達美樂 (DPZ) 2015 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the second-quarter 2015 earnings conference call.

(Operator Instructions) Thank you, and I would like to turn the conference over to Lynn Liddle.

Ma'am, you may begin your conference.

Thanks, Jennifer.

Appreciate it.

We are very happy to be with here with all of you to discuss our second-quarter earnings.

As is our usual practice, I have with me today our Chief Executive Officer, Patrick Doyle, and our Chief Financial Officer, Mike Lawton.

They will have some prepared comments and then we will open it up for Q&A.

As usual, we would ask the members of the press to be in listen-only mode since this is primarily for investors.

And I will turn all of your attention to our forward-looking statements, Safe Harbor statement in our press release in the event that any forward-looking statements are made.

So with that, I would like to turn it over to Mike for some opening comments.

Thank you, Lynn, and good morning, everyone.

I'm pleased to report that we once again delivered solid results for our shareholders.

Our domestic and international divisions posted very strong same-store sales growth.

We opened a significant number of new stores and our EPS grew 20.9% over the prior year.

We are pleased with this earnings growth, particularly in the face of strong foreign-exchange headwinds.

Global retail sales, which are our total retail sales at franchise Company-owned stores worldwide, grew 7.5%.

When we exclude the adverse impact of foreign currency, global retail sales grew by 14.9%.

The drivers of this growth included domestic same-store sales, which rose by 12.8% in the quarter, increased this quarter was comprised of franchisee same-store sales, which were up 12.8%, and Company-owned stores, which were up 12.5%, and this was due primarily to strong order growth.

We also saw some ticket growth during the quarter.

We are pleased to report that we opened 14 net domestic stores in the second quarter consisting of 22 store openings and eight closures.

Over the past four quarters we have opened 96 net domestic stores.

Our international division had another strong quarter as same-store sales grew 6.7%, lapping a prior-year quarter increase of 7.7%.

Our international division also grew by 172 stores made up of 178 store openings and six closures.

Over the past four quarters we have added 708 stores outside the United States.

Turning to revenues, total revenues were up $38.2 million or 8.5% from the prior year.

This increase was primarily a result of three factors.

First, higher domestic same-store sales and store count growth, which resulted in increased royalties from our franchise stores and higher revenues at our Company-owned stores.

Second, higher supply chain center food volumes as well as increased sales of equipment to stores in connection with our store reimaging program.

These supply chain volume increases were partially offset by lower commodity prices.

And third, higher international royalties, again from increased same-store sales and store count growth, which were partially offset by the negative impact of foreign currency exchange rates.

Moving on to operating margin.

As a percentage of revenues, consolidated rating margin for the quarter increased to 31.2% from 29.9% in the prior-year quarter.

The main drivers included improved Company-owned store operating margins, which benefited us from lower food cost and fixed cost leverage.

This margin increased as a percentage of revenues from 23% to 25.6%.

Our supply chain margin percentage increase from 10.5% to 10.9%, primarily from a decrease in commodity prices.

As a reminder, commodities are generally priced on a constant dollar markup to our franchisees.

Therefore, lower commodity prices do not impact our supply chain dollar profit.

They do, however, positively impact our supply chain margin as a percentage of revenues.

The average cheese block price in the second quarter was $1.59 per pound versus $2.20 per pound in the same quarter last year, which led to our overall market basket decreasing 8.9% as compared to the prior-year quarter.

Although we expect cheese and chicken prices to average higher in the second half of the year than in the first half, we still expect that commodities we use will be down 4% to 6% in 2015 from 2014 levels.

Currency exchange rates negatively impacted us this quarter by $4.5 million versus the prior-year quarter, due to the dollar strengthening against most currencies.

Based on current projections, we continue to estimate that foreign currency could have the $14 million to $20 million negative impact on pretax earnings in 2015.

Again, for perspective, we estimate that a 1% strengthening of the dollar against our basket of currencies has roughly a $0.015 to $0.02 negative impact on our full-year EPS.

Now, I will cover our G&A expenses.

G&A increased by $7.2 million in the second quarter versus the prior-year quarter due to several factors.

Our higher same-store sales led to increases in volume driven expenses such as variable performance-based compensation, Company-owned store advertising, and franchisee incentives.

Additionally, we made planned increases in e-commerce and technology support.

We have mentioned before that we charged transaction fees to stores to recoup a portion of the G&A cost of supporting our digital ordering platform.

I will note here that we recently increased our transaction fee from $0.17 per order to $0.21.

Based on our current volumes the $0.21 fee amounts to approximately $1.5 million to $2 million in revenue per four-week period.

We do not anticipate additional rate increases in the near-term.

As we noted before, this year includes an extra week.

We continue to project that our G&A will be in the range of $200 million to $275 million for this 53-week year.

We estimate that the extra week will drive approximately $4 million of this expense.

Keep in mind, too, that our G&A expense for the year can vary up or down by, among other things, our performance versus our plan as that affects variable performance-based compensation expense.

Switching to income taxes, our reported effective tax rate was 37.3% for the quarter.

We continue to expect that 37% to 38% will be our effective tax rate for the foreseeable future.

Our second quarter net income was up $7.4 million.

This 19.4% increase was primarily driven by higher domestic and international same-store sales, global store growth, and supply chain volumes.

Our improved results were partially offset by the negative impact of foreign currency exchange rates.

Our second-quarter diluted EPS was $0.81.

There were no significant items affect in comparability during the quarter.

The $0.81 is a $0.14, or 20.9% increase from the $0.67 EPS in the second quarter of last year.

Here's how that $0.14 difference breaks down.

Foreign currency exchange rates negatively impacted us by $0.05.

Lower interest expense benefited us by $0.01.

Lower diluted share count, primarily due to share repurchases, benefited us by $0.01.

And importantly, our improved up results benefited us by $0.17.

Now turning to our use of cash, during the second quarter we repurchased and retired approximately 638,000 shares at a cost of $68 million or an average price of $106.84 per share.

We also returned more than $17 million to our shareholders in the form of a quarterly dividend.

Before I conclude, I would like to address a couple of questions that we have been frequently asked about.

First, regarding our investments in technology, we would like to mention that we are testing a customer loyalty program in one market and, as many of you are aware, a portion of our existing debt is callable in October.

We continue to monitor the debt markets and evaluate all options regarding our capital structure.

Overall, our strong momentum continued in the second quarter, and we are very pleased with our results.

Thank you for your time today and now I will turn it over to Patrick.

Thanks, Mike.

Good morning, everyone.

I'll begin my commentary with a bit of an obvious statement (technical difficulty) disclaimer.

And here it goes.

It was a fantastic quarter for Domino's.

You don't have to look too far to find many areas we can point to all truly contributing to the fundamental strength of the business.

Brand momentum that continues to reach new heights, sustained robust domestic same-store sales, great global store growth that continued with our trailing 12-month net store openings of now over 800, rock-solid performance from international with two new market openings, unmatched technology innovation demonstrating some of the highest levels of creative forward thinking into all of retail, and a business model providing strong unit economics and continued franchise profitability around the globe as well as outstanding returns to our shareholders.

This global momentum helped us deliver nearly 21% adjusted EPS growth despite the ongoing headwinds of foreign-exchange.

We have now had 17 consecutive quarters of positive same-store sales domestically, and our outstanding streak of positive consecutive quarters in international has now reached to 86.

So using another rather obvious statement, we are very, very pleased with our second quarter.

Focusing on our thriving domestic business, I continue to be impressed and proud of the performance of our US franchisees and corporate store operators.

Strong operations, record 2014 franchise profitability as well as impressive franchisee action on the progress of store reimages have laid the foundation for terrific morale and momentum within our domestic system.

Our 12.8% same-store sales comp is a reflection of just that combined with a consistent brand message that continues to remind America that this new Domino's experience is much more than just pizza.

The genuine approach of listening and responding to customers going back over five years to the launch of our New and Inspired pizza has become a critical piece of what Domino's stands for and is clearly a huge element of our brand strength.

We have used customer feedback to remain disciplined and strategic on the new product front and will continue working and rolling out permanent menu items when it makes sense for customers and operators.

We have applied customer feedback to our Pizza Theater design and are pleased to say that we plan to reimage an additional 1,000 stores domestically this year, bringing this welcoming layout to many more customers across the nation.

And most recently, customer interest was a factor in partnering with Apple to launch a Domino's tracker app for Apple Watch, becoming the first US pizza company to bring this order tracking capability to Apple Watch devices.

We will continue listening and responding to our customers.

And speaking of apps and devices, we can't highlight our fundamental strengths and momentum without further discussing technology, an element that gives us a competitive advantage and contributes to our gaining market share.

While the world of digital can be quite a competitive one and the tech-to-table space we pioneered is ever evolving, one thing is evident.

We have not and we will not stop innovating.

Domino's continues to capture the attention of America with a truly creative approach to unique, innovative ordering platforms.

Last quarter I told you about ordering via Twitter, which, along with our agency CP+

B, was recently honored with the Titanium Grand Prix award at Cannes Lions 2015.

And I am now excited to say that by using a pizza emoji, you can now place your Domino's easy order via text message.

So we continue to gain ground on our goal of giving customers the ability to order from us anytime, anyplace.

As we learn more about our digital customer, I can't stress enough that the primary benefit of the platform is the customer experience.

This certainly helps promote frequency.

Once you try digital, it's hard to go back to anything else.

And that is ultimately a credit to our talented development team.

Our lineup now includes the ability to create a personalized pizza profile and store it, easy order; the benefit of seeing our entire menu; voice ordering via Dom, our virtual ordering assistant; Domino's tracker; and the list goes on and on.

Our focus remains on investing in this experience and preserving that customer frequency, which has a much greater benefit for us than nominal ticket increases and labor cost reduction.

Maintaining this focus is what has helped us maintain our lead within this space.

On the international front we simply continue to put up rock-solid results and turned in a terrific second quarter.

Same-store sales were very strong, as was the performance of our master franchisees and operators across the globe.

Recent standout markets included Australia, Canada, Brazil, and the UK.

The results demonstrate continued global success, as we have now reached 86 consecutive quarters of positive same-store sales growth in international, a phenomenal streak.

We were very pleased with 172 net store openings in the second quarter as well as new market openings in Georgia and Portugal.

Here's a fun fact.

Portugal's first-ever order was a digital one, which serves as a good segue to note that we continue to share best digital practices with our master franchisee partners and learn from one another.

Markets outside of the US are doing about 40% of sales from digital channels and while there are markets showing high levels of experience and excellence in the digital front, the opportunity exists to introduce and grow technology within many others.

We look forward to helping our master franchisees establish a digital presence or reach full digital capability within their markets.

I spoke earlier about our store reimage process, which goes well beyond the domestic market.

We now have nearly 3,000 Pizza Theater stores completed outside of the US and 16 international markets with all locations fully reimaged.

The positive international story at Domino's is nothing new but I continue to be encouraged by the master franchisee leadership, unit economics, same-store sales, and unit growth across the globe.

The overall strength of the business within both developed and emerging markets continues to impress.

To summarize the second quarter, our momentum and fundamentals strength sets the foundation for a strong first half of 2015.

The Domino's brand, according to a recent Millward Brown BrandZ top 10 year risers study was the best performing restaurant and ranked number four overall, just behind the likes of Apple and Amazon.

This accolade, we believe, was a result of our innovative forward thinking on all fronts; our honest, accountable communication; and, most importantly, our entrepreneurial culture that is anything but complacent and faces the challenge of sustaining success head on.

Our brand strength and global momentum is driving results, and I couldn't be more proud of our team across the globe, a team that is simply getting it done.

Before I move on and open it up for questions, I would like to take a few minutes to discuss the other important announcement we made this morning, the transition of our Chief Financial Officer positions.

From Mike Lawton, who has announced his retirement as of the end of August, to Jeff Lawrence, who is a seasoned Domino's leader and highly deserving of this promotion.

As I stated in our release, I simply can't say enough great things about either of these guys.

Mike has been a colleague and true friend for many years.

Since I recruited him from our former company, Gerber Products.

We have had so much to thank him for, from running our international division for over six years to the times we have counted on him to pinch hit and run both IT and supply chain when we needed him most.

His leadership and measured intelligent approach to any broad business issue has been a huge contributing factor to this Company's success.

His shoes will be tough to fill, but I'm confident there is a person equipped to do so, and it's Jeff.

Jeff is currently our Treasurer and has been with Domino's for 15 years in finance and leadership roles on both our US and international fronts.

He has been an integral player in past debt refinancings and our initial public offering.

Many of you in the investment community have already come to know him, and those who haven't certainly will soon.

My sincere congratulations go to both of you, Mike and Jeff.

And now, I will open it up for questions.

(Operator Instructions) Chris O'Cull with KeyBanc.

Patrick, there has been several ordering and delivery solutions that have been started in many cities in the past year.

Are you seeing any solution out there that has affected any of your markets?

No.

Okay, that's great.

And then it appears the percentage of the orders, though, from the digital platform isn't increasing as fast as they had in the past.

Is that true?

It seems like it's a stuck just under 50%.

Can you talk about how you are improving that conversion rate?

Yes.

Well, all of the things that we talked about our ultimately driving the conversion rates.

And really what we've seen in the past is in the fall you see really an increase in digital ordering percentages.

We've seen that every year.

We saw it again this year.

Kind of from the beginning of fourth quarter into the beginning of first quarter and then it tends to, frankly, flatten out over the course of the next six or eight months until people start going back indoors again and students go back to university and people seem to change their ordering habits around that time of year.

So you are right in the observation that it hasn't gone up in the last quarter or two.

But that is actually consistent with what we have seen every year.

Thank you.

Brian Bittner with Oppenheimer.

Thanks, this is Michael Tamas on for Brian.

You mentioned the balance sheet briefly, and I just wanted to ask a question about the leverage.

You seem to be at the lower end of your targeted 3% to 6% range.

So can you talk about any possibility of taking on additional leverage at some point?

How would you envision using that additional capital, whether would be another special dividend or significant more buybacks?

As I said in the script, we have got the opportunity to refinance one third of our debt in October.

And it's fairly clear that the debt markets are in very, very good shape right now.

So it's something that we will be evaluating.

That's really all I can say at this point.

Okay, thank you.

Karen Holthouse with Goldman Sachs.

Congratulations on another fantastic quarter.

Looking at the global unit growth year over year, we continue to push a little bit past the high end of the guidance range from January.

How should we think about that?

Is there a seasonality piece to that or are there particular markets driving that strength, thinking just what that pace could look like over the balance of the year?

Karen, you are clearly right.

From a straight numbers perspective, we are a little bit above that range.

I think what drives it ultimately are unit economics.

We are having a terrific year both domestically and internationally, and as unit economics continue to improve, capital continues to free up to build stores, opportunities for building stores with higher volumes at the new sales and profitability levels continue to open up.

And that's part of why, frankly, you are seeing at not only on the international side but on the domestic side if you look at the trailing 12-month net store growth.

You are continuing to see momentum for new stores domestically and, frankly, you're continuing to see store closures really get down to a very, very low number in the US.

So really the way to think about it is it's a reflection of unit economics and my view that I think I've expressed before is stores get built because they should be built and because there's an expectation that they are going to generate a great return.

And fundamental analysis of any heavily franchised restaurant company has two really start by looking at the unit economics for the franchisees.

And if those are strong and franchisees are prospering then ultimately the franchisor is going to prosper, and, frankly, the inverse is true.

So, our franchisees are doing really well.

That is always our first and primary focus.

And because they are doing well, our store growth continues to accelerate.

And a quick follow-up to that.

The other thing that often comes up when talking about unit growth potential, and I think one of the reasons that guidance at some point switch from a number of units to percentage of units is just human capital is the throttle on how many units can be built effectively.

How much insight do you have to make sure that unit economics alone aren't enticing franchisees to maybe get a little bit over their skis in terms of where the number of managers and GMs and area managers and such really is in the system?

Yes, I think the rate and pace that you are seeing growth overall in our system is really not constrained right now largely by that.

There are a few markets where we have seen that in the past.

I think there was a period of time in India where we were doing north of 25% store growth.

And that gets tough.

And the math is pretty simple.

When you are north of 25% store growth that means not only do every four stores need to generate a new general manager but you also have to replace any turnover in those stores, which pretty commonly around the world is kind of in the 25% rate.

So it means on average, if you are growing that fast and you are replacing turnover, you might need a new manager out of every two stores over the course of the year, and that seems to be a point at which it starts to be a bit of a barrier.

Now, you bring new resources and training and recruiting and you do everything you can to push through that.

So it's really more kind of a market-by-market sort of constraint as opposed to an overall global restraint.

Clearly, in the US we are not even anywhere close to a pace where we would feel that.

And there have been a couple of international markets in the past where I think that has been a bit more constraining.

And you also see it particularly early in markets just when the absolute numbers of stores -- you've got 10 stores in a market and you want to grow to 20 over the course of the year, that's tough.

You are at 100 and you want to add 10, that's much easier.

Great, thank you.

John Glass with Morgan Stanley.

Congratulations, Mike.

Well played.

And, Jeff, look forward to talking with you more.

On the domestic same-store sales you mentioned that traffic, that ticket was a little bit of a contributor.

Is that more than the last quarter?

How to you to dimensionalize that versus last quarter or the last several quarters?

Is it bigger, lesser, or just the same as it's been before?

Not a lot of difference.

There's a little bit of ticket that's coming out of just what you would call inflationary pricing, and a little bit just because the promotion this year is a little bit different than what was running last year.

But it's not -- again, this is primarily an order comp growth story at this stage.

That's helpful.

And then can you discuss earlier in the call around mobile ordering as a percentage or maybe online ordering in total?

Are there stats you would share with us with for this quarter, where it is in the US, for example, on both of those as a percentage of total orders?

Yes.

Roughly mobile and online are about equal.

So what do they add up to?

You are looking at [25 and 25-ish], right in that range.

Mobile continues to grow a little faster than online but both are growing.

That's very helpful.

And then just finally you mentioned that there was a customer loyalty program.

What does that look like in pizza?

Some brands have been hesitant to do that because it would [dilute their already] very successful business.

Why would you entice more people to order more often?

So how would you think about when that gets more fully rolled out how it looks?

Is there any kind of color or commentary you're willing to put on at this point?

So the first color commentary is we are always looking for more customers to order more often.

We are happy to do that and then that's pretty much our core job every day as we get up.

And the loyalty program, we're testing it.

It is one market; we're going to see how it works and then make a decision.

It's certainly something that you've seen success, I think, from Starbucks; Papa John's has certainly put a lot of focus on in the past.

But it's something we are testing and we will see.

Great, thank you.

Jeffrey Bernstein with Barclays.

Thank you very much and congrats to both Mike and Jeff.

Two questions -- just one, you talk about the unit growth opportunity and it seems like it is been well captured internationally.

Looking on the domestic side I think in the past you've talked about room for 1,000 or so.

Just wondering whether there's any interest in perhaps Company-operated growth.

Now you are sitting with under 400 but maybe to take advantage of the opportunity all you are in such a position of strength, maybe getting best real estate or not and obviously one day you could sell to franchisees.

But didn't know if there was any consideration of doing anything like that or any further incentive to franchisees to even accelerate the growth further in the US.

Yes, so the big incentive for the franchisees is the profitability on the stores, the trailing 12-month profitability at the franchise level is at record levels.

And that's what's driving more and more interest and it's why you are seeing the acceleration.

As to corporate stores you certainly, I'm sure, have noted that margins on our corporate stores continue to improve, profitability continues to improve.

I'm very pleased with the progress that we are making there.

And it's something that we look at.

Growth for our corporate stores, I think, overall the range that we are in is good in terms of counts.

We need to be doing our fair share of growth.

But what you see from us is that most stores that we will open for our corporate stores are going to be in existing markets.

So it's really about filling in opportunities in markets that we are in.

We opened one recently in New York City where all of our corporate stores in New York are in Bronx, Queens, and Brooklyn.

And we continue to look at opportunities within those markets to open it.

But I don't think you're going to see anything dramatic.

And overall, we feel pretty good about the size of our corporate store business.

But it's certainly something that's a tool out there if we weren't getting the growth that we wanted otherwise.

And then my other question was on the G&A spend.

I think Mike had confirmed the -- it was $270 million to $275 million this year.

Just wondering if there's anything that would hold you back at all on spending even above that.

I'm assuming there's opportunity for incremental spend when you have such strong results.

I know you mentioned e-commerce and technology.

But is there a priority list of investments or is there any constraints that's something on your list but you're holding back on doing it, for whatever reason?

Are you pretty much, when you are generating this much cash flow, investing as fast as you can come up with the ideas?

As we've said on the prior calls, most of the incremental spend that we've got in G&A that we regard as investment to grow the business either comes out of the e-commerce area or comes out of international.

And we have not been shy about adding on in the e-commerce area because we think it's been the right place to put money.

If we come up with more good projects we will continue to look at that, and that can be in the form of either capital or through the G&A.

But we've added -- that has been a big contributor to the growth, and we will just continue to look at whatever makes sense in that area.

We are not going to be shy.

There is not a constraint.

In the international area we added many people because we have been growing so rapidly.

Again, if it makes sense, we will continue to do that.

So the answer is no, there is not a constraint.

We have been growing those areas because we think it's good for the business.

The areas that you typically think about G&A, the back-office or legal, we are very tight on those.

But we will do the right thing for the business on growing the top line where we can.

Great, thank you.

Michael Halen with Bloomberg Intelligence.

Thanks for taking my question and congratulations, Mike.

You've served the shareholders very well over the years.

Can you please give us an update on pan pizza?

What percentage of your pizzas currently sold are pan, and can you get those to the 20% industry average if you are not there already?

Yes, so we haven't released the exact percentage on pan and aren't going to do that.

We feel very good about the product and how it has performed.

We have promoted it recently and so, when you are promoting it you are clearly going to -- that's when you are going to drive the growth on mix.

But we feel great.

This fresh dough pan product, I think, has been a real differentiator for us and, we think, has been part of what has driven our absolute growth and our relative growth over the last couple of years.

Great, thanks a lot.

Peter Saleh with BTIG.

Great, thank you and congrats on the quarter, guys.

I wanted to ask about capacity constraints within the actual restaurants.

Same-store sales have been phenomenal, as you guys have indicated.

Are you having any issues on capacity side in terms of getting product out?

Are you needing to upgrade any of the equipment?

And where do you stand on finding more drivers?

I think in the past you have discussed how there says in a little bit of a shortage on the driver side.

So there certainly are some constraints in some stores.

I would tell you, in terms of overall results you are certainly not feeling it.

And I will tell you that it is the highest-quality problem that we can possibly have as a Company and as a system.

But it is what is leading to accelerating store growth.

It is leading to our franchisees and our corporate stores putting more capital into the stores as they increase of oven capacity or make-line capacity.

And so it is certainly something that we look at.

And it can be a constraint, certainly in some stores but it's a minority in stores.

The other thing is, is we are very focused on making sure that we are staffed, that we are going to continue to give great service to our customers.

What I would tell you is that the net of all of that is our service levels, our service time, all of the metrics that we look at in our stores have never been better.

So we are executing at the highest level that we have ever executed at as a Company and as a system.

So we are certainly working through any of those (technical difficulty) as we hit them.

And the happiest conversation that you will ever have with a franchisee is to point out to them that their sales are so high and their profits are so good that they need to add a third deck to their oven in their store or it's time to open another new store to handle all the volume that's going into one.

So the profits are there.

The cash flow was there for the franchisees to invest to do it and they are dealing with it incredibly well as we hit any of those constraints.

Great.

And then can you just comment a little bit on the Pizza Theater?

It sounds like you guys have really accelerated, at least in the first half of the year, the remodels and the Pizza Theater especially internationally.

Can you talk about what you're seeing in some of the markets that actually have, that are fully complete on the Pizza Theater, what kind of returns you are seeing?

The story continues to be the same, which is individual stores as they get done on average, will see a couple-point bump.

Stores that were underperforming, we actually see a bigger bump.

Stores that were maybe already in the better place, less.

But our average has been 1% or 2% on individual stores.

But what we always said as we were heading into this is we think it's going to be something that allows us to continue to drive the performance that we've had.

It's going to lift overall momentum in the system.

As people see new and better looking stores, it elevates the performance of the whole system.

And I think you are seeing that play out.

It is clearly part of what is contributing.

So as whole markets get done or the majority of whole markets get done, I think see a bigger effect than when it is individual stores.

But I think we're seeing it also just in the overall strength of the business, both domestically and internationally.

Thank you very much and congrats again.

Alex Slagle with Jefferies.

Thanks, congrats to all of you.

I'm wondering if you could provide some more perspective on what you are seeing in terms of competitive pressure in the form of more aggressive price points from peers, given one major competitor still struggling out there and a number of smaller operators who can finally compete more effectively on price with the drop in cheese cost.

Do you see any change in that regard?

We really aren't.

It's really pretty consistent from a pricing and competitive standpoint.

I think the category has continued to be consistent with where it was in terms of growth.

We may see a little bit of order growth overall in the category and maybe a couple of points on ticket.

So you are seeing category overall grow maybe 2% or 3%.

That's consistent with where it has been previously.

And I think the broad story continues to be the same.

Even though, certainly, one of the competitors has not been performing quite as well, I'm relatively sure, with comments that they've made, that they are driving change over there and they are going to get back on track.

The longer-term story continues to be the same, which is the larger players are taking share from the smaller players.

And that's from efficiencies, that's from advertising and know-how, I think, within our system on how to run stores well.

But clearly, the new part of it is digital and we are continuing to see shares shift from the smaller players to the larger players.

And we have been a big beneficiary of that.

Thanks.

And then a follow-up on labor, I just noticed labor cost in the Company stores up again with the overtime and bonuses versus last year, which makes sense but gets me thinking more about overall wage inflation pressures, and wonder to what extent those have been felt by your franchisees in recent months or anything, any comments from them more perspective you have would be helpful.

We are generating record profits out of our stores.

And so our ability to run our stores well and efficiently, I think, is helping us to not only manage those increases but to prosper despite those increases.

And so, I think the bottom line is, frankly, the bottom line, which is profits are better than they have ever been.

So whatever pressures are out there on costs, we have been able to more than handle.

And the profit levels are at terrific levels right now.

So it's certainly something that we watch and we keep an eye on.

And there are certainly indications that there is more activity coming on that front.

I think that puts more pressure on weaker players and people who are not as efficient and maybe don't have the same structure that we have to drive success in what has been a little bit tougher labor environment, and will probably continue to be.

Great, thank you very much.

Mark Smith with Feltl.

Good morning, guys.

I just wanted to see if you can give us any more insight on digital mix, just on some of the new things that you've tested -- text, Twitter, and insight on incremental growth from those platforms.

I guess what I'd say is first, we are not going to give out the specifics around anything.

We don't want to make it easier for our competition to figure out how to prioritize investments to catch up to what we are doing.

But what I would say is if you look at the totality of the efforts we are making and how it is positioning our brands in the minds of consumers and the ease of access that it's giving to them, it is clearly a big part of what is driving our same-store sales growth.

So, I'm not going to go into the specifics on that because our competition has to try to prioritize, and I don't want to make that roadmap any easier for them.

But as we have said many times in the past, as we have expanded platforms, we have seen incrementality from it, we clearly own the digital space in the minds of consumers as being the leaders in that area and the real innovators, and so it's not just about the actual access, it's also about the brand presence in the minds of the consumers and how they think about us as being an innovative brand that is pioneering new things and giving them new ways to access the brand.

So that's really the answer.

It's all working in totality.

Great, thank you.

John Ivankoe with JPMorgan.

Mike, I was hoping you could revisit the comment that you made about the take-up in the online ordering fees for franchisees, which I think went from $0.17 in order to $0.21 an order.

Can you remind me of what the implementation, the timing of that was and if future online ordering pizza -- is that solely at Domino's, your discretion, as opposed to the franchisees' discretion.

I'm sure they have input, but at the end of the day is the decision yours?

And with that associated revenue that you discussed, is there any incremental cost or should we assume that that's a pure profit flow through?

Well, as we've said before, our intent in the United States has been to try to provide this service at a very good cost to our franchisees.

We've continued to go way beyond online ordering, which was what was originally envisioned, and now we have many, many different ways of accessing the Company and ordering through e-commerce, and that has led to more cost than the $0.17 fee covers.

So increased to $0.21.

That was at our discretion.

As I also said in my commentary, on the near-term we certainly have no intention of going above that number.

We are the ones, we as a Company have expended the money to create those systems.

We are recovering it over time.

And we will continue to evaluate what the appropriate fee structure is.

But it certainly is not something -- it is intended -- it doesn't have an additional incremental cost just because we raised it today.

We have done a lot of things over the last year and the last few years to continue to expand our e- commerce platforms and that's just part of recovering that cost.

No question about that.

So the implementation -- it was announced today that you -- is it more or less implemented today, then, as well?

It basically was included in the second quarter revenue.

Okay.

So it was in the full second quarter?

It was put into place in March.

Okay.

All right, thank you very much.

Joseph Buckley with Bank of America.

Thank you.

Mike, congratulations on your time and I wish you the best.

I had a couple of questions.

The follow-up on that question -- Mike, could you what you said in your script comments?

I think you said is like $1.5 million to $2 million but I'm not sure of the time period.

Was that --

So roughly, depending on the volume each quarter, but roughly each four-week period has generated $1.5 million to $2 million of fees at that $0.21.

I'm not expressing it in terms of months because we obviously have four-week periods.

But you could say it that way as well.

It's basically $1.5 million to $2 million for every four-week area.

That's not an incremental, that's the total fees that we're collecting.

We could do the math to figure out what incremental is of the $0.70 charge, presumably.

And then just a couple other questions.

Just on the carry-out business, how did that do this quarter?

Is that still growing pretty rapidly for you?

Yes, it is.

One of the things we are seeing is the newly reimaged stores, we see a bigger bump in carry-out than in delivery, as you would frankly expect, because the carry-out customers are the ones that are seeing the new image.

And so, from a relative standpoint we see that reimaging working a little better on the carry-out side then on the delivery side.

Okay.

And then, just have follow-up question also on the labor -- no question your margins are fantastic.

But curious if you could share with us what you are seeing in wage rate inflation and if the hourly turnover rate has gone up.

That was a pretty big been labor as a percent of sales in a great comp quarter.

We are certainly seeing some of it.

And it's not just from minimum wage.

I think the really healthy increase is when you are simply seeing demand for labor and employment going up in markets and there are markets where it's certainly getting tougher.

And that's great and that's healthy.

So I think it is, hopefully, something that we're going to continue to see because that's going to be a sign that the economy is continuing to do well.

I think it is very manageable.

It has been manageable and our franchisees are handling it well.

They make their own decisions on how they are going to approach it.

And I'd add to that the comments I was making about service levels and performance in the stores -- we are doing better than we have ever done.

And so, we are executing at a very high level and managing nicely within a situation where there certainly is a little bit of up or pressure.

And I take that, frankly, as a good thing.

I'd rather have a healthy economy and high demand for pizza and be able to pay people more and need to pay people more.

And then maybe one last one, Patrick, just a big-picture question on defining the brand as more than just pizza.

Can you talk at all about the game plan going forward, why you are making that move and what we should expect longer-term as you execute against that?

Yes.

Where we are going to continue to be a pizza company first and foremost.

That is going to continue to be the overwhelming majority of our sales, I would suspect for my lifetime and certainly my lifetime as CEO here.

That's what we are and what we are known for and will continue to be known for.

I think there are a number of reasons that that change is out there.

One is we do sell other things and we want people to know that.

We want them to know that there are great sandwiches and pasta and chicken on our menu and Coca-Cola products.

And we want them to think about us for those things as well.

And we also want those who might be a veto vote on a bigger order to know that there's going to be an option for those within a group who might not want pizza within that order.

But I think it also goes to our confidence about our brand and where we are.

And the example that I always use with people is Nike.

If you go back 25, 30 years you had this Swoosh and then Nike sportswear behind it, way back when.

And at some point that, pretty early on, they dropped the sportswear and increasingly you just see the Swoosh.

And that's a function of the strength of the brand and confidence of the brand.

People already know what Domino's does in the US, and so we think we are in a position where we can do that, we can be more confident as a brand.

And the last really tactical practical thing is sometimes you've got constraints on the size of the signs on the front of a store, and a bigger Domino's and just Domino's is relatively better signage than a smaller Domino's Pizza.

And that's a really tactical reason but it plays into it as well.

Thank you for that answer.

I appreciate the tactical as well as the strategic aspects.

Thank you.

And we have no further questions in queue at this time.

I would like to turn the conference back over to our presenters for closing remarks.

Thanks, everybody.

I look forward to talk to you again as we discuss third quarter results on October 8.

Thank you for your participation.

This does conclude today's conference call, and you may now disconnect.