達美樂 (DPZ) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Domino's Pizza, Inc.

Fourth Quarter Year-End 2018 Earnings Webcast.

(Operator Instructions) As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Tim McIntyre, EVP, Communications, IR and Legislative Affairs.

Please go ahead, sir.

Thank you, Jonathan, and hello, everyone.

Thanks for joining us.

Today's call will highlight the results of our fourth quarter and full year results for 2018.

The call will feature commentary from Chief Executive Officer, Ritch Allison; and Chief Financial Officer, 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 20 or so of you the chance to participate.

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

In the event that any forward-looking statements are made, I do refer you to the Safe Harbor statement you can find in this morning's release, the 8-K and the 10-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.

And with that, I'd like to turn the call over to CFO, Jeff Lawrence.

Thank you, Tim, and good morning, everyone.

We are pleased to report our results for the fourth quarter and full year fiscal 2018.

During the quarter, we continued to build on the positive results we posted during the first 3 quarters of the year, and we delivered strong results to our shareholders.

We continue to lead the broader restaurant industry with 31 straight quarters of positive U.S. comparable sales and 100 consecutive quarters of positive international comps.

We also continue to increase our store count at a healthy pace as we opened 560 net new stores in Q4.

Our diluted EPS was $2.62, which is an increase of 25.4% over the prior year quarter.

This increase primarily resulted from strong operational results and a lower effective tax rate.

With that, let's take a closer look at the financial results for Q4.

Global retail sales grew 6.5% in the quarter, pressured by a stronger dollar.

When excluding the negative impact of foreign currency, global retail sales grew by 9.5%.

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

Same-store sales for the U.S. grew 5.6%, lapping a prior year increase of 4.2%.

And same-store sales for our international division grew 2.4%, rolling a prior year increase of 2.5%.

Breaking down the U.S. comp.

Our franchise business was up 5.7% while our company-owned stores were up 3.6%.

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

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

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

During the quarter, all of our geographic regions were positive.

Our comps were negatively impacted when compared to the prior year as our Q4 2018 did not include New Year's Eve.

We estimate that both our U.S. and international comps were negatively impacted by approximately 0.5 points by this calendar shift.

We expect Q1 2019 to be positively impacted by the calendar shift.

Separately, and as discussed at our Investor Day, U.S. comp in 2018 were negatively impacted by 1 point to 1.5 points due to our store split fortressing strategy, an investment we are willing to make toward our long-term growth.

Our international comp was also negatively impacted by store split.

On the unit count front, we are pleased to report that we opened 125 net U.S. stores in the fourth quarter, consisting of 127 store openings and 2 closures.

For the full year, we opened 258 net U.S. stores, the most U.S. net store openings we have had since 1988.

We are also very pleased to announce that our international division added 435 net new stores during the quarter.

The 435 net new stores were comprised of 472 store openings and 37 closures.

For the full year, we opened 800 net new stores in our international division.

On a total company basis, we opened 560 net new stores in the fourth quarter and 1,058 net new stores for the full year 2018, demonstrating the broad strength and attractive four-wall economics our brand and franchisees enjoy globally.

Turning to revenue.

Total revenues for the fourth quarter were up $190 million or 21% from the prior year.

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 fourth quarter, it did result in a $112 million increase in our consolidated revenue.

It is important to know, 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 $77.7 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 revenue; and second, higher U.S. retail sales resulting from higher same-store sales and store count growth resulted in increased royalties and fees from our franchised stores as well as higher revenues at our company-owned stores.

International royalty revenues were down from the prior year quarter, primarily due to the negative impact of changes in foreign currency exchange rate.

FX negatively impacted international royalty revenues by $3.6 million versus the prior year quarter due to the dollar strengthening against certain currencies.

For the full fiscal year, foreign currency negatively impacted royalty revenues by $1.1 million.

Moving on to operating margin.

As a percentage of revenues, consolidated operating margin for the quarter increased to 38.2% from 31.5% in the prior year quarter.

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

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

Supply chain operating margin was up year-over-year and was positively impacted by procurement savings, but was negatively pressured by labor and delivery cost.

G&A cost increased $15.8 million as compared to the prior year quarter, driven primarily by continued investments in technological initiatives as well as investments in our supply chain, our marketing and our international team.

We also had 2 items that largely offset for the quarter: A $4 million pretax gain on the sale of company-owned stores to franchisees in Q4 2017, which reduced G&A in that period; and a $4.6 million reduction in G&A in Q4 2018, resulting from the adoption of the revenue recognition guidance primarily related to the reclassification of certain advertising expenses out of G&A into U.S. franchise advertising cost.

U.S. franchise advertising costs were $112.9 million in the fourth quarter.

As a reminder, beginning in fiscal 2018, we are showing U.S. franchise advertising in our revenues with an equal and offsetting amount of expense in our operating cost.

Interest expense increased $6.8 million in the fourth quarter, driven by increased net debt from our most recent recapitalization and a slightly higher weighted average borrowing rate of 4.1%.

Our reported effective tax rate was 17% for the quarter, down significantly from prior year.

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

The reported effective tax rate included 0.8 percentage point impact from tax benefit on equity-based compensation.

We expect that we will continue to see volatility in our effective tax rate related to equity-based compensation.

When you add it all up, our fourth quarter net income was up $18.3 million or 19.6% over the prior year quarter.

Our fourth quarter diluted EPS was $2.62 versus $2.09 in the prior year.

Here is how that $0.53 increase breaks down.

Our lower effective tax rate positively impacted us by $0.44, including a $0.57 positive impact from tax reform and a $0.13 negative year-over-year impact related to lower tax benefits on equity-based compensation.

Lower diluted share counts, primarily as a result of share repurchases, benefited us by $0.12.

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

The gain on store sales recorded in Q4 2017 negatively impacted us by $0.06.

Foreign currency negatively impacted royalty revenues by $0.05.

And last and most importantly, our improved operating results benefited us by $0.17.

Let's now turn to our use of cash.

First and most importantly, we invested nearly $120 million in capital expenditures for the full year.

We continue to invest in our supply chain to keep up with our rapid growth, including opening our New Jersey center in Q4 and starting work on 2 additional supply chain centers, one in South Carolina and one in Texas.

We also continue to invest in our technology capabilities.

During the fourth quarter, we repurchased and retired approximately 636,000 shares for approximately $162 million at an average purchase price of $255 a share.

For the full year, we repurchased nearly 2.4 million shares for approximately $591 million at an average purchase price of $248 a share.

During the fourth quarter, we also returned $45 million to our shareholders in the form of 2 quarterly dividends and made $9 million of required principal payment on our long-term debt.

Subsequent to year-end, on February 20, our Board of Directors increased our quarterly dividend approximately 18% to $0.65 per share.

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 for the benefit of our shareholders.

We'd like to remind you of the 2019 annual outlook items that were shared at our Investor Day in January.

We currently project that the store food basket within the U.S. system will be up 2% to 4% as compared to 2018 levels.

We estimate that foreign currency could add a $5 million to $10 million negative impact on royalty revenue in 2019 as compared to 2018.

We expect our growth CapEx investment to be in the range of $110 million to $120 million as we continue to improve and build supply chain capacity and capabilities and invest in technological innovation.

We expect our G&A expense to be in the range of $390 million to $395 million for 2019.

And do please keep in mind that G&A expense can vary up or down as our performance versus our plan, as that affects variable performance-based compensation expense and other costs.

Separately and as a reminder, we will be adopting the new lease accounting standard in the first quarter of 2019.

The adoption of this standard will result in a significant gross-up on our balance sheet, but it is not expected to have a material impact on our income statement.

Overall, our solid, consistent momentum continued, and we are very pleased with our results this quarter and for the full year.

We will remain focused on relentlessly driving the brand forward and providing great value to our customers, our franchisees and our shareholders.

Thank you for joining the call today, and I'll turn it over to Ritch.

Thanks, Jeff, and good morning, everyone.

I'm pleased with what was a terrific fourth quarter, one that capped another outstanding year for Domino's.

Our results continue to outpace the industry and our franchisees across the globe continue to make me extremely proud.

I plan to keep my commentary rather brief today, mostly due to the fact that we recently held our annual Investor Day, which was a great opportunity to communicate detail around our strategy and my thoughts on my first 6 months as CEO of this tremendous brand.

We certainly hope you found it to be helpful, filled with substance and time well spent.

The updates and concepts we discussed centered around one theme: What matters.

Today and going forward, I'm going to frame up our quarterly performance around these elements, areas and metrics that I am most focused on as we execute the long-term strategy designed to help us achieve our goal of becoming the pizza industry's dominant #1.

So let's revisit what matters.

Retail sales growth matters, and once again, we delivered.

Our global retail sales growth reflected a strong balance across our U.S. and international businesses.

For both businesses in Q4, our growth reflected a healthy blend of unit growth and traffic-driven same-store sales.

Looking first at our U.S. business, double-digit retail sales growth in Q4 was comprised of a very healthy and order-count driven 5.6% comp and 125 net new units.

The fourth quarter marked our 31st consecutive quarter of positive U.S. same-store sales growth and capped very strong top line performance in 2018, above our 3- to 5-year outlook range, and continually driven by focus, fundamentals and execution.

I'm so proud of our U.S. franchisees and teams who continue to lead the Domino's system.

Turning now to international.

We delivered strong retail sales growth for the fourth quarter and a double-digit result for the full year.

Fourth quarter net unit openings were particularly strong and represented a significant acceleration over previous quarters.

Same-store sales performance can certainly improve versus what we have all come to expect, but I'm pleased to see all of our comp coming from order growth.

During the quarter, we hit 2 important milestones.

First, we opened our 10,000th store outside of the United States, a testament to the unit growth engine this segment has provided to the business over a lengthy period of time.

In addition, the fourth quarter was officially our 100th consecutive quarter of positive same-store sales growth.

To think that we have grown sales in our international business for 25 straight years and 100 straight quarters still honestly blows my mind and is a testament to us having the best international model in QSR.

I credit our master franchisees and global operators for helping the brand achieve such an impressive milestone.

Continuing our discussion of what matters, let's turn to value.

Value matters and continues to be a significant part of our strategy.

We remain the only player within our category to deliver value in a sustained, meaningful and reliable fashion as we have for nearly a decade.

Our $5.99 delivery and $7.99 carryout offers in the U.S. continue to resonate with our customers.

But beyond just the price point, we continually search for and deliver additional customer benefits to the overall value equation.

Technology leadership and our loyalty program matter.

Although this call is about the fourth quarter, I can't help but note something exciting we introduced earlier this month.

We launched a technology and loyalty platform like no other of its kind.

The Points for Pies program allows customers to send photos of any pizza using our AI interface we call the Piedentifier, and earn points in our Piece of the Pie loyalty program.

It is one more example of how we do things a bit differently, always trying to stay ahead on how we make news; generate brand engagement; and in this case, grow awareness and participation in our loyalty program.

As we updated you at Investor Day, this platform, with over 20 million active users, has been a meaningful driver of sales performance and frequency over time, and I am very excited about the launch of this unique program.

Franchisee profitability and unit economics matter.

Franchisee profitability is at the center of everything we do at Domino's.

We anticipate average U.S. franchise store EBITDA to be in the range of $137,000 to $140,000 per store for 2018, with global cash-on-cash returns at better than a 3-year payback.

Very few in this industry and certainly our category will provide this figure.

We will continue providing information on store-level economics because it is a top priority for us and certainly should be for you as shareholders of any restaurant brand.

The health of our business and system is heavily reliant on our franchisees' success, and their enterprise growth and profitability will be a certain priority for me as CEO.

Few metrics demonstrate the relationship between store-level economics and growth potential better than unit openings, and most notably, closures.

You have heard us discuss for several years now how closures is the top indicator of the health of a franchise system, and I'm thrilled to say that we closed only 9 U.S. stores in the full year 2018.

Nine.

When combined with international, our global closures number of 125 off of a base of nearly 16,000 stores is a true testament to strong global unit economics, a component of the Domino's story that gives me a great deal of confidence and belief in our long-term potential.

Our proven four-wall economics continue to pace the industry and it's just another reason why there has never been a better time to be a growth-minded franchisee at Domino's.

In closing, I'm very pleased with our fourth quarter and full year 2018 results.

By focusing on the long game and what matters, I'm extremely confident that we are well-positioned for success.

2019 is only the beginning of our pursuit to win and accomplish our long-term goal of dominant #1.

And with that, we are happy to take some questions.

(Operator Instructions) Our first question comes from the line of Peter Saleh from BTIG.

I just wanted to ask about the international real quick on -- I think you said the comp growth is being driven primarily by order growth.

What's the dynamic going on, on the check?

Are you seeing your franchisees internationally discount to drive some of that traffic?

Or just any commentary on the check would be helpful.

Sure, Pete.

It's Ritch.

On the check, what we're consistently trying to do as a brand across the globe is to stay focused on value.

We talk about it a lot in the U.S. with $5.99 and $7.99, but we're also focused on it in our international markets as well.

And the approach that our growth-minded master franchisees are taking is really around driving transactions, driving order counts, as opposed to taking price increases over time.

So what you saw in 2018 was really that continued focus to make sure that we're driving growth the right way.

Great.

And then just domestically, comp growth, while impressive, was still a little bit below what we were anticipating.

Did you see any deterioration in delivery times or any shift in the consumer behavior in the fourth quarter versus prior?

Or was this pretty much in line with your expectations?

Pete, we were really happy with the comp growth in the U.S. in the fourth quarter.

As stated earlier, it's a traffic-driven comp, which is exactly what we like to see, with the business really healthy across all dimensions.

Hi, everybody.

This is Tim.

I'd like to reiterate we really would like you to stick to just one question on this call, please.

(Operator Instructions) Our next question comes from the line of Karen Holthouse from Goldman Sachs.

So you've previously talked about loyalty programs as something that come with sort of a natural half-life and one of reasons you expanded it outside of just digital transaction.

Should we take the expanded Points for Pies promotion as an indication that, that half-life was like starting to become more apparent in the existing program and you needed a new jump start?

Can you just sort of put that in context to your overall performance and confidence in the loyalty program as it exists?

Sure, Karen.

The loyalty program has continued to be a significant driver of comps for us since its launch now a little over, gosh, 3 years ago now.

And as we mentioned at Investor Day in January, we passed the mark of 20 million active users.

The Points for Pies program is a terrific enhancement to that program.

And a loyalty program does have a half-life, and our approach was not to wait until we hit ours, but to continue to bring more news and to bring more interesting ways for consumers to sign on with our program and get actively involved in it.

And I'll remind folks on the call that when we structured the loyalty program, our Piece of the Pie Rewards back in 2015, it was done with a mind toward driving transactions.

And everything about the program structure and the enhancements that we've made to it over time are all about making sure that we drive transactions and frequency with our customer base.

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

With respect to the comp and sort of the comment, I think, about the calendar shift that you made, is there anything else we should consider, given Easter comes later?

So lent -- the timing of lent occurring a little later.

Does that play into the quarterly comp at all, or some things to factor in?

And then also with that comp assumption, pricing, calendar shifted and a lot of wages went up in certain states.

Is that another factor to think about in 1Q, just the higher pricing domestically?

Yes.

Matt, it's Jeff.

We'll primarily answer this for Q4 since we're in Q1 right now and we can't report on that.

But what I can tell you is it did hit us by about 0.5 point, the calendar shift.

We'll get most of that back, obviously, in Q1.

As far as any kind of seasonality or order versus order stop in '19, not really that worried about it.

That -- if we're executing and putting up the numbers we want, that will be rounding error-type stuff.

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

My question is on the domestic comp trends.

And I know when you add back the calendar issue, the comp in Q4 was pretty similar to what you had in Q3.

But the comparison was quite a bit lower.

So when you look at maybe it on a 2-year stack-basis, it does look like the business decelerated.

But I guess my question is, is that the way you look at it?

Did the business decelerate?

And how does that change your thinking or not change your thinking about your 3% to 6% comp target as you enter 2019?

David, it's Ritch.

When -- the way I look at it is that the business did not decelerate from '17 to '18.

If we look at the full fiscal year '17 versus '18, looking at global retail sales and our U.S. business, we were up 11.1% in fiscal '17 and we were up 11.2% in fiscal '18.

If you took a look at the fourth quarter, we were up 7.6% in '17 and we were up 10.2% in '18.

So we feel very good about our retail sales growth across the business, which is really the key metric that we take a look at.

And we were very pleased with the comp in the fourth quarter for a couple of reasons: One is that it was driven by a very healthy dose of order count growth, transaction growth; and secondly, really nicely within the range of our long-term expectations.

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

Just about the company-operated comps and that spread.

I know it's a very small part of your system, but to the extent that company stores in the U.S. either bear a greater sort of brunt from splits or are more affected by aggregators, I mean, can you say anything about that sort of what appears to be, kind of on a 1- and 2-year basis, a widening gap for the company stores?

And whether that has any kind of portent for the system overall?

Yes, in the -- Sara, in the company-owned stores, as you know, those are concentrated in 8 markets, in primarily more urban-type markets.

So certainly, you'll see a little more impact from splits because all of the openings that we have in our corporate store business are going to be realignments of territories.

And to the extent that there's an aggregator impact, certainly, that's the areas where those folks are more focused.

So we don't see any concerns in the quarter from our corporate store growth.

We feel very good about the growth and profitability in that business, but the characteristics are a little more skewed toward the urban setting.

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

You've talked about the split impact and the anticipated split impact in the U.S. And I know you report your international comps without the split impact.

What would that be maybe in the fourth quarter?

And if you trended that over time -- or is the impact of splits increasing over time internationally, decreasing, or has it been stable as we look at that business over -- on the last couple of years?

John, we shared with you back at Investor Day the 1 point to 1.5 points on the U.S. side of the business.

We don't have a similar number to share with you on the international side.

It's really going to -- because it's really going to vary country-by-country, depending upon what state on -- of the growth curve that we happen to be in, in that particular country.

And some of our markets where we are more penetrated today, you may see a little bit more of an impact there.

And other markets, where we've got a lot of more -- a lot more white space left to fill, you're going to see less impact.

But if we come back to our 3- to 5-year outlook for same-store sales growth of 3% to 6%, it takes into account the fact that we will take some headwind on that due to the impact of fortressing and the splits.

And as we talked about at Investor Day, this is an investment that we're quite happy as a brand to make and our franchisees have been quite happy to make because it's necessary to drive the overall retail sales growth and overall profitability in the business, primarily at the franchisee level as well as the franchisor.

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

So just I wanted to ask about international.

And maybe, one, could you just tell me how many conversions you had in the quarter?

And then just on the comps, I thought they were a little softer than I was expecting.

And I guess I'm curious what that might have been attributed to, and if they came in below your expectations, and kind of if there was any regionality there.

Greg, we're not going to report specifically on the number of converted units.

The conversion that was primarily happening in the fourth quarter was the continued conversion of Hallo Pizza in Germany, and we've been very pleased with the progress that DPE is making there.

And you could probably refer to their release from about 36 hours ago and get more of the details around that.

With respect to the international comp, certainly, we would love to see that number a bit higher.

And we'll just be fully transparent with you on that because our trends over the longer term have certainly been in a better place than where we were in the fourth quarter.

That said, we are always going to have some ups and downs in the various markets around the world.

In the fourth quarter, we were softer in a few key markets in Europe and a few key markets in the Pacific region, specifically.

But when I take a look at the underlying health of those markets, we have strong market share positions, we have great unit economics, and we've got strong management teams in place.

And even with a little bit of weakness in the fourth quarter comp, when we step back and look at our retail sales growth, the product of that comp and the unit growth that we're seeing, I'm still quite pleased with the growth trajectory in the business.

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

This is actually Hugh on for Will this morning.

I was hoping you could out parse out the comp a little bit more in 4Q.

You said in your prepared remarks that same-store sales growth included some ticket growth.

I'm just curious if that check growth is a little bit more than we're accustomed to seeing and what was the driver of that.

Yes, Hugh, it's Jeff.

Real good comps in the fourth quarter for the U.S. business in addition to the retail sales growth.

Did a 5.6%.

The majority of that was traffic.

We did get a decent amount of what I would call smart ticket, so it's using the analytics capabilities we have, working with our franchisees to really figure out where are the places where we can kind of grow ticket.

But what I'll tell you it wasn't, it wasn't a willy-nilly raise prices across the board.

Our franchisees aren't doing that.

They're doing it more precision-based, using the analytics and it's a good balance is what I would tell you.

But again, primarily, it was traffic with a little bit of what I'd call smart ticket sprinkled in there.

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

I had a follow-up regarding the corporate stores, and I guess this applies to the franchise stores as well.

But are there any opportunities to mitigate some of the cost pressures that you're seeing, especially around labor, to kind of slow the margin pressure we're seeing at stores?

Yes.

This is Jeff.

Listen, the store environment in the U.S. and in many countries around the world, it can be challenging on multiple line items, and labor is certainly one of them.

When you look at the -- our corporate store margins for the year, they were pressured pretty significantly on labor rate.

Now the operators of that business, great teams in the markets that we're in, did a really nice job of generating some efficiencies, but it wasn't enough to overcome the increase in labor rate.

And labor rate is really 2 forms: One is government-mandated labor rate increases, which, of course, we follow; but also just that -- the fact that the economy, as you know, is white-hot right now in the U.S. Everybody's got a job, and sometimes the economics of the situation demands that labor rates go up.

So really don't have an opinion as -- or care as to why it goes up, what we need to do is to continue to drive those efficiencies.

And there are opportunities there, I think, for us to continue to chase that.

We're investing more in technology inside the store.

We've certainly done a great job with consumer-facing, the point-of-sale, things like that.

But we're really taking a fresh look at how we can use technology kind of behind the counter for labor scheduling for our corporate stores, sharing best practices to the extent that the franchisees, who obviously make their own decisions in this regard, can learn from that.

But yes, all is opportunity.

In margin, labor, all is a big opportunity.

And I think as we go forward, driving the volume, driving that traffic will give us a better chance at increasing dollar profit there.

But it is difficult environment with labor, but we just got to continue to work our way out of that.

Chris, just a couple of things to add to what Jeff was just describing in terms of some of our near-term efforts.

The real game-changer over time on labor is going to have to come from our efforts to fortress our market.

The most expensive thing that we do is take a pizza from point A to point B. And as we look forward over time to reducing the radius of these delivery areas, a -- in addition to driving incremental sales per household, which we've talked about in the past, we are also looking to reduce the cost per delivery.

And it just makes sense, of course.

The shorter the distance, the shorter the drive time.

Getting that driver out from the store to the customer and back to the store will lower the labor cost for that specific delivery.

And as we see wages rising in cities around the country, this is the key lever over the coming years in terms of reducing that delivery cost, to go alongside a lot of the things, as Jeff described, that we're trying to do around being smarter about our scheduling and how we think about using technology to make the flow of products from the store out to the customer more efficient.

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

I know you guys have expressed satisfaction with fourth quarter comps in the U.S. But I'm wondering if you think execution is optimal at the store level using in-store employees and optimal in terms of availability of delivery drivers.

Obviously, I've heard now and heard before the comments about reducing delivery spans, but are you currently staffed the way that you want to be?

Or are there execution issues that are popping up in various markets that might be constraining comps from what they otherwise would be?

John, on execution, we're never satisfied.

We're as fast as we've ever been in getting out to the customer, and we believe we're better than the competition, and competition old and new, but we're never satisfied there.

So the short answer is yes, we need to get better, both in terms of the average times that it takes us to get a pizza to our customers and also with the variability around those times.

And that's something that we're working on each and every day.

The driver labor market and availability of drivers certainly plays a part in that.

And as Jeff said, it is a very tight labor market right now.

So we've got to make sure, and our franchisees have got to make sure, that Domino's Pizza is the best place for those drivers to work when they have many more choices today than they had 5 years ago.

So what does that mean for us?

Well, the most important thing in terms of driver wages and satisfaction is how many deliveries per hour do these drivers get?

That drives the compensation.

And when we look at the places around the country where our franchisees have leaned in and built out their store networks to fortress, where we've cut those delivery zones down from 9 minutes down to 6 minutes or 5 minutes, we find that our drivers are making more money and turnover in those places is less.

So it's not a short-term play, it's a long-term play, but we are very much focused on it, John.

And we want it to be a great place to work now and also to create opportunities for our drivers of today to become the franchisees of tomorrow.

90%-plus of our franchisees in the U.S. started off delivering pizzas or started off answering the phones in our stores.

And one of the really terrific things that is happening right now with the resurgence in store growth in the U.S. is that we are developing new franchisees at a faster pace than we have in many years.

And so we're attracting drivers not only for the near-term wages but also for those that have the vision around the longer-term opportunity to potentially be a franchise owner at Domino's Pizza.

We think we've got a terrific value proposition for them.

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

Just want to ask about your international store growth.

Did that -- first, did that come in about as expected?

And then secondly, as we look forward into 2019 and beyond, should we be thinking about a step up in that development as some of your newer markets start to ramp up?

And then separately, you talked about the G&A investment in your international teams, where exactly is that going?

And as you start to become a bit more dispersed in your geographical mix, does that mean you have to broaden out your investment in G&A?

So Jeremy, on the store growth, we were very pleased with the fourth quarter international -- the international store growth.

As we had talked about on some of our calls earlier in the year, store growth got off to a slower start than we wanted to see in the earlier part of the year, and our expectation at that time was that it would pick up over the course of the year.

And we were pleasantly -- very pleased to see that, that in fact happened.

As we look out going forward, I remain very confident in our 6% to 8% outlook for store growth.

And I say that because the fundamentals of our four-wall economics in the business are still very solid with a payback in the international business of around 3 years on average, with a number of our markets even much faster than that.

One of the things that happened in 2018 that also gives us confidence is that we're really seeing an acceleration in the BRIC markets in particular.

And Russia, China, India, all had terrific years in 2018 for store growth.

And we -- in Brazil, we're very optimistic going forward.

We've got new ownership in the market there building off the great foundation that the previous master franchisee put in place.

So feel good about the 3- to 5-year outlook, and I feel very positive about our aspirational goal of 25,000 total stores globally by the end of 2025.

Your second question, I think you snuck a second one in on me there, was around G&A.

And we're investing in our international business really to help our franchisees continue to grow.

And one of the things that we've talked a little bit about over the last several quarters, post the leadership change that we had here at Domino's, is we've been building some centers of excellence in our business.

And that's something that our Chief Operating Officer, Russell Weiner, is working hard on every day.

And the thought behind that is to take some of the capabilities that have driven our U.S. business and make them more available to our international markets.

And one of the areas there is around our data analytics and our decision support capabilities.

And so we're going to be looking over the years to come to take some of the analytics, some of the data-driven decision-making that have helped us to be so successful in the U.S. and port that out to more of our international markets.

Our next question comes from the line of Dennis Geiger from UBS.

I wanted to ask about market share in the quarter.

And specifically, wondering if you saw any shift in the areas where you took share, specifically looking at the independents relative to the larger brands, whether you're taking any incremental amount from the larger brands.

And just perhaps if, on the carryout side, you saw greater gains there, given the increased focus over the last couple of quarters.

Sure.

So the short answer is we continue to gain market share at a very healthy clip across the business.

And that is -- that's both in our U.S. business and in our international businesses.

In both of those businesses, we grew at a very healthy multiple of the overall market growth rate.

And one of the things that we shared back in January at our Investor Day, if you look even back across the last 4 years, more than 100% of the transaction growth in the U.S. pizza category is being driven by Domino's.

You pull Domino's out of the -- if you pull Domino's out of the overall market, you would see that there are transaction declines when you add up all the rest of the players.

Now that share shift comes from a number of different places, and frankly, we're fairly agnostic about whether we take share from the larger players or from some of the smaller- and medium-sized players over time.

Across the different elements of our business, we continue to grow our share, both in delivery and in the carryout business.

And when you take a look at it, even as the #1 player overall now, we still have significant market share growth potential, given the fragmented nature of the category.

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

First, Ritch, I just wanted to compliment you on your television ads.

It's nice to see you on a more regular basis.

Thanks, Jeff.

Sure.

Separately, just on the international front, and I recognize that it's tough to make broadbrush comments when you're talking about so many different countries.

But the fact that the comp did come in slightly below the long-term range, seems like it's the lowest in many years, it does make the 3% to 6% guidance for the next multiple years look a little aggressive.

Just wondering, especially when you commented that you've had a couple of weaker markets, but in reality, all markets were positive.

So it doesn't mean like there's a big headwind that you're all of a sudden going to be able to correct.

Seems like it's more just slow and steady across pretty much all of your markets.

So I'm just wondering how you think about or why you're confident in such a re-acceleration?

Or why not perhaps lower that long-term guidance since we all know that, I guess, it's the total retail sales growth that you focus on?

Yes, Jeff, so, as I mentioned earlier on the call, we weren't altogether that thrilled with the fourth quarter comp in the international business.

But it doesn't diminish our confidence in our ability and our master franchisees' ability to continue to drive same-store sales growth across international over the longer-range outlook in that 3% to 6% range.

And the fourth quarter number, the 2.4%, really, it's a blend.

We had some markets -- while all regions were positive, we certainly had some markets that were negative, and we had some markets that were wildly positive.

And when we take a look at the potential, particularly as we break down the largest international markets that really drive the business and drive the overall number, we and our master franchisees see opportunities to continue to perform better.

And in some cases, the short term gets pressured by some macroeconomic factors.

In some cases, our short-term is not where we want it to be because maybe we weren't executing at the level that we needed to.

So we don't make any excuses for it, but we see -- we are still quite confident in the opportunity going forward.

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

Just real quick, following up on the franchise -- international franchise side.

The absolute unit closures on the international side was the highest, I think, that I have on record here.

So I was curious if there's anything going on, perhaps there's something related to conversions.

And then just secondly, on the U.S., you had mentioned the loyalty program, it's been in place about 3 years, and you mentioned it's been a significant driver of traffic.

So can you perhaps break down how that program is driving same-store sales?

Meaning are you seeing it from new member acquisition?

Or is it building frequency with existing active members as well as building check with those members?

So you snuck in 2 there also.

See?

These -- they get sneaky from time to time.

So on the international closures, there were some closures in there associated with conversions.

Whenever you do a conversion, there's always some overlap, and so you would find some closures in there.

We also had a few of our smaller markets where we had a few more closures than we might typically do.

And in those cases, places where we've got some unprofitable units or maybe some units that were opened maybe not in exactly the right place.

And if it's the right thing to do to close the unit, we hate to do it, but if it's the right thing for the overall health of that market, consistent with the long-term growth goals, then that's something that we're willing to take in the short term.

To your second question around loyalty, the answer there is kind of yes and yes.

We're continuing to drive sales and engagement with existing loyalty members while we continue to bring new members into our program.

And the way we share the data with you, when we talk about 20 million members, those are active members.

So that is -- when we put somebody in that bucket, that is a customer that has ordered through our loyalty program within the last 6 months.

And we continue to see terrific engagement from those that joined us 3 years ago and those that have come on board in 2018.

Our next question comes from the line of Andrew Charles from Cowen & Company.

When you look at the 500 basis points of deterioration in domestic to your trends from 3Q to 4Q in both 2017 and now 2018, both of which include a 50 basis point headwind from the calendar shift, but do you think there's a new element of seasonality in the business that you believe is emerging?

And if so, what do you think is driving that?

Yes, this is Jeff.

The short answer is no.

No more seasonality for the business than has ever been in there.

Still a simple business.

It's one where you just got to go out and execute every day.

But no, no new seasonality or any impacts from that.

Our next question comes from the line of Alton Stump from Longbow Research.

Just wanted to ask about the 1% to 1.5% impact that you guys talked about from fortressing on your comp.

I think by my count, this was a 7th year in a row that you've seen your overall net new unit growth accelerate in the U.S. If that does continue to accelerate, is there any concern about -- in that kind of 1% to 1.5%, that becoming a bigger number going forward?

Or is it -- am I not thinking about that correctly, if it -- if we were to continue to see net new unit growth expand in coming years?

Yes, so when we look at unit growth going forward and when we engage in conversations with our franchisees about building new stores, we absolutely take into account what type of impact we might have on the comps in the existing stores.

And the way we look at new unit openings is we take a look at the expected cash-on-cash return in that new unit, but we also take a look at the expected payback across the overall cluster.

So as an example, if there's an opportunity to carve out some territory and open a new store, the cash-on-cash return on that store might be 2.5 years.

The cash-on-cash return on the cluster, that might be 4 years, 4.5 years.

We look at this in each individual circumstance.

What I just shared with you is just an example.

But we're working with the franchisee and making sure that the new store makes sense, but also the impact on the cluster makes sense because we and the franchisees look at it as a near-term investment, giving up a little bit of comp in those existing stores to drive the long-term growth of their business and their profitability.

And one of the things that we are most excited about from 2018 is our franchisee profitability.

And I'm going to talk about that in 2 dimensions.

The thing we talk about a lot is the $137,000 to $140,000 per unit in franchisee profitability.

But what's -- what we also think about a lot is the overall franchisee enterprise profitability.

So our average franchisee today now has almost 7 stores.

And what that means, if you run your math, is that an average franchisee is now generating over $900,000 in EBITDA, and that has been growing rapidly over the last several years.

So we're focused on unit-level economics and we're very focused on franchisee economics.

Thank you.

This does conclude the question-and-answer session of today's program.

I'd like to hand the program back to Ritch Allison for any further remarks.

Well, thanks, everyone.

We appreciate your time today, and we look forward to discussing our first quarter 2019 results on Wednesday, April 24.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.