Yahoo Finance Domino’s Pizza, Inc. (NYSE:DPZ) Q1 2024 Earnings Call Transcript
Domino's Pizza, Inc. (NYSE:DPZ) Q1 2024 Earnings Call Transcript April 29, 2024
Domino's Pizza, Inc. beats earnings expectations. Reported EPS is $3.58, expectations were $3.39. Domino's Pizza, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to Domino's Pizza's First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Mr. Greg Lemenchick, Vice President of Investor Relations. Please go ahead, sir.
Greg Lemenchick: 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. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8-K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call.
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. With that, I'd like to turn the call over to Russell.
Russell Weiner: 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 segments. We saw the largest growth in our lower-income cohorts that are undoubtedly benefiting from the renowned value that we're offering. I'd like to highlight our first quarter results through the lens of our M-O-R-E, Hungry for MORE, pillars. As you know, M stands for most delicious food. We know we have the most delicious food in the industry and are focused on showcasing that with more mouthwatering food photography in all of our marketing and sales channels.
We also ran a campaign that highlighted our pan pizza, a premium product that brought news to this crust type for the first time since 2014. And I'm excited to announce that our first product innovation of the year, New York Style pizza launches on air today. The idea for New York Style came from customers who prefer a thinner more foldable crust than our traditional hand tossed. And we believe that this new crust style will drive incremental occasions. It will also drive deliciousness as the foldable crust lets us focus more on our incredible toppings, including a really unique blend of provolone cheese that comes on every New York Style pizza. Additionally, this crust option will be available as part of our Mix & Match offer, and Domino's Rewards members can redeem 60 points for free medium two-topping New York Style pizza as well.
This is another example of how innovation is designed to drive value and more customers into our loyalty platform. The 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 products. As I shared on our last earnings call, in 2024, we're rolling out a new service program we're calling MORE Delicious Operations, a series of three product training sprints that focused on our dough, how we build and make our products, and how we cook them. In Q1, we embarked on our first sprint, which focused on our dough, and rolled this out across all 6,800-plus stores in the U.S. We continue to see benefits from our service initiatives.
And in Q1, we actually delivered more pizzas than we did in Q1 of last year at improved delivery times. I'm just so proud of our operators. Our third Hungry for MORE pillar is R for renowned value. I want to expand on what renowned value means to us at Domino's. It's not about just having the lowest price in the market, it's about providing value that's innovative and that's memorable. Renowned value breaks through the sea of standard discounts that you see in the marketplace. Value is a Buy One, Get One Free. Renowned value reinvents this mechanic and creates Emergency Pizza. Emergency Pizza performed better than any Buy One, Get One Free I've done in my career, with a meaningful driver to our comps in both Q4 of '23 and in Q1. And it not only drove increased orders, but also the acquisitions of members into our loyalty program.
Domino's Rewards continues to perform extremely well and was the key driver of our strong U.S. comp performance. The program is delivering on our objectives. Active member growth rates are up significantly since the launch of our new program. From a percentage standpoint, our biggest increases are coming from new, lapsed and light customers. So, we're bringing these new customers into the fold. I'm particularly pleased with the increase in carryout customers made possible in part by our reduced $5 minimum spend for earning point. Once customers become members, they're redeeming more than ever before and increases are being seen across all of our channels, delivery and carryout. Our new 20 point and 40 point redemption tiers are doing exactly what we hoped.
They're engaging more customers. These two tiers now combine for the majority of the redemptions in Domino's Rewards. And the program has driven incremental profit dollars for franchisees. So, customers are getting more and our franchisees have earned more profits, truly a win-win. We believe Domino's Rewards will continue to be a meaningful sales driver for us in 2024 and beyond. National promotions are another way we're driving renowned value. In Q1, we brought back our Carryout Special Boost Week for the first time since January 2020, and this performance exceeded our expectations. Clearly, customers want value and we are driving it profitably for our franchisees. Now, as it relates to our promotional cadence in 2024, you can expect it to be consistent with what we did in 2019.
As part of that, you can expect around six boost weeks. As a reminder, these boost weeks are a proven customer acquisition tool that drives both short- and long-term benefits for our brand. And we're seeing the same commitment to providing renowned value internationally. Some of our best-performing markets are getting this right. As an example, our master franchisee in Mexico has run very successful boost week campaigns that have driven outstanding order and sales growth. While providing renowned value through our own channels is one part of our barbell strategy, tapping into the aggregator marketplace is the other. Our launch into the aggregator space remains on track to exit the year at 3% or more of sales coming through Uber Eats. Now that we're a quarter into our full launch, I want to share a few insights on what we're seeing.
Incrementality has been in-line with our expectations. In addition, we're seeing a higher percentage of single user transactions on Uber than we've seen on our own channels. Further, this channel is becoming more promotional. Customer responses to deals are stronger than to everyday low prices. As a result, we are continuing to work to finetune our marketing spend and our offers to ensure that we are effectively driving this channel. We remain focused on driving profitable transactions through Uber Eats while ensuring that the best values for our customers remain on our own channels. Everything we do at Domino's is enhanced by our best-in-class franchisees, the E in our Hungry for MORE strategy. We'll be hosting thousands of franchisees for our worldwide rally in May, where we plan to bring our Hungry for MORE strategy to life across our global system.
I can't wait for that gathering as our franchisees are what makes Domino's so special. They were the inspiration behind Hungry for MORE. So to close, I couldn't be more excited about 2024 and beyond for Domino's Pizza. Our first quarter results clearly show that our strategy is resonating with customers. This gives me great confidence that, we can deliver against our short- and long-term Hungry for MORE goals and drive significant value creation for our shareholders. With that, I'll turn things over to Sandeep.
Sandeep Reddy: 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. U.S. retail sales increased 7.8% and international retail sales, excluding the impact of foreign currency, grew 6.8%.
During Q1, same store sales for the U.S. saw a meaningful increase of 5.6%. Our strong comps in the quarter for carryout of 9.5% and delivery of 2.9% were driven primarily by transaction growth. As Russell mentioned in his remarks, the increase in U.S. same store sales was driven by transaction growth from our new loyalty program. This was inclusive of a continued benefit from Emergency Pizza and results that exceeded our expectations from the Carryout Special Boost Week that we ran. We also benefited from 0.9% of pricing and a 1.4% sales mix from Uber. These tailwinds were partially offset by a higher carryout mix, which carries a lower ticket than delivery. We are still evaluating how much of the 1.4% sales mix coming from Uber is incremental, but everything we have seen so far would indicate that it's in-line with our approximately two-thirds estimate.
Shifting to unit count, we added 20 net new stores in the U.S., in-line with our expectations, bringing our U.S. system store count to 6,874. Shifting to international, where results were generally in-line with our expectations, same store sales, excluding foreign currency impact increased 0.9% in the first quarter. Store counts increased by 144 net stores, which is an increase over the 106 we opened in Q1 of 2023. Income from operations increased 19.4% in Q1, excluding the negative impact of foreign currency of $1.4 million. This increase was primarily due to higher global franchise royalty revenues resulting from global retail sales growth of 7.3%, as well as higher supply chain gross margins due to procurement productivity, a decrease in the cost of our food basket and slightly lower delivery cost.
I also wanted to call out that our margin rate benefited by about 0.3% in Q1 from the tech fee being at $39.5 and the lower ad fund contribution rate of 5.75%. Now turning to our outlook, which remains in-line with what we previously shared. 7% or more global retail sales growth, excluding the impact of foreign currency, and we continue to expect the following: First, 2024 U.S. comps to be above the 3%-plus long-term guide as a result of our expected catalyst 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. Specific to Q2, we expect them to be slightly below Q1 on a one-year basis, as the Emergency Pizza promotion rolls off, partially offset by a ramp in Uber. You can expect a similar national promotions cadence to what we ran in Q1 in terms of our activity, inclusive of the April Carryout Special Boost Week that is now behind us.
Second, sales for Uber to increase throughout the year as marketing and awareness increases, and we are expecting to exit the year with an overall sales mix of 3% or more. Third, international comps to remain soft in the first half of the year due to a continuation of the trends we saw at the end of last year, but expect them to accelerate to our 3% or more long-term guidance in the back half of the year. Now, shifting to net stores, where we continue to expect 1,100 or more, which will be driven by 175 in the U.S. and 925 in international. 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 which remain unchanged, expect operating income margins to be relatively flat compared to 2023.
As a reminder, we are not expecting to see cost leverage in 2024 due to investments we are making in consumer technology, store technology and supply chain capacity to support future sales growth in the U.S. We are expecting our G&A as a percentage of retail sales to be approximately 2.4%. This is inclusive of approximately $9 million in timing of G&A spend in Q2, driven by our worldwide rally, which takes place every two years. We are expecting supply chain margins to be roughly flat compared to the prior year, incorporating an inflationary food basket for the rest of the year with a full year range of up 1% to 3%. Should our food basket pricing for the year move to the lower end of our expectations, we may see modest leverage in operating and supply chain margins.
Thank you. We will now open the line for questions.
See also
20 Best Business Ideas for Solopreneurs in 2024 and
25 Richest Billionaires in Sports Industry.
To continue reading the Q&A session, please click here.
