Domino's Pizza Q2 2024 Earnings Call Transcript

Presentation

[Operator]

Thank you for standing by, and welcome to Domino's Pizza's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded.

And now, I'd like to introduce your host for today's program, Greg Lemenchick, Vice President of Investor Relations. Please go ahead, sir.

[Greg Lemenchick, Vice President of Investor Relations at Domino's Pizza]

Good morning, everyone. Thank you for joining us today for our second quarter conference call.

Today's call will begin with our Chief Executive Officer, Russell Weiner, followed by our Chief Financial Officer, Sandeep Reddy. The call will conclude with a Q&A session.

The forward-looking statements in this morning's earnings release and 10-Q, both of which are available on our IR website, also apply to our comments on the call today. 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 our non-GAAP financial measures that may be referenced on today's call.

This morning's conference call is being webcast and is also being recorded for replay via our website. 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 one question only.

And with that, I'd like to turn the call over to Russell.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Thank you, Greg, and good morning, everybody.

Our second quarter performance demonstrated, once again that our Hungry for MORE strategy is delivering positive results. For the second straight quarter, we drove US comp performance in the healthiest way possible through profitable order count growth, positive order counts in our delivery business, positive order counts in our carryout business, positive order counts across all income cohorts.

We also continued to see improvement in our international comps and generated earnings that were in line with our expectations. As a result of our strong results year-to-date and expectations for the back half of the year, we remain on track to achieve our guidance for annual global retail sales growth of 7% or more and operating profit growth of 8% or more.

I want to provide an update on our net store growth guidance, which we temporarily suspended this morning. First, I want to reiterate that our US pipeline is strong and it continues to grow. We continue to expect 175 or more net new stores annually in 2024 through 2028 in the US. We now expect to fall below our net store growth target for international in 2024 by approximately 175 to 275 stores, primarily as a result of challenges in both openings and closures faced by Domino's Pizza Enterprises, DPE, one of our master franchisees. We're partnering closely with DPE as they work through this process.

Now it's important to note that our largest expected growth markets of China and India remain on track to deliver on their growth potential. In China, DPC Dash announced they'll open store number 1,000 by the end of this year, and then they'll increase their net openings per year to between 300 and 350 starting in 2025. Back in May, Jubilant, our master franchisee based out of India, increased its total store count potential to 5,500 over the medium term in the six global markets in which it operates. When you think that it took Domino's over 60 years to open 5,500 stores in the United States, Jubilant's goal exemplifies the Hungry for MORE mentality our global system is taking on.

Now let's look at our second quarter results through the lens of our MORE, Hungry for MORE pillars, which continue to drive our business. As you know, M stands for the most delicious food. We know we've got the most delicious food in the industry and are focused on showcasing that with more mouth-watering food photography in all of our marketing and our sales channels. We launched our New York Style pizza in Q2, and it's what we call innovation with intent. When we launch a new product, it's got a specific role and it's intended to stay on the menu permanently.

New York Style pizza is another example of that. It's got a crust that's thinner and more foldable than our traditional crust. It was designed to appeal to pizza lovers whose idea of deliciousness is a little bit different than Domino's Pizza offerings in the past. The result has been a high mix of sales within our pizza offerings. In addition to being a product that showcases deliciousness in a different way, New York Style Pizza is available as part of our Mix and Match offer. Domino's Rewards members can also redeem 60 points for a free medium two topping New York Style Pizza. This new offering drives more than just deliciousness, it drives value and it drives more customers into our loyalty platform, and that's why we call it innovation with intent.

In O in Hungry for MORE stands for operational excellence. This is how we'll deliver on our promise to have the most delicious food by consistently driving a great experience with our product. As I shared on our last earnings call, in 2024, we're rolling out a new service program we're calling MORE Delicious Operations. This is a series of three-product trading sprints focused on our dough, how we build and make our products, and then how we cook them.

In Q1, we embarked on our first sprint, which focused on our dough, and are now rolling out our second sprint around ingredients and product builds. These product sprints and last year's summer of service are working together with our DOM OS technology to drive improvements in our delivery times. In fact, estimated average delivery times were nearly 10% better in Q2 of 2024 than they were in Q2 of 2022. And we're doing all of this while our stores are handling more orders. So I wanted to congratulate our franchisees and operators whose commitment to service allows us to deliver on the promise we're striving to make in our marketing that Domino's has the most delicious food.

Our third Hungry for MORE pillar is R for renowned value. And as I said before, it's not just about having the lowest price in the market. It's about providing value that's innovative and memorable. Renowned value breaks through the sea of sameness discounts you see in the marketplace. Now, Domino's Rewards is an example of that renowned value. It continues to perform well and was the key driver of our strong US comp performance in Q2.

You'll recall, our objectives for the program were to drive new users, particularly carryout customers and increase the frequency of light users. I'm happy to report that Domino's Reward continues to deliver on those objectives. Our active members are up significantly year-to-date through Q2, showing this program is continuing to build. Redemptions across both the delivery and carryout channels are also increasing, which is contributing to the transaction growth we're seeing in each of our businesses. For example, in our carryout business, orders with a loyalty redemption in the first half of 2024 are twice as high 2X as they were in the first half of 2023 under our old loyalty program. So as Americans continue to look for value, Domino's is providing renowned value and doing it profitably for our franchisees.

National promotions are another way we're driving renowned value. In Q2, we had two boost weeks, both of which were very successful in driving transactions and customer acquisition. As it relates to our promotional cadence in 2024, you can continue to expect around six boost weeks. While providing renowned value through our own channels is one part of our barbell strategy, tapping into the aggregator marketplace is the other. And our launch into this space remains on track to exit the year at 3% or more of sales coming through Uber Eats.

Everything we do at Domino's is enhanced by our best-in-class franchisees. They are the E in our Hungry for MORE strategy. In early May, we hosted our largest worldwide rally with almost 9,000 franchisees and team members in attendance. This year's event was appropriately themed, Hungry for MORE. We brought this strategy to life across our global system and the results showed. This was our most highly-rated rally of all time.

To close, I couldn't be more energized by the future of Domino's Pizza, and seeing the excitement of franchisees at our rally really brought that to life for me and the leadership team. Our results show that our strategy is resonating with customers and our system. All of this gives me great confidence that we can continue to drive significant long-term value creation for our shareholders.

And with that, I'll turn things over to Sandeep.

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

Thank you, Russell, and good morning, everyone.

Our second quarter financial results were right in line with our expectations. Our strong start to the year has resulted in profit dollar growth versus 2023 for our US franchisees. We remain on track to achieve our target of $170,000 or more average US franchise store profit for 2024. Excluding the impact of foreign currency, global retail sales grew 7.2% in the quarter due to positive US and international comps and global net store growth.

US retail sales increased 6.8%, and international retail sales grew 7.7%, excluding the impact of foreign currency. During Q2, same-store sales for the US came in at 4.8%, which was in line with our expectations. Our strong comps in the quarter for carryout of 7.9% and delivery of 2.7% were once again driven primarily by transaction growth.

Our US same-store sales continued to be primarily driven by transaction growth from our new loyalty program and our strong marketing programming. We also benefited from 1.5% of pricing, which was inclusive of high-single-digits in California. Our sales mix from Uber grew to 1.9% for the quarter. The incrementality of Uber sales continues to be in line with our expectations. Our comp tailwinds were partially offset by a higher carryout mix, which carries a lower ticket than delivery.

Shifting to US unit count. We added 32 net new stores in line with our expectations. This brings our US system store count to 6,906. We remain on track to achieve our 175 or more net store growth target in the United States in 2024, and we anticipate opening our 7,000 store by the end of the year.

Shifting to international, where comp results were generally in line with expectations for the quarter. Same-store sales, excluding foreign currency impact, accelerated to 2.1% in the quarter. The improvement from Q1 was broad-based as we saw improvements in our Europe, Asia, and Middle-East markets. Store counts increased by 143 net stores as we finished the quarter with more than 14,000 international stores.

Our net store openings were impacted by softness in DPE on gross new-store openings and closures. Income from operations increased 1.7% in Q2, excluding the negative impact of foreign currency of $2.7 million. This increase was primarily due to higher franchise royalty revenues resulting from global retail sales growth. This was partially offset by higher G&A, which was primarily driven by higher labor expenses as well as the Company's worldwide rally expense as communicated on our last quarterly call.

I expect the return on this expense to be extremely high as everyone across our system left engaged, inspired and ready to drive our Hungry for MORE strategy. Lastly, our margin rate was impacted by 0.3% headwind in Q2 from the tech fee being reduced to $0.35 and our ad fund contribution rate increasing back to 6% as previously communicated.

Now, turning to our outlook. We continue to expect 7% or more global retail sales growth, excluding the impact of foreign currency based on the following key items. First, our 2024 US comp to be above the 3% or more long-term guide as a result of catalysts in Uber and loyalty for the full year, and we expect comps to be 3% or more in Q3 and Q4. Specific to Q3, we expect comps to be slightly below what we saw in Q2 on a one-year basis as we're expecting one less boost week, partially offset by a continued ramp-in Uber. Second, sales for Uber to increase as marketing and awareness grow, and we are expecting to exit the year with an overall sales mix of 3% or more. Third, international comps to accelerate 3% or more long-term guidance in the back half of the year.

As Russell noted, we now expect to fall below our 1,100 or more net new store number for 2024. This is due to challenges in our international business, primarily related to DPE. As we get further visibility into the full effects of DPE's store opens and closures, we will provide an update on the impact to our long-term outlook for 2025 and beyond.

We continue to expect an 8% or more year-over-year increase in operating income, excluding the impact of foreign currency. To highlight some of the components, first, for the year, you can expect operating income margins to be relatively flat compared to 2023 and to be down slightly in Q3. As a reminder, we are not expecting to see cost leverage in 2024, primarily due to investments we are making in consumer technology, store technology, and supply-chain capacity to support future sales growth.

Second, we are now expecting supply-chain margins to expand compared to the prior year due to some favorability in the food basket and slightly higher procurement productivity. We are forecasting to come in below the midpoint of our food basket range of 1% to 3% for the year. In Q3, expect supply-chain margins to be roughly flat compared to the prior year and down in Q4.

Third, the favorability in supply-chain margin is being partially offset by pressure within G&A due to slightly higher investment levels. We continue to expect our G&A as a percentage of global retail sales to be approximately 2.4%. And lastly, we are now expecting the impact of foreign currency to be approximately 1% of operating profit dollars in 2024. We expect this will impact our year-over-year operating profit margins by roughly 20 basis points.

As was noted in our disclosure this morning, we did not repurchase any shares in the second quarter. We continue to maintain flexibility due to the volatility in the interest-rate environment as we evaluate our upcoming debt maturity in October of 2025.

Thank you. We will now open the line for questions.

Questions and Answers

[Operator]

Certainly. [Operator Instructions] Our first question comes from the line of Dennis Geiger from UBS. Your question, please.

[Dennis Geiger, Analyst at UBS Group]

Great. Good morning, guys. Thank you. Appreciate it. I wanted to ask a little bit more on the loyalty, what you're seeing there, and sort of as we go into the back half of the year and maybe even into '25, how you guys are thinking about that loyalty program given the contribution you've seen already this year and what you're expecting kind of again balance of the year in the year two, how you think about marketing it, promoting it? Thank you, guys.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Good morning, Dennis. Thanks for the question. Yes, I'll tell you, loyalty for us this year has just been tremendous. If you think about the objectives that we outlined in our -- at our Investor Day, we said with the new loyalty program, we wanted to drive light users and frequency there, check. We wanted to continue obviously to drive our delivery customers. Obviously, we're doing that. But we also want to engage our carryout customers check there. So it really is doing every single thing that we had hoped it would. We'll give a number at the end of the year as far as new users, but I can tell you that the user -- the number of new users is increasing. I gave a number in my opening remarks that just to me is indicative of how this is going.

So remember, one of the things we said we were going to do is really use loyalty to drive carryout. So orders from a carryout perspective, orders with loyalty redemptions in the first half of this year are twice as high as they were under the old program in the first half of last year. Sandeep talked about how our carryout business is doing, and this is one of the big reasons. So just really on all of the objectives, the loyalty program is delivering what we had hoped.

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

And one thing I'll add to that, Dennis, is we've talked about this previously, but this is a multi-year driver of comps for us. So this year is just the beginning. And as we did in Piece of the Pie Awards when we launched it in 2014, we saw over three or four years continuous compounding of comps based on the launch of the program, we expect a similar kind of cadence as we go through this program as well.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. And when you think about the health of this quarter and how order counts came in so strong, all of those customers are going into the flywheel of this loyalty program. So today's orders are really tomorrow sales and that's why we're so excited about how the loyalty program is working with everything else that's firing on the business right now.

[Operator]

Thank you. And our next question comes from the line of Brian Bittner from Oppenheimer. Your question, please.

[Brian Bittner, Analyst at Oppenheimer & Co.]

Thank you. Good morning. As it relates to the unit growth guidance, I understand that the shortfall is primarily related to pressures you're witnessing at DPE. But can you dive into this dynamic a bit more? It just seems like a lot has changed versus when you initiated the long-term outlook at the end of last year. So just trying to better understand how the surprise came about so suddenly versus what you were expecting seven, eight months ago.

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

Yes, Brian. It's Sandeep. And so I think when you go back to the Investor Day back in December, I think one of the -- the process that we went through was working with all of our master franchisees, including DPE on the expectations that they had for the business. And then we basically, calibrated to that for both '24 and the five-year horizon as well. And at that time, we were completely aligned.

So then actually we got into the end of the Q1 call and then we got into the second quarter, and we started seeing that relative to our expectations and cadence, both new-store openings as well as closures really started increasing from DPE. And as we saw that, we continue to engage with the DPE team to validate the forecast that we had for the year. And it became pretty clear as we actually went through that conversation and discussion that there was not only the risk to the second quarter that we were seeing, but clearly, the outlook was going to be impacted as well. And in fact, just yesterday, I think DPE put out a release with a number of closures that they outlined in the Japan and France market in particular, which they're targeting for their first start, which is our second half, which therefore will land in this fiscal year. So apart from what we've seen in second quarter, we expect to see more pressure in the second half of this year.

So I think when you take the collective of all of that, it was a pretty material update that we were going to see in the numbers for this year and we felt it appropriate to update our guidance for 2024. And also if you notice, the range is 175 to 275. Why is the range that big? Because I think as we go through the process of not just the closures, but the potential openings, the timing of it could potentially shift between our fiscal '24 and fiscal '25. And that's why we're temporarily suspending guidance on the long-term outlook as well apart from this year.

So that's kind of what went on in the background, Brian, so you understand that. But I think one of the things I want to just come back to is when we look at our long-term guide, I mean we're talking about maintaining our GRS [Phonetic] growth of 7% plus and our operating income guide of 8% plus. And the reason for this is the store closures that we're talking about are very low-volume stores. So when you actually put it all together, the aggregate impact to operating income is really immaterial in the grand scheme of things. And so that's why we're very confident in our operating income guidance. And we are reiterating that and -- as you saw this morning.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

And Brian, I would just add to that. I think what this shows me is how many levers we had to grow this business. And so certainly, we're working with DPE, but let me just put some of this in perspective. So our sales and stores are still on-target for the 7% -- I'm sorry, our sales and non-profit for the 7% plus and the 8% plus. And with that -- those headwinds in DPE, that means we have a lot of other things firing. And so just maybe I'll start with development.

So at the same time as we have this DPE news, we have news that China and India are increasing their outlook. We've got today 14,000 stores, half of those stores we've opened since 2015. And so the momentum we have on our way to 40,000 stores, which is a lot more room for us is tremendous. And then when you think about our development in the US, obviously, we're -- as Sandeep said in his remarks, 175 plus is still our target this year that we're going to hit. And when you think about the strength of development, openings are really important so are closings. And in the trailing 12 months in the US, we've closed only seven stores out of a total of about 7,000. And so development, I think overall is pretty healthy, and like I said, we've got these other things firing at the same time, which is why our sales and profit numbers are still coming in at forecast.

[Operator]

Thank you. And our next question comes from the line of David Tarantino from Baird. Your question, please.

[David Tarantino, Analyst at Robert W. Baird]

Hi. Good morning. And my question is a follow-up, Russell, on your comments about the outlook for the year being unchanged. I guess, we've seen signs that consumer spending is slowing, and certainly, in parts of the restaurant industry. And it feels like the degree of difficulty in the US has increased. So I just wanted to ask you to give some commentary on why you're so confident in holding those targets for this year, and whether you think the degree of difficulty is higher or unchanged versus what you were thinking previously. Thanks.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. Thanks, David. To me, the best predictor of the future, even though I have a lawyer in the room who probably tells me I can't say this is what's happened. And you're right about consumer spending slow, but let's think about what's happened with that as a backdrop is we've had -- we've grown orders in our delivery business, our carryout business, every income cohort. We haven't talked about international, but we've grown order count in international. And so that's what's going on in an economy where folks are kind of maybe struggling to decide what to buy. And so if order counts are positive in that scenario, then as the momentum swings eventually, I expect our momentum to continue. So what you do when times are tough? To me that talks about the strength of the brand, and that's why I just could not be more excited about how we delivered the results for the quarter.

[Operator]

Thank you. And our next question comes from the line of Andrew Charles from TD Cowen. Your question, please.

[Andrew Charles, Analyst at TD Cowen]

Great. Thank you. Sandeep, you talked about how the 3Q comps in the US are expected to trail 2Q levels. And just given these are comparisons, I'm curious if that reflects what you're observing so far this quarter, or if it's more just forward-looking around your expectation given one less boost week in 3Q.

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

Andrew, thanks for the question. I think, no, it's more about what I talked about in the prepared remarks, which is we do have one less boost week. We do have the ramp in Uber. But on a net basis, it's slightly below what we saw in Q2 is our expectation for Q3. But I'll go back to Russell's previous answer. We are seeing tremendous performance in terms of transaction growth for the entire first half, and we are expecting to see that same performance in the entire second half. And so we're very confident in the ability of our business to deliver the kind of momentum that you've seen already in the first half -- in the back half, including Q3.

[Operator]

Thank you. And our next question comes from the line of David Palmer from Evercore. Your question, please.

[David Palmer, Analyst at Evercore ISI]

Thanks. Good morning. I guess the question is about -- I'll make it a kind of a two-parter. It looks like the sales trends are pretty volatile in the US from the data that we see, for example, things look like they were weaker in April when you didn't have sort of a value-forward message like Emergency Pizza, or the $3 tip. Could you kind of reflect on the quarter and what you're seeing in terms of the consumer response to stuff? And maybe give us a sense of what you think is working and not working in the US?

And then separately, I think people are going to be concerned about the fourth quarter. If the third quarter is worse than this quarter, maybe, let's say you do a 4% in the third quarter, I think people are going to be concerned about you holding that 3% plus in the fourth quarter given the comparison. So maybe you can address both of those. Thanks.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes, sure. Maybe I'll give it a shot and Sandeep if I miss anything. As far as the volatility in the short-term, I think we look at quarters, not days, and obviously, years as well, and there are always some bounciness based on everything from weather to what we put out there. And so I like your -- the second part of your question, which is kind of big-picture on what's working and what's not working.

What's working is the Hungry for MORE strategy. And I'll give you an example maybe using one of the things we are doing this year as we talked about was we're going to launch two new products. So we just launched the New York Style Pizza. New York Style Pizza is all about the most delicious food. It's an innovation with intent. There are, believe it or not, some people out there who don't love our traditional crust. So this is an incremental crust, more foldable, hopefully, bring new people in the fold. At the same time, that new product is delivered in better delivery times as it was -- than it was two years ago. That's operational excellence.

It's part of our Mix and Match promotion. It's also part of our loyalty program, renowned value. And so what we're doing, David, is really tethering all these things together. There's never anything that's firing one cylinder on its own. There truly is a domino effect of connectivity between all the programs we have going on right now.

From a non-working perspective, I mean, we're always Hungry for MORE. That's kind of the bumper sticker of this Company. But I've been here 15, 16 years and I know what drives the business. It's orders. It's stores. It's market share. And the orders that you've seen, the stores that you're seeing are -- just think about what traditional growth has been for the pizza category, we are going to be big winners from a share perspective. And once you do that, everything grows. Your franchisee profitability grows, your advertising fund grows, you get a moat, and our moat is filled right now with orders and stores and franchisee profits.

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

And David, I'll just tag on -- just clarifying a couple of the points. I mean, you asked about -- you talked about volatility in sales trends in the US. We didn't see any volatility. We saw a very steady cadence. And the steady cadence of sales is really driven by the flywheel that Russell talked about on the loyalty program and the frequency that's continuing to build from there. We've seen that pretty consistently across -- across the year frankly, including the second quarter. So we don't see the volatility at all.

And I think the other question that you asked was the confidence in the Q4 comp. And as I said in the prepared remarks, we expect both Q3 and Q4 to be above the 3%. So we just explained that Q3 may be slightly below Q2 because the timing of the boost -- of the number of boost weeks offset by Uber's ramp.

Now going to Q4, one of the things we talked about earlier was that loyalty is going to be a multi-year driver for us. So sure, we're lapping in Q4 the loyalty program launch, but we still expect to be seeing tailwinds and the compounding impact from the loyalty program in Q4. In addition, Uber continues to build. And so as -- with both those drivers, there's every case to look at 3% or more is very, very much within reach in the fourth quarter and we're always Hungry for MORE. So the more we do, the better it is.

So we're really confident. And because this is all transaction-driven, it's really driving very strong economics. So franchisee profitability continues to grow, and I think that's actually driven by a significant performance on the supply chain side also, which is you're seeing on the supply-chain financials that's going into the franchisee profits. So overall, very confident of our outlook for the back half of the year.

[Operator]

Thank you. And our next question comes from the line of Lauren Silberman from Deutsche Bank. Your question, please.

[Lauren Silberman, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you very much. I wanted to ask about the value strategy. So you talked about the one boost week in the third quarter that leads to, I believe, one in the fourth quarter, clearly driving strong performance. Given the value focus in the industry, what flexibility do you have to further increase promotional activity? And then are you seeing any increase in value mix and how much is going through deals?

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. Lauren, thanks for the question. I think what we're doing in value is very special and very different than what you're seeing in the industry right now, which I think folks, it's clear that there's been price taken and folks are dealing back kind of individual items, telling customers, hey, this is what you can get on value. What we've done and we've done this since 2009 when we launched Mix and Match.

Our Mix and Match offer values two things. Values the price, but it's the price for what you want. If the price for what you want is high and the price for something you don't want is not high, that doesn't really do much. And so when you think about all of our platforms, you think about pizza, you think about pasta, sandwiches, desserts, salads, breads, chickens, all of those things consistently have been part of our promotional value play since the end of 2009. And having that consistency when people wake up in the morning and decide where they want to order, they know that they can trust Domino's. That trusted value is leading to the order count you're seeing and then they become part of that loyalty flywheel. And so I just -- I think it's important to make sure you -- we explain our approach to value is not just price. It's about price for what people actually want to order, and that's, as you've seen over this time period, a very sustainable way to grow.

[Operator]

Thank you. And our next question comes from the line of Gregory Francfort from Guggenheim. Your question, please.

[Gregory Francfort, Analyst at Guggenheim Partners]

Hey, Russell, I love the domino effect referenced there. But I just had a question on the incrementality of Uber and just some of the commentary there. I think you've had in for about nine months. Can you talk about what you've learned and maybe how you're changing some of the marketing messages over the last maybe three or six months? And then any update on thoughts on DoorDash into next year? Should we still expect something on that and maybe what the timing would look like? Thanks.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Thanks, Greg. And we're going to send you the domino effect bumper sticker after this. So you want to look after that. Uber is performing as we thought it would. It's doing so in a little bit of a different way. And I talked about it last quarter, but I think it's worth bringing up again. So first, from a sales perspective, it's about 1.9% of sales, and our -- we're tracking towards our goal this year of 3% of sales.

How this company is a little bit different? And what we've seen is really an uptick more in a high-low strategy. Originally, our approach was, okay, if we have kind of an everyday low-price, not compared to our channels, right, still the lowest price loyalty program in our channel, that would be the way to win. But actually, it's -- whether it's how customers shop or part of the algorithm or a little bit of both. Starting out with a slightly higher price that you can discount from is a way to get more eyeballs. And so we've continued to test and pivot that way and you're seeing into the results.

So again, we're -- the year is folding like we thought it would. And so what that leaves us with your question about DoorDash is the current exclusivity with Uber runs through Q1. At that point, whether or not we renew is our choice, and so we'll be looking at the economics and potential at that point. But that would be the time to think about do we stay exclusive or do we open up to DoorDash, or other aggregators. We've talked about the billion dollar opportunity for us is really our fair share on all of the aggregators, which in about three years or so is what we hope to get to.

[Operator]

Thank you. And our next question comes from the line of John Ivankoe from J.P. Morgan. Your question, please.

[John Ivankoe, Analyst at JPMorgan Chase & Co.]

Hi. Thank you. It's especially in the context of closures in France and in Japan, I asked about impacts of store splits in the US. You're currently at around a 2.5% store growth rate in the US, which is actually, high for a fairly mature brand. So talk about what you see as net -- I guess, cannibalization, whatever you want to call it, what negative impact on same-store sales from store splits? And is there any learning on, I guess, either side of the Atlantic or either side of this Pacific as it may be in terms of who is learning for who -- who was learning from who in terms of how markets can be penetrated. Is it that they didn't necessarily follow the same-site model that you do, or do you have any opportunities to kind of look at them in terms of how densely markets can be penetrated? I just want to, I guess, have a sense of your level of risk acceptance in terms of hitting your US store targets without overly encroaching on your existing current asset base. Thank you.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes, John, I'll take that. And maybe I'd start with the fact that I remember when we used to actually, disclose what headwinds of splits were. So the fact that we're not disclosing them anymore can give you a sense of how material they are. The great thing about the Domino's model and us leaning into carryout about a decade ago is 80% -- when you split a store, 80% of the carryout volume is incremental. And so that right away when you're splitting a territory, you're getting all these customers, those customers, they don't want to drive and pass four pizza places on their way to a Domino's. And so the more Domino's we have, the more carryout business we drive, and you can see how on-fire carryout is.

The number that Sandeep took you through was same-store sales for carryout. That has nothing to do with all the carryout sales we're driving from new stores. And then what happens when you split these stores, not only does your carryout business get better, but remember, I talked earlier about our delivery time being 10% better than they were two years ago. Sure, it's a lot of the programs that we're driving with our franchisees, but it's also when you split stores, you get closer to your customers. And when you have more consistent delivery, those customers come back more.

So it really is a -- it's a wonderful cycle when it's really going well. And actually one what I'd say is because you had asked about international learnings, one that -- DPE was one of the first folks to do in Australia. They got a 50 market share in Australia, and a lot of it was through penetration with new stores and obviously, tightening their delivery areas, growing their carryout business. What they talked about that they saw in Japan was they probably split a little too fast. But doing it strategically over time has been a winning formula yhey've shown it and I think that's been a huge driver of our market share.

[Operator]

Thank you. And our next question comes from the line of Sara Senatore from Bank of America. Your question, please.

[Sarah Senatore, Analyst at Bank of America Securities]

Thank you. I have actually, sort of one just clarification and then a question on the new restaurant growth. So I guess, the clarification was just quickly on the pricing versus cost inflation, and whether franchisees are seeing something similar. Obviously, you're still on track for the franchisee profitability targets, but a pretty modest price increase that clearly didn't cover inflation for labor insurance. Is that kind of the dynamic that we should expect to see broadly going forward? Or was there any -- anything kind of one time in this quarter that specifically perhaps around insurance?

But then the question on net restaurant growth is about -- you mentioned your strength in China and India. Could you just maybe in broad strokes, talk about what volumes look like in different parts of the world? So a closure in Australia presumably is a higher volume, or let's say, lack of openings in Australia, more of a hit to volumes for retail sales overall than perhaps openings in China and India. I mean, that would be my guess, but perhaps that's not accurate. Thanks.

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

So, Sara, let me start with the clarification on pricing versus cost inflation. I think you're talking about the corporate stores, particularly. And really, if you look at what happened on the corporate stores, and we had an insurance charge in the quarter that actually, resulted in margins contracting. And if you actually, strip out that insurance charge, margins were roughly flat and profit dollars grew. And really speaking, when we look at our franchisee profitability, that's pretty much a dynamic, where we're looking at profit dollar growth and that's exactly what we're expecting to see. And frankly, we expect to see that in corporate stores as well as we actually, go through the year. We continue to expect to see both margin improvement as well as profit dollar growth on the corporate stores as well.

And then I think specific to restaurant growth in China and India, and your comment on the size of the stores, the closures that we're talking about essentially are very low-volume stores. So from that perspective, I think they're not necessarily comparable to the averages across all the different markets. And so I think the drag is relatively small with the closures that we're talking about, specifically in Japan and France. And the growth opportunities continue to be robust. And the China stores, they've actually put out releases talking about their new-store openings and the kind of record sales they're generating over there. So very exciting to see the growth coming from China.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

And I'd add to that, Sara. For us and I think really for the industry, when you think about the best way to cover cost inflation, assuming margins are in the area of where they should be, the best way to do that is by driving order count versus price. And so cost inflation for some folks may be a negative thing. For us, given our scale because we can drive more order counts, if we can get away with doing that without pricing and getting frequency, we're going to do that all day and that's what's happened. And I look -- I just want to give a nod to our insights team because one of the questions earlier was about pricing in this environment right now and headwinds with the customer.

Well, with -- through our research, we knew we figured out when it was time to take price and we also figured out when it was time not to take price. And all of those decisions are what's leading into the results you see now and we continue to drive what we decide to do moving forward. Now the best piece of it too is the research, a lot of it is, it's numbers, but then it gets translated to real life when you put it down to the stores. And then what you do is you watch what consumers do and you watch what your franchisees do. And what's been great is obviously, the order counts so consumers are happy, but franchisees are sticking with the recommendations, not only obviously, on international offer, but local offers and menu pricing. And so this is something that I think is proprietary for us and has worked and will continue to work over time.

[Operator]

Thank you. And our next question comes from the line of Danilo Gargiulo from Bernstein. Your question, please.

[Danilo Gargiulo, Analyst at AB Bernstein]

Thank you. I was wondering if you can give a little bit more color on what you think, at least in your view, really causing the softness in unit opening by DPE? And more specifically also, if you can share what is your level of confidence that international store openings and closure pressure is going to be limited only to DPE, and that we're not going to see another potential reduction in the guidance later on with other master franchisees coming softer versus your original expectations. Thank you.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. Danilo, I'll let DPE's release kind of speak to what they're thinking about those closures. So they talked about Japan being a little bit aggressive in openings and now they're seeing kind of the result of that. What gives me confidence about the rest of the pieces of the algorithm is, as example, I said earlier, DPC China, Dash and Jubilant, they're going to be 40% to 50% of our openings and they each increased their outlook. And so the beauty of being in over 90 countries around the world is, look, I'm not trying to look away from what clearly, was a mist of one part of the business, but a good business is able to kind of handle that and that's what being in 90-plus markets helps us do. And all of these levers that end up leading to the 7% plus on the sales basis and the 8% plus on the profit basis really show how that is made up in times like this.

Anything to add?

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

No, that's okay.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. Okay.

[Operator]

Thank you. And our next question comes from the line of Peter Saleh from BTIG. Your question, please.

[Peter Saleh, Analyst at BTIG Research]

Yes. Great. Thanks for taking the question. I wanted to ask about the -- you guys mentioned positive order counts in both delivery and carryout in the US. Can you just talk a little bit about are these new customers? Are these lapsed users? And just any thoughts on that, call it, lower-income consumer. Are you seeing -- I know you said you were seeing growth across all income cohorts, but any thoughts on what you're seeing there? Is that accelerating? Is it stable? I guess that's my first question.

And just a follow-up on that on the store closures from DPE. Sandeep, you said they're very low-volume. Is there any way to give us an order of magnitude of how low these stores are in terms of volumes just so that we understand? Thank you very much.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. Maybe Sandeep, you can -- the other way to look at that is just talk about the profit impact.

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

Yes. I think -- so on this -- let me start with the second part of the question, right, which is the store volumes and what's going to happen. Very low volume in relative terms to the rest of the fleet and rest of the market in all the stores that are closing in Japan and France. So the impact is so immaterial to the profit number, it's in a few million dollars, and on a forward basis for 2025, it will have a very limited impact even on 2024 considering we're already halfway through the year. So very small to answer your question from that, Pete.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. And Peter, just on the first question, what I'd say about the order count, and I try to stress this by giving the specifics of delivery and carryout in every income segment is we've got some of the most balanced order count I've ever seen, and I believe that's also true for the -- not only in our history but also just in the industry right now.

Your specific question on the lower-income customer. Yes, the order count there is positive as well, and part of that was intent, not only from our pricing but as we put the loyalty program together. Remember, it used to have to have two things. You had to buy $10 worth of food to get any points. Now it's $5 so that hurdle is a little bit easier. You used to have to buy six times to get something free. Now you can buy -- get some free after two orders, which is great for the customer, actually, great for our franchisee too because the margin on the 20 point and 30 point items much better on those orders than the 60 point. So it's not like we just kind of fell into this. This was intent in both the design of our pricing and the design of our loyalty program and it's not going away.

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

And the beautiful thing, Pete, is it's so balanced across all income cohorts and I think it really reflects what Russell is talking about. And that consistency has been seen all through the first half of the year.

[Operator]

Thank you. And our next question comes from the line of Chris O'Cull from Stifel. Your question, please.

[Chris O'Cull, Analyst at Stifel Financial]

Yes. Good morning, guys. And Russell, just given the success of the New York Style Pizza, can you talk more about this innovation with intent strategy? And it's just part of that answer, can you maybe touch on whether the innovation you expect to launch later this year will leverage that approach?

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. Sure, Chris. Well, I'll tell you the one thing that did not drive New York Style Pizza was the guy in the spot, which for those of you who don't know was me. Sandeep keeps telling me I have a face for radio so we'll see when it's time for your performance review, how that works out. But yes, so New York Style Pizza, this idea of innovation with intent. If you look back the last 15, 16 years at Domino's, there are -- I can't think of more than two items that -- products that we've launched that we've taken off the menu.

Launching a new product takes a lot of money, takes a lot of time, and so there needs to be a strategic role in it. Whether or not you are successful is whether or not those items are still there. So you think about -- I'm not going to really give you any forward-looking of it to say we're going to continue to do two a year. New York Style Pizza, right, we talked about, this is a customer that may not like our traditional crusts as much. So there's a reason for doing it.

If you think about what we did last year with Pepperoni Stuffed Cheesy Bread, okay? Putting pepperoni in something is probably not the most innovative thing in the world, but guess what, it reminded people that we had stuffed cheesy bread. And when you have all of these platforms and remember, Chris, 40% of what we sell is not pizza. You got to figure out a way to continue to talk about pizza, but continue to remind people that you have these platforms. And so maybe those are two good examples of intent, one is going after a customer that probably doesn't frequent Domino's, and the other is reminding people of a platform that when they add to their order is -- increases ticket and is more profitable for our franchisees.

[Operator]

Thank you. And our next question comes from the line of Brian Harbour from Morgan Stanley. Your question, please.

[Brian Harbour, Analyst at Morgan Stanley]

Yes. Thanks. Good morning, guys. If I could just follow up on some of the comments about store margins. So if you kind of set aside that insurance impact, I mean, is this mostly just about there being still pretty significant wage inflation? Do you think that's kind of the case through the balance of this year?

Obviously, you did have order count growth, right, but it sounds like that's kind of being offset on the labor side. And I don't know if maybe there is any sort of product mix dynamics that have also affected that. Could you just talk more about the store margin dynamic?

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

Yes. So, Brian, I think the thing of these -- with the Company stores is actually, it's a much smaller dataset, right, because we've only got about 60 MAs in which we're operating. And yes, there was some wage pressure that we were actually, dealing with as we went through the first half. But we were getting closer to lapping some of the wage pressures that we took. And overall, when you look at the economics of the stores, they actually on a first-half basis still pretty good and definitely, exit the insurance adjustment still expanding and growing.

We expect that to continue to happen. That's why I said for the full year on the Company stores, I still expect our margins to be better and our profit dollars to grow. And I think being -- what I want to emphasize is, we shouldn't view Company stores as an analog to what's happening on the franchisee stores because the dataset is so limited in relative terms. On the franchisee stores, we're seeing very, very balanced profit growth across the business and we -- that's what gives us confidence that the $170,000 or more is definitely on track.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. And I'll just maybe build on that. The question on the lap just reminds me of an earlier question we had about Q4 and Emergency Pizza, and how we're going to lap that potential headwind. And I guess what I'd say there is, we are in the business of creating headwinds. I love the questions on headwinds because that means we did something really successful that folks are wondering, oh, how are we going to overlap? Well, we're in the business of creating headwinds and we're in the business of beating those headwinds. And so I'm not concerned about that and I know what the team has going and they're up for the challenge.

And if you think about Emergency Pizza, during this time now where you are seeing a lot of price out there from folks, I think who has -- what price point is going to be, as I always talk about the sea of standard. How are you going to know when an ad is over, who owned this particular price point? Everyone in the country knows who owns Emergency Pizza, and so we have things like that, carryout tips, You Tip, We Tip, that's renowned value. And so there are -- as you see more-and-more discounts to customers as I think different restaurants are adjusting to pricing, I believe there is going to be a lot of noise in that. And what our team does really breaks through that noise.

[Operator]

Thank you. And our next question comes from the line of Todd Brooks from The Benchmark Company.

[Todd Brooks, Analyst at Benchmark]

Hey, good morning. Thanks for taking my question. Just a quick follow-up on loyalty. Sandeep, I think when you talked about loyalty last quarter that you talked about the 20 point and 40 point reward tiers being the majority of redemptions. Wanted to see if that trend is continuing to go going forward. And with enough time passing, do you have a sense that somebody that redeems at a lower point level tends to continue to do so? So it's almost a faster frequency flywheel coming from loyalty if those customers stick at those lower redemption tiers? Thank you.

[Sandeep Reddy, Executive Vice President and Chief Financial Officer at Domino's Pizza]

So, Todd, you asked the question and answered it yourself, right? And really, it's exactly that. We have been seeing very consistent trends in terms of the redemption of the 20 point and 40 point levels. And it is driving that frequency flywheel as we go along because they're continuing to transact and redeem. And that's what we're very confident on continuing as we move forward into a multi-year flywheel.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes. And back to the question before, Todd, that reminds me of the innovation with intent has -- innovation with intent is not just new products. It's a loyalty program and how you put your renowned value together. So with Emergency Pizza, if you recall, you buy pizza, you can get a free one in a month. Well, you do that, all of a sudden, you're part of our loyalty program. You're at 20 points, you're getting a free item.

With our tipping program, either carryout or delivery one, if you buy one, you're part of the program, you then use your tip, you've got a second item if you're part of the loyalty program and you're redeeming. The most important thing about our new loyalty program is getting people to understand how easy it is to earn. And the programs that we're putting out there aren't just driving sales, they're driving that clarity for folks about, wow, I can get stuff really quick.

[Operator]

Thank you. And our next question comes from the line of Christine Cho from Goldman Sachs. Your question, please.

[Christine Cho, Analyst at The Goldman Sachs Group]

Hi. Thank you. So I know you have just had the worldwide rally in May, so really curious to hear some of your key takes from the event. What were the -- any surprises? What were the areas that your franchisees around the world are most excited about, most worried about? Any common strategic priorities that have come up there will be great. Thank you.

[Russell Weiner, Chief Executive Officer at Domino's Pizza]

Yes, Christine. This was a fantastic rally and it's not just me saying it. Here is I'll give you some numbers on it. We do quantitative studies on everything here at Domino's. So we do it on a rally. It was the highest rally we've ever had as far as people, but the scores of attendees we've never had a higher one. And this one blew my mind. I'll get you all that later if I'm sharing something I shouldn't. But one of the things we ask people is, did -- what was the -- did you take away the key message, and the results there were 98% took away a key message.

We've never had numbers anywhere like that. And the cool thing was people were leaving the rally. A lot of times you do these rallies and whatever they're called like the bumper sticker we're going to send out earlier, it really is more -- what does the T-shirt look like or what do people shout? Hungry for MORE is more than that. Folks came away knowing what jobs they needed to do. And so really cool part for me were, for example, the US franchisees leaving and saying, I got it. I'm responsible for the M and the O, making sure the food, we make it delicious and we deliver it the right way.

We had international franchisees saying, ah, this idea of renowned value is really, really interesting. And what happened, we went back and you've seen changes in the marketing in a lot of our international markets because of Hungry for MORE. And so I just -- I believe it not only talks about the strength of our system, it's nice to have profitable franchisees all-in-one place, they're all pretty happy. But when they come away talking about the future is what makes us really excited.

[Greg Lemenchick, Vice President of Investor Relations at Domino's Pizza]

Thank you, Christine. That was our last question of the call. I want to thank you all for joining our call today, and we look forward to speaking with you all again soon. You may now disconnect.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Greg Lemenchick, Vice President of Investor Relations
• Russell Weiner, Chief Executive Officer
• Sandeep Reddy, Executive Vice President and Chief Financial Officer

Analysts

• Dennis Geiger, UBS Group AG
• Brian Bittner, Oppenheimer & Co.
• David Tarantino, Robert W. Baird
• Andrew Charles, TD Cowen
• David Palmer, Evercore ISI
• Lauren Silberman, Deutsche Bank Aktiengesellschaft
• Gregory Francfort, Guggenheim Partners
• John Ivankoe, JPMorgan Chase & Co.
• Sarah Senatore, Bank of America Securities
• Danilo Gargiulo, AB Bernstein
• Peter Saleh, BTIG Research
• Chris O'Cull, Stifel Financial
• Brian Harbour, Morgan Stanley
• Todd Brooks, Benchmark Co.
• Christine Cho, The Goldman Sachs Group, Inc.