達美樂 (DPZ) 2007 Q1 法說會逐字稿

Good morning.

My name is Benita, and I will be your conference operator today.

At this time, I would like to welcome everyone to the 2007 first quarter earnings conference call.

(OPERATOR INSTRUCTIONS) After the speaker's remarks, there will be a question and answer session.

Thank you.

I would now like to turn this call over to Miss Lynn Liddle, Executive Vice President of Communications and Investor Relations.

You may begin your call.

Thanks, Benita.

Hello, everybody.

We appreciate your taking the time to tune in this morning and we will not take up more than an hour of your time in total.

We're going to start as is our normal practice with commentary on the quarter and details on our recapitalization expenses.

Then we will open for Q&A at the end.

I will remind all of you that we generally do not make forward-looking statements but to the extent that that does happen today, we'll refer to you the Safe Harbor statement that is in our press release, and I would also remind members of the media that we would appreciate you being in a listen-only mode.

With that, I would like to turn the call over to Dave Brandon our CHief Executive Officer and Chairman.

Good morning, everyone and welcome back to what will be a more normal Dominos Pizza earnings call.

If you'll recall last time around we were not, we were in the middle of our recapitalization and we were not in position to do Q and A.

But I have Dave Mounts with me and David will be covering some information in a little while, then we'll both be available for your questions at the end.

So we're back into what we would consider to be our normal process of having a good exchange this morning.

We're happy to report that our recapitalization was completed successfully on April 17.

Our securitization debt is in place.

We now have the capital structure that we feel is appropriate for our cash flow generating business.

Our shareholders will be rewarded with a $13.50 per share dividend a couple of days from now.

We have also announced concurrently with all of that a $200 million open market share repurchase program to create additional value for shareholders through what we will describe as disciplined and opportunistic repurchase of our stock.

Our feedback from investors has been extremely positive regarding all elements of our recapitalization plan.

I want to thank all of our investors and all of you who have followed this for your support and confidence in our team and in this process.

And I also want to take this moment to personally thank our finance and legal teams as well as our people first in communications teams for all of the hard work and really starting with the bold step of initiating this recapitalization process.

And obviously seeing it through to a very successful completion.

With that, I'd like to turn to a more important topic, and that is the performance of the business.

We have been focusing our full attention on turning around our domestic same-store sales, and our domestic store growth.

As I'm sure most of you can appreciate those two measures are related to one another in light of the fact that store growth is often going to be stimulated by positive sales and positive momentum in the business.

As you all know, the negative domestic same-store sales we experienced in 2006 was the first time that we encountered that condition in 12 years.

And as I look back, which is easy to do, and evaluate how we reacted to that condition as a system and a company, we did a very poor job of reacting to the challenge of encountering a negative year.

I believe that our system reacted very defensively.

Many of our operators tried to salvage the year if you will from a profitability standpoint by micro managing labor costs down, which oftentimes creates reductions in quality of service to our customers as measured by delivery times, and way too often by cutting local store marketing activities, which meant that our operators were relying way too heavily on the national promotions that we offer to carry the marketing load.

And that just isn't the formula for success in this business.

Plans to build stores were delayed by many of our operators as a reaction to our sluggish sales, and the result of all of these very short-term and somewhat self defeating tactics was an even greater loss of sales momentum and same-store sales performance.

Now what we've been doing in the first quarter of this year is working extremely hard to move our system in a completely opposite direction to some of those patterns of behavior that we experienced in 2006.

I'm very encouraged by the fact that our team USA unit is leading the way and executing against our new marketing and operational initiatives.

And the focus that we're bringing to operations in our stores.

When we continue to see more of our franchisees getting on board and driving local store marketing and improving their operations and we're feeling positive sales momentum coming back, and we certainly experienced that throughout the fist quarter.

Specifically, our system is working hard to regain our positive sales momentum domestically through an extremely heavy focus on store level operations and store level marketing activities.

Last quarter, although we were limited in what we could say, we did explain how our industry has seen a shift where all of the national brands have lost market share and seen significant reductions in traffic growth at the expense of regional and local pizza shops.

What we learned from this is that the way to combat this trend requires a very locally based grassroots-driven effort on the part of our operators, and one of the things that we've done to invest and commit to this is we have added additional field staff, improved our span of control and put ourselves in a position where we can drive more of that local activity more effectively in the marketplace.

It also requires a rebuilding of traffic counts in an environment where consumers are more demanding and more value conscious.

We're working very hard with our menu and promotional strategies to make sure that we're perceived to be a value every day, not just part of the time.

I would tell you that in light of these initiatives and the focus we brought to this, the level of market-based activity that we are driving right now, both on the operational side and on the marketing side is greater than I have seen in my eight years at Dominos Pizza.

This retail level operational focus and the sales building activities are clearly the key to us continuing to build momentum and get back into the positive growth mode where we belong.

We're starting to see some positive momentum in our domestic sales and store growth.

Some of the indicators of that are that we certainly had a slightly positive Q1 same-store sales performance for team USA.

That's our corporate store unit and certainly that's the unit we can move the most quickly because we completely control it.

We saw improving comps in our franchise system in terms of same-store sales as the quarter unfolded.

The back half of the fist quarter was better than the first half.

That's encouraging.

We've seen in South a slightly improved sales landscape and we think combining that with some of the growth incentives that we put in place has resulted in a situation now where we have more franchise applications pending than we've had in the past five years.

So the backlog of applications for store growth now is starting to build momentum and we see that as another positive indicator.

I have a growing confidence in the leadership team here at Dominos shares in that confidence that we are gaining some momentum and

we're moving out of the soft traffic count cycle that we experienced basically throughout 2006 and early end of 2007.

And we've got as we look at our order count and traffic activity in the store versus our ticket, we're starting to see a pickup in traffic, and that's important to us.

I want to remind you that although we are very focused on this domestic store situation and same-store sales situation because it's exceedingly important, we're also working hard to maximize the performance of our international business.

And we're very proud we continue to be very proud of our international division.

It's not only our fastest growing business unit, but the growth that it's experiencing continues to be strong and steady.

As you all know, we utilized the master franchise model which helps us at the corporate level avoid high start-up costs and the risks associated with operating stores.

In these markets, yet, we're in over 55 countries which gives us great diversification and insulates us from the volatility on any given country or currency.

The first quarter marked our 53rd consecutive quarter of same-store sales growth in our international unit.

And it continues to be a growth engine that's performing consistently and well.

Now, normally, even with sales down, we can drive improvements in earnings through our ability to flex our spending.

This quarter didn't play out that way for really a couple of main reasons.

First of all, rather than cut spending, which we've done at times in the past when we really diagnosed where we were at coming out of 2006, we decided that it was a good investment to take a look at our organization and invest in expanding and improving our domestic sales, in-store growth organizations.

As I mentioned earlier, we made a commitment to additional human resources in the marketplace.

We improved and increased our span of control to give better service and frankly better advice and direction to our franchisees as we executed these operational and marketing plans at the local level.

We also created a very unique, specific targeted resource around development, and that's both franchisee recruitment as well as new store development.

We come into this year with a more focused, accountable development team that we think over the long haul will pay significant dividends.

Additionally, although sales began to improve in the second half of the quarter, obviously, the weaker volume levels that we experienced particularly in the earlier part of the quarter hurt the profit performance of our distribution business and obviously we will gain benefit in this unit as we increase our sales and can get more product through our supply chain through our stores ultimately to the consumer.

The other impact obviously in our earnings this quarter was the fact that our recapitalization expenses are skewing the numbers significantly those of you who have followed this obviously expected this and understand the fact that we're running a lot of those expenses through the P &L in the quarter.

This was to be expected and obviously will not reoccur.

With the sluggish but improving domestic landscape, a strong, international business and balance sheet that we feel is more levered than it's been in the past but appropriately levered, how should investors look at Dominos Pizza going forward?

If that is your question, my answer is, not that differently.

We're still a cash flow business that doesn't need a lot of capital investment to keep it growing.

We're committed to being primarily franchised with a low overall percentage of corporate owned and operated stores.

We only need modest top line growth in terms of same-store sales to produce robust bottom line growth.

Again, I'll reiterate a 1 to 3% positive domestic same-store sales growth and 3 to 5% international same-store sales growth puts us right in the sweet spot of where we want to be.

We've shared those numbers with you in the past and those numbers have not changed in terms of the growth expectations that we have over the long haul.

We do not need to exceed those expectations to meet our new debt service obligations under our new more leveraged capital structure.

And as you all know, we've done these recapitalizations at least twice in the past in my experience.

This is our third.

We've operated with leverage successfully in the past and we've expressed repeatedly a comfort level in the three to six times EBITDA range in terms of our going forward plan.

Clearly with the rate -- interest rate associated with our recently completed A.B.S.

financing, you will likely hear us talk more about interest coverage than leverage ratios in the future because we think that's an appropriate way to think about our management of the balance sheet.

We've demonstrated repeatedly that we're not afraid to use that balance sheet to drive returns for our shareholders, whether the technique is common and mainstream or not in the public company arena, and I would just summarize all of that by saying we continue to be a strong 46-year-old brand with lots of room to grow around the world, and I'm confident we will continue to grow stores and sales in the months and years to come.

That completes my opening remarks, and what I'd like to do at this point is turn it over to David, who has the challenging job of walking you through our fairly complicated first quarter numbers with all of the puts and takes associated with the recapitalization, but hopefully, I put those numbers into a larger context for you and David can give you a little more nor texture.

David?

Thanks, Dave.

Good morning, everyone.

I'd like to share highlights from our first quarter results first.

We'll start with sales.

Global retail sales were up 3.8% during the quarter versus the year-ago period.

This was driven by the international same-store sales growth and the increase in our worldwide store accounts, which were 270 units over the trailing four quarters higher than the prior year.

Same-store sales, domestically our sales decreased 2.9% for the quarter.

Company-owned stores were up 0.6%.

This was versus a negative three in the fist quarter of '06.

Our franchise stores were a negative 3.4%, and they were rolling over a negative 4.0% in the fist quarter of '06.

Our international same-store sales were up 3.8%.

This was after a positive 3% same-store sales number in the first quarter '06.

This made for the 53rd consecutive quarter of same-store sales increases for that division.

The income statement as you have seen was significantly impacted by the recapitalization, and I'll discuss that in a moment.

Before we talk about the recap, I'll touch on the highlights of our ongoing operations.

Our total revenues for the first quarter were 339.3 million.

That's an 8.3 million or 2.4% decrease from a year ago.

This was driven by the lower volumes and the distribution business and the lower domestic same-store sales but also were affected by the sale of the Netherlands and France operation which decreased revenue 6.6 million.

We ask you always to keep in mind that revenues can be misleading when analyzing Dominos' financials and ask that you consider global retail sales as a key gauge of our top line performance.

On our operating expenses, we held G & A expenses flat compared to the prior year.

I'd like to comment on one other item that affected our operating cost that we're monitoring very closely which is the minimum wage.

This is a topic that's going to affect Q.S.R.

as we move forward.

We've already felt increases in some of our markets due to the already enacted state minimum wage increases, and we may experience some more of these in the future.

Whenever our industry has experienced these increases in the past, industries always have been able to adjust either the cost structure or pricing over time but there definitely can be some lag effects and we want to make you aware of that.

On our bottom line earnings or our diluted EPS as reported on a GAAP basis was $0.13 in the fist quarter.

I noted earlier that the recap effect comparability when you are looking against '06, and we disclosed these items in the press release that went out this morning.

Those items had a $0.25 per share impact on our diluted EPS.

And when you adjust for the recap I actually posted a diluted EPS of $0.38 in the first quarter '07 compared to $0.39 in '06.

As we look toward the second quarter, we expect to record another 22 to 25 million in additional recap transaction-related charges on a one-time basis.

This is primarily the write-off of deferred fees in conjunction with the bridge loan and also in connection with obtaining a securitized debt, we had to defer 33.6 million of costs ,which will be amortized over the five-year debt term.

I'd like to spend more time explaining our recap on the effects on earnings.

As you know, we completed our recap with 1.7 billion of funded securitized financing and a total of 1.85 billion available.

There's been significant disclosure on the transactions so I'll avoid being redundant, but as for the ongoing P &L impact of the recap, it will not have an impact on our operations.

Accordingly, it will only impact items below income from operations and that's primarily interest expense.

In our earnings release this morning, we've included a table that summarizes the impact of the recap.

on our interest expense and the effective rates.

We included this in order for to you better understand the impact on our P& L.

In summary, we have a fixed rate that's inclusive of the bond insurance premiums of 5.96% on the 1.6 billion AAA-rated notes.

We also have a fixed rate of 7.62% on our $100 million of subordinated notes.

This results in a weighted average rate of 6.06%.

This is our anticipated cash interest rate on a go-forward basis.

When you layer on the amortization of the forward starting swap that was settled at closing and the deferred fees that would be amortized over the term, the weighted average rate increases to 6.95%.

So we just ask that you please keep this in mind as you model interest expense going forward.

Additionally, I'd like to remind everyone that the 2007 impact is only a partial year impact as we look to the full-year 2008, our interest expense will increase.

These rates are fixed but in 2008, we will have 105 additional days in our increased debt level when you compare against 2007.

Lastly, I'd like to discuss our debt level.

I view this really as a how are you going to use your free cash flow question?

My answer to this is that we intend to actively manage our balance sheet, which is nothing different from what we have said and done in the past.

Our first and most important use of cash will always be to reinvest the appropriate amount in our business.

Use of excess cash will always require some level of business judgment and at times it's going to make sense for us to repay debt while at other times to repurchase common stock.

When making these decisions, we consider several factors carefully including our stock price, the costs to refinance at term, the interest rates and other factors that might be relevant.

We all wish market conditions were consistent enough to just choose a specific target level and stay pegged to it without much thought but it's just not that easy.

We do not have a specific formula and we don't have a strict ratio or plan that we intend to follow.

We will be disciplined but we will also be opportunistic.

And as for our debt levels in the past, we provided you with a long-range outlook that anticipates our leverage in the three to six times EBITDA range.

That's still a good long range outlook.

However, we believe interest coverage is also an appropriate measure based on our now-completed A.B.S.

financing plan.

Our pro forma interest coverage for 2006 under the new financing is 2.2 times.

This is right in between the previous levels of 1.8 times and 2.7 times during the 1999 and the 2003 recapitalizations.

We believe we've proven our resolve to continue to utilize our future free cash flow in a matter that's most beneficial to our company and shareholders.

This concludes our financial update.

Once again, we thank you for your time today.

With that, we'd lake to open the call for questions.

(OPERATOR INSTRUCTIONS) We'll pause for a moment to compile the Q & A roster.

Your first question comes from the line of John Glass.

Thanks.

David Brandon, you talked about self defeating tactics during the quarter, cutting back labor, lower, you know, promotional materials.

Your system's old so they presumably been in the business a long time.

So I'm surprised they took such a quick reaction, to you know, maybe short-term events.

I guess my question is how do you incent them to go back and change their ways?

Are there financial incentives you need to provide them or is this just leadership incentives showing them how you can do it and they follow suit?

Its a great question John.

No, actually although we're a 46-year-old brand, as I mentioned, it's been 12 years since we had a negative same-store sale year.

We all probably fall prey to the notion that gee we're going to wake up next year and it'll be as good as last year.

I think if we really want to be truthful with ourselves, we had had so much success for so long in terms of being able to figure out a way to top the previous year, we lost track of the fact in 2006 we were really going up against a very challenging set of comps from the previous year.

We were going to have to work really, really hard to keep that momentum positive.

And so when we encountered negative same-store sales for the first time in a long time, I think the knee jerk reaction was a negative one and let's try to manage a bottom line and try to work our way out of this problem that way as opposed to manage the top line and continue to drive traffic and fix the problem by fixing the sales.

So we saw a declination in our operational execution, which is hurtful and we saw a significant reduction in the amount of market-based activity in terms of communication with customers and local store marketing.

So what we're doing is not offering financial incentives but what we are doing is providing leadership.

One of the ways we provide leadership is through our team USA activity because our average franchisee in the U.S.

has three stores.

The fact that we're out there operating over 550 stores that we own and we can demonstrate by our leadership that some of these return to fundmental local store marketing activities, passionate focus on operations when we can show that we can lead the system in terms of returning our traffic counts and our positive same-store sales, that's a powerful message.

The fact that we also deployed more people out in the marketplace to coach and help and lead our franchisees to higher ground as it relates to operational marketing activities is an investment for sure, but one that we think is very appropriate.

So that's the way we've approached it.

I'm encouraged with kind of how that's working, but it's obviously a work in progress.

Until I can report to you that we have sustained positive same-store sales for a measured amount of time, I still characterize it as a work in progress.

Then, if I could ask a follow-up.

The team USA margins declined year-over-year despite some improvement in the company-owned comps.

Maybe you can explain why that is, how much minimum wage may have accounted for that decline and if you could also maybe throw in a comment on maybe forward-looking on cheese prices or current cheese prices and if that, you think, has an impact on that line currently?

I'll let David talk about minimum wage and I'll talk about cheese.

Sure.

John, the operating margin was down 1.3% on the stores, and that is primarily all labor.

So I mean, there's a lot of other puts and takes, you know, by the time you net them all out, they're all offset.

As I mentioned in my comments, that there can be a lag effect with these minimum wage changes.

I think you are seeing some of that.

It's primarily a rate issue.

There is a little bit of deficiency but it's mostly a rate issue.

Basically, where we do have corporate store operations we have seen some significant minimum wage impacts.

So we may as a corporate operation have taken a little bit more of an impact of that than a lot of other regions of the country.

On the cheese front, cheese has obviously moved in the recent past.

You know, we are horrible at predicting cheese prices and we're not going to start to act like we're any better than we ever were.

I don't think anybody knows exactly how and when and why this market drifts the way it does other than we've played this game for a long time and my ten years or in the last ten years and my eight years actually at Domino's, we've paid as high as $2.20 and as low as $0.99.

We've seen all of the volatility we think we can see in this area.

In 2006, the average for the cheese block averaged below kind of what the average would be over the longer hall.

So it was a more favorable year.

Which will lead everybody to believe that we'd probably price pressure this year coming out of what would have been considered a lower than average cheese price year in 2006.

That appears to be happening.

Where we are at this point in the year is well within the bounds of our budget and forecast for the year.

But the balance of the year remains to be seen.

That's about all I can tell you.

We've accommodated some increase in cheese in our budget plan for the year.

Whether we got it right, time will tell.

Your next question is from the line of Ashley Woodruff of S.B.

R.

Thanks.

First the question on advertising in general.

You know, over the past several years, you've been shifting more and more of your spending to national advertising.

Now it sounds like you want to revisit that focus on the local level.

As you look out over the next couple of years, have you contemplated shifting some of that budget back to more local or local (inaudible) or do you feel like there's still enough available dollars of what you have now to just refocus that on the local side?

I think it's a great question.

Clearly one of the factors that led our operators to pull back from our local marketing activities last year were these rollups that we were conducting shifting more of the dollars from the national levels so we almost set up that situation by taking more of the resources and pulling them here.

I think what we're discussing right now and what we have to get right is the balance between media buying efficiencies and media effectiveness.

And probably as we look back in 20/20 hindsight can be very accurate at times, we probably pushed the needle further in the direction of efficiency and buying media, and in some cases that came at the expense of our effectiveness in terms of using all of the different media options available to us both nationally and locally.

So as we look forward, we do believe that it's appropriate for us to shift that pendulum back more towards the middle.

National advertising and national efficiency of media buying will always be important and central, but in addition to that, we have to make sure that there are enough resources and there's enough focus and accountability at the local level that we're doing the things in the neighborhoods you need to do to be successful as well.

Okay.

A question on the labor costs.

Again, you said 130 basis points hits margins is entirely labor.

Was that all minimum wage related or was that also driven by increased staffing in the stores in order to drive higher sales?

It's mostly a rate issue so in other words it was minimum wage, Ashley, that's a correct assumption on your part.

There's a little bit of efficiency in there with some additional staffing being in place, but what I'm giving there is primarily the effect if I was to run you through all of the items, there's several items that are ultimately lead us to that 1.3% but as you net most of those out, they have the zero effect.

The primary issue is labor and it's primarily rate.

Okay.

Just one last question on the share repurchase, the $200 million that you plan to buyback.

Do you have a time frame?

Is that something you want to complete by 2007 or is that kind of a longer-term $200 million?

We don't set a time frame and the other thing that we don't do is talk about the strategy around that.

Obviously, I'm sure there's a lot of folks that would like to know what that strategy is.

But we've received authorization.

The way that authorization works is that you get an amount that's approved by the board.

200 million is the amount approved by our board.

We execute that and review that execution with them from time to time and that's what we'll be doing.

We've not set any time frame on ourselves for that.

As Dave said, we're going to be disciplined and opportunistic about those buying decisions.

Thank you.

Your next question is from the line of Joe Buckley of Bear Stearns.

Thank you.

Another question on minimum wage.

What kind of exposure to the company-operated stores to the national minimum wage?

Is there another wave of this coming or can you share the percentage of stores maybe that are in states that already have a higher than national minimum?

It's all over the place, Joe, in light of the fact that there are some states that peg their minimum wage rate off of the national rate.

So obviously in those cases if the national rate moves, then we'll see incremental increases in those states.

Other states they follow the national.

The real answer is yes, we will be impacted by a change in the national minimum wage as will everybody in the industry.

So as David said, we're going to have to digest it.

We always have, we always will.

We'll figure out a way through inflated prices, promotional price strategies, you know, reduction in labor, ideas, I mean, we'll do what entrepreneurs do to manage that situation, but in the near term this clearly provides margin pressure.

Drivers, are they generally paid the minimum wage?

Yes, generally drivers are paid the minimum wage.

Can I ask a question, too.

You talked about field staffing.

You mentioned the phrase, you used the phrase span of control.

Have you tightened up this span of control so that there's fewer franchise stores per company supervisor or manager for lack of a better term?

We have a very critically important position in our company called area leaders.

They're assigned geographically to areas of the company.

They are deployed in the marketplace and the ratio really isn't necessarily the number of stores, although that's part of the span of control equation.

The other one is the number of franchisees.

We want to make sure that we have enough area leaders out there that they can communicate on a regular basis and truly understand what's going on with the franchisees that they are responsible for leading.

Their job is to bring ideas and best practices and implement standards and frankly expectations across these franchise owned and operated businesses in such a way that we get everybody on the same page and they know what's working and they're executing against plans.

And we looked at where we were at the end of 2006 and we felt that some of the freelancing that was going on and some of the decisions that were being made at the local market level were probably good decisions based on bad information.

And we wanted to provide good information.

We need more leg on the street to do that and we've staffed up accordingly.

Okay.

Just a question on the international revenues.

David Mounts, I know you mentioned the $6.6 million impact from the sale of the Netherlands and France.

When you look at at our models, it's the international revenues where we're way off.

Is there some implication to the distribution revenues internationally that we're not capturing or let me clarify I guess, is that 6.6 million a first quarter number?

That's correct.

Is that simply the sales that were going through those company stores?

That would be the revenues that we're going through those company stores and just to maybe give a little more clarity around those numbers.

If you take a look at the way the revenues were reported, Joe, it was 26.4 million this year and 30.7 last year.

So my apples to apples comparison is 26.4 million this year and 24 million last year for about a 10% increase.

Does that line up more with your projections, and if it does, I think maybe that clarifies it.

If it doesn't, I'd have to understand about more about what you've got in your projections.

Maybe this is something we can pursue offline, but yes, that's just something I need some help understanding.

Not a problem.

Maybe just one final question.

Just on the interest rate, you laid it out in the release to 6.59%.

I was expecting to see something like 6.12% maybe from a prior release.

Is there --

There's the cash rate and there's basically three components.

There's probably been three rates out there at different times.

It does get a little confusing, Joe, so it's a good question.

The 6.06 is the cash rate.

That at the time that we closed the transaction and we settled, that is the cash interest payment that we make going forward.

We had put a swap in place, you know, at the time you think about when we announced a transaction, you know, there was a lot of interest rate volatility, subprime market, you know, there was a lot of things going on in that market, and it was unpredictable what was going to happen with some of the rates money we put a swap in place to lock in.

We locked in about two-thirds of the transaction.

We didn't do a full lock, but we felt it was prudent financial management to hedge in.

So that swap effect itself makes the effective rate 6.19%.

Okay?

So that would be the effect of the cash interest rate plus the swap.

The full 6.5% rate that you're talking about is everything all in.

That would be all the amortized deal cost and deferred financing associated with those.

That gives you the effective rate when you include all of those costs into consideration.

Okay.

Thank you.

Yes.

This question have from the line of John Ivanko of J.P.

Morgan.

Hi, thanks.

I was just going to ask that question that Joe said.

I think the weighted average GAAP rate was expected to be 6.19%, so I think that's something that a lot of people, including us, certainly took at face value.

But a couple of other, I guess, questions, if I may.

There were obviously some franchise store closures from the first quarter to the fourth -- excuse me, the fourth quarter to the first quarter.

Does the company have any thoughts about, you know, maybe taking in some of those underperforming franchise stores, fixing them, then reselling them at some point in time?

Is that part of your future or even potentially owning them over the long term if some franchisees want to step away that are sick or completely depressed cash flows .

We take a look at a number of different strategies.

One of them is if we are well positioned to buy them and operate them at a improved level that's certainly a first choice.

Oftentimes, though, what we're looking at are stores that are not located in proximity to where we have corporate operations.

Our experience has been if you start buying a few stores here and few stores there that are remotely located it starts to cost you more to service and supervise than what you can really expect to gain in upside profit potential.

Those are stores that are far better positioned to be franchised.

Oftentimes, what you see when you see store closures is temporary closes.

At least that's the way we think about them.

For whatever reason, we're losing the current operator and what we immediately go into is a mode where we're trying to find an operator to refranchise with a better operator.

Obviously sometimes depending on where the store's located, that takes some time.

One of the reasons we've invested in this highly focused development group is to create a robust pipeline of franchise-ready candidates.

We think that one of the metrics that will improve is our number of closes will go down because we'll have more people at the ready to pick up those stores oftentimes at very, very attractive costs.

Right.

Go in, turn around and Maine make a lot of money.

That makes sense.

Secondly, it does sound like your prepared remarks that traffic is beginning to stabilize?

Is that a fair comment.

As you know, we don't split out traffic and ticket.

I will tell you team USA is kind of our stocking horse right now in terms of leading the way.

We experienced the dynamic in the first quarter where We saw positive traffic out of team USA.

that was something that we weren't able to achieve last year.

So we feel that momentum is moving in our favor in terms of traffic.

We saw a lot of our franchise operators experience a similar situation.

Interesting.

And obviously follow up on top of that.

I know pricing has been, you know, a fairly important part of the comp mix over the last couple of years.

What do you think the average delivery pricing is in '07 relative to '06?

Even just qualitatively?

Just in terms of --

If your average ticket is up or your average ticket is down?

Particularly in the fist half of the year, John, if you think back to the promotions that we were out with, I won't talk about the other guys, but the promotions that we had in the early part of last year is we had a 777 promotion which was a $21 ticket, the super six mix which was an $18 ticket.

We were really pushing hard on the ticket pedal during the first half of next year.

As we moved into 2007, we learned from that and we're trying to be more bolder and more value conscious and more traffic oriented in our promotional strategies.

So as you would expect because we're executing pretty well at the team USA level right now, we're seeing increases in traffic and reductions in ticket.

We think that's an appropriate thing for us to do at this particular time.

Okay.

Finally, I know it's historically been the case and I quite frankly have never understood why delivery drivers are not treated as tipped employees in the eyes of minimum wage or any type of hourly wage.

I guess personally, is that assumption true?

Secondly, is from any way they can be reclassed at some point to where you don't have to pay them minimum wage increases?

The accurate answer to your question is that I think in some unit because we have these living wage ordonnances in some municipalities.

Some states have their rules and regulations.

I think you will see regulatory and legal issues around minimum wage that vary greatly as you travel around the country.

Generally speaking, though, your position as stated is correct.

Way too often, our drivers are not considered like a lot of other categories of employment where there is a significant component of their compensation that is derived through tips.

They're not given credit for that so they're subjected to these minimum wage increases when in fact their hourly rates are double digit.

And it's very frustrating for us and probably frustrating for you, too.

All we can do is keep singing into the wind in Washington and try to get the politicians to understand that in some cases the very thing they are trying to accomplish is inappropriate and not helping.

Okay.

All right, thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Majid Khan of Cobalt Capital.

Are the store, domestic franchise store close years just a residual from last year's operations or do you expect this to be more of an ongoing regular business thing?

The amount of store closures that we had, we were down domestically, down 14.

Last year we were down 6.

So it was a difference of 8.

And in our process system of 5200 stores, I would not characterize that as statistically significant, change in trend.

We're going to typically see a few more closures in the beginning of the year because sometimes that's just when people make decisions about their go-forward investment plans.

Specifically I'm referring to the franchisees.

I would not forecast any change in kind of our ongoing direction that we provided in terms of net store growth or the closures associated with that.

We always quote our growth figures on a net basis which accommodates closings and we continue to believe that for us to have on a net basis opening 200 to 250 stores a year is a very, very achievable objective and one that we have actually demonstrated demonstrated an ability to do better than over the last few years.

We're not forecasting nor do we believe there's going to be any kind of unusual activity or spike in the number of closures.

In fact, when our development team gets more people in the pipeline and does a better job of getting our store growth momentum back, hopefully that trend will even go in the other direction.

What's the typical delta between the average sales of store that could be closed versus the average Domino's franchise store?

The terms of sales?

Yes.

It varies.

It depends on where you're at in a particular part of the country, right?

It's not going to be consistent in New York with Indianapolis, so it depends on the amount of capital that's been used in that particular store.

A lot of other operating, so I don't think there's one delta that you can expect to apply across the nation or on average.

All right.

And I might have --

I think -- ( All Talking At Once)

I apologize if you addressed this, but why is there such a big difference between same-store sales growth and your company-owned stores versus franchise stores?

Well, as I mentioned earlier and I understand you maybe weren't on the call, we're in a situation where you own and operate stores you can move very quickly and implementing change.

We've made significant changes in the way we've approached both operations and local store marketing over the past several months, and we actually believe that we're starting to realize a little sooner through our team USA unit the effects of some of those changes.

So right now, that's what I would say is the reason why there is an extraordinary gap between Team USA and franchisees because frankly historically it's been the other way around.

Right.

So you expect them to at least catch up over the next couple of quarters?

Well, we don't give forecasts in terms of going forward same-store sales projections.

I would just tell you as a general comment we feel like we're gaining momentum today versus where we were a few months ago.

We're seeing positive traction and we are seeing some positive effects from some of the initiatives that we put in place over the last three months.

I'm feeling hopeful and optimistic that we're starting to gain momentum but we'll see where that goes over the next quarter.

Got it.

Thanks, guys.

There is a follow-up question from the line of Ashley Woodruff from SBR

Hi, just a question on the backlog of franchisees you mentioned as now in the first quarter with some of the new initiatives that you've taken its the highest you had in five years.

Are those mostly new franchisees that you kind of recruited in the system or are these existing franchisees that you now offered new territory to?

I guess could you talk a little more about that?

Sure.

Its really a combination of both Ashley.

We actually have done a better job of recruiting more candidates for first time franchisees so that pipeline is more robust than it's been and improving by the day.

I stop in and visit our franchise development classes where we bring people through Ann Arbor and prepare them for franchising.

And I've been into more classes and met more people over the last few months than I can ever remember so we're making great strides there and continue to improve.

Yet, we also when we talk about applications and many instances, these are existing franchisees who have a pent up need to expand their operations into new geographies, better penetrate their markets and in some cases they were sitting back pulling back those aggressive growth plans last year because of some of the sales pressures.

What we're feeling now is some of that is starting to turn and we're getting more people who are stepping up and starting to build those stores.

The application process is an important step to really demonstrate what kind of pipeline we have for future growth prospects and the fact that we have a robust pipeline right now is encouraging.

So the existing franchisees that were pulling back last year, is it them signing up now, is that just based on what they're seeing with team USA or any there any incentives that are new for them to sign up.

We've always had incentives and we tweak those incentives at different times to try to create a new and different reason for someone to consider building that next door.

Yes we have incentives place but those are not entirely new In some cases they are different incentives, in some cases we always try to figure out a way to make them stronger and create more action.

Fundamentally, in any of these systems and I think you can check this out with any franchised system if you have a year where sales aren't working in your favor, entrepreneurs tend to pull in their horns a little bit saying I was going to build this store this year but maybe I'll wait till next year just till we get our sales situation turned around.

When you are out there being really pushed hard to regain your footing in terms of the operation of your existing stores.

In some cases that identifies personnel changes and needs you immediate to implement to operate your existing stores better ,it pulls your attention away from growth because you have attend to your business and get it righted.

So all of those dynamics create a circumstance where in most situations if sales are sluggish, you will see a lot of operators who are on the bubble as to whether they build or not they will hold off on that decision until they feel like they've got their legs underneath them with their core business.

That's kind of how it feels to us right now.

Okay, thank you.

Your final question is from the line of Jack O'Hara of Sentinel Funds.

Hi.

I think you already answered or declined to answer this question with prior questioners but I'll ask it anyway.

This is for domestic franchisees.

Over the last month of the reported quarter and/or currently, is the same-store begun to run positive.

I don't know if that's been asked on this particular call and the answer is still no but we decline to comment on any near-term results.

We'll be looking forward to reporting to you how we're performing in the recently completed period and the next two periods when we get together and talk about the second quarter.

Okay.

Thank you.

You're welcome.

There are no further questions.

Are there any closing remarks?

Only to say thank you for your interest and support and that we're proud to be a management team that has proven its ability to drive shareholder returns.

We will continue to work hard to remind everyone that we're also a system of great operators.

We're proud of the recapitalization and what it means to our shareholders.

What we're most proud of is that we're great operators, we have a great brand, great system of stores, the best franchisees in the world.

To the extent we're frustrated over some of our recent short term sales issues, we feel very comfortable we're getting those turned around we're going to continue to win on your behalf.

Thank you very much.

We'll talk to you in another three months.

This concludes today's conference call.

You may now disconnect.