Domino’s Pizza, Inc. (NYSE:DPZ) Q4 2023 Earnings Call Transcript
Domino's Pizza, Inc. (NYSE:DPZ) Q4 2023 Earnings Call Transcript February 26, 2024
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 Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a 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, Greg Lemenchick, Vice President, Investor Relations. Please go ahead, sir.
Greg Lemenchick: Good morning, everyone. Thank you for joining us today for our fourth 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-K 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. I thought you were going to sing the opening as we discussed, but I guess we'll let that path today. Welcome to your first call here on Domino's, and good morning to everyone joining us. Our strong Q4 demonstrated that our Hungry for MORE strategy is already delivering results. Our positive U.S. same-store sales and transaction growth in both delivery and carryout underscore the strength and momentum that we're building in our business. These results and the initiatives that I'll cover today give me confidence in Domino's ability to continue to drive meaningful value for shareholders. We're excited to share an update on the business through the lens of our Hungry for MORE strategy. Now as a reminder, Hungry for MORE is our new strategy around what we're going to do to deliver over the course of the next five years, more sales, more stores and more profits.
We're going to accomplish this through our four more pillars, MORE, that I'll share a brief update on. Let's start with M. M is for the most delicious food. And we know we have the most delicious food in the industry, but you know what, it's time to talk about it more. It's time to show it more, and we're already doing that. We're currently on air with Pan Pizza advertising for the first time since 2014. We call Pan Pizza, our best kept secret. It's time to change that. Pan Pizza is a delicious product made with fresh never frozen dough. It also showcases the variety of crust we have to offer. You're probably also noticing a shift in our advertising as we're beginning to romance the product more to showcase the deliciousness of our food. You can expect this to continue throughout the year.
The O in Hungry for MORE stands for operational excellence, and this is how we're going to deliver on our promise to have the most delicious food. By consistently driving a great experience with our products. As we've noted before, we made meaningful strides operationally in 2023 with our Summer of Service program, which has resulted in service times being back to pre-COVID levels. But we're never satisfied, and we want to continue to get better, our operators and our franchisees, we are Hungry for MORE. In 2024, we're rolling out a new service program. We're calling that MORE Delicious Operations. This program will be a series of three product training sprints focused on our dough, how we build and make our products and how we cook them. All of this is being done with a keen focus on driving more consistency in our food by providing the proper teaching, tools and processes for our team members to succeed.
Our third pillar is R for Renowned Value. We've always been known as a premier value player, and we believe this can continue to be a differentiator for us in '24 through our improved loyalty program, our national promotions, and our rollout on Uber. Domino's rewards is off to a great start and was a key driver of our strong comp performance in the fourth quarter, when we saw positive sales and transactions in both our U.S. delivery and carryout businesses. We've also seen the following: an uptick in active members. We are up 3 million active members in 2023, with 2 million plus since our relaunch in September. Domino's Rewards ended the year with approximately 33 million active members, a big driver of the increase in active members as well as the early success of the program was our Emergency Pizza promotion, which was an innovative marketing initiative that drove increased order counts and acquisition of customers into Domino's rewards.
We're seeing more redemptions than ever before, and we're seeing them at those lower tiers that we implemented. And we know that this program has driven incremental profit dollars for our franchisees. So customers are getting more, and franchisees have earned more profits truly a win-win. Finally, we're seeing more carryout users and light users in the program than we were prior to the relaunch. So Domino's Rewards is working as we intended. National promotions will be another way will drive renowned value in '24. And right now, we're on air with our perfect combo promotion. We believe this is the best deal in the QSR industry to feed the family, and it highlights the depth we have in our menu. We also brought back our carryout special boost week in January for the first-time since January 2020.
And this performance exceeded my expectations. Clearly, customers want value, and we are driving it profitably for our franchisees. While providing value through our own channels is one part of our barbell strategy, tapping into the aggregator marketplace is the other. We're very excited about this new sales layer, which we believe is a different and largely incremental customer that we had not been able to reach in the past. Our entrance into this marketplace with Uber is on track as we are now fully rolled out across our U.S. system. We've gone live with the marketing and formally kicked off our one-year exclusivity period in Q1. Sales are building in line with increased marketing, which has been great to see and we expect those orders to continue to grow throughout the year.
Sandeep will share more about our sales expectations in 2024 for Uber in his comments. Now everything we do at Domino's is enhanced by our best-in-class franchisees, the E in our Hungry for MORE strategy. In 2023, we continue to enhance our U.S. franchisee base by adding more than 60 new franchisees to the system, the most in 15 years. Every one of these new franchisees started with Domino's either as a delivery driver or from within our system. This remains the secret sauce to our success. We ended 2023 slightly ahead of our expectations on U.S. store growth and profits, adding 168 net new stores and finishing the year with estimated average franchisee profitability per store of $162,000. This highlights the momentum we expect to continue into 2024.
I couldn't be more excited about 2024 and beyond for Domino's Pizza. Our foundation has never been stronger and our vision has never been greater. We made a ton of progress in 2023 and our strong start to '24 gives me confidence in our ability to win with customers and drive return for Domino's franchisees and shareholders. Now with that, I'll turn things over to Sandeep.
Sandeep Reddy: Thank you, Russell, and good morning, everyone. As a reminder, in the third quarter, we closed the remaining 143 stores in the Russia market. The 2023 global retail sales growth measures exclude the Russia market and are calculated as a growth in retail sales, excluding the retail sales from the Russian market from both 2023 retail sales and the 2022 retail sales pace. Now for our fourth quarter financial results. Excluding the impact of foreign currency, global retail sales grew 4.9% due to positive U.S. comps and global net store growth. U.S. retail sales increased 4.5% and international retail sales, excluding the impact of foreign currency, grew 5.2%. During Q4, same-store sales for the U.S. business saw an increase of 2.8%.
As Russell noted earlier, our strong comps in the quarter were driven by both delivery and carryout as they were up 2% and 3.9%, respectively. For the year, delivery represented 48% of our transactions and 58% of our sales, while carryout represented 52% of our transactions and 42% of our sales. The weight of sales and transactions shifted slightly more to carry out in 2023. The increase in U.S. Q4 same-store sales was driven by transaction growth from our new loyalty program inclusive of a benefit from Emergency Pizza, pricing of approximately 1%, and a 0.4% sales mix from Uber. It will take us some time to determine just how much of that Uber mix is incremental. So more to come on that as we move through 2024 and into 2025. These tailwinds were partially offset by a slightly lower average ticket that was the result of higher carryout mix.
Shifting to unit count. We added 92 net new stores in the U.S., bringing our U.S. system store count to 6,854 stores at the end of the year. For the year, we added 168 net new stores, which was a strong increase over the 126 net stores we opened in 2022. U.S. company-owned store gross margin decreased 1.6 percentage points in the fourth quarter of 2023. Excluding the impact from higher insurance costs and an increase in our loyalty liability, due to the change in point structure following the relaunch of the Domino's Rewards program, margins would have expanded slightly. Domino's unit economics remained strong with continued EBITDA growth for our U.S. franchisees. We are expecting that our average franchisee profitability per store will come in at $162,000 in 2023, up $23,000 from the prior year.
Shifting to International. Same-store sales, excluding foreign currency impact, increased 0.1%. The deceleration from the third quarter is being driven primarily by pressures in Europe and geopolitical tensions in the Middle East. Please note that the Middle East represents a relatively small portion of our profits at less than 3% of our operating income. Our international store count increased by 302 net stores in the fourth quarter. For the year, our net store growth in international was 702 units, excluding the Russia closures. In total for the year, we grew 870 net stores across the globe. Income from operations increased $8.4 million or 3.4% in the fourth quarter. Excluding the impact of the $21.2 million prior re-franchising gain that we are lapping income from operations would have been approximately -- would have been up approximately 13% in the fourth quarter and up approximately 10% for the full year.
Now turning to our 2024 outlook, which remains in line with what we shared at Investor Day in December. Our guidance calls for the following in 2024. 7% or more of global retail sales growth excluding the impact of foreign currency. We are expecting our 2024 U.S. comp to be above the 3% long-term guide as a result of our expected outsized catalysts in Uber and loyalty. As we have communicated previously, we expect our sales with 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. We expect sales with Uber to start ramping up after Q1, which will have only a partial tailwind from marketing. In the U.S., we are planning for a modest price increase in the low-single digits.
This is inclusive of California, where we're expecting to take pricing above that to offset the wage impacts from AB 1228. We expect our international comps to remain soft in the first half of the year due to a continuation of the trends we saw in the fourth quarter, 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 are expecting 1,100 or more, which will be driven by 175 in the U.S. and 925 in international. There was a meaningful uptick in our U.S. net store growth in the fourth quarter, which was slightly ahead of our expectations, and the pipeline continues to build. We are expecting net unit growth in the U.S. to be relatively flat to 2023 in the first half of the year and to accelerate slightly in the back half based on current visibility.
Internationally, we are expecting to increase net store growth each quarter over the prior year as we lap the one-time closures we had in 2023 and to step up significantly in the back half of the year. As previously communicated, we are expecting slightly less than half of our growth to come from China and India. On profits, we are expecting an 8% or more year-over-year increase in operating income excluding the impact of foreign currency. We do not expect the impact of foreign currency to have a material impact in 2024 based on current FX rates. A few additional points of color on some of the profit components. We are expecting our food basket to be up 1% to 3%. This has been driven by continued moderation on cheese prices. From meeting's perspective, we expect the Q1 food basket to be deflationary as we lap the only quarter from 2023 when the basket increased followed by moderate increases for the remainder of 2024.
We are expecting our supply chain margins to be roughly flat for the year, barring any unforeseen shifts in the food baskets. We are expecting an increase in year-over-year supply chain margins in Q1 due to the expected negative food basket, followed by a slight moderation for the balance of the year. We expect supply chain margin dollars to grow in line with transaction growth throughout the year. We are estimating that rate (ph) inflation across the system, inclusive of California will be in the mid-single digits, and this has been primarily driven by minimum wage increases. We are expecting our G&A as a percentage of retail sales to be approximately 2.4%, which is in line with 2023. We also wanted to provide an update on our technology fee for 2024.
In Q2 2023, we increased this fee to $39.5 and temporarily lowered our advertising fund contribution percentage by 0.25% to 5.75% for a 12 month period. Starting at the beginning of Q2 2024, we are lowering the technology fee to $35.5 and increasing the ad fund back to 6%. As previously communicated, we are expecting operating income margins to be relatively flat compared to 2023. We do not expect 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 Q1 margin expansion due to lower inflationary pressures, as previously noted on our food basket and we are expecting the Q2 margin rate to be down because of the timing of G&A spend which will be partially driven by our worldwide rally (ph), a gathering of our U.S. and international franchisees that takes place every two years.
We expect margins in the back half of the year to be flat. As I conclude, I wanted to note that we announced a 25% increase in our dividend and increased our share repurchase authorization by $1 billion. All of this is being done in line with our capital deployment priorities. Thank you. We will now open the line for questions.
See also 17 European Countries that Allow Dual Citizenship and 14 Best Software Stocks To Buy According To Hedge Funds.
To continue reading the Q&A session, please click here.
