達美樂 (DPZ) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Domino's Pizza's Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Tim McIntyre, EVP of Communications and Investor Relations.

Please go ahead, sir.

Thanks, Katherine, and hello, everyone.

Thank you for joining the call today about the results of our fourth quarter and full year 2019.

Today's call will feature CEO Ritch Allison, who will be joined by Chief Financial Officer Jeff Lawrence.

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

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

We will start with prepared comments from CFO Jeff Lawrence, and then from CEO Ritch Allison, followed by analyst questions.

(Operator Instructions)

And with that, I'd like to turn it over to Jeff Lawrence.

Thank you, Tim, and good morning, everyone.

In the fourth quarter, our positive global brand momentum continued as we delivered solid results for our shareholders.

We continue to lead the broader restaurant industry with 35 straight quarters of positive U.S. comparable sales and 104 consecutive quarters of positive international comps.

We also continued to increase our global store count at a healthy pace as we opened nearly 500 net new stores in Q4.

Our diluted EPS in Q4 was $3.12, an increase of 19.1% over the prior year quarter primarily resulting from strong operational results.

As previously disclosed, we also completed a $675 million recapitalization transaction in Q4, increasing our leverage to match our growing business and locking in a long-term favorable fixed interest rate which lowered our cost of capital.

We also returned nearly $650 million of cash to shareholders during Q4, comprised of share buybacks and dividends.

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

Global retail sales grew 6.9% as compared to the prior year quarter, pressured by a stronger dollar.

When excluding the negative impact of foreign currency, global retail sales grew by 7.6%.

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

Same-store sales for the U.S. grew 3.4%, lapping a prior year increase of 5.6%.

And same-store sales for our international business grew 1.7%, rolling a prior year increase of 2.4%.

Breaking down the U.S. comp.

Our franchise business was up 3.3%, while our company-owned stores were up 3.9%.

The U.S. comp this quarter was driven by both ticket and, to a lesser extent, order growth.

Both our delivery and carryout businesses continue to grow overall and our carryout comp continues to grow at a particularly impressive rate.

Our delivery comp was positive in Q4 and up sequentially over Q3, demonstrating resilience in the highly competitive food delivery marketplace.

Our international comp for the quarter was also driven by both order and ticket growth.

On the unit count front, we opened 141 net U.S. stores in the fourth quarter, consisting of 146 store openings and 5 closures.

Our international division added 351 net new stores during Q4, comprised of 382 store openings and 31 closures.

We opened 1,106 units in 2019, an acceleration over 2018, which we believe demonstrates the broad and enduring strength of our four-wall economics combined with the efforts of the best franchise partners in the restaurant industry.

Turning to revenues.

Total revenues for the fourth quarter were up 6.3% from the prior year, driven primarily by higher U.S. franchise retail sales and higher international retail sales, which drove higher supply chain and global franchise revenues.

The increase in international royalty revenues was partially offset by an $800,000 negative impact of changes in foreign currency exchange rates versus the prior year quarter due to the dollar strengthening against certain currencies.

These increases were also partially offset by lower company-owned store revenues resulting from the previously disclosed sale of the 59 corporate stores in our New York market to existing franchisees during the second quarter of 2019.

Moving on to operating margin.

As a percentage of revenues, consolidated operating margin for the quarter increased to 38.9% from 38.2% in the prior year quarter and was positively impacted by the New York store sale and higher revenues from our global franchise business.

Supply chain operating margin was down 0.1 percentage points year-over-year, while our company-owned store operating margin was up 1.3 percentage points year-over-year driven primarily by the New York store sale.

G&A costs decreased approximately $2 million as compared to the prior year quarter.

G&A was benefited by the New York store sale and a pretax gain of approximately $2 million on the sale of 3 company-owned stores to existing franchisees in Q4.

These decreases were partially offset by higher performance-based compensation.

Our reported effective tax rate was 17.8% for the quarter, up 0.8 percentage points from the prior year quarter.

The reported effective tax rate in the quarter included a 3.8 percentage point positive impact from tax benefits on equity-based compensation.

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

When you add it all up, our fourth quarter net income was up $17.7 million or 15.8% over the prior year quarter.

Our fourth quarter diluted EPS was $3.12 versus $2.62 in the prior year, which was a 19.1% increase.

Our fourth quarter diluted EPS as adjusted for our 2019 recapitalization transaction was $3.13, which was a 19.5% increase versus the prior year.

Here is how that $0.51 increase breaks down.

Lower diluted share count resulting primarily from share repurchases over the past 12 months benefited us by $0.08.

Higher net interest expense resulting primarily from a higher average outstanding debt balance resulting from the 2019 recapitalization negatively impacted us by $0.03.

Our higher effective tax rate negatively impacted us by $0.02.

And most importantly, our improved operating results benefited us by $0.48.

Transitioning for a second from Q4 to the full year, I would like to hit on a few financial highlights for 2019.

In a more challenging and dynamic competitive environment, we were able to grow our global retail sales 8% when holding currencies constant.

Same-store sales for the U.S. grew 3.2% and same-store sales for our international division grew 1.9%.

We also opened our 17,000th store globally during 2019.

Our continued sales growth and improved discipline around our G&A investments led to healthy growth in our diluted EPS year-over-year and strong and consistent free cash flow generation.

We are pleased with our performance for the year, including our ability to continue to fund critical strategic investments while driving efficiencies throughout the business.

Now turning to cash.

During full year 2019, we generated net cash provided by operating activities of nearly $0.5 billion.

After deducting for CapEx, we generated free cash flow of $411 million, which was a 50% increase over our 2018 free cash flow.

On average, that is more than $1 million in free cash flow generated per day, which we believe demonstrates our outstanding financial model and performance.

We also completed a recapitalization transaction in Q4, which included the issuance of $675 million of new 10-year fixed-rate notes with a 3.668% pretax interest rate.

We are very pleased to have locked in this additional low-rate debt well into the future.

Our strong free cash flow generation and net proceeds from our recapitalization transaction allowed us to continue our long-term commitment of returning cash to shareholders during 2019.

For the full year, we repurchased and retired approximately 2.5 million shares for $699 million or $280 per share on average, including $594 million repurchased in Q4.

We also repurchased an additional $80 million worth of shares in Q1 of 2020 as we have exhausted the net proceeds from the recapitalization.

As a reminder, we now have approximately $327 million remaining under our Board-authorized share repurchase program.

For the full year, we also returned $106 million to our shareholders in the form of $0.65 quarterly dividends, including 2 dividend payments totaling $52 million that were paid during fiscal Q4.

On average, during 2019, we have not only generated more than $1 million per day in free cash flow, but when you add share repurchases and dividends together, on average, we have also returned more than $2 million per day to our shareholders, or $805 million in total.

As we move into 2020, we are pleased that our Board of Directors just yesterday declared a quarterly dividend of $0.78 per share, an increase of 20% over the previous quarter's dividend.

Before I turn it over to Ritch, we would like to remind you of the 2020 annual outlook items that we communicated in mid-January.

First, I would like to remind everyone that 2020 is a 53-week fiscal year.

We currently project that the store food basket within our U.S. system will be up 1% to 3% as compared to 2019 levels.

We estimate that the impact of foreign currency on royalty revenues in 2020, as compared to 2019, could be flat to negative $5 million.

We expect gross CapEx investments to be in the range of $90 million to $100 million as we continue to increase supply chain capacity as well as invest in technological innovation.

We expect our G&A expense to be in the range of $400 million to $405 million based on a 53-week fiscal year.

Keep in mind that G&A expense can vary up or down depending on, among other things, our performance versus our plan, as that affects variable performance-based compensation expense as well as other areas such as corporate store advertising.

Overall, our solid, consistent momentum continued, and we are pleased with our results for the fourth quarter and full year 2019.

We will remain focused on relentlessly driving the brand forward and providing great value to all of our stakeholders, including customers, franchisees, team members, shareholders and the communities we serve.

Thanks for joining the call today.

And now I'll turn it over to Ritch.

Thanks, Jeff, and thanks to all of you for joining us this morning.

On the call this morning, I'd like to do a few things.

First, I'll share some reflections on our performance during the quarter and for 2019 in total across both our U.S. and our international businesses.

And then I'll discuss some of the things that we're focused on as we look forward into 2020.

Following that, as always, we'll be happy to take some Q&A.

So with that as our road map for this morning, let's get started with our U.S. business.

I'm extremely proud of the commitment and the passion demonstrated by our U.S. franchisees not just during the quarter but throughout all of 2019.

As we discussed on prior calls, 2019 marked an unprecedented acceleration of competitive activity across restaurant delivery.

It was a year where our alignment and our focus as a system was more important than ever as we fought back against a new group of competitors that we believe were not bound by the constraints or requirements associated with running a profitable business model.

While delivery grew rapidly across the restaurant landscape, as we reviewed a variety of third-party industry research, we saw no observable inflection in restaurant industry transactions.

Now certainly, some players benefited with incremental customer occasions, but many more restaurant brands who aggressively pursue delivery produced flat or declining traffic.

With that as a backdrop, the alignment and unified focus of the Domino's system really shined through as we continued to grow at a faster pace than the restaurant industry and took meaningful share within our pizza category.

We delivered our 35th consecutive quarter and 10th consecutive year of positive same-store sales in the U.S. During the quarter, I was also pleased to see the sequential improvement in the comp versus our Q3 results.

U.S. retail sales grew at 6.8% for the quarter and 6.9% for the year, significantly faster than the restaurant industry.

And while same-store delivery orders were slightly negative for the year, overall U.S. delivery order count increased 1% in 2019.

Carryout growth was strong throughout the year and was driven by traffic.

Our carryout order count was 3.9% positive during 2019 on a same-store basis and 8.1% positive in total across the U.S. system.

Store growth was also once again a significant contributor to our retail sales growth in the U.S. Our franchisees, both new and existing alike, continued to invest in their businesses, resulting in 250 net new stores for the year.

During the fourth quarter, we also passed the 6,000th store milestone in the U.S. As we look back over the last 5 years, we have opened over 1,000 net new stores in the U.S. and this kind of sustained growth only happens with strong unit-level economics.

Those economics also drove a remarkably low level of store closures.

In 2019, we closed 15 stores in the U.S., and over the last 5 years, we closed fewer than 100 stores in total across the U.S. business.

I'm going to repeat that one.

Fewer than 100 stores in total across the last 5 years have been closed in our U.S. business.

I'd also like to share a few highlights from our ongoing digital efforts.

We reached a milestone in 2019 with 25 million active loyalty members.

We now have 40-plus million enrolled in our program and over 85 million customers in our database.

We ended the year at a run rate of 70% digital sales in our U.S. business.

And our corporate store business, which is more concentrated in urban markets, hit a run rate of 75% digital sales in the final period of the year.

Overall, we finished the year strong, as evidenced by a good quarter of top line sales growth.

While we still have plenty of work to do in getting back to consistent traffic-based comps, order count in the fourth quarter showed sequential improvement in its contribution to the overall same-store sales mix.

As we look back on the quarter, it does appear to us that while we see continued headwinds in delivery that are difficult to forecast, aggregator pressure appeared to level off on our delivery orders in Q4, while carryout traffic was outstanding during the quarter as our strategy to grow that business continues to pay off.

You will always hear me say that we are an imperfect and a work-in-progress brand with plenty of areas to get better, but with that said, I'm happy with another strong year of growth and profitability for our franchisees and our operators.

As I look ahead to 2020 in the U.S. business, I'd like to highlight a few areas of focus for us.

First, we're going to continue to fortress our markets.

Our strong four-wall and enterprise profitability for franchisees should continue to position them well for continued growth.

We continue to see favorability in key metrics for our fortress stores and territories as we compare them to our non-fortress territories.

We see faster and more consistent service, lower delivery costs, better economics for our drivers and incremental carryout traffic.

Fortressing will continue to drive overall store growth in 2020, including for our company-owned markets where we plan to further accelerate our investment in store growth.

We're also opening 3 new supply chain centers in 2020.

We opened a new center in Winnipeg in January.

Our Columbia, South Carolina center will open in the first half of the year.

Our Katy, Texas center will open in the second half.

And we're also adding a thin crust line to our existing Edison, New Jersey supply chain center and that is also scheduled to open in the second half of 2020.

We're also excited to deliver some new menu news this year and look for that to come this summer.

Value is always top of mind for us, as you know.

More than ever, as we navigate through the current landscape, value matters.

And I'm pleased with our continued discipline and unquestioned position of value leadership within the QSR pizza segment.

We're ramping up our focus on service in 2020, getting our pizzas to our customers hotter, fresher and more consistently than ever before.

Fortressing will help us position the business for success through tighter delivery zones, but that's only part of the battle.

We're doubling down on training, communication and connection points with our operators.

This is a very high priority for me in 2020.

We'll also continue to roll out technology to our stores to help our operators get pizzas in the oven and out to our customers.

Innovation has been and will remain a key investment area for us in 2020.

We recently rolled out our GPS technology and it's already in use in over half of our U.S. stores.

You may have seen the ad that we're running now highlighting our GPS technology with a really fun take on the movie Risky Business.

Our Pie Pass technology is also in stores and went on air earlier this week.

This brings personalization to the carryout customers, greeting them by name on our digital menu boards.

You may have seen Norm from Cheers in our commercials, if you've seen them -- if you've been watching a little TV this week.

We also continue to make progress in areas related to autonomous delivery, Dom order taking and other behind-the-curtain technologies that will help our store-level talent operate more efficiently.

And the last focus area I want to highlight is franchisee profitability.

Jeff shared our 2019 store-level EBITDA estimate with you in January.

And we'll share the final number with you on our earnings call in April, but we now expect to land more towards the high end of the $136,000 to $139,000 per store range that Jeff shared with you in January.

Now while we are pleased that our unit-level profitability and cash-on-cash returns remained strong by any comparison within the industry, we recognize that some of our franchisees are under intense cost pressure in their markets.

The labor market is very tight right now and minimum wages continue to rise across the country.

Fixed costs such as rents and insurance also continue to increase, and a number of other above level -- above-store-level costs continue to bring added pressure.

My team and I recognize these challenges, and we remain intensely focused on helping to drive efficiency and profitability at the store and enterprise level for our franchisees just as we are for our corporate markets.

So all in all, I'm happy with our U.S. performance in the fourth quarter as well as for the full year.

We will continue to play the long game.

And we will remain focused on what matters, the fundamentals, our franchisee health and making disciplined decisions.

I'll move on to international now, where we had another solid quarter of retail sales growth driven by unit growth, positive performance from our regions and a meaningful improvement in order growth relative to the first 3 quarters of the year.

Same-store sales in our international business was positive for the 104th consecutive quarter.

That's a remarkable 26-year run in this terrific business.

Our 351 net store openings in the quarter and 856 for the full year reflect the terrific unit-level economics we continue to enjoy in many markets around the globe.

We only closed 83 international stores for the full year on a base of almost 11,000.

When you add that to our U.S. number, it's less than 100 closures for our 17,000-store global brand.

And now for a few market highlights.

We opened for the first time in 3 new countries, Bangladesh, the Czech Republic and Luxembourg, welcoming these great new teams to the Domino's family.

We passed the 17,000th store milestone globally, and we hit some important milestones in several of our key markets.

I'd like to give a shout out to those teams now: 800 stores in Mexico, 500 in Canada, 400 stores in France, 300 each in Germany and Spain; and we opened our 200th store in Russia.

I also want to highlight the outstanding year we had in 2 of our emerging markets China and Brazil.

Both had breakout years in store growth, with 80 net new stores in China and 60 net new stores in Brazil.

Among our more established markets, Japan and India delivered exceptional growth.

117 net new stores in India surpassed 1,300 total stores, more than any other Domino's market outside the U.S. And an outstanding 92 net new stores in Japan surpassed 600 total in that market during 2019.

Our teams in France, South Korea and the Netherlands celebrated their 30th anniversaries as Domino's markets.

And while we continue to address the opportunity for same-store sales improvement in international, our 9% retail sales growth, excluding the foreign currency impact, during 2019 shows that our business is very healthy and fundamentally sound.

We're actively working with our international partners to help reverse the recent softness in same-store sales in certain markets.

And that will be necessary to take an already outstanding business to new heights.

So I continue to feel confident that our global terrific group of operators, combined with our corporate support and best practice sharing, will produce the desired results to help the international business reach its full potential.

In closing.

Domino's is now a $14 billion global brand, with the vast majority of our stores owned and operated by an incredible collection of franchisees around the world.

I'm proud of the way we continue to operate with passion and offer a homegrown opportunity for store team members to fulfill their dreams of business ownership as a Domino's franchisee.

I'm proud of the way our franchisees are committed to be a #1 in each of their respective neighborhoods.

I'm proud of the way we continue to innovate aggressively across all aspects of our business, including GPS, e-bikes, AI, in-store technology, great food and an always evolving digital experience that's second to none.

I'm proud of our track record of profitable growth and our long-standing commitment to franchisee economics.

With a disciplined operating model and a focus on the long term, we've demonstrated as a system that you don't have to choose between top line growth and bottom line results.

Domino's delivers both.

And with that, Jeff and I will be happy to take your questions.

(Operator Instructions) Our first question comes from Brian Bittner with Oppenheimer.

When I look at your 3.4% comp this quarter, it is impressive when you consider it marks the first acceleration in 6 quarters, and the fourth quarter has historically been a much tougher quarter for you.

You touched on the driver of the acceleration this quarter being sequentially improving traffic.

Can you dive into that a little bit more?

Was that acceleration in traffic primarily driven from the leveling off of competitive delivery externally?

Or would you call out anything internally like incremental loyalty or the change-up in marketing that you did as driving the acceleration?

Brian, it's Ritch.

Really a combination but, I think, more driven by the things that we were proactively doing in the marketplace.

So as I first look at the external side, we certainly still saw a lot of aggregator promotion and advertising activity out there both on your televisions but also digital.

So while we felt like that leveled off a bit relative to Q3, the pressure was certainly still there and quite intense.

When I think about the things that we did proactively to drive the business, and we discussed some of these things with you when you were here in September at our Innovation Garage, we launched our delivery insurance program in the fourth quarter, which really resonated with our customers.

And our customers think about Domino's as a brand that is transparent and is a brand that takes accountability when we make mistakes.

So this campaign resonated well with them.

We also were promoting the carryout business throughout the quarter and in particular bringing to light the crust variety that we have on our menu.

And that also resonated and drove terrific results on the carryout side of the business.

As always, I'm also going to be transparent with you about some of the things that didn't work as well.

We talked a lot about launching our late night promotional program and that did not drive a lot of incremental sales across the business in total but in certain markets around the country was really effective.

So we've dialed that back a bit overall but are using it now more selectively in some key markets around the country.

So that's really how I look at it, Brian.

External, kind of a lot of pressure still there staying flat, but a lot of the things we did internally worked nicely in the quarter.

And lastly, Jeff, your EBITDA growth basically grew twice as fast as your system sales growth in the fourth quarter.

Is that mostly the product of a heavier focus on flow-through?

Or was there any unique benefits that happened in the quarter that we should be aware of?

I know you talked about the small gain on refranchising, but anything else?

Yes.

So there was a little bit of noise in the G&A that I mentioned in my prepared remarks around a gain on a couple store sales.

Certainly, the New York sale being done earlier in the year helped you a little bit on the G&A line, but make no mistake.

We leaned in real heavy on additional financial discipline during 2019.

And I think you see the flow-through really coming through both in EBITDA and free cash flow.

We were able to ratchet down CapEx a little bit more than we thought we were going to originally.

But having said all that, I think the most important thing is that, Ritch and the other leaders in the business, we still all invested in all the strategic initiatives that we really think will continue to drive the long game in the business.

So we took advantage of where we thought there was opportunity.

We squeezed it down a little bit, but the level of investment and the seriousness at which we will continue and have continued to invest in supply chain capacity, technological innovation and really a customer-centered, great experience, that hasn't slowed down in 2019, and I don't think you'll see that slow down going forward.

Our next question comes from Matt DiFrisco with Guggenheim Securities.

I appreciate all the color you guys are giving there on the digital.

And obviously, carryout has been growing pretty fast.

How should we think about that as far as is there -- what percent of that -- how does 70% look like when you sort of break it out by either carryout, delivery, presuming that the delivery probably skews a little higher and then carryout skews a little lower?

Is there a way to use some technology in the store to try and drive digital for carryout as well?

Matt, it's Ritch.

So most certainly, the digital side of the business -- excuse me.

The delivery side of the business has a higher digital percentage mix than the carryout side of the business.

And one -- honestly, one of our objectives as we continue to grow carryout is to drive up that digital percentage.

So you may have seen our Pie Pass technology in the commercial that we started running on Monday of this week.

In order to be greeted in the store and to expedite the process of picking up your pizza, you have to have ordered ahead of time digitally.

And so that's one innovation that we're using to try to drive more customer uptake on the digital side.

There are other things that our teams are working on and investing in here because we do see that as a great opportunity to help us to continue to drive that business, not only order counts but also giving us an opportunity for smarter upsells and other things that help us drive smart ticket in the business.

So most certainly an opportunity for us going forward.

Excellent.

And then could you also just give us an update?

You talked a lot in September about some of the new technologies, specifically the Houston test and the driverless cars.

How is that going?

And is there any sort of -- what's the time line on that or the expansion of those tests perhaps?

Yes.

So we're working hand-in-hand with Nuro on that, Matt, as we talked about a bit in September.

Testing is going well so far.

And I'm going down there personally this month to have a look at it myself.

But so far, so good.

And you may have seen there was an announcement out within the last week or so around some of the regulatory approvals that they received to conduct deliveries down in Houston.

So we're excited about where we are with the partnership to date and looking forward, frankly, to learning a lot from this and helping it shape our approach to autonomous delivery going forward.

And our next question comes from Chris O'Cull with Stifel.

Ritch, I appreciate you probably don't want to share many details about new products, but can you help us understand what you're hoping to accomplish with the new product?

Meaning, are you focused on addressing a certain customer need state or a competitive threat?

And then also, could you talk about the testing process you go through to evaluate the likely success of any new product?

Sure, Chris.

So when we think about new product development, it is our decision process is centered around incrementality for our franchisees.

So not just incremental sales but also incremental profits for the franchisee.

Now that, of course, starts with identifying products that have strong consumer appeal.

But that's not enough.

A lot of brands will measure success of a new product by what mix that product gets post release.

We actually take a look at it a little differently and we measure success based on the incremental profit because a lot of the products that we launch -- and I'll use salads for an example.

We didn't launch salads to sell salads.

We launched salads to sell pizza.

And the launch of salads drove incremental profitability in our stores not through selling salads but through selling pizzas.

So that's the lens that we look through.

So our testing processes start, obviously, with the consumer and the appeal there, but really what we're looking for is what will the overall behavior of that customer be.

Will it drive incremental traffic into our stores?

And what happens with ticket as well?

Will it add additional items to the basket that ultimately help the profitability of the franchisees?

And it's why we don't launch that many new products because when we go down into the test kitchen, we see dozens of products that taste great and drive a lot -- have consumer appeal, but if they don't drive incrementality in terms of sales and profits for the franchisees, then we're not going to force more operational complexity into the stores without a significant benefit on the back end.

So that's the approach that we take to it.

And I'm excited that we're going to have some news coming up this summer that I think will be exciting for consumers and also, I know, exciting for our franchisees.

That's helpful.

And then just quickly on the international unit openings.

It was down a little bit year-over-year.

Can you provide some color as to why that may have been the case?

And then should we anticipate fewer openings in 2020 as a result of the coronavirus?

I think you mentioned China was a big source of openings this past year.

So if you look at the total year.

Our international unit openings were actually higher than they were last year.

Fourth quarter was lower, but you might recall, in the fourth quarter of 2019, we had a tailwind in the openings coming from some of the conversions of Hallo Pizza stores in Germany, which you may remember we were pushing really hard on in the fourth quarter of last year.

I still feel very good, looking forward, about our 6% to 8% global unit growth that we've laid out for you as our 2- to 3-year outlook, and that's really driven by strong four-wall economics across the international business.

To your question on the impact of the coronavirus.

Today, China is still a relatively small part of our overall portfolio in terms of store count and also in terms of retail sales.

Now as I highlighted in my comments earlier, China was a big contributor to store growth in 2019.

As we look at what's happening over there with the coronavirus today, I can tell you that I am really proud of how Dash Brands is handling things.

The #1 priority right now is not sales or store openings in China.

It is the health of our team members and our customers.

At the present, we've got fewer than 20 stores that are closed in the market.

All of those are temporary closures.

None of them are permanent.

But with this virus, there is a slowdown in the early part of the year in store openings.

It's just inevitable, but I do not see this as a long-term impact on the business.

Obviously, our thoughts are with the citizens of China and our team members over there, for this virus to get under control.

But so some temporary impacts, but I don't expect a long-term impact.

(Operator Instructions) Our next question comes from Sara Senatore with Bernstein.

I wanted to just clarify a comment you made about the aggregator pressure leveling off.

I don't want to split hairs, but I guess, are you saying sales growth is stable or aggregator dollar sales look to be stable?

I'm trying to understand.

If we're in sort of steady state now, why -- if 2% to 5% is the right comp run rate for you, why not -- why shouldn't it be sort of reaccelerating back to where it was before we saw this real heavy step-up in aggregator pressure?

Is it fortressing?

Or is it just sort of how I'm interpreting your comments about leveling off?

Sara, so I'll try to clarify a little bit.

When I say level off, I mean relative to the second half of '18 and the first half of '19, when we saw significant push of aggregators into new cities across the country and significant incremental spending on advertising, both traditional media and digital, and significant increases in discounting in the marketplace.

All of that stuff is still there.

We just didn't see more of a ramp-up like we had seen on some of the previous quarters.

So think about it as the pressure is all still there.

It's just not -- we didn't see it as elevating on us from Q3.

Now we don't know what's going to happen in 2020.

I'm just going to be honest with you.

We don't know how these folks are going to behave.

The best metaphor I can think of is they're standing in a circular firing squad right now, and they are going to continue to keep advertising, going to continue to keep discounting because I don't think they have any choice.

And so we expect, while we're not in the middle of the firing squad, we might get hit by a few stray bullets along the way.

And we just don't know exactly yet how to quantify that.

So that's why, the 2% to 5%, it is a 2- to 3-year outlook.

We're not moving it around quarter-to-quarter.

We feel like if we can operate in that range, we've got a really healthy business model that can deliver growth and profits for our franchisees and can reward our shareholders along the way.

Our next question comes from Lauren Silberman with Crédit Suisse.

Just to clarify.

Was the sequential acceleration in comps all attributable to the delivery segment?

And then on GPS tracking, what percentage of the U.S. system currently has it?

And in stores that have implemented the technology, can you provide any color on what you're seeing across relevant metrics, whether that be delivery times, customer satisfaction, labor savings?

Lauren, it's Jeff.

I'll take the first one, and then I'll kick it over to Ritch on the GPS.

As far as the comp in Q4, the carryout business just was on fire in a great way; us leaning hard into that strategically, given our franchise operators, the tools and the technology, to really make the most of it; and as Ritch mentioned earlier, really advertising heavily behind it.

It's what a big cross-section of our customers really want.

We're getting better at carryout every day that we focus on it and really saw a big surge in the comp for carryout.

On the delivery side, a tougher competitive environment there.

It did sequentially improve over Q3.

So we definitely feel like the value that we can provide to our delivery customers in that segment remains very, very strong, and we were pleased to see the resiliency in that business.

So glad we're in both of those businesses, going to continue to invest heavily behind them in advertising, technology, the consumer experience.

But carryout did a little bit better than delivery did in Q4.

And I'll kick it over to Ritch on the GPS commentary.

Sure.

And I've actually personally been out in quite a few stores over the last couple of weeks, talking with our franchisees and with our store managers as we roll out the GPS technology, getting a very, very positive reception out among our operators because it is helping them to better manage what is a really complex process around getting food out of the store and to customers.

So knowing exactly where the drivers are, knowing when they are close to the store in terms of their returns enables us to get pizzas ready and in the hands of those drivers and out the door quickly.

So we're seeing some reduction in turn times.

It's still very early but some reduction in turn times in the stores that have really adopted this new technology.

And as I look forward and as I think about it, there are 2 sides to the GPS.

One is the consumer side.

And to be -- if we're honest with ourselves, GPS on the consumer side, it really is a me-too thing that we've got out there.

I mean you've got GPS anytime you get an Uber or a Lyft, and competitors have that in place as well.

It's important for customers and we have to have it for them.

But the real benefit, in my mind, from GPS is how it will change the way we operate and run the delivery business inside our stores for our managers but also for our drivers because historically a driver needed 3 to 6 months to learn the delivery area.

Well, we can accelerate the training of those drivers.

With GPS in hand, they already know the fastest route to get a pizza to our customers.

So more to come on that.

It's still early, but I'm excited about where we are today.

Our next question comes from Peter Saleh with BTIG.

Great.

Ritch, I think you mentioned you're aware of how much pressure the franchisees are under in terms of costs and with wages rising.

Could you elaborate a little bit on what -- some of the efficiencies that you guys are putting into place outside of GPS tracking to try and mitigate some of the costs within the 4 walls of the stores and improve the margins?

Sure, Pete.

So there are a lot of -- as you guys look across the restaurant landscape, I'm sure all of you see it, a lot of labor cost pressure out there in the marketplace.

And it's not uniform, as you know.

It is concentrated along the coast and in states where we've seen significant minimum wage increases over time.

So our franchisees, just like restaurant operators across the industry, are dealing with those cost pressures.

In terms of efficiencies, there are a number of things that we're working on.

GPS is one of them that we were just talking about, whereby we're trying to shrink the turn time on orders, which provides labor efficiency.

We have been piloting in our corporate store business some AI-based labor scheduling algorithms to try to make sure that we are using the right number of hours in each of our stores.

And there's a lot of inefficiency in our system today, if we're honest with ourselves about that.

So a lot of things that are going on there.

We're taking a look at -- with our Innovation Garage, with some of you were able to come see, we're looking at every aspect of how we set up and operate our stores because it is a game of steps and pennies and seconds, and we're trying to focus on all of those as we look for ways to help our operators be successful.

All right.

Congrats on the quarter.

Thanks, Pete.

Our next question comes from David Tarantino with Baird.

Ritch, I think you mentioned that one of your biggest focus areas for the U.S. business in 2020 is on operations or execution or service.

And I was wondering if you could give us some context on whether you see the current service levels as an issue relative to where you've been in the past.

Or is this more opportunistic?

Anything you can offer there would be helpful.

Yes, Dave, I'd be happy to.

What I can tell you is on our delivery service today we're as good as we've ever been on delivery, but we're not good enough for the future, is how I would describe it.

So business was founded on this kind of 30-minute promise decades ago.

Well, I think as we look forward, when you can get anything, food or otherwise, delivered, we've got to be the absolute best at it.

And so we're working with our franchisees.

Fortressing is obviously a part of that.

In fortressed stores, we see a reduction of about 2 minutes on average in delivery time versus those non-fortress territories, but that's not all of it.

It's using technology like GPS.

We now have technology in our stores that enable us to get pizzas in the oven much faster based on what customers are ordering digitally.

So we're taking a look at every aspect of it.

Paramount to all of it, obviously, is safely getting that product to the customer, but we're looking at ways to take out time through every step of the process from the time you open that app to the time that pizza shows up to your door.

And just a follow-up related to that.

When you do make progress on this, do you see a pretty good immediate correlation to the sales in the market when you see this type of improvement?

The correlation is very strong between average delivery times and the sales per household, which is a great measure of customer repeat purchase.

So yes.

And I'll tell you, when you get down to -- and we have a number of operators across the U.S. today that are delivering in under 20 minutes on average.

When you get below 20 minutes, the inflection in the curve is dramatic.

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

There were some articles last night that the largest franchisee of one of your biggest competitor in the U.S. likely is going through bankruptcy.

Do you know how much overlap you have with that system?

Is that something you have looked at, at all?

And then maybe at the risk of asking a second question, where does your average franchisee leverage stand today?

That would be great.

So on the first question, Greg, I won't speculate on NPC.

It's a really tough operating environment out there in the restaurant industry, as we talked about earlier, from a cost standpoint.

And I can tell you that if we were not growing our sales, profit would be declining.

As we talked about, we had pretty good same-store sales growth in 2019, and we expect our store-level profits to be roughly flat.

So you got to grow in order to continue to compete and thrive in the business.

We've got -- given our footprint of 6,000-plus stores across the U.S., certainly we've got territories that overlap with that franchisee's units, but we don't focus as much specifically on one franchisee of a competing brand or, frankly, even one competing brand.

We're out there fighting for share in every community that we operate in across the country.

I'm going to let Jeff take the second question, around the franchisee leverage.

Greg, on the franchise leverage in the U.S., we're very fortunate that our nearly 800 independent franchisees submit to us their P&Ls and their balance sheets on a regular basis.

So we have a pretty good understanding of where they're at.

And what I would tell you is we don't believe that that's a significant risk for our U.S. business and not just because they enjoy the best model and economics that they've earned alongside of us but because they -- in our opinion, they use a little bit of leverage responsibly.

So not a big risk for us as we think about getting to those 25,000 units around the world.

Our next question comes from Chris Carril with RBC Capital Markets.

So how much incremental opportunity is there, in your view, to highlight Domino's value proposition in your advertising, maybe particularly from a delivery perspective relative to aggregator delivery?

Will that be a greater part of your messaging going forward?

Yes.

Chris, it's been a core part of the message now for 10 years since we first launched $5.99, and then we really doubled down on it with $7.99 around the carryout business.

So it's going to continue to be a core part of it.

And I think the additional element of this that comes into play, I think, when we think about how we compete against the third parties, will be the delivery fee component of it relative to what the third parties are charging customers to have food delivered.

There's been a lot of promotional activity in that space with free delivery and for your first order and all those sorts of things.

So we've yet to fully see how it shakes out, but when we take a look at the value proposition of feeding a family of 4 with Domino's, inclusive of delivery charges, we feel really good about how that stacks up against what you would pay to have virtually any other type of food delivered to you via a third party.

We have a question from Katherine Fogertey with Goldman Sachs.

A question here about the mix on carryout this quarter both in terms of ticket and of sales.

And then with the increased messaging around carryout, are you guys seeing any kind of accelerating trends in the fortress stores relative to the non-fortress stores?

And in fortress stores itself, if you could comment on if you're seeing cannibalization to the delivery business or just more messaging out there on carryout is bringing in incremental customers or potentially stimulating delivery as well.

Thanks for the question.

This is Jeff.

I'll take a shot at this one.

On the mix of the 2 businesses in Q4, again, carryout is just performing extraordinarily well for us.

We're in our 60th year of existence.

In a lot of ways, we were kind of an accidental carryout company for maybe the first 50 years or so but with the strategic insight around where the pizza industry was going, really trying to address better the consumer needs about that separate occasion.

And they are separate occasions.

I think people sometimes conflate the 2, but our research says and I think our results show that a carryout customer is absolutely different from a delivery customer.

Us leaning into that, as Ritch just mentioned, with -- we're many, many years now into the $7.99 large 3-topping carryout special which is all week, you can get every day of the week.

Customers really like it, and it's really helping to drive some outperformance that you're seeing drop to the bottom and the total comp.

On the delivery side of the business, obviously, highly competitive food delivery marketplace.

It's very dynamic over the last year-plus there, but our franchisees and our corporate stores are holding their own there, the value proposition really shining through with the $5.99 mix-and-match offer.

And as Ritch mentioned multiple times over multiple calls, the focus on service and making sure that we're delighting our customers really helps us capture that long-term value of the customer.

So we were super excited to see the sequential improvement Q4 over Q3 on delivery.

So that's what I'd say overall on that.

As it relates to fortress stores versus stores that have kind of been split with their territory, it's really the same stuff that we've told you.

The carryout in the new store, the fortress store, almost 100%, more than 90% incremental, that's what the data shows.

So we are reaching customers that simply weren't enjoying the Domino's brand there.

So that's a really important part of the financial equation to get those franchisees excited about the investment opportunity.

The delivery side of the business, certainly we are picking up new addresses, but the addresses that are shifting from an old store to a new store were simply getting it safely to the customer and better service times there.

So it's really gelling together.

Our franchisees remain super excited about it.

And we're going to continue to go as fast as we can on that strategy.

And our next question comes from John Glass with Morgan Stanley.

Can you just maybe talk about the impact the loyalty program had on 2019 as you sort of think about the year that's just passed?

How has membership grown?

How has the impact on sales grown?

Or what the impact has been.

And I guess, importantly, I think there was -- have been some discussion, hopefully I'm remembering correctly, about maybe at some point changing it right from a visitation to more points or something else that might enhance it or continue to help it grow.

Is that something you're contemplating in 2020?

John, it's Ritch.

So we were pleased with the growth in the loyalty program.

As you'll recall, in 2018, we passed the 20 million active member mark.

And in 2019, we passed the 25 million mark.

So continues to grow and resonate with customers.

The tailwind impact on sales that you get from loyalty does decline over time.

So in '19, it was nowhere near what you would have seen in '16 and '17 right after we launched the program.

And we're always looking at ways that we might be able to enhance it over time.

We ran our Points for Pies campaign in the first part of this year to find another way to give value to our customers, and we're going to keep looking at ways to grow and enhance it because any loyalty program does have a bit of a half-life to it, and you have to keep feeding it for it to continue to deliver results.

Just to be clear.

Would it be the kind of change where you'd actually shift, though, the value of points or the way you earn them?

Or would it be more an evolution, as you talked about, points from pies or some other sort of idea, that would get people more reengaged in the program on a near-term basis or short-term basis?

Well, one thing that won't change, John, will be the purpose behind the loyalty program, which is to drive order count growth and frequency over time.

That's really -- it's the way it's structured.

It's why it's a transaction-based program where you order 6 times and you get a free pizza, as opposed to a spend-based program.

So we're going to remain focused on driving transactions with it because we know transactions drive sales, which drives profits in our business.

So with that context, we're constantly running research and taking a look at different ways that we can enhance the program.

So I can't tell you today what will be different about it a year from now, but I can tell you that we're not going to do anything that gets us away from trying to drive transactions through customer frequency.

Our next question comes from Brett Levy with MKM Partners.

Just following up on the franchise system a little bit, and I'm going to try to ask this a little bit differently.

You've talked about a number of things that you are doing for the franchisees, but you've also talked about some of the pressures that they're under.

What are you hearing right now both domestically and internationally as your -- as the biggest asks from you that you're not already doing?

And also, are there any areas where you're getting any pushback from them?

Yes.

So franchisees, Brett, continue to ask for help around technology.

And that's something that we've brought to the system time and time again.

I mean, ultimately, it is the franchisees' job to serve their customers, to hire and staff their teams, to motivate and grow and develop their team members.

But we as the brand overall can bring technologies to bear that help them run their businesses more efficiently.

So that's why you see GPS as an example that we've rolled out.

That's something that franchisees were hungry for and eager for us to bring to bear.

And ultimately, franchisees want to grow sales and profits.

So our dialogue with them outside of specific things like technology is always around how do we work together to continue to grow the system in a healthy and profitable way.

Our next question comes from Dennis Geiger with UBS.

Ritch or Jeff, just another one on the strength in the U.S. carryout business and the opportunity.

In addition to the fortressing, the service levels, the Pie Pass and some of the other tech that you mentioned, could we also see greater marketing and promo efforts even beyond the $7.99 carryout given the success you've seen recently?

And I guess, particularly given some of your competitors are shifting more towards a delivery focus, does that potentially present an even greater opportunity for you to pick up even more carryout share?

Thanks, Dennis.

I'll try to take that one.

The answer on carryout around -- are we going to do more to drive that business?

The answer is absolutely because we see it as a huge opportunity for us.

The -- on a transaction basis, it's 2.5x the number of transactions that are in the delivery segment in the U.S. And I think we've got more opportunities to drive it.

We started with this $7.99 hero offer.

We expanded that toward the end of last year to include all 5 of our crust types.

That really resonated.

So we are definitely thinking about what are the other products or opportunities that we could roll into what is already a great value off of our customers.

We're working hard on technologies to take friction out of the carryout experience.

We've got more than 600 of our stores in the U.S. now that have pickup windows, where a customer can pull right up to the window and have their pizza handed through to them, as opposed to getting out of the car, potentially with the kids, and trying to come into the store and pick them up.

So we're looking for more and more ways to make it seamless.

Pie Pass lets them jump the line, get up to the front, get the pizza handed to them.

And everybody likes to see their name on a screen.

If I'm feeling lonely, I'd order carryout.

And I'd go into Domino's, and I'd love to see "Ritch" up on the screen in the store.

And then to the second part of your question, it's -- and it is a really interesting question about this competitor shift.

So what we see happening in the industry is a huge increase in delivery but no incremental restaurant transactions rolling in.

So sure, there's shift across some brands.

There's most certainly shift across channels.

And if you look in the -- particularly in the high-wage markets in the U.S., if you're trading drive-thru business or pick-up business for delivery business, then you are moving your customers to a higher-cost channel to serve.

So when we think about how we're going to grow our business and continue to have a very profitable base of franchisees, we got to hold, serve and defend that delivery side of the business, but we are pushing hard on carryout because, as you approach $13-, $14-, $15-, $16-an-hour labor, that carryout business becomes the profit engine over time.

Our next question comes from John Ivankoe with JPMorgan.

First, just a very specific question, and I know that you guys don't normally like to talk about it, but quarter-to-date, we have had very unusual restaurant trends, especially on the casual dining side, probably a lot of that driven by weather.

Weather, warm weather, lack of snow isn't necessarily a good thing for you.

Is there anything that you'd like to call out specifically in the first quarter?

Because expectations could obviously really change based on what you reported in the fourth.

And I'll have a follow-up.

John, we'll talk about Q1 in April.

I got it.

In your prepared remarks, and I think you've touched on this in a few different ways, but I'd like you to revisit it, you talked about driving efficiency and profitability both at franchisees and corporate.

Certainly, I understand about GPS being part of that.

But what other big structural just not managing pennies and nickels but maybe finding bigger ideas do exist that we might be able to see within the U.S. store system?

And following up on that, what type of efficiencies might exist on the corporate side that we haven't necessarily talked about?

Yes, John, great question.

We're spending a lot of time on this and it's one of the main reasons we built that Innovation Garage in our backyard over here so that we could accelerate some of these operational efficiency initiatives.

I talked about GPS a bit.

Our AI work and machine learning around team member scheduling, which we've been working hard on in our corporate stores to more efficiently schedule, not only to get improvements -- and in the pilots we've done, not only does it result in lower labor costs, but it also results in better service levels.

So there's a win-win there on having the right number of team members in the store at the right time.

We're also looking at other things that we've done for years and years in our business and asking ourselves if we need to keep doing them.

And some of these things are lessons that we learned from our international markets.

We've got more than 1,000 stores outside the U.S. that don't prefold any pizza boxes, for example, which requires a pretty decent amount of labor in the store to do that.

And we're taking a look at things like that and testing them in our corporate store business.

We're looking at the equipment that we use and how that equipment is positioned in our stores, how we think about preparing our stores for the rush which comes at us at dinner time every night.

So we're breaking down every aspect of the operation to try to find opportunities for efficiency because we know that labor costs are only going up over time.

I'm willing to bet that in my business career no state or municipality is going to lower minimum wage.

So we got to be prepared to operate in an environment where costs are going to go up and the customer's willingness to pay does not go up linearly with your cost to provide them with that service.

And our next question comes from Jeffrey Bernstein with Barclays.

Great.

A question on the loyalty program.

I think you mentioned active now north of 25 million.

I'm just wondering if you could share any color in terms of whether it's average usage versus a nonactive; or whether or not you've pushed any greater emphasis on one-to-one marketing in the fourth quarter, kind of trying to dial in to the benefit of having that loyalty program.

And ultimately, how do you incentivize greater adoption?

I know you mentioned 85 million, I guess, total customers in your database.

Wondering how you go about pushing that 25 million, having gone from 20 million to 25 million, even higher from there to help increase usage per household.

Yes.

So certainly, our active loyalty members buy from us a bit more often than our nonactives.

So that's a big driver of why we want to get them into the program.

I think we've got a lot of opportunity to continue to drive the program, in particular around this growing carryout side of our business, which as I mentioned earlier is not -- digital is not as entrenched in that business as it is with our delivery customers.

So we're looking for ways to make the carryout experience, digital experience, more helpful and more convenient to our customers as we try to continue to drive adoption that way.

You also asked about a bit about how do we use the data, how do we get more targeted.

This is an area where we're early stage right now but spending a lot of time and energy looking at that data set not just of the 25 million active but the 40-plus million that are enrolled and the 85-plus million in our database to say how can we be more surgical and more relevant in how we present offers and opportunities to our customers.

And I think we're on the early -- very early stage of becoming effective in that area, Jeff.

Our next question comes from Andrew Charles with Cowen and Company.

In the last month, the largest domestic carryout-only pizza concept launched national delivery through a third-party platform.

And I'm curious what gives you the confidence that you can defend against short-term headwinds through delivery traffic as an incremental 4,000 pizza restaurants are now [aggressively promoting] the value of their delivery offering versus yours, which is unusual as obviously we all kind of know that third-party delivery usually is more expensive versus your ticket.

Yes, Andrew.

It's Ritch.

We take every competitor that enters very seriously.

And I think for us it just further reinforces that we and our system have to stay very focused on value.

And as we take a look at what the all-in delivered cost of a Domino's pizza is, we still feel very good about the value that we can offer our consumers relative to any of the pizza players that have been or are now in delivery.

But most certainly, we take every competitor seriously that comes into the business.

Our next question comes from Todd Brooks.

As we look at maybe the international store base and the slowing of same-store sales performance across 2019, can we talk about -- is it relatively homogeneous slowing across most of the international partners?

Or are there a few discrete markets that you would call out as being a bit of a headwind to the international same-store sales?

Yes, Todd, what I would tell you is that it's not uniform across the 90 countries that we operate in.

And if you start to break it down: In the quarter, our emerging markets outperformed our more mature markets.

So if you wanted to try to draw a line of distinction, there are always, of course, exceptions.

But by and large, the emerging markets tended to outperform the more mature markets during the quarter.

Thank you.

And I'm showing no further questions at this time.

I'd like to turn the call back to Ritch Allison for closing remarks.

Thank you.

And listen, thanks, everybody.

We really appreciate you joining the call this morning.

And Jeff and I look forward to speaking with you in late April as we discuss our first quarter 2020 results.

Thanks.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.

Everyone have a great day.