainable.

That's great. Thank you. We are up on time. It's a good place to leave it. Thank you very much for being here.

Thank you.