達美樂 (DPZ) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the 2008 third quarter earnings conference call.

all lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period.

(OPERATOR INSTRUCTIONS).

Thank you.

I would now like to turn the call over to Ms.

Lynn Liddle, Executive Vice President of Communication and Investor Relations.

Ma'am, you may begin your conference.

Thanks, Chelsea.

With me here today are Dave Brandon, our Chief Executive Officer, and Wendy Beck, our Chief Financial Officer.

We have some prepared remarks and then we are going to follow that with Q&A.

We are going to end on or before noon.

So before we begin I have a couple of brief comments.

One is to have you refer to our Safe Harbor Statement in our press release and our 10(Q) so that in the event we make any forward statements you can take a look at that and also I would ask the media to be in a listen-only mode.

So with that, I would like to start with Wendy Beck, Chief Financial Officer.

Thanks, Lynn.

Good morning everyone.

As you all know from our filings with once again experienced challenges this quarter in our domestic environment while continuing to generate strong international growth.

Starting with the top line, please remember that revenues alone do not necessarily give you the complete picture of our top line growth and still consider global retail sales as a clearer gauge of overall sales and store growth performance.

Our global retail sales increased 2.4% during the third quarter.

This was driven primarily by same store sales growth in our international business, and an increase in worldwide store counts of 55 net units during the third quarter and 216 net units over the trailing four quarters.

Our international division now operates in 60 markets, including recently opened stores in Indonesia and Qatar.

Same store sales.

Domestically our sales decreased 6.1% for the quarter compared with a negative 1.6% comp in the third quarter of '07.

Company-owned stores decreased 3.4%, rolling over a positive 0.8% in the third quarter of '07.

While franchise same store sales decreased 6.4%, rolling over a negative 2% in the third quarter of '07.

International same store sales however increased 5.4% over last year's comp of a very strong positive 8.3%.

This marks the 59th consecutive quarter of international same store sales growth.

As a result, our total revenues for the third quarter were $323.6 million, a $13.7 million or 4.1% decrease from prior year.

Company owned store revenues declined $11.5 million or 12.8% primarily due to a lower store count from store divestitures earlier this year, as well as lower same store sales.

The loss of sales from the store divestitures was approximately $9.4 million.

Domestic franchise revenues declined $1.1 million or 3.2% due to lower same store sales.

And domestic supply chain revenue declined $5.9 million or 3.2% due to lower volume.

This was offset in part by higher revenues due to higher pass-through commodity costs.

Offsetting these declines was a $4.7 million or 16.5% increase in international revenues, due to higher same store sales and increased store count.

Moving on to our operating margin.

Our consolidated operating margin as a percentage of revenue decreased 0.6% in the third quarter versus the prior year period.

As a reminder, we define operating margin as revenue plus cost of sales.

There were essentially three main operating margin variances.

First, our Company-owned store operating margin declined 4.6% from the prior year period, which accounted for 1.2% of the consolidated operating margin decline.

Food, labor, and delivery costs accounted for over 60% of the decline with occupancy costs accounting for most of the remainder.

Second, our supply chain margin declined 0.2% from the prior year quarter, which had a minimal impact on our consolidated operating margins.

The supply chain margin decline was due primarily to the increase in pass-through costs on other noncheese commodities such as wheat, meat and pastas.

This had no impact on dollar margin.

The dollar margin was negatively impacted due to reduced volume from lower same store sales as traffic declined as well as increased costs for fuel.

Third, a change in the blend of our revenue had a positive impact on our margin this quarter.

We had a greater percent of our revenue from our international franchise system this year which had a 100% gross margin and a lower percent of our revenue from our Company-owned stores.

This change in blends improved our consolidated margin by 0.6%.

Now let's look at our G&A expenses.

G&A decreased $1.7 million, or 4.2% in the quarter versus the prior year.

$1.8 million of the decrease is non-recurring relating to the gain on the sale of three stores sold in California as part of our previously announced California store divestiture plan.

Including the three stores sold during the third quarter, we have sold 59 stores year to date.

These details are also outlined in the items effecting comparability table in our earnings release.

Excluding this non-recurring activity, G&A would have been essentially flat.

While we did experience lower advertising expense due to the store divestitures and lower variable labor expense, our bad debt expense did increase in 2008.

Having said that, the company continued to collect over 99% of domestic franchise royalty and domestic supply chain receivables during the third quarter and year to date.

Believe me, we are all over aggressively managing our G&A in this challenging environment.

Now let's look at our leverage.

I'm thrilled to report that this quarter marks the first quarter that we do not have comparability issues with our debt structure.

Given the uncertainty in today's debt markets, we are very pleased to have a debt facility in place with the blended fixed cash interest rate of 6.06% through 2012, with two possible one year extensions.

As for our tax rate, our effective rate was 30.7% in the third quarter.

We recorded approximately $1.6 million of tax reserve reversals related to certain state income tax matters.

This reduced our effective rate for the quarter and is also outlined in the items affecting comparability table in the earnings release.

However as previously indicated, we currently anticipate approximately a 40% normalized rate in the foreseeable future.

Now let's look at bottom line earnings.

Our third quarter diluted EPS as reported on a GAAP basis was $0.17 or $0.13 when adjusted for items affecting comparability.

The $0.13 of adjusted EPS figure is a $0.04 decrease from the $0.17 in 2007.

Our operating results negatively impacted us by $0.05 for the quarter.

This was all driven by the lower domestic sales that we have experienced.

Our EPS benefited $0.01 from the lower share count in the quarter versus 2007, primarily resulting from our share repurchases.

Please note our 2007 recap did not impact the comparison during the quarter.

As stated in our earnings release, we repurchased approximately 1.1 million shares of our common stock under the share repurchase program for $12.8 million during the quarter or $12 per share.

Additionally, on a year-to-date basis, we have returned $41.1 million to our shareholders and $95.5 million life to date under our share repurchase program.

We have now completed 48% of our repurchase authorization.

Due to the anticipated impact of recent events in the credit markets which I'll discuss in a moment we plan to build our cash reserve will be continue to evaluate the share repurchase program.

Now let's look at our liquidity.

As of the third quarter, we had $20.1 million of unrestricted cash.

Subsequent to the third quarter, Lehman Brothers, our primary provider of our revolver declared bankruptcy.

As a result, our ability to draw upon the $150 million revolver has likely been reduced but we are actively monitoring the bankruptcy proceedings.

Lehman's share of the $150 million revolver was $90 million.

If we cannot borrow under this agreement, and we are unable to secure replacement financing from other parties to the $90 million, our availability will be reduced to $60 million, of which approximately $38.3 million is already committed under letters of credit, giving us a net availability of approximately $21.7 million.

The Company has historically not needed or used the revolver for working capital requirements.

We believe that our current unrestricted cash balance, our expected ongoing free cash flow generation and our estimated $21.7 million availability under the revolver is more than sufficient to fund our operations for the foreseeable future.

However as I mentioned earlier, we plan to build our cash reserves during these unprecedented times, and will be conservative and prudent with our cash.

In closing, despite a challenging year, we continue to generate positive free cash flow, $25.8 million year-to-date, and continue to grow our global system as we have great momentum with our international division with both strong sales and store growth.

We have a proven business model that is resilient even during these challenge learning time.

We also have a long-term fixed rate favorably priced debt structuring that has us on sound footing.

In addition, we are taking action to be sure we have well-positioned for growth when the domestic environment stabilizes.

This concludes our financial update.

I'd now like to turn it over to Dave.

Thank you, Wendy.

Good morning everyone, and thank you for joining us on our third quarter earnings call.

We entered the third quarter knowing it was going to be a difficult quarter for us.

We had virtually no sales momentum going into the quarter.

We had fewer national weeks on TV than we had a year ago by nearly 50%, and this was at the same time it became very apparent to us that our national competitors were stepping up their spending considerably.

Our main national topic was a movie property and something I would describe as more of a gimmick, limited time only, pizza product for our national promotion.

We had committed to that a year earlier and it clearly wasn't a great fit for the sales environment that we face.

We experienced a peak in cheese costs.

We incurred another increase in Federal minimum wage.

We saw tremendous volatility in spikes in fuel costs.

And we knew the benefit we would get from our introduction of oven baked sandwiches wasn't going to begin until the fourth quarter.

So it was a lousy quarter.

In fact, it was a quarter that I can best describe as one of those, that if it could go wrong did it go wrong.

And I take full responsibility for it.

Now, let me share with you what we are doing to improve our outcomes in the fourth quarter.

First off, I'd like to start with our recent new product platform introduction, oven baked sandwiches.

This is a big new product introduction for us.

And one of the quick quest products to go from concept to test to national roll-out in the history of our Company.

While sandwiches are not a panacea for all of the problems that we face, they are a huge launch for our brand and as our franchisees nationwide more excited about a new product line than they've been in years, and they are doing a great job of really working this product hard with local store marketing, sampling programs and a keen eye on operations.

Our team members are very eager to sell these products, because they are great, and so far this launch has given us promising indications that we are on the right track with this exciting new line of permanent product on the Domino's menu.

In the first seven weeks of our roll-out, when we had no national TV, and we were still just ramping up to have the product available in all of our domestic stores, we sold nearly five million sandwiches.

That's already about $25 million in sandwich sales before we really got started, and that was without any benefit of national TV support.

We will likely sell one million sandwiches a week during our national promotion and that's in addition to the pizzas, chicken wings and bread sticks we will also be selling.

Significantly, sandwiches have increased our store traffic, which has been on the decline, along with most of the rest of the industry for a long period of time.

Plus we have expanded our lunch opportunity.

Every Domino's Pizza store in the US is now open for lunch, which is becoming an increasingly valuable day part.

The dinner day part has been suffering from recent consumer economic malaise, but the lunch day part has held up better, and sandwiches are a huge part of our lunch, and interestingly, our dinner sales as well, and we will take all of the incremental sales that we can get at this particular time.

All that said, I would like to caution to you remember that there are no silver bullets in this business.

As I stated at the outset, sandwiches are not a panacea to solve every ill of our current domestic environment.

We have only been on national TV for two weeks.

And it's still in its early days.

But sandwiches, and it's important for you to remember that sandwiches are a lower ticket item, which will make it tough for them alone to drive enough business to overcome a string of negative comps.

We have lots of work to do to get back to positive domestic sales comps and sandwiches are just one of the levers we are using in that effort, but I want to emphasize it's not an important lever, not the only lever but a very important one.

So in additional to sandwiches our team is also filling our products pine with more products than I've seen in years.

These are not one time limited time only type products that they are developing and testing.

These are products designed to become permanent menu layers that will improve our product variety, our brand quality, and our consumer brands impression.

We are also developing and testing more value oriented promotions and products than we've ever had in our pine and considering the current economic environment, we're convinced this is the right path to follow.

To ensure that we have the ability to shout very loudly about upcoming product and promotion news, we plan to have a much more significant presence on national TV in 2009.

We plan to have a much greater share of voice in our category at the national level, and we are going to launch our menu expansion with more weeks of television than we had in 2008.

We know our franchisees agree that more television exposure, particularly for our new products and promotions, will be a good thing, particularly in a year where we will likely be facing a continued difficult consumer environment.

We are also continuing to develop our technological edge with on line ordering now making up over 20% of our team USA orders, and with franchise stores not far behind.

We expect this percentage to continue to grow, which is positive for our business.

My team and I believe that we have most important tasks we are undertaking is to revitalize our brands and refresh our franchise system, placing a strong focus on making sure our franchise base is where we need it to be for success going forward and that we have the right franchise partners in place, particularly in our domestic business.

Admittedly, a shake out is happening right now, and it's a bit painful at the moment.

Existing ex franchisees from the system is hard on everyone and with the credit markets where they are right now, getting stores turned out to new franchisees is becoming even more difficult.

It's paramount that we work hard with lenders to get credit lines opened up, so that this turnover of the store base continues to move along at the rate and pace we need.

And it's important that we recognize that all store operators, regardless of grade are under pressure in today's environment, seeing lower EBITDA margins as franchise P&L gets squeezed by tough sales environment and higher commodity and labor cost.

We know from a recent roll-up of the 2007 self reported franchise P&L that EBITDA margins were down from traditional levels, putting additional strain on unit economics.

Plugging in some projections for 2008, we expect this year will be worse.

It's hard on our operators out there right now, and we respect that, and we are doing everything we can to address the issue.

We are working hard to assist F franchisees who want to stay in the system and improve to an A or a B.

Our former interim CFO, Bill Katz, who is a very respected leader and a 20-year veteran of our Company, is leading this most important project.

He's in the trenches working with banks and other lending institutions to get the sale of stores executed and to create work out plans so that those with marginal stores who need bank support to turn their stores around have the capital to do it.

I promise you an update on a quarterly basis as to where we stand relative to those A, B and F franchisees, and here's where we are as of the moment.

Of the 247 original F rated franchisees, we are happy to report that 111 of them have recommitted to the brand, and are doing everything they can do to earn their way back into the system as a permanent member, and many of them are making substantial progress.

Right now, 75 franchisees are in the process of selling their stores.

14 are still working out their options.

We have removed 47 of those F franchisees from the system; 22 of them left during the third quarter.

The F franchisees who committed to stay are performing better overall.

Both operationally, as well as their sales trends.

And we are continuing our efforts to keep them moving along to a more positive outcome.

Our goal is to not allow marginal stores to be operated at substandard levels.

Most of them are owned by F franchisees but some are not.

Even our strong franchisees are feeling the pressure of marginal stores.

As we work through the tough market for selling stores, it make it difficult to project what our total number of US store closures will be this year.

In Q2, we said that the US could be down by 50 to 75 net stores domestically.

From where I sit today, I hesitate to try to update that range, except to say I expect it will be higher than that.

We do expect to open approximately 100 new domestic stores during this year.

However, market conditions will dictate what the final net domestic store growth number will be at year end.

All of that notwithstanding, we still expect our worldwide net store growth numbers to be very positive, thanks to the continued strong store growth in our international markets.

But unfortunately our final net store growth for 2008 will be less than the 200 to 250 range we have established as normal annual net store growth for our system.

Speaking of our international business, I continue to not only be impressed by the growth and drive of this division but what I see on the grounds when I visit these countries.

I recently traveled to five countries from Turkey to France to the UK, Ireland and Mexico, touring many stores and meeting with many franchisees.

The most impressive thing that I observed was the energy of the stores.

I saw franchisees and team members proudly growing their business by providing great products and services to their customers.

I saw aggressive market going both at the local level and national level.

I saw well located stores with strong brand imaging, and strong operation, and that's the basic formula.

It's no wonder we have been enjoying consistent growth from our international division because in my opinion, they are operating at a very high level.

Another strength of our international business model is what we truly refer to as our portfolio of countries.

We tend to discuss international as if it's one unified market and it's not.

It's 60 different markets with 60 different market conditions.

That means when one market is weak, typically we can figure out a way to get another market to grow faster and offset it with strength.

We've been asked late fully we are seeing a slow down in our global business and the current answer to that question is best found in the outstanding results our international business achieved in the third quarter.

However, we'll continue to stay focused as we know global markets are being impacted more and more by the unstable financial markets, higher commodity cost pressures, and in many cases reduced consumer confidence.

One thing that may work against us in many countries in the weeks and months ahead is the recent strengthening of the US dollar, which would impact our reported earnings going forward.

As we have benefit from weaker dollar in past years.

However, despite whatever challenges we may need to confront in our international business, we still expect robust sales and store growth going forward.

Now, before I go to questions, I just want to say that despite the fact that commodities are high, consumers are scared, stores are battling tough trends, Domino's Pizza is still producing ample free cash flow.

And right now, as Wendy mentioned, I believe hanging on to that cash is the prudent decision.

We will be building our cash reserves over the next several weeks until we feel the markets are more stable and the debt markets are becoming more receptive to the needs of our franchisees.

It will never be my preference to provide financing to our franchisees.

We would rather keep our relationship with them focused on being the franchiser rather than their bank.

However we are wading through unchartered waters and are not going to left our A and B.

franchisees fail if there are ways we can be helpful with some short term financial support and solutions.

We will be monitoring this situation carefully in the weeks ahead, and invest capital as always that are in the best ways in the long-term interests of our shareholders.

Finally, an important reminder to you all.

We are working on some of our weaker franchisees.

We are working on some franchisees that are not operating at the level and the standard required in the environment that we are in, but I want to be sure to put on the record that we still have a talented, experienced, core group of domestic franchisees, and they have not only the talent but the experience and the passion to get their businesses turned around.

And we are working well together with them to make that happen.

With that, operator, I'd like to open up the call for questions.

(OPERATOR INSTRUCTIONS).

Your first question is from John Glass with Morgan Stanley.

Hi, a couple of questions, first, can you maybe provide a little color on how bad the franchise financing environment is?

Is it an absolute lack of access to capital or is it just an interest rate issue?

You made a comment about not letting your franchisees fail.

Franchisees typically don't need the capital to operate, I presume, it's getting the Fs out of the system or is there some access to working capital needs?

The issue we have with access to capital right now is the transactional activity.

For the most part because our franchise blaze tends to be small business operators, they have not gotten particularly leveraged in their balance sheet.

It's not a function of typically.

There's exceptions to every rule, but typically, we are not dealing with a situation where people need necessarily short term borrowings.

Often times, what we're running into problems with is we have an A or B operator that wants to buy stores, distressed stores, from some of our F operators, and right now there is not an interest rate issue.

There doesn't seem to be any capital availability to finance those transactions.

The ones that are happening are the ones that are financed from people who have cash flow that's substantial enough to fund it out of their own cash but the bank credit market has been very tough, and that's gotten exceedingly worse during the third quarter, and I would say right now, it's fundamentally shut down.

And did you mentioned a spending as national advertising presence in '09 versus '08?

Are you spending more?

Are you increasing the percentage of advertising spend or is it just another year of shifting from local to national?

It's going to be a combination of both.

The truth of the matter is that one of our problems thus far this year is we are getting killed in terms of share of voice.

We are not out there at a competitive level with our national competitors and what's happened, and again, this is one of those kind of timing is working against us.

As you recall, we went into 2008 with a plan to shift more of our dollars to the local level; less dollars at the national level.

And what fundamentally has happened, is with the inflationary pressures and the margin squeeze, some of those dollars that we hoped would be spent on marketing at the local level are not being spent, and in essence, what we've done is really trimmed back our voice as relates to our overall marketing message.

At the same time, we are teeing up a lot of new products and things are going to require new education, more communication with the consumer.

So as we go into 2009 we already put the plan together.

We will be on national TV, a substantial number of weeks more than we had as part of our planned calendar for this year.

That funding will come from a variety of sources including a shift back to a higher percent funding at the national advertising fund level because that's just an imperative as we launch these new product platforms to have the marketing bullets we need to get them communicated.

Are you prepared to talk about how much, though, and are you asking for incremental contributions in aggregate to the ad funds?

I really don't want to go into exactly how much that's going to be because I think that's very proprietary but I'm happy to share with you the fact that we are putting together a much more aggressive national advertising plan for next year that will put us on TV at substantially higher levels.

Got you.

One last question maybe for Wendy, cash flow from operations this quarter looked, appeared to be negative, in other words you actually used cash from operations and it had to do with some of your other assets and liabilities in the current section.

Is that a bad debt?

What was that?

Does that recur and is that related to bad debts in any way.

That's a great question.

It's primarily two items.

There's an $11.7 million tax payment, purely the timing that it fell into our third quarter, but it really was more for catch up of first and second quarter.

And $5 million was the legal settlement for California that's now been paid.

Got you.

Reverse those out, I don't have the number in front of me, but how much would you if you reversed those out?

Add back the $18 million to the $25.8 million, and those would be non-recurring.

Got you.

Great.

Thank you .

Your next question comes from Jeffrey Bernstein with Barclays.

Great.

Thank you.

A couple of questions.

First a follow up on the slowing, the credit implications.

Just wondering if you can talk a little bit about your share repurchase intentions for '09, whether that might be pared back as you look to kind of conserve cash?

And if you can also give us an update, in terms of the turnover of the existing franchisees that you are trying to move through the system and perhaps the rate and pace of the turnover has slowed.

If you can talk about perhaps where they are in the turnover versus where you were perhaps internally targeting them to be when we talked about it a few quarters ago?

And I have a follow up.

I will handle the second part of that question first.

The way the best for the brand and best for the system is to move F franchisees from our system is transactional.

It's not to close those stores either temporarily or permanently.

It is to get those stores in the hands of quality operators who love buying those stores at distressed levels.

They bring in their strong operational expertise.

They execute a high level and the cash and cash returns from those investments can be very substantial.

So that's the plan that we had, and the plan that we have to kind of remove those F franchisees from the system, and yet keep those stores open.

The difficulty that we've run into is simply a function of the fact that many of our are franchisees have had twenty-year relationships with their local bank that has typically been available to them to extend credit to fund those kind of transactions, and in the recent past, those banks have not wanted to make commitments, simply because they are trying to figure out kind of what's going on in their industry, and I think their credit committees have gotten very conservative as the overall banking industry has gone through their own form of hell.

So it has put a lot of our F franchisees in a situation where they want to transact their way out of the business.

They don't want to just close the store and not get any value but transactions have been slow as a result of the credit market.

We are hoping that that situation relieves itself, but that's a tough one to predict.

As relates to our stock repurchase program, we just had a board meeting last week.

It was a topic of considerable conversation.

I can tell you that certainly where we were sitting last week looking at what was going on in the equity markets, looking at what was happening in the credit markets and the bank failures, our point of view was for the time being, we were going to sit on the sideline.

We are going to pile up more cash than we would thinking about piling up until this situation sorted itself out, and once we knew where the credit markets where, where our revolver was as we saw more trends develop in terms of what's happening with the health and vitality of our franchise system, that we would make a better decision as relates to stock repurchase at some point in the future.

So right now we are going to carry a larger cash balance and see how this all sorts out.

Based on what's happened in the last couple of days, we feel better than we did last week, but I think that's a of how volatile the situation were is and we are going to watch it carefully and be patient.

Great.

Then more on the operations side of the business, I know you mentioned commodity cost pressures through the third quarter, and I guess your third quarter ended in early September.

Wondering if you could give an update in terms of most recent easing we've seen and cheese and wheat would be flat to favorable if you were locked into more of a quarterly basis and going forward, I was wonder wag you see from in terms of your core commodities as you look out to the rest of this year and the next?

A great question and we we spent a lot of of time on in the last week.

Third quarter we took a serious history in terms of cost of our overall food basket.

Cheese peaked at a higher level than it's been in terms of cheese costs in the third quarter.

Our average costs was higher.

It was a difficult quarter for us with cheese.

But the reality is that if there's any good in what appears to be happening in the economy right now, most of the smart people I talk to expect that we are going to see some relief as relates to some of these commodity pressures that we've been under.

Fuel coming down helps us a lot.

We've seen some relief in some of the meets and other areas of the food basket.

Some of them are still very high.

We continue to monitor them closely.

The one that's most important as you know to us is cheese.

Cheese actually came down a little bit at the very end of the quarter, and we thought maybe we were going to get some significant relief, and it frankly has gone back up to the point where I think it closed yesterday at like $1.89.

The cheese market which is still very, very high.

So we have not seen yet cheese block come down at the rate and pays that we like to see and expect to see and hopefully as we get into 2009, sadly because of a lot of economic reasons that will be negative but hopefully what we are going to see is relief on the commodity side.

If I can throw in one last question I guess for Wendy, you mentioned, either of it you mentioned the FX head winds which have been a favorable tale wind for awhile but looks like beginning 4Q should we expect a head wind?

Wondering if you have any hedging in place or if the dollar was to stay at these levels what you would expect your '09 hit to earnings per share would be or perhaps what it was in '08 to kind of get some perspective?

Sure.

While we can't foretell the future, right now we are braced for a hit for $1 million in the fourth quarter.

Again, we would have no way of knowing if in fact that happens.

Thank you very much.

Your next question comes from Joe Buckley of Banc of America.

Thank you.

A couple of questions.

First on the oven baked sandwiches, thanks for sharing as much insight into it as you did.

I know you said it was a product that moves very quickly from test markets to roll-out, but I'm curious in the test markets how incremental those product sales proved to be versus cannibalizing your pizza sales.

Joe , what we've learned thus far about the sandwich business is that first of all, it's brought in some new customers which is always great.

It's accelerated our traffic appreciably.

It's been the biggest traffic mover we've seen in my ten years.

Some of it's from new customers but the other thing is we are learning about the sandwich business is repeat customers is like a people cycling, a person once a week, every three weeks, we are in a situation with sandwiches that people are buying multiple sandwich orders from us per week.

So one of the things we are learning and we like about sandwiches is that we are getting more loyal repeat order customer which is having a significant impact on our traffic.

So we saw that in our test markets.

We've seen that, a continuation of that as we've gotten in the initial stages of our roll-out.

Obviously, it's far from a mature product platform for us so we are still learning and still a couple of weeks into national TV so we are still educating people.

But right now, we are excite bowed what it's doing for our traffic.

It's making the phones ring and getting us more engaged in different parts of the day and we are

How do you view the price point?

Is there a minimum check that's required for you to deliver the product?

Is that one of the issues with the lower ticket product?

It is one of the issues.

We leave that up to the local operator and will you see a little bit of everything out there.

Some will require a minimum of two sandwiches.

Some will have a minimum total dollar amount for the order, $8 or greater.

Other people as part of the trial experience are willing to take the hit and they will deliver whatever you want to order to get the trial.

We really leave that up to the local operator and we are all still learning as to what's kind of the best answer.

But right now I would say we are being very aggressive.

I'm very proud of my franchisees.

They really embraced this.

This is teaching old dogs new tricks in terms of a whole new platform operationally in the store but also the marketing.

This is a product that sets us up very well for sampling and our franchisees have done a phenomenal job of getting people and getting this product in their mouths and when they do they buy it.

Moving on to the revolver for a moment, are the implications of the revolver are there any day-to-day implications of the revolver being so modest, how concerning is the situation or is it just something that your prudence would suggest you need to raise cash and find some replacements for that $90 million of short term credit?

Joe, I am going to soon be celebrating my tenth anniversary at this company and as you know from day one we've been a levered balance sheet because we should be.

And in my ten years, we have never used the revolver for anything material.

The only time we've accessed it is to either put LCs against it or, in very odd circumstances, we've accessed it because we've gone out and done a big block trade.

We bought some additional incremental shares since we've become a public company, I think the most we ever got into was $15 million.

So we are losing no sleep, have no concern about our liquidity.

We have significant cash balances.

We still have two components of the original revolver that are in place and available to us if we need them.

We don't plan to use it, but it's there if we need it.

The only disappointment of the $90 million Lehman piece is that when the stock market does what the stock market does and drive our stock down to irrationally low levels, that big revolver was there and we always had the opportunity of thinking about accessing it to a more material degree to take advantage of buying opportunities.

In the case of those large block trades and big open market share repurchase plans, we are going to have to be a little bit more conservative than we otherwise would have been because we've lost $90 million of our capacity.

But from a day-to-day operations perspective, I think that that event means nothing.

Okay.

And then the conditions under which you would extend credit to your franchisees are you indicating would only be to facilitate transactions of A and B franchisees buying F rated stores?

I think the situation we are in right now is a very one off consideration and Bill Katz and his team are looking at this things very carefully.

If we can help facilitate a transaction that we know is going to be a winner, and we can provide some very nonmaterial levels of bridge financing, we will consider that.

If we've got a franchisee who is moving into a bunch of new stores that's going to be in a turnaround mode, and it's sensible for to us provide some deferrals of cost, deferrals of royalty, deferrals of other some payment, we will look at that simply as a way to work with that franchisee and help facilitate something that's overall good for the brand and the system.

We are going to be creative and we are not opposed to helping out our best a franchisees becoming bigger and better but it's going to be done in a very careful I would say targeted way with limited exposure to our shareholders because frankly I don't want to be a bank it's never been our plan or our interest so whatever we do in my opinion will be done at a very low level and will not be material to our financials.

Domestic store closures we are seeing, are they related to the F program for lack of a better term?

Absolutely.

Theory late to do two factors, actually three factors.

One, we are putting enormous pressure on people who are not operating stores at acceptable levels.

We are putting a lot of pressure on them.

We are making their life miserable because they are hurting the whole system.

They are not just hurting us at the corporate level.

They are hurting our entire system of franchisees.

So we are putting a lot of pressure.

The second thing we are doing as we are putting that pressure on them if you are a weak operator with lower volumes and are not doing a great job in this environment your margins are going to disappear pier.

This is the time and place where operators have to be great to be successful and by definition if you're an F franchisee and you are not getting the job done your bank and your income statement every period is encouraging to consider getting out of the business.

And then the third component is whereas normally with would have big accounts payable title around the system to buy up these stores as I mentioned earlier the credit markets being what they are it's just the overall fear factor that exists in small business today is such that we've seen people that would traditionally be stepping up and wanting to buy these stores being far more hesitant until there's a little bit more stability in the financial markets and the overall business conditions.

Last question, Wendy, you talked about the possible FX impact in the fourth quarter but what's been the positive EPS impact on foreign exchange in the first three quarters?

Let's look that up.

We will get that to you, Joe.

That's all I have.

If we get it before the end of the call we will shout it out here.

Sounds good.

The total effect was 1.7 million positive, 0.9 in Q1, 0.6 in Q2 and 200,000 in the quarter.

Did you get that, Joe?

Hello?

Your next question comes from Colin Guheen of Cowen & Company.

Hi there, just a couple of questions that haven't been asked.

Focusing back in the company store margins you talked a little bit about food.

What about labor during the quarter with some of the variability in the comp, declining comps ended up with inefficient laboring schedule that may be better planned in the quarter, parse out.

Team USA had a very poor quarter.

We did not manage the labor well.

We got hit particularly hard with the next tranch of the minimum wage increase which puts pressure on labor.

I think we had the right intentions.

In many cases we were bringing on incremental labor, door hanging and we were trying to improve our service but at the same time we were bringing on all that labor, our sails were dramatically less than what we've grown to expect from team USA.

So lower sales and higher investment in labor and higher fundamental minimum wage labor costs, the combination of those factors created a very lousy outcome in terms of team USAs performance.

We've addressed those issues in the number of ways and again we don't do go forward things but I can tell you that that trends is moving the other direction and that's a good thing in term of our tight management of labor costs in team USA.

Just we've talked a lot about providing some maybe small financing of franchisees.

What about buying franchise stores?

Is that on the table at all or is that something that's just left to the A franchisees?

I recollect it's always on the table but what we are commit to do is being very, very disciplined about where we by stores.

And meaning if we have infrastructure in place and we've got a good team and a solid business in a market and there are stores that are contiguous to that and we can by it at levels that we think are attractive that will always be an option that we will look at and certainly carefully consider.

But what we are not going to do is become the port of last resort for three stores here and four stores there that will cost us more to supervise and integrate into our system then we can ever hope to make and frankly that's more of the situation today with F franchisees sprinkled across the country we really need A.

and B.

to step up and take over those stores.

It's hard for us to step into those to.

There's no material change in that $25 million of Capex, that's kind of a run rate number.

No, other than as we look at a world where the business is tough and we are still in the process of getting things turned around we will be even more conservative and careful in the way that we allocate and spend that capital.

So $25 million is still a very good number to Q2 much but understand there's flexibility in that number if things continue to stay very tight we will see if we can continue to reduce it.

Assuming you are going and looking out to extends the revolver back to the 150 million if that would be available or what's kind of the process given the bankruptcy.

That would take about a hour and a half to answer that question.

There's ongoing discussions with Lehman and certainly this involves now Barclays and how they want to manage their client relationships and how they want to pick up the pieces with some of their existing clients and so there are conversation going on at that end.

There's other relationships which we have have very close and very important and those people may have an opportunity to step up and fill that void and we are having those conversations.

Obviously everybody is playing their cards very close to the invest particularly in the last week or two weeks it was hard for people to get people to answer their phone in light of what's going O.

We are very good conversation with people that we have we have good relationships with and we will put that 90 millions back in place if it's attractive and consistent with what our needs are.

Thank you very much.

Your next question comes from Tom Forte with Telsey Advisory Group.

I want to do talk about the quarter, the first question was when you look back and think about some of the activities, the Olympics, some of the other good television, what if any was the benefit to sales from those activities?

Very little.

From the standpoint of the fact that we weren't really involved in the Olympics in terms of any kind of advertising or brand presence.

The Olympics does put people in front of TVs admittedly but based on the time differences, and other factors, we didn't feel any kind of material impact from the Olympics nor do we normally see that as a big business boom opportunity for us.

The key thing for us was our competitors and God love them, they fired a lot of media bullets during the quarter, launching platforms, supporting them with high levels of TV and we got caught in a quarter where we had a major reduction.

And so I think it was more of a share of voice issue than it was anything else in terms of what was going on in the marketplace.

Then in that regard, can you talk about some of the promotions you talked about, you said you've had, you have more promotion in the pipeline than you've ever had.

Is that something lower price points, what sort of considerations you have?

Listen, I hate talking about this because I don't like to make it easy for anybody to figure out what we are up to but I can tell you that first of all we are excited about our new Chief Marketing Officer who is now on board, in the saddle, a very talented marketing executive that is going to bring a fresh perspective and new energy and we are excited about having Russel on board.

I'm excited about the fact that we are working hard to get a greater share of voice, getting out there and be able to share from the roof tops some of our new platforms.

We have test markets that are out and going that have a new pizza products that I think are the best food that we ever made in terms of pizza products.

We are testing pasta products because obviously that'ska category that's generated some interest and we want to participate and we've got an approach to that that we are very excited about with some additional good results.

We've got some pricing and value promotions that I won't go into specifics on only because I think that would damage our competitive situation.

We are looking at a value menu opportunity, value offering that we think will balance out what we are doing at the premium end with some of our new line of pizzas that we are very excited about.

We think commodities are going to be coming our way and we will see some relief in that regard.

We have already seen some in some areas.

We hope to see more.

So a combination of all those factors puts news a position where we are optimistic about the way we are going to be moving into 2009 and the kind of momentum that we can crate.

We are disappointed with the fact that we've created a low base for ourselves with the problems that we've weighed through the last couple of years but we are optimistic about where we think we can go and there's a lot of energy about the throughout the system in that regard.

Thank you very much.

There are no further questions at this time.

I would like to turn the call back over to Mr.

Dave Brandon.

Listen, very briefly I want to point out the obvious and that is that we are living through unprecedented times.

We've seen shake outs in a number of industries as of late and we are likely to see shake outs in our industry as well.

I want to assure you that Domino's Pizza will not only be one of the as you are advisors but we will be one of the brands that will be stronger in light of the challenges we are working through today.

We appreciate your patience.

We appreciate your commitment and I look forward positive reporting to you on our fourth quarter results in a few months.

Thank you.

This concludes today's conference call.

You may now disconnect.