Domino's Pizza, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Thank you for standing by, and welcome to Domino's Pizza's First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded.
Good morning, everyone. Thank you for joining us today for our first 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.
Thanks, Greg, and good morning, everybody. Our Q1 results demonstrated that our Hungry for more strategy is delivering on its promise, driving more sales, more stores and more profit. We drove strong comp performance in the U.S. that flowed through to the bottom line with double-digit profit growth. And our growth in the U.S. came through positive order counts across all income cohorts in both our carryout and delivery segment. We saw the largest growth in our lower income cohorts that are undoubtedly benefiting from the renowned value that we're offering.
Thank you, Russell, and good morning, everyone. Our first quarter financial results demonstrate how powerful our model can be when we drive profitable transaction growth. The smart pricing we took in 2022 and 2023 has kept us at a great value to our customers in 2024, while being profitable for our franchisees. This has resulted in profit dollar growth versus 2023 for our U.S. franchisees so far this year. We remain on track to achieve our target of $170,000 average U.S. franchise store profit for 2024. Excluding the impact of foreign currency, global retail sales grew 7.3% due to positive U.S. and international comps and global net store growth.
first, 2024 U.S. comp to be above the 3% plus long-term guide as a result of our expected catalysts in Uber and loyalty for the full year, and we expect comps to be 3% or more in each quarter for the remainder of the year.
[Operator Instructions] Our first question comes from the line of Andrew Charles from TD Cowen.
Question first on same-store sales. Just 1Q is 5.6%. Obviously, a very impressive number. Should we think of that as the high watermark for 2024 U.S. same-store sales. You talked about Q2 will sequentially moderate partially given the benefit of emergency pizza rolls off, while UberEATS picks up. But just curious if you think this performance, though, is broadly sustaining as we think about the remainder of 2024?
Andrew, thanks for the call. Part of the reasoning for putting out 3% or more as part of our Hungry for MORE algorithm is that 3% for us is the floor, but we're going to do everything we can to beat that and deliver more every single quarter. And so I'm not going to get into forward-looking on the quarters, but what I will say that I really liked about this quarter is there are 2 things I look at. I look at results and I look at repeatability.
And our next question comes from the line of Dennis Geiger from UBS.
Congrats on the quarter. Sandeep wondering if you could talk a little bit more about supply chain margin and sort of the overall operating margin strength that you saw in the quarter. And perhaps anything more on the latest thoughts on full year? I know you gave color on the quarter. You just talked about reiterating your thoughts for the full year. Anything more if you could kind of break down that procurement benefit perhaps exactly maybe what you saw deflation in the quarter itself for the supply chain? And anything on that go-forward procurement, et cetera, as we think about the full year.
Thanks, Dennis. And I think that's a great question because if you really go back to our fourth quarter call, Dennis, we talked about our expectations for the first quarter to be really margin improvement and margin expansion, which we did see. And directionally, it was slightly more, and I'll get to that in a second. But I think overall, when we look at the full year, our expectations really haven't changed. We were expecting to see procurement productivity benefits for the whole year, and we were expecting to make investments that offset the procurement productivity.
And our next question comes from the line of Brian Bittner from Oppenheimer.
Your same-store sales in the U.S. accelerated in the first quarter about 300 basis points from 4Q. Can you just talk about how much of the acceleration was traffic -- was all the acceleration traffic? And it sounds like one of the biggest drivers of the strong comps are the rewards program. That's what you seem to be citing the most. And I realize 2Q may be a little lower than 1Q. But in general, can you just unpack why you believe the rewards program and all the improvements that you've made there can be an ongoing driver for sales trends, not just even in 2024, but how it can build on itself in '25?
Sure. Brian, the Q1 results, I think you nailed it, what makes me so proud of the team is that they were order-count driven overall. They were order-count driven on our delivery business, on our carryout business across the different segments we've got. And I think that's something special in general, let alone, given the current environment for QSR.
And our next question comes from the line of Sara Senatore from Bank of America.
I wanted to ask about the promotional environment. I guess a couple of things. One is, I know you mentioned that 3P is more promotional. So I think the appeal for pizza had been that it was more margin neutral or maybe even accretive because of the -- maybe the absence of deals. So I'm just curious if that still going to be the case?
Thanks, Sara. I'll try to get to each piece of that unpack a little bit. I think what we talked about that we're seeing on 3P is definitely a high low value-driven business. And what we're doing is we're kind of adjusting accordingly. The important thing to remember is the best prices for consumers and our loyalty program are always going to be on our own channels. But it's interesting, though, when you look at what's going on in 3P, I think that really exacerbates the difference between what we're doing on our own channels. So there, it's price.
And I'm just going to add something, Sara, because I think sometimes when we talk about promotion, the subtext is what's happening to profitability. What is great for us is our profit dollar growth continues to grow as we expected it to. We are on track to the $170,000 or more for the year. And we're doing exactly what we hoped for.
And our next question comes from the line of David Palmer from Evercore ISI.
I was hoping maybe we could drill down into just the labor situation for Domino's as you see it across not just your company stores and supply chain, but also the franchisees. Any metrics you can share that could speak to how labor availability is impacting the business, both sales and margins?
Maybe I'll talk big picture, and Sandeep, you can talk on the margin level. I think, David, the biggest indicator to me about both labor availability, and frankly, the improvements that we're driving operationally is the fact that we delivered more orders in Q1 than we did last year at better delivery times. And so if labor was an issue, we wouldn't be able to do that. And obviously, the flow-through to profitability front, Sandeep spoke about that a little bit. And so that, to me, should be a takeaway that is working right now.
Yes. No, I think and Russell is exactly right. I think accessing labor has been not a problem at all as we move through the year. What I do think is reality, and we talked about this on the last call as well, is there is some wage pressure in the year with some minimum wage increases, statutory increases that will impact the franchisee P&L and even our corporate store P&Ls.
CX marketer may needs to follow up with that. There are 2 profitabilities that we care about at Domino's Pizza because we know if we balance those, our profit follows and certainly, the franchisee profitability is one of them. But the other is the profitability of -- for every American out there every pizza-buying citizen kind of all over the world.
And our next question comes from the line of Lauren Silberman from Deutsche Bank.
Congrats on the quarter. You talked about the strong performance across income cohorts. Can you expand on what you're seeing with the consumer and whether there are any observable differences and how consumers across cohorts are using the brand? And then any changes in consumer behavior signs are particularly down within each channel?
Sure. We talked -- I think, Laura, in Q4, even maybe in Q3 a little bit about what we were -- we thought was coming in 2024, and that is coming to fruition, traffic is hard to come by, orders are hard to come by in QSR. I think you're going to see that continue throughout the year. I don't think that's going to be the case at Domino's because of what we talked about before.
And our next question comes from the line of Danilo Gargiulo from Bernstein.
Congrats [indiscernible] the quarter. I was wondering if you can elaborate on what is causing international markets to have a little bit more compressed growth this quarter, which kind of was in line with your previous expectations? And particularly, if you can elaborate if you have been able to estimate how the pressure from the tension in the Middle East are impacting you specifically? And more broadly, if you can take any lessons from the domestic markets that are growing so fast and you can trust them over to the international market?
Well, you both asked and answered the question. So great job. Yes. No, look, Q1 comps were in line with our expectations. We continue to see pressure in Europe and Middle East. Sandeep had talked about this last time. The Middle East represents a relatively small percentage, less than 3% of our operating income.
And our next question comes from the line of Gregory Francfort from Guggenheim.
Russell, you made a comment about just the third-party channel having more single item orders. And I think the reason for why you expected sales to build as you move through the year, was because you were still figuring out how to promote on the platform. I'm curious, what do you think has been working and what do you think still needs to be tweaked to kind of get you to where you want to be as you exit the year from a mix perspective in terms of pricing and promotional structure?
Yes, Greg, we -- like I said, things are a little bit different on the platform than they were last year. The competition -- the promotional competition is just up. But we're still sticking to our strategy there of best pricing online at Domino's. It's just more about how we manage it. So for example, your base price could be higher if you want to discount a little bit more. I mean all of that stuff is available to us.
And our next question comes from the line of John Ivankoe from JPMorgan.
In the context of third-party delivery, maybe being a little bit more promotional. I was hoping if you could put that in the context of your own delivery fee. We've actually seen some stores where it can be as high as $7.99. I think that's a New York example, but it's still an example.
Yes. Thanks, John. We do price scraping on a, I think, other weekly or biweekly basis on delivery fee. And so what's important to understand is the recommendations to our franchisees are based on the competitors that are out there, kind of the ones that have stores that are more direct competitors whose pricing is probably a little bit lower than when people buy things on the aggregators.
And our next question comes from the line of Chris O'Cull from Stifel.
Russell, you mentioned the company seeing more individual orders on UberEATS channel. And I was just wondering, does this create an opportunity to be more aggressive in promoting non-pizza items on the channel and maybe even attempt to drive sales during the lunch daypart? And also as a company share of voice on the platform right now among the pizza competitors, is that similar to what we might see outside of the channel?
Chris, on the second one on share of voice inside versus outside the channel. I'll have to get back to you on that one. That's not something that I know off the top of my head. As far as what it is that we sell on Domino's, we have been -- I've been here a long time, and I've seen us promote just pizza on media, and I've seen us promote just our individual items like sandwiches or pasta. And really, the magic for us, the big sales becomes when -- I've used this before, this idea of Pizza Plus when you offer both. And that's really what mix-and-match is all about.
And our next question comes from the line of Andrew Strelzik from BMO Capital Markets.
I wanted to ask about the U.S. store growth pipeline. The first half of the year, I know it's supposed to be roughly flat year-over-year, and it seems like it's tracking there. But how are you seeing that pipeline build with the comp strength and margins obviously moving in the right direction? And just wanted to get a sense from you on when you expect and your confidence that you'll see that inflection higher in the back part of the year and even as we move into 2025 and beyond?
Yes. Thanks. We've got visibility of the pipeline through the remainder of this year through next year, and I feel really good about hitting the 175 plus number. Stores tend to be a lagging indicator of performance and as you can expect with profits going up with order counts going up, we're becoming a more and more attractive proposition every day to our franchisees, but regardless of Q1, you should note, but before these results, the pipeline was clear on the 175 plus.
And our next question comes from the line of David Tarantino from Baird.
Russell, I had a question related to one of the comp drivers that maybe gets underplayed and that's the advertising approach. It seems like you made quite a big evolution in the advertising versus what you've done in the past in the first quarter and maybe before the first quarter, with a lot more focus on the food and the value as opposed to some other topics.
Yes, David, I'm really glad you noticed. The team, I think, has done a fantastic job. We brought a brand-new food photographer, filmmaker on and the deliciousness on Domino's ad. I mean, it's just -- it's a different ad than it used to be. And you take that and you combine that with the talk value, the renowned value I talked about earlier. And that stuff breakthrough. I have a lot of -- people I know are saying, wow, it feels like Domino's is advertising a lot more this year than it ever did before. And the answer is not really. It's -- what's happening is what we're doing is breaking through more. And that's where you want to be. And I think when we talk about Hungry for MORE, the M and the R, the most delicious food and the renowned value were going to be the 2 things we're going to lean into.
And our next question comes from the line of Brian Harbour from Morgan Stanley.
Maybe just on the operational focus on dough, what was the nature of that? And what's still planned for this year? Are those things that sort of have a cost benefit in your view? Or is it more just about kind of product consistency and service time?
Yes. Thanks. It really is about consistency. And consistency gets repeat purchase. And so the way I think of it is we -- in the U.S., we sell about 1.5 million pizzas every day. We don't want to look at it that way. We want to look at -- we sell one pizza, 1.5 million times. Every pizza that we make is a chance to delight a customer or disappoint a customer.
Our next question comes from the line of Peter Saleh from BTIG.
I just wanted to ask about the U.S. pizza category in general. Russell, do you think it's taking share at this point in time? I think coming out of COVID out of really '21, there was some pizza fatigue going on. That seems to have subsided. Just curious if you think the category itself has grown faster than it had been in the past couple of years. Or are you guys just taking share with some of the self-help initiatives that you have in place?
Yes. I think we've returned to where we were, what our calling card was over time, which is that this is a category that is tremendous, and it's growing kind of in line with population. What we have always done is we've been, what I call it equal opportunity share stealers. And frankly, we lost that last year, 2 years, and we're back.
And our next question comes from the line of Jon Tower from Citi.
I'm curious, I wanted to come back to your comments earlier, Russell, regarding the loyalty program. I think you had mentioned in the U.S. that you're seeing some pretty good uptick from new lapsed users, light users, but I'm curious to hear about how existing loyalty members have responded to the program so far and all the changes that have taken place? And then separately, in terms of the consumer demand, obviously, you've had a lot of promotional -- heavy promotional windows during the fourth quarter and into the first quarter here. How has the consumer responded to the brand outside of those windows?
Got it. Well, first, on the loyalty program, I think it's safe to say that not only new customers, but existing customers are really engaging in the program. If you're an existing customer and you had 50 points in your loyalty bank, you woke up when we launched this new program and you were able to get 2 free items instead of 0. And so there are a lot of happy customers who are existing customers there.
And just -- I'm going to add something to that, John, because I think when you look at the promotional windows and you talked about what's the cadence outside the promotional windows, it's very good. But why is it very good? It's because of the loyalty program. The activity that's actually generated through the loyalty program is really dispersing transactions and redemptions right through the quarter. And I think that just speaks to the strength of what we're doing with renowned value and the loyalty program specifically.
Yes, that's a great point, Sandeep, which I don't like to admit when Sandeep makes a great point, but this was a good. The other pieces of the renowned value that are different than what we did before is to get this value, you have to sign up for the loyalty program, right? You can get mix and match, you don't have to be a loyalty member. But to get the carryout tips to get emergency pizza to get tipped for your delivery, you have to be part of the loyalty program. And so what these things are doing is they're working together versus working separately. And I think you just see the compounding effects of that.
And our next question comes from the line of Jeffrey Bernstein from Barclays.
Just a question on the near-term comps for Domino's and the industry, I guess. On Domino's, I know you mentioned the second quarter comp below the 5.6% in the first quarter. I'm wondering whether that surprises you relative to plans at the start of the year. I would think that the ramp in Uber and loyalty and easier compares would more than offset the fee of emergency pizza. So just wondering whether that similarly surprises you?
I'll ask Sandeep to talk about the near-term comps, and then I'll answer your question on transactions.
Yes. So I think on the near-term comps in Q2 that we talked about on the call, really, it's not surprising as at all. I mean, this is pretty much in line with our plans. We knew that we've had great success with the [ multi ] Pizza, and we were glad we did that because we've actually acquired customers into the loyalty program. But we did see some lift, which I think will kind of normalize as we go into Q2. But to the point we made making sense at the beginning of the year, we're expecting ramping and Uber to happen over the course of the year. So we expect to be slightly below our Q1 performance, which was very, very good. And we still think Q2 is going to be very, very good, but in line with what we expected.
Yes. And I think on the -- in the QSR space, Jeff, what I was talking about was really more order count. I think there's just been pricing that's been taken in the category and consumers are responding now. You're seeing it in the results and what I'm excited about for us is the pricing we've taken is really in the rearview mirror. And so we can focus on driving value, profitable value to both our customers and our franchisees. And look, I'm sure there will be others in the industry who are also doing the same, but I think we'll be a little bit of an outlier there.
Yes. And I just want to add one thing on this because -- I talked about in the prepared remarks and Russell referred it on smart pricing. The interesting about smart pricing is we took a lot of spot pricing in '22 when the market was highly inflationary. The smart pricing in '23 was almost taking no pricing. And that's really what actually drove that value differential that is now really showing up.
Yes. I think one of the things we talked about before was consistency of product. If there are 2 things that we've got this tremendous e-commerce business. So we know we can tell on conversion when we do things right and we do things wrong. Product consistency is really important. The other thing is pricing consistency. People don't want whiplash. They want to get what they expect and we took that in 2022 and now they're getting what they expect, and it's profitable for our franchisees, and we're seeing that in the numbers.
And our next question comes from the line of Meredith Jensen from HSBC.
On prior calls, I've heard you all speak about the experience Domino's has had internationally with third-party delivery and now that it's been rolled out here, I was just kind of wondering if you might speak a little bit about sort of the -- maybe the consumer behavior differences that you're seeing? Or some other things that have come up even anecdotally about the differences there.
Yes, sure, Meredith. I mean really, what we've seen so far is some of it's very in line with what we thought going in, which was these customers, as we said earlier, would be more single users, they'd be younger they, especially on Uber, would be incremental to us and Sandeep has talked about a few months into this, it looks like they're about 75% incremental.
2/3 incremental.
I'm sorry, about 2/3 incremental, yes, sorry -- about 2/3 incremental. And so the thing on the other side is just more just the promotional nature of it. And the pricing and profit ends up being kind of what we thought, but how we're getting to it is just in a little bit of a different way. Anything to add?
And our next question comes from the line of Alex Slagle from Jefferies.
Great to see everything coming together here. I had a question on the operations and the acceleration in delivery volumes, seemingly just starting and so forth, you're able to drive the speed improvements. But as the volumes ramp further, I guess, it's more of these individual orders on 3P and perhaps more surges of demand at certain times. I mean how much of your ability to keep up with the volumes and improve speed will require a step up in hiring drivers versus productivity and technology-driven improvements or other opportunities that you see out there?
Yes. Well, the nice thing about our business is it scales really, really well. And so the -- I know you know this, but it sounds like we have to add a driver every time we add an order. And so what we're trying to do and what we have done with a lot of these back of house improvements is we've made these orders just more scalable, more leverageable. And so that's part of the process. But secondarily, as we talked about, driving for Domino's Pizza now is an attractive job. We're about to see a whole bunch of franchisees and more importantly, future franchisees at our rally. In order to become a Domino's franchisee, you need to start as a driver or a pizza maker.
And our final question for today comes from the line of Jim Salera from Stephens.
Wanted to ask on the New York Style Pizza innovation. Just as how that triangulates with some of the other promotions you guys have going on? And just any color you might have on driving either new use or new consumption from people that are discovering Domino's on the third-party apps or potentially newcomers to the loyalty program and how you can tie innovation into those newer users?
Yes. That's a great question. New York is our first new product launch of the year and one the things that testing shows for us is this is a different customer. This is a customer who prefers a thinner foldable pizza that's a customer who really -- ingredient quality is important to them. And so we think bringing this into a portfolio is actually going to be attractive to folks who may be are pizza lovers, but our traditional hand cost may be a little bit too thick for them in cross type.
Thank you, Jim. 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 to you all again soon. You may now disconnect.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.