Sandeep Reddy
Executive Vice President and Chief Financial Officer at Domino's Pizza
Thank you, Russell, and good morning to everyone on the call. I'll begin my remarks with updates on the actions I've previously outlined to improve our long-term profitability. First, we are continuing to examine and evolve our pricing architecture. During the fourth quarter, the average year-over-year price increase that was realized across our U.S. system was 6.3%. The realized pricing for full year 2022 was 5.4%. Second, efficiencies in our cost structure as we seek to ensure that revenues consistently grow faster than expenses. We saw another sequential improvement in year-over-year operating income margin as a percentage of revenues as margins expanded 130 basis points in Q4 versus the 160 basis points contraction in Q3. Even if you exclude the 150 basis points benefit to operating income margin from the $21.2 million refranchising gain recognized in the quarter, the contraction in year-over-year operating income margin as a percentage of revenues in the quarter sequentially improved by 140 basis points versus Q3. Third, we had positive same-store sales growth, excluding foreign currency impact in both our U.S. and international businesses for the first time since Q4 2021, contributing to improving our operating income leverage.
Now our financial results for the quarter in more detail. When excluding the negative impact of foreign currency, global retail sales grew 5.2% due to positive sales comps and global store growth over the trailing four quarters, lapping 9% global retail sales growth excluding FX and the 53rd week impact in 2020 in Q4 2021. As we have discussed in the past, we believe it has been instructive to look at the cumulative stack of sales across the business anchored back to 2019 as a pre-COVID baseline. With the evolving macroeconomic conditions, we do not currently believe it will be relevant to anchor back to 2019 going forward and anticipate returning to evaluating the business on a one-year comp basis in 2023. Looking at the three-year stack, our Q4 2022 global retail sales excluding foreign currency impact grew over 26% versus Q4 2019.
Breaking down total global retail sales growth, U.S. retail sales increased 2.7%, rolling over a prior year [Phonetic] increase of 4.6% excluding the impact of the 53rd week in 2020, and are up more than 21% on a three-year stack basis relative to Q4 2019. International retail sales excluding the negative impact of foreign currency grew 7.5%, rolling over a prior year increase of 13.2% excluding the impact of the 53rd week in 2020, and are up more than 30% on a three-year stack basis relative to Q4 2019.
Turning to comps. During Q4, same-store sales for the U.S. business increased 0.9%, rolling over a prior year increase of 1%, and were up 13.1% on a three-year stack basis relative to Q4 2019. This represented a sequential deceleration of 4.5% from Q3 on a three-year stack basis as we saw clear evidence of softening demand from delivery customers in particular, given the challenging macroeconomic environment during the holidays. The estimated impact of fortressing was 0.5 percentage points during the quarter across the U.S. system. Going forward, we will only update the impact of fortressing if the change in impact is material. The increase in U.S. same-store sales in Q4 was driven by an increase in ticket, which included the 6.3% in pricing actions I mentioned earlier, partially offset by a decline in order counts.
As we have previously shared, we believe it is instructive to break U.S. stores into quintiles based on staffing levels relative to a fully staffed store to give a sense for the magnitude of the impact of staffing. Looking at Q4 same-store sales, stores in the top 20%, those that are essentially close to fully staffed, on average, outperformed stores in the bottom 20%, those that are facing the most significant labor shortages by less than 2 percentage points. This is down sequentially from the approximate 6 percentage point gap we saw in Q3.
Now, I'll share a few thoughts specifically about the U.S. carryout and delivery businesses. The carryout business was strong in Q4, with U.S. carrier same-store sales 14.3% positive compared to Q4 2021. On a three-year basis, carryout same-store sales were up 31% versus Q4 2019. The gap for carryout between the top and bottom quintiles based on staffing levels remained small during the quarter.
The delivery business continued to be more pressured. Q4 delivery same-store sales declined by 6.6% relative to Q4 2021. Looking at the business on a three-year stack, Q4 delivery same-store sales were 3.3% above Q4 2019 levels. When we look at the same quintiles relative to the delivery business, the gap between the top and bottom quintile stores closed considerably. We saw only a 2-percentage-point gap in delivery same-store sales between stores in the top 20% and those in the bottom 20%. This represents a sequential improvement from the 8-percentage-point gap in the third quarter. The 2-percentage-point gap is in line with the expected gap in performance in a normal operating environment, and we believe is no longer a significant driver of sales performance. We do not intend to continue disclosing the performance by staffing quintiles in the future.
Our U.S. carryout business is going from strength to strength, and our pizza QSR carryout market share is up close to 200 basis points in 2022, and up close to 500 basis points since 2019. Our market share in total pizza QSR, which includes delivery, carryout and sit down, continued to hold steady over the past year and is still up close to 300 basis points versus three years ago.
Before I conclude my comments on market share, I would like to touch on channel dynamics for pizza QSR versus non-pizza QSR based on data we received from NPD. As Russell mentioned earlier, delivery in 2022 was down in both pizza QSR and non-pizza QSR, while sit down was up significantly in both. In the case of pizza QSR, this was driven more by a shift from delivery to sit down and cooking at home. In the case of non-pizza QSR, growth in sit down was potentially driven by a shift from delivery, but also from carryout. Domino's business model in the U.S. has historically been focused mostly on the delivery and carryout channels. So the shift to sit down hurts us relative to others in the non-pizza QSR, who historically have had business models that included sit down and carryout, but have now added delivery to their distribution channels. We expect this dynamic to continue to play out in 2023 as sit down, despite recent growth, is still below 2019 levels.
Shifting to unit count. We and our franchisees added 43 [Phonetic] net new stores in the U.S. during Q4, consisting of 50 store openings and 7 closures, bringing our U.S. system store count to 6,686 stores at the end of the quarter, which brought our four-quarter net store growth rate in the U.S. to 1.9%. This deceleration in growth was expected in light of the permitting and store construction supply chain challenges we have faced all year. While we expect the first half of the year for U.S. store openings to continue to be challenging due to a continuation of these same factors, based on our current pipeline, we expect a gradual recovery starting towards the second half of 2023. Domino's unit economics remained strong relative to the many pressures faced throughout the year, including staffing challenges and a high inflationary environment for food and labor. The average Domino's store in the U.S. generated more than $1.3 million in sales during 2022. We currently estimate that our 2022 average U.S. franchisee store EBITDA was close to $137,000, not much below the 2019 estimated EBITDA of $143,000. In fact, estimated average store profitability was higher in Q4 2022 than Q4 2019. We will update the final number on our Q1 call.
With our continued strong four-wall economics, we remain bullish on the long-term unit growth potential in the U.S., and we maintain our conviction that the U.S. can be an 8,000-plus store market for Domino's. New store openings paybacks remained strong with stores opened in 2019, averaging around three-year paybacks similar to the 2018 vintage. Same-store sales excluding foreign currency impact for our international business increased 2.6%, rolling over a prior year increase of 1.8%, and were up nearly 12% on a three-year stack basis relative to Q4 2019. We continued to face the headwind of the negative year-over-year impact of the expiration of the 2021 VAT relief in the U.K., our largest international market by retail sales. The fourth quarter impact was around half the magnitude of the second and third quarter as the U.K. VAT relief was reduced from 15% to 7.5% in 2021 on October 1st. The year-over-year impact of expiration of the U.K. VAT relief will continue while we lap the reduced rates that were in place through March 31, 2022.
Our international business added 318 net new stores in Q4 comprised of 406 store openings and 88 closures. Our closures were driven by another round of closures in Brazil as our master franchisee there continues its work to optimize the store base in the market as well as some closures in Russia, where our master franchisee as previously announced by them continues to explore opportunities to exit the business in that market. This brought our current four-quarter net store growth rate in international to 7.4%. When combined with our U.S. store growth, our trailing four-quarter global net store growth rate was 5.5%. The 5.5% is impacted by a significant increase in international closures this year as compared to our historical run rate, including in Brazil, Italy and Russia.
Turning to EPS. Our diluted EPS in Q4 was $4.43 versus $4.25 in Q4 2021. Breaking down that $0.18 increase in our diluted EPS, our operating results benefited us by $0.27. Changes in foreign currency exchange rates negatively impacted us by $0.22. Our lower effective tax rate positively impacted us by $0.20, driven by the discrete impact from the reversal of a tax reserve based on a recent tax law change related to one of our foreign subsidiaries during 2022. Lower net interest expense benefited us by $0.04. The refranchising gain recognized from our fourth quarter store transaction benefited us by $0.46. The unrealized gain recognized on our remeasurement related to our investment in Dash in 2021 negatively impacted us by $0.68. And a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.11.
Transitioning to the full year. I would like to hit on a few financial highlights for 2022. Global retail sales grew 3.9% for the year, excluding the impact of foreign currency. Same-store sales in the U.S. declined 0.8%, and international excluding FX grew 0.1%. We and our franchisees opened 1,032 net new stores during the year despite significantly higher closures this year in our international markets as previously discussed. Our food basket for the year was up 13.2%, reflecting the strong impact of inflation. Our G&A for the year was $417 million, down 2.8% versus $428 million in 2021. Operating income was down $12 million versus 2021 including the $21 million impact of the refranchising gain. Operating income margin was positively impacted by 50 basis points due to the refranchising gain, but this was fully offset by the negative impact from foreign currency. If foreign currency remains at current levels or increases as a headwind going forward, we expect that this will be a barrier to recovering to our pre-pandemic operating income margins. Although we faced operating headwinds in 2022, we continued to generate sizable free cash flow. During 2022, we generated net cash provided by operating activities of approximately $475 million. After deducting for capital expenditures of approximately $87 million, which consisted of investments in our technology initiatives and supply chain centers, we generated free cash flow of approximately $388 million. Free cash flow decreased $172 million from 2021, due primarily to changes in working capital including accrued liabilities and income taxes as well as higher advertising fund spend and lower net income.
During the year, we returned over $450 million to shareholders through share repurchases of $294 million and dividends of $158 million. As of the end of the year, we had approximately $410 million remaining under our current Board authorization for share repurchases. Our Board has also approved a 10% increase from our prior quarterly dividend to $1.21 that is payable on March 30th of this year.
Looking forward to 2023, we would like to provide our annual guidance measures for the year. We currently project that the store food basket within our U.S. system will be up 3% to 5% as compared to 2022 levels. We expect the first quarter food basket increase to be higher than the rest of the year. We estimate that changes in foreign currency exchange rates could have a $2 million to $6 million negative impact on international royalty revenues in 2023 as compared to 2022 if foreign exchange rates remain at current levels. The negative impact of currency is expected to be higher in the first half of the year based on current rates. We anticipate our capex investments will be between $90 million and $100 million as we continue to strategically invest in our business and prioritize our spend. We expect our G&A expense to be in the range of $425 million to $435 million. Our tax rate excluding the impact of equity-based compensation is expected to range from 22% to 24%.
Finally, given the current macroeconomic headwinds that are impacting our U.S. delivery business in particular, we are updating our two- to three-year outlook from 6% to 10% global retail sales growth to 4% to 8% global retail sales growth, and unit growth from 6% to 8% global net unit growth to 5% to 7% global net unit growth. We expect 2023 to come in towards the low end of the ranges for both metrics. We look forward to providing more details at our Investor Day we will hold before the end of calendar 2023.
Thank you all for joining the call today. And now I will turn it back to Russell.
