Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2019, Domino's Pizza incorporated earnings Conference call.
This time, all participants are no listen only mode. After this speaker presentation. There will be a question answer session asked the question. During this session you'll need to press star one on your telephone. Please be advised that today's conference is being recorded if you acquire any further systems. Please press star Zero I would now like to hand, the conference over to your speaker today and Bakken.
Prior communications and Investor Relations. Please go ahead Sir.
Thanks, Sarnia Hello, everyone. Thank you for joining us for our conversation today regarding the results of our third quarter 2019.
The call will feature commentary from Chief Executive Officer, Rich Allison Aden, Chief Financial Officer, Jeff works.
This call is primarily for our investor audience I ask all members of the media and others to be in listen only mode.
And the effect that any forward looking statements were made I refer you to the Safe Harbor statement you can find in this mornings release, the 8-K and the 10-Q.
In addition, please refer to the 8-K to find disclosures and reconciliations of non-GAAP financial measures that may be used on todays call.
Our request to our analysts we want to do our best to accommodate all of you today. So we encourage you to ask only one one part question on this call if you wouldn't please.
With that I'd like to turn call over too.
She financial Officer, Jeff Florence.
Thanks, Tim and good morning, everyone.
In the third quarter are positive global brand momentum continued as we delivered solid results for our shareholders.
We continue to lead the broader restaurant industry with 34 straight quarters of positive U.S. comparable sales and 103 consecutive quarters of positive International comps. We also continue to increase our global store count at a healthy pace as we opened at 214 net new stores in Q3.
Our diluted EPS was $2.05, an increase of 5.1% over the prior year quarter, primarily resulting from strong operational results offset impart by a higher tax rate.
With that let's take a closer look its financial results for Q3.
Global retail sales grew 5.8% as compared to the prior year quarter pressured by a stronger dollar.
When excluding the negative impact of foreign currency global retail sales grew by 7.5%.
This global retail sales growth was driven by both an increase in the average number of stores opened during the quarter and higher same store sales.
Same store sales for the U.S. grew 2.4% lapping a prior year increase of 6.3%.
In same store sales for our International Division grew 1.7% rolling over a prior year increased 3.3%.
Breaking down the U.S. comp our franchise business was up 2.5%, while our company owned stores were up 1.7%.
This quarter was driven entirely by ticket growth.
While we continue to grow our overall delivery business, we continue to experience pressure on the delivery business comp from our successful forecasting strategy as well as from aggressive competitive activity.
Our carry out business continues to grow at an impressive right.
On the international front, our comp for the quarter was also driven primarily by ticket growth.
On the unit Count front, we opened a 40 net U.S. stores in the third quarter, consisting of 43 store openings and three closures.
Our International Division added 174, net new stores during Q3 comprised of 203 store openings and 29 closures.
We have opened 1174 units over the past 12 months, which we believe demonstrates the broad and enduring strength of our four wall economics combined with the efforts of the best franchise partners in the restaurant industry.
Turning to revenues.
Total revenues for the third quarter were up 4.4% from the prior year, resulting primarily from the following.
First hire us franchise retail sales, resulting from both store count and same store sales growth drove increased supply chain and us franchise revenues.
Higher international retail sales resulted in increased international royalty revenues, but were partially offset by the negative impact of changes in foreign currency exchange rates.
FX negatively impacted international royalty revenues by $1.5 million versus the prior year quarter due to the due to the dollar strengthening against certain currencies.
These increases were partially offset by lower company owned store revenues, resulting from the previously disclosed sale of the 59 corporate stores in our New York market to existing franchisees during the second quarter.
Moving on to operating margin.
As a percentage of revenues consolidated operating margin for the quarter increased to 38.5% from 37.6% in the prior year quarter and was positively impacted by the New York sale and higher revenues from our global franchise business.
Supply chain operating margin was up 0.1 percentage points year over year, while our company owned store operating margin was up 2.8 percentage points year over year, driven primarily by the New York sale.
Gionee costs increased $3.4 million as compared to the prior year quarter DNA was benefited by the New York sale.
As a reminder, we recorded a pretax gain of approximately $6 million on the sale of 12 company owned stores in the prior year, which was recorded in DNA.
Our reported effective tax rate was 21.7% for the quarter up 6.4 percentage points from the prior year quarter due to lower tax benefits on equity based compensation.
The reported effective tax rate included a 1.1 percentage point positive impact from tax benefit on equity based compensation in 2019.
We expect to see continued volatility in our effective tax rate related to equity based compensation for the foreseeable future.
When you add it all up our third quarter net income was up $2.3 million for 2.7% over the prior year quarter.
Our third quarter diluted EPS was $2.05 versus $1.95 in the prior year, which was a 5.1% increase.
Here is how that 10 cents increase breaks down.
Lower diluted share count, resulting primarily from share repurchases over the past 12 months benefited us by five cents.
Foreign currency negatively impacted royalty revenues by three cents.
Our higher effective tax rate negatively impacted us by 14 cents.
And most importantly, our improved operating results benefited us by 22 cents.
Now turning to cash during the first three quarters of 2019, we generated net cash provided by operating activities of approximately $325 million.
After deducting for Capex, we generated free cash flow of more than $280 million.
On average that has more than $1 million in free cash flow generated per day.
Highlight our cash flow story, not only to demonstrate our outstanding financial model in performance, but also to remind folks of our long term commitment of returning cash to shareholders.
To that end, we repurchased and retired $94 million worth of shares at an average purchase price of $244 per share during Q3.
Bringing our year to date total repurchases to $105 million and our total share repurchases over the past 12 months to more than $267 million.
We also returned $26.9 million to our shareholders. During Q3 in the form of a 65 cents per share quarterly dividend.
On average over the last 12 months, we have not only generated more than $1 million per day in free cash flow, but when you add our share repurchases and dividends together. We have also returned more than $1 million per day to our shareholders.
We're also excited to announce today that our board of directors has approved a new $1 billion share repurchase program, which will replace the remaining authorization under our existing program.
Before I turn it over to rich I wanted to give you some commentary and updates to our previously issued its financial guidance for full year 2019.
We have provided guidance of 2% to 4% increase for store food basket pricing in our us system as compared to 2018 levels.
We now expect we will be near the low end of this range.
We have provided guidance of a negative five to 10 million dollar impact of foreign currency on royalty revenues as compared to 2018.
We now expect we will coming closer to negative $10 million.
We have provided guidance of $110 million to $120 million for Capex investments.
We now expect our Capex investments will be in the range of $95 million to $100 million.
This reflects our ongoing disciplined approach to prioritizing and investing in the projects that will get us to dominant number one.
We have provided guidance of $390 million to $395 million for DNA expense. We now expect that our DNA expense will be in the range of $380 million to $385 million for full year 2019.
This update reflects the impact of the New York store sale and more importantly, our continued prioritization around investments.
Overall, our solid consistent momentum continued and we are pleased with our results this quarter.
We will remain focused on relentlessly driving the brand forward and providing great value to all of our stakeholders, including our customers our franchisees team members and shareholders.
Thank you for joining the call today, and now I will turn it over to rich.
Thanks, Jeff Good morning, everyone and thank you for joining us on the call today.
I'm going to do with him to do things a little bit differently.
Excuse me. This morning, then than we typically do I'll take a few minutes to walk through some highlights from the third quarter.
I want to turn our attention to the revised outlook that we released to you earlier this morning, and after that we'll take some time for some QNX.
Let's start with us business and a few highlights there.
It is an evolving competitive and operating environment in the US right there, but I continue to feel that our fundamentals are solid and that the priorities that we have around the business are all in the right place.
We remain as always steadfastly focused on delivering value to our customers and best in class unit economics to our franchisees.
The quarter yielded strong growth in our carry out business. This was driven by great value terrific advertising and also great looking stores, we continued to build more stores around the us as we work to get closer to our customers.
It's not only improves our delivery service in economics, but it also brings a significant number of incremental carry out orders into our stores.
When we look across to you as we now have over 90% of our US system in our modern Pizza theater image. This is truly elevated the carry out experience for our customers.
Turning to our delivery business, we continue to feel some pressure from the entry of many non pizza QSR players who are enabled by the third party aggregators.
Timber started with the programs that we shared with many of you last month.
All with a focus on driving traffic and order count gains.
I'll share a few highlights from that we launched our delivery insurance campaign, which some of you may have seen the advertising on TV over the last couple of weeks. This is a spin off of our successful carry out insurance campaign.
Reinforces our commitment to delivery with new features that enable customers to give us real time feedback and also showcases our commitment to make every delivery a great delivery.
One of the things I've, particularly love about this advertising is that it features two of our fantastic franchisees.
Second we introduced a key I campaign, adding additional crust types to our 799 carry out deal we believe that adding more variety add that 799 price point, we're not only drive orders, but also ticket to this rapidly growing part of our business.
Our carry out business in the US is now approaching 45% of our total orders, helping us to diversify our business into this carry out segment, which as we've discussed with you in the past is significantly larger than the delivery segment today.
Finally, we're bringing additional value to the late night day part with our 20% off late night deal. This really is the first time that we've introduced incremental value dedicated to this this daypart nine pm and lighter.
And then beyond that we've got many more exciting things happening as we look out toward 2020, and we shared some of these things with you just a month ago, we're continuing to progress in the test kitchen on menu innovation products.
I personally just did another tasting last Friday afternoon, and I am excited about some of the things that we mean that we may be able to bring to the market in 2020.
Service as always continues to be a major focus in our business enabled by technology like GPS and also additional platforms that we are bringing out to our stores with the goal of making.
Making the day to day running of the business easier for our franchisees in our general managers.
And then finally and is always investments in programs to keep us top of mind with both digital and loyalty across both of our key businesses delivery and carry out.
As I close.
Also on the discussion of the US business I just want to highlight.
6% retail sales growth in the third quarter.
With that level of growth, we are clearly continuing to gain share in the pizza category and more broadly growing at a pace that exceeds most estimates of the restaurant industry growth rate for sure.
Let's turn our attention now to the international business.
We had another solid quarter of retail sales growth in the international business driven by strong unit growth around the globe.
We opened 174 net stores in the international business during the quarter. This reflects terrific unit economics that we continue to enjoy in many markets around the globe.
And to that end I'd like to highlight a couple of our emerging markets that I'm excited about that are leading the way on growth.
During the third quarter, we opened 20 stores in China, and when we look at our retail sales growth year on year, the third quarter demonstrated 45% retail sales growth in China versus last year.
Another one of our emerge emerging markets, Brazil opened 17 stores during the quarter and growth there continues to accelerate under new ownership.
We also have some of our larger and more established markets that are continuing to demonstrate strong retail sales growth, Japan, and India or two more terrific examples where the brand is growing around the globe.
While all five international regions were positive our international comps certainly still our work in progress and remain an area of tremendous focus for us around the world.
But as I wrap up international I do want to highlight the retail sales growth rate of 9.1%. Once again, we are clearly gaining share in pizza and growing at a pace that exceeds the broader restaurant industry.
So as we wrap up the quarter globally.
Our strategies around four dressing value and best in class economics for our franchisees are progressing very nicely.
The third quarter once again demonstrated the strength of the dominoes business model.
We once again delivered strong retail sales growth strong EBITDA growth and strong EPS growth even in the face of comps that frankly were below some of our historical averages.
And when I look out at our franchisees around the world I continue to be incredibly impressed with their focus and the competitive nature that they bring to their stores each and every day.
I'm also really proud that during the quarter. Despite a lot of distractions. Our team remained focused on the things that really matter franchisee profitability, our franchisees overall economic health and their ability to maximize the operational performance in their business.
We're doing our part to support them with Undoubtably, one of the strongest economic opportunities in all of QSR.
I also want to highlight what we've been doing to continue to build our brand in the direct relationship that we have with our customers.
We now have more than 23 million customers, who are active users in our loyalty program and when we look at our broader database of customers. We now have 85 million active users of the Domino's Pizza brand, we have always and we will.
Continue to value. This direct relationship that we have with these customers.
So thats a bit about the quarter I'm going to turn my attention now to the revised outlook that we shared with you in our earnings release this morning.
Many of you were here with US just a few weeks ago for our Investor Open House.
And during that event I spoke at length about where we are today.
Well I believe we're positioned for the future and some of the important things that we're working on both for the near term and also over the longer term I realize it's some of you weren't able to join US. If you. If you weren't that webcast is still available to you. It's out there. It is dot dominoes dot com and I'd invite you to listen.
In.
To hear some of our thoughts about these exciting developments in the business.
I will tell you that since that open house.
My views on the health of our business and on the long term growth potential of the Domino's brand certainly have not changed.
So why then you might as did we change our approach to the forward outlook.
Well, we believe that the evolving market conditions, and the resulting uncertainty have reduced the relevance of a three to five year outlook.
And in our view the market is more dynamic now than it has ever been.
The reality is that we don't have visibility into exactly how long some of these new entrance into the quick service delivery segment are going to benefit from the financial support of Aggregators, who are seeking to by market share.
These players are currently pricing below the cost to serve offering free delivery or other deep discounts that are currently enabled by investor subsidies.
So when we take all that into consideration, we no longer believe that a long term outlook with a three to five year time horizon is that instructive to our investors.
Therefore, we'll be using a two to three year time horizon for our outlook ranges for global retail sales growth comparable unit sales in the US comparable unit sales in our international business and also global unit growth.
I want to be very clear. This is not a reactive decision, but a proactive want to make our guidance more meaningful and more relevant to our investors in light of the current competitive landscape.
With all that said our updated two to three year outlook is the following 7% to 10% retail sales growth to be driven by 2% to 5% us comps.
1% to 4% international comps and 6% to 8% unit growth, let me talk a bit about each of those in term.
The international comp our updated international comp reflects longer than expected weakness in some of our markets recognizing that we've fallen below the previous outlook now for four consecutive quarters.
While some of this weakness is driven by the ongoing competitive pressures I want to be clear that there are many opportunities for improved but that we in our master franchisees can influence we are working alongside them every day through our centers of excellence, but these efforts are going to take some time to unfold.
When we look at the us comp.
The updated range for our us comp reflects two thanks.
First the continued pressure from competitors, who are pricing delivery below the cost to serve and socket. The comparable sales drag as we plan to further ramp up our four interesting program.
And I want to talk about that for a few minutes you might ask why do we intend to get even more aggressive in building new stores will the answer here is twofold first.
These fortress store openings continue to be a compelling economic opportunity that's both for us and for our franchisees.
Second we've got a unique opportunity right now to solidify market share gains for the long term as our competitors retreat and as these third parties fundamentally alter the economics of many players in the restaurant industry.
We believe that a significant shakeout is coming to the industry and there has never been a better time for dominoes to fortress.
Our us system is financially strong we've got terrific four wall economics, and very very healthy franchisees, who will generate approximately $1 million each in average EBITDA this year.
We believe that our franchisees are aligned with the strategies and they continue to invest in stores and invest in their people I am as always grateful for their partnership.
So in closing we're playing the long game at Dominoes for our investors and most importantly for our franchisees.
We firmly believe that now is the time to go on offsets and to take advantage of our continuing strength to drive profitable growth to expand our market share gap to the competition and to further solidified domino's as the dominant pizza brand.
So with that said we are happy to take your questions.
As a reminder to ask your question. Please press star one of your telephone to withdraw your question press the pound key and interested time magazine. Please limit yourself to one question any additional questions. Please reenter the queue. Please standby will be compiling M&A roster.
And our first question comes from Brian Bittner of Oppenheimer and company. Your line is now open.
Thank you good morning.
Question on the guidance I assume all of us on this call.
We understand the philosophy around changing the structure of how you're communicating your same store sales guidance, but just a little more color on how you're approaching this 2% to 5% range, it's really not a dramatic change from what you were communicating.
As you know people were going to be using that range to evaluate your performance from here quarterly and annually. So just a little more color on what that 100 basis points change on both sides of the equation is directly attributable to.
Sure Brian Thanks for the question.
Yeah listen as we take a look at it really is it really is twofold as I described in in my earlier remarks, you know as we take a look at the US business first there is just a level of uncertainty.
In the near term around some of these competing delivery offers in the marketplace and we know that has an impact on the comp and therefore.
Felt that we needed to two to adjust that range down a bit. We also as we look forward over the next couple of years.
We are moving aggressively to continue our fortress thing program and this is not just with our franchisees, but also.
Our corporate store book business, we believe in this so adamantly that we have is we look at the seven markets that we still play and with our corporate store business, we intend to fortress those seven markets completely within the next three year time horizon, and we know that will also create some great some drag.
And on additional drag on the comp in the near term. So it really is those two factors that led us to.
A restructure the timeframe around the comp and then B you know two to set the ranges at that 2% to 5%.
Thank you.
Thank you.
Next question comes from next to tie in of Wedbush Securities. Your line is now open.
Thank you.
We're starting to see some of that Qs on competition.
Receiving deals that are actually very favorable to the restaurant so.
Whether or not.
Third party providers.
Staying subsequent to that level.
It is a theoretical question, but certainly the near term.
Those deals are going to allow.
Those QSR Burger players, particularly to to become incrementally.
More and more competitive and so.
I guess the question is.
The near term, what's the plan to to compete.
You.
In the rounds menu innovation.
Yes so.
As we as we highlighted.
Just a few weeks back we've got some opportunities we believe to continue to not only reinforce value in the marketplace, but also to reinforce.
The Domino's Pizza service and the delivery expertise that we've been known for for now almost 60 years. So you in the near term. It is staying focused on our 599 and 799 T. Rowe price points.
Aggressively.
Doing to push on service.
Working with our franchisees to make sure that we are providing great delivery service to our customers and really putting our money where our mouth is on that as you see with our delivery insurance campaign that we have on on TV now we know that two of the main frustrations that consumers have around any.
Delivery is the cost of it and then also getting their food on time every time and so we're trying to make sure that we continue to address both of those.
As it relates to the menu.
We are talking now on air about variety.
With our crust types, but also we've got the team working very hard on menu innovation as well and just as of last Friday I tasted. Some more terrific products I think we'll have some some great news coming out in 2020 that I think I think our customers will find exciting.
And then and then broadly you know to the opening point of your question around the deals that are out there in the marketplace. Now you I think the rest I think the the restaurant companies have have have gotten smart and they've realized that aligning with one delivery partner probably doesn't make a lot of sense. If you go out there and get two or three of them you.
I can get them to beat beat each other up and give you a better deal.
So not surprising to us at all that Thats happening in the marketplace and then long term, we're not sure how sustainable some of those economics are for the third parties, which is part of what drives that near term uncertainty around the two to three year outlook. So we're going to we're going to continue obviously to.
To keep a close eye on what's happening in the competitive environment, but to really stay focused on the things that we can do and that we can control to drive value and service for our customers.
Thank you.
Thank you and our next question comes from Chris Ocull of Stifel. Your line is now open.
Thanks, Good morning.
Rich My question is about the decision to ramp up Fort you're seeing what gives you confidence at US franchisees will execute this plan, especially as comps are expected to slow it would seem that slower comp performance would eventually weigh on their willingness to develop units, but maybe I'm wrong.
Yes, so what really drives unit development is the cash on cash return for those new units. Both the individual unit, but then also the overall cash on cash return for the for the cluster of or the area of stores that impacts and.
What we continue to see in the business is that we've got very strong cash on cash returns and I talked a little bit earlier, we're going to put our money where our mouth is on this as well with respect to our corporate store business. We're getting terrific returns you in our corporate stores and therefore, we're going to push aggressively over the next three years.
Years to fortress the territories that we operate in there.
And we're hearing the same from our franchisees in.
The results around this.
It's not only the near term financial returns at franchisees get but it's also.
How this reinforces their relationships with their customers locally because of the great service that they provide.
I was just looking at that some numbers. This morning, you are one of the things that we'd love to do is is give me over time.
Some.
Some examples from around the business, we've talked to you about Seattle in the past and we talked to you about what we're doing in Las Vegas and.
And we talk to you about Roanoke, Virginia, and some of the things we're doing there.
Looking at our Dallas Fort Worth DNA, and if you lived in Lewisville, Texas last week, where we've got three stores the worst performing store on delivery last week in Lewisville averaged 16.5 minutes average delivery time with zero deliveries over 45 minutes. So when we could allow.
Out there and fortress not only do we create great economics for our stores, our franchisees and for the drivers that are delivered these pieces. But also this is just an unmatched experience around around customer service. So.
These are the kinds of things when our franchisees see this and when we see it with our corporate store business. It gives us more conviction that the right thing to do while we're playing in a position of great strength here with our unit economics is to go faster and to take advantage of this disruption in the marketplace.
Thank you and your next question comes from Matthew Difrisco of Guggenheim. Your line is open.
Thank you Richard Jeff. So your comments imply somewhat of an unchanged outlook for the profit growth I was wondering if a can you help us reconcile that with the lower same store sales outlook. The models ability to I guess sustained EBITDA growth ahead of retail sales are there gene a belt tightening opportunities on an ongoing basis.
Maybe if you could sort of tie that into from a franchise perspective, a $141000 per store.
With a lower same store sales outlook are there.
Net benefit still from seeing better carry out and that higher margin sale opportunity is that able to offset maybe the headwinds from the lower same store sales outlook.
Hey, Matt It's Jeff I appreciate the question.
The first thing we would say is on a store by store basis on franchisees are going to make order of magnitude more than anybody else in the Qs pizza industry I in the United States, We know that per share we still got three months ago. So there's a lot of pizza to be sold in a lot of money to be made.
But there's still going to be from a great position of strength and from an enterprise perspective, as rich mentioned approach in about a million dollars of operating cash flow per independent franchise partner, so great strength, great cash available to reinvest in the brand and we've seen that so again whether that.
Comes in ultimately and we'll we'll update you on that exact number early and 2020 once we actually get it whether that comes in a 1000 or $2000 higher or lower doesnt fundamentally change the way their approach in the business as far as running the business and investing in the business.
As it relates to get on our side you know during my prepared remarks, you'll note that we brought in our both our capital expenditure 2019 guide as well as our DNA 2019 guide so as we've done in the past we expect to give you a new view of that for 2020 in 2020 once we.
Been able to to roll up all the plans, but I think what that shows is we're always looking to be disciplined and prioritize the investments that we now it's going to take tied to really take advantage of our number one position and really get to that dominant number one the last thing I'll say is I can tell you that even though we brought in.
The 2019 Capex in gene a guides slightly down, which which we think is a good thing I can tell you that all of the important projects and investments that we know we need to make around technology around image around product development. All of those things are still getting done and done for again from a position of strength.
While still investing.
Now front footed, but we're doing a little bit tighter recognizing the current system, but but we're not leaving anything on the table, we're going to make sure we invest in everything we need to to get to a dominant number one and we feel great about that and our franchisees do as well so from a gene a perspective would we would it be correct not to assume then that you're just shifting maybe.
$19 into $2000. There is an implied ramp up into 20 to make up for.
The 19, or what you're cutting or finding the savings in a 19 something sustainable through 2000.
Yes, I mean, we'll give you a 2020 guide when we get into 2020 on Gionee and Capex as we've always done.
But but the 19 guy changes are just a result of running a little bit more disciplined livermore prioritized, but the important part air isn't that 19 versus 20 thing. The important part is we're investing and all the things we need to do to get the dominant number one.
Thank you so much.
Thank you and address on line. Please limit yourself to one question. Our next question comes from will Slabaugh Stephens, Inc. The company incorporated your line is open.
Yes. Thanks, guys just wanted a quick update on some of them a recent initiatives such as the 20% off late night, the delivery insurance, which seem to be more directly going after delivery competition. Just curious how that affected your late night and delivery business as you losses. Thanks.
Hey will it's rich we just launched those in September so really in the fourth quarter. So we can't really comment on results from those initiatives yet certainly the.
The the advertising we think is terrific.
So we're optimistic about the programs, but no comments on on the results today.
Thank you and your next question comes from Andrew Charles with Cowen and Company. Your line is now open.
Yes, just to piggyback think has just to piggyback little bit unless common im just curious about the timing of the guidance change following the confidence in the prior arranged investor meeting 32 days ago, and I can understand that you don't want to get into that dynamics of what's going on the fourth quarter, but you did mentioned that the guidance new guidance ranges proactive not reactive and so can you just confirmed.
There's nothing in the performance for the first 30 days for Q that did in fact provoked the lower guidance.
Matthew we don't talk.
Andrew excuse me, we don't talk about the current quarter.
I will tell you that theres no real magic to the timing of that it's it's not a reactive decision. It's a proactive decision to change the structure of the guidance again, all in an effort to make it more meaningful at relevant to our investors.
Thanks.
Thank you and our next question comes from Alton Some of Longbow Research. Your line is now open.
Great. Thank you and good morning.
Just wanted to ask about comments, Jeff that it was a very competitive quarter.
Is that a sign that we're seeing even more competition coming from third party providers or was that level of competition unchanged.
Review.
In threeq versus the second quarter.
Alton, it's rich no real major change in the level of competition that we see out there.
Still a pretty.
Heavy stream of advertising and discounting out there in the marketplace that we see but no significant ramp up.
Or down from from prior.
Okay. Thanks rich.
Thank you and the next question comes from John Glass from Morgan Stanley . Your line is that open.
Hi, Thanks, Rich I appreciate the detail on the carry out business and how large is gotten relative to the delivery business can you dimensionalize how the relative comps are doing in those two businesses if not absolutely maybe just on a relative basis is curio just growing so much faster that thats really the story right now on a comp basis.
And that's why you're looking into forcing if you can kind of help us understand where delivery is versus the carry out business.
So advertising spend I think you noted a couple of quarters ago Aggregators are spending more and advertising others have also noted that in that so sort of leading them relative to traditional brands. What can you do about that as there are ways you can shift advertising dollars back to reinforce your message in the marketplace versus what's going on now.
Thanks, John on your first your first question around care that carry out business, yes, absolutely were good we're getting terrific.
Growth in the carry out business.
Overall, and then also on a on a same store basis.
When we look at delivery business the delivery business continues to grow overall, we've had some pressure on the comps but overall.
Delivery sales are higher than they were a year ago. When we look at it in total across our system, but certainly a more rapid pace of growth into carry out business.
To your to your next question around the share of voice in the advertising we are.
We're fortunate on two dimensions, one is to have a pretty hefty war chest for advertising and second is to have some really smart folks who run the analytics about how we spend that money on behalf of our franchisees on an ongoing basis. So we are constantly.
Running our media mix models and tweaking.
The mix of UBS spend both across channels, but also with respect to how thats been goes across the various.
Messages that we're communicating be that carry out or delivery. For example, so it is it's a constant thing that we manage on a very active basis.
Thank you.
Thank you and your next question comes from CASM Saturday of Goldman Sachs. Your line is now open.
Great. Thank you I am I was hoping if you can kind of comment on the cadence as the quarter.
In particular, you know how contextualize built on the carry out and on the delivery business on the impact that some of them more promotions that you ran during the quarter had that would be helpful. Thank you.
Yes, Katy no no real no real comments kind of intra intra quarter on the cadence of things and we continue to to actively manage the calendar against both of our businesses to carry out in the delivery business, but no real.
No real.
Hi likes to call out based on the cadence within.
And maybe another way to ask that is when you look at your customer data are you seeing that these promotions are driving frequency.
Or a new customers onto the platform.
So we're we're constantly running programs to drive both.
It was it within all out effort around around traffic so.
We have certain things.
That will often bring new customers into dominoes in one of the things that you see is that we run.
Periodically we will run a.
A 50% off delivery.
For a week or we will run a carry out special during the course of a week those are great vehicles to bring new customers into the into the Domino's brand and then we're also using this incredible database that we have a 23 million active members of our loyalty program and 85 mill.
In active customers in total so we are constantly looking at ways that we can use the power of that data to help us reach out to customers that we've already acquired and identify ways to drive increased frequency. So the answer for US really is both our teams are constantly working on.
On both of those levers to drive sales growth in the business.
Thank you and our next question comes from Gregory Francfort with Bank of America. Your line is now open.
Hey, Thanks for the question Rich I think earlier in the queue in that you talked about why the economics don't work for third parties or or brands that are partnering with third parties and can you talk a little about why the economics work for dominoes, but they don't work for the Aggregators, maybe explain some of the differences and I don't know if its brand density or product.
Product life or anything like that just just in terms of what the major differences arms why your delivery orders are profitable and your competitors or not thank you.
Well I.
Greg I'll I'll leave it to you all as the as the analysts to figure out the profitability of the of the third parties, but I'll just focus on our business.
Yes, we've got a we've got a terrific business model and that we take and I'll try to describe it a little bit holistically and we'll get into to kind of contextualize the delivery component. So yes, we built these boxes that cost.
About $350000 or so on average to build.
And then we run two businesses through those boxes that complement each other we run a carry out business and we run a delivery business now the dynamics. So those two businesses or are different.
But they complement each other in that they give us a really profitable.
Pizza production engine.
Then allows us to offer delivery and as it as it is in any business you have some of those delivery orders are going to be more profitable than others.
A large ticket order that is 200 yards from the store is going to have phenomenal profitability.
We take a 15 dollar order nine minutes away from a store where labor is $15 an hour, that's not going to be less profitable a delivery.
But because we're running so much volume through this box both through the carry out channel and the delivery channel. It gives us an opportunity then to drive great economics for the franchisee in a way that also allows us to offer compelling value to the customer and.
We just believe that that captive system is a much more efficient business model then a business model that has a.
Restaurant, which is separate from a a third party service that ultimately does does the deliveries.
Helpful perspective, thank you.
Uh huh.
Thank you and our next question comes from Harrison is more of Bernstein. Your line is open.
And Sarah Verifone is omni please UN mute.
Hello.
I can you hear me.
I'd say or we can area.
Sorry.
Just a question on the international markets. Please you said that the competitive set is there any is different but there are other issues can you I guess could you just talk a little bit Q. What those are I know you've mentioned value in the past.
And also some of your licensees there are partnering with Aggregators.
That is that helping them is there.
Is there anything to convince you that maybe that's the right strategy in the U.S. too. Thanks.
Yes, a share on the first on the first party or have your question around.
What we're seeing in some of the international markets you have the the answer is that the issues are little bit different depending on what market you happen to be at I mean, we we benefit broadly from Havent really diversified.
Portfolio of international markets, but at any given time, we always have some that are.
Blow the doors off in terms of sales growth and and then we've got some that are little bit challenged and.
Often times more often than not what we are a little bit challenged it does tend to come down to the value positioning in the marketplace and in some of our international markets, We don't have as much.
Capability in place around some of the analytics that we haven't here in the us that really allow us to sort through the value maximizing.
Price points out there in the market. So we've stood up over the course of the last.
Year of centers of excellence, where we've now got some of our teams here that are working alongside some of our international franchisees. It just takes time for some of that to come through to gather the data to do the analytics into effect the change in some of those in some of those markets. So I.
Stick.
Very optimistic about the long term success of that international business as all of you probably know it is quite near and Dear to my Heart Haven Havent personally spent.
Over seven years, leading that business and haven't personally put my feet on the ground and more than 70 of the countries that we that we operate in around the globe, but I have a high level of optimism we have terrific master franchisees, who are committed to.
To grow in their growing their businesses.
The second part of your question was around the third parties.
Now in none of our international markets do we allow third parties to deliver our food that's kind of first and foremost in that isn't on the ending.
And on yielding position.
That that we take because we feel so strongly so strongly about the customer relationship and our ability to show up at the door with the dominoes uniform delivery expert. We also feel so strongly about the quality and the safety of that product as it goes from point a data point b.
But on the front end, we do have some international markets that are working with third parties.
To to generate orders now in some cases, there are structural differences in the market that that lead us to that place China is probably the best example of that where the third parties are quite dominant and while our business is growing really rapidly right now on a relative basis.
We're still a pretty small player in China.
With.
Approaching.
Tracking toward 250 units, so thats still a pretty.
On a relative basis, we're still we're still relatively small so those third third parties are an important source of of order growth. There are some other markets.
Around the World, where I think our master franchisees have done an effective job we've of partnering with third parties, but we've also got yes, some markets, where you have to be honest with you. We've been on those platforms rule awhile and we really don't see any meaningful growth in the in the business. So it is a cost.
The thing that we are working.
With our master franchisees on the benefit of having said that diversified portfolio of markets is that we can look for lessons learned that we think might come back and be applicable to the us and I can tell you that if I saw any lessons learned out there that I.
I would lead me to believe that we should be doing this in the us than we would more actively consider it but when I take the context of the fact that we've got.
A database of 85 million active users a loyalty program of 23 million plus active users.
Terrific technology that we've spent many millions of dollars building over time I feel like we're in a place where we are far better served to protect that data to not share that with third parties and secondly to protect the economics of our franchisees because while.
Now as was discussed on the call earlier, certainly some of the more recent deals with the Aggregators.
They have got with restaurant companies certainly some of those deals have been more favorable let's talk about the deal that a domino's pizza franchisee gets when they pay 25 cents per order that we sent to them, which is just north of of a.
One percentage point of ticket.
I think we'd be hard pressed to go out there and find third parties that we're willing to to send orders for just over 1%.
Thats our perspective there.
Thank you.
Thank you and your next question comes from Dennis Geiger VBS Your line open.
Thanks for the question I wanted to ask a bit more about the ticket contribution in the quarter and just generally how much of that contribution is from the higher delivery fees and then from pricing and how much of it is from what you're doing to drive mix through things like smart ticket and I guess more importantly, just looking ahead, how you're thinking about those components at a high level and what kind of opportunities you still have with that smarter.
Ticket as you think about the size of your loyalty program and all your digital capabilities. Thanks.
Hey, Dennis I appreciate the question this is Jeff.
The first thing on the ticket for the us business in the quarter certainly some some franchisees on balance taking the menu price also some some delivery fee there.
They use the data.
That we work with them, obviously to try to make a good decision there and as we've mentioned a couple times today. When you have 85 million active customers in your database you have a lot to work with when you when you try to tackle the real thorny issue of pricing in every neighborhood on all the trying to also sell more food obviously more.
Mix I think as rich mentioned earlier with cross variety that we're talking about we've done the more than Pete television AD, mostly during Q3, what's really highlights the broad menu for a pizza company I'm always always trying to get additional food and the ticket as well.
Having talked about ticket doesn't change our primary focus which is a hard stuff and it is a little bit harder right now given the dynamism in the industry that especially around the delivery business traffic little harder to get than it was two or three or four years ago, but we remain focused on driving traffic. We think we'll get we'll get back to that spot, but right now you're seeing a little bit.
More ticket during the third quarter than traffic, but doesn't change the overall philosophy of what we're trying to chase.
Thanks, Jeff.
Thank you and our next question comes from David Tarantino Baird. Your line is now open.
Hi, Good morning, Rich I wanted to revisit the targets for the comps in the U.
And I appreciate.
You've been running inside that range year to date, but.
At the last quarter.
The comp trend.
And a gradual mode of deceleration so I wanted to ask.
I think everything about the targets to be achieved you need the I guess stabilize.
This trend of deceleration so wondering how you're thinking about your ability to do that and what what's needed whether you think that inside the control of what you have planned or are you assuming that the environment or competitive environment gets better I guess, how are you thinking about your ability to sort of.
2%.
And in the near term relative to your target.
Yes, David Thanks. Thanks for the question, Yes, we do take a look at both of those elements. The elements that we can control and then obviously there are elements out there in the marketplace that are that are happening around us when we take a look at.
If I if I start with the second part of that.
You know we deals we do still believe that there's a good bit of uncertainty out there as I mentioned earlier, we didnt see.
We didnt see any significant change.
In the in the aggregator pressure in the third quarter versus the second quarter.
But where we spend the vast majority of our time thinking about is that things that we can control and so when we take a look forward im pretty excited about the programs that the team has developed as we go into 2020, which are going are going to continue to.
Reinforce some of the things that are really important.
The US number one we are going to stay focused on on value as we always as we always do.
We've got.
Some technology and some operational initiatives all around service and that is both for our delivery business, but also for this rapidly growing carryout business that we have.
And I, you and I spoke first about value and about service because.
As we look at as we look at the consumer research out there. The two most important things that we hear from customers that either delight them or that that caused them not to be so happy about delivery coming from anybody our do they feel like they were charged a fair price and secondly did they get.
Do they get great service. So we're going to stay focused on those then third is and I mentioned this earlier on the call as well we do have some innovation that I'm excited about on the food front as well and yet we havent brought any new products forward in a while and so I think some news there is.
Is also something that is that as do and I think we'll be will be exciting.
To our customers so when I take a look at it all in.
We believe that we've got.
Factors under our control that can allow us to continue to grow our business.
From a same store sales perspective.
Continue to get new stores on the map because the economics are great and when you roll. It all together to continue to grow our market share which is overtime as we think about how do we continue to establish this as the dominant pizza brand, but also.
A long term.
Taker of share in the marketplace. It really is about all of that rolled together.
Great. Thank you.
Thank you and your next question comes from Peter Sally's Etiology. Your line is now open.
Great. Thanks.
Rich I think you mentioned.
Menu innovation, new product news coming in in 2020.
I think it's been several years since we launched a new product and historically.
Most of them in the second half of the year. So can you give us.
Color around you plan is to be in first half.
Launch.
We need to wait again Joel.
Given the follow a similar pattern margins.
Any color around a little bit entre dessert size.
Nature would be helpful. Thanks.
Yes.
Pete really nothing I can share with you on the call. This morning about the timing or the items really from a competitive standpoint, thats information that we like to keep.
We like to keep close to close to divest.
Alright, Thank you very much.
Thank you and our next question comes from John Ivan Kim Jpmorgan. Your line is now open.
Hi, Thank you I wanted to follow up on the comments of service being a major focus.
Even market by market have you seen any difficulty image of attracting and retaining drivers is kind of the first point and secondly, it's something that at least that we've heard and some of this may be anecdotal as there has been an increasing quote unquote late orders what drives that arriving later than at least what consumers perceive dominoes orders should take hazard.
Didnt any decrease at all.
As you guys look at the empirical evidence not the anecdotal evidence service levels that may have slipped over the over the past couple of years and that actually maybe an opportunity going forward for you to improve that.
Hey, John Thanks, Thanks for the question first on that on the drivers. It's most certainly a.
Tight labor market out there right now I think the last statistic I saw was 3.5% unemployment in the US which is as low as it's been and I don't know maybe 50 years.
So yes. It is it is it is a tight battle for talent out there for drivers all all over the country and.
But the interesting thing is when and what we what we go around.
The franchisees that are really focused on their teams and investing in the growth and development of their teams.
They are fully staffed is what I'm hearing out there in the marketplace, there make they're making it they're making it happen and we're getting terrific delivery service, we're not doing that all over the country right now we do have.
Open.
Positions for drivers and a lot of markets around the country, where frankly, we just we got to get better.
We are seeing drivers.
As I travel around our there's a lot of stores I am hearing a lot of stories of drivers who are coming back to us from some of the gig economy.
Opportunities that they may have left us to join and realize that maybe the grass isn't always greener, there and part of what we try to work with our our teams on is to make sure that these drivers understand that there is an opportunity is domino's pizza that doesn't exist in a lot of these other areas I mean, we have 90%.
Of our U.S franchisees started as drivers and we have our franchise management school that we run here in Ann Arbor, which is producing a new crop of franchisees that are coming into our system. We see the same story. There we see folks that started as drivers are insiders and work their way up through so the battle is ongoing.
But our franchisees I think are up to the up to the challenge as it relates to as it relates to service.
We've we've we've recently.
You know put more of a focus.
On.
Making sure that we.
Manage any late orders because it's interesting you know those are the orders that can really drive a negative perception in the mines of consumers and so we've put a heightened focus on that here in 2019, and we're going to continue to do that going forward.
So while I would not say that we're seeing.
In a significant negative movements in service, it's not move and positive as fast as I would like it.
It is where we are running our where we've hit our fortress thing stride in certain markets, we see some significant improvements, but it's not broad enough across the system right now for me to be satisfied.
Thank you.
Thank you.
Your next question.
David Anderson of Maxim Group. Your line is now open.
Yes. Thank you very much is what piggy back on some of the comments you discuss on some of the technology initiatives and I've talked about in the past year, new players cell system.
And more front burner supply chain automation as well see what you've picked up.
Recently as you've learned from some of the newer you as in the Jersey location, what you brought over to some of the.
Older supply chain facilities, and a lot of maybe an update on the your new parts self test.
Got it so.
Steven we certainly continuing to invest in it as Jeff said earlier, even even with little tighter management around Capex and expense. We are still fully funding all of the key technology initiatives that we have inside the company.
Our next generation point of sale system progressing along really nicely I was in the lab myself, where they handed me what order scripted I was actually able to enter it end myself with no training. So not only are we're building a more robust system, but which which what but also one that will enable more rapid training of our team members, which I think is.
Is critical.
We're still tracking toward.
Toward getting that system in a pilot store by the end of this year and then.
As we continue to work through our planning.
Yes, we'll have a what will be a multi year rollout of the system up and when you think about it. This is a system that isn't that is present today in over 13000 of our 16000 plus stores around around the globe.
Second you asked about.
About supply chain technology.
We have we've learned a lot in the year since we opened.
Our center in Edison, New Jersey, where we employed really for the first time in the US system. Some of these new technologies, we've learned a lot and we are taking the best of that to the next two centers, which will open in South Carolina and in Houston. So.
I'm I'm I'm personally excited about.
About where the supply chain team is going in terms of making sure that we've got the capacity that we need.
To support the terrific growth of our franchisees.
Thank you and your next question comes from Alex cycle of Jefferies. Your line is now open.
Thanks for the question historically, the mix of digital sales in the U.S. seemed to grow at 5% annually year after year and it seems like we have been near the 65% level for a few years now I know there's about 60% at the end of 16. So I'm wondering it has this digital mix been increasing as you expect.
If it has been a little slow in recent years why would that be.
Yes, Alex it's some it does continue to increase but as you might guess once you start getting up to more than two thirds of your orders already on digital that kind of year on year pace of it's hard to add five five percentage points and five percentage points again and again, but yes.
We're pushing up close to 70% in the us.
And it's it's interesting you know in some of our international markets as well, we see incredible numbers, you know China over 90% of our delivery business is digital today. So.
Continuing to see great move, but they're in the U.S. and across the globe.
Great. Thanks.
Thank you and our next question comes from Jefferies.
Of Barclays. Your line is now open.
Great. Thank you very much rich just broader question I guess on the industry.
What I'm just wondering whether you think you're seeing slippage across the pizza category, whether all will be feeling on the third party delivery pressures equally or whether maybe you are.
Perhaps feeling it for some reason differently than others.
And then if you could just clarify your comment on the.
Hi demand outlook I know you talked about significant shake out to come.
I'm, just wondering whether you're talking specifically about the pizza category or the broader industry.
In the evidence of that already but any color on that front would be great. Thank you.
Yes, Thanks, Jeff will first first off you within the Pizza category.
We're still gaining significant share inside of the pizza category I mean, if you look and thats into us and globally, 6% retail sales growth in the us well outpaces the growth of the category and the nine one when you normalize for for currency internationally also.
Well outpaces.
The category and we're continuing to be as we talked about earlier you know aggressive in terms of fortress seeing the markets that we operate in and we see so much pizza share out there is still left to be taken.
We're not going to slowdown you in that regard.
And then.
In some of my comments you second part of your question was around some of the shakeout.
Certainly we do see.
Some pizza competitors that are experiencing more difficulty as evidenced by closures, particularly when we look in some of the higher labor costs markets around the use one of the things that really helps our business model is that we run at.
Volume.
That.
Significantly exceeds most of the competition on a per unit level and as these as these labor costs rise over time.
If you're not running a high volume business in QSR pizza, it gets more and more difficult to compete.
It also gets more and more difficult to compete in a pizza delivery business, if you're not shrinking down the radius of your territory for delivery because that is the key that wage rate is the key driver and you really have to improve over time, the number of deliveries per driver.
For our that you can get so we look we look at an industry that is under pressure from labor costs that.
An industry that is.
Is transitioning.
Volume from.
Dining in two delivery.
Without any increase that we can see in terms of overall growth in the restaurant industry. So a lot of lot of restaurant companies are trading.
Orders from a more profitable to a less profitable channel while weight wage rates are going up so that is why when we when we talk about a shake out to cover this is not an industry that starts with 40% profit margins typically so there's not a lot of room for some of these players to seed margin to it.
To to third party on one end, while labor costs are going up on the other.
Thank you.
Thank you and your next question comes from Brett Levy of MKM Partners. Your line is now open.
Great. Thank you good morning, everyone.
You go back to very impressive numbers 23 million active 85 million overall loyalty and email members. So.
Is there anything that you can see out there either across these different cohorts that's different.
And also do you think that you need to maybe adjust your approach to how you're talking to either the most loyal piece of the pie members or the other 60 million that are out there because we've seen other competitors really stepped up their depth and breadth of.
Oil members and we've started to see them Reaccelerate. So is there something you can do is there something you're seeing under the surface that we're not seeing.
Any color would be I think.
I think there quite a few things that we can do over time to take more advantage of this incredible asset that we have which is this database of.
Of customer information that we have and we've challenged our teams here to think about how can we get closer and closer to those customers. So how do we know the I guess the the ultimate thing that everybody strives for as people use term one on one marketing well, we've still got a long way to go between.
Where we are today and that point over time. So it's something we think about quite regularly and with the data that we have that gives us a chance to really look at how customers purchasing behavior evolves over their lifecycle with dominos and we've got an asset here that I think and can help us in.
In the months in years to come up.
Thank you.
Question funds from John our of Wells Fargo. Your line is now open.
Great. Thanks, just hitting on the third party delivery stuff again.
Can you discuss what you've learned about the stickiness of those customers.
Tried the third party delivery services, and I guess I'm trying to go back to your comments about the lower fees or the lower fees or promotional activity driving a lot of.
The shift in demand in the market right now away from perhaps pizza, but if fees move higher what do you guys seeing that suggest they're going to come back to the pizza category over time. Thank you.
Hi, John it's.
It's tough to really.
Yes, we look at it.
Hard as you might yes.
Well, we don't know yet however is.
How will the behavior evolve for customers that are now, placing some number of orders through the third parties.
As the full cost.
Or at least some measure of the cost is borne by the customer you over time, what will ultimately happen to their behavior.
We don't know the answer to that yet, but what we do know is we know a whole lot about the elasticities of demand in the pizza category, We've got with.
6000 units around to us and with.
Franchisees around to you as you have the ability to set their own prices for delivery charges and their own menu prices, we have a pretty darn good idea about what the elasticity curves look like in the pizza category now up we.
We know that.
And we believe QSR more broadly is a pretty elastic category. So what we expect overtime is that there will be some equilibrium, what's what's the the cost to get food delivered to you.
I have to fully support the effort that it takes to get there will only then we'll we know ultimately where this thing falls, but.
I do not expect the same number of customers to use third party delivery.
Once they have to pay for it as the number is that use it when it's free.
If you offered a mile on for free I've got to say, yes. When you come in charge me forward I might just go out there and push the borrower around myself.
Thank you.
Thank you and ladies and gentlemen, this does conclude or question answer session I would now like turn the call over to enrich Allison for any further remarks.
Well listen thank you once again for taking the time to join US. This morning, and we look forward to getting back together with you in February and to sharing the results of the fourth quarter. Thanks, So much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.