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Dominos Pizza [DPZ] Conference call transcript for 2022 q2

2022-07-21 14:45:21

Fiscal: 2022 q2

Operator: Good day and thank you for standing by. Welcome to Domino's Pizza Q2 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today to Ryan Goers, VP of Finance and Investor Relations. Please go ahead.

Ryan Goers: Thank you, Dylan, and good morning. Thank you for joining us today for our conversation regarding the results of the second quarter of 2022. Today's call will feature commentary from Chief Executive Officer, Russell Weiner; and Chief Financial Officer, Sandeep Reddy. As this call is primarily for our investor audience, I ask all members of the media and others to be in a listen-only mode. I want to remind everyone that the forward-looking statements in this morning's earnings release and 10-Q also applied to our comments on the call today. Both of those documents are available on our website, 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. I'll request to our coverage analysts, 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 only one one-part question on this call. Today's conference call is being webcast and is also being recorded for replay via our website. With that, I'd like to turn the call over to our Chief Executive Officer, Russell Weiner.

Russell Weiner: Thank you, Ryan, and thanks to all of you for joining us this morning. As Ritch Allison and I communicated back in April, we expected the second quarter to be challenging. We continue to navigate a difficult labor market in the U.S., especially for delivery drivers, in addition to inflationary pressures, combined with COVID and stimulus fuel sales costs from the prior two years. Our results for the quarter were consistent with the challenges we outlined at that time. However, the strength of our franchisees and team members along with the strategies we're putting into place, make me feel confident that we're on the path to overcome these short-term obstacles, make the Domino's brand and business stronger than ever. Back in May, my team and I gathered with more than 8,000 of our franchisees and team members from around the globe at our 2022 worldwide rally. Due to COVID, we had to cancel our last rally. So it was our first time back together as one global team in four years. We used this time to share best practices, a lot on goals and commit to continue growth that will drive meaningful value creation for all of our stakeholders. The energy, the commitment, passion for the brand and confidence displayed at this year's rally was truly inspiring and reinforces my belief that our best days lie ahead. I can assure you that nobody at Domino's is happy with our recent performance. However, I have tremendous confidence in the team that we have assembled to leverage some of our current successes, address our current pressures and proactively work to mitigate the negative impact of those external factors that we can't control. As always, we will make discipline decisions and we'll focus on doing what is right for our customers, our franchisees and our brand. This approach has served our stakeholders well over many years and I don't see any reason to the verdict from this proven approach. We have high expectations for what we can achieve and we will hold ourselves accountable for meeting and often exceeding those objectives. I plan to provide you with more specific on the strategies and plans we have for the business after our CFO, Sandeep Reddy walk through the results of the quarter. Sandeep?

Sandeep Reddy: Thank you, Russell, and good morning to everyone on the call. Before I get into the details of the quarter, I wanted to share some of my initial observations after my first full quarter, as Domino's CFO. I see some exciting opportunities to improve our long-term profitability. First, while we continue to explore options to further optimize our consumer pricing architecture in the United States, it is important to highlight that the average price increase we realize in the second quarter across our U.S. system was nearly 6%. We have successfully pulled many pricing levers, including our standard menu pricing. Our national offers, our local offers and our delivery fees. This has helped us cover some of the cost increases we are incurring in both the food basket and labor market while also ensuring we continue to deliver terrific value to our consumers. Our work continues on right pricing our product while keeping a compelling value proposition for our consumers, with more opportunities to pursue. Second, efficiencies exist in our cost structure, as we seek to ensure that revenues consistently grow faster than expenses. We saw a sequential improvement in the year-over-year contraction of operating income from 270 basis points in Q1 to 180 basis points in Q2. We need to continue the strength. Third, as a result of the actions we are taking to increase our capacity to meet demand. We realized a sequential improvement in the U.S. same-store sales declines from minus 3.6% in Q1 to minus 2.9% in Q2. Now our financial results for the quarter in more detail. Global retail sales decreased 3% in Q2 2022, as compared to Q2 2021. When excluding the negative impact of foreign currency, global retail sales grew 1.5% due to sustained positive store growth momentum over the trading full quarters lapping 17.1% global retail sales growth, excluding FX in Q2 2021. As we have discussed in the past, we believe it remains instructive to look at the cumulative stack of sales across the business, anchored back to 2019 as a pre-COVID baseline and will continue to do so for as long as we believe it is useful in understanding our business performance. Looking at the three-year stack, our Q2 2022 global retail sales, excluding foreign currency impact grew nearly 27% versus Q2 2019. Breaking down total global retail sales growth, international retail sales excluding the negative impact of foreign currency grew 3.7% rolling over a prior year increase of 29.5% and are up almost 30% on a three-year stack basis relative to 2019. U.S. retail sales declined 0.6% rolling over a prior year increase of 7.4% and are up almost 27% on a three-year stack basis relative to 2019. Turning to comps. During Q2, same-store sales excluding foreign currency impact for our international business declines 2.2%, rolling over a prior year increase of 13.9% and were up 13% on a three-year stack basis relative to 2019. Order growth was slightly positive during the quarter, demonstrating continued global demand. However, this growth was more than offset by declines in ticket driven by the year-over-year impact of exploration of the 2021 VAT relief in the UK, our largest international market by retail sales. This resulted in a negative comp for the quarter for international versus a slightly positive comp without this unfavorable UK VAT impact. The year-over-year impact of exploration of the 2021 UK VAT relief will continue while we left the reduced rates from 2021 to the rest of year. Same-store sales for our U.S. business declined 2.9% rolling over a prior year increase of 3.5% and were up 16.7% on a three-year stack basis relative to 2019, representing a sequential 5.3 percentage point improvement from Q1 on a three-year stack basis. Breaking down the U.S. comp, our franchise business was down 2.5% in the quarter, while our company-owned stores were down 9.2%. We believe the difference in the top line performance in our company-owned stores as compared to our franchise stores continues to be driven by more substantial operational challenges in our company-owned stores that Russell will address later on the call. The estimated impact of fortressing was 0.7 percentage points during the quarter across the U.S. system. This impact will continue to trend lower as our U.S. store base grows. The decline in U.S. same-store sales in Q2 was driven by a decline in order counts, which continued to be pressured by the challenging staffing environment, which had certain operational impacts such as shortened store hours and customer service challenges in many stores, both company-owned and franchise along with tough COVID and stimulus fuel comps from the prior years. The decline in order counts was partially offset by ticket growth, which included nearly 6% in pricing actions I spoke about earlier. We saw a similar trend on a three year stack basis with a 16.7% growth in same-store sales driven by growth and ticket and partially offset by a decline in order count. As we have previously shared, we believe it is instructive to break our 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 Q2 same-store sales. Stores in the top 20% those that are essentially fully staffed on average outperformed stores in the bottom 20% those that are facing the most significant labor shortages by 7 percentage points. This is down sequentially from the 12 percentage point gap we saw in Q1 between the top and bottom quintiles showing improvement in the lower quintile store’s ability to meet consumer demand. Now I’ll share a few thoughts specifically about the Carryout and Delivery businesses. The Carryout business was strong in Q2 with U.S. carryout same-store sales 14.6% positive compared to Q2 2021. On a three year basis, our carryout same-store sales were up 33% versus Q2 2019. The gap between the top and bottom quintiles based on staffing levels remain small during the quarter highlighting both strong consumer demand and the lower cost to serve relative to delivery orders. We are incredibly pleased with our carryout momentum, especially considering carryout as a much larger segment of QSR giving us a significant runway for growth in the future. The Delivery business continued to be more pressured, Q2 delivery same-store sales declined by 11.7% relative to Q2 2021. Looking at the business on a three stack, Q2 delivery same-store sales remain more than 8% above Q2 2019 levels. When we look at the same quintiles relative to the Delivery business, we continue to see a more pronounced difference in performance. We saw an 11 percentage point gap in delivery same-store sales between stores in the top 20% and those in the bottom 20%. While we continue to see a significant gap in performance between the top and bottom quintiles, this does represent a sequential improvement from the 17 percentage point gap we observed in the first quarter. Shifting to unit count. We and our franchisees added 22 net new stores in the U.S. during Q2, consisting of 24 store openings and two closures bringing our U.S. system store count to 6,619 stores at the end of the quarter. With our strong formal economics, we remain bullish on the long-term unit growth potential in the United States and we maintain our conviction that the U.S. can be an 8,000 plus store market for Domino’s. The pace of U.S. store growth may decelerate slightly from the current four quarter runway to 3%, the rest of the year or until the headwinds subside, given some of the continued development, supply chain, staffing and inflationary headwinds. Our International business added 211 net new stores in Q2 comprised of 249 store openings and 38 closures. This brought our current four quarter net store growth rate in international to 9%. When combined with our U.S. store growth, our trading four quarter global net store growth of nearly 7% continues to fall within our two to three year outlook range of 6% to 8%. Turning to revenues and operating income. Total revenues for the second quarter increased approximately $32.7 million or 3.2% from the prior quarter driven by higher supply chain revenues resulting from a 15.2% higher market basket pricing to stores. Our market basket pricing is up approximately 20% on a three year basis now. The increase in supply chain revenues was partially offset by declines in our company-owned stores revenues. Changes in foreign currency exchange rates negatively impacted international royalty revenues by $5.9 million during Q2. Our consolidated operating income as a percentage of revenues decreased by 180 basis points to 16.7% in Q2 from the prior quarter, primarily driven by food basket and labor cost increases. These impacts were partially offset by pricing actions and G&A leverage. Our diluted EPS in Q2 was $2.82 versus $3.06 in Q2 2021 or $3.12 when adjusted for the $0.06 impact of the recapitalization transaction in the prior year. Breaking down the $0.30 decrease in our diluted EPS as compared to our adjusted diluted EPS, our operating results negatively impacted us by $0.14. Changes in foreign currency exchange rates negatively impacted us by $0.12. Our higher effective tax rate negatively impacted us by $0.14, $0.09 of which was driven by changes in tax impact of stock price compensation. Higher depreciation negatively impacted us by $0.02 cents. Higher net interest expense negatively impacted us by $0.02 and a lower dilutive share count driven by share repurchases over the trading 12 months benefited us by $0.14. Although we faced operating headwinds, we continued to generate sizable free cash flow. During the first two quarters of 2022, we generated net cash provided by operating activities of approximately $153 million. After deducting for capital expenditures of approximately $33 million, which included investments in our technology initiatives, such as our next-generation point of sale system and investments in our supply chain centers, we generated free cash flow of approximately $121 million. Free cash flow decreased $142 million from the first two quarters of 2021, primarily due the changes in working capital as a result of the timing of payments and recruit liabilities and in receipt to an accounts receivable and lower net income. During the quarter we repurchased and retired approximately 148,000 shares for $50 million at an average price of $337 per share. As of the end of Q2, we had approximately $606 million remaining under our current board authorization for share repurchases. Before I close, we would like to update the guidance we provided in April for 2022. Based on the continuously evolving macroeconomic environment, we now expect the increase in the store food basket within our U.S. system to range from 13% to 15% as compared to 2021 levels and increase from the 10% to 12% we were expecting in April. Changes in foreign currency exchange rates are now expected to have a negative impact of $22 million to $26 million compared to 2021. An increase from the $12 million to $16 million we were expecting to see in April. We anticipate that we will continue to see fluctuations in commodity prices, including wheat and fuel costs, and foreign currency exchange rates resulting from geopolitical risk and the resulting impact on the overall macroeconomic environment. Thank you all for joining the call today, and now I will turn it back to Russell.

Russell Weiner: Thank you, Sandeep. I'm going to start my comments with the U.S. business. The performance during the quarter started slow as we were lapping – fueled comps on a one and two year basis. These dynamics ease throughout the quarter as we move further away from the government payments distributed March of 2021. During the quarter, we continued innovative ways to engage with our consumers through our carryout tips promotions, where we rewarded our carryout customers with a $3 tip good for the purchase of another carryout order within the next week. We also launched our Mind ordering app, which created a fun ordering experience for – into the new season of stranger things, one of the most popular shows on TV and streaming. In addition, the second quarter marked our first full quarter, since we evolved our national offers to include $5.99 mix-and-match for carryout customers and $6.99 for delivery mix-and-match. On the last call, I laid out some of the action plans that we’re taking to meet customers demand, including returning to core hours, utilizing call centers to ease constraints in the stores and bringing back those suite promotions. I'd like to take some time to provide additional color on each of these actions. If you recall out of necessity, many stores have had to flex their hours of operations because of the labor constraint from the staffing challenges and the Omicron surge early in the year. During the first quarter, when we added up all the lost operating hours, we estimate the stores cumulatively closed the equivalent of almost six days across the entire U.S. business. During the second quarter of this number improved a little over four days. The stores primarily flexing hours could be closed during non-peak times. The impact on orders of less than the number of days closed as a percentage of the total days in the quarter, while we and our franchisees continue to make progress on a full returns of all stores to core hours as we start to lap the service disruptions from last year, this metric will become less meaningful as a driver of the year-over-year of sales performance. Another key action is utilizing call centers to take phone orders. This allows team members to focus on making and delivering pizza without having to worry about answering phones, especially during the busiest times in the store. At the end of the quarter, around 40% of our U.S. stores were utilizing call centers in some capacity. As a result, headwinds from unanswered calls were lower than we experienced during the first quarter. The third action is bringing back boost weeks. We promise we would bring back these important customer acquisition and loyalty enrollment activities this summer. And as you saw, we ran our first boost week in more than two years in early June, I am extremely proud of our franchisees, team members and supply chain for executing at a very high level during what was our busiest week of the year. Consumer reaction was strong and we planned to do another boost week by the end of the summer, before we evaluate future cases. Turning now to corporate store performance, our corporate stores continue to lag franchisee performance during the second quarter. As I mentioned during the last call, we are committed to restoring our corporate store's leadership position among the U.S. system of store. As such we have put into place an operations recovery plan with 30, 60 and 90-day milestones. Now, last month we made a leadership change designed to positively impact our corporate store business. Frank Garrido, our Executive Vice President of Operations who also led corporate store before taking on his current role in February of 2020 will have that team report directly to him. So he can more closely assess and address the needs of this business. We will continue to provide updates on the progress of our corporate stores and look forward to them resuming their leadership role among our U.S. system of stores. Now, finally, I'd like to provide an update on our ongoing delivery labor market fee cut. We continue to believe that many of the answers to the labor shortages we are facing are already in our system. We see that our top quintile stores, they can meet the demand and outperform the system. We also saw the gap in performance, which between our top and bottom quintile stores improve during the second quarter. We know from our work that one of the key issues for delivery drivers is flexibility. And for many, this is even more important than compensation. Flexibility includes the ability to work shorter shifts, fewer hours in a week, and sign up for shifts with short lead time. These are the areas where we are continuing to evaluate and evolve our practices. The question remains, can we close the gap in performance and get back to fully meeting demand, utilizing our current delivery model as it has evolved over many decades. Until we've fully answered this question, all options will remain on the table. Now let's turn to international. The international business displayed strong fundamental growth opening over 200 net new stores during the quarter as well as positive order count growth. During the second quarter, 44 of our international markets opened at least one net new store demonstrating the strong demand for Domino’s around the world. As Sandeep mentioned, we had some short term pressures from the UK VAT relief overlaps that drove the comp to go negative in the quarters, snapping our long running streak of consecutive quarters with positive same store sales growth. I remain confident – extremely confident in the long-term growth potential for our international business. Opening more than 1, 000 net stores over the trailing four quarters is an outstanding accomplishment by our team and our international master franchisees. I'll now highlight a few international markets of notes. I'd like to congratulate DPC Dash. DPC Dash, our master franchisee in China for opening their 500th store during the second quarter. Also as you may have seen Dash brands recently made it A-1 filing for a listing on the Hong Kong Stock Exchange. We saw strong sales growth in the Middle East, especially in Saudi Arabia. Also Alamar Foods, our master franchisees across 11 markets in the Middle East and North Africa announced its intention to go public through an IPO on the Saudi Stock Exchange. Other markets have noted with strong growth in the quarter, including India and Mexico, Spain, Turkey and Guatemala. We have a long runaway for growth in the U.S. and around the world in both our delivery and our carryout businesses. We will continue to mitigate challenges within our control and take steps to proactively confront external factors. We can't completely control with strategies and plans to minimize their impact. We're now happy to take some questions.

Operator: Thank you, sir. Our first question comes from the line of Brian Bittner from Oppenheimer. Please go ahead.

Brian Bittner: Thank you. Good morning. Question on the same store sales in the U.S., your same store sales in the second quarter, as you said accelerated by over 500 basis points first. The first quarter when we look at it on a three year stack basis, so clearly a meaningful improvement in the quarter. Can you just unpack the drivers of this improvement in a little bit more detail and help us understand maybe, how much of this improvement came from improved staffing levels through the quarter versus maybe some other sources of improvement, just so we can understand the underlying health of this improvement in the second quarter? Thanks.

Russell Weiner: Good morning, Brian. Thanks for the question. And I think a lot of it is actually in some of the prepared remarks that we went through, but I'll just really try to split it up a little bit for you because the answers are really a sequential acceleration for sure on the carryout business, where we went from 11% increase in the first quarter to 14.6% increase in the second quarter. So definitely that momentum that we saw impacted on three-year stack basis. We went from 24% to 33%, so significant acceleration and strength in the carryout business, very exciting. I think on the delivery business if you look at what happened in the quarter. We were up against much more significant overlap last year. So even though we had 11.7% decline on a three-year stack basis were up 8% compared to the plus 6% that we had last quarter. And so sequentially, a lot of the initiatives that we talked about on the last earnings call started playing in and delivery did improve sequentially. We have more work to do, but we definitely had some progress that we saw in the quarter, so said another way that the sequential improvement of 530 basis points was driven by both carryout and delivery with both making meaningful progress.

Operator: Thank you. And our next question comes from the line of David Palmer from Evercore ISI. Please go ahead.

David Palmer: Thanks. First just maybe a two part here, you mentioned customer service issues and that being a drag I wonder what does that look like? I mean, what does the customer experiencing any numbers that describes what that is and how you measure the impact on the business? And then relatably it sounds like you're still in an evaluation phase with regard to other options to alleviate pressure to labor in the delivery sense, could you talk about some of the things that you're most evaluating at this point? Maybe things that are in test right now? Thanks so much.

Russell Weiner: Sure. Thanks and good morning. On the customer service side really at the end of the day, what we like is things have gotten sequentially better in the second quarter over the first quarter. We certainly still have capacity things we're dealing with, but at the end of the day, demand is strong and our ability to serve in that capacity is getting better. To your second question on the evaluation, what I tell you is we are 100% committed to getting this done ourselves. We think the answers to some of the capacity issues lie within the system and until we get though where we need to be, our responsibility is to understand all the options available and that's what we're going to do.

Operator: Thank you. And sir, our next question comes from the line of David Tarantino from Baird. Please go ahead.

David Tarantino: Hi, good morning. I had a question on the carryout versus delivery business, I guess first, if you could maybe give us an update on what the mix of businesses today, given the big changes you've seen in the carryout business. And then I guess, secondly on the carryout business, the strength that you saw in the second quarter was very impressive. And I'm wondering if you could at least offer some thoughts on the sustainability of that or whether you think it was just a great promotion with the offer that you are in there? If you think that this is a more durable layer of sales with new customers or new occasions? Thanks.

Sandeep Reddy: Thanks, David for the question that's really good one. I think there's – we'll take it in two parts, Russell will cover the second piece, and now let's talk about the carryout versus the delivery dynamics that you asked about. So I think overall, when we look at carryout versus delivery from a mix standpoint, clearly with the comps actually are the acceleration in carryout mix, carry out comps was a delivery declining. The mix is shifting towards carryout. We typically update only at the end of the each year. And I think we will give you a further update at the end of the year because things are moving around quite a bit. But what we are really thrilled about is the momentum on the carryout business, because as we said in the prepared remarks it's an accelerating trend on a business that is a significantly larger business and in the QSR space. So there's a lot of runway for growth for us on that business. And then Russell, do you want to talk about the sustainability?

Russell Weiner: Yeah. Thanks David. We have seen sustainability and continuing momentum and convenient growth in carryout not just over the last three years, but over last decade or so, since we decided to really focusing on that area. One of the reasons that's so important for us is, it's very incremental to delivery. We see maybe 15% or so overlap between carryout occasions and delivery occasions. Interestingly enough, the carryout sourcing of buy-in we have is lesser from pizza on a percentage basis and more so from other QSR. So enables us to not only grow in the larger carryout pizza segment, but the larger carryout QSR segment.

Operator: Thank you. And I show our next question comes from the line of Brian Mullan from Deutsche Bank. Please proceed with your question.

Brian Mullan: Hey, thank you. Just question related to domestic development. As you think about restoring the pace of growth domestic growth back up to that 45 to 5% rate. What are the most important factors for investors to consider right now in regards to the pipeline for next year? Do you think you can get back to that pace in 2023, or is this going to be a little bit of a longer path to the pre-COVID run rate in your view? And if it's a little longer, what are kind of the key gating factors right now?

Sandeep Reddy: So Brian, thanks for the question. I think when we look at the U.S. potential, I think Russell has touched on something really important with the carryout momentum and the acceleration that we are seeing there and the opportunities that we have in terms of the QSR space and how we can actually penetrate into that. So then I'm going to actually go back to what we've talked about previously as our goal for the U.S. of 8,000 stores relative to that is 6,619 stores already. So the gap is not massive. And as we've talked about this year from the beginning, I think on the last call itself, Rich mentioned that we were probably going to see some headwinds basically in terms of the space of development because of supply chain problems, just the fishery environment, et cetera. This continues to be the factor. And I think even though we are at a trailing 12 months of 3%, we see some potential deceleration relative to that in the short term, until all of these headwinds subside, doesn't change the long term trajectory of where we can take this, but I think we need these headwinds to subside before we can accelerate. And I think from our franchisees, they have a really fantastic industry meeting profitability. Their returns are very compelling. They average three years in terms of cash on cash payback. And they see the potential part to future growth. So we are really confident that the 8,000 unit objective is definitely very achievable and especially for the momentum that we are saying on the carryout business if we actually have more upside without focusing strategy, and that actually, that gives us a lot of upside in runway in terms of development.

Operator: Thank you. And I show our next question – our next question comes from the line of John Glass from Morgan Stanley. Please go ahead.

John Glass: Hi, thanks very much. Why did you run a boost week during a time when you had driver constraints still? I mean, I would think that would risk disappointment of customers. Was that a signal that toward the end of the quarter, you just were getting better? I mean, maybe what was – when you still have capacity constraints and already too much demand to deal with?

Russell Weiner: I think John for the question I just also want to reiterate that success of that boost week, it was the biggest week for us for the year and on the carryout side, it was our biggest week in history. And so when you think about a boost week, it's not just about the delivery business, it's also about the carryout business and we did an incredible job doing it there. Look, we have the best franchisees in the business and we gave them enough time and our supply chain enough time to prepare for this thing. We were ready. I think they're also right. It is showing that we're making some of the things that we're doing, improving, Sandeep talked about the sequential decline in the difference between our top and bottom staff quintile. So we wouldn't have done this if we didn't think we could handle it. And I think our system did a great job.

John Glass: Thank you.

Operator: Thank you. And I show our next question comes from the line of John Ivankoe from Morgan Stanley. Please go ahead.

John Ivankoe: Hi, thank you from JP Morgan. I think I heard in your prepared remarks that the U.S. would see, I guess a down tick in development for the next 12 months relative to this last 12 months. Could you just clarify that? I heard that, and then secondly, if you're willing to give that I guess, soft guidance for the U.S., I mean, can you do something similar on international, especially with the negative same store sales, you know the second quarter comps very often a leading indicator of development. Should we expect the next 12 months of international to be same higher or less than what the thousand or so stores that you hit in the previous 12 months. Thanks.

Sandeep Reddy: Thanks John for the question. So I think what you did here on the prepared remarks was, yes, we expect to see a slowing down of the trailing 12 months unit growth, definitely through the balance of the year and as long as we see the headwind. So we didn't say 12 months, but we said until the headwinds is subside. But I think in the international business, we're super excited because it's a plus 9% trailing 12 months growth. And that's very, very solid. And I think if you look at the quarter and you unpack it, it was really driven by this UK VAT impact and the overlaps. And in fact, if you include, basically it's been a positive comp for the international division. And so what I would say is look at the three-year stacks on international. It's 13%, very healthy. And we are very confident with that. And so I think we are very comfortable with the range that we provided the 6% to 8% on average across the global footprint of growth and international at 9%. That sounds we've demonstrated that with all these comps, we've been able to deliver very strong unit development. And we see no reason for that to change.

Russell Weiner: Yes, I think to add to Sandeep’s points, just a little context on the development side. First, I'm just so proud of our system. If you look back at the last five years and you look both in the pizza industry and the QSR industry, as far as actual number of net stores and percentage, Domino's is a leader in that, and still with these numbers, we're going to continue to be a leader. So just some context there, but also I think what that tells me is while we continue to lead in development, our franchisees are doing exactly what they need to do, which is balancing the capacity needs between the current stores they have and stores they need to open.

Unidentified Analyst: Thank you.

Operator: Thank you. And I show our next question comes from the line of Andrew Charles from Cowen & Company. Please go ahead.

Andrew Charles: Great. Thank you. I wanted to follow up on an earlier question, U.S. same-store sales accelerated by an impressive, I think you said 530 basis points from 1Q to 2Q on a three-year basis. I know you guys called out 6% price in 2Q and first, it's very helpful. Thank you for disclosing that. But we estimate nearly 5% price was taken at the end of 1Q. Back when the mix and match platform for delivery orders was raised from 5.99 to 6.99. We know the 10-Q called out a higher number of items per order in addition to that higher pricing at the end of 1Q. So I'm curious if you can speak to the sequential change in traffic from 1Q to 2Q on a three year basis that our math suggests was perhaps flat, perhaps deteriorated amid some encouraging updates that you guys shared on staffing and carryout.

Sandeep Reddy: A lot to unpack in the question itself so, but I'd say overall, let's start with pricing. And our pricing, we have multiple levers on pricing. A mix and match is one of them and as part of the national offer, but I think there's menu pricing, which I think would have been activated well before any of the changes on national offer that we talked about. There's the national offer updates that were made in the first quarter. And then I think local pricing is actually an option that the franchisees have at their disposal and delivery fees are something that has been activated all the time, with the franchisees. So all of those elements would have gone into pricing effectively, both in the first quarter is whether the second quarter and it's not just national pricing. So the average of all of that was about 6% in the second quarter. So that's one thing I would actually take away from that. And so I think when we look at pricing and ticket versus order count. What we had in the second quarter was order count was definitely down. And I think when you look at the pressure that we actually faced, the pressure was really significantly more on the delivery side. And then when I look at the overall offset, we saw ticket offsetting order count declines to end up with the minus 2.9% that we saw in the quarter. Even though, we had these headwinds, I think sequentially same-store sales did accelerate to the point that we made. And I think we are very happy because from a sequential standpoint, it's clear that the actions that we are taking to address the issues in terms of capacity to serve on the delivery business are helping us. And we are seeing the demand coming through and that's why we saw the acceleration because it's reflected both in the order count as well as the ticket and the combination of those. So happy with what we're seeing, but I think as we go through the subsequent quarters, we'll have more information on all the drivers that we’re talking about all.

Andrew Charles: Thank you.

Operator: Thank you. And I show our next question comes from the line of Jared Garber from Goldman Sachs. Please go ahead.

Jared Garber: Good morning. Thanks for the question. I wanted to revisit the U.S. unit growth commentary. I know it's been asked a couple times, but if we look back historically the unit growth annually has certainly continued to decelerate. Even if we look back to several years ago into the 2018 or 2019 timeframe so, can you just help us understand what gives you the confidence that pace of development can reaccelerate, maybe it's a 2024 kind of timeframe, given some of the headwinds you talked about, maybe there's a way to frame what the pipeline of demand looks like from franchisees. And then as a follow-up, just as we think about the carryout opportunity, is that changing how the discussions are going with franchisees, maybe in terms of site location, making those a little bit more accessible to consumers versus I think the base delivery business is one that doesn't necessarily need to be main and main to drive that delivery business, but that may change to carryout as a greater focus going forward. Thanks.

Sandeep Reddy: So Jared, thanks for the question. There's two pretty significant components in that. So let me start with a second and I'm going to go to the first, because from a carryout momentum standpoint, I think Russell talked about it earlier in one of the previous answers as well. The carryout business and the delivery business are two separate businesses. What we are seeing is very significant acceleration on the carryout business, which is very encouraging for us because we basically are able to penetrate a new market and I think a much – a significantly larger market in addition to the delivery business. The delivery business, one in three pizzas like Russell told last time is delivered by us. So we have a very strong position in that. So the thesis in terms of unit development is based on both businesses being fulfilled from the box and the potential that we have continues to be very strong. If anything, this actually gives us even more runway in terms of unit development versus what was there before, but in no way, is this a trade between carryout and delivery. They're two separate businesses. The carryout should be incremental to the delivery business and we are doing all the work that we're doing on the delivery business. So in terms of U.S. unit growth and the deceleration that's been happening, there's a few puts and takes that are going on over there. I think it's a few years ago, we had the reclass the Hawaii and some of the market that's basically out of the United States into – out of international into the United States, which helped the United States. That was the one year it picked about 5%. But other than that, it's been in the flourish range, pre-pandemic. And I think the trailing 12 months of three is more reflective of some of the headwinds that we've been seeing since the pandemic started in terms of supply chain, economic factors, including staffing. So overall, I think once we get past these headwinds, there's no reason we can't get to a normalized unit development growth, especially given the drivers that just talked about, this carryout business, being an incremental opportunity that we seem to be seeing, gathering steam as we go along and delivery business being what the baseline thesis was about anything. So that's answering both of your questions and I hopefully give you enough information on that.

Russell Weiner: Yes, Sandeep, I think I would just add, there is every incentive for our franchisees to continue to build, obviously the EBITDA per store is still a very strong place. The returns on a new store still in a very strong place, when we look at the top quintile stores on delivery, the ones that are really doing well, those are the ones that have fortress the most. And so what happens when you're fortress is you get closer to your customers, getting closer to your customers from a delivery perspective, during a capacity constrained, labor constrained environment helps delivery. We also know the majority of the carryout volume, the overwhelming majority of the carryout volume when you open up a new store is incremental. So there's every incentive financially and also in helping us deal with capacity to go ahead and continue to do that.

Jared Garber: Thank you.

Operator: Thank you. And I show our next question comes from the line of Andrew Strelzik from BMO Capital Markets. Please go ahead.

Andrew Strelzik: Hey, good morning. Thanks for taking the question. I just wanted to follow up on comments indeed, that you made in your prepared remarks about after the first full quarter, excuse me, seeing a lot of efficiency opportunities. Can you elaborate a little bit on what you're seeing, maybe where the biggest opportunities are and the timeline to which we might see that start to come through the P&L? Thanks.

Sandeep Reddy: Yes, Andrew, thanks for the question. And so I think the opportunities are multifaceted, right. So I think we talked about three different components. On the first one, we talked about the consumer pricing architecture and I think there, it's really about looking at given the different cost measures that we are dealing with. How do we make sure that we deliver terrific value to the consumer, but at the same time, taking up price where it makes sense, and it still delivers that value to the consumer. And so we'll keep on looking at that as time goes along. The second was, just making sure that operating revenues are going faster than – revenues are going faster than expenses. And from an operating margin standpoint, we did see some sequential improvement. We went from a 270 basis points decline in Q1 to 180 basis points decline in Q2. So that includes some G&A discipline as well, that we talked about. And you saw that we lowered our guidance for the year on G&A based on that. And it’s really about prioritizing as to expenses to make sure that we’re making investments and opportunities that are driving near-term growth, and actually continuing to invest in critical areas like technology and supply chain, which we have over the years, will keep doing that. But it’s that prioritization that is critical. But the most important thing honestly, is the third one that I talked about, which is how do we accelerate our capacity to serve the demand that we see. And that’s what Russell talked about earlier in the call. And I think that’s been very encouraging to see the progress that we’ve actually made in the last quarter. We continue to work on similar drivers in the coming quarters as well. So as much as we can make progress on that I think we’ll be able to get to much better place.

Russell Weiner: Yes, I would just add to, Sandeep talk about efficiency, answers your question from a financial standpoint. I would maybe do that also to add some color on the operations standpoint. Essentially on the delivery side efficiency is what we need to drive. Simplification is what we need to drive. So our folks in stores are focused on the most added value parts of their jobs. And if you think about a couple of the programs we talked about last quarter and we continue to give some input on here. For example, one of those things is taking calls out of the store. We ended last quarter with 29% of our stores on call center. We ended this quarter at 43%. Our operation simplification project there are many of them, one we spoke about last time, which is eliminating multiple box folding times within a store, which doesn’t sound like a lot. It actually adds up to 40 hours a store a week. And that program is now in 90% of our stores around the country. So efficiency on the operations standpoint leads to unlock capacity, and then that flows down to the financial.

Unidentified Analyst: Great. Thank you very much.

Operator: Thank you. I show our next question comes from the line of Dennis Geiger from UBS. Please go ahead.

Dennis Geiger: Great. Thanks for the question. Appreciate all of the commentary on your efforts to address the driver staffing challenges and sort of the – a lot of the metrics that you provided as a result there. Just wondering if you could speak a bit more to sort of where you are on the journey to address the challenges? Is the plan to address the driver situation internally? Is that finalized or are you still kind of tinkering with different opportunities internally to address that? And I guess really the question is, if you could kind of frame up what inning you think you’re in with respect to addressing those challenges internally, maybe before you look at other options, if there’s a way to frame that up? Thank you.

Russell Weiner: I don’t know about innings, Dennis, it’s the All-Star break, although my Yankees, Mr. Stanton won the MVP. So, we’re pretty happy there. We are a work in progress brand and we are just – we are never going to be satisfied with our ability to fulfil capacity until we can fulfil every single order. That is coming our way. So in that case, we will never be in the final three innings as far as I’m concerned because we can always get better. We did say, we do think and our first priority is try to fulfil this stuff internally. We have a lot of stores who are doing that. A lot of franchisees are doing that. We are 100% committed to getting this done ourselves and we’re seeing improvements. But until we get where we need to be, we will continue to explore all options. But our big focus there is for us to be able to serve our own customers.

Dennis Geiger: Thank you very much. Go Yankees.

Operator: Thank you. And I show our next question comes from the line of Lauren Silberman from Credit Suisse. Please go ahead.

Lauren Silberman: Thanks for the question. I had one on the boost week. So one was run in early June, and I think you talked about plans to do another one by the end of the summer, which I believe is more frequent than historical. So can you talk about how you’re thinking about the cadence of boost week promotions from here? And is there any read through, an underlying demand? Or do you see this more of a catch up from not running promotions over the last couple of years? Just trying to understand how that all plays out?

Russell Weiner: Yes. No, I mean, if you look historically we ran, call it three to four boost weeks a year. Obviously we are planning one at a time. And so we want to work with our franchisees. Obviously everyone thought the last one went well or see how the next one goes. And we will announce anything further after that happens. So nothing more than just one step at a time, one pizza at a time.

Operator: Thank you. And I show our next question comes from the line of Chris Carril from RBC Capital Markets. Please go ahead.

Chris Carril: Hi. Good morning. Thanks for the question. And thanks for the detail and thoughts on pricing so far. Following up on those earlier comments though, can you tell us how you’re thinking about pricing power today? Do you see greater risk to any potential further pricing actions given that there is more pressure on the consumer today? Or do you see yourself as well positioned? Should you pull that pricing lever if necessary?

Sandeep Reddy: So Chris, it’s a great question. And I think it really ties back to what I talked about in the prepared marks, which is in the end pricing in itself is fine, but it’s about making sure there’s a terrific value to the consumer. And that really is the key threshold for us. And so we continue to do testing. And by the way, the testing’s been done for the last decade, not just the last quarter. And that’s a process that is always going on inside the company. And look, when the macroeconomic situation is as volatile as it is, things keep on shifting and we continue to do consumer testing to ensure based on the shifting sense, what makes sense and what doesn’t make sense. We’re pretty clear that there is definitely a decreasing cost environment. So there’s a balance between making sure that terrific value is being delivered to the consumer. And then making sure that from a profitability standpoint, our franchisees are able to make the profits on their stores to deliver the paybacks they need from a long-term perspective. And we and our franchise partners basically look at it from a long-term perspective because most of them have been with us for decades or a number of years and find long-term commitments with us. And it’s a shared journey. So we work on it together with them. And I think there’s – that thoughtfulness will continue to go into what we do.

Russell Weiner: Yes, I’d just add to that to Sandeep’s point on balance. The balance for us as we go into this quantitative testing, like he said, we’ve done this over a decade is essentially to balance how do we optimize EBITDA, but also how do we optimize value to the customer? And all of those inputs help us get to where we want to be. We know at the end of the day though, order counts are much more correlated to profitability than tickets. So it’s about driving order counts. When we talk about the macro environment, to me, I started at Domino’s right in the middle of a recession back 14 years ago. This is a category where for folks who want to continue to eat out when times are tough, they will maybe down switch from a sit down or what have you into pizza. So we actually think our concept, our business is strong as we maybe go through more difficult times.

Chris Carril: Okay. Thank you.

Operator: Thank you. Our last question will come from the line of Mr. Jon Tower from Citi. Please proceed with your question.

Jon Tower: Hello?

Operator: Mr. Tower, your line is open.

Jon Tower: There we go. Sorry, you cut out for a minute there. Yes. I appreciate you taking the question. First, a clarification and then a question. I’m curious if you could clarify or at least explain perhaps the check differences in the Carryout business versus the Delivery business and what that might mean for your same-store sales just in a normalized environment? And then I guess the question is, you did the Stranger Things promotion in this quarter, and I believe it’s the first time since I won’t say Batman in 2008, but you’ve done anything with really any other brand at least in the TV or streaming businesses. So I’m curious to know if this is a one-off or if you believe this is something that could persist with other TV shows or whatever in the future?

Sandeep Reddy: Yes. So Jon, I’ll go through the clarification question and then Russell will definitely answer the question on the Stranger Things question that you have. So I think from a check different standpoint, there are always I think between the delivery fee and other components of the cost to serve, the delivery ticket tends to be higher than the carryout ticket. There’s a few other dynamics in terms of some of the natural offer changes that we made as well that go into it. But that is pretty much what we would say. It is a higher ticket than carryout. But I think it also is pretty obvious when you look at the relative trends of delivery versus carryout. Carryout had a 14.6% same-store sales increase in the quarter, delivery was down 11.7% and comps were down minus 2.9%. So you can actually make the conclusion from that.

Russell Weiner: Yes. And on Stranger Things, I just – you have an amazing memory. My first day, I remember looking at the Batman box, wow, that’s pretty amazing. You’re right though, interestingly enough, we have not done a tie in, in a big way since then. And that’s because, I believe – we believe that we really don’t have any interest in getting lost in a laundry list of brand high. And most of the time nowadays, whether it’s with sports or with movies or what have you, that’s what it is. At the end of the day, I’m not sure if anyone knows what brand is associated with what. I think you just get lost there. And I think that was one of the reasons why this promotion was so strong because we don’t do it a lot. And Netflix, and particularly the Stranger Things property, they don’t do that a lot. And so when two brands that are really strong brands in and of itself without being borrowed equities come together and do something like this is so powerful. And so, yes, an opportunity like this comes around, again, you can see us do this, but our logo will not be paved at the bottom of a dozen others in a partnership.

Operator: Thank you. This concludes our Q&A session. At this time, I’d like to turn the call back to Russell Weiner, CEO for closing remarks.

Russell Weiner: Hey, thanks so much everybody for joining the call this morning. Sandeep and I look forward to speaking with you in October to discuss our third quarter 2022 results. Have a great day.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.