Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the fourth quarter 2019, Domino's Pizza earnings Conference call. At this time, all participants' lines are in listen only mode. After the speakers presentation they'll be a question and answer session to ask a question. During this session you'll need to press star one on your telephone.
Please be advised that today's conference is being recorded if you are any further assistance. Please press star zero.
I'd now like 10, the conference over to your Speaker today Mr., Tom Mcentire, He VP of communications and Investor Relations. Please go ahead Sir.
Thanks, Catherine Hello, everyone. Thank you for joining the call today about the results of our fourth quarter and full year 2019, today's call will feature CEO Rich Allison will be joined by Chief Financial Officer, Jeff Florida.
As you know this call is primarily for our investor audience. So I kindly ask that all members of the media and others being I'll listen only mode throughout the call.
In the unlikely about that any forward looking statements are made or read the safe Harbor statement you can find in this mornings release, the 8-K and the 10-K.
We will start with prepared comments from C O John Lawrence.
And then from CEO rich Alison followed by analysts questions.
As always we ask that you limit yourself to one one part question. This morning.
And with that I'd like to turn it over to Jeff floor.
Thank you, Tim and good morning, everyone.
Fourth quarter, our positive global brand momentum continued as we delivered solid results for our shareholders.
We continue to lead the broader restaurant industry 35 straight quarters, a positive U.S. comparable sales and 104 consecutive quarters of positive International comps. We also continue to increase our global store count at a healthy pace as we opened nearly 500 net new stores in Q4 or delay.
<unk> in Q4 was $3.12 an increase of 19.1% over the prior year quarter, primarily resulting from strong operational results.
As previously disclosed we also completed a 675 million dollar recapitalization transaction in Q4, increasing our leverage to match, our growing business and locking in a long term favorable fixed interest rate, which lowered our cost of capital.
We also returned nearly $650 million of cash to shareholders. During Q4 comprised of share buybacks and dividends.
With that let's take a closer look at financial results for Q4.
Global retail sales grew 6.9% as compared to the prior year quarter pressured by a stronger dollar when excluding the negative impact of foreign currency global retail sales grew by 7.6%.
This global retail sales growth was driven by both an increase in the average number of stores opened during the quarter and higher same store sales.
Same store sales for the U.S. grew 3.4% lapping a prior year increase of 5.6%.
And same store sales for our international business grew 1.7% rolling a prior year increase of 2.4%.
Breaking down the U.S. comp our franchise business was up 3.3%, while our company owned stores were up 3.9%.
The U.S. comp this quarter was driven by both ticket and to a lesser extent order girl.
Both our delivery and carry all businesses continue to grow overall and our carry out comp continues to grow at a particularly impressive right.
Our delivery comp was positive in Q4 and up sequentially over Q3, demonstrating resilience in the highly competitive food delivery marketplace.
Our international comp for the quarter was also driven by both order and ticket growth.
On the unit Count front, we opened 141, not U.S. stores in the fourth quarter, consisting of 146 and store openings and five closures.
Our International Division added 351, net new stores during Q4 comprised of 382 store openings and 31 closures.
We opened 1106 units in 2019 and acceleration over 2018, which we believe demonstrates the broad and enduring strength of our four wall economics combined with the efforts of the best franchise partners in the restaurant industry.
Turning to revenues total revenues for the fourth quarter were up 6.3% from the prior year, driven primarily by higher U.S. franchise retail sales and higher international retail sales, which drove higher supply chain and global franchise revenues.
The increase in international royalty revenues was partially offset by an 800000 dollar negative impact of changes in foreign currency exchange rates versus the prior year quarter due to the dollar strengthening against certain currencies.
These increases were also partially offset by lower company owned store revenues, resulting from the previously disclose sale of the 59 corporate stores in our New York market to existing franchisees during the second quarter of 2019.
Moving on to operating margin.
As a percentage of revenues consolidated operating margin for the quarter increased to 38.9% from 38.2% in the prior year quarter and was positively impacted by the New York store sale and higher revenues from our global franchise business.
Supply chain operating margin was down 0.1 percentage points year over year, while our company owned store operating margin was up 1.3 percentage points year over year, driven primarily by the New York store sale.
Good day costs decreased approximately $2 million, that's compared to the prior year quarter.
DNA was benefited by the New York store sale and a pre tax gain of approximately $2 million on the sale of three company owned stores to existing franchisees in Q4.
These decreases were partially offset by higher performance based compensation.
Our reported effective tax rate was 17.8% for the quarter 0.8 percentage points from the prior year quarter.
The reported effective tax rate in the quarter included a 3.8 percentage point positive impact from tax benefits on equity based compensation.
We expect to see continued volatility in our effective tax rate related to tax benefits on equity based compensation.
When you add it all up our fourth quarter net income was up $17.7 million or 15.8% over the prior year quarter.
Our fourth quarter diluted EPS was $3.12 versus $2.62 in the prior year, which was a 19.1% increase.
Our fourth quarter diluted EPS as adjusted for our 2019 recapitalization transaction, what $3.13, which was a 19.5% increase versus the prior year.
Here's how that 51 cents increase breaks down.
Lower diluted share count, resulting primarily from share repurchases over the past 12 months benefited us by eight cents.
Higher net interest expense, resulting primarily from a higher average outstanding debt balance, resulting from the 2019 recapitalization negatively impacted us by three cents.
Our higher effective tax rate negatively impacted us by two cents.
And most importantly, our improved operating results benefited us by 48 cents.
Transitioning for a second from Q4 to the full year I would like to hit on a few financial highlights for 2019.
In a more challenging and dynamic competitive environment, we were able to grow our global retail sales, 8% when holding currency is constant.
Same store sales for the U.S. grew 3.2% and same store sales for our International Division grew 1.9%.
We also opened our 17000 stores globally during 2019.
Our continued sales growth and improved discipline around our DNA investments led to healthy growth in our diluted EPS year over year, and strong and consistent free cash flow generation.
We're pleased with our performance for the year, including our ability to continue to fund critical strategic investments, while driving efficiencies throughout the business.
Now turning to cash.
During full year 2019, we generated net cash provided by operating activities of nearly half a billion dollars.
After deducting for Capex, we generated free cash flow of $411 million, which was a 50% increase over our 2018 free cash flow.
On average that is more than $1 million in free cash flow generated per day, which we believe demonstrates our outstanding financial model and performance.
We also completed a recapitalization transaction in Q4, which included the issuance of $675 million of new 10 year fixed rate notes with a 3.668% pre tax interest rate. We're very pleased to have locked in this additional low rate debt well into the future.
Our strong free cash flow generation and net proceeds from our recapitalization transaction allowed us to continue our long term commitment of returning cash to shareholders during 2019.
For the full year, we repurchased and retired approximately 2.5 million shares for $699 million or $280 per share on average.
Including $594 million repurchased in Q4.
We also repurchased an additional $80 million worth of shares in Q1 of Twentytwenty as we have exhausted the net proceeds from the recapitalization.
As a reminder, we now have approximately $327 million remaining under our board authorized share repurchase program.
For the full year, we also returned $106 million to our shareholders in the form of 65 cents quarterly dividends, including two dividend payments totaling $52 million that were paid during fiscal Q4.
On average during 2019, we have not only generated more than a million dollars per day and free cash flow, but when you add share repurchases and dividends together on average we have also returned more than $2 million per day to our shareholders or $805 million in total.
As we move into 2020, we're pleased that our board of directors, just yesterday declared a quarterly dividend of 78 cents per share an increase of 20% over the previous quarters dividend.
Before I turn it over to rich, we would like to remind you of the Twentytwenty annual outlook items that we communicated in mid January.
First I would like to remind everyone that 2020 is a 53 week fiscal year.
We currently project at the store food basket within our U.S. system will be up 1% to 3% as compared to 2019 levels.
We estimate that the impact of foreign currency on royalty revenues in 2020 as compared to 2019 could be flat to negative $5 million.
We expect gross capex investments to be in the range of $90 million to $100 million as we continue to increase supply chain capacity as well as investment technological innovation.
We expect our GNS expense to be in the range of $400 million to $405 million based on a 53 week fiscal year.
Keep in mind that DNA expense can vary up or down depending on among other things our performance versus our plan as that affects variable performance based compensation expense.
Well other areas such as corporate store advertising.
Overall, our solid consistent momentum continued and we are pleased with our results for the fourth quarter and full year 2019.
We will remain focused on relentlessly driving the brand forward and providing great value to all of our stakeholders, including customers franchisees team members shareholders and the communities we serve.
Thanks for joining the call today, and now I'll turn it over to rich.
Thanks, Jeff and thanks to all of you for joining us this morning.
On the call. This morning, I'd like to do a few things first I'll share some reflections on our performance during the quarter and for 2019 and total across both our us and our international businesses.
Then I'll discuss some of the things that we're focused on as we look forward into 2020 following that as always we'll be happy to take some QNX.
So without as our roadmap for this morning, let's get started with our U.S. business.
I am extremely proud of the commitment and the passion demonstrated by our us franchisees.
Not just during the quarter, but throughout all of 2019.
As we discussed on prior calls 2019 marked an unprecedented acceleration of competitive activity across restaurant delivery.
It was a year, where our alignment and our focus as a system was more important than ever as we fought back against a new group of competitors that we believe we're not bound by the constraints or requirements associated with running a profitable business model.
While delivery grew rapidly across the restaurant landscape as we reviewed a variety of third party industry research, we saw no observable inflection in restaurant industry transactions.
Now certainly some players benefited with incremental customer occasions, but many more restaurant brands, who aggressively pursue delivery produced flat or declining traffic.
With that as a backdrop the alignment and unified focus of the Domino system really shine through as we continued to grow at a faster pace than the restaurant industry.
And took meaningful share within our pizza category.
We delivered our 30 fiveth consecutive quarter and 10th consecutive year, a positive same store sales in the U.S.
During the quarter I was also pleased to see the sequential improvement in the comp versus our Q3 results.
US retail sales grew at 6.8% for the quarter and 6.9% for the year significantly faster than the restaurant industry.
And while same store delivery orders were slightly negative for the year overall U.S. delivery order count increased 1% in 2019.
Curio growth was strong throughout the year and was driven by traffic our carry out order count was 3.9% positive during 2019 on a same store basis and 8.1% positive in total across the U.S system.
[noise] store growth was also once again, a significant contributor to our retail sales growth in the U.S.
Our franchisees, both new and existing alike continue to invest in their businesses, resulting in 250 net new stores for the year.
During the fourth quarter. We also passed the 6000 store milestone in the U.S.
As we look back over the last five years, we've opened.
We have opened over 1000 net new stores in the U.S.
And this kind of sustained growth only happens with strong unit level economics.
Those economics also drove a remarkably low level of store closures in 2019, we closed 15 stores in the U.S.
And over the last five years, we've closed fewer than 100 stores in total across the us business I'm going to repeat dot one.
Fewer than 100 stores in total across the last five years have been closed in our us business.
I'd also like to share a few highlights from our ongoing digital efforts, we reached a milestone in 2019 with 25 million active loyalty members. We now have 40 plus million enrolled in our program at over 85 million customers in our database.
We ended the year at a run rate of 70% digital sales in our us business.
And our corporate store business, which is more concentrated in urban markets get a run rate of 75% digital sales in the final period of the year.
Overall, we finished the year strong as evidenced by a good quarter of topline sales growth.
While we still have plenty of work to do and getting back to consistent traffic based comps order count in the fourth quarter showed sequential improvement in its contribution to the overall same store sales mix.
As we look back on the quarter. It does appear to us that while we see continued headwinds in delivery that are difficult to forecast aggregator pressure appeared to level off on our delivery orders in Q4, while carry out traffic was outstanding during the quarter as our strategy.
To grow that business continues to pay off.
You will always hear me say that we are an imperfect and a work in progress brand with plenty of areas to get better.
But with that said I'm happy with another strong year of growth and profitability for our franchisees and our operators.
As I look ahead to 2020 in the US business I'd like to highlight a few areas of focus for us.
First we're going to continue to fortress our markets.
Our strong four wall and enterprise profitability for franchisees should continue to position them well for continued growth.
We continue to see favorability in key metrics for our fortress stores and territories as we compare them to our non fortress territories, we see faster and more consistent service lower delivery costs.
Better economics for our drivers and incremental carry out traffic.
Fortress thing, we'll continue to drive overall store growth in 2020, including for our company owned markets, where we plan to further accelerate our investment in store growth.
We're also opening three new supply chain centers in 2020.
We opened a new center in Winnipeg in January.
Our Columbia, South Carolina Center will open in the first half of the year.
Our Katy, Texas Center will open in the second half.
And we're also adding a thin crust wine to our existing Edison, New Jersey supply chain Center and that is also scheduled to open in the second half of 2020.
We're also excited to deliver some new menu news this year and look for that to come this summer.
Values always top of mind for us as you know more than ever as we navigate through the current landscape value matters and I'm pleased with our continued discipline and unquestioned position of value leadership within the QSR Pizza segment.
We're ramping up our focus on service in 2020, getting our pizzas to our customers Potter fresher and more consistently than ever before.
Fortress thing will help us position the business for success through tighter delivery zones, but that's only part of the battle.
We're doubling down on training communication and connection points with our operators. This is a very high priority for me in 2020.
We'll also continue to rollout technology to our stores to help our operators get pieces in the other and out to our customers.
[noise] innovation has been it will remain a key investment area for us in 2020.
We recently rolled out our GPS technology and its already in use and over half of our U.S stores.
You may have seen the AD that we're running now highlighting our GPS technology with a really fun take on the movie risky business.
Our pipe has technology is also in stores and what on Air earlier. This week. This brings personalization to the carry out customer greeting them by name on our digital menu boards you may have seen Norma from cheers in our commercials, if you've seen them if you've been watching a little TV. This week.
We also continue to make progress in areas related to autonomous delivery dabo undertaking and other bus behind the curtain technologies that will help our store level talent operate more efficiently.
Now the last focus area I want to highlight is franchisee profitability.
Jeff shared our 2019 store level EBITDA estimate with you in January.
And we will share the final number with you on our earnings call in April, but we now expect to land more toward the high end of the 136000 to 139000 per store range that Jeff shared with you in January.
Now, while we are pleased that our unit level profitability and cash on cash returns remain strong by any comparison within the industry. We recognize that some of our franchisees are under intense cost pressure in their markets. The labor market is very tight right now.
Minimum wages continue to rise across the country.
Fixed costs, such as Redsun insurance also continue to increase and a number of other above level above at store level costs continue to bring added pressure.
My team and I recognize these challenges and we remain intensely focused on helping to drive efficiency and profitability at the store in enterprise level for our franchisees just as we are for our corporate markets.
So all in all I'm happy with our U.S performance in the fourth quarter as well as for the full year. We will continue to play the long game and we will remain focused on what matters the fundamentals, our franchisee hill and making disciplined decisions.
I'll move on to international now, where we had another solid quarter of retail sales growth driven by unit growth.
I wasn't performance from our regions and a meaningful improvement in order growth relative to the first three quarters of the year.
Same store sales in our international business was positive for the 104th consecutive quarter. That's a remarkable 26 year run in this terrific business.
Were 351 net store openings in the quarter and 856 for the full year.
Reflect a terrific unit level economics, we continue to enjoy in many markets around the globe.
We only closed 83 international stores for the full year on a base of almost 11000, when you add that to our US number it's less than 100 closures for hours 17000 store global brand.
And now for a few market highlights.
We opened for the first time in three new countries, Bangladesh, the Czech Republic in Luxembourg welcoming these great new teams to the Dominoes family.
We passed the 17000 store milestone globally, and we get some important milestones and in several of our key markets I'd like to give a shout out to those teams now 800 stores in Mexico 500 in Canada 400 stores in France, 300, each in Germany and Spain.
And then we opened our 200 store in Russia.
I also want to highlight the outstanding year, we had in two of our emerging markets, China and Brazil, both had break out years in store growth with 80, net new stores in China, and 60 net new stores in Brazil.
Among our more established markets, Japan, and India delivered exceptional growth.
117, net new stores in India surpassed 1300 total stores more than any other dominoes market outside the us.
And an outstanding 92, net new stores in Japan.
Surpassed 600 total in that market during 2019.
Our teams and France, South Korea, and the Netherlands celebrated their thirtyth anniversaries as Domino's markets.
And while we continue to address the opportunity for same store sales improvement in international our 9% retail sales growth excluding the foreign currency impact during 2019 shows that our business is very healthy and fundamentally sound.
We're actively working with our international partners to help reversed the recent softness in same store sales in certain markets and that will be necessary to taken already outstanding business to new Heights.
So I continue to feel confident that our global terrific group of operators combined with our corporate support and best practice sharing will produce the desired results to help the international business reach its full potential.
In closing.
Domino's is now $14 billion global brand.
The vast majority of our stores owned and operated by an incredible collection of franchisees around the world.
I'm proud of the way, we continue to operate with passion and offer a home grown opportunity for store team members to fulfill their dreams of business ownership as a dominoes franchisee.
I'm proud of the way our franchisees are committed to be a number one in each of their respective neighborhoods.
Im proud of the way, we continue to innovate aggressively across all aspects of our business, including GPS E bikes AI in store technology, great food and an always evolving digital experience that second to none.
Im proud of our track record of profitable growth and our longstanding commitment to franchisee economics.
With a disciplined operating model and a focus on the long term we've demonstrated as a system that you don't have to choose between topline growth and bottom line results.
Dominoes delivers both and with that Jeff and I'll be happy to take your questions.
Thank you as a reminder to ask a question you need to press star one on your telephone to withdraw your question press. The pound key please limit yourself to one question and then re queue up.
My first question comes from Brian Bittner with Oppenheimer. Your line is open.
Thank you good morning, guys.
When I look at your 3.4% comp this quarter. It is impressive when you consider marks the first acceleration in six quarters in the fourth quarters historically been a much tougher quarter for you you touched on the driver the acceleration this quarter being sequentially improving traffic can you dive into that.
Add a little bit more was that acceleration in traffic, primarily driven from the leveling off of competitive delivery.
Externally or would you call out into anything internally like.
Incremental loyalty or the change up in marketing that you did.
As driving the acceleration.
Good morning, Brian It's it's rich really.
A combination, but I think more driven by the things that we were proactively do it in the marketplace. So as I as I first look at the external side, we certainly still saw a lot of aggregator promotion.
And advertising activity out there both year on year televisions, but also digital so while we while we felt like that leveled off a bit relative to Q3. The pressure was certainly still there and in quite intense what I think about the things that we did proactively to do.
Drive the business and we discuss some of these things with you. When you were when you were here and in September at our innovation garage.
We launched our delivery insurance program in the fourth quarter, which really resonated with our customers and our customers think about dominoes as a as a brand that is transparent and as a brand that takes accountability when we make mistakes. So this campaign resonated well with them. We also were promote.
The carry out business throughout the quarter in in particular, bringing to life. The crust variety that we have on our menu and that also resonated and drove.
Terrific results on the carry outside of the business.
As always I'm also going to be transparent with you about some of the things that didnt work as well you know we talked a lot about launch in our our late night promotional program at.
That did not drive a lot of incremental sales across the business in total but in certain markets around the country was really effective so we've dialed that back a bit overall, but are using it now more selectively in some key markets around the country. So.
That's really how I look at it Brian external kind of lot of pressure still they're staying flat, but lot of things, we did internally work to nicely in the quarter.
Thank you and lastly, just your EBITDA growth basically grew twice as fast as your system sales growth in the fourth quarter is that mostly the product of the heavier focus on flow through or was there any unique benefits that happened in the quarter that we should be aware of.
I know you've talked about the small gain on re franchising, but anything else.
Yes, so there was a little bit a a noise in the DNA that I mentioned in my prepared remarks.
Around.
Again on a comp store sales I'm, certainly the New York sale being down earlier in the year help you a little bit on the DNA line, but but make no mistake, we leaned in real heavy on additional financial discipline. During 2019, I think you see the flow through really come in through both in EBITDA and free cash flow.
While we were able to ratchet down capex, a little bit more than we thought we knew we were going to you originally but having said all that I think the most important thing is that rich and the other leaders in the business. We still all invested in all the strategic initiatives that we really think we'll continue to drive the long game in the business. So.
So we took advantage of where we thought there was opportunity we squeeze the down a little bit but.
But the level of investment in the seriousness at which we will continue and have continued to invest in supply chain capacity technological innovation and really a customer centered.
Great experience that hasn't slowed down in 2019, and I don't think you'll see that slowdown going forward.
Thank you.
<unk>.
Thank you. Our next question comes from Matt Difrisco with Guggenheim Securities. Your line is open.
Thank you.
I appreciate all the color you guys are giving mineral digital and obviously carry out it's been growing pretty fast how should we think about that as far as or is there what percent of that how to 70% look like when you sort of break it out by either carry out delivery presuming that the delivery probably skews a little higher and then carry out skews a little.
Lower there's a way to you some technology in the store to try and drive digital for carry out as well.
Hey, Matt its rich.
So its most certainly the digital side of the business excuse me the delivery side of the business has a higher digital percentage mix than the carry outside of the business and what honestly one of our objectives. As we continue to grow carry out is to drive up that digital percentage. So.
You may have seen our pipe has no technology in the commercial that we started running on Monday of this week.
Order to be greeted in the store and to expedite the process of picking up your pizza you have to have ordered.
Ahead of time digitally and so that is that's one innovation that we're using to try to drive more customer uptake on the on the digital side. There are other things that our teams are working on it and investing in here because we do see that as a as a great opportunity you know to help us to continue to drive that business not only order.
Accounts, but also given us an opportunity you know for smarter upsells and other things that help us drive smart ticket in the business. So most certainly an opportunity for us going forward.
Excellent and then could you also just give us an update you talked a lot in September about some of the new technologies, specifically, the Houston test and the driverless cars, how is that going and is there any sort of and whats the timeline on that or the expansion of those tests perhaps.
Yes, we are up where were working hand in hand with neuro all of that Matt as we talked about a bit in September you know testing has gone well so far.
And I'm going down there personally.
This month to have a look at it myself.
But so far so good.
And you May have seen there was an announcement out within the last week or so around some of the regulatory approvals that they received to conduct deliveries down in Houston. So we're excited about where we are with the partnership to date and looking forward frankly to learning a lot from this and helping to shape our approach to.
Autonomous delivery going forward.
Excellent. Thank you so much.
Thank you and our next question comes from Chris Ocull with Stifel. Your line is open.
Thanks, Rich I appreciate you probably don't want to share many details about new products, but can you help us understand what's you're hoping to accomplish what the new product, meaning are you focused on addressing a certain customer need state or competitive threat and then also could you talk about the testing process you go through to evaluate.
The likely successive than any product.
Sure Chris.
So what we think about new new product development.
It is our decision process is centered around incrementality.
For our franchisees so not just incremental sales, but also incremental profits for the franchisee now that of course starts with.
Identifying products that have strong consumer appeal, but that's not enough you a lot of a lot of brands will measure success of the new product by what mix that product gets you know post release, we actually take a look at a little differently and we measure success based on the incremental profit.
Because a lot of the products that we launch.
And I'll I'll use the salads for an example, we did launch salads to sell salads, we launched salads to sell pizza and the launch of salads drove incremental profitability in our stores not through selling salads, but through selling pizzas. So that's the lens that we look through so our testing processes.
Start obviously with the consumer in the appeal, there, but really what we're looking for is what will the overall behavior of that customer be will it drive incremental traffic into our stores and what happens with ticket as well will it add additional items to the basket that ultimately help the profitability of the franchisees.
And it's why we don't launch that many new products because.
When we go down into the test kitchen, we see dozens of products that taste, great and drive a lot have consumer appeal, but if they don't drive incrementality in terms of sales and profits for the franchisees that we're not going to do a force more operational complexity into the stores without a significant benefit on.
On the back end. So that's the approach that we take to it and you I'm excited that we're going to have some news coming up this summer that I think we'll be exciting for consumers and also I know exciting for our franchisees.
That's helpful. And then just quickly on the international unit openings. It was down a little bit year over year can you provide some color as to why that may have been the case and then should we anticipate fewer openings in 2020 as a result of the Corona virus. I think you mentioned, China was a big source of openings this past year.
So if you look at the total year.
Funnel unit openings were actually higher than they were last year fourth quarter of was lower but you might recall in the in the fourth quarter.
Up 2019, we had a we had a tailwind in the openings coming from some of the conversions of Hello Pizza stores in a in Germany, which which you may remember were we were pushing really hard on in the fourth quarter of last year I.
I still feel very good looking forward about our 6% to 8%.
Global unit growth.
Weve that we've laid out for you guys are as our two to three year outlook and that's really driven by the strong four wall economics across the international business.
To your question on on the impact of the Corona virus.
Today.
China is still a relatively small part of our overall portfolio in terms of store count and also in terms of retail sales now as I highlighted in my comments earlier, China was a big contributor to store growth in 2019.
As we as we look at what's happening over there with the growth of buyers today I can tell you that I'm really proud of how.
Dash brands is handling things you know the number one priority right now is not sales or store openings in China. It is the health of our team members and our customers.
At the present, we've got fewer than 20 stores that are closed in the market. All of those are temporary closures none of them are permanent.
But.
With this virus there is a slowdown in the early part of the year in store openings, it's just inevitable, but I do not see this as a.
I I don't see this is a long term impact on the business.
Obviously, our thoughts are with.
The citizens of China, and our team members over there for this virus to get under control.
But so some temporary impact, but I don't expect a long term impact.
Thank you.
Thank you and as a reminder, please limit yourself to one question. Our next question comes from Sara Senatore with Bernstein. Your line is open.
Hi, Thank you.
Hi comment you made about the aggregator pressure leveling off I don't want to split hairs, but I guess are you, saying sales growth is stable or aggregator dollar sales to be stable I'm trying to understand if we're in sort of steady state now why is you know.
The 5% the right comp runway for you why not why shouldn't be certainly accelerating back to where it was before we saw this real heavy step up in aggregate our pressure is it forcing or is it just sort of how I'm interpreting your comments about leveling off.
Hi, Sarah so I'll try to clarify a little bit.
What I say level off I mean.
Relative to.
The second half of 18, and the first half of 19, when we saw significant push of aggregators into new cities across the country and significant incremental spending on.
Advertising, both traditional media and digital.
And significant increases in discounting in the marketplace all of that stuff is still there. We we just didnt see more of a ramp up like we had seen on some of the previous quarter. So think about it as the pressure is all still there. It's just not it we didnt see it as elevating.
On us from from Q3 now we all know what's going to happen in 2020, I'm just going to be honest with you. We don't know how these folks are going to behave.
You know.
The best metaphor I can think of as they are standing in a circular firing squad right now and they are going to continue to keep advertising going to continue to keep discounting because I don't think they have any choice and so we expect to while we're not in the middle of the firing squad, we might get hit by few stray bullets, along the way and yes.
We just don't know exactly yet how to quantify that so that's why the 2% to 5%. It is a two to three year outlook, we're not moving it around quarter to quarter, we feel like if we can operate in that range. We've got a really healthy business model that can deliver growth and profits for franchisees and can reward.
Holders along the way.
Thank you.
Thank you. Our next question comes from Lauren Silvernail with Credit Suisse. Your line is open.
Hi, Thanks to the question just to clarify was the sequential acceleration in comps all attributable to the delivery segment and then on GPS tracking what percentage of the U.S. system. Currently has it and in stores that have implemented the technology can you provide any color on what you're seeing a cross relevant metrics, whether that be delivery times customer satisfy.
Jackson Labor savings.
Hey, Lauren it's Jeff I'll take the first one and I'll kick it over to rich on the GPS as far as the comp in Q4, the Carryout business just was on fire and integrate way.
Possibly in hard into that strategically given our franchise operators the tools and the technology to really make the most of it and as rich mentioned early really advertising heavily behind it it's what a big cross section of our customers really want we're getting better at carry out.
Every everyday that we focus on it and really saw big surge in the comp for carry out on the delivery side, a tougher competitive environment. There. It did sequentially improve over Q3, so we definitely feel like the the value that we can provide to our delivery customers in that segment remains very very strong.
And we were pleased to see the resiliency in that business. So.
We're in both of those businesses are going to continue to invest heavily behind them in advertising technology, the consumer experience, but carryout hit a little bit better than delivery date in Q4, and I'll kick it over to rich on the GPS commentary sure and.
I've actually I've personally been out in quite a few stores over the last couple of weeks talking with our franchisees and with our store managers as we roll out the GPS technology.
Getting a very very positive reception out among our operators.
Because it is helping them to better manage what is a really complex process around getting food out of the store and to customers. So knowing exactly where the drivers are knowing when they are close to the store in terms of their returns enables us to get pizzas ready.
And in the hands those drivers and out the door quickly. So we're seeing some reduction in turn times, it's still very early but some reduction in turn times in the stores that have really adopted.
This new technology and as I look forward and as I think about it you know there are two sides of the GPS one is the consumer side and if we're honest with ourselves you know GPS on the consumer side. It really is a me too thing that we've got out there I mean, you you've got you've got GPS anytime you get a nuber are lifted.
You know competitors have that in place as well, it's important for customers and we have to habit for them, but the real benefit in my mind from GPS is how it will change the way we operate and run the delivery business you know inside our stores for our managers, but also for our drivers because historically.
The driver needed three to six months to learn the delivery area well, we can accelerate the training of the drop those drivers with GPS in hand.
They they already know the fastest route to get a pizza.
Two to two our customers so more to come on that it's still early but I'm excited about where we are today.
Great. Thank you.
Our next question comes from Peter slowly with BTI G. Your line is open.
Great. Thanks.
Thank you mentioned you know.
How much pressure the franchisees rocker in terms of costs, then wages pricing.
Could you elaborate a little bit now what's the efficiencies that you guys were putting into place outside of GPS tracking to try and.
Mitigate some of the costs four wall stores.
The margins.
Sure.
So yes, there are a lot and as you guys look across the restaurant landscape I'm sure. All of you see a lot of labor cost pressure out there in the marketplace and it's not uniform as you know.
It is concentrated along the coast add in states, where we've seen significant minimum wage increases over time. So our franchisees just like you know restaurant operators across the industry are dealing with dealing with those cost pressures in terms of efficiencies there.
Number of things that we're working on GPS is one of them that we were just talking about whereby we're trying to.
Shrink the turn time on orders, which provides labor efficiency.
We have been piloting in our corporate store business.
AI based labor scheduling algorithms to try to make sure that we are using the right number of hours in each of our stores and Theres a lot of inefficiency in our system today, if we're honest with ourselves about about that.
So lot of things that are that are going on there were taking a look at deal with our innovation garage with some of some of you were able to come see we're looking at every aspect of how we set up and operate our stores because it is it is a game of steps and pennies in seconds and we're trying to focus on all of those as we look for ways to help our operators.
Successful.
Thank you very much.
Quarter.
Thanks Pete.
Our next question comes from David Tarantino with Baird. Your line is open.
Hi, Good morning, Rich I think you you mentioned that one of your biggest focus areas for the U.S. the.
And 20 to one is on operations or execution or service and I was wondering if you could give us some context on whether you see the current service levels as an issue relative to where you bet on the path or is this more opportunistic.
Anything you can offer there would be helpful thing.
Yeah, David I'd be happy to what I can what I can tell you is.
On a on the our delivery service today, Where's versus where as good as we've ever been.
On delivery, but we're not good enough for the future. You know is how I would describe it. So the business was founded on this kind of 30 minute promised decades ago, well I think as we look forward. When you can get anything food or otherwise delivered we've got to be the absolute best at it.
And so we're working with our franchisees fortress thing is obviously, a part of that when fortress stores, we see a reduction of about two minutes on average and delivery time versus those non fortress territories, but thats not all of it. It's it's using technology like like GPS up we now have technology and our store.
Is that all that enable us to get pizzas in the other than much faster based on what customers are ordering digitally. So we're taking a look at every aspect of it.
Paramount to all of that obviously is safely getting that product to the customer.
But we're looking at ways to take out time through every step of the process from the time you open that app to the time that pizza shows up to your door.
And just a follow up related to that when you when you do make progress on the.
Pretty good immediate correlation to the sales than the market. When you when you see this type of improvement.
The correlation is very strong between.
Averaged delivery.
Times and.
Sales per household which is a great measure of customer repeat purchase so yes.
And I'll tell you when you get down to and we have a number of operators across the us today that are delivering in under 20 minutes on average when you get below 20 minutes the inflection in the curve is dramatic.
Great. Thank you.
Our next question comes from Gregory Francfort with Bank of America. Your line is open.
Hey, Thank you for the question.
There were some articles last night that that the largest franchisee at one of your two bit of your biggest competitor. The U.S. likely is going through bankruptcy do you know how much overlap you have with that system is that something you have looked at all and then maybe at the risk of asking the second question, where does your average franchisee leveraged and today that's great.
Thanks.
So you know the of the first first question, Greg I will I won't speculate.
So on a on on NPC.
It is a it's a really tough operating environment out there in the restaurant industry as we talked about earlier from a cost standpoint, and I can tell you that we were not growing our sales profit would be declining.
As we talked about you we had we had pretty good same store sales growth in 2019, and we expect.
Our store level of profits to be roughly flat.
So you've got to grow in order to continue to compete thrive in the business.
We've got given our footprint, a 6000 plus stores across the US you know certainly we've got territories that overlap with that franchisees.
Units, but we don't we don't focus is you much specifically on one franchisee of a competing brand or frankly with one competing Brad we're out there fighting for share in every community that we operate in across the country.
Im going to let Jeff take the second question around the franchisee leverage Hey, Greg Good morning on the franchise leverage in the U.S. why we're very fortunate that are nearly 800 independent franchisees submit to us their therapy and out their balance sheets on a regular basis. So we have a pretty good understanding of where they're at and what I would say.
Kelly is we don't believe that Thats, a significant risk for our for our us business and not just because they enjoy the vast model and economics that they've earned alongside of us, but because they are opinion, they use a little bit of leverage responsibly, so not a big rest for us as we think about.
Getting to those 25000 units around the world.
Thank you. Our next question comes from Chris Corral with RBC capital markets. Your line is open.
Hi, good morning, Thanks for the question so how much incremental opportunity is there in your view to highlight domino's value proposition in your advertising maybe particularly.
From a delivery perspective relative to aggregator delivery will that be greater part of your messaging going forward.
Yes, Chris it's been a core part of the message now for 10 years. Since we first launched 599, and then we really double down on it was 799 around to carry out business. So it's going to continue to be a core part of it and I think the additional.
Element of this that comes into play I think we have what we think about how we compete against the third parties will be.
The delivery of fee component of it relative to a relative to what the third parties are charging customers to have food delivered there's been a lot of promotional activity in that space with free delivery and for your first order and all those sorts of things so we've yet to fully.
See you know how it how it shakes out but when we take a look at the value proposition of feeding a family of four with Domino's inclusive of delivery charges, we feel really good about how that stacks up against what you would pay to have virtually any other type of food.
Liberty.
A third party.
Great. Thank you.
We have a question from Katherine so greedy with Goldman Sachs. Your line is open.
Great. Thank you my question here about the mix on carrying out this quarter both in terms of.
And ticket and sales and then with the increase messaging around carry out are you seeing.
And any kind of accelerating trend in the fortress towards relative to the non portraits stores and Inflectra. Stuart itself. You know if you can comment on if you're seeing cannibalization to they delivery business or just more messaging out there on here at bringing in incremental customers or potentially stimulating delivery as well.
Thank you.
Hey, Thanks for the question. This is Jeff I'll take a shot Swan on the mix of itself. The two businesses in Q4 again carry out is just performing extraordinarily well for us.
We're in our 60, a year of existence and in a lot of ways. We were kind of an accidental carry out company from maybe the first 50 years or so but with the strategic insight around where the pizza industry was going really trying to address better the consumer needs about that separate occasion and they are separate occasions, I think people sometimes can.
Flight, the two but but our research says I think our results show that that carry our customers absolutely different from a delivery customer OCC leaning into that as rich just mentioned with the you know were many many years now into the 799 large three topping carry out special which is all we can get everyday of the week customers really like it and.
And is really helping to drive some outperformance that you're seeing a drop to the bottom in the telecom on the delivery side of the business, obviously highly competitive food delivery market place very dynamic over the last year, plus there, but our franchisees in our corporate stores are holding their own there the value proposition.
Really shine through with the 599 mix and match offer and as rich mentioned multiple times over multiple calls the focus on service and making sure that were delighting our customers.
Really helps us capture that long term value of the customer.
So where we were super excited to see the sequential improvement Q4 over Q3 on delivery. So.
So that's what I'd say overall on that as it relates to fortress stores versus versus the stores that have kind of been split with their territory.
It's really the same stuff that we've told you have the carry out in the new store the fortress door, almost 100% more than 90% incremental that's what the data shows that we are reaching customers. That's simply weren't enjoying a warning joined the Domino's brand. There. So thats a really important part of the financial equation to get those franchisees.
Cited about the investment opportunity the delivery side of the business certainly we are picking up new addresses but the addresses that are shifting from an old store to a new store, we're simply getting it safely to the customer and better service times. There. So it's really gel and together our franchisees remains super excited about it and die and.
We're going to continue to go as fast as we can on that strategy.
Thank you and our next question comes from John Glass with Morgan Stanley. Your line is open.
I think thank you very much can you just maybe talk about the the the impact of loyalty program had on 2019 as we sort of think about the or that's just past how's membership grown has the impact on sales grown or what was the impact has been and it gets importantly, you think there was had been some discussion slim remembering.
Frankly about maybe at some point changing it right from a visitation to more points or something else that might enhance it or continue to help grow is that something you're contemplating it 2020.
Hey, John it's rich. So we were pleased with the growth in the loyalty program as Youll recall and no 2018, we passed the 20 million active member market in 2019, we passed the 25, Mark So continues to grow and resonate with customers.
The tailwind impact on sales that you get from loyalty does decline over time, So 19 of nowhere near what you would have seen in.
16, 17, right after we launched the program.
And we're always looking at ways that we might be able to enhance the overtime. We ran our points for pies campaign in the first part of this year to find you another way to give value to our customers and we're going to keep looking at ways to grow and enhance it because any loyalty program does have a bit of a half life to it and you have to keep feeding.
At for it to continue to deliver results.
Okay.
Just to be clear would it be the kind of change read actually shift, though the value of point to the way you earn them or would it be more evolution as you talked about waits for pies or some other sort of.
Idea that would get people more reengaged in the program and in near term basis or short term basis.
Well one thing that won't change you know John will be the purpose behind the loyalty program, which is to drive order count growth and frequency over time, that's really the it's the way it's structured it's why it's a.
Transaction based program, where you order six times and you get a free pizza as opposed to a spin based program. So we're going to remain focused on driving transactions with it because we know transactions drive sales, which drives profits in our business so with that caught with that context, we're constantly right.
Research and taking a look at different ways that we can enhance the program. So I can't tell you today, what will be different about a year from now but I can tell you that we're not going to do anything that gives us away from try to drive.
Transactions through customer frequency.
Thank you.
Our next question comes from Brett Levy with MKM Partners. Your line is open.
Great. Thank you good morning, everyone.
Just following up on the franchise system a little bit.
And I'm trying to answer this a little bit differently, you've talked about a number of things that you are doing for the franchisees, but you also talked about some of the pressures that they are under.
What are you hearing right now both domestically and internationally.
As you are as the biggest asks from you that you're not already doing and also are there any areas where you're getting.
Any pushback from them. Thank you.
Yes.
<unk> franchisees Brett.
Continue.
To ask for help around technology, and Thats something that we've we brought to the system time and time again I mean ultimately.
It is the franchisees you know job to to serve their customers to hire and staff their teams.
Motivate and grow and develop their team members, but we is that we use the brand overall can bring technologies to bear that help them run their businesses.
More efficiently. So that's why you see.
GPS is an example that we've rolled out and that's something that franchisees, we're hungry for a and eager for us.
Bring to bear and ultimately franchisees, one gross sales and profits so our dialogue with them outside of specific things like technology is always around how do we work together to contribute continue to grow the system and a healthy and profitable way.
Our next question comes from Dennis Geiger with CBS. Your line is open.
Great. Thank you Richard Jeff just another one on the strength in the U.S. carrier business and the opportunity.
In addition to the purchasing the service levels, the pipettes and some of the other tech that you mentioned could we also see greater marketing and problem promo efforts even beyond the 79 carry out given the success you've seen recently and I guess, particularly given some of your competitors are shifting more towards a delivery focus does that potentially present that even greater opportunity for you.
To to pick up even more carry out year. Thank you.
Thanks, Dennis I'll I'll try to take that one yes, the answer on a carry out.
Around are we going to do more to drive that business. The answer is absolutely.
Because we see it as a huge opportunity for US you know the transact on a transaction basis, its two and a half times the number of transactions.
That are in the delivery segment.
In the U.S. and I think we've got more opportunities to drive it we started with this this 799 hero offer.
Yeah, we expanded that toward the end of last year to include all five of our cross types that really resonated. So we are definitely thinking about what are the other products or.
Opportunities that we could roll into what is already a great value offer for our customers. We're working hard on technologies to take friction out of the carry out experience and we've got more than 600 of our stores in the US now they have pickup windows, where a customer can pull right up to the window and have the pizza handed through two.
To them as opposed to getting out of the car potentially with the kids and trying to come into the store and pick them up. So we're we're looking for more and more ways to make it seamless pipe pass let's have jumped the line you'll get up to the front get the pizza handed to them.
And everybody likes to see their name on a screen you know if I feel it lonely I'd or carry out I go into Dominos and I love to see rich up on the on the screen in the store.
And then to the second part of your question.
It's a really yet it is a really interesting question about this competitor shifts so what we see happening in the industry is a huge increase in delivery, but no incremental restaurant transactions rolling in so sure there shift across some brands.
There is most certainly shift across channels and if you look enough, particularly in the high wage markets in the us if you're trading.
If you're trading drive through business or pick up business for delivery business than you are movement your customers to a higher costs channel to serve so well, we think about how we're going to grow our business and continue to have a very profitable base of franchisees. We got it we got to hold serve and defend that delivery side of the business.
Yes, but we are we're pushing hard on carry out because as you approach 13, 14, 15, $16 an hour labor that carry out business becomes the profit engine overtime.
Thank you. Our next question comes from John Ivan Coal with JP Morgan Your line is open.
But first just a very specific question on and I know that you guys. So normally like to talk about it but you quarter to date, we have had very unusual restaurant trends, especially on the casual dining side, probably a lot of that's driven by weather.
Good weather warm weather lack of snow isn't necessarily a good thing for you is there anything that you'd like to call out you specifically in the in the first quarter because expectations could obviously really change based on what you reported in the fourth and I'll have a follow up.
John will talk about you want in April.
Got it.
In your prepared remarks, and I think you've touched on this in a few different ways, but I'd like you to revisit that you talked about driving efficiency and profitability both at franchisees in corporate.
Certainly understand about GPS being part of that but what other big structural just not managing pennies nickels that maybe finding bigger ideas.
Do exist that we might be able to see within the U.S. store system and.
And following up on that what type of efficiencies might exist on the corporate side that we havent necessarily talked about.
Yeah, John Great question, we're spending a lot of time on this and.
It's one of the main reasons, we we built that innovation garage in our backyard over year. So that we could accelerate some of these operational efficiency initiatives I talked about GPS a bit.
Our AI work and machine learning around.
Team member scheduling, which we've been working hard on in our our corporate stores to more efficiently schedule not only to get improvements in the pilots. We've done not only does it result in lower labor costs, but it also results in better service levels. So theres a win win there on having the right number of team member.
As in the store at the right.
Time, we're also looking at other things that we've done for years and years in our business and asking ourselves if we need to keep doing up and some of these things are lessons that we learn from our international markets. We've got more than a thousand stores outside the us that don't pre fold any pizza boxes for example.
Requires.
Pretty decent amount of labor in the store to do that.
And we're taking a look at things like that and testing them in our in our corporate store business. We're looking at the equipment that we use it how that equipment has positioned in our stores, how how we think about preparing our stores for the rush, which comes at US at dinner time every night. So we're breaking down every ad.
Aspect of the operation to try to find opportunities for.
Efficiency, because we know that labor costs are only going up over time I willing to bet that in my business career, no state or municipality is going to lower minimum wage. So we got to be prepared to operate in an environment where costs are going to go up and the customers willingness to pay does not go up.
Linearly with your cost to provide them with that with that service.
Thank you and our next question comes from Jeffrey Bernstein with Barclays. Your line is open.
Great. Thank you very much.
Question on the loyalty program I think you mentioned active now north of 25 million I'm. Just wondering if you could share any color in terms of whether its average usage versus a non active for.
Whether or not you pushed any greater emphasis on one to one marketing in the fourth quarter trying to dial into the benefit of having that loyalty program.
And ultimately how do you incentivize greater adoption I know you mentioned 85 million I guess total customers and their database wondering how you go that pushing that 25.
We haven't gone from 20 to 25, even higher from there. So I hope increased usage per household. Thank you.
Yes, so certainly our active loyalty members by promise you know a bit more often than ours that are non active. So that's that's a big driver of why we want to get up into the into the program.
I think we've got a lot of opportunity to continue to drive the program, particularly around this growing carry outside of our business, which as I mentioned earlier is.
You know is a is not as digital is not as entrenched in that business as it is with our delivery customers. So we're looking for ways to make the carry out.
Experience you know digital experience.
You know more helpful and more convenient to our customers as we try to continue to drive adoption that way.
You also asked about.
A bit about how do we use how do we use the data how do we get more targeted this is an area where we're early stage right now, but I'm spending a lot of time and energy looking at that dataset not just of the 25 million active but the 40 plus that are enrolled in the 85 plus in our database to say how can we.
The more surgical and more relevant and how we present offers and opportunities to our customers and I think we're on the early.
Very early stage of of of becoming effective in that area Jeff.
Thank you. Our next question comes from Andrew Charles with Cowen and company. Your line is open.
Great. Thank you in the last month, the largest domestic carload only pizza concept launch national delivery through third party platform and I'm curious what gives you the confidence that you can defend against short term headwinds your delivery traffic is an incremental 4000 pizza restaurants are now aggressively from one of the value of their delivery offering versus yours, which is unusual as you know obviously, we all kind of know that third party.
We deliver usually is more expensive versus versus your ticket.
Yeah, Andrew its rich you know.
We take every every competitor that enters very seriously and.
And I think.
For us it just further reinforces that we in our system have to stay very focused on value.
As we take a look at what the all and delivered cost of the Domino's Pizza is we still feel very good about the value that we can offer our consumers relative to any of the pizza players that have been or are now in delivery, but most certainly we take every competitor you know series.
He is like that comes that comes into the business.
Thank you.
Thank you. Our next question comes from Todd Brooks Your line is open.
Hey, good morning, Thanks for the question.
As we look at maybe the international store base and the slowing of same store sales performance across.
2019.
Can you talk about things is relatively homogeneous slowing across most of the international partners or are there.
A few discrete markets that you would call out as being a bit of a headwind to the international same store sales. Thank you.
Yes, Todd what I would tell you is that.
It's not uniform across the 90 of society.
Countries that we operate at.
And if you start to break it down.
In the in the quarter, our emerging markets outperform our more mature markets. So if you wanted to try to draw a line of distinction there always of course exceptions, but.
But by and large the emerging markets tended to outperform the more mature markets during the quarter.
Thank you and I'm showing no further questions at this time I'd like to turn the call back to rich Alstom for closing remarks.
Thank you and listen thanks, everybody. We really appreciate you joining the call this morning and.
Jeff and I look forward to speaking with you in late April as we discuss our for our first quarter 2020 results. Thanks.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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