Q1 2021 Domino's Pizza Inc Earnings Call
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I would now like to hand, the conference over to your Speaker today, Chris Brendan Director of Investor Relations. Thank you and please go ahead.
Appreciate it Samantha and good morning, everyone. Thank you for joining us for our conversation today regarding the results of our first quarter 2021, today's call will feature commentary from Chief Executive Officer, Ritch, Allison and Chief Financial Officer, Stu, leaving as this call is primarily for our Investor Audi.
I ask all members of the media and others to be in a listen only mode I want to remind everyone that the forward looking statements in this morning's earnings release and 10-Q also apply to our comments on the call today.
Both of those documents are available on our website.
Actual results or trends could differ materially from our forecast for more information. Please refer to the risk factors discussed in our filings with the SEC.
In addition, please refer to the 8-K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call a request to our coverage analysts we want to do our breath of this morning to accommodate as many of you as time permits. So we encourage you to ask only.
One one part question on this call if you would please.
Today's conference call is being webcast and is also being recorded for REIT for replay via our website with that I'd like to turn the call over to our Chief Financial Officer Stu Levy.
Thanks, Chris Good morning, everyone.
We're excited to share our strong first quarter results with you today.
Overall, Domino's team members and franchisees around the world generated impressive operating results leading to a diluted EPS of $3 for the first quarter.
Global retail sales grew 16, 7% in Q1 as compared to Q1 2020.
As a reminder, global retail sales growth includes both comp growth and unit growth, which I'll break down for you in a moment.
When excluding the positive impact of foreign currency global retail sales grew 14%.
Breaking down that global retail sales growth our U S. Retail sales grew 15, 3% and our international retail sales grew 18%.
When excluding the positive impact of foreign currency International retail sales grew 12, 8%.
We continued to see positive momentum in both our U S and international businesses in Q1, leading to both strong same store sales performance and net unit growth.
Turning to comps.
During Q1, we continued to lead the broader restaurant industry with 40 straight quarters of positive U S comparable sales and 109 consecutive quarters of positive international comps.
Same store sales in the U S grew 13, 4% in the quarter lapping of prior year increase of 1.6% say.
Same store sales for our international business grew 11, 8% rolling over of prior year increase of 1.5 per cent.
Breaking down the U S comp a bit further our franchise business was up 13, 9% in the quarter, while our company owned stores were up six 3%.
We observed a larger spread than we've historically seen between the top line performance of our franchise stores and our company owned stores, which we believe was primarily a result of the heavily urban and higher income footprint of our company owned stores relative to a more diverse mix across our franchise base.
Corporate store comp was also disproportionately impacted by store splits, resulting from our fortresses efforts as we opened more new corporate stores as a percent of the total corporate store base than we did franchise stores in 2020.
The U S comp this quarter included a healthy mix of both ticket and order growth there.
At the ticket growth was driven by both an increase in items per order and a higher delivery mix, which also includes a transparent delivery fee.
The 11, 8% international comp was driven by ticket growth similar to our U S business that ticket growth was driven by a higher delivery mix and an increase in items per order.
Shifting to unit count.
We and our franchisees added 36 net stores in the past during the first quarter, consisting of 37 store openings and the closure of one of our corporate stores.
Our international business added 139 net stores comprised of 160 store openings and 21 closures. We're very pleased with our new with our net unit growth during Q1, which was an increase over the prior year quarter.
Turning to revenues and operating margins total revenues for the first quarter were approximately $984 million and were up approximately 111 million or 12, 7% over the prior year quarter.
The increase was driven by higher global retail sales, which generated higher revenues across all areas of our business.
Changes in foreign currency exchange rates positively impacted our international royalty revenues by $2 1 million in Q1, 2021 as compared to prior year.
Our consolidated operating margin as a percent of revenue increased to 39, 6% in Q1, 2021 from 39% in the prior year due primarily to higher revenues from our U S franchise business.
Company owned store margin as a percentage of revenues increased to 23, 9% from 22.4% primarily as a result of strong sales leverage. This was also up sequentially from 21, 9% in Q4 2020, driven by lower labor cost as a percentage of revenue in Q1 'twenty two.
Only one.
Supply chain operating margin as a percentage of revenues decreased to 10, 5% from 11, 5% in the prior year quarter. As a reminder, in 2020, we opened two new supply chain centers in South Carolina, and Texas, respectively, as well as of new pressed product line in New Jersey, which increase.
Our overall fixed operating costs as a percentage of revenue.
G&A expenses increased approximately $2 8 million in Q1 as compared to Q1 2020, resulting from a combination of higher advertising expenses and labor costs, partially offset by travel.
Net interest expense increased approximately <unk> 9 million in the quarter, primarily the result of lower interest income.
As previously disclosed in Q1, 2021 we invested an additional $40 million in dash brands, our master franchisee in China. Following their achievement of previously established performance conditions.
Accordingly, we re measured the original $40 million investment we made in Q2 of last year due to the observable change in price from the valuation of the additional investment.
This $2 5 million gain was recorded in other income in the first quarter of 2021.
Our effective tax rate was 21 three per cent for the quarter as compared to a negative three 7% in Q1 2020.
The effective tax rate in Q1, 'twenty 'twenty. One includes a 0.6 percentage point positive impact from tax benefits on equity based compensation as compared to a 26 percentage point positive impact in Q1 2020.
This decrease was due to significantly fewer stock option exercises in Q1 of this year and we expect to see continued volatility in our effective tax rate related to these equity based compensation tax benefits.
Combining all of these elements our first quarter net income was down $3 8 million or three 2% versus Q1 2020.
On a pretax basis income before provision for income taxes was up $32 3 million or 27, 6%.
Our diluted EPS in Q1 was $3 versus $3.07 in the prior year of decrease of two 3%.
Breaking down that seven cent decrease most notably our improved operating results benefited us by 61 cents.
The gain on the dash brands investment benefited us by five cents.
Net interest expense negatively impacted us by two cents.
Our lower diluted share count driven by share repurchases over the trailing 12 months benefited us by <unk>.
And finally, our higher effective tax rate, resulting from lower tax benefits on equity based compensation as I mentioned previously negatively impacted us by 74 cents.
Shifting to cash or.
Our economic model continued to generate significant cash flow throughout the quarter.
During Q1, we generated net cash provided by operating activities of approximately $153 million. After deducting for Capex, we generated free cash flow of approximately one $136 million.
Regarding our capital expenditures, we spent approximately $17 million on Capex in Q1, primarily on our technology initiatives.
As previously disclosed during Q1, we also repurchased and retired approximately 66000 shares for $25 million.
As a reminder, in February our board approved a new $1 billion authorization for future share repurchases.
We also paid of 94 cent quarterly dividend on March 30th.
Subsequent to the end of the quarter, our board of directors declared a quarterly dividend of <unk> 94 per share to be paid at June 30th.
As it relates to our capital structure on April 16th we refinanced our debt to keep pace with our growing business. We're very pleased with our gross gross issuance of $1.85 billion, which includes $850 million of seven and a half year to 662% fixed rate notes and 1 billion of 10.
Year, 3.151% fixed rate notes.
We used a portion of the proceeds to retire our 2017 floating rate notes and our 2017 five year fixed rate notes to pre fund certainly interest payable and at pay transaction fees and expenses.
We expect to use the remaining proceeds for general corporate purposes, which may include distributions to holders of our common stock other equivalent payments end or stock repurchases.
This recapitalization will reduce our weighted average borrowing rate from three 9% at as of the end of the first quarter to approximately three 7% and it will return of our leverage to approximately six times EBITDA consistent with our leverage model following previous recapitalizations additional information on this transaction is included in our.
Form 10-Q, which was filed this morning.
Since the onset of the pandemic in previous earnings calls we've provided updates on the impact of COVID-19 related expenses, including safety and cleaning equipment enhanced sick pay and other compensation for our team members and support for our franchisees and our communities. The estimated impact of these items in the first.
Order of 2021 was not material.
In closing our business continued its strong performance during the first quarter and while we continue to closely monitor all aspects of our operations in these ever changing times, we're confident in the strength and resilience of the Domino's brand and of the Domino's franchisees their team members and our corporate teams worldwide our results would not be.
Possible without their tireless efforts each and every day and we sit here at sincerely appreciate them.
Thank you again for joining the call today and I'll now turn it over to rich.
Thank you Sue and thanks to all of you for joining us this morning.
Overall I am very pleased with our results this quarter and our strong start to <unk> 2021.
We are now more than one year end of the COVID-19 pandemic. The most challenging operating environment, we've ever experienced as a brand I continue to be extremely proud of our global franchisees and their extraordinary efforts around product service and image and day to day execution, we remain focused on providing.
Outstanding food through safe and reliable delivery and Carryout experiences.
And as a brand. We are also proud to continue our position as an industry leader on value at a time when our customers need at the most.
Today I'll keep my comments, rather brief as I highlight the first quarter results for our U S and our international businesses and then after that Stuart and I'll be happy to take some of your questions.
Let's start with the U S business.
Our U S business performed extremely well during the quarter highlighted by 15.3% retail sales growth and a 13.4% comp. This marked our 14th consecutive quarter of positive U S same stores sales growth.
We continue to see strong growth across our business in the first quarter and we did not witness any material differences between those markets that have largely reopened versus those that have remained more restricted.
We certainly saw some sales benefits from the federal government stimulus at the beginning and at the end of Q1, which were partially offset by the negative impact of the significant winter storms in February that impacted such a large portion of the country.
Due to the positive sales impacts from the stimulus we elected not to run any of our aggressive boost week promotions during the quarter.
But instead, we remain focused on providing great service and offering great value to our customers every day.
Now like many of you. We are also watching the two year stack on U S same stores sales at 15% for the first quarter, we saw a slight sequential improvement of the two year stack when compared to the fourth quarter of 2020.
Given the COVID-19 overlaps we will continue to look at the business through both the one and two year lenses as we report to you throughout 2021.
Now beyond the comps when you look at the absolute dollars. Our first quarter same store average weekly unit sales in the U S exceeded $26000.
I am also quite pleased with our performance in the first quarter on the other critical component of our retail sales growth.
New store openings.
Our addition of 36 net stores was a nice improvement over Q1 of 'twenty 'twenty and we anticipate a strong pipeline of future openings.
I want to highlight that we had only one corporate store closure in the U S. During Q1, and we had zero.
Zero U S franchise store closures and impressive Testament to the continued health of our U S system.
On many occasions, you've heard me say that net unit growth and by extension store closures are one of the most important ways to measure of brand's health within our industry.
A single store closure in the quarter on a base of over 6000 units demonstrates the elite economic proposition that we offer to our franchisees.
And on that note I'm thrilled to report yet another record setting year of franchisee profitability with our final 'twenty 'twenty estimated average EBIT Dawn number four U S franchise stores coming in at just over $177000.
The highest in our history.
While this result was certainly aided by the COVID-19 demand tailwind it clearly demonstrates not only the power of the brand, but also the incredible work of our U S franchisees and operators and their relentless efforts throughout an incredibly busy 2020.
Our fortress thing strategy continues to build best practice case studies, showcasing franchisee enterprise growth and ROI, which is a big part of the momentum and excitement behind the strategy.
But equally as important it sets us up extremely well to compete in 2021 and beyond as we continue to drive lower relative costs better service higher runs per hour and therefore, better economics for drivers along with meaningful incremental carry out within our stores.
In fortress territories.
While Carryout order count remained pressured in Q1 as it was throughout the last year, we continue to grow awareness of Domino's car side delivery.
This has created a new option to serve our customers effectively during COVID-19 and will remain an important part of our strategy as we continue to evolve the carryout experience not only to enhance the loyalty of our current carryout customers, but also to reach of new different and largely untapped drive thru oriented customer.
Forward.
On the advertising front I'm excited about the National TV campaign, we launched this week highlighting our very exciting partnership with neuro, we're delivering a true autonomous pizza delivery experience to select customers in Houston today, demonstrating our forward thinking approach to innovation as we build.
And evolve the brand for the future.
We also brought back our old nemesis the noise in this AD campaign and it is already generating some incredible buzz around the Domino's brand.
Now the final thing I'd like to acknowledge as we close out of the discussion on our Q1 results in the U S is the very difficult staffing environment that we're in today the combination of COVID-19 strong sales the broader economy reopening and the high level of government stimulus, it's creating one of the most difficult.
Staffing environments that we've seen at a longtime this puts pressure on our operators to meet demand, while continuing to deliver great service to their customers.
I think our U S franchisees and our corporate store operators for the work that you're doing to attract and retain great team members and a very tight labor market.
As we close out our discussion on the U S business I would simply highlight that the Domino's brand is as strong as it has ever been and I remain confident in our ability to drive long term growth.
Let's move on now to the international business.
It was an outstanding quarter of performance for our international business.
Our 12.8% retail sales growth was supported by a very strong 11, 8% comp.
Continuing the momentum we saw at toward the end of last year.
Q1 also marked our 109th consecutive quarter of positive same stores sales in international a tremendous accomplishment by our international franchise partners and in fact, the Q1 comp was the strongest result, we've seen in more than a decade in that business.
As I discussed earlier with our U S business. We are also watching the two year comp stacks for international and we'll continue to do so throughout 2021 Q.
Q1 represented a 13.3% two year stack, which was a 430 basis point improvement versus the fourth quarter of 2020.
We also continue to build momentum on store growth in our international business are 139 net stores in Q1 was of 100 store improvement versus the first quarter of 2020.
We expect that COVID-19 will continue to have a significant impact on many of our international markets for some time to come and will bring ongoing challenges to new store openings, but this acceleration in growth speaks to our outstanding unit level economics.
End of the perseverance and commitment of our international Master franchisees.
We continue to have temporary store closures around the world, but those have come down dramatically over the last few quarters and we're below 100 at the end of the first quarter.
Now I'd like to highlight a few markets that drove terrific growth during the quarter.
India, China, and Japan, once again led our system of net unit growth and I'd like to highlight another market Guatemala that also delivered terrific store growth.
China, Japan, Turkey, Colombia, Germany, and France, all drove impressive retail sales growth during the quarter.
So once again I am very proud of our master franchisees and their operators for a great start to 'twenty 'twenty. One they are the best in the business and that's why I continue to be bullish about our international retail sales growth opportunity over the long term.
So in closing I'm very pleased with our quarter. One results are incredible base of franchisees and operators combined with outstanding unit level economics place us at an enviable position of strength within our industry.
Q1 reinforced our position as the global leader in Q S. Our pizza, but there is still so much opportunity ahead of us to drive global retail sales growth and to capture additional meaningful share within the category.
As we look ahead to the rest of 2021 and beyond we will as always stay focused on winning the long game and we remain confident in our two to three year outlook of 6% to 8% annual net store growth and 6% to 10% annual global retail sales growth. So.
Thank you once again for joining us today and at this time, Sue and I will now be happy to take your questions.
Ladies and gentlemen, as a reminder, if you would like to ask an audio question. Please press Star then the number one on your telephone keypad and we ask that you limit yourself to one question.
Your first question comes from the line of Brian Bittner with Oppenheimer.
Thank you good morning, good morning, rich good mornings too.
Obviously, the U S business continues to be a phenomenal engine and the long term outlook. There is pretty clear, but the topical question that I must ask is related to the U S business at as it begins to lap the meaningful upswing and strength from last year that really began around this time is as we.
Kind of sit here and we analyze your two year trends in the first quarter at it does suggest actually an improving likelihood of of successfully lapping that strength at least with maybe the ability to perhaps hold on to those gains more than we all all thought originally can can I get your reaction to that thought end.
And what specific weapons do you have in your Arsenal that you plan to deploy over the rest of the year to to fight this lap.
<unk>.
Hi, Brian and thanks for the question and.
You're absolutely right we've got some.
Pretty strong lapse ahead of US you know from the second and the third quarters of last year, but what we're really focused on are continuing to make the investments to drive long term growth in the business and you know as I look out across the rest of the year. We are at really in an enviable position we've got a.
A fantastic advertising war chest.
We have not.
Not deployed some of the tools this.
Of this year, so far that we've used in the past around our boost weeks you know to drive incremental customer acquisition. So we have those in our Arsenal and I think very importantly, the carryout business, which on.
On a relative basis, you know when you look at order growth.
During 2020 was weak you know relative to its historical run rate and so we've got an opportunity to continue to drive that carryout business along with some of you know some day and day parts during the week as well.
As it relates to you know last year weekends, and late night were relatively weak relative versus weekdays and.
And the earlier in the day day parts from last year so at.
As you know customer patterns continue to change as the economy continues to open up we feel we feel confident that we've got a set of tools to allow us to continue to grow our business.
Thank you.
Your next question comes from the line of Peter at <unk> with B T I G.
Yeah.
Great. Thanks rich.
Rich I think you mentioned that the store level EBITDA was about 177000 per store.
I think that number was almost 20000 higher than.
The original estimate that you guys provided back in January at could you just give us a little bit of a sense on maybe what the differences between the original estimate and and the new figure that that you guys actually reported this morning.
Sure Pete Yeah, we when we give the original estimate which comes back in early January as is based on a pretty limited sample of of the franchisee P&L that come in and you know over the course of the of the first quarter as those begin to roll in we collect them and rarely does it move this much from the original estimate.
To the to the final number but just the way the sample played out over time.
The result ended up coming in quite a bit stronger and you know when I think about.
Where we sit within the industry today, you know that 177000 in store level EBITDA really puts our system in an incredible position of strength and when you see at your not surprised that you know we only had one store that closed in the U S throughout the entire quarter.
Very impressive thank you.
Your next question comes from the line of Sara Senator with Bernstein.
Thank you very much.
I just had a quick question I guess about.
Commentary of that Carryout person delivering of nuance.
I guess in terms of that at the strength of the business at that Youre, not really seeing any variability across the U S market, but I would of associated sort of softer carryout with mobility restrictions from China kind of reconcile those.
Now that you know overall I would think carryout might be affected by restrictions.
But those vary across markets and maybe if you can just talk about the share yeah within Macquarie out parcels with delivery.
Within pizza at that category. So that you can sort of understand what might be going out.
Between those two businesses. Thank you.
Sure Sara.
What we saw at you know across the U S was was continued pressure on Carryout order count in total, but when we broke it down and look state by state at the different pace of reopening across the country. They really were.
No discernible differences in our business overall, so we still we still see a lot of opportunity.
For Carryout to continue to grow and come back as mobility increases broadly across the country and I can also tell you that we have we've not been as aggressive as we've been in the past on promoting that Carryout business also.
And so there are opportunities there for us as we look across the rest of the year as well.
Okay.
Your next question comes from the line of John Glass with Morgan Stanley.
Talk about the international business when you think about those two year trends those materially inflected how.
How much of that was just a result of maybe the increased international Lockdowns you of any anecdotes as this is our underlying business trends just broadly stronger or is it really just walk down markets are getting a benefit and maybe if you. If you wanted to just highlight a few of the key drivers and then you talked about development, but just from a comp perspective, what really contributed to that significant acceleration.
In the international markets.
Sure.
John Thanks for the question and it really is it's.
Performance is still quite mixed across the markets within the international business as you might guess that you know the dynamics you know as it relates to COVID-19 are still.
Quite different depending upon what parts of what parts of the world that are that we're in but what we what we have seen is as we were able to over the course of 'twenty 'twenty reopen our markets you may recall at this time last year, we we were gosh 2000 plus units.
Were temporarily closed and as we've been able to to get units reopened and then to get the pipeline of new development going and turn the marketing back on across the international businesses. We've seen of strong resurgence in sales in many of the markets that we operate in and it's.
To continue to be choppy market by market as we look out across 2021 because in some places we're going to be lapping a very weak comps in retail sales from last year and at other places on the planet, we're gonna be lapping very strong numbers from last year.
Thank you.
Your next question comes from the line of at Jared Garber with Goldman Sachs.
Thanks for taking the question I actually wanted to follow up on that prior question on international.
Several years ago Retro you took over you came in from the international business and I wanted to get a sense from you. If you think that there are any sort of structural changes that are happening at some of your key international markets be at maybe Japan or Australia.
India for that matter of has talked about unit unit opens there that we should be thinking about.
At the level of comps and unit growth in those markets.
At a higher level over that kind of that at the medium term.
Yeah.
As I look across.
The globe, Jeremy we still see so much opportunity for continued growth and share gain in that international business. So while it's grown rapidly certainly over the last decade Youre still looking at the international business in total that grows in that kind of low.
Market overall of that grows in that kind of load of.
You know the mid single digits, and then you've got much share gain opportunity as well you know our share in the international business. In total is is is.
Significantly less than where we are in the U S. A.
Today.
So as I look at it now I still see a significant amount of opportunity to continue to grow the business.
So where we're hitting scale and some of the key markets around the World. You know if you look at the places where we've been really strong you know.
Recently.
You know like like Japan, like India, we're starting to get there you know in China. You know, we've we've started to hit some really nice scale points in some of those markets as well that give us.
Give us the wherewithal and the ability to invest at a high level in the business going forward and then finally.
I would just highlight once again as we talk about all the time the growth really comes back to the unit level economics in the business and while we still got some challenges in a few places around the globe by and large the unit level economics remain really strong across the world and with with COVID-19 looser.
Inning up certainly in some places not as much in others. You know is it loosens up it really gives those franchisees the opportunity to to release some of that pent up demand for unit level investment and growth.
Thanks for the color.
Your next question comes from the line of Andrew <unk> with BMO.
Hey, good morning, I was hoping you could share some color or maybe some metrics on the frequency and retention of new or lapsed customers that you gain during the pandemic here in the U S. Now that the environment is starting to normalize with the vaccine rollouts et cetera.
Are you seeing higher retention and the CRM initiatives driving frequency of the way you would have expected.
Yeah, and I think as we mentioned at the <unk>.
Back in February when we released the fourth quarter, you know dynamics remained pretty consistent in the first quarter and that you know we're getting a lot more of the growth out of retained customers you know versus newly acquired customers and again you know.
We've turned down some of the more aggressive promotions, which drive a lot of customer acquisition, what I am pleased to see is that you know our active loyalty membership continues to grow and also we can say we continue to see you know really strong and steady order frequency. Among those are among those active law.
Realty customers. So strong strong continued strong continued engagement and sales from our existing customers. Then you know we've got some opportunities I think as we look out through the course of the year to really turn the volume back up on on new customer acquisition as well.
Yeah, I mean, when you look at our loyalty numbers over the course of the last year end, having not run some of those those boost tweaks in the things that we've traditionally done to attract new customers. Obviously pleased at the loyalty numbers continue to grow but when you look at that relative to our sales are at.
That obviously had to come from more repeat business and greater frequency from our core loyalty base.
Your next question comes from the line of Chris Oh Cool with Stifel.
Thanks, Good morning, guys.
Rich it was my understanding that the Carryout Pizza segment overall grew at a pretty healthy pace last year I'm. Just curious why do you think domino's is struggling to grow that business, especially in light of the systems marketing efforts not just recently, but over the past few years and just the Ford fishing strategy curious if you feel like there needs to be any changes.
And the approach to going after that business.
So.
Chris Thanks for the question.
We are continuing to grow sales in the Carryout segment. It really is the order order counts in the Carryout segment that were under more pressure in Q1, and then also looking back into end of last year. So we still we're still capturing growth in that segment, but it's come more from <unk>.
Ticket through customers, adding more items per order for the first quarter and also back into last year.
As I mentioned earlier, we have not been as aggressive.
In our marketing of the Carryout segment.
Just given some of the challenges around operating in the in the COVID-19 environment, but we see a lot of opportunity as we look across this year to continue to crank.
That back up and our new servicemaster at of Domino's car side delivery, we see as a critical weapon to do that you know we brought that forward.
To address the safety concerns at customers had around picking up their food and of COVID-19 environment, but over the long term, that's really a great tool for us as we compete for Carryout business against the drive through lanes of other <unk> concepts.
The other thing just to keep in mind that you know and this is a very COVID-19 unique thing, but you do all of that demand that was dine in for a lot of restaurants. They their choice was to figure out how to do carryout or delivery. So you've got players and carryout players and delivery that you know where we're all still wonder.
During whether they stay there permanently whether they shift back into dine in how they split their dining rooms etcetera, but.
At essentially changes that that market in terms of that.
The group of players playing in there as well, which is one of the reasons you see that increase in the in the Carryout market says.
That's helpful. Thanks.
Your next question comes from the line of John <unk> with J P. Morgan.
Hi, Thank you out at the question is on you at flavor and I'd like to ask at one in terms of supply chain and of your ability to have people that work in that the commentaries from self and I'll say distribution and if you have of pricing mechanism.
With the franchisees to cover those costs I think you can do on commodities, but next year, whether you do on labor and then secondly, rich and it's something that we've talked about on calls before things like service levels.
You know what the U S. Consumer you can you talk about at the current labor market you know, it's changing some of the service levels in other words lengthening.
<unk> you.
You know that youre kind of thinking.
Taking a swing that pendulum swing in an unfavorable direction and if theres anything.
So you can do to continue to improve the service times and I think we used at about discussing of pre COVID-19 basis. Thanks.
Yeah, Thanks, Jonathan I'll grab that thanks for the question Yeah, Let me let me start on the supply chain side, you know, we we don't.
Explicitly price.
With our with our franchisees based on a breakdown that says well this pieces labor in this pieces food and as I've mentioned previously while we're trying to grow our overall profit dollars for the supply chain business, we're not trying to do at at the expense of our franchisees, we're trying to do it with.
Our franchisees through the overall growth. So you know so we're at we're absorbing a piece of that labor increase versus passing that automatically through the same the same that we do with with food cost inflation.
In terms of store level.
Certainly I think everybody right now you see at in the news everywhere is challenged from a from a labor perspective, and a hiring perspective.
We still believe that at the you know when when all is said and done you've got to be focused on service services, where you drive your differential.
Customer engagement drive that loyalty.
Part of at one of the one of the structural things that we do which helps us from a service perspective, because we don't want to take our eye off that ball is fortresses and we've obviously talked a lot about fortresses, but you get closer to your customers and you have the ability to serve them better. The second thing that we do is.
I think everybody sees a lot of the technology investments that we make at.
On the front end, there's a lot that we do on the back end to try and improve the efficiency of the labor and store. It takes some of the labor out of stores and enable that same labor to be doing other things. So whether it's tools related to the make line or other initiatives that we're doing to try and drive throughput in their stores.
And trying to reduce the labor required on a.
Daily hourly basis.
It's at the forefront of everybody's mind right now.
But I don't think sacrificing service is the way to do at.
Definitely not at as to describe John you know some a good bit of the work that we're trying to do around tech at around the store operating model is basically to keep drivers moving 100 per cent of the time.
With a long term goal that they never never get out of their cars.
[laughter] at her delivering delivering pizza is constantly as opposed to other tasks and other activities kind.
Kind of that they had to perform in the in the old operating environment.
And if I may I may have half of service times materially changed.
Customer from the time they order it from the time that they get their.
Their pizza end.
It's at a risk or an opportunity at this point.
Yes, John no no material change.
For us it's not good enough because they got to get it they've got to continue to get faster and so that's really what we're focused on here we've absorbed the volume without any material change in the service times, but we gotta get faster.
Understood. Thank you.
Your next question comes from the line of David Tarantino with Baird.
Hi, good morning.
My question is first through on the capital allocation.
Now that you've done your.
The refinancing transaction.
A lot of excess cash on the balance sheet and you have a big buyback in place.
But I guess I don't want to assume anything so could you just kind of walk her to walk us through them.
What youre thinking.
In terms of capital allocation and how quickly you might deploy that cash they have.
Yeah, I mean, there there's no fundamental change to our to our strategy from a capital allocation perspective, and we were pretty upfront about this even as we went through our recapitalization, we will deploy that that capital for.
Investments in the business and then generally speaking in one form or another returning that to shareholders over the course of time, but we don't have an intention of sitting long term with a huge amount of excess cash on the balance sheet.
Alright, Thank you sure.
Sure.
Your next question comes from the line of Dennis Geiger with UBS.
Great. Thanks for the question Rich I wanted to ask a bit more about your comments on no on taking market share going forward and just kind of curious how youre thinking about share gain opportunities in U S.
This year end, perhaps over the next few years, if you're if you care to kind of segmented delivery versus Carryout, Steve I know you kind of mentioned some players are kind of coming in and out of different channels.
Kind of any latest thoughts on maybe where that share comes from whether its independent and small chains continues or if its larger players curious of the latest thoughts there.
Sure Dennis Thanks for the question I guess I'll start by saying, we're relatively agnostic as to where the share gain comes from.
And we see opportunities to continue to take share across the category and it's why we were so that's why we're so so focused on retail sales growth as the as the key metric you know not only because it drives all of the economics in our business, but obviously, that's how that's how we ultimately.
<unk> gained market share over time.
As I look this year and ongoing fortress thing is going to continue to be a big part of that strategy to gain share.
As we've talked about in the past we are still a relatively.
<unk> Underpenetrated in terms of share in the Carryout business, specifically and fortress. It gives us an opportunity to go out and grab that largely.
Incremental carryout business.
And then all of the delivery side, we believe that we've got to continue to offer great value to our customers and terrific service to continue to gain share on the on the delivery side and we've talked about how fortress thing helps that overtime, we're going to continue to invest in.
In our technology initiatives and operating practices procedures to continue to help us.
Do a better job of service with the with our customers as well and then you combine that with fantastic unit level economics, which allow franchisees to invest in service and a a incredible war chest in terms of our advertising fund to go out there and dry.
<unk> customer awareness and acquisition and we feel like we're in a in a very strong position to continue to grow.
Thanks very much.
Your next question comes from the line of Lauren Silberman of with Credit Suisse.
Thanks for the question Great degree here comes from staffing part of the labor challenges.
Given the environment.
At the longer term structural headwind given more optionality for delivery drivers.
Or can you delivery of at least the perception at this I will turn again.
A bit more flexibility.
Yes, Lauren it's of Great question, and something we think about a lot is both the availability and the cost of labor.
And in particular, you know the real pinch point in the business. You know is a it is his drivers so part of what we're doing and working on is trying to continue to make that a great job with the best economics for drivers relative to the other alternatives that they have out there and now we can.
Talked about a number of strategies around that we continue our work around fortress seem to give drivers more deliveries per.
Her hour, which translates into higher wages, we're working on technology and operating practices that keep drivers in their cars. So imagine a world where they don't come back into the store we run the pizza is out to their cars and they go and take the next order. So we're trying to work on those.
Economics for our drivers to keep them keep them busy end and earning a higher level wages and then also a big part of <unk>.
What makes domino's different and has made us different over time as that being a driver at Domino's ordinance or a pizza maker inside the store is an opportunity to become an entrepreneur overtime and so a big part of our job at our franchisees jobs also is to sell.
The the opportunity going forward, because you know 90 plus percent of them started off as drivers or insiders and at the final thing I'd say about labor that will present, an ongoing challenge not just for domino's, but for others across the industry is.
Just the changes in minimum wage around the country, you know as that moves differentially from one market to another you know certainly at puts it puts pressures in some places end and not in others and as we operate as a national brand. We always have to take those things into account as we as we plan our ongoing.
Marketing and promotional calendar over the course of the year.
Thank you very much.
Your next question comes from the line of Chris Carroll with RBC capital.
Hi, Good morning, Rich you mentioned the strong pipeline for store openings earlier, when discussing the U S business. So could you provide a little bit more detail around the composition of the pipeline are you seeing a step up in demand from existing franchisees on the back of the very large increase in average store EBITDA that you hi.
Alighted earlier.
I presume you're also seeing more demand from potential new franchisees as well so curious to hear.
More of what about what.
At the pipeline looks like moving forward.
Sure Great question at you know it really is it's a it's a mix of of of both so certainly a lot of demand within our existing franchisee base given the economics of our stores today and also the fact that the stores have gotten a lot of lot busier that creates a lot of.
Our ongoing opportunity for fortress thing territories.
That are operated by existing franchisees, you've also got here in 2020. One you know some pent up demand that wasn't satisfied in 'twenty 'twenty as.
As we had so many more restrictions around construction and permitting and everything else at.
And then you add to that is you know a healthy.
A number of new franchisees coming into the system every year end, you're one of the things that makes us a little different from the rest of Q S. R and of franchising is that those new franchisees all come from within our system. So they could be a corporate employees they could be team members of.
<unk> of our franchisees, but we've got a steady pipeline of of of folks that want to become Domino's franchisees, who already have the you know the skills necessary and the experience necessary to run our stores.
Great. Thank you.
Your next question comes from the line of David Palmer with Evercore ISI.
Thanks.
Yes, thanks for your comments too on that two year trends that end.
And I do think it makes sense to track those going forward.
Perhaps you can help us think back to 2019, if we're going to look at those two year trends and compare what you saw back then and what you did back then to what Youre seeing in terms of your internal plans. This year starting in the second quarter and I know last year was of weird year in terms of maybe not doing as many boost week sadness and then of course.
Of the innovation.
It has not been as robust as you might have had.
<unk> been doing lately and what we're seeing from your competitors lately.
So perhaps you can talk about how much sort of thunder youre going to be making in your business over the next few quarters versus what you did in 2019 as a benchmark.
Sure David.
A lot of things did change in our approach in 2020 relative to what we were doing back in 2019, driven by COVID-19 and I talked about some of those a little bit earlier on the call. You know some of the things that we kind of turned the volume down on a little bit with the carryout business being one of them.
You might recall back at at the beginning of 'twenty 'twenty, we were running our advertising on television called of campaign called Pie pass where folks would walk into the store and see their name up on the screen as they pick their pizza, but we had to turn that off immediately when we couldn't allow customers to come into our stores.
And then throughout the remainder of the year.
We were developing new safe service methods for carry out, but we werent pushing that business as hard as we had pushed not just at 19, but in the years that the five or six years that preceded that.
Secondly, we turned off the more aggressive.
Promotional weeks that we had typically peppered across the annual calendar. We ran those at 19, we didn't run those end in 2020. So those may give you a little bit of a sense for some of the things that we arrows that we have in the quiver. If you will that we can bring back of deploy in 2020, one as we get to a more normal.
<unk> operating.
Environment at will.
Also we will also continue to look at new product development and other relevant news to bring out to the market to attract customers into the brand. We actually did do a little bit of that at 2020, and and looking forward of doing some more of that here in 2021.
So some of it all up each day that it feels like it'll be relatively comparable in terms of the energy on boost weeks in innovation.
The remainder of the year versus 2019 remainder of the year.
Well, we've still got David you know things are still at vault evolving at a real time basis and Theres a lot of factors that we bring into play when we think about what where.
What we're going to deploy going forward. We're certainly still you know as a not just at domino's, but across the economy still riding a bit of the wave of government stimulus.
And then we've still got a COVID-19 to deal with we're making good progress with vaccinations across the U S. But there's still a lot of work to be done there. So.
One of the things that we always look to do and that we have the ability to do here is to be flexible and to be adaptive and we've got a number of arrows in the quiver as I mentioned to drive the business as we look out across the year, depending upon how things unfold.
Thank you.
Your next question comes from the line of James Rutherford with Stephens, Inc.
I wanted to follow up on the comment you made earlier about not seeing sales deterioration in markets that are more fully opened.
Given there were a lot of puts and takes throughout that first quarter, including weather stimulus in many of their factors can you share anything about more recent trends given that is from we're seeing of real spike in dining behavior and it also puts a little more distance between us from those stimulus checks I mean have you seen any impact on your more recent average weekly sales in light of that reopening.
James we're not going to comment today on anything you know post.
At quarter, one, but yeah, we did see during quarter, one as I mentioned, a little bit at my prepared remarks, you know, we certainly saw a quarter that was not at the even quarter you had stimulus at the beginning at the end and then you had some rather extreme weather events in certain parts of the country in the middle and.
Alongside all of that you had the country reopening at different at different speeds all around so a lot of moving parts in the first quarter of the business.
We obviously continue to stay at top of it now not weekly, but daily and hourly.
And we'll have more to share obviously about the second quarter when we get together again in three months.
Okay. Thank you.
Your next question comes from the line of Jon Tower with Wells Fargo.
Taking the question just a quick clarification and then second a question on clarification. The franchisee EBITDA of 177000 per per store because of that included a benefit from government support Mike Triple P loans, and then secondarily following up on the loyalty conversation.
With others in the limited service space kind of adding programs later this year.
Do you plan to alter some of the new loyalty member acquisition tactics or perhaps change the rewards programs to some of their rewards themselves to ensure that the high level of engagement you up to date slip.
Hey, Jon on your first question on the on the one.
<unk> hundred 77, we don't we don't.
Counting of government money in that number that's the yeah, that's the EBIT daub from running at <unk>.
<unk> pizza stores.
And.
As of as a company you know D. P Z, we didn't take any government money through the course of this.
Through the course of the pandemic.
Then of loyalty.
The loyalty program has to be of a living thing overtime, where we're a little over five years into our loyalty program. We launched at back in 2015, and so we are constantly looking at different ways that we can turn the dials on that program to attract customers in.
The program to keep them engaged so constantly thinking about how customers earn and burn points overtime. So as we and we do learn from what we see out there in the marketplace as well as continuing to do an extensive amount of customer research on our own on our own customers. We've been very pleased.
To see that the active enrollment in that program has continued to grow. So it's continued to have appeal for new customers coming in and then also as I mentioned earlier, we've been pleased to see that the order frequency of active loyalty members has continued to remain steady because once you get your program to 2000.
7 million active as we have today.
A big part of that value comes of rent comes from the just the ongoing at continued engagement and frequency of of those customers.
Great. Thank you very much.
Your next question comes from the line of Andrew Charles with Cowen.
Great. Thank you rich you guys of previously spoken about the AD fund surplus in 2020 from the better than expected sales performance that likely be deployed in 2021 and I recognize that you are on their of 52 weeks last year and presumably beyond 52 weeks. This year, but how are you thinking about deploying net surplus across the year and in particular.
Are you concentrating at <unk> when the toughest compares are lapped.
Yes.
Andrew Thanks for the thanks for the question at all.
I won't comment on quarter to quarter at how we're going to deploy at really for competitive reasons. If you will but we are in a fortunate position.
Position to have a very strong award chest end and surplus going into the year end that gives us an opportunity as we look out across the year end, we see what happens with sales trends in the business. It really does allow us to put a little bit more muscle against things when and where we need to.
Okay.
Your next question comes from the line of Brett Levy with end Cayenne partners.
Thanks for taking the call.
<unk> talked about you talked a lot on this call and over the years about technology and innovation.
Can you give us a little bit more clarity to.
How much of what you have right now.
More of that talk and how much we can really start to put into play and drive and drive greater efficiencies and show up more in the net.
Sales of the operational numbers, obviously things like north of our good day showcase your forward looking but.
For some for right now, it's probably not something thats going to be material for some time, just how are you thinking about that framework. Thanks.
Sure Brett it's of Great question, and one that when we sit down every year and make our investment decisions around technology, we are always trying to invest against our portfolio.
Both of near term things that can have immediate value. But then also some of the longer term investments that may not drive any immediate value, but you know that.
We want to make sure that we're out in the forefront on you know when I think about the near term component of that we've got a significant amount of of of technology investment that is going to our stores today and improving the efficiency with which we operate our stores you know when you think about what some of the.
Kind of in key pinch points or constraints are at the business right. Now. It is at is labor you know what it is.
The availability of labor cost at the store level. So we're focused on a lot of time and energy on running a more efficient stores such that we can drive higher.
Order counts at higher sales per labor hour.
So there's a lot of effort there and a number of.
Things that are rolling out through our system today, and then of the longer term neuro is of Great example of that we are doing some autonomous deliveries as we speak in Houston right now, but it's going to be a while before autonomous delivery is broadly deployed across the domino's system, but.
We want to make sure that we're investing at learning today in particular, how the customer will interact with the robot and how the robot will interact with our operations at the stores and those of the key learnings that we're trying to drive now such that when we are able to more broadly deploy the technology.
<unk>, where we're ready and have a good understanding of of how it can impact our business and our customers.
Your next question comes from the line of Jeffrey Bernstein with Barclays.
Great. Thank you very much.
Just wanted to ask about unit growth, we know that 2020 was a tough year.
Ultimately sub 4% versus I think your two to three guidance two or three year guidance for 6% to 8% growth.
And of that COVID-19 caused a one year setback for you guys and others as well, but I'm just wondering whether there's any lingering effects in terms of sites or.
I think you mentioned permitting and construction delays you would think the pent up demand would be huge and the big uptick in our store level EBITDA would obviously help but I'm just wondering whether you think 'twenty one it's reasonable to assume you get back within that range, whether you have any color on the U S or.
More importantly on the international.
Whether or not that hiring issue comes into play we know that youre, obviously struggling as everybody has too to higher I'm wondering whether any franchisees are talking about slowing down growth just because they need to stay of those stores. So whether they have creative ways to get labor in the stores. Thank you.
Sure Jeff.
On the unit growth, we have already seen an acceleration at the pace. If you look at last year. We had 624 net openings for the year end if you look at.
The first quarter of this year when you look back trailing four quarter was 730, so that pace has already accelerated up by more than 100 units and when we look at the pipeline in the U S and we've looked at the pipeline at our international markets. We see a really strong pipeline ahead at an opportunity to continue to accelerate.
That pace of unit openings.
The the unknown for us as we look out across the year.
Still relates to COVID-19 at you.
You turn the news on you'll see there are some places around the world, where COVID-19 is really still still raging and in some places getting worse.
To what extent that impacts our pace of unit growth, where we're still monitoring and end still have some uncertainty around that but the good news for the brand is that the unit economics are incredibly strong the demand for franchisee investment is there and we expect to continue to see the pace of unit growth.
Accelerate.
The final part of your question was around the staffing and that's always a challenge.
But one that are yeah that we and our franchisees feel comfortable that we can manage over time part of the beauty, particularly as it relates to the U S of opening these new stores is that the majority of these are opening in our.
As part of our fortresses program, giving.
Giving us an opportunity to do two things one is to shrink the territory. So we can get more deliveries per per hour of delivery driver labor, but also you get that incremental carryout business, which is a much less labor intensive business for our stores, which is one of the reasons, we want to continue to grow and bill.
That business.
Yeah. The other thing that I would just.
Add to that is you end you've seen the increase in the growth, particularly at Q4 last year in terms of new units there is.
The unfortunate practical reality of even if you have the ability to grow you have the demand or desire to grow.
Just the sheer bandwidth of trying to get that done you don't at.
It just takes a while to make up for what stopped last year. You catch you are our franchisees our master franchisees internationally can't just double their numbers because they want to they they need the resources to go build at the time to go build at.
So it's going to take a while while we continue to accelerate its going to take some time before we make up for the period of time that we lost last year.
Understood. Thank you.
Your next question comes from the line of Todd Brooks with CL King and associates.
Hey, good morning, Thanks for squeezing me at least.
Spend some time on the call talking about arrows in the quiver to kind of drive.
Traffic against this period of tougher compares coming up of talked about boost we talked about.
Focusing on Carryout and I'm wondering with the incremental advertising dollars that youre carrying into the year.
I'm just wondering about any of anything you can share about shifts in tactics, whether more personalized marketing more more one to one marketing or through CRM platform is really trying to stimulate frequency at the individual level are more resources going to that versus broader medium and getting the message out that way when you look at.
Kind of the mix of your spend in fiscal 'twenty one.
Hey, Todd Thanks for the question Ed.
It's something we think about all the time because the vast majority of the dollars of that advertising thought our all of our franchisees dollars that we spend at with great care at.
Ann.
It's one of the areas also we talk a lot about how we use analytics to make decisions at Domino's, It's an area, where we've got terrific analytics in terms of understanding the return on spending those dollars across a range of different channels or opportunities that we have to invest.
Them on the part of our system at so we're constantly looking at that and managing the dials to use that investment for the greatest return for our system.
Okay, great. Thanks rich.
There are no further questions at this time I would now like to turn the call back over to Ritch Allison for any additional or closing remarks.
Thank you very much and thanks to all of you for taking the time to join US on the call. This morning, we look forward to speaking with you again in July to discuss our second quarter 2021 results have a great day.
Ladies and gentlemen, this does conclude today's conference call you may now disconnect your lines.
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Yes.
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