達美樂 (DPZ) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2018 Earnings Conference Call.

(Operator Instructions)

Thank you.

I will now turn the call over to Tim McIntyre to begin.

Please go ahead.

Thanks, Maria, and hello, everyone.

Thank you for joining us.

Today's call will highlight the results of our third quarter and will feature commentary from Chief Executive Officer, Rich Allison; and Chief Financial Officer, Jeff Lawrence.

I just said Rich Allison, I should have said Ritch Allison, sorry, oh my goodness, CEO Ritch Allison and CFO Jeff Lawrence.

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.

A friendly reminder to our analysts.

We have asked you to stick to one question on this call because we want to give all 19 of you the chance to participate.

We will provide each of you the opportunity for more in-depth one-on-one calls later today and tomorrow.

In the event that any forward-looking statements are made, I refer you to the safe harbor statement you can find in this morning's release and the 8-K.

In addition, please refer to the 8-K to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call.

With that, I'd like to turn the call over to Jeff Lawrence.

Thank you, Tim, and good morning, everyone.

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

We continue to lead the broader restaurant industry with 30 consecutive quarters of positive U.S. comparable sales and 99 consecutive quarters of positive international comps.

We also continued to increase our global store count at a healthy pace.

Our diluted EPS was $1.95, which is an increase of 53.5% over the diluted EPS as adjusted in the prior year quarter, which excluded the impact of our recapitalization completed in 2017.

With that, let's take a closer look at the financial results for Q3.

Global retail sales grew 8.3% in the quarter.

When excluding the negative impact of foreign currency, global retail sales grew by 10.4%.

This global retail sales growth was driven by increases in same-store sales and the average number of stores opened during the quarter.

Same-store sales for the U.S. grew 6.3%, lapping a prior year increase of 8.4%.

And same-store sales for our international division grew 3.3%, rolling a prior year increase of 5.1%.

Breaking down the U.S. comp, our franchise business was up 6.4%, while our company-owned stores were up 4.9%.

Both increases were driven primarily by higher order count in addition to some ticket growth as consumers continued to respond positively to our overall brand experience.

Our Piece of the Pie loyalty program once again contributed meaningfully to our traffic gains.

Our international comp for the quarter was driven entirely by order comp growth.

During the quarter, comps in our Asia Pacific, Americas and Middle East regions were strong.

And while still positive year-to-date, the comp in our European business was slightly negative for the quarter.

Our teams on the ground are working hard with our European franchise partners to regain comp momentum.

Our retail sales growth in Europe remained strong due to healthy store count growth, and we remain optimistic long term in the business there.

On the unit count front, we are pleased to report that we opened 59 net U.S. stores in the third quarter, consisting of 61 store openings and 2 closures.

Our international division added 173 net new stores during Q3, comprised of 192 store openings and 19 closures.

On a total company basis, we opened 232 net new stores in the third quarter and 920 net new stores over the last 12 months, demonstrating the broad strength and attractive 4-wall economics our brand enjoys globally.

Turning to revenues.

Total revenues were up $142.3 million or 22% from the prior year quarter.

As a reminder, we adopted the new revenue recognition accounting standard in the first quarter of 2018.

As a result, we are now required to report the franchise contributions to our not-for-profit advertising fund and the related expenses gross on our P&L.

Although this did not have an impact on our reported operating or net income in the third quarter, it did result in an $82.5 million increase in our consolidated revenues.

It is important to note, although these amounts are included in our financial statements, they are restricted funds that can only be used to support the Domino's brand and are not available to be used for general corporate purposes.

The remaining $59.8 million increase in revenues resulted primarily from the following.

First, higher food volumes, driven by strong U.S. retail sales resulted in higher supply chain revenues.

Second, higher U.S. same-store sales resulted in increased royalties and fees from our franchise stores as well as higher revenues at our company-owned stores.

Store count growth also contributed positively to these increases.

And finally, higher international retail sales resulted in increased international royalty revenues, but were partially offset by the negative impact of changes in foreign currency exchange rates.

FX negatively impacted international royalty revenues by $1.9 million versus the prior year quarter due to the dollar strengthening against certain currencies.

For the full fiscal year 2018, we now estimate that the impact of foreign currency on royalty revenues could come in near the low end of our prior 2018 guidance of flat to positive $4 million.

As you know, there are many uncontrollable factors that drive the underlying exchange rates, which makes it a harder part of our business to predict.

Moving on to operating margin.

As a percentage of revenues, consolidated operating margin for the quarter increased to 37.6% from 30.8% in the prior year quarter.

This increase resulted entirely from the recognition of domestic franchise advertising revenues on our P&L from the new accounting guidance I mentioned previously.

Supply chain operating margin was negatively pressured by delivery and labor costs.

Procurement savings partially offset these margin pressures.

Our supply chain center operations in both the U.S. and in Canada continue to have opportunities for improvement.

We continue to invest heavily in both capacity and driving efficiencies in all of supply chain, and we remain committed to our franchise partners in making tangible headway in both capacity and efficiency in the near term.

Company-owned store margin was negatively impacted by higher food, labor and insurance expenses as compared to the prior year quarter.

G&A costs decreased $1 million as compared to the prior year quarter.

This net decrease resulted primarily from a $5.9 million pretax gain on the sale of 12 company-owned stores and a $4 million impact from the adoption of the revenue recognition guidance, primarily related to the reclassification of certain advertising expenses out of G&A into domestic franchise advertising costs.

These decreases were partially offset by continued investments in our marketing, supply chain, corporate store teams as well as our planned investments in technological initiatives, including e-commerce and the teams that support them.

Please note that the company receives technology fees from franchisees that are recorded separately as franchise revenues.

We currently estimate that our G&A cost for the full year 2018 will come in near the low end of our previously communicated range of $370 million to $375 million.

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

Domestic franchise advertising costs were $82.5 million in the third quarter.

As a reminder, we are now showing domestic franchise advertising in our revenues with an equal and offsetting amount of expense in our operating costs.

Interest expense increased $800,000 in the third quarter, driven by increased net debt from our most recent recapitalization.

This increase was largely offset by $5.8 million of incremental interest expense recorded in the prior year quarter related to our 2017 recapitalization.

Our weighted average borrowing rate was flat as compared to the prior year quarter at 4.1%.

Our reported effective tax rate was 15.3% for the quarter, down significantly from prior year.

This was primarily due to the lower federal statutory rate of 21%, resulting from the federal tax reform legislation enacted at the end of 2017.

The impact of tax benefits on equity-based compensation also resulted in a $7.4 million reduction in our third quarter provision for income taxes.

This resulted in a 7.5 percentage point decrease in our effective tax rate.

We continue to expect that our ongoing tax rate, excluding the impact of equity-based compensation, will be 22% to 24%.

We also expect to see continued volatility in our effective tax rate related to equity-based compensation.

When you add it all up, our third quarter net income was up $27.7 million or 49% over the prior year quarter.

Our third quarter diluted EPS was $1.95 versus $1.18 last year, which was a 65.3% increase.

As compared to our prior year diluted EPS as adjusted of $1.27, our third quarter diluted EPS increased 53.5%.

Here is how that $0.68 increase in diluted EPS breaks down.

Our lower effective tax rate positively impacted us by $0.41, including a $0.31 positive impact from tax reform and a $0.10 positive year-over-year impact related to higher tax benefits on equity-based compensation.

Lower diluted share counts, primarily as a result of share repurchases, benefited us by $0.17.

Higher net interest expense resulting primarily from a higher net debt balance negatively impacted us by $0.09.

Foreign currency negatively impacted royalty revenues by $0.02.

And importantly, our improved operating results benefited us by $0.21, which includes $0.08 from the gain on the sale of company-owned stores.

Now turning to our use of cash.

During the third quarter, we repurchased and retired approximately 397,000 shares for $109 million at an average purchase price of approximately $275 per share.

Year-to-date, we repurchased and retired approximately 1.75 million shares for $429 million at an average purchase price of $245 per share.

We also returned $23.2 million to our shareholders in the form of a $0.55 per share quarterly dividend.

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

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

Thanks, Jeff, and good morning, everyone.

I'm very pleased with our third quarter performance, and am extremely proud of our great franchisees and operators around the world, particularly within our U.S. business, who executed at high levels during the quarter.

Our focus on global retail sales growth and franchisee economics continues to shape our steady long-term strategy and approach.

My first 3 months on the job have only reinforced my point of view about what it takes to succeed in this business.

The brand with the best people, the strongest franchisee relations, a focus on forward thinking innovation and most importantly, the courage to take smart risks and tackle the steep hills needed to create meaningful change and improvement will win.

I am very proud to be leading an organization that continues to play the long game by taking this winning approach.

Focusing first on the U.S. business.

It was an outstanding quarter with strong retail sales growth driven by a solid balance of same-store sales and unit growth.

The launch of Domino's HotSpots and the Paving for Pizza Program both generated terrific attention and are 2 good examples of how we continue to make news for the brand in unique and different ways.

We see these as more effective than the limited-time offerings product-of-the-month approach, which differentiates us from others, not only in pizza, but across the QSR landscape.

We continue to drive healthy traffic and order counts and, as always, remain focused on our own strategy and execution rather than specific competitive or macro factors.

For years now, we've stressed the importance of franchisee profitability and cash-on-cash returns as important drivers of long-term growth for Domino's or any restaurant brand.

Store openings are an obvious measure of the health of cash-on-cash returns, but it is also important to take a look at the rate of store closures.

Closures are a key indicator of brand momentum and franchisee confidence.

I am pleased to note that year-to-date, in 2018, we have only closed 7 stores in the U.S. I'm just going to repeat that, year-to-date in 2018, we have closed just 7 U.S. stores, while opening 140.

I credit the many efforts related to sales and efficiencies made by our team and our franchisee base toward industry-leading unit economics that are keeping stores open and profitable.

On our last call, we spoke about the need to accelerate supply chain capacity to support our industry-leading retail sales growth.

I am pleased to report that during the quarter we opened our new state-of-the-art supply chain center in Edison, New Jersey, the first Domino's U.S. supply chain center to open in more than a decade.

I am very pleased to see us making progress on these efforts to expand capacity and, as Jeff mentioned earlier, continuing to address needed efficiency improvements as we invest toward upgrading capabilities within our centers, both old and new.

I'd like to call out one more event during the quarter that makes a big statement about the strength of the Domino's brand.

Stan Gage, a former member of the Domino's leadership team, left Domino's and then became a 12-store franchisee in the Carolinas.

Stan, in a familiar Domino's story, started as a driver more than 30 years ago and worked his way up through the company.

Most recently, he ran our company-owned stores.

I note this not only because it is one more outstanding talent to add to our nearly 800 franchisees in the U.S. today, but also because it shows ultimate confidence in the brand.

Stan, we wish you all the best as you build your Domino's business.

Many of you have told us we make this look easy at times, but the retail sales results, franchisee energy and momentum within our U.S. system don't come easily.

They take hard work each and every day.

The U.S. business results are driven by a system, culture and collection of franchisees and corporate team members that refuse to be complacent or to rest on past success.

This collective energy and drive motivates me and my leadership team each and every day.

Turning to the international business.

We had a good quarter, generating strong retail sales growth and improving store growth trends across all regions.

3 of our 4 regions delivered positive same-store sales with our Europe region being the exception.

While there is work to do in a few key markets, overall, I continue to be very pleased to see our international same-store sales growth being driven by order growth.

Across the international business, our master franchisees continue to perform at a very high level with excellent unit economics.

We have the best master franchisee partners in the restaurant business, and we will continue to work closely with them in driving home elements from the proven playbook used in the U.S. and many other markets, including customer insights, franchisee alignment, technology innovation and a clear focus on value and transaction growth as the main drivers of top line results.

We are a work-in-progress brand, and we will never rest in our quest to achieve a dominant #1 position in every market where we compete.

On the technology front, our HotSpots program was featured front and center this past quarter.

Beyond any sales expectations at this early stage, the thing I am most pleased with has been the incredible engagement from this program, with our customers, our franchisees and the media.

HotSpots received much attention because it is a program that is completely unique within our industry.

I couldn't be more proud of the store level execution of our franchisees and operators around the country as they deliver delicious Domino's Pizza to parks and beaches and more than 200,000 hotspots across the U.S.

Not all technology innovation is television commercial worthy.

And some that happens behind the scenes is as valuable as anything else.

We continue to consider tech when discussing operational efficiencies with our franchisees, seeking to innovate and support their needs wherever possible.

From this, we have recently incorporated voice and mobile capabilities into some of our store-level activities, including inventory management and other areas.

While not a customer-facing digital platform, which I'm still pleased to see us doing plenty of, these launches can also drive value.

We are constantly striving to create a better experience in our stores.

Utilizing technology to benefit our franchisees, managers and store team members in ways that improve efficiencies and make their lives easier is something we will continue to do wherever and whenever possible.

In closing, I am pleased with our third quarter results.

As I mentioned during my opening remarks, I am very proud to be part of a brand with such a winning attitude and mentality, a winning strategy and approach and a winning collection of people that are no doubt the best in the industry.

This is what gives me the utmost confidence that we can maintain our energy, momentum and success.

And now, operator, we'll open it up for questions.

(Operator Instructions) Our first question comes from the line of Brian Bittner of Oppenheimer & Co.

First question is just, when you look at the U.S. business and you look at the fourth quarter last year, the comps of 4% in 4Q last year were still obviously very solid, but it also was a very clear temporary slowdown that we saw in the business.

Can you just remind us what drove that temporary slowdown last year, so we can better understand your fourth quarter this year?

Was it mostly driven by external issues or internal issues in the fourth quarter last year?

Brian, we were pleased with the fourth quarter last year.

The 4.2% was within our 3- to 5-year outlook that we've been giving you guys for quite some time.

And we don't see any material -- didn't see any material challenges back then that gave us cause for concern.

When we take a look at the momentum in the business this year and on a multiyear stack looking backwards, we're very, very pleased with the performance.

Okay.

And just in the international business, I know your Australian franchise is going to be doing a conversion.

How do you expect that to impact the international openings over the next few quarters?

We are in the midst with our partner, Domino's Pizza Enterprises, of a conversion of Hallo Pizza in Germany, as we speak.

So Brian, that is a work in progress and conversions are -- have been happening for several months now and will continue to go forward in the months to come.

We won't comment on any specific unit count impact as it's an ongoing process.

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

This is the first quarter in a while that we've seen really only a moderate increase in year-over-year supply chain costs.

Is there anything specific you would point to that's, sort of, helping the cost curve there?

Is that early benefits of the new facility that's been opened in the U.S.?

Are you starting to see changes on the freight or shipping side of things?

Really just any color there.

Yes, Karen.

It's Jeff.

In supply chain, we've really taken our role as a franchisor seriously.

We're investing materially, as you know, both in capability building as well as capacity building.

As Ritch mentioned in his prepared remarks, we were super excited to get our first supply chain center in more than a decade open and running.

There are dough balls running down the line as we speak, and that is in New Jersey.

And that's something that we're going to continue to do.

It's a great division.

Guys are working really hard, and our franchisees need that comfort that we're going to continue to get them high quality, safe food supply so that they have the confidence to continue to grow.

They have that confidence in our supply chain.

We're going to continue to invest, again, in even more capacity and more capabilities over time.

As I mentioned, I believe, it was last quarter we raised our guidance on CapEx for 2018 to reflect the fact and the optimism and where we're going in the U.S. business to pull forward supply chain centers number 2 and 3 in the U.S. So a lot of opportunity for improvement there like we have in lots of parts of our businesses.

But it's a great business, a good ROI and, most importantly, getting good food supply to our franchisees in the U.S. and Canada.

Our next question comes from line of Gregory Francfort of Bank of America.

I got 2 questions for Ritch.

One is just a clarification.

I think you said 3% to 5% long-term algorithm.

I think you meant 3% to 6%, just maybe clarify that.

And then, the other question I had was just on the European sales and what the reason for the pressure there is?

And I guess, what you're doing right now to address that market and maybe sort of bend the arc back.

Sure.

Thanks, Greg.

And yes, you are correct.

3% to 6% is our 3- to 5-year outlook.

So thank you for correcting me on that.

First, around the business in Europe.

Our 3 other regions were very strong in Q3, but within the Europe region, we've got a couple of markets where we've got some improvements to address and some of those are short term and some of those are going to take a little bit of time.

When I take a look at the business over there, the issues that we have are by and large in our master franchisees' control, and we share a joint commitment to take whatever steps we need to get the business back to the performance on comps that we're all used to.

If you take a look at it, holistically, in Europe, I still feel very positive about our overall market position.

We still have strong cash-on-cash returns across the region, and our retail sales growth performance has still been quite solid, even in the face of a quarter where we didn't achieve the comp results that we'd like to see.

Our next question comes from the line of David Tarantino from Baird.

My question is on the domestic unit growth.

I think this is maybe the seventh year in a row where the pace of growth has increased, and I think that's probably now come of your fortressing strategy.

But just wondering if you would expect that pace to continue to move higher as we move forward?

And is it possible, in your view, that we could see domestic growth in line with your long-run target for the global unit growth outlook?

Sure, David.

Yes, we're very pleased with what has now been a multiyear acceleration of the pace of unit growth in the U.S. Certainly, this strategy of fortressing and driving retail sales growth plays a big part of that.

Also, the fact that we have seen consistently improving over the last couple of years store-level profitability, which as we reported out to you has been in the mid-130s on a store level basis.

That's driving a lot of confidence in the franchisee base and building new stores.

Now you combine that with the fact that we've got a lot of stores out there in the U.S. right now that are really busy.

On Friday and Saturday nights, we've got some stores where we have a tough time putting an incremental pizza in the oven because they're so busy.

Take all of that, you roll in historically low rate of closures in the business, and it's driven a nice acceleration.

And we're very optimistic about U.S. store growth going forward.

We've shared with you that we think the U.S. within a 10-year horizon is an 8,000 store business.

And so we're optimistic about the forward growth also.

And Ritch, maybe a related follow-up.

Are you seeing any signs of concern among the franchisees related to the overall labor environment.

I know the cash flows are still quite good, but is there any, sort of, pause or concern you're seeing anywhere in the system in the U.S. on developments?

I think labor is tight in any business in the U.S. today, and we're certainly no exception to that, with unemployment now under 4% for a while.

But our franchisees out there are making it happen.

And they are hiring drivers.

The fact that our drivers are so busy helps us.

When we take a look at what a driver can make at a Domino's Pizza relative to delivering or driving for some other business, it's very, very attractive.

But yes, labor pressures are certainly on the minds of our franchisees.

On the flip side of that, the -- one of the things that -- or the thing that drives sales of pizza as much as anything is having people gainfully employed and earning good wages out in the marketplace.

So as the #1 player in the pizza business, we also get a nice topside benefit from a strong labor market.

Our next question comes from the line of Will Slabaugh of Stephens Inc.

This is actually Hugh on for Will this morning.

I think this is really the first full quarter with the HotSpots now in.

And can you provide any learnings from the program and maybe any color on the adoption or top line contribution from this program?

Yes, HotSpots has been a really fun program for us.

It's another one of our anywhere platforms with our goal of making Domino's Pizza accessible to our customers anytime and anywhere they want it.

What I've been most pleased about on this is just the terrific brand engagement that we've seen on this platform, and it starts with our franchisees who've set up these 200,000-plus hotspots around the country, our customers who've been excited about the program and also this has gotten a terrific amount of media attention as well, which has been quite a bit of fun.

So overall, we're quite pleased with the program.

(Operator Instructions) Our next question comes from the line of Matt McGinley of Evercore ISI.

My question is on the G&A.

When you back out that $5.9 million gain you had in the impact for ASC 606, your G&A dollars were up about $10 million in the quarter.

Is that just a normal G&A increase?

Or is there some, sort of, lumpiness in the quarter that, that should go down?

And just to confirm, the full year guide on G&A reflects that gain, meaning you went a little bit higher given that there would have been an offset?

Yes, Matt, it's Jeff.

The $370 million to $375 million remains the guide.

That is inclusive of some of the noise that you see, including the gain.

So it's inclusive of that.

We're guiding to the low end of that range or near the low end of that range in part because of that gain that you saw from the store sales.

So it kind of, I think, compensates for that a little bit.

As far as the rate and pace, basically what we're probably going to continue to give you is just one year at a time is our best guess on what's going to go into G&A because we are in such a dynamic environment.

We have been in periods where we've decided to accelerate some strategic investments if we see the opportunity in the marketplace.

And so given one year at a time is what we feel responsible to do now.

So in any one quarter, you might always get some bounce around, things like that, but $370 million to $375 million is what we'll invest this year, again possibly at the lower end of that range.

But again, if we outperform in Q4, that's going to go up.

You have things like advertising that flows through and corporate stores and such.

And if we underperform, we could be at even the lower end of -- or below the range.

So I think the key point here is, is a continued -- the increases continue to go in strategic areas, it's in marketing, it's in analytics, it's in technology, it's in the things that are driving the profitable retail sales for franchisees around the world.

And that you're going to see more of, not less of, as we go forward.

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

Could you just talk a little bit about the U.S. competitive environment?

It's not lost on you or anyone on the call that one of your key competitors ceded some share this quarter.

But it's hard to see if you actually got a benefit or how much that benefit is?

So -- and even what the store overlaps are?

Can you talk about, one, the overall U.S. competitive environment and the changes, but specifically to that comment on the competitor that's losing share, did you pick it up?

Or is it too hard to measure because from the outside in, it's hard to see if you picked up share from that or not?

Yes, John, we're in -- as you're aware, we're in a very fragmented category.

And if we have a competitor donating share, it doesn't simply fall in, in our pocket.

We've got to earn it.

And sometimes share that's donated doesn't necessarily all fall into the pizza category as well.

And that specific competitor has a relatively small share within the category.

So the impact of this on the overall landscape isn't necessarily as heavy as some might assume.

When we take a look at the category overall, we're really more focused on our own competitive strategy than we are on kind of the short-term ups and downs of any specific competitor.

And we think if we can continue to stay focused on bringing value to our customers and also on delivering terrific unit-level economics to our franchisees, we think we can continue to be successful and can continue to take share from competitors, small and large, in the pizza market.

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

I want to circle back on the category as well.

Can you guys talk a little bit about the growth of the pizza category?

Have you seen that growth moderate or accelerate at all?

And then also, anything you can discuss on the closure rate of some of your competitors, primarily the independent operators?

Are you still seeing the closure rate accelerate and more closures in the system?

Peter, first of all, on the overall market, we aren't seeing any significant swings one way or another on the -- on what is just a pretty steady low single-digit growth of the category in the U.S. And then, globally the pizza category continuing to grow, we believe, in that 3% to 5% range.

So no significant changes that we've seen there.

And with respect to closures, as I commented earlier, in our business, the very strong unit-level economics have led to our franchisees maintaining confidence and keeping their stores open, 7 closures across the entire U.S. year-to-date.

As you look elsewhere broadly across the industry, I don't have any specific comments about closures at competitors small or large, but what I will say is that over time, my experience has always taught me that it's going to follow unit-level economics.

And if we have players in the marketplace that are struggling to generate returns at the unit level, then that's what's going to drive either closures on the downside or openings on the upside going forward.

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

Ritch, you mentioned both value to customers and unit economics to franchisees, but I think sometimes in other systems we see those in conflict.

And there's just some struggle to stay on message around value because of franchisee pushback.

So maybe could you just address how you are franchising about value and consistency in that $5.99 price point?

Are there offsets that you're continually finding?

Is it the mix there sort of a fixed amount?

Just trying to understand how you're able to be so consistent around value and others kind of float in and out.

Sure.

Sara, I think you used exactly the right word in your question, which was the word consistent.

And that's really been the key within our system.

So we've been on our $5.99 mix and match, which is our Hero offer in delivery, we've been on that for effectively about 9 years now.

And in our carryout business, for multiple years now, we've been consistently at our $7.99 offer there.

And the key with value is consistency because it's really hard to offer those price points in the marketplace, if you're not driving volume growth over time.

And you can't just jump on value for a quarter or for one promotional window and jump back out of it again.

That's just not a recipe to driving long-term transaction count gain from the business.

And everything that we have experienced here at Domino's in the U.S. and in our other large international markets is that it is that transaction count growth over time that correlates not only with sales growth but with profit growth.

And staying consistent and focused on that value has helped us to drive the kinds of unit-level profitability numbers that you've seen from us over time.

So consistency and alignment is the key.

Franchisees also have at -- levers at their fingertips as well with local menu pricing with how they price their delivery charges, et cetera, that allow them outside of the national price point to manage pricing and some of the profit dynamics in their business at a local level as well.

And we think that, that mix of a strong consistent national price point with flexibility at the local franchisee level is the recipe for a profitable and growing business.

Our next question comes from the line of Chris O'Cull of Stifel.

Ritch, I had a follow-up regarding labor.

Several restaurant companies have stated they're having difficulty fully staffing their restaurants in the current market.

And obviously, this becomes a major concern if it hurts your customer service.

So are you able to monitor whether franchisees are properly staffing restaurants?

And can you tell us whether customer satisfaction or drive time performance has changed much in recent quarters?

We don’t monitor franchisee staffing at the local level.

They're independent business owners.

And that's their job to track and manage their staffing at a local level.

Certainly, as we look broadly across the business, service is critically important to us, and it plays, Chris, into the fortressing strategy that we've been driving in the business.

Getting our stores closer to the customer is going to help obviously with that service dimension, but also when we get our stores closer to the customer, our drivers can execute more runs per hour because the distances are shorter and more runs per hour means happier customers and it also means more tips, which helps us to attract and retain delivery drivers into our business over time.

Have you seen a decline in customer satisfaction or changes in it in recent quarters?

No, we haven't seen any decline in customer satisfaction.

Our next question comes from the line of Alton Stump of Longbook Research (sic) [Longbow Research].

[Just like a predicting] question.

You just had a question, I think, about -- for third-party delivery providers.

A, is that, sort of, have any kind of bigger impact from what you can see on your demand?

And then B, kind of, how do we model out, of course, the increased labor costs thinking from a driver standpoint that are most likely going to result, of course, of the growth in these third-party providers?

Alton, it's Jeff.

On aggregators, we don't have that much more to add than what we've already said and been saying over the last 18 months to 2 years.

It's more about what we're doing.

Our strategy is our great execution in more than 90 markets around the world.

And we're -- as you see again, we're hitting more often than not in that 8% to 12% global retail sales growth with really good flow through the bottom line.

So I don't think we have anything really to add to the conversation around this aggregator phenomena other than to tell you that we're going to grow regardless.

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

For the question on the unit growth, I mean, hard to look at in the system quarter to quarter, but there's a couple of quarters we've been sitting in the 6% range, which is the lower half, I guess, of your 6% to 8% annual guidance.

And I recall last quarter there was talk about the international maybe coming in a little light of expectation.

So I was wondering if you could talk about whether the third quarter results saw the uptick you were anticipating?

Or whether there is any reason why we might see more modest growth or particular regions that might see more modest growth on the international front?

Otherwise, it does seem to imply a pretty big uptick as we think about fourth quarter growth and just wondering to get your thoughts there specific to the international.

Well, thanks, Jeff.

First, keep in mind that 6% to 8% unit growth outlook is a 3- to 5-year range in terms of that outlook.

Specifically, related to the third quarter, we were pleased to see the pickup in international growth, 173 net units in the third quarter.

We were pleased with what we saw there.

And when we take a look forward at the medium and the long term, we've got solid unit economics across the international business, and that's across all of the regions that we operate in.

And that is really the leading indicator of what is going to -- that gives us confidence in that 6% to 8% unit growth range that we give you on a global basis.

And then as we've talked about previously on this call, the unit-level economics in our business in the U.S. also continue to be very, very strong and at a level of returns that encourage our franchisees to invest their hard earned dollars into building Domino's Pizza stores.

Our next question comes from the line of Jeremy Scott of Mizuho.

Just bigger picture on international, the next 2,000, 3,000 stores versus the last 3,000 stores.

Can you talk about the difference in contributions from your core markets versus some of your younger markets that were launched in that 2013 to 2015 period when, I believe, Ritch, you were leading the effort?

I have your long-term store targets in front of me.

But just thinking about the momentum over the next 2 years, which markets may surprise us and accelerate versus those that where the growth might level out.

And then maybe just a follow-up on the previous comment.

You mentioned that you share a joint commitment to drive business in your international franchisees.

Wondering if you can expand on that a little bit.

Is there a threshold of underperformance in a major market that would induce you to step up with capital support?

Or is there something else that you had in mind?

Sure, Jeremy, start with your -- I'll start with your first question.

When I think about the composition of store growth in international, the good news there is that it has been a pretty balanced portfolio growth if you look over time, in that we continue to get strong store growth out of long, established core markets and you've seen that the last couple of years in places like the U.K. and Australia, for example, while also driving strong growth in some of the newer or more emerging markets that we got around the world.

And you've seen a lot of units over the last couple of years come from places like India and Russia and Brazil and places that are relatively undeveloped for.

When I take a look forward, honestly, I don't see a lot of change in that dynamic.

We still have very attractive unit-level returns in our core markets and also a good bit of white space for growth in those markets.

If you take a look at the top 15 markets that we operate in by unit count, there is still another 4,000, 5,000 units of opportunity available in those places.

And then beyond that, markets that wouldn't appear on that list like places like China and Russia and places like that, we're optimistic about the forward growth in some of those emerging markets as well.

Having this balanced portfolio really helps us over time because, frankly, not all markets are going to be performing at any particular point in time.

So you need that balanced portfolio to be able to consistently drive unit growth in that 6% to 8% range.

I'll turn now to your second question.

We have a really deep partnership with our master franchisees around the world, and I think that is one of the things that has allowed us to be successful over a sustained period of time.

So our teams work side by side with our master franchisee teams to make sure that we're driving the business forward with our customers in those market places, but also working hand in hand on the unit-level economics in the business as well.

So it's not so much stepping in with capital or other financial support as it is really making sure that we are taking the best of the learnings that we have, whether that's from here in the U.S. or from the more than 85 countries that we operate in and making sure that we don't repeat some of the same mistakes, making sure that we take advantage of those things that work.

So that's how we look at it.

It's really a partnership that is driven by a shared set of expectations and a shared opportunity to create value for DPZ and for our master franchisees.

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

You mentioned in your prepared remarks about your taking risks and climbing steep hills.

And I just think that in and of itself was an interesting quote.

And then secondly, Jeff, and I think it was you, perhaps an answer to a question that you talked about looking at G&A one year at a time, which I understand, but also you mentioned accelerating strategic investments.

So I guess, maybe I'm trying to connect 2 things that aren't necessarily directly connected, but what does that mean in terms of your future spend in G&A?

Obviously, this year $370 million to $375 million.

But going forward, I mean, is this -- are you an organization at this point that wants to spend more, get more?

Or are you beginning to think about potentially getting leverage out of the dollar spend that you're currently committed to?

John, this is Jeff.

The first thing I would tell you is, the overarching way that we view the business is to be front-footed and really try to invest to get the gains that we want.

We're not going to take our foot off the gas pedal and just hope that things continue to get better or we can continue to perform in a high fashion.

We really want to make sure that we're targeted with incremental investments in the areas that we think will, again, drive the consumer experience, drive great franchise economics, all those things roll together, hopefully we can do double-digit retail sales growth out into the next 3 to 5 years.

We are not a brand that is going to circle a number and say G&A must be this percentage of revenues or this percentage of retail sales.

We think that that's limiting.

And we think that, that ultimately -- if we had that kind of mentality over the last 3, 5, 10 years, we would not be sitting in the competitive position that we are today.

So we're going to continue to be front-footed.

We're going to continue to take smart risks.

To Ritch's prepared remarks, I have been at the brand now for almost 19 years.

I think the courage that Patrick and now Ritch have shown, our franchisees have shown to take on the really difficult challenges of the quick service restaurant industry and continue to fight through them and win is really energizing not only for the folks here in this holding, but more importantly, the franchisees and team members in 90 markets around the world.

So we're going to continue to be front-footed, we're going to continue to try to make the right choices.

But we're not going to run out the clock, John.

We're going to be aggressive and try to grow share.

Our next question comes from the line of Alex Slagle of Jefferies.

As you think about building traffic over the next couple of years, how do you envision the balance between building frequency of existing guests, where you've done a great job with loyalty and analytics, versus the opportunity to accelerate growth in new customer visits and perhaps thoughtful on how you go about identifying those groups and reeling them in to be Domino's loyalists?

Sure.

Well, the -- first and foremost, the opportunity is there to continue to drive frequency among folks that buy from Domino's already.

And when the loyalty program was first developed, our Piece of the Pie rewards program, 3 years ago, the foundation of that program was built on driving frequency.

That's why points are earned based on the number of purchases as opposed to the amount of dollars that are spent.

So as we look across the landscape, we still see a significant amount of opportunity to get the customers who buy from us already to buy more.

Also, getting trial is important as well and reducing the kinds of veto votes that may keep folks away from Domino's is important.

That's one of the reasons that you saw one of the few product introductions that we've done over the last couple of years was salads.

And that was a way to attract potentially some customers and some households into the brand that maybe otherwise weren't using us before.

But I see -- I still see lots of opportunity in driving frequency.

Our next question comes from the line of Jon Tower from Wells Fargo.

First a clarification.

I believe last year, at least according to my notes, there was roughly a 50 basis point headwind to U.S. same-store sales from the hurricanes.

So first, is that correct?

Second is, was there one this year from Florence?

And then the question is for Ritch.

Is there any sort of level of U.S. market share that you feel like Domino's could get to or perhaps some other metrics that you're looking at where you'd consider monetizing the technology platform to other operators outside your franchise base?

John, this is Jeff.

I'll take your comp/hurricane question.

And then I'll take it over to Ritch for the second part of your question.

The short answer is, last year and in this year, we did not see a material either benefit or detriment to the U.S. comp because of weather, including hurricanes or anything else.

To the extent that we do see measurable stuff like that in the future, we'll point it out.

But it's -- I know everybody in the industry likes to talk about weather when things aren't as good, but for us, it wasn't, either last year or this year, a material part of our comp performance.

And then, John, to the second part of your question on market share.

One of the great things about this segment of the QSR industry is that we, as the market leader, still only sell about 1 in 6 pizzas that are sold in the U.S. and only about 1 in 15 that are sold outside the U.S. So I think there is significant headroom for market share growth.

If you take a look at benchmarks across other segments of QSR, whether you're looking at burgers or coffee or chicken and other places, the market leader is typically going to have a 25% or higher share, and we see that in some of our own Domino's businesses around the world as well.

So in my opinion, lots of room to continue to grow.

And that's really where we're focused, is on continuing to do what we do really well.

I like the fact that we have more than 300,000 people around the world wearing the Domino's logo who wake up every day and think about selling more Domino's Pizza.

And so as long as we've got a lot of runway for growth, I want to remain focused and not distracted by trying to take some elements of our business across to other brands or other sectors of the restaurant industry.

Our final question comes from the line of Stephen Anderson of Maxim Group.

One comment I do want to make is on your commodity outlook.

I just want to see if there has been any change to that?

And if you're looking at any trends heading into '19?

Stephen, this is Jeff.

Our guidance for 2018 as you may recall is 2% to 4% up on the food basket that our U.S. franchisees are expecting.

We're not updating that guidance at this point.

Year-to-date, we're in that kind of 3% or 4% range.

So we're at the high end of that, but our franchisees have done a great job at executing at the local level, driving volume and continuing to drive really good dollar profit in their operations.

So no change to the food basket guidance in 2018.

And as far as it relates to 2019, we're not giving any commentary or guidance on that today.

Thank you, ladies and gentlemen, that was our final question.

I would now like to turn the call back over to Ritch Allison for any additional or closing remarks.

Well, thanks, everybody.

And we look forward to seeing many of you at our Investor Day on Thursday, January 17, following the ICR Conference.

And we also look forward to discussing our fourth quarter and full year 2018 results on Thursday, February 21.

Thank you, ladies and gentlemen.

This does conclude today's Third Quarter 2018 Earnings Conference Call.

You may now disconnect.