Q4 2022 Domino's Pizza Inc Earnings Call

February 23, 2023

Yeah.

Thank you for standing by and welcome to Domino's Pizza's fourth quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

Phone to remove yourself from the queue simply press star one again.

Today's program is being recorded.

Now I'd like to introduce your host for today's program, Mr. Ryan <unk>, Vice President Finance and Investor Relations. Please go ahead Sir.

Thank you and good morning, everyone. Thank you for joining us today for our conversation regarding the results of the fourth quarter and full year 2020 to.

Today's call will feature commentary from Chief Executive Officer, Russell, Leaner, and Chief Financial Officer, Sandeep Reddy as.

As this call is primarily for our investor audience 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 earnings release, and 10-K also apply to our comments on the call today.

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 best this morning to accommodate as many of your questions as time permits.

As such we encourage you to ask only one one part question on this call.

Today's conference call is being webcast and is also being recorded for replay via our website with that I'd like to turn the call over to our Chief Executive Officer Russell Wiener.

Thank you Ryan and thanks to all of you for joining US. This morning, as we end 2022 and look back to the beginning of the pandemic I'm encouraged by the incredible work done by Domino's team members and franchisees.

Since the beginning of 2020, we and our franchisees have grown by 2000 and 860, new stores around the world. When many restaurant brands closed stores or struggled to grow through an extremely difficult time for store development.

Domino's is in over 90 markets and should hit 20000 stores as a system in 2023.

In the U S. The <unk> Pizza category grew over the last three years with sales up almost 10% versus pre pandemic level.

<unk> service that growth, resulting in a gain of approximately three share points in the <unk> pizza category since 2019, according to NPD.

We continue to grow our Carryout business Carryout now comprises approximately half of the orders and about 40% of sales in the U S.

Carryout remains highly incremental to delivery for us and in cases, where it's not incremental customers are moving to a service method with significantly lower costs for our system.

Our delivery business experienced both headwinds and tailwind over the past three years.

Our team focused efforts on finding solutions at every turn.

Now to the fourth quarter.

In the fourth quarter, our results were mixed particularly with the challenges in the U S delivery business that we previewed during our Q3 call.

During that call I pointed to a couple of dynamics, we were watching and the broader restaurant category that have since played out.

First as consumers return to many of their pre COVID-19 eating habits. Some of the Sitdown business that was a source of volume for restaurant delivery orders returned to that channel.

Second inflation impacted delivery due to the added expenses of fees and tips on that channel.

Our research shows that a relatively higher delivery costs during inflationary times lead some customers to prepare meals at home instead of getting them delivered.

We believe this dynamic will continue to pressure the delivery category in the short term as long as consumers disposable income remains pressured by macroeconomic factors.

Despite these pressures U S delivery sales for Domino's in 2022, where more than half of $1 billion higher.

Then the pre Covid baseline in 2019.

Domino's delivery business was not alone in facing these challenges.

According to NPD data the entire to USR delivery category was down high single digits for fiscal year 2022.

Not surprisingly according to NPD pizza delivery was down as well.

Given these industry wide headwinds, we are encouraged that while our delivery business was challenged in 2022 Domino saw a moderate increase in <unk> pizza delivery share.

On the topic of delivery, while theres more work to do on staffing that part of the business, we feel like answers to this challenge exists within the Domino's system.

Staffing has improved at all positions in our corporate restaurants, including drivers.

Continuing to leverage internal best practices around delivery service as well as innovations in this area like our new electric delivery fleet should help continue to improve as critical measure.

I am proud of the work that we and our franchisees have done to address labor constraints in the delivery business.

And now we have more to do.

Our consistent positive throughout 2022 has been the continued evolution of the Domino's business.

This helped offset some of the macro challenges on the delivery side.

In the U S. We are a more complete restaurant company than ever running two businesses out of our stores. We are number one in the U S and both the delivery and Carryout pizza segments of <unk>.

The Carryout business continues to be a strength with tremendous momentum.

<unk> U S. Carryout retail sales for full year, 2022, where more than $1 billion higher than pre COVID-19 levels.

More importantly, we still have a long runway for growth in this important segment of the business.

To give you a sense of the current scale of our U S. Carryout business. If it were a company of its own Domino's Carryout would be counted amongst the top 20 <unk> brands in America based on consumer spending obtained by NPD for the year ending December 2022.

To support the growth of the business, we opened a new supply chain center in Merrillville, Indiana in September .

As you know we have invested significantly in our supply chain opening four new centers since 2018.

During the fourth quarter I visited our new center in Indiana.

It has the latest in technology automation that new operational procedures Merrill.

Merrillville represents an incredible testing ground for the future of dominant supply chain and we look forward to bringing the best parts of what we learned in Indiana to other centers around the country over time.

2022 was a strong year for global store growth, we and our franchisees had nearly 1300 gross openings around the world in 2022.

For context, that's about $3 five new store openings per day on average while operating in a difficult environment for development.

This is a testament to the strength of the Domino's brand around the world.

Our team members and franchisees have continued to show the agility and perseverance required to operate and grow domino's footprint and a volatile macroeconomic environment.

Looking specifically at our international business. The 1135 gross openings outside of the U S, where the highest organic openings in our history.

Meaning they were achieved without any of our master franchisees conducting a large scale conversion of another pizza chain.

One of my personal highlights during the quarter was the opportunity to be in market with one of our largest master franchisees jubilant food works.

In December I met with their team in New Delhi, where they reiterated their goal to grow to over 3000 stores in India over the next five years, which would further cement domino's position as the leading <unk> brand in this critical global market.

Additionally, jubilant as inspiring our global system to raise the bar on service with their do 20 minute delivery zones.

I was able to see these inaction when I was touring stores.

Service has always been a key differentiator for the Domino's brand and jubilant is extending its delivery service advantage in India. However.

They're able to do this with incredible operations enhanced by a global fortresses strategy.

When we and our franchisees build more stores, we can get closer to customers and improve delivery and Carryout service.

Now for more detail on our Q4 results I would like to turn it over to our CFO Sandeep Reddy deep.

Deep.

Thank you Russell and good morning to everyone on the call.

I'll begin my remarks with updates on the actions I have previously outlined to improve our long term profitability.

First we are continuing to examine and evolve our pricing architecture.

During the fourth quarter average year over year price increase that was realized across our U S system or six 3%.

Our realized pricing for full year 2022 was.

Five 4%.

Second.

Efficiencies in our cost structure as we seek to ensure that revenues consistently grow faster than expenses.

We saw another sequential improvement in year over year operating income margin as a percentage of revenues as margins expanded 130 basis points in Q4 versus the 160 basis points contraction in Q3.

Even if you exclude the 150 basis points benefit to operating income margin from the $21 2 million Refranchising gain recognized in the quarter.

The contraction in euro, but your operating income margin as a percentage of revenues in the quarter sequentially improved by 140 basis points versus Q3.

Third we had positive same store sales growth, excluding foreign currency impact in both our U S and international businesses.

For the first time since Q4 2021.

Contributing to improving our operating income leverage.

Now our financial results for the quarter in more detail.

When excluding the negative impact of foreign currency.

<unk> retail sales grew five 2% due to positive sales comps and global store growth over the trailing four quarters lapping, 9% global retail sales growth, excluding FX and the 50 <unk> week impact in 2020 in Q4 2021.

As we have discussed in the past we believe it has been instructive to look at the cumulative stack of sales across the business anchored back to 2019 as a pre COVID-19 baseline.

With the evolving macroeconomic conditions.

We do not currently believe it will be relevant to anchor back to 2019 going forward and anticipate returning to evaluating the business on a one year comp basis in 2023.

Looking at the three year stack, our Q4 2022 global retail sales, excluding foreign currency impact grew over 26% versus Q4 2019.

Breaking down total global retail sales growth U S. Retail sales increased two 7% rolling over a prior increase of four 6% excluding the impact of the 50 <unk> week in 2020.

And are up more than 21% on a three year stack basis relative to Q4 2019.

International retail sales, excluding the negative impact of foreign currency grew seven 5% rolling.

We're rolling over a prior year increase of 13, 2%, excluding the impact of the 50 <unk> week in 2020.

And are up more than 30% on a three year stack basis relative to Q4 2019.

Turning to comps.

During Q4 same store sales for the U S business increased 0.9%.

Rolling over a prior year increase of 1% and we.

We're up 13, 1% on a three year stack basis relative to Q4 2019.

This represented a sequential deceleration of four 5% from Q3 on a three year stack basis, as we saw clear evidence of softening demand from delivery customers in particular.

Given the challenging macroeconomic environment during the holidays.

The estimated impact of focusing with 0.5 percentage points during the quarter across the U S system.

Going forward, we will only update the impact of focusing if the change in impact isn't material.

The increase in U S same store sales in Q4 was driven by an increase in ticket.

Which included a six 3% and pricing actions I mentioned earlier.

Partially offset by a decline in order counts.

As we have previously shared we.

We believe it is instructive to break U S stores into Quintiles based on staffing levels relative to a fully staffed store to give a sense for the magnitude of the impact of staffing.

Yeah.

Looking at Q4 same store sales store.

Stores in the top 20% those that are essentially close to fully staffed on average outperformed stores in the bottom 20%.

Those that are facing the most significant labor shortages by less than two percentage points.

This is down sequentially from the approximate six percentage point gap, we saw in Q3.

Now I'll share a few thoughts specifically about the U S carryout and delivery businesses.

The carrier business was strong in Q4 with U S. Carryout same store sales 14, 3% positive compared to Q4 2021.

On a three year basis Carryout same store sales were up 31% versus Q4 2019.

The GAAP prokaryote between the top and bottom Quintiles based on staffing levels remained small during the quarter.

The delivery business continued to be more pressured.

Q4 delivery same store sales declined by six 6% relative to Q4 2021.

Looking at the business on a three year stack.

Q4 delivery same store sales were 333% above Q4 2019 levels.

When we look at the same quintiles relative to the delivery business the gap between the top and bottom quintile stores closed considerably.

We saw only a two percentage point gap in delivery same store sales between stores and the top 20% and those in the bottom 20%.

This represents a sequential improvement from the eight percentage point gap in the third quarter.

The two percentage point gap is in line with the expected gap in performance in a normal operating environment and we believe is no longer a significant driver of sales performance.

We do not intend to continue disclosing their performance by staffing quintiles in the future.

Our U S. Carryout business is going from strength to strength in our pizza USR carrier market share is up close to 200 basis points in 2022.

And up close to 500 basis points since 2019.

Our market share in total pizza, <unk>, which includes delivery carryout and sit down.

To hold steady over the past year and is still up close to 300 basis points versus three years ago.

Before I conclude my comments on market share.

I'd like to touch on channel dynamics for Pizza USR versus non pizza USR based on data we received from NPD.

As Russell mentioned earlier.

Delivery in 2022 was done in both pizza ISR and non pizza ISR.

While sit down was up significantly in both.

In the case of Pizza <unk>.

This was driven more by a shift from delivery to sit down and cooking at home.

In the case of non Pizza USR.

Growth in sit down was potentially driven by a shift from delivery, but also from carryout.

Domino's business model in the U S has historically been focused mostly on the delivery and carryout channels.

So the shift to sit down hurts us relative to others and the non pizza <unk>.

Historically <unk> had business models that includes fit down and Carryout, but have now added delivery to their distribution channels.

We expect this dynamic to continue to play out in 2023 as symptom. Despite recent growth is still below 2019 levels.

Shifting to unit count, we and our franchisees added 43 net new stores in the U S. During Q4.

Consisting of 50 store openings and seven closures, bringing our U S system store count to 6686 stores at the end of the quarter, which brought our four quarter net store growth rate in the U S to one 9%.

This deceleration in growth was expected in light of the permitting and store construction supply chain challenges, we have faced all year.

While we expect the first half of the year for U S store openings to continue to be challenging due to a continuation of the same factors.

Based on our current pipeline, we expect a gradual recovery starting towards the second half of 2023.

Domino's unit economics remained strong relative to the many precious face throughout the year, including staffing challenges and high inflationary environment for food and labor.

The average Domino's store in the U S generated more than $1 3 million in sales during 2022.

We currently estimate that our 2022 average U S franchisee store EBITDA was close to $137000.

Yeah.

Not much below the 2019 estimated EBITDA of $143000.

In fact.

The estimated average store profitability was higher in Q4, 2022, then Q4 2019.

We will update the final number on our Q1 call.

With our continued strong four wall economics, we remain bullish on the long term unit growth potential in the U S and we maintain our conviction that the U S can be an 8000 plus store market for Domino's.

New store openings paybacks remained strong with stores opened in 2019, averaging around three year paybacks similar to the 2018 vintage.

Same store sales, excluding foreign currency impact for our international business increased two 6% rolling over a prior year increase of one 8% and were up nearly 12% on a three year stack basis relative to Q4 2019.

We continue to face the headwind of the negative year over year impact of the expiration of the 2021.

Relief in the UK, our largest international market by retail sales.

The fourth quarter impact was around half the magnitude of the second and third quarter as the UK Vap relief was reduced from 15% to seven 5% in 2021 on October <unk>.

The year over year impacts of exploration of the UK Vap relief will continue while we lapped the reduced rates that were in place through March 31 2022.

Our international business added 380, net new stores in Q4 comprised of 406 store openings and 88 closures.

Our closures were driven by another round of closures in Brazil.

Master franchisee there continues its work to optimize the store base in the market.

As well as some closures in Russia, where our master franchisee as previously announced by them.

News to explore opportunities to exit the business in that market.

This brought our current fourth full quarter net store growth rate in international to seven 4%.

Yes.

When combined with our U S store growth, our trailing full quarter global net store growth rate was five 5%.

The five 5% is impacted by a significant increase in international closures this year as compared to our historical run rate, including Brazil, Italy and Russia.

Turning to EPS.

Our diluted EPS in Q4 was $4.43 versus <unk> 25 in Q4 2021.

Breaking down the 18% increase in revenues and EPS.

Our operating results benefited us by 2017.

Changes in foreign currency exchange rates.

The impacted us by 'twenty two.

Our lower effective tax rate positively impacted us by <unk> <unk>.

Driven by the discrete impact from the reversal of a tax reserve based on a recent tax law change related to one of our foreign subsidiaries during 2022.

Lower net interest expense benefited us by <unk> <unk>.

The refranchising gain recognized from our fourth quarter store transaction benefited us by <unk> 46 cents.

The unrealized gain recognized on a remeasurement related to our investment in dash in 2021 negatively impacted us by <unk> 68.

And a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by 11.

Transitioning to the full year.

I would like to hit on a few financial highlights for 2022.

Global retail sales grew three 9% for the year exclude.

Excluding the impact of foreign currency.

Same store sales in the U S declined 0.8% and international excluding FX grew 0.1%.

We and our franchisees opened 1032 net new stores during the year, despite significantly higher closures this year.

International markets as previously discussed.

Our food basket for the year was up 13, 2%.

Collecting the strong impact of inflation.

Our G&A for the year was $417 million down two 8% versus $428 million in 2021.

Operating income was down $12 million versus 2021, including the $21 million impact the refranchising gain.

Operating income margin was positively impacted by 50 basis points due to the refranchising gain but this was fully offset by the negative impact from foreign currency.

If foreign currency remains at current levels or increases as a headwind going forward.

We expect that this will be a barrier to recovering to a pre pandemic operating income margins.

Although we face operating headwinds in 2022, we continue to generate sizable free cash flow.

During 2022, we generated net cash provided by operating activities of.

Approximately $475 million.

After deducting for capital expenditures of approximately $87 million, which.

Which consisted of investments in our technology initiatives and supply chain centers, we generated free cash flow of approximately $388 million.

Free cash flow decreased to $172 million from 2021, due primarily to changes in working capital, including accrued liabilities and income taxes.

When there's higher advertising fund spend and lower net income.

During the year, we returned over $450 million to shareholders through share repurchases of $294 million and dividends of $158 million.

As of the end of the year, we had approximately $410 million remaining under our current board authorization for share repurchases.

Our board has also approved a 10% increase from our prior quarterly dividend to $1 21.

That is payable on March 30 of this year.

Looking forward to 2023, we would like to provide our annual guidance measures for the year.

We currently project that the store food basket within our U S system will be up 3% to 5% as compared to 2022 levels.

We expect the first quarter food basket increase to be higher than the rest of the year.

We estimate that changes in foreign currency exchange rates could have a 2 million to $6 million negative impact on international royalty revenues in 2023 as compared to 2022.

Foreign exchange rates remain at current levels.

The negative impact of currency is expected to be higher in the first half of the year based on current rates.

We anticipate our capex investments will be between $90 million and $100 million as.

As we continue to strategically invest in our business and prioritize our spend.

We expect our G&A expense to be in the range of $425 million to $435 million.

Our tax rate, excluding the impact of equity based compensation is expected to range from 22% to 24%.

Finally, given the current macroeconomic headwinds that are impacting our U S delivery business in particular.

We are updating our two to three year outlook from 6% to 10% global retail sales growth to 4% to 8% global retail sales growth and.

And unit growth from 6% to 8% global net unit growth.

Two 5% to 7% global net unit growth.

We expect 2023 to come in towards the low end of the ranges for both metrics.

We look forward to providing more details at an investor day, we will hold before the end of calendar 2023.

Thank you all for joining the call today and now I will turn it back to Russell.

Thank you Sandeep. The Domino's system has a lot to be proud of and we also have opportunities to address with.

We pride ourselves on being a work in progress brand and there is no better way to describe this period in our history.

As we saw in the last recession delivery moves with the economy, especially for customers with lower disposable income.

Present, a significant portion of our business.

As it was in Q4 of 2022, we expect the economy to be a headwind for our delivery business in 2023.

While we expect to continue to grow <unk> pizza delivery share. We also expect delivery sales will be challenged.

Every day delivery customers will be deciding where to spend their hard earned dollars.

So we need to maintain value and continue to improve our service.

On the subject of value moving to $5 99 mix and match offer we launched in December of 2009 to $6 99, and 2022 was the right decision for our brands.

That said, we and our franchisees must be vigilant to make sure a value exists across our entire menu not just in promotional offers.

We also need to drive more innovation.

When I look back at my 14 years at Domino's, we were at our best when we brought big ideas to market.

These ideas helped us tell great brand stories come.

Coming out of Covid, we became more transactional with our customers than I would've liked.

This was understandable as our team needed to pivot and react to some of the labor constraints, we discussed earlier in the year.

I am encouraged at the way we ended 2002 and have begun 2023.

We and our franchisees reinforced our position as the delivery leader by introducing a fleet of 800 electric delivery vehicles.

Dominos now has the biggest electric fleet of pizza delivery vehicles in the country.

And Carryout, we brought back our innovative carryout tips promotion, which continues to drive value and news in that segment.

We have launched loaded path in early 2023.

Adding a potato side to our menu has been a goal for many years.

But it was difficult to find a product that delivered well and didn't end up in customers' homes cold and soggy.

Loaded tops delivers literally and figuratively and continues our innovation strategy of adding platforms that are incremental to our menu.

In 2023, we will also refresh and improve our piece of the pie loyalty program.

We finished last year with approximately 30 million active members in the program and over 77 million total members in our loyalty database.

We launched piece of the pie in the fall of 2015.

There is an opportunity to innovate and grow this program further by unlocking value to an even wider base of customers.

Domino's has been called many things over the years, a pizza company in delivery company, a marketing company and technology company all of those are true, but when we're at our best We're also an innovation company Prada.

Product service and technology innovation with a very specific purpose.

Our customers in store team members, the best possible pizza experience.

One of a kind brand stories and to over deliver on expectations.

This is what you have come to expect and should continue to expect from.

Domino's Pizza.

With that we'll open the call to questions.

Certainly as a reminder, ladies and gentlemen, if you have a question at this time simply press Star one one on your telephone one moment for our first question.

And our first question comes from the line of Brian Bittner from Oppenheimer. Your question. Please.

Thank you good morning.

My question is on unit growth just first on the two to three year algorithm change moving to five to seven from six to eight can you just help us understand the drivers that forced this change is that primarily because of the decelerating U S outlook or is there other factors that maybe you'd like to take this moment.

To unpack for us in.

Second to that Sandeep, you said in 2023.

That growth should be at the low end of this new range kind of near the 5% area can you just paint the scenario for us where you accelerate.

From the bottom of this range is there a catalyst that you see emerging following 2023 that we should be thinking about that makes the midpoint of this range more of a base case for unit growth moving forward. Thanks.

Good morning, Brian . Thank you for the question and so let me let me start first with the rationale for the unit growth update.

From 6% to 8% to 5% to 7% as we said in the prepared remarks, as well I think would be the U S delivery business and the constraints that we see in front of us on the U S delivery business are a big driver of the decision to actually slow down.

Sure.

The expectations from a unit growth standpoint, and as you also noted from my prepared remarks, the headwinds that we saw throughout 2022 are expected to continue into the first half of 2023 and that is going to put pressure on the unit growth that we expect to see as we go forward in 2020.

Three and I think in terms of what.

What the catalyst would be.

Answer is a little bit in terms of what I talked about on the U S growth itself indicators. So the first half of the year is going to continue to be pressured for the same reasons that it was pressured in 2022, but as we move into the second half of the year. The pipeline that we have for 2023, it looks really encouraging and I think this was on the back of it.

Economics have continued to be very compelling we are delivering $137000 in EBITDA with all the pressures that we face from an inflationary standpoint on our food costs labor and just general cost in the P&L and that's literally within $6000 of 2019 levels.

Most encouragingly the exit rate from Q4 had the EBITDA levels every estimating above 2019 levels.

This is really a manifestation of the price increases that we took on the national alcohol mix and match in the fourth quarter in particular for.

For Carryout beginning to flow through the.

Flow through benefits for the franchisee PNM are very compelling and we feel that if this continues.

This cadence as we move forward.

In 2003, and notwithstanding 3% to 5% food basket increase have been looking at franchisees are in a very good place to continue improving their profitability and that's why we feel so confident with the pipeline that we're seeing in 2023 economic package paybacks continue to be very strong at roughly three years.

Thank you. Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Peter Saleh from <unk>. Your question. Please.

Great. Thanks, Russell you alluded to some changes to the rewards program in 2023.

I was hoping you could add a little bit more color to that that feels like it could be.

Meaningful driver is as it has been a driver for you guys for several years in the past so just any update on that would be beneficial. Thanks.

Sir good morning, and thanks, Thanks Peter.

As I said during my remarks, where we've been pleased with this program.

We launched it in 2017, we've got over 30 million active members 77 million total members and really at this point as we think about the evolution of the rewards program.

It is about taking the best and keeping the best of what we have and then continuing to dial up and where the opportunities are and so and.

And we're not going to talk to the specifics of it now, but I think when you when you see US launch. It later on this year Youll see those who are joining the program continue to.

Are going to continue to enjoy the positives of it.

And.

Probably some of our less frequent customers are going to be incentive to do more and I should I should tell you I'm sorry, I misspoke there the launch of a loyalty program with 2015 2017.

Okay. Thanks, and then just one follow up for Sandeep.

Is it is it possible to get restaurant level margins.

For the franchisees back to 2020, 'twenty one levels with this mix of Carryout delivery or do you really need delivery to two research here to get back to those types of margins. Thanks.

Thanks, Thanks, Peter for that question.

In terms of where we were in terms of restaurant level margins on franchisee side.

What you did see from a cadence standpoint was.

<unk>.

The profitability it really went up pretty significantly between 2019 and 2021 from $1 43 to 174 I believe in 2021.

I think the cost increases that have actually come through have been rather significant and I think until that kind of bids in and the price increases that we've taken basically start normalizing its going to take them. Some time over time of course, I think we will get back with those are those levels of profitability in absolute dollars, but I think in the short term.

We're looking at small steps and I talked about Q4, specifically because we're now inflicting we're now reflecting the trend and I think with the adjustments that we've made on the pricing architecture.

We're in a good place with the franchisees and we hope that as we move into 'twenty. Three this continues to accelerate in and helps them actually see even better profitability in 'twenty three.

Thank you one moment for our next question.

And our next question.

Comes from the line.

One woman from Sara Senatore from Bank of America. Your question. Please.

Yes.

Can you hear me okay. Thank you I wanted to ask about sort of comment on the comp and the macro environment, Yes, we're really not seeing.

Softness or evidence of price.

<unk>.

Sensitivity across the rest of the industry and I understand delivery might be different but I guess.

<unk> is twofold. One is is there any reason to think that maybe your pricing could be higher you seem to be lagging the industry by <unk> four points and that's roughly where your comp gap is I would say so yes.

We think about pricing is there room to maybe take more on the menu and perhaps less on delivery fees and then separately.

Kris.

Mike Rehaut.

Attractiveness of partnering with Aggregators not delivered as a service, but as a marketing platform virtually everybody who has done that has suggested that the income cohort is higher on aggregator platform.

And that is incremental to the.

Can you elaborate maybe ordering through the proprietary ordering so I'm just trying to piece together everything thats happening in the context of pizza in a very good value in absolute.

But the lag versus the ethanol industry and maybe some drivers yes.

Yes. Thanks, Sarah is a great question I think what I'll do is take a little step back and just give perspective on our business.

As you said, it's a unique one.

60% of our sales are delivery.

When we talked in our comments about the <unk> delivery category.

Down the pizza delivery category was down Domino has actually gained share. So it's not the prettiest way to gain share but in a in a macroeconomic time, where the entire delivery <unk> category is pressured.

We grew share in the pizza category, that's 60% of our business and when that 60% of your business Youre going to see the numbers fall out the way. They did now what I like to think about when I when I talk about that.

Yes.

And feature a domino's is how much more diverse we are than we were years ago. So I think about our carryout business, that's not encumbered by any of those headwinds was up 14% to 15% in Q4 over 30% over the last three years $1 billion over the last three years.

It's really a business that's on fire and then internationally.

We opened more organic stores than we ever have in our history.

And so I think you just need to have that perspective of looking at our entire business, how we're performing in delivery how that.

<unk> is actually making us better so when we come out of this we're going to be a better delivery company, but how the more complete domino's is in a better place as we head through these.

These tougher times.

So if I were to take that as a backdrop as tiers tier second question an aggregator for delivery again like I said, we're continuing to grow share.

Of delivery Pizza here, we do work with Aggregators globally, we've got $1 billion in sales outside of the U S where we're learning.

Every day and while we do that we're doing things like continuing to improve our ordering experience and improving the loyalty program as I spoke about and make sure our delivery ordering experiences better than everybody else's.

Thank you one moment for our next question.

And our next question comes from the line of Jeffrey Farmer from Gordon Haskett. Your question. Please.

Morning.

You guys stated that you are proud of the work that you've done with franchisees to address labor constraints and delivery business can.

Can you just elaborate on what you've done there to sort of shore up some of the driver need.

And do you believe that staffing shortfalls are no longer having a material impact.

<unk> on your relative same store sales performance.

Yes. Thanks for the question look we're satisfied with the improvement we're never going to be satisfied until every delivery is there as as as expeditiously as we can get it.

So we're satisfied but what I'd say is we have more work to do.

So our service times are better they are not better than they were in 2019, and that's a place we need to go.

When you look at our corporate stores is trying to think about that as a.

A proxy for what's going on in the rest of the business corporate stores are hires are at pre pandemic levels now turnovers down job applications are are are up and we're getting people through the system faster on applications.

We talked about call centers, we didn't really mentioned on this on this call, but about half our stores are on call centers right now.

Not every single call goes through the call centers, but they are there to help.

And that makes the job easier for our team members, we have a lot of operation simplification processes that we've put into place that we're really excited to sharing with you guys. When you come in for Investor Day.

And then something that I would point to.

That we just launched was this EV fleet. So we have an EV fleet of 800 vehicles.

But that actually is part of a larger.

Strategic shift youre, starting to see with our franchisees and corporate stores and purchasing.

Vehicles, and what that enables us to do is attract folks who've got driver's licenses, but maybe don't have access to vehicles. So when you. When you put all that stuff together youre seeing a more efficient inflow of people more efficient operations new pools of driver that's why you're seeing the sequential improvement in <unk>.

The first and fifth Quintile and Thats why we got another boost we coming up.

Back to the regular cadence is as we said we would do in Q3.

Thank you one moment for our next question.

And our next question comes from the line of Brian Martin from Deutsche Bank. Your question. Please.

Okay. Thank you just a question on the Carryout business in the U S. In the quarter same store sales were up 31% versus 19, very very strong on an absolute basis.

That trend versus 19.

It decelerated, a little bit 200 basis points versus the 35% you saw the third quarter.

Wondering if you could speak to what dynamics, you think were at play in the quarter and Carryout and what might have been behind that deceleration if anything worth noting.

Brian Good morning, I think look on the carrier business.

When we look at it when you look at three year stacks of 31% on a business that has actually grown over a $1 billion over the last three years, you get to a point.

The sequential change is sometimes going to be off a little bit, but I don't think it really reflects on the underlying business. The underlying business is extremely strong we're really pleased about what we're seeing in the carrier business. Both as we look back on 2022 and as we look forward into 2023.

So super happy with what we've seen.

Thank you one moment for our next question.

And our next question comes in the line of Dennis Geiger from UBS. Your question. Please.

Great. Thank you I wanted to ask another one on the U S delivery challenges and how you address those the biggest issues. There roughly you just mentioned a focus on making the order order experience better than everyone else's and I think at the end of your prepared remarks, you gave a bunch of points of focus for sales going forward, but can you talk just a bit more about the biggest opportunity.

To address the delivery pressures right now.

Just how difficult it is to overcome this kind of macro pressure and but again ultimately how you can do that with within your Brent. Thank you.

Yeah sure look I think part of the answer to your question within your question. The delivery pressures are a macro economic thing and so like I said, well, it's not a pretty way to grow share. When you are growing share in a category that has got headwinds that means you're kind of outperforming the <unk>.

The category now that's not what we like to see an overall numbers, but youre really talking about macro pressures and so when I look at is all the things that we're doing now to get better in delivery with hiring folks with having a tighter circle of operations with innovating with technology all of these things so that what it is.

Now a share increase in a category that's got headwinds when those headwinds will subside and look I joined during the time during the last recession.

We boomed out of that recession.

Because I think as we said last time, we knew this.

Delivery because of delivery fee and because of tips.

They're going to have an echo.

Extra headwinds during these economic times, so I like to look at how are we performing during these times are we getting better during these times. So when that pressure has gone you should see us accelerate.

Thank you one moment for our next question.

And our next question comes from the line of Andrew <unk> from BMO. Your question. Please.

Hey, good morning, Thanks for taking the question Manav is actually a follow up to your prior answer I guess.

Yes.

My question is about balancing kind of maybe being more aggressive in kind of creating a bridge through the macro challenges instead of maybe what sounds like a more incremental approach is kind of how im understanding what youre talking about the kind of incremental steps in and then a real acceleration as the macro improves so how do you think about potential opportunities.

To be more aggressive to smooth out that cadence rather than kind of a dip in the <unk>.

Thanks.

Yes, Andrew Great question, and that's kind of what I was talking to really at the end look during COVID-19.

We're clear during the pandemic that we had capacity issues.

And so the type of delivery innovation, there youre seeing more on things like.

Car side delivery or.

Contactless delivery and so I'm not going to talk to innovations moving moving forward, but that's that's that's an important piece for us if we want to break out of the category then we need to break out of the category from an innovation standpoint and.

We will talk product later I could talk all.

All day, but there are innovations that are going to help us in addition to EV fleet.

On the technology side that that that should help us break away from.

From the crowd.

Thank you one moment for our next question.

And our next question comes from the line of Gregory Frankfurt from Guggenheim. Your question. Please.

Yes. Thanks for the question Russell, you talked a little bit about broadening value from the national coupon offers maybe the rest of the menu can you expand on what that looks like and maybe what customer feedback youre getting that's driving you to or a franchisee to reassess that.

Yes sure. Thanks.

I wanted to reiterate our.

Positive look to the change we made in our mixed and matched moving to $6 99, both delivery and Carryout that was absolutely the right thing.

As you know, our franchisees and local stores control their own menu pricing and delivery fees and things like that.

And all the models in the world all the experience in the world with the headwinds and <unk>.

And changes.

Food cost and labor and things like that.

Folks pretty quick and I think if we were to look at some of our stores and things that are not on promotion, so menus and maybe some case delivery fee.

Price may have got a little bit of a head we need to be we need to be of value not just in our national offer sometimes people want medium two top pizza is a lot of times, they want medium to pop pizza, but sometimes they want other things too and it's just making sure that we have the right value across the other pieces.

Our menu will be working with our franchisees on that.

Thank you one moment for our next question.

And our next question comes from the line of Lauren Silberman from Credit Suisse. Your question. Please.

Thank you for the question I appreciate all the commentary on franchise EBITDA payback can you just level set we're developing costs are running today I think there.

<unk> 350000, or so in 2019, just trying to figure out where that stands now and then Sandeep I think you might've said franchise, the EBITDA could actually corral in 'twenty three versus 22 did I understand that correctly.

Yeah. Thanks, Lauren for the question I'll start with the last part of them will go back to the first part.

So I think.

In terms of franchise EBITDA, we expect we expect 'twenty three to be improved versus 'twenty versus 2022 for sure given the pricing changes that we made towards the back half of the year and the lowering pressure pressure from food basket and costs.

We anticipate in 'twenty three.

But I think in terms of the development cost. The answer is it kind of varies it depends on where exactly where we're building stores and there's a big range in terms of development costs around the country.

So as we're coming out of this constrained environment, where we had permitting and store construction issues.

We are basically seeing that there is some cost pressure for sure, but I think getting into specifics on what that number is probably not right until we see this play out over the course of 'twenty three and I think at the right time, we will be in a position to give you a better update in terms of where things are at but essentially from a payback standpoint.

The three year range of payback is to very much what franchisees are looking at and that's why we're making the investments we're making.

Thank you one moment for our next question.

And our next question comes from the line of John <unk> from Jpmorgan. Your question. Please.

Hi, Thank you a two parter if I may at first.

<unk> unit development one 9%.

I know you've talked about splits of around 50 basis points, so that would.

Suggests something like 25% on average have a splits store comps from existing stores and I Wonder as you kind of think about the footprint going forward to 8000 stores, if there'd be a way to reduce the sales impact from those splits because obviously to the most nearby stores it would be much greater than 25%. So.

That's fair.

First part of the question and then secondly.

I think it's been sometime since we talked about.

The test there's some initiatives that you are specifically doing in the Houston market. If I remember correctly is there anything to share that youre seeing there that I guess in theory, we could see publicly and we can see publicly if we went and found that selection of stores.

Maybe has some application to the domino's system from a efficiency or effectiveness in store delivery whatever we can maybe get a little preview of some of those initiatives on this call. Thank you so much.

So I'll start off on the on the impact on unit growth and a split split.

The impact of fortress, saying basically that you're referring to John .

As you restart a dirty updating again during the course of 'twenty two and if you saw we went from I think 7% fortresses impact under <unk>.

Second quarter, two 5% now so the impact on from fortress thing is becoming less and less in terms of.

What what affects it Scott on the same store sales, we don't see it being a very very significant impact.

As we move forward.

As we said again, we're going to update if it's too early deviates from that there is there is plenty of growth still that we actually have seen a runway we have.

We have the opportunity mapped out by our internal teams and we know that we can definitely go off of that in the pipeline that we have from franchisees is on the back of knowing what that opportunity looks like the economics are basically coming out of it and so I think we feel pretty good that way.

The right balance on that yes.

And I would just add John we're transforming this company right now.

The.

Obviously, the delivery business is a hot topic today, but carryout pizza Carryout <unk> is significantly bigger than delivery <unk> and so will we see it every time, we open up a new store not only do our delivery times get tighter.

And Hot Pizza is actually hot food in general by the way, which is why we are launching our tops because people want hot potatoes pun intended.

The.

Delivery times get tighter, but also the carryout volume is very incremental consumers don't want our customers I want to walk that far drive that far to get there.

Their pizza so part of the transformation of this brand.

A more complete company is absolutely.

<unk> to drive the store growth.

As far as some things that we were doing in Houston, I think rather than me trying to describe things over overall call I would really invite you to come to.

Our.

Meeting later this year, where we're going to show that stuff alive, It's a super hard to describe but I would say at the end of the day.

These are processes that enable us to get a hot pizza pizza the customer to customers.

Obviously in a safe, but faster way, but also improve the experience in the store for our team members and the resulting quality of that product. So hopefully thats enough to whet your whistle to come to Ann Arbor.

Thank you one moment for our final question.

And our final question for today comes from the line of David Tarantino from Robert W. Baird. Your question. Please.

Hi, good morning.

Questions on.

The margin outlook and Sandeep I was wondering if you could help to frame up how you think the EBIT margin will progress if you hit the low end of your targeted range in 2023.

Yes, so great question, David So look I mean as far as we're concerned the guiding principles that we've actually outlined.

Revenue should be growing faster than expenses. So when you look at our guidance range on global retail sales and you look at our guidance range on G&A you can see that.

Essentially even at the low end, our G&A is basically below that in terms of growth at the midpoint.

And so I think straight away, but that gets you into a place where you can be margin accretive.

So that's point number one point number two is.

We actually experienced a lot of headwinds this austere from foreign exchange and I think that that should be had a 50 basis point negative impact on our operating margin in <unk> and 'twenty. Two unfortunately, given where we are we still see a little bit more headwind, but not in the same period, given where current rates are.

So that would be an offset to some of the operating improvement.

Patrick from a mixed standpoint with the corporate store sales that eventually happen, we'll now get three three more full quarters from that that helps our margins.

So I think overall when we look at the margins by expectation for margins is that margins will improve but I think when we talked about pre pandemic margins of 2019 margins.

The currency headwinds that we experienced in 'twenty two that's probably further away in 'twenty three but it's not something that we're saying is unattainable. It's more of a question of time and some of the other factors that hit the P&L.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Russell Weiner for any further remarks.

Well, thank you and thank you everybody for joining the call. This morning, Sandeep and I look forward to speaking with you in April to discuss our first quarter results until then we'll talk soon.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Lower Johan during Q&A, you can dial one one.

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Q simply press Star one again as a reminder, today's program is being recorded and now I'd like to introduce your host for today's program, Mr. Ryan <unk>, Vice President Finance and Investor Relations. Please go ahead Sir.

Thank you and good morning, everyone. Thank you for joining us today for our conversation regarding the results of the fourth quarter and full year 2022.

Today's call will feature commentary from Chief Executive Officer, Russell, Leaner, and Chief Financial Officer, Sandeep Reddy as.

As this call is primarily for our investor audience 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 earnings release, and 10-K also apply to our comments on the call today.

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 best this morning to accommodate as many of your questions as time permits.

As such we encourage you to ask only one one part question on this call.

Today's conference call is being webcast and is also being recorded for replay via our website with that I'd like to turn the call over to our Chief Executive Officer Russell Wiener.

Thank you Ryan and thanks to all of you for joining US. This morning, as we end 2022, when look back to the beginning of the pandemic I am encouraged by the incredible work done by Domino's team members and franchisees.

Since the beginning of 2020, we and our franchisees have grown by 2860, new stores around the world. When many restaurant brands closed stores were struggled to grow through an extremely difficult time for store development.

Domino's is in over 90 markets and should hit 20000 stores as a system in 2023.

In the U S. The <unk> Pizza category grew over the last three years with sales up almost 10% versus pre pandemic levels.

<unk> service that growth, resulting in a gain of approximately three share points in the <unk> pizza category since 2019, according to NPD.

We continue to grow our Carryout business Carryout now comprises approximately half of the orders and about 40% of sales in the U S.

Carryout remains highly incremental to delivery for us any cases, where it's not incremental customers are moving to a service method with significantly lower costs for our system.

Our delivery business experienced both headwind and tailwind over the past three years.

Our team focused efforts on finding solutions that return.

Now to the fourth quarter.

In the fourth quarter, our results were mixed particularly with the challenges in the U S delivery business that we previewed during our Q3 call.

During that call I pointed to a couple of dynamics, we were watching and the broader restaurant category that have since played out.

First as consumers return to many of their pre COVID-19 eating habits. Some of them sit down business that was a source of volume for restaurant delivery orders returned to that channel.

Second inflation impacted delivery due to the added expenses of fees and tips on that channel.

Our research shows that a relatively higher delivery costs during inflationary times lead some customers to prepare meals at home instead of getting them delivered.

We believe this dynamic will continue to pressure the delivery category in the short term as long as consumers disposable income remains pressured by macroeconomic factors.

Despite these pressures U S delivery sales for Domino's in 2022, where more than half of $1 billion higher.

Then the pre Covid baseline in 2019.

Domino's delivery business was not alone in facing these challenges.

According to NPD data the entire to USR delivery category was down high single digits for fiscal year 2022.

Not surprisingly according to NPD pizza delivery was down as well.

Given these industry wide headwinds, we are encouraged that while our delivery business was challenged in 2022 Domino's saw a moderate increase in <unk> pizza delivery share.

On the topic of delivery, while theres more work to do on staffing that part of the business, we feel like answers to this challenge exists within the Domino's system.

Staffing has improved at all positions in our corporate restaurants, including drivers.

Continuing to leverage internal best practices around delivery service as well as innovations in this area like our new electric delivery fleet should help continue to improve as critical measure.

I am proud of the work that we and our franchisees have done to address labor constraints in the delivery business.

And now we have more to do.

Our consistent positive throughout 2022 has been the continued evolution of the Domino's business.

This helped to offset some of the macro challenges on the delivery side.

In the U S. We are a more complete restaurant company than ever running two businesses out of our stores. We are number one in the U S. In both the delivery and Carryout pizza segments of <unk>.

The Carryout business continues to be a strength with tremendous momentum.

<unk> U S. Carryout retail sales for full year, 2022, where more than $1 billion higher than pre COVID-19 levels.

More importantly, we still have a long runway for growth in this important segment of the business.

To support the growth of the business, we opened a new supply chain center in <unk>, Indiana in September .

As you know we have invested significantly in our supply chain opening four new centers since 2018.

During the fourth quarter I visited our new center in Indiana.

It has the latest in technology automation that new operational procedures Merrill.

Merrillville represented incredible testing ground for the future of Domino supply chain, and we look forward to bringing the best parts of what we learned in Indiana to other centers around the country over time.

2022 was a strong year for global store growth, we and our franchisees had nearly 1300 gross openings around the world in 2022.

For context, that's about $3 five new store openings per day on average while operating in a difficult environment for development.

This is a testament to the strength of the Domino's brand around the world.

Our team members and franchisees have continued to show the agility and perseverance required to operate and grow domino's footprint and a volatile macroeconomic environment.

Looking specifically at our international business. The 1135 gross openings outside of the U S, where the highest organic openings in our history.

Meaning they were achieved without any of our master franchisees conducting a large scale conversion of another pizza chain.

One of my personal highlights during the quarter was the opportunity to be in market with one of our largest master franchisees jubilant food works.

Additionally, jubilant as inspiring our global system to raise the bar on service with their new 20 minute deliveries, though.

I was able to see these inaction when I was touring stores.

Service has always been a key differentiator for the Domino's brand and jubilant is extending its delivery service advantage in India. How are you.

Able to do this with incredible operations enhanced by a global fortresses strategy.

When we and our franchisees build more stores, we can get closer to customers and improve delivery and Carryout service.

Now for more detail on our Q4 results I'd like to turn it over to our CFO Sandeep Reddy Sandeep.

Thank you Russell and good morning to everyone on the call.

I'll begin my remarks with updates on the actions I have previously outlined to improve our long term profitability.

First we are continuing to examine and evolve our pricing architecture.

During the fourth quarter, the average year over year price increase that was realized across our U S system or six 3%.

Our realized pricing for full year 2022 was five 4%.

Second.

Efficiencies in our cost structure as we seek to ensure that revenues consistently grow faster than expenses.

We saw another sequential improvement in year over year operating income margin as a percentage of revenues as margins expanded 130 basis points in Q4 versus the 160 basis points contraction in Q3.

Even if you exclude the 150 basis points benefit to operating income margin from the $21 2 million Refranchising gain recognized in the quarter.

The contraction in euro, but your operating income margin as a percentage of revenues in the quarter sequentially improved by 140 basis points versus Q3.

Third we had positive same store sales growth, excluding foreign currency impact in both our U S and international businesses.

For the first time since Q4 2021.

Contributing to improving our operating income leverage.

Now our financial results for the quarter in more detail.

When excluding the negative impact of foreign currency.

Mobile retail sales grew five 2% due to positive sales comps and global store growth over the trailing four quarters lapping, 9% global retail sales growth, excluding FX and the 50 <unk> week impact in 2020 in Q4 2021.

As we have discussed in the past we believe it has been instructive to look at the cumulative stack of sales across the business anchored back to 2019 as a pre COVID-19 baseline.

With the evolving macroeconomic conditions.

We do not currently believe it will be relevant to anchor back to 2019 going forward and anticipate returning to evaluating the business on a one year comp basis in 2023.

Looking at the three year stack, our Q4 2022 global retail sales, excluding foreign currency impact grew over 26% versus Q4 2019.

Breaking down total global retail sales growth U S. Retail sales increased two 7% rolling over a prior increase of four 6% excluding the impact of the 50 <unk> week in 2020.

And are up more than 21% on a three year stack basis relative to Q4 2019.

International retail sales, excluding the negative impact of foreign currency grew seven 5%.

Rolling over a prior year increase of 13, 2%, excluding the impact of the 50 <unk> week in 2020.

And are up more than 30% on a three year stack basis relative to Q4 2019.

Turning to comps.

During Q4 same store sales for the U S business increased 0.9% Roe.

Rolling over a prior year increase of 1%.

And were up 13, 1% on a three year stack basis relative to Q4 2019.

This represented a sequential deceleration of four 5% from Q3 on a three year stack basis, as we saw clear evidence of softening demand from delivery customers in particular given.

Given the challenging macroeconomic environment during the holidays.

The estimated impact of focusing with 0.5 percentage points during the quarter across the U S system.

Going forward, we will only update the impact of fortresses if the change in impact isn't material.

The increase in U S same store sales in Q4 was driven by an increase in ticket, which included a six 3% and pricing actions I mentioned earlier.

Partially offset by a decline in order counts.

As we have previously shared we believe it is instructive to break U S stores into Quintiles based on staffing levels relative to a fully staffed store to give a sense for the magnitude of the impact of staffing.

Yeah.

Looking at Q4 same store sales.

Stores in the top 20% those that essentially close to fully staffed on.

On average outperformed stores in the bottom 20%.

Those that are facing the most significant labor shortages by less than two percentage points.

This is down sequentially from the approximate six percentage point gap, we saw in Q3.

Now I'll share a few thoughts specifically about the U S carryout and delivery businesses.

The carrier business was strong in Q4.

With U S. Carryout same store sales 14, 3% positive compared to Q4 2021.

On a three year basis Carryout same store sales were up 31% versus Q4 2019.

The GAAP prokaryote between the top and bottom Quintiles based on staffing levels remained small during the quarter.

The delivery business continued to be more present.

Q4 delivery same store sales declined by six 6% relative to Q4 2021.

Looking at the business on a three year stack.

Q4 delivery same store sales were 333% above Q4 2019 levels.

When we look at the same quintiles relative to the delivery business the gap between the top and bottom quintile stores closed considerably.

We saw only a two percentage point gap in delivery same store sales between stores and the top 20% and those in the bottom 20%.

This represents a sequential improvement from the eight percentage point gap in the third quarter.

The two percentage point gap is in line with the expected gap in performance in a normal operating environment and we believe it is no longer a significant driver of sales performance.

We do not intend to continue disclosing their performance by staffing quintiles in the future.

Our U S. Carryout business is going from strength to strength in our pizza USR carrier market share is up close to 200 basis points in 2022.

And up close to 500 basis points since 2019.

Our market share in total pizza, <unk>, which includes delivery carryout and sit down.

To hold steady over the past year, and it's still up close to 300 basis points versus three years ago.

Before I conclude my comments on market share.

I'd like to touch on channel dynamics for Pizza USR versus non pizza USR based on data we received from NPD.

As Russell mentioned earlier.

Delivery in 2022 was done in both pizza USR and non pizza <unk>.

While <unk> was up significantly in both.

In the case of Pizza <unk>. This was driven more by a shift from delivery to sit down and cooking at home.

In the case of non Pizza ISR.

Growth in sit down was potentially driven by a shift from delivery, but also from carryout.

Domino's business model in the U S has historically been focused mostly on the delivery and carryout channels.

The shift to sit down hurts us relative to others and the non pizza USR.

Historically <unk> had business models that includes fit down and Carryout, but have now added delivery to their distribution channels.

We expect this dynamic to continue to play out in 2023 symptom. Despite recent growth is still below 2019 levels.

Shifting to unit count, we and our franchisees added 43 net new stores in the U S. During Q4.

This deceleration in growth was expected in light of the permitting and store construction supply chain challenges, we have faced all year.

While we expect the first half of the year for U S store openings to continue to be challenging due to a continuation of the same factors.

Based on our current pipeline, we expect a gradual recovery starting towards the second half of 2023.

Domino's unit economics remained strong relative to the many precious face throughout the year, including staffing challenges and high inflationary environment for food and labor.

The average Domino's store in the U S generated more than $1 $3 million in sales during 2022.

We currently estimate that our 2022 average U S franchisee store EBITDA was close to $137000.

Yeah.

Not much below the 2019 estimated EBITDA of $143000.

In fact.

The estimated average store profitability was higher in Q4, 2022, then Q4 2019.

We will update the final number on our Q1 call.

New store openings paybacks remained strong with stores opened in 2019, averaging around three year paybacks similar to the 2018 vintage.

We continue to face the headwind of the negative year over year impact of the expiration of the 2021.

Relief in the UK, our largest international market by retail sites.

The fourth quarter impact was around half the magnitude of the second and third quarter as the UK Vap relief was reduced from 15% to seven 5% in 2021 on October <unk>.

The year over year impacts of exploration of the UK Vap relief will continue while we lapped the reduced rates that were in place through March 31 2022.

Our international business added 380, net new stores in Q4 comprised of 406 store openings and 88 closures.

Our closures were driven by another round of closures in Brazil.

Master franchisee there continues its work to optimize the store base in the market.

As well as some closures in Russia, where our master franchisee as previously announced by them.

<unk> to explore opportunities to exit the business in that market.

This brought our current fourth full quarter net store growth rate in international to seven 4%.

Okay.

When combined with our U S store growth, our trailing full quarter global net store growth rate was five 5%.

The five 5% is impacted by a significant increase in international closures this year as compared to our historical run rate.

Putting in Brazil, Italy, and Russia.

Turning to EPS.

EPS in Q4 was $4.43 versus <unk> 25 in Q4 2021.

Breaking down the 18% increase in our diluted EPS.

Our operating results benefited us by 27.

Changes in foreign currency exchange rates.

The impacted us by 'twenty two.

A lower effective tax rate positively impacted us by <unk> <unk>.

Driven by the discrete impact from the reversal of a tax reserve based on a recent tax law change related to one of our foreign subsidiaries during 2022.

Lower net interest expense benefited us by <unk>.

The refranchising gain recognized from our fourth quarter store transaction benefited us by 46 cents.

The unrealized gain recognized on a remeasurement related to our investment in dash in 2021 negatively impacted us by <unk> 68.

And a lower diluted share count driven by share repurchases over the trailing 12 months.

<unk> us by 11.

Okay.

Transitioning to the full year.

I would like to hit on a few financial highlights for 2022.

Global retail sales grew three 9% for the year exclude.

Excluding the impact of foreign currency.

Same store sales in the U S declined <unk>, 8% and international excluding FX grew 0.1%.

We and our franchisees opened 1032 net new stores during the year, despite significantly higher closures this year.

International markets as previously discussed.

Our food basket for the year was up 13, 2%.

Affecting the strong impact of inflation.

Our G&A for the year was $417 million down two 8% versus $428 million in 2021.

Operating income was down $12 million versus 2021, including the $21 million impact the refranchising gain.

Operating income margin was positively impacted by 50 basis points due to the refranchising gain but this was fully offset by the negative impact from foreign currency.

If foreign currency remains at current levels are increasing as a headwind going forward.

We expect that this will be a barrier to recovering to a pre pandemic operating income margins.

Although we face operating headwinds in 2022, we continue to generate sizable free cash flow.

During 2022, we generated net cash provided by operating activities of.

Approximately $475 million.

After deducting for capital expenditures of approximately $87 million.

Which consisted of investments in our technology initiatives and supply chain centers, we generated free cash flow of approximately $388 million.

Free cash flow decreased $172 million from 2021, due primarily to changes in working capital, including accrued liabilities and income taxes.

As well as higher advertising fund spend and lower net income.

During the year, we returned over $450 million to shareholders through share repurchases of $294 million and dividends of $158 million.

As of the end of the year, we had approximately $410 million remaining under our current board authorization for share repurchases.

Our board has also approved a 10% increase from our prior quarterly dividend to $1 21.

That is payable on March 30 of this year.

Looking forward to 2023, we would like to provide our annual guidance measures for the year.

We currently project that the store food basket within our U S system will be up 3% to 5% as compared to 2022 levels.

We expect the first quarter food basket increase to be higher than the rest of the year.

We estimate that changes in foreign currency exchange rates could have a 2 million to $6 million negative impact on international royalty revenues in 2023 as compared to 2022.

Foreign exchange rates remain at current levels.

The negative impact of currency is expected to be higher in the first half of the year based on current rates.

We anticipate our capex investments will be between $90 million and $100 million.

As we continue to strategically invest in our business and prioritize our spend.

We expect our G&A expense to be in the range of $425 million to $475 million.

Our tax rate, excluding the impact of equity based compensation is expected to range from 22% to 24%.

Finally, given the current macroeconomic headwinds that are impacting our U S delivery business in particular.

We are updating our two to three year outlook from 6% to 10% global retail sales growth to 4% to 8% global retail sales growth.

Unit growth from 6% to 8% global net unit growth.

Two 5% to 7% global net unit growth.

We expect 2023 to come in towards the low end of the ranges for both metrics.

We look forward to providing more details at an investor day, we will hold before the end of calendar 2023.

Thank you all for joining the call today and now I will turn it back to Russell.

Thank you Sandeep. The Domino's system has a lot to be proud of and we also have opportunities to address.

We pride ourselves on being a work in progress brand and there is no better way to describe this period in our history.

As we saw in the last recession delivery moves with the economy, especially for customers with lower disposable income.

Represent a significant portion of our business.

As it was in Q4 of 2022, we expect the economy to be a headwind for our delivery business in 2023.

While we expect to continue to grow <unk> pizza delivery share. We also expect the delivery sales will be challenged.

Every day delivery customers will be deciding where to spend their hard earned dollars.

So we need to maintain value and continue to improve our service.

On the subject of value moving the $5 99 mix and match offer we launched in December of 2009 to $6 99, and 2022 was the right decision for our brand.

That said, we and our franchisees must be vigilant to make sure a value exists across our entire menu not just in promotional offers.

We also need to drive more innovation.

When I look back at my 14 years at Domino's, we were at our best when we brought big ideas to market.

These ideas helped us tell great brand stories.

<unk> out of Covid, we became more transactional with our customers and I would have liked.

This was understandable as our team needed to pivot and react to some of the labor constraints, we discussed earlier in the year.

I am encouraged at the way we ended 22 and have begun 2023.

We and our franchisees reinforced our position as the delivery leader by introducing a fleet of 800 electric delivery vehicles.

<unk> now has the biggest electric fleet of pizza delivery vehicles in the country.

And Carryout, we brought back our innovative carryout tips promotion, which continues to drive value and news in that segment.

We've launched loaded path in early 2023.

Adding a potato side to our menu has been a goal for many years, but it was difficult to find the product that delivered well and didn't end up in customers' homes cold and soggy.

Loaded tops delivers literally and figuratively and continues our innovation strategy of adding platforms that are incremental to our menu.

In 2023, we will also refresh and improve our piece of the pie loyalty program.

We finished last year with approximately 30 million active members in the program and over 77 million total members in our loyalty database.

We launched piece of the pie in the fall of 2015.

There is an opportunity to innovate and grow this program further by unlocking value to an even wider base of customers.

Domino's has been called many things over the years, a pizza company delivery company, a marketing company and technology company all of those are true.

But when we're at our best we're also an innovation company.

Product service and technology innovation with a very specific purpose.

To give our customers and store team members the best possible pizza experience to tell one of a kind brand stories and to over deliver on expectations.

This is what you have come to expect and should continue to expect from.

From Domino's Pizza.

With that we'll open the call to questions.

Certainly as a reminder, ladies and gentlemen, if you have a question at this time simply press Star one one on your telephone one moment for our first question.

And our first question comes from the line of Brian Bittner from Oppenheimer. Your question. Please.

Thank you good morning.

My question is on unit growth just first on the two to three year algorithm change moving to five to seven from six to eight can you just help us understand the drivers that forced us to change is that primarily because of the decelerating U S outlook or is there other factors that maybe you'd like to take this moment.

To unpack for us in second.

Second to that Sandeep, you said in 2023.

Unit growth should be at the low end of this new range kind of near the 5% area can you just paint a scenario for us where you accelerate.

The bottom of this range is there a catalyst that you see emerging following 2023 that we should be thinking about that makes the midpoint of this range more of a base case for unit growth moving forward. Thanks.

Good morning, Brian . Thank you for the question and so let me let me start first with the rationale for the unit growth update.

From 6% to 8% to 5% to 7% as we said in the prepared remarks as well I think it would be the U S delivery business and the constraints that we see in front of us on the U S delivery business are a big driver of the decision to actually slow down.

In 2023, and I think in terms of.

What the catalyst would be.

The answer is a little bit in terms of what I talked about on the U S growth itself indicators. So the first half of the year is going to continue to be pressured for the same reasons that it was pressured in 2022, but as we move into the second half of the year. The pipeline that we have for 2023, it looks really encouraging and I think this was on the back of.

Economics have continued to be very compelling.

We're delivering $137000 in EBITDA with all the pressures that we face from an inflationary standpoint.

Our food cost labor and just general cost in the P&L and that's literally within $6000 of 2019 levels.

Most encouragingly the exit rate from Q4.

The EBITDA levels every estimating above 2019 levels.

<unk> is really a manifestation of the price increases that we took on the national alcohol mix and match in the fourth quarter in particular.

For Carryout beginning to flow through the.

Flow through benefits for the franchisee PNM are very compelling and we feel that if this continues.

This cadence as we move forward.

In 2003, and notwithstanding the 3% to 5% food basket increase have been looking at franchisees are in a very good place to continue improving their profitability and that's why we feel so confident with the pipeline that we're seeing in 2023 economic package paybacks continue to be very strong at roughly three years.

Thank you. Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Peter Saleh from <unk>. Your question. Please.

Great. Thanks, Russell you alluded to some changes to the rewards program in 2023.

I was hoping you could add a little bit more color to that feels like it could be.

Meaningful driver is as it has been a driver for you guys for several years in the past so just any update on that would be beneficial. Thanks.

Sure good morning, and thanks, Thanks Peter.

As I said during my remarks, we've been pleased with this program.

We launched it in 2017, we've got over 30 million active members 77 million total members and really at this point as we think about the evolution of the rewards program.

It is about taking the best and keeping the best of what we have and then continuing to dial up and where the opportunities are and so and we're not going to talk to the specifics of it now, but I think when you when you see US launch. It later on this year Youll see those who are joining the program.

<unk> two.

Are going to continue to enjoy the positives of it and <unk>.

Probably some of our.

Less frequent customers are going to be incentive to do more and I should I should tell you I am sorry, I misspoke there the launch of the loyalty program with 2015 2017.

Alright, Thanks, and then just one follow up for Sandeep is it is it possible to get restaurant level margins.

For the franchisees back to 2000 2021 levels with this mix of Carryout delivery or do you really need delivery to two research here to get back to those types of margins.

Thanks, Thanks, Peter for that question.

In terms of where we were in terms of restaurant level margins on franchisee side.

You did see from a cadence standpoint was.

Sure.

The profitability it really went up pretty significantly between 2019 in 2021 from $1 43 to 174 I believe in 2021.

I think the cost increases that have actually come through have been really significant and I think until that kind of bids in and the price increases that we've taken basically start normalizing its going to take them. Some time over time of course I think.

We get back to those are those levels of profitability in absolute dollars, but I think in the short term, we're looking at small steps and I talked about Q4, specifically because we're now inflicting we're now reflecting the trend and I think with the adjustments that we've made on the pricing architecture.

We're in a good place with the franchisees and we hope that as we move into 'twenty. Three this continues to accelerate in and helps them actually see even better profitability in 'twenty three.

Thank you one moment for our next question.

And our next question.

Comes from the line.

One woman from Sara Senatore from Bank of America. Your question. Please.

Yes.

Can you hear me. Thank you I wanted to ask about sort of comment on the comp and the macro environment, Yes, we're really not seeing much softness or evidence that price.

Sensitivity across the rest of management I understand delivery might be different but I guess the question is twofold. One is is there any reason to think that maybe your pricing.

Could be higher you seem to be lagging the industry by three to four points and that's roughly where your comp gap is I would say so.

Think about pricing is there room to maybe take more on the menu and perhaps less on delivery fees and then separately does this.

Kris.

Likelihood or the.

The attractiveness of partnering with Aggregators not delivered as a service, but is that marketing platform virtually everybody who has done that has suggested that the income at cohort is higher on aggregator platforms.

And that is incremental to the premium.

Can you remember maybe ordering through the proprietary ordering so I'm just trying to piece together everything thats happening in the context of pizza being a very good value in absolute.

But the lag versus the overall industry and maybe some drivers. Thanks.

Yes. Thanks, Sarah is a great question I think what I'll do is take a little step back and just give perspective on our business.

As you said, it's a unique one.

60% of our sales are delivery when we talked in our comments about the <unk> delivery category.

That's present.

Rather than future of Domino's is how much more diverse we are than we were years ago. So I think about our carryout business, that's not encumbered by any of those headwinds was up 14% to 15% in Q4 over 30% over the last three years $1 billion over the last three years.

That's really a business that's on fire and then internationally.

We opened more organic stores than we ever have in our history.

And so I think you just need to have that perspective of looking at our entire business. How we're performing in delivery how that performance is actually making us better. So when we come out of it is we're going to be a better delivery company, but how the more complete domino's is in a better place as we head through these.

These tougher times.

So if I were to take that as a backdrop as tears to your second question on.

Aggregator for delivery again, like I said, we're continuing to grow share.

Delivery Pizza here, we do work with Aggregators globally, we've got $1 billion in sales.

Outside of the U S, where we're learning.

Every day.

And while we do that we're doing things like continuing to improve our ordering experience and improving the loyalty program as I spoke about to make sure our delivery ordering experience is better than everybody else's.

Thank you one moment for our next question.

And our next question comes from the line of Jeffrey Farmer from Gordon Haskett. Your question. Please.

Morning.

You guys stated that you are proud of the work that you've done with franchisees to address labor constraints and delivery business can.

Can you just elaborate on what you've done there to sort of shore up some of the driver need.

And do you believe that staffing shortfalls are no longer having.

Cereal impact on your relative same store sales performance.

Yes. Thanks for the question look we're satisfied with the improvement we're never going to be satisfied until every delivery is there as as expeditiously as we can get it.

So we're satisfied but what I'd say is we have more work to do.

So our service times are better they are not better than they were in 2019, and that's a place we need to go.

When you look at our corporate stores is trying to think about that as a.

We talked about call centers, but didn't really mentioned on this on this call, but about half our stores are on call centers right now.

Not every single call goes through the call centers, but they are there to help.

And then something that I would point to.

That we just launched was this EV fleet. So we have an EV fleet of 800 vehicles.

But that actually is part of a larger.

The strategic shift youre, starting to see with our franchisees and corporate stores and purchasing.

The first and fifth Quintile and Thats why we got another boost week coming up.

Back to the regular cadence is as we said we would do in Q3.

Thank you one moment for our next question.

And our next question comes from the line of Brian <unk> from Deutsche Bank. Your question. Please.

Okay. Thank you and just a question on the Carryout business in the U S. In the quarter same store sales were up 31% versus 19, very very strong on an absolute basis.

That trend versus 19.

It decelerated, a little bit 200 basis points versus the 35% you saw the third quarter.

Wonder if you could speak to what dynamics, you think were at play in the quarter and Carryout and what might have been behind that deceleration if anything worth noting.

Brian Good morning, I think look on the carrier business.

When we look at it when you look at three year stacks of 31% on a business that has actually grown over $1 billion over the last three years, you get to a point.

So super happy with what we've seen.

Thank you one moment for our next question.

And our next question comes from the line of Dennis Geiger from UBS. Your question. Please.

To address the delivery pressures right now.

Just how difficult it is to overcome this kind of macro pressure and but again ultimately how how you can do that with within your Brent. Thank you.

Yeah sure look I think part of the answer to your question within your question.

Delivery pressures are a macro economic thing and so like I said, well, that's not a pretty way to grow share. When you are growing share in a category that has got headwinds that means you're kind of outperforming.

The rest of the category now that's not what we like to see in our overall numbers, but youre really talking about macro pressures and so when I look at is all the things that we're doing now to get better in delivery with hiring folks with having a tighter circle of operations with innovating with technology all of these things so that.

What is now a share increase in a category that got headwinds when those headwinds will subside and look I joined during the time during the last recession.

We boomed out of that recession.

Because I think as we said last time, we knew this.

Delivery because of delivery fee and because of tips.

Is there going to have.

Thank you one moment for our next question.

And our next question comes from the line of Andrew <unk> from BMO. Your question. Please.

Hey, good morning, Thanks for taking the question Manav is actually a follow up to your prior answer I guess.

Yes.

My question is about balancing kind of maybe being more aggressive in kind of creating a bridge through the macro challenges instead, maybe what sounds like a more incremental approach is kind of how im understanding what youre talking about the kind of incremental steps in and then a real acceleration as the macro improves so how do you think about potential opportunities.

To be more aggressive to smooth out that cadence rather than kind of a dividend.

Thanks.

Yes, Andrew Great question, and that's kind of what I was talking to really at the end look during COVID-19.

We're clear during the pandemic that we had capacity issues and.

So the type of delivery innovation, there youre seeing more on things like.

Car side delivery or.

<unk>.

Contactless delivery and so I am not going to talk to innovations moving moving forward, but.

That's an important piece for us if we want to break out of the category then we need to break out of the category from an innovation standpoint and Thats.

We will talk product later I could talk all.

All day, but there are innovations that are going to help us in addition to EV fleet.

On the technology side that that that that should help us break away from that.

From the crowd.

Thank you one moment for our next question.

And our next question comes from the line of Gregory Frankfurt from Guggenheim. Your question. Please.

Thanks for the question Russell, you talked a little bit about broadening value from the national coupon offers maybe the rest of the menu can you expand on what that looks like and maybe what customer feedback youre getting.

Driving you to or a franchisee to reassert that thanks.

Yes sure. Thanks.

I wanted to reiterate our.

Positive and look to the change we made in our mixed and matched moving to $6 99 dose delivery and Carryout. It was absolutely the right thing.

As you know, our franchisees and local stores control their own menu pricing and delivery fees and things like that.

And all the models in the world all the experience in the world with the headwinds and <unk>.

And changes in.

Food cost and labor and things like that.

Folks pretty quick and I think if we were to look at some of our stores things that are not on promotion, so menus and maybe some case delivery fee.

Price may have got a little bit of a head we need to be we need to be a value not just in our national offer sometimes people want medium two top pizza is a lot of times they want medium two top pizza, but sometimes they want other things too and it's just making sure that we have the right value across the other pieces.

Our menu will be working with our franchisees on that.

Thank you one moment for our next question.

And our next question comes from the line of Lauren Silberman from Credit Suisse. Your question. Please.

Thank you for the question I appreciate all the commentary on franchise EBITDA and payback can you just levels that we're developing costs are running today I think they were.

<unk> 350000.

<unk> thousand 19, just trying to figure out where that stands now and then Sandeep I think you might've said franchise. The EBITDA could actually grow in 2013 versus 22 did I understand that correctly.

Yeah. Thanks, Lauren for the question and then I'll start with the last part of that will go back with the first part.

So I think.

We anticipate in 'twenty three.

But I think in terms of the development cost. The answer is it kind of varies it depends on where exactly where we are building stores and there's a big range in terms of development costs around the country.

So as we are coming out of this constrained environment, where we had plummeting and store construction issues.

Three a range of payback is to very much what franchisees are looking at and Thats why they are making the investments we're making.

Thank you one moment for our next question.

And our next question comes from the line of John <unk> from Jpmorgan. Your question. Please.

Hi, Thank you a two parter if I may firstly.

U S unit development one 9%.

Talked about splits of around 50 basis points, so that would.

Suggests something like 25% on average how that splits store comps from existing stores and I Wonder as you kind of think about the footprint going forward to 8000 stores, if there'd be a way to reduce the sales impact from those splits because obviously to the most nearby stores it would be much greater than 25%. So.

That's fair.

First part of the question and then secondly.

I think it's been sometime since we've talked about the test. There's some initiatives that you are specifically doing in the Houston market. If I remember correctly is there anything to share that youre seeing there that I guess in theory, we could see publicly and we can see publicly if we went and found that selection of stores.

That maybe has some application to the domino's system from efficiency or effectiveness in store delivery or whatever.

We can maybe get a little preview of some of those initiatives on this call. Thank you so much.

So I'll start off on the on the <unk>.

<unk> you.

Unit growth I must flipped.

But the impact on <unk>, basically if you're referring to John .

We started already updating again during the course of 'twenty two and if you saw we went from I think <unk>, 7% fortresses impact in the second quarter two 5%. So the impact on from fortress thing is becoming less and less in terms of.

What what effects it Scott on the same store sales.

We don't see it being a very very significant impact.

As we move forward.

But as we said again, we're going to update if it deviates from that.

There's plenty of growth still that we actually see in our runway we have.

We have the opportunity mapped out by our internal teams.

And we know that we can definitely go out for that in the pipeline that we have from franchisees is on the back of knowing what that opportunity looks like the economics are basically coming out of it and so I think we feel pretty good.

The right balance on that.

Yeah, and I would just add John we're transforming this company right now.

Obviously, the delivery business is a hot topic today, but.

Gary out pizza, Carryout, <unk> significantly bigger than delivery GSR and so when we see it every time, we open up a new store not only do our delivery times get tighter.

And Hot Pizza is actually hot food in general by the way, which is why we are launching our tops because people want hot potatoes.

Pun intended.

The.

Delivery times get tighter, but also the carryout volume is very incremental consumers don't want to customers I want to walk that far drive that far to get there.

Pizza, so part of the transformation of this brand.

A more complete company is absolutely.

<unk> to drive the.

This store growth.

As far as some things that we were doing in Houston, I think rather than me trying to describe things over overall call I would really invite you to come to.

<unk>.

Meeting later this year, where we're going to show that stuff alive. It is super hard to describe but I would say at the end of the day. These are processes that enable us to get a hot pizza pizza the customer to customers.

Obviously in a safe, but faster way, but also improve the experience in the store for our team members and the resulting quality of that product. So hopefully that's enough to whet your whistle.

Onto Ann Arbor.

Thank you one moment for our final question.

And our final question for today comes from the line of David Tarantino from Robert W. Baird. Your question. Please.

Hi, Good morning, My question's on.

The margin outlook and Sandeep I was wondering if you could help to frame up how you think the EBIT margin will progress if you hit the low end of your targeted range in 2023.

Yes, so great question, David So look I mean as far as we're concerned the guiding principles that we've actually outlined.

Revenue should be growing faster than expenses. So when you look at our guidance.

Guidance range on global retail sales when you look at our guidance range on G&A you can see that.

Essentially even at the low end, our G&A is basically below that in terms of growth at the midpoint.

So I think straight away, but that gets you into a place where you can be margin accretive.

That's point number one point number two is we.

We actually experienced a lot of headwinds this posture from foreign exchange and I think that that should be had a 50 basis point negative impact on our operating margin in 'twenty. Two unfortunately, given where we are we still see a little bit more headwind, but not in the same period, given where current rates are.

So that would be an offset to some of the operating improvement.

From a mix standpoint, with the corporate store sales that eventually happen, we'll now get three three more full quarters from that that helps our margins.

So I think overall when we look at the margins by expectation for margins is that margins will improve but I think when we talked about pre pandemic margins of 2019 margins.

The currency headwinds that we experienced in 'twenty two that's probably further away in 'twenty three but it's not something that we're saying is an attainable. It's more of a question of time and some of the other factors that hit the P&L.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Russell Weiner for any further remarks.

Well, thank you and thank you everybody for joining the call. This morning, Sandeep and I look forward to speaking with you in April to discuss our first quarter results until then we'll talk soon.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Q4 2022 Domino's Pizza Inc Earnings Call

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