達美樂 (DPZ) 2010 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the first quarter 2010 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 session.

(Operator Instructions).

Thank you.

Miss Lynn Liddle, Executive Vice President of Communications and Investor Relations, you may begin your conference.

Thanks, Sherrie.

Thank you, everybody for joining us today as we recap our first quarter 2010.

Please turn your attention to the Safe Harbor statement that we have contained both in our release and our 10-Q in reference to any forward-looking comments that may take place on today's call.

And since this call is designed primarily for investors, I will, as I always do, ask for members of the media to please remain in a listen-only mode.

With us from our headquarters in Ann Arbor today are Domino's Chief Financial Officer, Wendy Beck, and President and CEO Patrick Doyle.

Both have some prepared comments to make and we'll open it up for questions later on in the call.

Also with us today from another line is our Chairman of the Board, David Brandon who also has some prepared opening remarks for you.

Good morning, Dave.

Good morning, Lynn.

Good morning, team and good morning, everyone.

I told you last quarter that I would participate in this first quarter call and I'm very happy to be here to fulfill that promise this morning.

I could not be more proud of the Domino's leadership, team members and franchisees around the world who have worked to post such an amazing outcome for the quarter.

It would be an under estimate to say we're off to a strong start for the year.

Our adjusted EPS is up a mere 75% versus last year's first quarter.

Notably, our success has been across the board with vastly improved domestic landscape.

We've had unprecedented sales, we have a strengthening franchise base and our overall momentum in our US business is just terrific.

And, of course, we had another successful quarter for our international business.

So, everything continues to come together in a really powerful way.

As I told you before, I would not have considered stepping down as CEO of Domino's unless I was chair of two things.

One that the business itself was stable and poised for future growth, and secondly, that the team was in place that would not only be the best in the restaurant industry but the best in any industry I know of.

Certainly I'm incredibly proud of the fact that this team is performing so well.

The leadership, the team members, the franchisees are all performing and doing a great job.

And as Chairman of your Board, I can assure you that the shareholder interests are well protected.

And this Company is in great hands with Patrick and the rest of the leadership team and the great team members and franchisees who are making it happen.

So, I don't really need to say a whole lot more other than I will leave it to the team to recap the quarter and answer your questions.

While I listen in with considerable pride to this and future quarterly investor calls.

I think it is Wendy's turn.

Wendy, take it away.

Thanks, Dave.

Good morning, everyone.

As you have seen from our filings this morning, we had an outstanding quarter.

Our unprecedented domestic same store sales growth and continued international growth led the way as we made significant progress in all of our financial performance measures, including improving our operating margins over prior year level and growing our adjusted EPS 75%.

Walking down the P&L, I'll start by taking a look at the top line for the quarter.

Global retail sales grew 12.1% during the quarter when excluding the impact of foreign currency.

However, when including the positive impact of foreign currency, our global retail sales grew 17.4%.

The increase this quarter was driven primarily by robust domestic same store sales growth resulting from the successful launch of our New and Inspired pizza combined with strong, international same store sales growth as well as store count growth in our international markets.

Now, looking at the different business unit components, domestically, we posted one of the best quarters in our history as total domestic same store sales grew 14.3%.

This is rolling over a positive 1% over the prior year quarter.

Franchise same store sales were up 14.2% while Company-owned stores were up 14.7%.

We closed a net 17 stores domestically during the quarter.

We are gaining some momentum with more openings and less closings than in the prior year quarter and we continue to expect to end the year with flat domestic store growth.

These net domestic closures were more than offset by our strong international store growth.

Our international division grew by a net 54 stores in the quarter.

Further, on our international division, international same store sales were positive, 4.2% on a constant dollar basis, rolling over a positive 6.6% a year ago.

We continue to be extremely proud of the accomplishments of this growing division.

Our total revenues for the first quarter were $381.1 million, a $59.3 million or 18.4% increase from prior year.

We saw revenue growth in all of our operating divisions versus the prior year quarter.

As supply chain is our highest revenue generating division due to our pass through commodity pricing structure, approximately two-thirds of the total revenue increase was attributable to supply chain.

This increase was the result of higher volumes from our New and Inspired pizza, combined with slightly higher commodity prices versus the prior year quarter.

Additional revenue increases came from higher international royalties due to both same store sales and store count growth.

Also, the higher domestic sales we experienced drove higher Company-owned store revenues and domestic royalties.

Further detail regarding our revenue by business unit can be found in our Form 10-Q that was filed this morning.

Moving on to our operating margins, our consolidated operating margin as a percentage of revenues increased 0.7 of a percent in the first quarter versus the prior year quarter.

The increase in our consolidated operating margin was driven primarily by higher margins in our supply chain as well as our Company-owned store and international businesses.

All of which benefited from higher volumes quarter over quarter.

Offsetting these increases were slightly higher commodity costs including cheese and meats which pressured Company-owned store and supply chain margins as a percentage of revenue.

Our Company-owned store operating margin increased 1.4% from the prior year quarter.

I am very pleased to report a healthier 20% plus margin level at our Company-owned stores.

Driving unit economics at our Company-owned and franchise stores continues to be a key objective of our Company.

Labor as well as occupancy costs which include rent, utilities and depreciation dropped as a percent of revenue as a result of leveraging some of these fixed costs with the higher sales volume.

Offsetting these decreases were commodity price inflation in cheese and meats.

Our top commodities including cheese increased versus the prior year quarter.

The average cheese block price in the first quarter was $1.44 per pound versus $1.23 last year or approximately a 17% increase.

Commodities are difficult to predict.

Some are forecasting further cheese price increases this year while others are predicting decreases from the current levels due to high inventories.

We're still estimating cheese prices will rise to be in the $1.50 to $1.70 range in the latter part of the year.

Higher cheese prices benefit our supply chain revenues but do not impact our supply chain dollar margins.

They do, however, negatively impact our supply chain margin as a percent of revenues.

Our supply chain margin increased 1.1% from the prior year quarter.

Higher traffic in our stores led to larger volumes in our supply chain centers which was the primary contributor to the margin improvement.

Additionally, supply chain margins benefited from product mix changes.

Offsetting the volume increases was the impact of slightly higher commodity costs.

Now turning to G&A expenses.

G&A increased $6.6 million in the quarter versus the prior year, however it decreased 0.4 of a percent as a percent of revenues.

The increase was due primarily to our very strong first quarter operating performance which drove higher performance-based bonus expenses and store awards and incentives.

In addition, we had expenses for some of the new growth and technology initiatives I've mentioned on previous calls.

Offsetting these increases was lower bad debt expense versus the prior year quarter and we see the improved collections as a primary indicator of the strengthening of our franchise system.

Turning to our income taxes, our effective tax rate was 38% this quarter.

However, we continue to expect that 39% will be our normalized effective tax rate.

Next, bottom line earnings.

Our first quarter diluted EPS as reported on a GAAP basis was $0.41 or $0.35 when adjusted for items affecting comparability.

The $0.35 cents as adjusted EPS figure is a $0.15 or 75% increase from the $0.20 in the first quarter of 2009.

Here's how the $0.15 difference breaks down.

Our improved operating results benefited by $0.11 in the quarter.

Our lower interest expense primarily as a result of our lower debt balances also benefited us by $0.03 in the quarter.

Foreign currency positively impacted us by $0.02 and we benefited $0.01 from a lower effective tax rate.

Offsetting these amounts was a $0.02 negative impact resulting from our higher diluted share count due primarily to our higher share price as well as reduced interest income.

Now, turning to our balance sheet.

In the first quarter, we repurchased at a discount, $60 million of principal on our senior notes for a pretax gain of $6.1 million.

So, like to date, we are repurchased a total of $249.2 million of principal on our senior notes, resulting in $62.4 million of pretax gains.

In terms of our leverage, we are thrilled to have leveraged down from 7.7 at the end of 2008 to 6.1 at the end of the first quarter or 5.7 in net leverage when considering the amount of cash on hand.

We ended the quarter with $28 million of unrestricted cash.

Our free cash flow continues to remain strong as we generated $27.4 million during the first quarter.

During fiscal 2009, we produced nearly $1.5 million per week on average in free cash flows and based on our performance so far, we would anticipate exceeding that weekly average for fiscal 2010.

In closing, we experienced a tremendous first quarter and are excited about the momentum we have built as we look toward the remainder of 2010.

We continue to drive shareholder value through our operating performance as well as debt repurchases and we'll remain opportunistic with our strong free cash flows.

Thanks for your time today.

Now, I'll turn it over to Patrick.

Thanks, Wendy.

I appreciate the great financial overview.

And thank you, Dave, for your kind words and most importantly, for transitioning the business to me during a terrific quarter.

What CEO wouldn't want his first earnings call to showcase numbers like that.

And thanks, all of you, for listening in on my inaugural earnings call as CEO of Domino's Pizza.

We've started off 2010 with some significantly positive sales results, as we indicated in our fourth quarter call.

This kind of positive momentum feeds on itself and evolves into positive energy and buzz at our stores, creates excitement amongst our franchisees and results in high volume supply chain centers.

Because the more pizzas we sell and the more dough we make in our supply chain centers, the more efficient and profitable the centers become.

This is not only a benefit to our own bottom line, it is also benefiting the EBITDA margins of the franchise units as we share half of our supply chain profits with franchisees.

Our first quarter 14.3% domestic same store sales increase is unprecedented.

The last large QSR brand we could find that posted anything close to this was McDonald's 14.2% comp back in the first quarter of 2004 at what was the beginning of a remarkable strengthening of their brand and business, something we hope to emulate.

While sales like this are obviously not typical, we could not be more pleased with the results we've had.

Clearly, this rare pace of sales growth is not something we expect to sustain at this level but we do, nevertheless, still expect solid growth in our domestic business in the second quarter.

Our New and Inspired pizza has been a home run for us.

We responded to consumers who asked that we make our pizza better.

We listened to our harshest critics, took their criticism to heart and we produced a pizza that they and our loyal customers could all love.

The result is that we've kept our core consumers and brought in many new Domino's Pizza lovers who, according to early results, are now repeat customers.

Not only have we seen consumer trial at levels beyond what one might expect for a core product makeover, we're also pleased to see new consumers who we haven't seen in the past, are coming to the brand.

In an interesting demographic shift, while we're seeing strength across all demographics, more suburban and high-end income customers are coming on board as new customers than in the past.

Repeat purchases by new customers are strong and meanwhile, existing customers are also ordering the new pizza more often and are also coming back more quickly than in the past.

And online ordering continues to grow, now nearing 25% of total sales.

We have revitalized the pizza category, bringing some excitement and news to a segment that is currently leading all of QSR with tremendous results.

In our advertising, we won back and gained consumer trust through transparency.

We were honest and open about our weaknesses.

We didn't hide anything and we've now proven that this kind of straightforward communication with customers resonates and creates a positive halo for the brand.

We've seen many articles since launching this campaign asking the question why can't more brands or celebrities or politicians be direct and honest like Domino's Pizza was in their ads.

It's refreshing.

While there was some calculated risk in taking this approach, it has clearly paid off for our brand.

Nothing makes for strong franchisee relations like good sales.

So, our first quarter results have certainly caused our franchisees to be happy and very supportive of the actions that we've taken.

The state of our franchise relations can certainly be described as some of the best we've had in years.

But we're not resting on our laurels.

We want our franchisees to be even stronger.

One of our corporate objectives in 2009 and again this year is to increase per store EBITDA so the franchisees are financially robust and incentivized to grow stores.

Toward that goal, we held an economic summit here a few weeks ago.

We spent a few days with some of our leading franchisees, continuing to focus on ways we can improve store economics.

The ideas that came out of the summit combined with the progress we've made on this front last year can now be used to strengthen the entire system.

One of our lessons learned back in the bad times of 2008 was we need to be vigilant about not tolerating poor operators in our system.

And while we've invested significant time and resources to strengthen our system of franchisees and see the results of those investments, we continue to weed out any franchisees who choose not to operate their stores at the highest level.

This will ensure a stronger franchise system.

An early indicator that our system is strengthening on all fronts can be seen in the reduction of store closures this quarter compared with last year.

While we are still planning on net flat store unit growth in the US this year, we're feeling good about the strengthening of our domestic store system due to improved sales, stronger unit economics and hopefully improving credit markets.

For the last few years, we spent a fair amount of time talking to you about our domestic operations and as a result, I feel that our international division hasn't received the recognition it deserves.

In just a few years, our international retail sales are poised to surpass our domestic sales.

And our biggest store growth opportunities are in international markets.

We can look at it this way.

We believe we can nearly double the number of stores in our top ten international markets alone.

That level of growth would make our store count in those markets greater than our US store count.

Again, this is only our top ten markets.

We're not even including the other 55 markets we currently operate in.

To put this in perspective, Domino's Pizza international division represented 34% of the Company's total adjusted operating income in 2009.

When comparing this percentage to established players in the QSR segment, only Yum brands, McDonald's and Burger King's international divisions contributed more in 2009.

In fact, Domino's international business is actually bigger than all of Papa John's worldwide.

Yes, it is bigger than our next largest competitor.

In the last five years, we've opened more stores internationally than Pizza Hut by almost 400 stores and we've added a total of over 1,300 stores around the world in the last five years.

The international growth potential of our business is a huge part of the Domino's story that should get more attention.

In fact, four of our top master franchisees are public companies.

Three of those are pure plays in Domino's and the fourth, Mexico's [Alsaya] owns several restaurant chains.

They started with us and they continue to have their largest store concentration in Domino's.

Since all of these master franchise businesses are strong and they continue to have impressive growth potential, their combined market capitalization is $2.1 billion.

Not an insubstantial amount and reflecting the value those stock markets put on the Domino's brand and business.

One market I would really like to highlight is India.

I was just there in March to celebrate the opening of the 9,000th Domino's Pizza store and I continue to be amazed at the potential this market holds.

The demographics of this incredibly diverse country are definitely in our favor.

India is home to approximately 1.2 billion people.

That's more than one-sixth of the world's population and Domino's is the largest QSR brand there.

It is remarkable.

The median age in India is 25 versus an average age of 34 in China.

And their economy continues to grow at a high single digit rate.

Meanwhile, we've got an excellent master franchisee in that market, Jubilant FoodWorks.

They had a very successful IPO in January of this year.

The growth potential in this market where the 9,000th store for Domino's worldwide was also the 300th in India remains impressive.

The large, quick-growing and most importantly, young middle class in India makes this market very attractive to Domino's in both the near and long-term and Domino's foothold is excellent.

Outside of the 2009 Spain conversion, we opened more stores in India last year than in any other market.

This is a testament to a great franchisee and a market that is taking off and we're proud to be the leader there.

India isn't the only opportunity for us to grow.

After a number of years spent strengthening and growing our existing international markets, I'm pleased to say we're looking at opening more new markets than we have in a long time.

We expect to open stores in new markets in Europe, Asia and Latin America all yet this year.

The key to our international business is its simple model that leverages our 50 years of expertise.

It is a low-risk, low capital investment and yet highly profitable model.

Something that not all of our peers can say.

With a lean G&A structure, this division brings excellent returns and is an engine that will drive our future growth.

With 65 straight quarters of positive sales, the momentum in this business is undeniable and we are only a few years away from the time when our international business will be larger than our domestic business.

Transition is something we've seen a lot of around here over the past few months.

Outside of the obvious transition in CEO that you're all familiar with, I want to call out a few more recent changes around here.

First is the:departure of David Mounts who in a relatively short time frame of just four years had a successful run as both our CFO and then as head of our supply chain.

David left Domino's at the end of March because he was offered the opportunity to be the CEO of a company in North Carolina called Inmar Inc.

We wish David and his family much continued success.

Fortunately, we have a deep bench and an excellent succession planning program and we've named John Macksood to the position of Executive Vice President of our supply chain business.

John is a veteran of Domino's Pizza and has been with us for over 20 years running various supply chain centers around the country and holding positions within purchasing and logistics.

John has the benefit of a deep understanding of the Domino's business and culture and has been instrumental in driving many of the improvements in our supply chain business over the past few years.

We're very excited to see John in this position.

He's already hit the ground running.

Finally, some of you may have noticed that Bain Capital, the private equity firm that purchased Domino's from our founder back in 1998 has done some distributions recently that have brought down their holdings significantly.

They've created great returns for their investors through their investment in Domino's and hold the remainder of these shares in a fund that's now nearly 12 years old.

So, it is no surprise to see them continue to distribute these shares.

They've been very supportive and absolutely terrific partners of Domino's and still hold two seats on our board.

They also recently bought into our master franchise business in Japan, demonstrating not only their continued support of our business but also the belief in our brands.

Happily Bain's shared distribution seem to have been easily absorbed by the demand for our stock and have increased the float for additional liquidity for our shareholders.

So, to wrap things up, we're absolutely thrilled with how our New and Inspired pizza is performing domestically and with continued robust performance of our international business.

We're proud to be leading our category and infusing it with new energy and momentum.

And while I know you're all eager to know how things are going so far in the second quarter, we are sticking with our practice of not discussing current comps midway through the quarter.

I would remind you though that our long-term outlook is still the best guide for our business.

Even though I would point out that we have fallen above and below these ranges over the years.

This quarter has been a terrific way to begin my tenure as CEO and I look forward to leading this great brand into the future.

With that, I would like to open up the line for questions and then after questions, I'll have a few closing remarks.

(Operator Instructions).

Your first question comes from the line of Mitch Speiser with Buckingham Research.

Thanks very much.

And of course, the big question is on sustainability.

And Patrick, if you can just reiterate maybe what you said.

You did mention that maybe first quarter levels will be hard to achieve in the second quarter.

I'm paraphrasing, if you can just repeat what you said.

And if you can maybe just give us a sense of, besides the new pizza launch can you give us a sense of how the category is growing?

Do you think it is taking share from frozen pizza?

With people eating at home more, I guess that's a benefit.

But maybe people are beginning to eat out a little bit more.

Can you maybe discuss some of the dynamics besides the new pizza launch that might be driving your comps and the overall category?

Thanks.

Yes.

Thanks, Mitch.

And I think what I said was you we're certainly expecting solid results in the second quarter.

This is a Company that had 12 years without a negative comp.

I think ending in 2005-2006 we were negative.

But we feel very good about getting back to consistent, positive comps as a company in our domestic business.

The other thing I would say is I'd point out that not only did we have good trial on this new pizza, but our repeat numbers were great, our frequency has increased.

There was strength across all consumer metrics.

So, we feel very good about where we are.

All of that said, our long-term guidance remains positive comps of 1% to 3% on the domestic business.

In terms of where we're sourcing the business from it is a little unclear on that right now.

You asked about frozen.

We don't have visibility on the real short term results in frozen pizza.

But I think what I would say is the category clearly had some weakness in 2008 and 2009.

So, some of this is recapturing consumers that were lost in that time frame.

I do believe, as you asked about the overall relative strength of the restaurant industry, that pizza is the fastest-growing category right now within the restaurant industry.

So, I think we're leading that.

I don't know that I would call particular strength yet in the overall restaurant industry but I do think that the relative strength of the pizza category versus the restaurant industry is clearly there and clearly it is being driven by Domino's .

Your next question comes from the line of Matt Difrisco with Oppenheimer.

Yes, hi, this is Rachel Schacter in for Matt Difrisco.

Regarding your comps in the first quarter, can you quantify or comment on any impact you saw from weather?

Yes.

Rachel, thanks.

When we try to pull that together, the answer is the results were overwhelmingly about our new pizza.

That is clearly what drove consumers both the trial of the new pizza and then repeat on the new pizza.

And so if weather had any effect in the first quarter, it was overwhelmed by the results we were getting from the new pizza.

Okay.

And then also, can you comment on your traffic trend at lunch versus dinner and weekday versus weekend and also have you seen any change at any of your major geographies as far as your comps are concerned?

I'll tell you, it really has been strength across the board on that front.

And I think we have seen relatively more strength in the dinner day part with selling more pizzas on a relative basis.

But that said, our lunch business and our sandwich business have all continued to hold up very well.

So, I think a little bit more relative strength on the dinner day part but that's relative strength in a sea of a lot of strength in the first quarter.

Okay.

And then just lastly, were there any international markets that under-performed relative to some of the others?

No, 4.2%, our long-term guidance is 3% to 5% and we were solidly within that range.

We feel good about where we are.

As I was mentioning earlier, four of our international markets that represent about half of our stores are public companies and they have not all released first quarter numbers yet.

So, I'm not going to get out ahead of their numbers.

But putting up a 4.2% comp against good results a year ago overall, our international business is continuing to perform very, very well.

Okay, thanks very much.

Your next question comes from the line of Greg Badishkanian from Citigroup.

Hi, this is Jeff Hans on for Greg.

Good quarter.

Quick question for you.

I know you were talking about flat unit growth, domestically.

Clearly, with the improving unit economics, you're seeing, are you getting any signs of at least indication of interest from either existing or prospective franchisees on building new stores, particularly for the back half of this year?

We're still calling flat for this year but clearly the improving results of the business are very encouraging for us, including for our existing franchisees.

While we will bring in some new franchisees, the vast majority of our store growth as we move forward is going to come from our existing franchisees.

So I think what I would say is the business performed very well, the same store unit economics have improved materially.

I think we said our corporate store margins were up about 1.5 points year over year.

And certainly our franchisees are seeing improved results and that's on a percentage basis that is up on a double digit increase in sales.

That means they're putting a lot more dollars to the bottom line.

So, you're right that it is certainly a positive indicator.

We're not moving our guidance on that number right now.

But it certainly is a positive as we go forward.

Okay.

And then I know value relevance has obviously been important in sustaining and driving traffic for you guys and the category.

But now with gas prices and some of your key commodities beginning to rise, do you see an opportunity at some point to maybe selectively take up some pricing?

First, I don't know if we're really seeing commodities starting to rise much.

As we look at the environment out there there's been a little bit of movement but we're not seeing right now, any material change in outlook on commodities.

We're still sticking with our cheese call of about $1.50 to $1.70 for later in the year.

We're below that right now.

I think at $1.38.

So, up a little bit there.

But we're not seeing significant increases in the commodities overall.

So we're simply not seeing that kind of pressure.

And our margins are up.

Our sales are up.

We feel good about progress we're making on unit economics.

And we're now in early May and we're still running the same promotion we started at the end of December.

The two medium pizzas for $5.99 is a profitable price point once you add on Coke and chicken and bread sides.

So, we're feeling pretty good about where we are.

One last one.

I apologize.

In light of obviously your very strong EBITDA growth and you continue to remain committed to debt pay down, any thoughts on share repurchase?

Thanks.

I think near term, we're going to continue to buy back debt opportunistically, that's clearly our focus.

Our net leverage, net of cash because remember, we've got a lot of restricted cash with this ABS structure, north of $80 million.

Plus, we ended the quarter I think with $28 million on top of that.

So, our net leverage was down to 5.7 on a trailing basis.

So, we're feeling very good about where we are financially.

We are producing free cash flow at the $1.5 million a week plus rate.

We're going to continue to purchase back in debt.

But as we continue to pay that down, we're always going to focus on producing the best returns we can for our shareholders.

And as we pay down debt and you we think that's the right answer right now, but we will certainly continue to examine that as we move forward and when we think there is a better way of creating value for our shareholders, then we'll look at that.

Your next question comes from the line of Jeffrey Bernstein with Barclays Capital.

Great.

Thank you.

Couple of questions.

Without commenting on current trends, obviously, but in the past you've talked about how it has been sustainable and the trajectory.

Wondering if you can give any kind of qualitative commentary in terms of seeing the monumental product, that it is, the sequential comp trends through the quarter.

Does it ramp up as people get more familiar with it, or a monthly thought as to how it trended throughout the first quarter?

We're not going to go into the specifics on that but again, what I will tell you is and, you asked for something qualitative, the answer is this is not a promotion.

We relaunched the Domino's pizza and our core pizza, consumers are loving it.

We think we've got a materially better tasting pizza out there.

As people have tried it, they're coming back.

They're trying it again.

We're seeing strong repeat and frequency.

So we feel very good about where we are.

We're not going to get into breaking apart the trend within the quarter or getting into second quarter results.

But clearly, consumers are loving this new pizza.

And when you put that on top of a brand that has always owned the convenience and fast delivery part of the category and producing or creating good value for consumers with a good price point, you add on top of that a better pizza and we think we're in a pretty powerful place within the category.

Agreed.

Wondering whether you can comment perhaps, some color on the attachment rate with the new pizza or perhaps maybe better, the impact on sales of the pasta and the sandwiches now that the focus is on the pizza.

Just trying to size up consumer's response to such a heavy focus on pizza.

What I'd tell you is the other platforms and particularly sandwiches, they've held up really well.

So we haven't talked about sandwiches now since last fall.

And our unit sales on sandwiches have done very, very well despite the fact that we have been talking exclusively about this new pizza.

So we really like where we are on that front.

These other platforms, we launched them for a reason last year.

They continue to be a part of what we're doing going forward.

And including the American Legends which gives us a higher price point pizza for the premium customer.

And as the environment improves and as consumers' pocketbooks improve, we've got a place to trade those consumers up with that American Legends line.

So, overall, the answer is the other platforms are continuing to do well despite the fact that we've been talking exclusively about this new pizza since the last week of December.

Okay.

And then just lastly on the commodity front, I know you made it pretty clear, you're not seeing significant pressure from a basket standpoint.

I'm wondering if you can project at this point what you think the basket is in terms of 2010 year-over-year versus 2009.

And secondly, I know the cheese hasn't yet even gotten into your range but is there any kind of sensitivity in terms of what a dime of cheese does to earnings or any way to gauge that since we are running below that range?

Thanks.

Hi, it is Wendy.

I'll take that.

So, overall, we're looking at commodities being fairly stable but it is up slightly over the prior year.

For the quarter, the market basket was up 4.1%.

When we look at the individual components, cheese is the most significant one but we continue to hear that the inventories of cheese are up 10%, milk production is up 2.9%.

So, we continue to think that probably in the latter half of the year, we'll hit the $1.50 to $1.70 range.

For now, we're not seeing it.

I mean it is down $1.38 and others are out there saying cheese is going to go down.

Wheat, meat, poultry, sauce, all of those are fairly stable.

So, when you roll over the entire year, it will be up slightly from the prior year.

But we're pleased that we've got a stable outlook.

And the answer to the other question was how much does cheese affect it.

We've got this long-term agreement in place with our supplier that basically reduces the volatility by about a third versus if we were just buying it at the spot rate.

And so the way that works out is a $0.40 move in the block is about a point on the store level P&L.

Very helpful.

Thank you.

Your next question comes from the line of Joe Buckley with Merrill Lynch.

Thank you.

Question on the first quarter sales.

Taking a look at the 10-Q, it looks like the check was down.

Can you comment a little bit on the check and the traffic mix in that 14% plus comp?

It was all traffic.

We drove a lot of traffic in the first quarter.

And we haven't broken that out specifically.

But it was customer counts and traffic in the first quarter.

Okay.

Was check relatively flat or was it in fact down year over year?

What I would tell you is it was -- slightly down and all of the growth was coming from traffic.

Okay.

And Wendy, on the G&A line, back in January, you were talking to us about a $3.2 million pickup in G&A related to some technology and it would be first half loaded.

Did a fir amount of that flow through the first quarter or is more of that coming in the second quarter?

Or are you still thinking about it in the same way?

Okay, great question, Joe.

So, in addition to the $3 million plus in sales building and technology, we also talked about $2 million of insourcing expenses that would hit our G&A line but we also mentioned that there would be an offset in revenues.

Those are for things similar like a call center.

That's one example.

In addition to that, there is approximately $3 million anticipated for normal inflation which gets you to about $8 million.

Again like you said, it is primarily front loaded to the first half.

So, if you look at the increase for first quarter alone, the additional amount over what you break out for those items we just talked about really is related to our sales growth and all of the awards and sales awards and incentives and our variable bonus plan.

Okay.

Maybe forget the $3 million of inflation for a minute because that presumably would flow to the year but the other roughly $5 million, did a lot of that occur in the first quarter?

Yes.

I would say it is weighted.

Probably a third of that, Joe.

Okay.

And would the other part of it come in the second quarter or is it spread through the year?

I would say about another third in the second quarter and then spread the balance.

Very good.

Thank you.

Your next question comes from the line of John Ivankoe with JPMorgan.

A question on what your marketing weights were in the first quarter year-over-year and what we should expect in general going forward, if there is any unusual lapse meaningfully positive versus the previous year or meaningfully negative versus the previous year that we should counter or that we should put into our expectations.

No, we're going to be strong.

All year as we talked about before, we had our franchisees, 100% of them commit to a new contract that started on January 1st that moved our national spend to 5.5% of sales.

We're going to have a record number of weeks on air this year.

And you're going to see us be strong throughout the year.

And can you quantify what those number of weeks are in 2010 versus 2009?

No.

But up, a lot.

Can you quantify what that was in the first quarter?

No.

We're not going to get into the specifics on it just for competitive reasons.

But the answer is we've got a lot more bullets to fire with a great message to talk about.

So, we're feeling very, very good about where we are.

And for your purposes, trying to pull out how are the quarters going to look and are they going to be affected by the media plan, we're going to be very strong all year long.

Okay.

And secondly oftentimes when sales are slow, companies cut back on various investment initiatives whether it is the store level regarding operations and capital expenditures.

Even local store marketing in some cases.

Now that your business is so strong, basically a windfall in the first quarter, are you considering any way to spend that money for the future going forward?

In other words, anything that can help the Domino's brand and operation a little bit longer term?

I think really what you're seeing this year is the result of investments that we made previously.

We talked to you about how we were going to invest in more people in the field and it has worked.

I need to call out our franchisees.

We really do believe and as best as we can find, this is the best quarter a major QSR chain has had in the US.

And moving from 0.5 up last year to 14.3 up in the first quarter puts a whole lot of pressure on the stores in a hurry.

And I'll tell you, our system responded just beautifully.

They caught up in a hurry and handled the volume very, very well.

Certainly a few little bumps in January as it was first hitting.

But they hired people into the stores quickly, got them trained up and I just couldn't be more proud of the way that the system responded to it.

But really, in terms of those investments, I think you're seeing in the results this year, the effect of investments that we made in previous years.

Okay.

Thank you.

Your next question comes from the line of Colin Guheen with Cowen.

Longer term question on international, Patrick.

I guess the theme of it would be do you think that the Company's missing an opportunity over the next couple of years to invest more equity possibly in an international market?

I understand the benefits of the master franchise model but given some of the growth and scale you've established and as the Company looks to refinance its capital structure at some point, is there an opportunity to put some equity in international markets?

We love the model we have.

I would never say never and if there were a specific market opportunity where we thought that would really create value and faster growth in that market, we would look at it.

But honestly, I don't see that today.

Our master franchisees are having a very high level of success.

You've got visibility on the P&Ls of the four public master franchisees that make up half of our store count in international and these are very profitable businesses that are generating more than enough cash to fuel the growth that's there.

So we think we've got an absolute best in class international business.

I wouldn't trade it with anybody else's international business.

And the master franchise model has served us really, really well.

Okay, thanks.

Your next question comes from the line of Peter Saleh with Telsey Advisory Group

Great.

Thanks.

Just wondering if you could talk a little bit more about your advertising in the first quarter.

Was there a high correlation between the weeks that you were advertising and the sales improvement?

And then is the first quarter a little bit heavier in terms of advertising than the rest of the year or how should we be thinking about that?

The answer is the day we went on air, we saw a very significant increase in sales.

So consumers clearly reacted quickly to the advertising we started generating the trial.

But with better repeat and improved frequency it then gets hard to pull apart how much is from advertising as you move forward versus some people simply loving the new pizza.

And so advertising clearly worked and as I was saying earlier to John we're going to have strong levels of advertising all year.

For your model purposes, I wouldn't be trying to pull things apart quarter to quarter based on relative media strength, all I would tell you is we're going to be strong throughout the course of 2010.

Great.

Thanks.

Your last question comes from the line of Mitch Speiser with Buckingham Research.

Great, thanks.

Can you comment more on online sales?

I believe you said it was close to 25%.

I think it was closer to 20% in the fourth quarter.

I think in the past, you've mentioned that it does have a higher average ticket and maybe how that worked into the equation.

With the ticket down, can you maybe talk about why the ticket was down if online sales were up so materially.

And secondly, just on supply chain services, you have mentioned that you might offer those out to third parties.

Any updated thoughts on that front?

Thank you.

In terms of online sales, you're right.

We were around 20%, we're not at 25% yet but we're approaching 25%.

It continues to grow and that is, by the way, approaching 25% of total sales and it skews heavily toward delivery.

So, we're materially higher on delivery sales than the 25%.

And yes, it continues to have a higher ticket than phone sales or than walk up carry out sales.

But I'll tell you what's more important to me is higher levels of customer satisfaction for Domino's when they're ordering online.

It is growing because consumers like it and they're having a great experience there which leads me to believe that it is going to continue to grow.

You're looking at a shift as you're trying to pull it apart on ticket, you're looking at an increase sequential quarters of 3%, 4%.

So its effect on the ticket change on a year-over-year basis or on a sequential basis isn't going to be that big.

But clearly still higher ticket there, more profitable orders and we love what it does for the consumer dynamics.

In terms of third parties on supply chain center, I'll tell you supply chain was incredibly busy in the first quarter.

They were making a whole bunch of dough balls and did yeoman duty handling the increase in business that we've got at Domino's Pizza.

So, that would also fall into the never say never category.

But our supply chain business was very busy handling the Domino's business in the first quarter.

There are no further questions.

All right.

In conclusion, a wise Domino's international master franchisee once said that today's traffic will result in tomorrow's sales.

And we really believe that the measures we took in 2008 and 2009 to revitalize our menu and turn around our traffic are a big part of the equation for our strong US sales results.

Even as our new pizza clearly drove our fantastic results in the first quarter.

Our customers are more pleased than ever with the quality and taste of our pizza, our service times, are some of the best I've ever seen.

And we're firing on all cylinders in all of our divisions.

While domestic comps like these can't last forever, I believe the momentum and the positive energy we're experiencing will help to get us back into positive store growth in future years and sustained positive same store sales growth in the US.

All while we ride the wave of even stronger growth overseas.

I look forward to being at the helm for the journey.

Thanks for joining us today.

This concludes today's conference call, you may now disconnect.