達美樂 (DPZ) 2017 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Q1 2017 Earnings Call.

(Operator Instructions) Thank you.

Mr. Tim McIntyre, you may begin your conference.

Thank you, Michelle, and hello, everyone.

Thank you for joining our First Quarter 2017 Earnings Call.

As you know, this call is primarily for our investor audience, so I kindly ask that all members of the media and others be in a listen-only mode.

I also refer you to our Safe Harbor statement that is in this morning's 8-K release in the event that any forward-looking statements are made this morning.

Today, we will start with prepared comments from our Chief Financial Officer, Jeff Lawrence; and our Chief Executive Officer, Patrick Doyle, followed by your questions.

And with that, I'd like to introduce Jeff Lawrence.

Thank you, Tim, and good morning, everyone.

In the first quarter, our positive global brand momentum continued as we once again delivered strong results for our shareholders.

We continue to lead the broader restaurant industry with 24 straight quarters of positive U.S. comparable sales and 93 consecutive quarters of positive international comps.

We also continued to increase our store count at a healthy pace, which we believe is more evidence that our brand is strong and growing.

Our diluted earnings per share was $1.26, which is an increase of 41.6% over the prior year quarter.

This increase resulted from outstanding operational results as well as our adoption of a new accounting standard, which I will discuss in more detail in a moment.

With that, let's take a closer look at the financial results for quarter 1. Global retail sales, which are the total retail sales at franchise and company-owned stores worldwide, grew 13.2% in the quarter.

When excluding the impact of FX, global retail sales grew by 15.2%.

The drivers of this retail sales growth included strong domestic same-store sales, which grew by 10.2% in the quarter.

Our U.S. franchise business was up 9.8%, while our company-owned stores were up 14.1%.

Both of these comp increases were driven by order count or traffic growth, as consumers continued to respond very positively to the overall brand experience we offer them.

Our Piece of the Pie loyalty program continues to contribute significantly to our traffic gains, while overall ticket decreased slightly during the quarter.

On the unit count front, we are pleased to report that we opened 28 net domestic stores in the first quarter, consisting of 29 store openings and 1 closure.

Our international division had another solid quarter, as same-store sales grew 4.3%, slanting a prior year increase of 7.9%.

Our international division also added 161 net new stores during Q1, comprised of 175 store openings and 14 closures.

On a total company basis, we opened 189 net new stores in the first quarter.

Turning to revenues.

Total revenues were up 15.8% from the prior year.

This increase was primarily a result of increased global comps and store count growth, which drove higher supply chain volumes.

Currency exchange rates negatively impacted international royalty revenues by $1.5 million versus the prior year quarter due to the dollar strengthening against certain currencies, including the British pound.

For the full fiscal year, we continue to estimate that foreign currency could have an $8 million to $12 million negative year-over-year impact on pretax earnings.

And as you know, there are many uncontrollable factors that drive the underlying exchange rate, which does make this a harder part of our business to predict.

Moving on to operating margin.

As a percentage of revenues, consolidated operating margin for the quarter was flat at 31.0%.

The operating margin in our company-owned stores decreased to 23.2% from 24.6%, driven primarily by higher transaction-related expenses, higher food and labor and a slightly lower ticket.

Lower occupancy expenses, as a percent of sales, benefited the operating margin and partially offset these decreases.

Supply chain operating margin increased to 11.7% from 10.9%.

The primary drivers of this increase when compared to the prior year quarter were lower food cost and, to a lesser extent, the leveraging impact of higher volumes, offset in part by increased labor and delivery costs.

There was a very strong domestic volume growth this quarter and even stronger volume growth in Canada.

Market backed and commodity cost to stores increased slightly this quarter.

We continue to estimate that the domestic stores' commodity cost will range from flat to up 2% in 2017 from 2016 levels.

Before we leave operating margin, I'd like to also note that franchisees in the U.S. continued to share in our success with record supply chain profit-sharing checks that they have earned alongside of us with great execution and performance.

As I mentioned before, we expect to make additional investments in supply chain in the near to medium term to keep up with our rapid growth.

Let's now shift to G&A.

G&A increased by $9.3 million in the first quarter versus the prior year quarter, driven primarily by 3 factors: first, our planned investments in technology, predominantly in e-commerce and other technological initiatives and the teams that support them.

Please note that these investments are partially offset by fees that we receive for digital transactions from our franchisees, which are reported as franchise revenues.

Second, our strong performance led to higher performance-based compensation expense.

And third, higher advertising expenses at our company-owned stores, which increased as a result of our positive sales growth.

Moving down the income statement.

Interest expense decreased slightly in the first quarter and our weighted average borrowing rate was 4.6%.

Our reported effective tax rate was 31% for the quarter.

As previously communicated, we adopted the new accounting standard this quarter, which requires us to record the excess tax benefits on equity-based compensation as a reduction to our income tax provision on the P&L.

Previously, these tax benefits were recognized directly in the equity statement.

As a result of this new standard, there was a $6.5 million decrease in our first quarter 2017 provision for income taxes, which resulted in a 7.2-percentage point decrease in the first quarter 2017 effective tax rate.

Again, the economics have not changed, just the way we are required to present it.

The 2016 amounts have not been reclassified to match this presentation.

We expect that we will continue to see volatility in our effective tax rate because of this accounting standard change, and as such, will not be giving further guidance on our expected future effective tax rate.

To give you a sense of the magnitude of the potential future tax benefit, I'll direct you to our equity incentive plan footnote in our 10-K.

This will give you the intrinsic value of outstanding options at the year-end 2016 stock price.

When multiplied by our tax rate, this gives a then-current approximation of the excess tax benefit amount that could be recognized in future periods.

I'll remind you that this number will change based on the stock price and option and share activity, but we do expect to see a continued future benefit from the adoption of this accounting standard.

When you add it all up, our first quarter net income was up $17 million or 37.4%.

Our first quarter diluted EPS was $1.26 versus $0.89 last year, which was a 41.6% increase.

Here is how that $0.37 increase breaks down: our lower effective tax rate positively impacted us by $0.12, including the $0.13 impact from the adoption of the new equity-based compensation accounting standard.

Our lower interest expense positively impacted us by $0.01.

Lower diluted share counts, primarily as a result of share repurchases, benefited us by $0.04.

Foreign currency exchange rates negatively impacted royalty revenues by $0.02.

And most importantly, our improved operating results benefited us by $0.22.

Now turning to our use of cash.

During the first quarter, we repurchased and retired approximately 80,000 shares for $12.7 million at an average purchase price of approximately $158 per share.

During the first quarter, we also made $9.6 million of acquired principal payments on our long-term debt.

Our quarterly dividend of $0.46 a share, totaling $22.1 million, was paid to our shareholders after the first quarter ended.

As always, we will continue to evaluate the most effective and efficient capital structure for our business, as well as the best ways to deploy our excess cash to the benefit of our shareholders.

All in all, our fantastic momentum continued, and we are very pleased with our results this quarter.

And with that, I'll turn it over to Patrick.

Thanks, Jeff, and good morning, everyone.

I am very pleased at another outstanding quarter and a terrific start to 2017.

Our franchisees and operators worldwide continued stepping up to the challenge of sustained success, and I wake up each day proud to be a part of a brand and culture that is truly inspiring, one that keeps us looking forward at how we can and must improve every day.

We have an uncommon passion for what we do, and our performance during the first quarter certainly demonstrated that yet again.

As we discussed in our Investor Day, our performance is the result of many years of reshaping our brands, improving our food, investing in our digital capabilities, reinvesting in our stores and most importantly, building a team of the best people in the restaurant industry, both working for our company and throughout our global franchise system.

Our story is one of a true long-game approach, riddled with difficult decisions, reset priorities and smart risks, which while they took time to bear fruit, eventually reshaped our brand and system.

I say all of this because we are often asked about which specific activities are driving our near-term success.

And while our great analytics give us many of the answers, we know that the cumulative effect of a lot of long-term decisions over many years is what is ultimately driving our success.

Our near-term success is the result of decisions and investments made 3, 5 or 10 years ago by our franchisees and by the company.

It's that commitment to the long term, combined with great short-term execution for our customers, that makes me so proud of our team, our 800 outstanding franchisees in the U.S. and our master franchisees and team members around the world.

And it's the investments we're all making in new stores, better food, better digital and stronger teams that will ensure our results continue to be strong in the coming years.

Our performance in the U.S. just continues to impress me.

Our 24th consecutive quarter of positive same-store sales growth also marks another impressive figure.

8 of our last 10 quarters resulted in double-digit sales growth domestically.

But as I just said, what impresses me the most is not what we've done, but how we've done it; through consistent strategy, a research disciplined approach and constant focus on long-term fundamentals, rather than seeing things in a short-term quarter-by-quarter way.

I'm incredibly pleased our franchisees, corporate operators and team members have shown such phenomenal alignment.

We opened 28 net new stores in the first quarter, a nice start as we continue to focus on this opportunity within our business.

I continue to be pleased with our domestic store growth momentum and the commitment our franchisees and internal team has shown.

They are more focused as a team on growing our system than I've seen in many years.

One of the areas we focused on domestically during the first quarter was technology, as our digital leadership continues to strengthen.

We are in the midst of a national ad campaign, revisiting something in our back catalog of innovation that is no less, to this day, a fan favorite, Domino's Tracker.

This is very cool.

It's one of our foundational innovations and was our breakthrough hit with customers.

It helped demonstrate our forward thinking approach early on as it was initially developed and launched back in early 2009.

And for those of you who have seen the commercial and I think I might now drop my favorite Ferris Bueller line on today's call, it's not going to happen.

But with that, it's a great ad, and nice to have some fun with our digital fans and customers, while revisiting a pioneering piece of technology first delivered by Domino's last decade.

We also continue to raise awareness of our Piece of the Pie rewards loyalty program and recently held our first loyalty member appreciation week, offering double points to our digital rewards program members for a week long time period earlier this month.

The simplicity of this program continues to be very well received by customers, and the focus on driving frequency continued to be a meaningful contributor to sales performance during the first quarter.

And lastly on the technology front, we introduced the latest in a new wave of AnyWare ordering platform innovation, the ability to start and complete a new order from scratch without the need for a profile or saved Easy Order.

Customers can now order this way through Facebook Messenger and Google Home, with more to come.

This is very exciting.

The next major step in the evolution of our ever-growing suite of unique and forward-thinking ordering platforms, which continue to be unmatched within our competitive space.

Our international performance in the first quarter was solid, facing a strong sales comparison from the year prior.

The best international model in QSR continued to show its strengths, with our diverse portfolio of over 85 markets and growth potential that continued into the first quarter, with 161 net new store openings.

We also had a very exciting event earlier this month, celebrating the opening of our 14,000th store worldwide in Cyberjaya, Malaysia, which was only 8 months after cutting the ribbon on our 13,000th location.

This demonstrates our continued runway for growth within our international geographies, both new and existing and developed and emerging markets.

We have now reached 93 consecutive quarters of positive same-store sales in our international business, a streak that continues to amaze me.

Our store reimaging program, Domino's Pulse and Global Online Ordering implementation, are all on track with where we expect, and the long-term opportunity for this rock-solid business segment continues to be very strong.

In closing, our momentum continued into the first quarter, and 2017 is off to a tremendous start.

Our long-term approach continued to pay off, and our reliable fundamentals continue to drive what we do and how we do it.

I'm grateful to once again report positively on and represent a global franchisee base that is second to none in a system that has truly never been more aligned on our goal of sustaining success as 2017 continues.

We know this is earned and are more motivated than ever to continue to achieve it.

Thanks, and I'll now open it up for questions.

(Operator Instructions) Your first question comes from the line of Gregory Francfort from Bank of America.

Just one quick question on the supply chain margins, and not necessarily the margin percentage but the margin dollars, I think up 24% this quarter.

I guess, what's driving that?

And I guess, what -- when is the investment coming?

I guess, should we'd be thinking about that as a near-term headwind or maybe in the next year?

What's the timing on when you might reinvest there?

You're going to see investments this year and as we expand the capacity.

So yes, that's coming soon.

The primary driver of growth in supply chain was volume growth.

And remember, not only are we having terrific comp growth domestically and in Canada, and it was actually even stronger in Canada than in the U.S., it is all order growth.

And on top of that, you've got store growth coming now.

So if you look at total kind of pounds of food sold through our supply chain, there are a lot of factors that are playing in there to pretty tremendous growth in food shipped out to the stores.

Got it.

But I guess, my question, like it's a 24% growth if the comps were 10% and the units were up low to mid-single digits.

I guess there must be -- are you signing on more franchisees?

I guess what's the delta there?

No.

I mean, that's -- you're doing the math and add on some for Canada as well.

And overall, it's about scale.

And with that kind of volume going through, there are just efficiencies that are coming with it, and it was a very, very strong quarter.

Your next question comes from the line of Matt McGinley from Evercore ISI.

On the international franchise revenue, the way that we look at that as we do a revenue build and we look at the comp and the unit growth, and then we adjust for the FX, and there's always a little bit of delta there that's usually a change in royalty or new unit productivity.

That delta was pretty big this quarter.

Do you know what drove that?

Did you just open the stores up later in the quarter, and that you didn't get the lifts from that or the revenues from that, or did something else happen?

When you kind of do -- this is Jeff, when you kind of do the rough math, Matt, you'd obviously have the royalty contractual rates that's really haven't changed a bunch.

I think the one thing you need to remember, though, is you have 250-or-so conversions that we got done in '16 that are rolling through.

And again, as we share in the investment upfront as those guys invest in the brand and change out all their leaseholds, we do typically provide some royalty relief there for the first year to 2 years, depending on kind of their performance.

And then the other stuff you have rolling around in there is some of the Global Online Ordering platform revenue.

So as those 2 things kind of -- both kind of ebb and flow quarter-over-quarter, you may see some movements in that rough math.

Got it.

On the store-level margin, in the Q, you broke out the big buckets of what moves that margin around the quarter, and this quarter, the drag was from food and the transaction expense.

We don't have every line item, but the way we'd kind of bucket all the other stuff that's in there, it looked like it grew at around the rate of sales growth.

So question is that, given most of the other things that you have in there or tend to be fixed like rent and zoning utilities, why didn't you get more leverage on that line item with the 14% comp?

Was there something else in there that it increased at a faster pace?

Yes, I mean -- I think you mentioned transaction-related expenses, that's some of charge-backs we talked about.

Obviously, credit card usage continues to go up, you're going to get a little bit there.

On the food side, specifically, we did have a little bit of a lower ticket as we've been running really effective marketing and advertising, both looking after our delivery business, but also ever increasingly, our fantastic carryout business, which does have a little bit of a lower ticket.

You're getting a little bit of a math problem there, playing with the percentages as well.

What I would point, though, to is that's a really good thing to have because we're really growing carryout and delivery still at a very healthy pace.

But because you have different amounts of foods in those baskets, because you have different tickets, you can play around a little bit with the percentages.

But to us, as we look at that, it's good news.

But what I can tell you is the food is not going up as a percentage because of waste or ineffectiveness in the stores, it's really more of a math problem.

Your next question comes from the line of Brian Bittner of Oppenheimer.

Back to the supply chain.

Obviously, something happened there, where it really flexed its muscle on the profits, more so than it has, I think, in recent high-volume growth quarters.

So just trying to think about that going forward.

You talked about the investments coming for that part of the business to keep up with the volume growth.

Are you able, at all, to put some guardrails around what the expense magnitude may be as you kind of expand the capacity there?

I mean, I know it's going to come with some CapEx, but as far as the fixed costs that come into that business, so we can kind of think about how to model that business going forward.

Yes, Brian, it's Jeff.

I mean, again, just to reiterate what Patrick said.

I mean, first and foremost, this is about healthy volume growth in the U.S. business and Canada.

Again, we do deliver food to all of our franchisees in Canada as well, and they actually grew, hard to believe, but actually grew faster than the U.S. business in Q1.

On the CapEx side, the supply chain stuff is really baked into the $75 million estimate I gave you all in January at Investor Day.

And again, that can flex, depending on how fast we grow our brand and the additional capacity we think we need to grow over time.

We are going to make those investments, whether it's a little bit more or a little bit less than the current estimate.

So there's still some to play out there, but our supply chain team is zeroed in on the investments that they need to make to continue with the impressive growth of the brand.

And again, it's about volume growth.

And I did mention in my prepared remarks, we have a unique setup here at Domino's where we share 50% of our profits and our supply chain system.

As our franchisees in the U.S. and Canada continue to execute at just a phenomenal rate and pace, they share $0.50 out of every $1 that we make through that system.

So we really like that alignment.

We love that they're winning with us with profits here, and as I mentioned, their profit-sharing checks are at an all-time record high right now.

So it's on us to get these capacity investments made.

We're zeroed in on them, and we will be swinging hammers very shortly here.

Yes, that profit-sharing agreement is working out well for them.

And then I just had one more question.

Obviously, we're in the business of trying to project your business going forward.

And being on the outside looking in, I was wondering if you guys could shed light on how you think about the core trend internally.

Do you guys kind of think about things on a 3-year basis when you talk about the business going forward?

Or is it some other way?

(inaudible);

That's not me trying to get the comp out of you.

I'm just literally wondering because it's been such an incredible cycle here of same-store sales.

I'm just wondering if there's a certain way you guys kind of look at that internally, that cycle?

No.

I think, Brian, that the real answer is kind of in the setup I was giving, which is, we made a decision a number of years back now that we were going to look at the long term on this business, fundamentally exclusively, and that's a -- something that you can only do, obviously, if the near term is working.

But our view is that if you keep your eyes up on the long term, if you're looking out 3 to 5 years on the business and you're making investments on that kind of a time horizon, a lot of the competition out there, frankly, doesn't look at things that way.

And so we do that and, obviously, at some point, if you're doing that right, the short term gets better and gets easier and kind of starts taking care of itself.

And that's what we've been seeing.

What I would reiterate for you is that on both our domestic and international business, when we look out in kind of the medium term, we have guided you to 3% to 6% comps for both the domestic and international business.

And so that's when we look out, that's where we think it's going to be, kind of over the medium term.

We're right in the middle of that range with our international business, and we're clearly still well above that range on the domestic business.

But in terms of looking at the 1-year, 2-year stacks, 3-year stacks, sure, of course, we're looking at those.

But, at the end of the day, our focus is on how do we continue to make this a better experience for our customers next year than it was this year.

And while we have done some new product launches, we always try to remind ourselves that the typical customer orders kind of their favorite pizza on an ongoing basis.

And so if somebody is a pepperoni pizza customer, how are we going to make that experience better for them next year than it is this year?

That's what's ultimately going to drive growth in the business.

Your next question comes from the line of Karen Holthouse of Goldman Sachs.

One quick housekeeping question.

In the international unit growth number this quarter, how many of those were conversions?

A real small number.

We didn't disclose it, but it's not at the rate and pace that we saw in '16 as we told you we expected.

Yes, remember, Karen, what we did talk about is the fact that, that process is done in South Africa, it's done in Germany.

So the only place where there was a little bit of activity was in France.

We have disclosed that there is a smaller chain in Norway that may get converted, but that activity is basically in the rearview mirror as of the end of 2016.

There will be a little bit, but that's going to -- in 2017, that's going to be a relatively immaterial part of the overall growth.

Great.

And then on the store margin side of things, the increase in transaction fees, is there any -- which we really started to see that sort of spike last year, is there any piece of that that's tied to regulations around the world of chip-in-pin technology, where that growth rate might sort of moderate a little bit once we start lapping that?

Yes, Karen, it's Jeff.

We have the EMV readers in our 400 corporate stores in the U.S. With that, obviously, and being such a digital presence, to the extent that there is any transaction-related expenses on chargebacks, you can see that exacerbate a little bit, particularly in some of the urban markets that we are in.

We are seeing that.

It is a challenge for us, but we've got resources dedicated against it to try to manage it the best we can.

The other thing buried in transaction-related expense increase is the fact that more and more customers are choosing to use credit cards with us over time, as you would expect that most QSR folks that have a digital presence.

So a little bit of both of those things.

On the credit card side, we're happy to take those as payment from our customers, if that's what's convenient for them.

I would expect that trend to kind of continue most likely.

On the chargeback side, it's an area of opportunity for us.

And Karen, the only thing I would add is, and you've been reading probably the same things we've been reading on it, is the consensus seems to be that as EMV readers rolled out in the U.S., they saw the same thing happen in the U.S. as happened in Europe, which was fraud level did not change, they just shifted from retail to online.

And our experience is that, that assessment looks correct.

Well, and then, if you look at just given that your digital presence and the amount of orders that go through the website and, increasingly, through the rewards program, you're looking at other restaurants that have pretty dominating digital presences.

It's -- are there opportunities to work around partnerships or create an incentive for stored value that could mitigate just sort of that overall transaction cost over time, either because shifting people to bigger transactions or actually -- you're working with a partner that's actually a less expensive processor.

Yes, I guess, what I'd tell you, Karen, is that right now we are primarily focused on how do we drive the fraud out of the transactions on kind of a direct basis.

And so all of the other things that you kind of discussed there, we look at those frankly separately, we're not going to do those things simply because of how they might affect fraud.

There would have to be a really good customer reason for, as you talked about, stored value or some of the other things for doing that.

And yes, we certainly review partners and looked at the outside kind of fraud prevention groups and are doing some things internally.

And I think the answer is, like fraud at retail, it is an ongoing battle and something that we are certainly very much on top of and engaged in and putting resources on, but not something that is likely to go away.

It's really going to be something that you just manage on an ongoing basis, and we look forward to the credit card companies looking at technologies that might effectively combat that online.

Your next question comes from the line of Peter Saleh of BTIG.

I just wanted to ask about the gap in same-store sales between the company and the franchise.

It looks like it was about 430 basis points this quarter, probably one of the widest gaps we've seen since maybe 2008.

So can you just talk a little bit about what's going on there?

And what are the reasons behind that such a wide gap versus previously?

Pete, it's Jeff.

One thing, I think, and again, not that we're proposing that a 2-year stack or a 3-year stack is any better than any other stack.

But if you look a 2-year stack, the gap between franchise and our 400 corporate stores isn't as wide.

The other thing I think, though, that's probably driving some of that is our Team USA corporate store footprint skewed a little more urban than, on average, than all of our other franchise stores in the U.S. As a result -- and as a result of the fact the our company-owned stores were really adopters of digital and online a little bit quicker than our franchise stores years and years ago.

You're seeing a little bit more digital mix in our corporate stores, which means that the impact of loyalty and the tailwind we're getting from that is a little bit more as well.

So I think it's all those things kind of put together.

But listen, geographically, regionally, our franchisees are doing well, our corporate stores are doing well and that's not a gap that we're concerned about.

Great.

And then I just wanted to ask about the advertising spend.

I think Patrick mentioned 8 of the last 10 quarters, you had double-digit comps.

We assume the ad budget's grown pretty significantly.

So where are the incremental dollars on the advertising side being spent?

Yes, really, the answer is across the board.

We continue to get a great return on television, and our television spend is up.

But we're also finding great places to spend it on digital, and that continues to grow as well.

So it really has been across the board.

Your next question comes from the line of John Glass of Morgan Stanley.

Just first, just a follow-up.

You mentioned, I think, check was lower in the corporate stores and transactions are higher, and you cited takeout mix, for example.

Is that true, systemwide, too, that transactions would have exceeded the 10% comp?

Yes, so both the corporate stores and the franchise business driven by traffic.

Ticket in both, just slightly down.

And then there was just some chatter this quarter about progression of sales in the industry being softer in some months versus others.

Did you see that variation?

Or were the sales pretty stable across the quarter?

Yes, we're not going to get into the mix within the quarter.

I think it's -- as you're used to, that's kind of our standard approach.

Okay.

And then did -- my follow-up question is, does the day when GrubHub reports very strong user up significantly and there's this conversation about how people trade different kind of delivery services now.

If you were looking for evidence that Domino's wasn't really vulnerable to that, could you point to those company stores?

You said they were in urban markets, and I don't know which urban markets they are, but that's typically where these delivery services are strongest.

I mean, is that a good evidence, piece of evidence, in your mind that other deliveries aren't really impacting your business?

Or how else do you measure that if it's not?

Yes, John.

I think, at some level, that's true.

I mean, effectively, all of our corporate stores are within areas that would have those services now.

There might be a couple that are outside of that.

And I guess what I would say is that our answer on this remains the same as it has been before, which is, to date, we have certainly not seen any evidence that the growth of both aggregators on the digital side or increase in delivery activity has had any effect on our business.

And Jeff, just one more accounting question.

Did the change in the tax rate, did that impact the share count or the way you calculate share count at all?

Or was that purely just a tax rate change?

It's primarily -- runs through the provision line item.

There is a small impact that runs through the denominator of the share, but it's very small.

And just as a reminder, that $6.5 million running through the provision is real cash.

That's a real break that we will get on our taxes when we file them.

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

Just on the delivery side of things, maybe following up to that last question.

Is there any -- I think you've talked about this in the past, but is there any way for you to monetize or take advantage of the ramp-up in delivery that the, or online ordering perhaps, and you obviously have the expertise from a technology standpoint on ordering, and delivery peers would love to get some of that help, whether inside or like the outside the restaurant industry?

I'm not sure that's ever an option or something you'd ever consider to outsource some of your skill sets to those, you could use it if it wasn't a competitive intrusion to you?

Yes, you're right at all of your assumptions and there are those in the industry who have thought that we might be a great partner on those.

And our answer has continued to be and remain that the competitive advantage that we've created in digital and in delivery is something that we're going to use to grow the Domino's brand.

And I guess the only thing I would say on that is that if our share of the business were double or triple what it is today, I suppose you might think about that a little differently.

But when you're sitting, selling 1 in 6 or 1 in 7 pizzas in the U.S., there's an awful lot of growth for us in sticking to our knitting, and I think our results are kind of evidence that the potential distraction of doing it for others is not a risk really worth taking.

Got it.

That's a good -- I'm sure these discussions have been had before.

And then just a follow-on to the earlier question regarding these third-party services.

Despite the outsized U.S. comps that you're putting up, it doesn't seem to be having a negative impact on you.

Are there any signs that the small and midsized players are starting to capitalize on the third-party online and delivery options, maybe just growing their own share and just demonstrated that the overall pizza category is even growing faster than it has been before?

Again, seeing that it's not necessarily having an impact on you.

But how do you gauge the small and midsized players maybe starting to capitalize on that, even if it's not as profitable to their bottom line?

I think what I would say is, you're seeing a lot of people experimenting with it right now and learning about it and trying some of the different services, both on the aggregator side and on the delivery side.

But I don't know that I've seen evidence that it's changing the trajectory of anybody's business at this point.

Got it.

And just lastly, just to clarify the tax discussion.

And I know you say you're not going to give guidance going forward from effective tax rate.

But is there any reason that it wouldn't be a benefit through all 4 quarters of '17?

Obviously, it could be to different magnitudes, but just trying to weather that we should be stripping something like that out?

Or whether there's some reason why next quarter could be totally different and, therefore, we should look at each quarter kind of independently.

So Jeff, the answer is, these effects are going to happen based on when people exercise stock options.

And so it is only predictable if you can predict when people are going to choose to exercise their options.

The only thing that I would say that will maybe help on that is when you look at our K, it does give you a sense of, under the equity incentive plan, it gives you a sense of kind of the average life left on those options, and so you're going to have some sense.

But people can leave the organization, people can decide they're going to exercise earlier or later.

That's why it's going to fluctuate.

I mean, our tax rate is clearly going to move around.

But short-term predictability on that is not going to be easy.

Your next question comes from the line of Alton Stump of Longbow Research (Operator Instructions).

Just to ask you 2 quick questions.

First off, unit growth here domestically, up 3.5% versus last year.

I think that's quite the biggest number I've seen in over 10 years, anyway.

In the past, you talked about the opportunity to add 1,000 stores in the U.S., but you've added now almost 200 over just the last 5 quarters.

So is that 1,000 store number still valid, even with all the stores you have added?

And just kind as of beyond that, or could there be further upside to that down the road?

No, there could be further upside.

I mean, we've always said there's at least another 1,000.

And I think, as I've said before, we've been saying there's at least another 1,000 for a while, even as the store count has grown.

So we are continuing to see more opportunity for kind of a full build-out in the U.S. than we did in the past.

And I think that there are 2 things that really play into that.

First, as our comps have gone up, as our same-store sales have gone up, it has made more and more stores viable than may have been viable in the past.

So as we're able to pull more sales per household out, which has been kind of the primary driver of our comp growth over the course of the last 5, 7 years, that means necessarily, that areas that you may have looked at before and said, I'm not sure if this store is going to work there, now you get more optimistic about that.

The other thing I would say is, as population continues to grow in the U.S. a little bit under 1% a year, and so the way I look at it is, if on our store base, if we're not growing 50 or 60 stores a year, we're not even keeping up with the population growth from the U.S. So yes, we continue to believe that there are at least 1,000 more.

That number has gone up in terms of what we think the potential is versus the past, and it's something that we're continuing to assess.

But in any sort of near- to medium-term basis, we're not seeing real constraints on our ability to continue to grow stores.

That's very helpful.

And just one quick housekeeping follow-up.

Was there any benefit from the Easter shift in the first quarter?

And could there be a headwind for 2Q?

And then also secondly, if I recall, I think weekday was not included or was not a benefit in first quarter '16.

Is that accurate or not?

I think what I'd say is kind of what we've always consistently said, which is most of those shifts and weather and all of that short-term stuff is just not big enough that it makes that material a difference.

And so honestly, we try to not to spend a lot of time worrying about that.

There'll be an individual day where we'll wake up in the morning and our sales will be dramatically up or dramatically down.

And our adrenaline has to go down after 30 seconds when we realize oh wait that it was Easter a year ago or New Year's Eve or whatever.

But overall, particularly of the kind of comp that we're putting up, it just doesn't have a material effect on that growth rate.

(Operator Instructions) Your next question comes from the line of Chris O'Cull of KeyBanc.

Patrick, would you talk a little bit about how the system is planning to adjust to menu labeling laws?

Yes, we're going to be compliant next Friday.

And our website, all of our digital ordering already is.

When you get to the checkout page, the calories are there and listed.

And so we will comply with whatever law is in place next Friday.

And currently, it will be in place next Friday.

Is there is a significant expense burden associated with doing these?

Yes, there is.

Yes, there is.

I mean, for the system and for the franchisees, I mean, you're looking at a few thousand dollars per store that they have to invest in store.

And so our point of view has been and remains that we've been disclosing calories for, I think, 12, 13, 14 years now.

There is a really good way to do it, where our customers are making decisions.

60% of our business is digital now, and that's the best, most efficient place to do it.

And if you're calling on the phone, then you're not going to have it there, and the best way to access it if you're calling on the phone, is also going to be online.

And so we think that's the right way to do it.

It's the efficient way to do it.

And we've had a pretty strong point of view around that, but we will certainly comply with whatever laws are there.

And frankly, the cost is really about putting things up in the stores and we don't think that's going to have any effect.

In fact, we know, based on having rolled it out a number of years ago in New York, that it doesn't have any effect on customer behavior because in the store is not what people are ordering and the range of calories that are posted are frankly not helpful for the customer in making a decision, even if they do line up in the store to place an order.

Your next question comes from the line of Matthew DiFrisco of Guggenheim Securities.

I have a two-part same-store sales question.

With respect to the comp, I mean, you've had now 5 years of greater than -- or 4 years greater than 5% same-store sales.

I wonder, as we might be getting into a period where maybe in the second half, if you were to drop below that sort of level of 5% or so, does that -- how do you think the franchisees might respond to that?

Or is there some change to promotional scheduling or advertising that you might come out?

Or is it that not big of a difference to them optically to start to experience that?

And then the other thing, I guess, just with respect to same-store sales, you've done a phenomenal job, and a lot of us have asked a lot about what you've seen inter-quarter and versus your peers and everything and versus the new delivery entrants, is it safe to say that we're still -- what's your opinion on how early are we in this trend with delivery?

And is this something, maybe in aggregate, that's not bad.

There's a reason why people are getting into delivery more because it's trending well.

So are we seeing an acceleration?

What are you seeing out there as far as the demand for food delivered to homes?

Our delivery is up materially.

But as Jeff was saying before, our carryout was actually even up a little bit more in the first quarter.

So both parts of our business are growing very, very strongly.

And I guess, what I'd say is, this new trend towards food delivery is something that we started 3 years before I was born, in 1960.

And our founder in 1960 was pretty convinced it was a good idea, and he's a smart man and he was correct.

Bringing people their food is a really good idea.

It is really difficult.

and I think people continue to underestimate how difficult it is to do efficiently and give consistent service to your customers.

And so stay tuned as people talk about executional issues and margin effect and all the rest of it.

Delivery is not easy.

And we will see how all this plays out, but we're growing our delivery and our carryout business.

As it relates to the first part, we have determined that our franchisees are happier the faster sales are growing, and -- but we've been producing record profit year-over-year for a number of years now at the store level.

That remains, what we believe, is one of the most critical metrics for the financial success of a mostly franchise business, and we remain committed to focusing on that hard.

And our long-term guidance is 3% to 6%, but certainly, we like it even better when we're above that.

Your next question comes from the line of Sara Senatore of Bernstein.

One question, and then a follow-up on something earlier.

I guess I'll start with the -- really start with the follow-up, and this is on the ideas or value competition because I know that it looks like other national players seem to be seeding a lot of ground now.

Your long-term view is that it's more of consolidating the market and smaller players, but I guess, could you just talk a little bit about the competitive environment?

Are you seeing a step-up in promotional intensity?

Or rather, is it something that if it happens, you can match that, in the sense that do you think your system is better positioned to offer really good value.

Because, again, that does seem to be some -- a place that you're really winning right now, so competitive intensity and your advantage there.

And then I'll have a quick follow-up on the loyalty program, please.

Yes.

So I don't see any difference in competitive intensity versus what we've had in the past.

We believe that our efficiencies in our system do give us real competitive advantage.

And while food costs are pretty benign, you are seeing, in -- certainly in some markets, some pretty good inflation rate in wages.

And a lot of it is healthy, a lot of it is coming in places simply because that's what you've got to pay to staff your stores.

So we all have to deal with that, and I think the efficiency that we have and our scale gives us some advantages, and that's been certainly part of the story around why we've been consolidating share.

Great.

And then just on the Piece of the Pie, I mean, you mentioned that that's been a big driver and very effective.

As you think about lapping that this year, do you envision any changes to it, in particular, it can be very effective at driving ticket if you're so inclined, but typically, to do that, you need to reward spend.

So anything as you think about this year or coming years and evolution of that program that we might see?

Well, certainly nothing that we're going to talk about, going forward.

What I would say is that we think the simplicity of our program is the real strength in the program, and we are always looking at things and testing things and trying things, and that's part of our process around here.

But certainly, nothing that we're going to talk about today or prior to launching it.

But I would say that we think that simplicity of the program, the ease for customers to understand what they're going to get from us is one of the strengths.

Your next question comes from the line of Will Slabaugh with Stephens.

I wanted to dig a little bit more on carryout.

I know that's been a focus for you and it sounds like it driving some pretty strong comps in the current quarters.

I was curious with your view on how that's been going versus internal expectations.

And in particular, as you think about the sustainability of that business, if you're willing to talk about what percentage of those sales were on deal versus where you thought.

And if you feel like you're keeping that carryout customer coming in even when the deal isn't front and center.

Yes, we are.

I would say that we've been running 2 messages.

We've been running, very consistently, a carryout message, which is not something we have done over a long term in the past.

And so I think the consistency of value that we're giving in carryout has certainly been helping the growth.

More stores helped because people are not willing to go as far as they're willing to let our drivers go to bring them food.

And so as we grow stores, I think that helps our carryout business and the mix of the carryout.

And certainly, the reimaging program, that we've gone through is going to more directly affect a carryout customer than a delivery customer.

And so I think there are number of things that are playing into it.

The next question comes from the line of John Ivankoe of JPMorgan.

The question is really competition for store employees and delivery drivers, in particular.

If even on a very, very local basis, and maybe that's in urban areas, maybe it's not in urban areas, where the employment market is getting increasingly tight and a lot of people are just searching for that last-mile driver that maybe has some customer service skills and a well-operated vehicle.

So are you guys hearing anything in the system at all in terms of competition for these drivers is getting tougher, whether just availability of drivers or cost of drivers or quality of drivers relative to maybe what it's been over the past couple of years?

Yes.

I think there certainly is, although, I would say that I think it is more a result kind of overall employment levels maybe than, really, competition for those drivers, at least so far.

But for those drivers who are listening to this call, my pitch is you're going to be more consistently busy and receiving tips at Domino's than working somewhere else, and that is ultimately what keeps drivers happy, is that they're busy.

And the more orders they're getting in an hour, the more tips they're getting in an hour, and that's ultimately what's going to make it a good earning proposition for them, and they do really well with us.

And so that's ultimately how we're able to compete.

And certainly, I understand the tip component.

But has there any change in the relationship at all between the stores and the drivers in terms of a per order fee, or maybe what their minimum wage is, what have you, or are the economics unchanged?

Well, I mean, yes, in a material basis, no.

Has there been a sea change in kind of how we approach it?

No.

But you certainly have seen some wage inflation, as I was saying before.

Some of it is a result of minimum wage, but some of it is simply because there are areas in the country where employment levels are strong and up, and you're going to have to compete, not just with other delivery concepts, but with other employment opportunities for those people.

And so there certainly has been some wage inflation, on average.

And the final question, on delivery.

Could you update us where you are in terms of GPS tracking with drivers?

I think that's, in foreign market, something that's been really successfully implemented, and this actually reduce delivery times to the consumer.

But where are we in the U.S. with that?

We are -- we have been actively testing that.

Okay.

If you're not giving more color, that's fine.

There are no further questions at this time.

Please continue.

All right.

So thanks, everyone, and we look forward to discussing our second quarter results on Thursday, July 20.

This concludes today's conference call.

You may now disconnect.