Q2 2021 Domino's Pizza Inc Earnings Call
Hello, Thank you for standing by and welcome to the Q2.2021 Domino's, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session basket question. During the session you'll need the press star 1 on your telephone please be advised.
As of today's conference is being recorded you require any further assistance. Please press star Zero I would now like turn the conference over to your speaker today Jenny for acre Investor Relations. Please go ahead.
Thank you so much and thanks to everyone for joining us for our conversation today regarding the results of our second quarter 2000 at 21 today's call will feature commentary from Chief Executive Officer, Ritch, Allison and from the office of the CFO Jessica parish.
At this call the primarily for our Investor audience I asked at all members of the media and others be in listen only mode I want to remind everyone that the forward looking statements in this morning's earnings release and 10-Q also part of our call.
On the call today.
Both of these 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 and addition of 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.
Our request for coverage analysts and we would like to accommodate at many of you at a time for men. We encourage you to ask only 1.1 for the question on this call of any kind of today's conference call is being webcast and is all the being recorded for replay via the website.
With that I'd like to turn over the call to our CEO Ritch Allison.
Thank you Jenny and thanks to all of you for joining US. This morning overall I am very pleased with our results this quarter, which once again demonstrated the strength of the Domino's brand around the world.
We are still navigating through the COVID-19 pandemic across the globe throughout the last 18 months, our franchisees have continued to step up to the challenge in service of their customers their communities and their team members.
I continue to be extremely proud of our global franchisees and their extraordinary efforts to provide outstanding food through safe and reliable delivery and carryout experiences.
You've heard me speak often about the importance of global retail sales growth and how that drives our business model.
During the second quarter, we delivered 17.1% global retail sales growth, excluding foreign currency impact driven by a powerful combination of growth in U S. Same store sales international same store sales and global store counts.
The second quarter marked our 40 <unk> consecutive quarter of U S same store sales growth and our 110th consecutive quarter of international same store sales growth.
We also reinforced our leadership position in the pizza category with a very strong quarter of global store growth highlighted by the opening of our 18000 store.
We celebrated this terrific milestone with the opening of a beautiful store in la junta of Kal, Colorado.
The pace of that store growth has accelerated significantly during the first half of this year. When you look at at on a trailing 4 quarter basis, our pace of net store growth has increased from 624.
In Q4.2020 to 884 in Q2 'twenty 'twenty 1.
During the quarter. We also completed our 1.85 billion dollar refinancing transaction.
Lowering the cost of our debt and giving us the capacity to return $1 billion to our shareholders through our recently completed accelerated share repurchase transaction.
Overall, the Domino's brand continues to deliver as our strong same store sales store growth and resulting retail sales growth deliver great returns to our franchisees and our shareholders.
I'll turn the call over and out of Jessica Perish, our controller and Treasurer. She will take you through the details of the quarter and then after that I'll come back and share some additional observations about the quarter and some thoughts around how we are approaching the business going forward Jessica over to you.
Thank you rich and good morning, everyone. We are excited to share our strong second 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 $3.06 for Q2.
Our diluted EPS as adjusted for certain items related to our recapitalization transaction completed during the quarter with $3.12.
In Q2, we continued to see positive momentum in both the U S and international businesses in both same store sales performance in that unit growth leading to strong global retail sales growth.
Global retail sales grew 21.6 per cent in Q2 as compared to Q2.2020, when excluding the positive impact of foreign currency global retail sales grew $17.1 per cent.
Breaking down total global retail sales growth U S. Retail sales grew 7.4% and international retail sales grew $39.7 per cent when excluding the positive impact of foreign currency International retail sales grew 29, 5% rolling over a prior year decrease.
<unk> of $3.4 per cent.
The prior year, a decrease in international retail sales, excluding foreign currency resulted primarily from temporary store closures changes in store hours and service method disruptions in certain international markets as the result of the COVID-19 pandemic.
Turning to comps during Q2, we continued to lead the broader restaurant industry with 41 straight quarters of positive U S comparable sales and 110 concern the consecutive quarters of positive international comps.
Same store sales in the U at 335 per cent in the quarter lapping the prior year increase of $16.1 per cent.
Same store sales for our international business grew 13, 9% rolling over a prior year increase of 1.3 per cent.
Breaking down the U S comp on.
Our franchise business was up 3.9% in the quarter, while our company owned stores were down 2.6%.
As we noted on our Q1 call we continued to observe a larger spread between the top line performance of our franchise stores in our company owned stores than we have historically seen.
We believe this is primarily a function of the heavily urban and higher income footprint of our company owned store market relative to a more diverse mix across our franchise space.
The U S comp this quarter was driven by ticket growth due to increases in items per order in our transparent delivery fee as well as the mix of products we sell.
Order counts on a same store basis were consistent with Q2, 2020 levels, which were higher than Q2.2019 levels as a result of customer ordering behavior during the pandemic.
The international comp was driven by order growth due to the return of non delivery service methods. The resumption of normal store hours and the reopening of stores that were temporarily closed in certain of our international markets in Q2.2020.
Shifting to unit count we end our franchisees added 35 net stores in the U S. During the second quarter, consisting of 39 store openings and foreclosures.
Our international business at a 203 net stores comprised of 217 store openings and 14 closures.
Turning to revenues and operating margin.
Total revenues for the second quarter were up approximately $112.4 million or 12, 2% over the prior year quarter.
The increase was driven by higher global retail sales, which generated higher revenue across all areas of our business.
Changes in foreign currency exchange rates positively impacted our international royalty revenues by $4 million in Q2, 2021 as compared to the prior year quarter.
Our consolidated operating margin as a percentage of revenues increased to 39, 5% in Q2, 'twenty 'twenty 1 from 38, 8% in the prior year due primarily to higher revenues from our U S franchise business.
Company owned store margin of the percentage of revenues increased to 24, 5% from $23.1 per cent, primarily as a result of lower labor costs, partially offset by higher food costs recall that we incurred additional bonus pay in the second quarter of last year for team members on the front lines during the COVID-19.
Pandemic.
Supply chain operating margin as a percentage of revenue decreased to 11% from 11, 9% in the prior year quarter, resulting primarily from higher insurance and food costs as well as higher fixed operating costs driven by depreciation on our new supply chain facilities opened last year.
These increases were partially offset by lower labor costs.
G&A expenses increased approximately $12.3 million in Q2 as compared to Q2, 2020, resulting from higher labor costs, including higher variable performance based compensation and noncash compensation expense, partially offset by lower professional fees.
Additionally, as we discussed on our Q1 call. We completed our most recent recapitalization transaction during the second quarter in April.
In connection with the recapitalization, we incurred approximately $500000 of pretax G&A expenses for certain professional fees, which is included as an item affecting comparability in this morning's earnings release.
Net interest expense increased approximately $6.7 million on the quarter driven by a higher average debt balance.
This increase in interest expense also includes $2.3 million of pre tax incremental interest related to the recapitalization transaction, which has been adjusted out of an item affecting comparability in this morning's earnings release are.
Our weighted average borrowing rate for Q2, 2021 was 3.8% down from 3.9% in Q2 'twenty 'twenty.
Our effective tax rate was $19.6 per cent for the quarter as compared to 4.7% in Q2.2020 the.
The effective tax rate in Q2.2021 includes a 2.3 percentage point positive impact from tax benefits on equity based compensation.
This compares to an 18.5 percentage point positive impact in Q2.2020.
This decrease was due to significantly fewer stock option exercises in Q2 of this year.
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 second quarter net income was down $2 million or 1.7% versus Q2.2020 on a pre tax basis, we were up $26 million or 16, 5% over the prior year.
Our diluted EPS in Q2 was $3.06 versus $2 of 99 cents on the prior year.
Our diluted EPS as adjusted for the impact of the Recapitalization transaction was $3.12 funds, an increase of 13 cents or for 3% over the prior year.
Breaking down that 13 cent increase in our diluted EPS as adjusted most notably our improved operating results benefited us by 53 cents.
Net interest expense adjusted for the impact of the items affecting comparability I discussed previously negatively impacted us by 8 cents.
A lower diluted share count driven by share repurchases over the trailing 12 months benefited us by 12 cents.
And finally, our higher effective tax rate, resulting from the lower tax benefits on equity based compensation negatively impacted us by 44 cents.
Shifting to cash our strong financial model continued to generate significant cash flow throughout the second quarter.
During Q2, we generated net cash provided by operating activities of approximately $143 million.
After deducting for Capex, we generated free cash flow of approximately $126 million.
Regarding our capital expenditures, we spent approximately $17 million on Capex in Q2, primarily on our technology initiatives, including our next generation point of sale system.
As previously disclosed during Q2, we also entered into an accelerated share repurchase transaction for $1 billion.
We received and retired approximately 2 million shares at the beginning of the a S. R.
The ASR subtle the yesterday and we received the retired an additional 238000 shares in connection with this transaction.
In total the average repurchase price throughout the ASR program was $444.29 per share.
Additionally, and as noted on this morning's earnings release subsequent to the end of the quarter. Our board of directors authorized a new share repurchase program for up to $1 billion of our common stock.
We also paid a 94 cent quarterly dividend on June 30th.
Subsequent to the ended the quarter our board of directors declared a quarterly dividend of <unk> 94 cents per share to be paid on September 30th.
In closing our business continued its strong performance during the second quarter and we are very pleased with the results of our franchisees and team members around the world delivered. Thank you all for joining the call today and now I will turn it back over to rich.
Thanks Jessica.
I'll begin my comments with the look at our U S business.
For months now many of you have been asking how we would lap the tough comparisons from Q2 of last year. My answer has always been that we're not focused on managing to a 12 week quarter.
We are focused on building the business for the long term and at long term focus on great product service and image and technology is precisely why we were able to deliver a terrific quarter highlighted by 7.4% U S retail sales growth lapping 19.9 per.
For scent from Q2 'twenty 'twenty.
Turning to same store sales, perhaps of the thing I'm. Most pleased about when I look at the 3.5% U S comp is the fact that we were able to hold orders flat, while overlapping the big gains from Q2 'twenty 'twenty.
I'm also pleased that our ticket growth was driven by a very healthy balance of more items per order and modest menu price and delivery fee increases.
We achieved positive comps in both our delivery and carryout businesses with delivery driven by ticket and carry out driven by a balance of order count and ticket growth.
We continued to see strong growth across our business in the quarter, you've often asked if our sales growth might be weaker end markets that had more fully reopened but to the contrary the opposite trend emerged through the second quarter, where we saw higher levels of sales growth in the second quarter in the markets with.
Fewer COVID-19 related restrictions.
Similar to Q1, we saw the comp growth in rural areas outperformed urban areas and the less affluent areas outperformed more affluent areas. These differences combined with the impact of more aggressive fortress thing accounted for much of the same store sales gap between our corporate store and the.
Franchise store businesses.
We saw sales benefits during the quarter from the federal government stimulus, particularly the checks that were delivered back in March at.
It's difficult to quantify the magnitude of the impact of the onetime distributions and the ongoing unemployment and other government payments to consumers, but we believe that they do continue to have some positive sales impact on our business.
Due to the strong sales throughout the quarter, we once again elected not to run any of our aggressive boost week promotions, but instead remained focused on providing great service and offering great value to our customers every day.
As we continue to experience Covid overlaps we believe it will be instructive to continue to look at the cumulative stack of comparable U S same store sales.
Anchored back to 2019 as of pre Covid baseline.
At 19, 6% for Q2, we saw on material sequential improvement of the 2 year stack when compared to the first quarter.
Beyond the comps when you look at the absolute dollars are second quarter same store average weekly unit sales in the U S exceeded $27000 another sequential uptick from the levels seen in the first quarter.
Now turning to the other critical component of our retail sales growth New store openings. Our addition of 35 of that stores was softer than we expected.
We have a very strong pipeline of future openings, but at a number of stores delayed due to store level staffing challenges and construction permitting or equipment delays, we hope to accelerate the pace of openings during the second half of the year as some of the delays in unit growth may subside.
Alternative speak now about the Carryout and the delivery businesses.
We saw the return of Carryout order growth in Q2, and we continue to build awareness of Domino's car side delivery.
We ran a brief 49% of car side delivery awareness campaign during the quarter end just reach of just recently launched a campaign highlighting our car side delivery 2 minute guarantee.
This campaign hits on 2 key elements of the Domino's brand service and value of.
Our franchisees and operators have fully embraced car side of delivery and we are consistently averaging below 2 minutes out the door and on our way to the customers' cars.
This is of great technology enabled way to serve our customers 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 carry all customers, but also to reach of new different and largely untapped drive thru oriented customer going for.
Sure.
For the delivery business I was also very pleased to see positive delivery same store sales growth during Q2, while facing very difficult overlaps.
We brought back the annoyed to highlight of our partnership with neuro for autonomous delivery.
This campaign hits on our technology and innovation leadership, while having a little bit of fun with our old nemesis the noise.
We continue to learn as we pilot of true autonomous pizza delivery experience to select customers in the Houston market.
Now turning to staffing I'll reiterate something I said back in April we continue to operate in a very difficult staffing environment for our stores and our supply chain centers. The combination of Covid strong sales the accelerating economic growth across the country and the ongoing government stimulus.
The result in 1 of the most difficult staffing environments that we've seen in a long time.
And frankly, this led to higher margins in our corporate store business than we would like to see the reality is that we were operating during the quarter with fewer team members than we would like to have and many of our stores. This puts pressure on our operators to meet demand, while continuing to deliver great service.
In the back half of the year, we expect to implement additional wage increases across certain corporate store markets and positions.
In the face of these challenges I want to thank our U S franchisees and corporate store operators for their ongoing efforts to attract and retain great team members and a very tight labor market.
And as we look forward in the U S business, we will continue to make the necessary investments to drive retail sales growth into the future.
We recently announced our plans to build another supply chain center in Indiana, which we expect to complete by the end of 2022.
We are making solid progress on the rewrite of our pulse point of sales system, and we'll continue that multiyear investment along with additional investment in our enterprise systems to support the business.
We will continue to invest in technology operations and product innovation to support our carryout in our delivery businesses.
We are continuing to raise wages and invest in our hourly team members.
And of course as always we will remain focused on value for our customers.
So I'll close out our discussion of the U S business by simply saying that the Domino's brand has never been stronger and I remain confident in our ability to drive sustainable long term growth.
Now, let's move on the international it was an outstanding quarter of performance for our international business, our 29.5% international retail sales growth, excluding foreign currency impact was supported by an exceptional 13.9% comp.
The momentum we had in the first quarter.
As I discussed earlier with our U S business. We're also watching the 2 years 2 year comp stacks for international anchoring back to pre Covid 2019, and we'll continue to do so throughout 'twenty 'twenty 1.
Q2 represented a 15.2% 2 year stack of sequential improvement over the first quarter.
I'm, particularly pleased with our strong momentum on store growth is international provides a significant push toward our 2 to 3 year outlook of 6% to 8% Global net unit growth.
Our 203 net stores in Q2 increased our trailing 4 quarter pace of international store growth to 653 net stores.
Our accelerating store growth continues to be driven by our outstanding unit level economics at.
And the strong commitment of our international Master franchise partners.
During the quarter Covid continue to have a significant impact on many of our international markets and we expect Covid to remain a challenge in many parts of the world for some time to come.
At the end of the quarter, we had fewer than 175 temporary store closures with many of those located in India, which has been hit particularly hard by Covid.
And I want to take a minute here to think jubilant food works, our master franchisee in India for their outstanding commitment to their team members. During this very difficult time the.
The company founded a series of initiatives to support their employees and families through this unprecedented crisis.
This included a cross functional team that provided employee assistance 24, 7 as well as several COVID-19 isolation centers with oxygen concentrator banks.
Jabil at mounted a massive vaccination drive for all of their employees and dependent family members.
Challenging times always bring out the best in Domino's franchisees and I could not be more proud of our leaders in India and how they have responded to this crisis.
I'd also like to highlight a few international markets that drove terrific growth during the quarter.
China passed the 400 store milestone during Q2 and once again dash, our master franchise partner delivered outstanding retail sales growth for the brand China is without question 1 of the most exciting businesses in the Domino's system with significant long term runway for growth.
Japan reach the 800 store milestone in the weeks following the close of our second quarter and continue the outstanding performance under Master franchisee Domino's Pizza enterprises ownership.
The U K, Germany, Mexico, and Turkey were also large market highlights and a strong quarter of performance across our international business.
I am proud of our master franchisees and their operators for their great work, thus far in 2021, and I remain optimistic about our international retail sales growth opportunity over the long term.
So in closing I'm very happy with our Q2 results great franchisees and operators combined with outstanding unit level economics place us at an enviable position with an eye on our industry and gives us a strong foundation for future growth.
There is absolutely no question that Domino's is the global leader in <unk> Pizza, but there is still so much opportunity ahead of us to drive global retail sales growth and to grow market share around the world in both our delivery and Carryout businesses.
As we look to the back half of the year end beyond you can be confident that we will remain focused on winning the long game.
So thank you again for joining us today, and we will now be happy to take some of your questions.
Thank you.
A question you will need to press star 1 on your telephone.
Draw your question, Chris the balance sheet. Please.
The limit yourself to 1.1 part questions at least and while we compile the Q&A roster.
Our first question comes from Brian Bittner with Oppenheimer <unk> Company. You May proceed with your question.
Thanks, Good morning congratulations.
Rich you highlighted the importance of paying attention to the 2 year same store sales trend, but within the press release and on this earnings call on that trend, obviously accelerated meaningfully in the second quarter.
Taking this 2 year trend relevant in your mind for the rest of the year, including the fourth quarter, because sustaining it would imply a pretty big jump in the 1 year same store sales in the fourth quarter end I just think in general folks remain a big confused how the fixed.
The accelerated business performance at Domino's is generating is able to occur in this reopening environment Ya actually suggested that more reopened footprints are outperforming. So can you just put some insights into the core drivers of this dynamic that youre seeing within your business.
Sure Brian. Thanks. Thanks for the question Yeah, we do feel that it's instructive to take a look at the business.
Comparing back to that pre Covid anchor if you will of of 2019, because there's so many dynamics that have occurred over the last 18 months that for us as we look at the business internally and we think instructive.
For our investors as well really understanding what is that longer term trend and the growth in the business is important.
We're not we're not making any.
Statements or projections today about the third or fourth quarters of this year, just merely sharing with you how those trends are unfolding on a quarter to quarter basis, because there's still so many factors there that are driving.
The business, you're obviously those things that we have under our control, but there are also many factors externally outside of our control that are difficult to predict.
What happens with Ah.
As Covid continues to unfold with the Delta variant for example, what happens with respect to ongoing government stimulus and the intervention in the economy all of those things will continue to play a factor.
As a as we look at what happens with comps end and what that resulting 1 at 2 year comp a profile of it looks like over time you. You asked about you know the dynamics going on in markets that of reopening like many of you. We've obviously been.
Watching very studiously, you know what happens as some of these markets around the country reopen and I think it's important to remember that our business is a it's the delivery business, but it's also a very robust carryout business end so.
When the markets closed down and I've talked about this several times over the last year at had a negative impact on our Carryout business. So as we see markets reopen we get some positive tailwind on the Carryout business and then also.
Our for our delivery business. The fact that we've been able to stay very focused on value for our customers.
We saw a positive comp in the in the second quarter on the delivery business as well, even though markets had reopened so we will keep track of the 1 and 2 year basis looking at across both of those businesses and as the year unfolds you on a quarterly quarterly basis, we'll continue to share of those insights back with you.
Thank you.
Thank you for our next question comes from Peter Salad with <unk>. You May proceed with your question.
Great. Thanks.
Rich I wanted to ask about the competitive environment now that it seems like the economies.
Somewhat reopened or mostly reopened.
How do you feel the competitive environment is looking right now, especially with respect to independents do you feel like independents are stronger today or weaker.
Post Covid, just trying to get a sense on if you feel like you guys are taking share from independents or where those market share gains are coming from thanks.
Sure. Thanks, Thanks Peter.
Still yeah the.
As the market continues to unfold here, there's still a lot of moving parts and so we're always a little careful to make definitive statements about market share movements until we see a few quarters behind us, but at least some of the indications that we have.
Now or that you know the larger chains are are driving most of the growth in the pizza category right now with independents kind of more flat to down so.
Best we can tell you know growing market with share being gained by the larger chains and certainly has the largest chain. We are taking some of that share.
Thank you very much.
Thank you. Our next question comes from John Glass of Morgan Stanley. You May proceed with your question.
Thanks, very much Richard I wanted to go back to your comments about the labor and the wage environment.
1 of you talked about how much youre, taking some pricing yourself at company stores, maybe what what that is to help contextualize that end.
Our franchisees managing that you said that theyre, taking moderate amounts of pricing of theirs modern amount of pricing in your maybe at your company comps maybe assumed the that's the franchise as well does.
Does that open the conversation about what the price point should be at Domino's. Given this unique market environment should you know as youre sort of locked into these 590.979 price points is there more friction around that conversation given the cost of labor and if there is how do you. How do you answer that question for the franchisees might ask about pricing.
Sure. Thanks, John and this is certainly something that we think about you know all of the time.
To the first part of your question, Yes, most certainly.
When we look at the at the labor and the wage environment wages are only going in 1 direction over time and that is that is up you know some of that obviously is dictated by some of the minimum wage Ah.
Changes that are happening you know the another round of which occurred here in July but also the just the general supply and demand equation in the late in the labor market is is causing wages to go up and we're certainly.
We continue to invest more in our hourly team members in our corporate store business to make sure that we can remain staffed and serve our customers. When we think about how do we offset those wage increases and still deliver a terrific for wall economic model.
Pricing is certainly 1 of the levers that is out there and you know at.
At the local level, we do this on our corporate stores in our and our franchisees have.
They have the latitude to do this for their businesses we have taken.
Some increases in our single transparent delivery fee.
We charge wherever we are we charge of single fee at varies significantly market to market based on the local dynamics, but that's certainly a lever that we end our franchisees have pulled.
And then menu pricing on our franchisees have can have control of that end in the higher wage markets you will find higher menu prices are.
At the generally higher menu prices at Domino's.
As it relates to the National offers are 599 and 799 hero offers we continue to test those on a very frequent basis not just looking at which offers would drive the most topline, but the but more importantly, whats going to drive.
The the strongest 4 wall EBITDA.
For our stores and 599 and 799 have continued to emerge from the many many offers that we test on a frequent basis, but what I will tell you is you know.
If we find on offer or if the dynamics changed at that such that at different offer drives higher levels of profit for our franchisees, we would move to that offer you know for.
<unk> hundred 90, 90, 799 are not sacred the only thing that is sacred is that we're going to bring value to the consumer because that's what drives order counts and ultimately order counts over time are correlated with with sales and with profitability at the store level. So something we are always looking at that John and always talking to our franchisees.
About.
Thanks very much.
Thank you for our next question comes from Jared Garber with Goldman Sachs. You May proceed with your question.
Hi, Thanks for thanks for the question.
It's a little bit of a follow up on some of the previous questions as it relates maybe to the competitive landscape.
We've seen a little bit more menu innovation, maybe some from some of the larger.
Direct pizza, Alex our competitor has recently and maybe over the last 6 months or so and I think the consumer is seemingly willing to pay more for for some offer is now for some more maybe surprise and delight. So I wanted to get a sense of how youre thinking about menu innovation going forward.
So you like the the operations and the simplicity of everything makes sense from a franchisee economics perspective, but wanted to get a sense of of how youre thinking about innovation from here.
Sure.
I appreciate the question.
Our overall philosophy and approach really really hasn't changed around menu innovation. Yeah. We are we are constantly testing.
A robust pipeline of new products and platforms for the menu, but we hold.
At 2 a pretty high standard in terms of what ultimately gets on our menu because you were not not just looking to put things on the menu to do to drive sales for a limited amount of time. So that you don't see us use L. T OS in and you Shouldnt expect to see as use of those into the future. You know what we are looking for products that.
Can drive incremental <unk> in revenue and in profit. So we test products not only for where they would mix on the menu, but more importantly.
Once you take into effect the potential cannibalization from other menu items are we deliver in the incremental revenue and profit at the store level.
You asked a little bit about you know premium end customers willing to pay more.
When we introduced our 2 new specialty pizza is the chicken Taco in the end in the cheeseburger those were all about bringing some more premium products to that specialty line, which gives you know the franchisee an opportunity for some incremental revenue over and above.
Our our more traditional products that are offered on the $5.99.
Menu. So we will continue to look for opportunities there and when we introduce something like those 2 specialty pizzas at it's not just to drive sales of those 2 pieces, but we also see at that elevated sales of the specialty line in general which is a more premium.
So as we look forward you should expect to see us continue to roll out new products.
As has been the past you probably won't see us rolling them out or as fast or is it is significant quantity of some of the other players in the industry simply because we've just got a different strategy in terms of how we look at it end and I suspect it goes without saying that a big part of that strategy is also just managing the level of.
The change and complexity on our operators in our 6000 plus stores across the country.
Thanks, Rich I appreciate the color.
Thank you. Our next question comes from Andrew Strauss's with BMO. You May proceed with your question.
Hi, Thanks for taking the question of them.
Curious how your conversations more broadly are going on with franchisees at the moment I guess it wouldn't surprise me if kind of going into this period against the tough compares there was maybe a little bit of uncertainty.
On the U S franchisees, but now obviously that you're.
Demonstrating the performance against those comparisons I'm just curious how those conversations are unfolding.
Has it kind of unlocked anything with respect for the development pipeline or.
Anything else with those conversations.
Sure sure. Thanks for the question.
It's something that we're always actively engaged in discussions with our franchisees in those relationships and frankly, 1 of the best things about the second quarter from for myself personally is that I've been out on the road a lot out in stores and visiting with our franchisees as a as we've gotten ourselves vaccinated and.
And are able to get out there and interact a lot more in for.
Franchisees I.
I think certainly pleased with the topline growth that we've seen in the business end and the fact that we've seen the sustained levels of sales that we've had here in the here in the in the first and second quarters of the year you won't be surprised because franchise to hear that franchisees are is just as we.
We are concerned about staffing about.
About labor rates, and where those are going over time.
Thinking about commodity costs, and where those are going all the things that you would expect.
Restaurant, operator operators to be concerned about but when we take a look at the business in total the 4 wall economics of the business are still incredibly strong you know the.
Cost of entry of what it takes to get of Domino's Pizza opened.
Relative to other Q S are still very modest so the cash on cash returns in the business are still very strong and that's really what drives the appetite for development. So I still see a strong appetite for development and that's not just true in the U S business, but at its around the globe and really you know kind of tying back to some of the common.
I made earlier on this call the real gating factor right now in terms of getting stores open is not the desire to do so it is some of those other factors around staffing and just having teams ready to be in those stores day, 1 when they open given some of the labor constraints, but also we have.
Seen some continued delays in construction and permitting and then also just in some specific equipment categories that go into our stores you probably won't be surprised to hear that there are still some significant supply chain disruptions out there and some of those have hit some of the you know some of the equipment.
That we used to build out of Domino's Pizza store.
Great. Thank you very much.
Thank you for our next question comes from Chris I'll call with <unk>.
You May proceed with your question.
Thanks.
Rich just to follow up on the labor side is is the company able to monitor franchisee staffing levels and what's the company doing the kind of help franchisees with staffing so that it doesn't become a service issue.
Sure Chris We don't we don't monitor our franchisees staffing levels are really have any say or direction on what they do with their own people outside of the of the brand standards. So what we tried to do is is lead by example, with what we do inside of our corporate store.
Our businesses and so.
The 1 of the most important things about running corporate stores is that.
We are out there across the country feeling exactly what our franchisees are feeling.
And so when they're feeling pinched on staffing and wages and other things we feel it in our own business as well and it allows us to maintain the level of alignment that it's just impossible to have if you've sold all your corporate stores over time, Inc.
So we communicate what we're doing in the corporate store business and do our best of lead by example, with respect to the things that we're trying to do around AR higher.
Tiring and wages and other things that we've got going on out there in the marketplace, but ultimately theyre going to make their decisions about how they are how they choose to pay and staff their stores.
Thank you.
Thank you our next question comes from.
John <unk> with Jpmorgan. Please proceed with your question.
Hi, the first.
I guess the topic I'd like address not not really a question that secondly question first rich.
Rich could you address some of the the <unk>.
On your level of turnover that you've seen at has been fairly chunky I mean at kind of came at a wave of more or less and you know.
Maybe the some of the challenges but also opportunities.
He is at that May bring as you kind of think about the domino's over the next 5 to 10 years. So that's I guess at the first topic of it would be great to address and then secondly.
Your app.
You a lot of data that others would love to have at some of that data may show customers at abandon their orders once they see at delivery time that he has got to be quite long.
Talk about how much of an issue that's the calm on that.
There is a way.
For you to think it's like how much sales you could actually recapture or I guess in this case actually grow.
If you were to get service levels, you know materially down, which I would assume would come through increased delivery driver staffing.
Sure John and that's that's good creativity around the topic in a question since we said 1 question.
So bravo.
To address the address of the first topic.
We've had we've had some turnover among among the management team, but what I can tell you is you know.
That also creates opportunity for great leaders that we've had on the bench and who were ready to step up and take it.
And really take things to the next level. So you know as I look across our our team in and that's not just the direct reports to.
To myself, but also as I look broadly across our senior management team within the company, we've never been stronger than we are today.
You know we like.
I'm sure some others out there we've still got a few.
Positions that we still need to fill but when I look across I feel very good about the leadership team at Domino's Pizza and I don't think we could deliver the kind of results that we've been delivering if we didn't have the didn't have a great a great leadership team.
The second.
The question around taking a look at our service end and what we're seeing you know they're in the business.
With the with the challenges that we've had in staffing.
We haven't made the service gains and improvements you know that I would like to see.
Here in in 2021 and you know, we've we've slipped a minute or 2 in some places with respect to the average times in terms of getting food to our customers and that is a big area of focus for us as we look going forward.
We know because we got all of the data you know as you as you referenced we know that when our meeting delivery times get better and when our standard deviation around delivery times get tighter we get more sales delivery sales per household for those customers that are in our delivery areas. So there's clearly an opportunity to continue.
<unk> to grow delivery by driving those service times.
The down some of that will come from getting our staffing levels back to where we need them to be but also I can tell you. We are spending a lot of time looking at how we can get more efficient in our stores and frankly, how we can deliver those same deliver better delivery times.
With the same or in some cases, even fewer drivers you know some of that is.
Examining all of the wasted time that we have.
If we want to be as efficient as we can possibly be then of driver should never get out of his or her car.
And should spin all of their time getting pizzas to customer. So we're trying to take some of those other things.
Out some of those other task some of those things that drive inefficiencies. So that we can keep the drivers moving that's better for the customer in terms of delivery times, but it's also a lot better for the drivers. If we can get more deliveries per driver per hour of that means more tips for those drivers in and we know that when they earn higher wages the retention rates.
Get better for US also so we're working on all of those things John to you know to try to continue to drive improvements in service because we know what the value of that is over time.
Thank you so much.
Thank you. Our next question comes from David Tarantino with Baird. You May proceed with your question.
Hi, good morning.
Was wondering rich of you could comment on where the U S businesses in terms of Carryout sales relative to where you were pre pandemic and then in particular I guess the related question would be you know what.
Thank the car side the delivery.
Option is doing for you in terms of growing that business and the opportunity going forward.
Great David Thanks, and if you take a look at where Carryout is and you know the most important.
The metric that we look at around it as you know, what's where are we in terms of carryout orders per store and basic the basically when we take a look at the queue. At Q2, we were pretty well back to where we were in 2019 on Carryout orders you know slightly slightly.
Positive you know lot of a benefit in ticket growth that we've seen in carry out really driven by customers ordering more product per order, but we did see in the in the second quarter that we got back to the pre COVID-19 levels in terms of orders in terms of the mix of our business yet when you look at Carryout orders versus <unk>.
Delivery orders were still a little bit below where we were pre COVID-19 and that's really driven by the fact that our delivery order counts on a 2 year basis are significantly higher than the than they were back in 2019. So what I would say is that we are in kind of the first phase of that carry out.
The order count growth.
Resurgence that we've been thinking about it and an end and forecasting for a while internally.
The car side delivery for us is something that was on.
It was on our work plan, even the Coke before Covid hit because we were looking at car side delivery really as the way at Domino's to compete for that drive thru customer now when Covid hit we kind of reshuffled, our work plan and pulled all of that forward to get at rolled out more quickly because it all.
So provides a safe.
And contactless experience for the customer which became so important during COVID-19, but we look at car side is a fantastic way to compete against the drive through because while we've got pick up windows in a in a number of our stores out there. The reality is we're never going to get to a 100% pickup windows.
And Domino's Pizza.
Stores and so we've got to have a way to get the product out of the customer I have been incredibly pleased with our franchisees and how they have embraced this.
In particular, leading up to at now during our 2 minute guarantee that we're running on the on television we're averaging.
Well below 2 minutes across our system of getting those pizza is out the door.
I don't know I don't know David if you sat in the drive through line recently, but I've said at them at some <unk> for 5 minutes 10 minutes 15 minutes and if you can pull into our order ahead pull into our parking lot and we can get that pizza in your car and 2 minutes I think that's of great customer experience and then for us another.
They're fantastic benefit of car side is the fact that these orders are they're preorder digitally and their prepaid so preordering digitally allow.
Allows us to drive a higher ticket because we do a much better job of driving ticket for those digital orders because we've got all of the technology built in there based on the a b testing and everything else, we do to give the customer of great experience and make sure they get in their basket of the things that they would enjoy that even for dinner.
And then on the prepayment.
That's also great for us.
As well because it shortens the transaction time in the store and lets us get the customer out the door faster at using using less less labor.
And the digital obviously also gives us an opportunity then to invite those customers into our loyalty program. So.
Early stages of car side, but I'm really happy with the adoption across the system at and what this could mean for us as we continue to compete for more occasions with our consumers.
Great. Thank you very much.
Thank you. Our next question comes from Dennis Geiger with UBS. You May proceed with your question.
Great. Thanks, Rich wanted to ask you a little bit more about customer loyalty in the new customer acquisition that Youre seeing and how you were thinking about the the go forward from here, maybe if you could talk a little more about the opportunities that you have to continue to attract new customers and also keep those that you have gained over the last let's say 15 months or so.
So I'm sure, it's a bunch of things, but any thoughts around kind of what factors are most important for this if it's that service level opportunity that you mentioned, if it's new menu items value boost weeks, just curious how you what you're seeing and how you think about the opportunity. Thank you.
Sure. It is happy to happy to touch on that.
As you take a look really over the course of the last year or so you know the.
The bulk of the growth in our business really has come from existing customers and end that customer retention and purchase frequency and even more concentrated within our our loyalty customer base that 27 plus million are active.
Loyalty members that we have at Domino's, So I'm really pleased with what we've been able to do as the pandemic has unfolded and folded in terms of driving customer retention.
Staying relevant and keeping those.
Orders the order frequency up overtime, when I look forward I think.
We do have more opportunities to continue chip to prime the pump further around customer acquisition you know some of the most important tools that we've used historically to do that have been some of these periodic booster weeks that we've used and we havent run any of those for quite some time. So that's that's certainly an arrow in the quiver that we have a go.
Going forward.
Product introductions, certainly another opportunity to invite new customers in and we do have some robust.
<unk> in the pipeline. So you should expect to see some news.
From us from us on that in the quarters to come as another potential opportunity and then what I would tell you also.
It just kind of underlying all of this is not a specific action or a catalyst for driving customer acquisition, but I fundamentally believe that staying focused on value.
Is is perhaps our greatest customer acquisition vehicle over time, because you know.
As you see.
Prices.
Being raised significantly at a number of other restaurant chains around the country and as we start to see some of this government stimulus.
From a way as we go into the back half of this year I think it's going to be really important.
For the families that we serve to stay focused on value and I think that's a that's always a consistent message from us at an opportunity to continue to bring new customers in the fall.
Great. Thanks rich.
Thank you for our next question comes from Lauren Silberman with Credit Suisse. You May proceed with your question.
Thanks for the question so within the context of the current labor environment can you talk about some of the in store technology are back of House technology.
Testing of our recently launched to enhance the.
Our operating model and then related digital represents 75 per cent of sales now increase of about 5% ETR for the last several years.
Or are you thinking about how high that penetration could go could it be 90% to 95% just given some of the labor benefit.
Thanks, Lauren on your first on the on the on the Labor environment, We're absolutely.
The working on technologies and the operating procedures to help us run our stores more efficiently and with less labor you know 1 of those.
I spoke about earlier as it relates to our delivery drivers, which is that we're trying to take a lot of things off of their plates that caused them to do anything other than being in a car delivering of pizza.
We're on a bike delivering of pizza to our customer. So an example of that is that is.
That drove me crazy for years.
Was.
Pre folding boxes.
Of which was often a task the delivery drivers did we've made enormous strides within our system and now have.
More than 2000 of our stores in the U S that no longer pre fold boxes. So that's taken work out of the store.
And by the way. It also makes for a much cleaner and better looking store as well other things that we've been working on and we've rolled out our GPS.
Our software out to our stores and it's in the hands of our drivers.
On their smartphones.
That allows drivers to get for.
<unk> much.
Much more quickly than the old way at Domino's of driver might take 2 or 3 months to learn the delivery area, but with the GPS capability that we have we can do a better job of routing and getting getting drivers to there.
To the location of that Theyre headed to we're working on other things as well around how we schedule and staff the stores.
Using machine learning to really help us do a better job of predicting what our sales are going to be and therefore more appropriately matching the number of team members at the store at the times when we need them. So a lot going on there.
Around digital yes around 75% of sales of.
How high is high I don't know, but I know it is higher than 75% the.
The the benchmark that we use in the Domino's world to kind of inspire everybody else's is China, where more than.
More than 19 out of every 20 orders come in through digital channels. So.
That's really the inspiration for us so I guess until we get close to a 100 I'm not going to stop pushing.
Great. Thanks, so much.
Yes.
Thank you. Our next question comes from Chris <unk> with RBC capital markets. You May proceed with your question.
Great. Thank you so of returning to the commentary on rates.
At the latest thoughts on the third party.
And perhaps in light of the reopening and the gradual return of in restaurant dining for us.
The <unk> opportunities and it sounds like Hey, Chris.
On a static on your line.
This better.
Yeah, Yeah, that's better yes, we couldn't hear anything you were saying.
Oh, sorry about that so.
So I guess just returning to the theme of competition Rich just curious to get your latest thoughts on third party delivery competition.
And your latest thoughts on how the shifting dynamics around the reopening will drive the next phase of delivery competition, just more broadly that would be great. Thanks.
Sure.
The first on third party I mean, I don't think there's any question at this point yeah. The third party delivery is here to stay.
You know you can pretty well get.
Any type of food delivered anywhere in the in the country and frankly now broadly just about across anywhere in the world. Today. So we don't think that competition is going away and in fact in many ways. We look at that as our primary competitive set as the leader in the Pizza category. Obviously, we still continue to look at the pizza.
Asian, but but frankly, the biggest competition over the long term for us and delivery is that third party.
The aggregator channel so when I think about what we've got to do let's so let's assume regardless of where their economics sit today, we believe theyre going to be here for.
For the long haul so we have to continue to make sure that we are the best value both for the consumer and for the restaurant operator so.
We continue to believe that our our owned.
The fleet for for Us in our corporate stores and for our franchisees and their stores, having our own delivery drivers running point to point back and forth of the store. We continue to believe that's the most efficient operating model and gets even more efficient as we continue to fortress, our markets and so having that very efficient.
Model.
It is important in order in order to put us in a position to continue to offer a very competitive delivery fee and overall value proposition of the customer. We also believe that the fact that we use a single transparent delivery fee. We think over time as it is an important competitive advantage.
When I order of third party delivery I have to really get my calculator out to figure out what I've actually paid out of that food delivered because maybe I got a discount on the delivery fee, but maybe I'll pay the service fee, maybe I paid of small order fee, maybe I pay the fee because it happened to be at a city, where they were charged on an incremental city fee.
We very much believe around a single transparent delivery fee over time, we think will be important to customers in the back on the other side of the equation.
Day, staying as the best value for the restaurant operator.
We we charge for a digital order, we charge our franchisees just a little bit over 1 percentage of ticket at 27, and a half cent digital order fee.
It is.
So so much lower than what youre, what youre going to see in terms of what the third parties are charging restaurants out there. So we think that gives us the competitive advantage in terms of continuing to make sure that we've got great 4 wall economics for our operators because thats the only way we grow the business over time.
In the open more stores as if the 4 wall economics continue to be to be strong. So I think Chris we don't exactly know yet how all of this ultimately shakes out and what all of the dynamics that may shift over time, but we're really focused on maintaining a competitive position with both of those groups the customer.
Or is at the restaurant operators.
Great. Thank you appreciate all the detail.
Thank you on our last question comes from David Palmer with Evercore ISI. You May proceed with your question.
Thanks, I think this 1 touches on some of the things you've been talking about with regard to third party delivery, but you mentioned sales trends were best in the less affluent in the less dense population areas and I Wonder if you could give us your best thinking about why that might be.
And in your answer.
If you could really touch on the influence of third party deliveries competition.
I don't want to lead the witness too much but.
And I'm thinking that.
The restaurants and the third party players themselves may be passing along particularly rapid menu price inflation lately, which is perhaps less accepted in the less affluent areas and that third party may also be pulling back in service levels in these less profitable low density markets, but at.
Just guessing there and you might have better data on this thanks.
Sure sure David Thank you I think if we start at.
If we start with you.
The less affluent versus more of affluent.
I think certainly you know to the extent that these third party delivery fees get more complex and increase over time that less affluent customer is absolutely going to feel more of a pinch on and I think is.
Ed.
At the brand the size of.
Domino's, a big portion of the customers that we serve out there.
Or are these these these are not you know.
Super wealthy folks and values really really important to them and so I suspect at an end.
In many of these less of fluid areas, we stack up very favorably in terms of the all in value of having delivered food to serve to your family, whereas in some of the more affluent areas. There may be less price sensitivity to some of these more significant.
Significant delivery charges indoor if those consumers are ordering a higher overall ticket you know if they're ordering $75 worth of food from the casual dining restaurant than paying the fee is less less of pinch on a relative basis. So we're still looking at this and seeing how it evolves, but I suspect at you.
The hypothesis.
No.
Ours, there are a reasonably reasonably well aligned and then I think on the as it relates to the urban versus versus the rural.
I do believe there that in those more rural environments.
There's the where there is less density I think.
Sure the cost model around how we deliver probably shines even more on some of those places where we can keep drivers busy running point to point back and forth from from our.
From our from our stores.
So we're continuing to watch it and evolve at yeah. There may be some other dynamics there David that we look at such as some of the just the migration of people out of some of the urban areas during COVID-19 and not all of those folks have returned yet.
Yet.
To back to the Big cities are places, where they were they previously lift so still watching at trends are still evolving.
Well folks we really do appreciate your time and thank you all for joining us on the call. This morning, and we look forward to getting back together with you again in October to discuss our third quarter 2021 results.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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