This paragraph introduces the Domino's Pizza Second Quarter 2023 Earnings Conference Call and provides instructions to participants. It also announces that Domino's will host an Investor Day on December 7 in Ann Arbor, Michigan, and reminds listeners of the forward-looking statements in the earnings release and 10-Q. The Chief Executive Officer, Russell Weiner, and the Chief Financial Officer, Sandeep Reddy, will provide commentary on the call. The call is being webcast and recorded for replay, and the Chief Executive Officer will then take over.

Russell Weiner opened with remarks about Domino's Pizza's current focus and momentum. He then discussed their efforts to improve delivery service and staffing, as well as their agreement with Uber Eats. According to Circana, aggregator sales for delivery among U.S. quick-serve pizza restaurants has grown to almost $5 billion, representing a potential $1 billion in incremental sales for Domino's U.S. business. Domino's international master franchisees have already developed a $1 billion business taking orders from aggregators, and the company plans to get its fair share of this market.

Domino's is excited to begin accepting orders through the Uber Eats channel later this year and is hoping to replicate the success of their carryout pizza segment in 2011. They are aiming to drive their carryout market share to the same level as their pizza delivery market share, which would represent an additional $2 billion in retail sales. Additionally, their new global deal with Uber Eats has the potential to bring Uber Eats' customers to 70% of Domino's stores worldwide. Lastly, they will be launching a new and improved loyalty program in the U.S. in September.

Domino's Pizza is introducing a new loyalty program that will reduce the requirements to earn and redeem loyalty points, as well as two innovations to the U.S. market in the third quarter. The innovations include Domino's Pinpoint Delivery and Pepperoni Stuffed Cheesy Bread. The Mix & Match offer at $6.99 has helped franchisees accelerate store-level profitability and should drive continued EBITDA growth for franchisees.

In the second quarter, Domino's Pizza implemented a 3.9% average price increase across the U.S. system and drove improvement in their operating income margin. They also experienced positive same store sales growth for the third consecutive quarter, with U.S. retail sales increasing 1.7% and international retail sales increasing 10.1% (excluding the negative impact of currency). The increase in U.S. same store sales was due to a higher average ticket, including the pricing actions, partially offset by order count declines.

In Q2, the carryout business was strong with a 5.6% increase in same store sales, but delivery sales declined 3.5%. The company expects a slight improvement in trend in Q4 due to their loyalty program and Uber Eats partnership. In the U.S., 27 net new stores were added, and international same store sales increased 3.6%. Domino's Pizza Enterprises intends to close 65-70 underperforming stores during Q3, which will pull down the net store growth rate for the quarter and the full year.

The company anticipates returning to its full-year run rate of net store growth in 2024 and has a current trailing four quarter net store growth rate of 6.3%. They expect their 2023 global retail sales growth to track between the low end and midpoint of their two to three year outlook of 4% to 8%, and their 2023 global unit growth to track to the low end of their 5% to 7% two to three year outlook. The company will use its free cash flow to make investments, create strong shareholder returns, and retire debt when it's in the best interest of shareholders. They will also be opportunistic if credit markets warrant additional borrowing or refinancing.

Russell Weiner explains that Domino's Pizza has three tangible catalysts to stimulate demand: the Uber Eats partnership, the relaunch of loyalty program, and carryout. The $1 billion dollar prize from the Uber Eats partnership is a signal of their fair share of the $5 billion US aggregator pizza delivery business. The relaunch of the loyalty program is also an important opportunity, and Domino's Pizza intends to get their fair share of the aggregator pizza delivery business.

Russell Weiner discussed changes to the loyalty program that will be implemented in September, which will recognize carryout customers and have points available at various levels. The changes are intended to benefit customers and be profitable for franchisees, and will involve a transition from a transaction-based to a spend-based model. This may result in increased pressure on order counts.

Russell Weiner answers Sara Senatore's two-part question about the carryout opportunity and pricing gap in the industry. He explains that order count drives franchisee profitability and the program will allow customers to transact at a lower level to drive frequency. He also notes that through Domino's multiple platforms and AB testing system there is appropriate upselling happening, and that the company is looking to bridge the pricing gap with the industry to improve traffic trends.

Domino's Pizza is able to provide great value for carryout customers due to their fortressing strategy of opening up stores closer to customers. This allows for more efficient deliveries and more incremental transactions. Additionally, they offer competitive pricing with a high-volume mentality which encourages customers to buy from Domino's more frequently.

Russell Weiner explains that while the headline-grabbing sales drivers such as third-party partnerships, carryout and loyalty are impactful, the underlying fundamentals of the business such as improved profitability and better service have been improved and will help the other drivers be more effective. He cites that service times have improved by 1.9 minutes since last year.

The company is focused on purposeful innovation, which includes both product launches and technology innovations. An example of this is Pinpoint Delivery, which is a technology innovation that demonstrates the company's commitment to delivery. In the past, the company has also launched its own electric vehicle and the DXP.

In the new agreement with Uber, Domino's Pizza was focused on getting the data they need to analyze the incrementality of the platform. Additionally, they are delivering the pizzas themselves in order to own the customer experience and gain a competitive advantage. This data was important to them during the negotiations and they are satisfied with the outcome.

Sandeep Reddy discussed the food basket deflation that has happened over the past seven quarters and how it could help the profitability of franchisees. He mentioned that the food basket is up 1% year-to-date and that if the deflation from the last quarter continues, there could be material upside on the food basket for the rest of the year.

Sandeep and Russell discussed the value of the different promotional platforms and how they will maximize the opportunity for the consumer. They also discussed how the aggregator platform will open up a new unlock for value, targeting higher income customers. They concluded that this gives them more levers to unlock value for customers and franchisees, as well as a higher price marketplace.

Russell Weiner explains that Domino's Pizza is opening a new store every eight hours around the world and that they expect the store growth to inflect towards the end of the year and into 2024. He then explains that in order for franchisees to open new stores, they need to ensure profitability and track record, which Domino's Pizza has done with only closing 16 stores in the last 12 months, which is 0.2% of their base.

Sandeep Reddy added to Chris Carril's point about the profitability of closing more stores in 2016 by discussing the Uber partnership. He explained that the national promotions and special deals will only be available on their platform, driving profitability for the franchisees and increasing transactions in 2024. He also mentioned that the increase in profitability for the franchisees will be very material. Brian Harbour then asked about the $1 billion number being over multiple years and whether they have considered any incrementality internationally.

Russell Weiner explains that Domino's will be on 28 markets that overlap with Uber Eats, and 70% of their stores will benefit from the incremental volume. He emphasizes that Domino's will have the best service experience in the pizza or restaurant industry, as they are the only ones who make and deliver the product from the time it is ordered. He also mentions that Domino's has good prices and expects service times to be at the high end.

Domino's is investing in marketing on the platform to drive customers to their product, and they have negotiated a return on their advertising spend that is in line with their other digital media buys. They are hopeful that the Uber Eats deal and their loyalty program, which includes a lower check minimum for carryout transactions, will help them restore growth in US delivery same store sales. Sandeep Reddy has considered this move to aggregators over a multiyear period when they lowered their growth targets earlier.

Russell Weiner discusses the increased applications for delivery drivers that the company has seen since 2019, as well as their electric fleet vehicles. He notes that this is likely what has led to the improved service times, which have increased by two minutes. He also notes that the aggregated deal was not contemplated when the two- to three-year outlook was provided in February.

Domino's Pizza has seen an increase in momentum due to the availability of drivers with licenses but no vehicles. The company is holding a Summer of Service to bring the importance of the delivery experience to the forefront and to provide best practices. Additionally, new technology systems are being implemented in stores to improve the level of service, such as making pizzas before orders are completed and dispatching orders to drivers before they return to the store.

Sandeep Reddy and Russell Weiner discussed their excitement for the China market, which has seen strong growth in productivity since the end of the COVID years and has great potential for future development. They highlighted China as one of their top 15 international markets with 10,000-plus stores still to build. Joshua Long asked about their marketing and messaging strategies as they build out their platform for disparate consumers.

Russell Weiner explains that Domino's has a strong brand message that has been consistent for the last 10-15 years, and that they are in a great place to leverage media and a high-level marketing budget in order to personalize the message for different types of customers, such as those looking for control and value or quick delivery times.

Russell Weiner answers a one-part question combining two questions about Uber Eats. He states that the marketing funds that are being used to cover tech investments are from a surplus of the budget, and that they have plenty of money to increase GRPs and reach customers despite inflation.

Sandeep Reddy provides an explanation of Uber's commission structure, which is based on order counts and includes food sales and delivery fees. Russell Weiner clarifies that Uber's delivery fees and franchisee level delivery fees are accounted for in their pricing structure, and there is no concern that the free promotions offered by third-party aggregators will affect their profitability.

Russell Weiner discussed the importance of staffing levels when it comes to meeting the additional demand from aggregators. He clarified that any promotional activities would need to be agreed upon by both parties, and then answered a question from Danilo Gargiulo about the staffing levels in Domino's stores. He jokingly stated that he hopes they do not currently have enough delivery drivers to meet the expected demand.

Russell Weiner states that the decision to partner with Uber came down to three main elements: scale, scope, and incrementality. He explains that the scale of the aggregator QSR pizza delivery business is currently large and that Domino's is the number one pizza delivery company in the country, but does not sell a single order on it. He then explains that if there is a $5 billion opportunity, Domino's will compete for their fair share.

Sandeep, Ryan, and Russell Weiner discussed the success of their deal with Uber, which provides 70% of their stores with the ability to receive orders from Uber. This deal is beneficial for both their international and domestic franchisees, and they have found that they can manage this separate channel and drive incremental volume. The increased service time shows that they are ready for the next wave of orders, and they look forward to discussing their Q3 2023 results in October.

This summary was generated with AI and may contain some inaccuracies.