達美樂 (DPZ) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Domino's Pizza Q2 2022 Earnings Conference Call. (Operator Instructions)

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today to Ryan Goers, VP of Finance and Investor Relations. Please go ahead.

Thank you, Dylan, and good morning to everyone. Thank you for joining us today for our conversation regarding the results of the second quarter of 2022.

Today's call will feature commentaries from Chief Executive Officer, Russell Weiner; and Chief Financial Officer, Sandeep Reddy. As this call is primarily for our investor audience, I ask all members of the media and others to be in a listen-only mode.

I want to remind everyone that the forward-looking statements in this morning's earnings release and 10-Q also apply to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8-K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call.

(Operator Instructions) Today's conference call is being webcast, and is also being recorded for replay via our website.

With that, I'd like to turn the call over to our Chief Executive Officer, Russell Weiner.

Well, thank you, Ryan, and thanks to all of you for joining us this morning. As Rich Allison and I communicated back in April, we expected the second quarter to be challenging. We continue to navigate the difficult labor market in the U.S., especially for delivery drivers. In addition to inflationary pressures combined with COVID and stimulus-fueled sales comps from the prior 2 years. Our results for the quarter were consistent with the challenges we outlined at that time. However, the strength of our franchisees and team members along with the strategies we're putting into place, make me confident that we're on the path to overcome these short-term obstacles to make the Domino's brand and business stronger than ever.

Back in May, my team and I gathered with more than 8,000 of our franchisees and team members from around the globe at our 2022 Worldwide Rally. Due to COVID, we had to cancel our last rally. So it was our first time back together as one global team in 4 years. We used this time to share best practices, align on goals and commit to continued growth that will drive meaningful value creation for all of our stakeholders. The energy, commitment, passion for the brand and confidence displayed at this year's rally was truly inspiring and reinforces my belief that our best days lie ahead.

I can assure you that nobody at Domino's is happy with our recent performance. However, I have tremendous confidence in the team that we have assembled to leverage some of our current successes, address our current pressures, and proactively work to mitigate the negative impact of those external factors that we can't control.

As always, we will make disciplined decisions and we'll focus on doing what is right for our customers, our franchisees and our brands. This approach has served our stakeholders well over many years, and I don't see any reason to defer from this proven approach. We have high expectations for what we can achieve and we will hold ourselves accountable for meeting and often exceeding those objectives.

I plan to provide you with more specifics on the strategies and plans we have for the business after our CFO, Sandeep Reddy, walks through the results of the quarter. Sandeep?

Thank you, Russell, and good morning to everyone on the call. Before I get into the details of the quarter, I wanted to share some of my initial observations after my first full quarter as Domino's CFO.

I see some exciting opportunities to improve our long-term profitability. First, while we continue to explore options to further optimize our consumer pricing architecture in the United States, it is important to highlight that the average price increase we realized in the second quarter across our U.S. system was nearly 6%. We have successfully pulled many pricing levers, including our standard menu pricing, our national offers, our local offers and our delivery fees. This has helped us cover some of the cost increases we are incurring in both the food basket and labor market while also ensuring we continue to deliver terrific value to our consumers.

Our work continues on right pricing our product while keeping a compelling value proposition for our consumers with more opportunities to pursue.

Second, efficiencies exist in our cost structure as we seek to ensure that revenues consistently grow faster than expenses. We saw a sequential improvement in the year-over-year contraction of operating income from 270 basis points from Q1 to 180 basis points in Q2. We need to continue this strength.

Third, as a result of the actions we are taking to increase our capacity to meet demand, we realized a sequential improvement in U.S. same-store sales declined from minus 3.6% in Q1 to minus 2.9% in Q2.

Now our financial results for the quarter in more detail. Global retail sales decreased 3% in Q2 2022 as compared to Q2 2021. When excluding the negative impact of foreign currency, global retail sales grew 1.5% due to sustained positive store growth momentum over the trailing 4 quarters, lapping 17.1% global retail sales growth, excluding FX in Q2 2021. As we have discussed in the past, we believe it remains instructive to look at the cumulative stack of sales across the business, anchored back to 2019 as a pre-COVID baseline and will continue to do so for as long as we believe it is useful in understanding our business performance.

Looking at the 3-year stack, our Q 2022 global retail sales, excluding foreign currency impact, grew nearly 27% versus Q2 2019. Breaking down total global retail sales growth, international retail sales, excluding the negative impact of foreign currency, grew 3.7%, rolling over a prior year increase of 29.5% and are up almost 30% on a 3-year stack basis relative to 2019. U.S. retail sales declined 0.6%, rolling over a prior increase of 7.4% and are up almost 27% on a 3-year stack basis relative to 2019.

Turning to comps. During Q2, same-store sales, excluding foreign currency impact from our international business declined 2.2%, rolling over a prior year increase of 13.9% and were up 13% on a 3-year stack basis relative to 2019. Order growth was slightly positive during the quarter, demonstrating continued global demand. However, this growth was more than offset by declines in ticket driven by the year-over-year impact of expiration of the 2021 VAT relief in the U.K., our largest international market by retail sales. This resulted in a negative comp for the quarter for international versus a slightly positive without comp this unfavorable U.K. VAT impact. The year-over-year impact of expiration of the 2021 U.K. VAT relief will continue while we lap the reduced rates from 2021 to the rest of the year.

Same-store sales for our U.S. business declined 2.9%, rolling over a prior year increase of 3.5% and were up 16.7% on a 2-year stack basis relative to 2019, representing a sequential 5.3 percentage point improvement from Q1 on a 3-year stack basis. Breaking down the U.S. comp, our franchise business was down 2.5% in the quarter, while our company-owned stores were down 9.2%. We believe the difference in the top line performance in our company-owned stores as compared to our franchise stores continues to be driven by more substantial operational challenges in our company-owned stores that Russell will address later on the call.

The estimated impact of fortressing was 0.7 percentage points during the quarter across the U.S. system. This impact will continue to trend lower as our U.S. store base grows.

The decline in U.S. same-store sales in Q2 was driven by a decline in order counts, which continue to be pressured by the challenging staffing environment, which had certain operational impacts such as shortened store hours and customer service challenges in many stores, both company-owned and franchise, along with tough COVID and stimulus-fueled comps from the prior years.

The decline in order counts was partially offset by ticket growth, which included nearly 6% in pricing actions I spoke about earlier. We saw a similar trend on a 3-year stack basis with a 16.7% growth in same-store sales, driven by growth in ticket and partially offset by a decline in order count.

As we have previously shared, we believe it is instructive to break our U.S. stores into quintiles based on staffing levels relative to a fully-staffed store to give a sense for the magnitude of the impact of staffing.

Looking at Q2 same-store sales, stores in the top 20%, those that are essentially fully staffed on average, outperformed stores in the bottom 20%, those that are facing the most significant labor shortages, by 7 percentage points. This is down sequentially from the 12 percentage point gap we saw in Q1 between the top and bottom quintiles, showing improvement in the lower quintile stores' ability to meet consumer demand.

Now I'll share a few thoughts specifically about the carryout and delivery businesses. The carryout business was strong in Q2, with U.S. carryout same-store sales 14.6% positive compared to Q2 2021. On a 3-year basis, our carryout same-store sales were up 33% versus Q2 2019. The gap between the top and bottom quintiles based on staffing levels remained small during the quarter, highlighting both strong consumer demand and the lower cost of sales relative to delivery orders. We are incredibly pleased with our carryout momentum, especially considering carryout is a much larger segment of QSR, giving us a significant runway for growth in the future.

The delivery business continued to be more pressured. Q2 delivery same-store sales declined by 11.7% relative to Q2 2021. Looking at the business on a 3-year stack, Q2 delivery same-store sales remained more than 8% above Q2 2019 levels. When we look at the same quintiles relative to the delivery business, we continue to see a more pronounced difference in performance. We saw an 11 percentage point gap in delivery same-store sales between stores in the top 20% and those in the bottom 20%. While we continue to see a significant gap in performance between the top and bottom quintile, this does represent a sequential improvement from the 17 percentage point gap we observed in the first quarter.

Shifting to unit count. We and our franchisees added 22 net new stores in the U.S. during Q2, consisting of 24 store openings and 2 closures, bringing our U.S. system store count to 6,619 stores at the end of the quarter. With our strong four-wall economics, we remain bullish on the long-term unit growth potential in the United States and we maintained our conviction that the U.S. can be an 8,000-plus store market for Domino's.

The pace of U.S. store growth may decelerate slightly from the current 4-quarter run rate of 3% the rest of the year or until the headwinds subside given some of the continued development, supply chain, staffing and inflationary headwinds.

Our international business added 211 net new stores in Q2, comprised of 249 store openings and 38 closures. This brought our current 4-quarter net store growth rate in international to 9%. When combined with our U.S. store growth, our trailing 4-quarter global net store growth of nearly 7% continues to fall within our 2- to 3-year outlook range of 6% to 8%.

Turning to revenues and operating income. Total revenues for the second quarter increased approximately $32.7 million or 3.2% from the prior year quarter driven by higher supply chain revenues resulting from a 15.2% higher market basket pricing to stores. Our market basket pricing is up approximately 20% on a 3-year basis now. The increase in supply chain revenues was partially offset by declines in our company-owned stores' revenues.

Changes in foreign currency exchange rates negatively impacted international raw material revenues by $5.9 million during Q2. Our consolidated operating income as a percentage of revenues decreased by 180 basis points to 16.7% in Q2 from the prior quarter, primarily driven by food basket and labor cost increases. These impacts were partially offset by pricing actions and G&A leverage.

Our diluted EPS in Q2 was $2.82 versus $3.06 in Q2 2021 or $3.12 when adjusted for the $0.06 impact of the recapitalization transaction in the prior year. Breaking down that $0.30 decrease in our diluted EPS as compared to our adjusted diluted EPS, our operating results negatively impacted us by $0.14.

Changes in foreign currency exchange rates negatively impacted us by $0.12. Our higher effective tax rate negatively impacted us by $0.14, $0.09 of which was driven by changes in tax impact of stock-based compensation. Higher depreciation negatively impacted us by $0.02, higher net interest expense negatively impacted us by $0.02 and a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.14.

Although we faced operating headwinds, we continue to generate sizable free cash flow. During the first 2 quarters of 2022, we generated net cash provided by operating activities of approximately $153 million. After deducting for capital expenditures of approximately $33 million, which included investments in our technology initiatives such as our next-generation point-of-sale system and investments in our supply chain channels, we generated a free cash flow of approximately $121 million. Free cash flow decreased $142 million from the first 2 quarters of 2021, primarily due to changes in working capital as a result of the timing of payments of accrued liabilities and receipts on accounts receivable and lower net income.

During the quarter, we repurchased and retired approximately 148,000 shares of $50 million at an average price of $337 per share. As of the end of Q2, we had approximately $606 million remaining under our current Board authorization for share repurchases.

Before I close, we would like to update the guidance we provided in April for 2022. Based on the continuously evolving macroeconomic environment, we now expect the increase in the store food basket within our U.S. system to range from 13% to 15% as compared to 2021 levels, an increase from the 10% to 12% we were expecting in April. Changes in foreign currency exchange rates are now expected to have a negative impact of $22 million to $26 million compared to 2021, an increase from the $12 million to $16 million we were expecting to see in April. We anticipate that we will continue to see fluctuations in commodity prices, including wheat and fuel costs and foreign currency exchange rates resulting from geopolitical risk and the resulting impact on the overall macroeconomic environment.

Thank you all for joining the call today, and now I will turn it back to Russell.

Thank you, Sandeep. I'm going to start my comments with the U.S. business. The performance during the quarter started slow as we were lapping with tough [COVID and] stimulus-fueled comp on a 1- and 2-year basis. These dynamics eased throughout the quarter as we move further away from the government payments distributed in March of 2021.

During the quarter, we continued innovative ways to engage with our consumers through our carryout tips promotion, where we were awarded our carryout customers with a $3 tip, good for the purchase of another carryout order within the next week. We also launched our Mind Ordering app, which created a fun ordering experience, which was cut out for some time, into the new season of Stranger Things, one of the most popular shows on TV and streaming. In addition, the second quarter marked our first full quarter since we evolved our national offers to include $5.99 Mix & Match for carryout customers and $6.99 delivery Mix & Match.

On the last call, I laid out so many action plans that we're taking to meet customer demand, including returning to core hours, utilizing call centers to ease constraints in the stores and bringing back to the street promotion.

I'd like to take some time to provide additional color on each of these actions. If you recall, out of necessity, many stores have had to flex their hours of operations because of the labor constraints from the staffing challenges and the Omicron surge early in the year. During the first quarter, when we added up all the lost operating hours, we estimate (inaudible) cumulatively both the equivalent of almost 6 days across the entire U.S. business.

During the second quarter, this number improved to a little over 4 days. The stores primarily flexing hours to be closed during nonpeak times. The impact on orders was less than the number of days closed as a percentage of the total days in the quarter. While we and our franchisees continue to make progress on a full return of all stores to core hours as we start to lap the service disruptions from last year, this metric will become less meaningful as a driver of the year-over-year sales performance.

Another key action is utilizing call centers to take phone orders. This allows team members to focus on making and delivering pizzas without having to worry about answering phones, especially during the busiest times of the store. At the end of the quarter, around 40% of our U.S. stores were utilizing call centers in some capacity. As a result, headwinds from unanswered calls were lower than we experienced during the first quarter.

The third action is bringing back booth weeks. We promised we will bring back these important customer acquisitions and loyalty enrollment activities this summer. And as you saw, we ran our first booth week in more than 2 years in early June. I am extremely proud of our franchisees, team members and supply chain for executing at a very high level during what was our busiest week of the year. Consumer reaction was strong, and we plan to do another booth week by the end of the summer before we evaluate future cadence.

Turning now to corporate store performance. Our corporate stores continue to lag franchise performance during the second quarter. As I mentioned during the last call, we are committed to restoring our corporate stores' leadership position among the U.S. system of stores. As such, we have put into place an operations recovery plan with 30, 60 and 90-day milestones. Now last month, we made a leadership change designed to positively impact our focus to our business. Frank Garrido, our Executive Vice President of Operations, who also led corporate stores before taking on his current role in February of 2020, will have that team report directly to him, so he can more closely assess and address the needs of this business. We will continue to provide updates on the progress of our corporate stores and look forward to them resuming their leadership role among our U.S. system of stores.

Now finally, I'd like to provide an update on our ongoing delivery labor market deep dive. We continue to believe that many of the answers to the labor shortages we are facing are already in our system. We see that our top quintile stores, they can meet the demand and outperform the system. We also saw the gap in performance was between our top and bottom quintile stores improved during the second quarter. We know from our work that one of the key issues for delivery drivers is flexibility. And for many, this is even more important than compensation. Flexibility includes the ability to work shorter shifts, fewer hours in a week, and sign up for a shift with short lead times. These are the areas where we are continuing to evaluate and evolve our practices. The question remains, can we close the gap in performance and get back to fully meeting demand utilizing our current delivery model as it has evolved over many decades. Until we fully answer this question, all options will remain on the table.

Now let's turn to international. The international business displayed strong fundamental growth, opening over 200 net new stores during the quarter as well as positive order count growth. During the second quarter, 44 of our international markets opened at least 1 net new store, demonstrating the strong demand for Domino's around the world. As Sandeep mentioned, there were some short-term pressures from the U.K. VAT relief overlaps that drove the comp to go negative in the quarter, snapping our long-running streak of consecutive quarters with positive same-store sales growth. I remain confident, extremely confident in the long-term growth potential for our international business. Opening more than 1,000 net stores over the trailing 4 quarters is an outstanding accomplishment by our team in our international master franchise.

I'll now highlight a few international markets of note. I'd like to congratulate DPC Dash, our master franchisee in China for opening their 500th store during the second quarter. Also, as you may have seen, Dash brands recently made its A1 filing for a listing on the Hong Kong Stock Exchange.

We saw strong sales growth in the Middle East, especially in Saudi Arabia. Also, Alamar Foods, our master franchisees across 11 markets in the Middle East and North Africa, announced its intention to go public through an IPO on the Saudi Stock Exchange.

Other markets of note with strong growth in the quarter included India, Mexico, Spain, Turkey, and Guatemala. We have a long runway for growth in the U.S. and around the world in both our delivery and our carryout business. We will continue to mitigate challenges within our control and take steps to proactively confront external factors we can't completely control with strategies and plans to minimize their impact.

We're now happy to take some questions.

(Operator Instructions) I show our first question comes from the line of Brian Bittner from Oppenheimer.

Question on the same-store sales in the U.S. Your same-store sales in the second quarter, as you said, accelerated by over 500 basis points versus the first quarter when we look at it on a 3-year stack basis. So clearly, a meaningful improvement in the quarter. Can you just unpack the drivers of this improvement in a little bit more detail and help us understand maybe how much of this improvement came from improved staffing levels through the quarter versus maybe some other sources of improvement just so we can understand the underlying health of this improvement in the second quarter?

Brian, thanks for the question. I think a lot of it is actually in some of the prepared remarks that we went through, but I'll just really try to respin it up a little bit for you because the answers are really sequential acceleration for sure in the carryout business where we went from an 11% increase in the first quarter to a 14.6% increase in the second quarter. So definitely, the momentum that we saw, in fact, on a 3-year stack basis, it went from 24% to 33%. So significant acceleration and strength in the carryout business is very exciting.

I think on the delivery business, if you look at what happened in the quarter, we were up against much more significant overlaps last year. So even though we had an 11.7% decline on a 3-year stack basis, we're up 8% compared to the plus 6% that we had last quarter. And so sequentially, a lot of the initiatives that we talked about on the last earnings call started playing in and delivery didn't improve sequentially. We have more work to do but we definitely had some progress that we saw in the quarter. So said another way, the sequential improvement of 530 basis points was driven by both carryout and delivery with both making meaningful progress.

And I show our next question comes from the line of David Palmer from Evercore ISI.

First, just maybe a 2-parter here. You mentioned customer service issues and that being a drag. I wonder what does that look like? I mean, what is the customer experiencing any numbers that describe what that is? And how you measure the impact on the business? And then relatedly, it sounds like you're still in evaluation phase with regard to other options to alleviate pressure to labor in the delivery sense. Could you talk about some of the things that you're most evaluating at this point, maybe things that are in test right now?

Sure. On the customer service side, really, at the end of the day, what we like is things have gotten sequentially better in the second quarter from the first quarter. We certainly still had capacity things we're dealing with. But at the end of the day, demand is strong and our ability to serve that capacity is getting better.

To your second question on the evaluation, what I'd tell you is we are 100% committed to getting this done ourselves. We think the answers to some of the capacity issues lie within the system. And until we get though where we need to be, our responsibility is to understand all the options available, and that's what we're going to do.

And I show our next question comes from the line of David Tarantino from Baird. .

I had a question on the carryout versus delivery business. I guess, first, if you could maybe give us an update on what the mix of business is today given the big changes you're seeing in the carryout business? And then I guess, secondly, on the carryout business, the strength that you saw in the second quarter was very impressive. And I'm wondering if you can at least offer some thoughts on the sustainability of that or whether you think it was just a great promotion with the offer that you ran there or if you think that this is a more durable layer of sales with new customers or new occasions.

Thanks, David, for the question. It's a really good one. I think there's -- we'll take it in 2 parts. Russell will cover the second piece, and I'll just talk about the carryout versus the delivery dynamics that you asked about.

So I think overall, when we look at carryout versus delivery from a mix standpoint, clearly, with the comps -- actually, with an acceleration in carryout mix -- carryout comps versus delivery declining, the mix is shifting towards carryout. We typically update only at the end of each year. And I think we'll give you a further update at the end of the year because things are moving around quite a bit. But what we're really thrilled about is the momentum on the carryout business because as we said in the prepared remarks, it's an accelerating trend on a business that is a significantly larger business and in the QSR space. So there's a lot of runway for growth for us on that business.

And then Russell, do you want to talk about sustainability?

Yes. Thanks, David. We have seen sustainability and continued momentum and continued growth in carryout, not just over the last 3 years, but over the last decade or so since we decided to really focus in on that area. One of the reasons that's so important for us is it's very incremental to delivery. We see maybe 15% or so overlap between carryout occasions and delivery occasions. Interestingly enough, the carryout sourcing of volume we have is less so from pizza out on a percentage basis and more so from other QSRs. So it enables us to not only grow in the larger carryout pizza segment with a larger carryout QSR segment.

And I show our next question comes from the line of Brian Mullan from Deutsche Bank.

Just a question related to domestic development. As you think about restoring the pace of growth, domestic unit growth back up to that 4% to 5% rate, what are the most important factors for investors to consider right now in regards to the pipeline for next year? Do you think you can get back to that pace in 2023? Or is this going to be a little bit of a longer path to the pre-COVID run rate in your view? And if it's a little longer, what are kind of the key gating factors right now?

So Brian, thanks for the question. I think when we look at the U.S. potential, I think Russell has touched on something really important with the carryout momentum and the acceleration that we're seeing there and the opportunity that we have in terms of the QSR space and how we can actually penetrate into that. So then I'm going to actually go back to what we've talked about previously as our goal for the U.S. of 8,000 stores. Relative to that, we're 6,619 stores already, so the gap is not massive.

And as we've talked about this year from the beginning, I think on the last call itself, Rich mentioned that we were probably going to see some headwinds basically in terms of this pace of development because of supply chain problems, because of the inflationary environment, et cetera. This continues to be the factor. And I think even though we are a trailing 12 months of 3%, we see some potential deceleration relative to that in the short term until all of these headwinds subside, doesn't change the long-term trajectory of where we can take this. But I think we need these headwinds to subside before we can accelerate.

And I think from our franchisees, they have a really fantastic industry-leading profitability. Their returns are very compelling. They average 3 years in terms of cash on cash payback. And they see the potential path to future growth. So we are really confident that the 8,000 year-end objective is definitely very achievable and especially with the momentum that we're seeing on the carryout business, we actually have everything set with our fortressing strategy. And actually, that gives us a lot of upside and runway in terms of unit development.

And I show our next question comes from the line of John Glass from Morgan Stanley.

Why did you run a boost week during a time when you had (inaudible) constraint still. I mean I would think that would risk disappointment of customers. Was that a signal that toward the end of the quarter, you just were getting better or maybe what would when you still have capacity constraints and already too much demand to deal with?

Thanks, John, for the question. I just also want to reiterate the success of that boost week. It was the biggest week for us for the year. And on the carryout side, it was our biggest week in history. And so when you think about a boost week, it's not just about the delivery business, it's also about the carryout business, and we did an incredible job doing it there.

Look, we have the best franchisees in the business, and we gave them enough time and our supply chain enough time to prepare for this thing. We were ready. I think you're also right. It is showing that we're making -- some of the things that we're doing are improving. Sandeep talked about the sequential decline in the difference between our top and bottom staff quintile. So we wouldn't have done this if we didn't think we could handle it, and I think our system did a great job.

And I show our next question comes from the line of John Ivankoe from Morgan Stanley (sic) [JPMorgan].

From JPMorgan. I was -- I think I heard in your prepared remarks that the U.S. would see, I guess, a downtick in development for the next 12 months relative to this last 12 months. Could you just clarify that I heard that? And then secondly, if you're willing to give that, I guess, soft guidance for the U.S., I mean, can you do something similar on international, especially with the negative same-store sales? And the second quarter comps are very often a leading indicator of development, should we expect the next 12 months of international to be same, higher or less than what the 1,000 or so stores that you hit in the previous 12 months?

Thanks, John, for the question. So I think what you did hear on the prepared remarks was, yes, we expect to see a slowing down of the trailing 12 months unit growth definitely through the balance of the year and as long as we see the headwind. So we didn't say 12 months, but we said till headwinds subside. But I think in the international business, we're super excited because it's a plus 9% trailing 12 months growth, and that's very, very solid. And I think if you look at the quarter and you unpack it, it was really driven by this U.K. VAT impact and the overlaps, and in fact, if you include, basically, it will build up in a been a slightly positive comp with international division.

And so what I would say is look at the 3 year's tax on international, it's 13%, very healthy, and we're very confident with that. And so I think we're very comfortable with the range that we provided, the 6% to 8% on average across the global footprint of growth and international at 9%. That sounds -- we've demonstrated that with all these comps, we've been able to deliver very strong unit development, and we see no reason for that to change.

Yes. I think to add to Sandeep's point, just a little context on the development side. First, I'm just so proud of our system. If you look back in the last 5 years, when you look both in the pizza industry and the QSR industry as far as actual number of net stores and percentage, we are -- Domino's is a leader in that. And still with these numbers, we're going to continue to be a leader. So just some context there. Well, also, I think what that tells me is while we continue to lead in development, our franchisees are doing exactly what they need to do, which is balancing the capacity needs with -- between the current stores they have and stores they need to open.

And I show our next question comes from the line of Andrew Charles from Cowen & Company.

I wanted to follow up on an earlier question. U.S. same-store sales accelerated by an impressive -- I think you said 530 basis points from 1Q to 2Q on a 3-year basis. And I know you guys called out 6% price in 2Q and first, it's very helpful, thank you for disclosing that. But we estimate nearly 5% price was taken at the end of 1Q back when the Mix & Match platform for delivery orders was raised from $5.99 to $6.99. We know the 10-Q called out a higher number of items per order in addition to that higher pricing at the end of 1Q. So I'm curious if you can speak to the sequential change in traffic from 1Q to 2Q on a 3-year basis that our math suggests was perhaps flat, perhaps deteriorated amid some encouraging updates that you guys shared on staffing and carryout.

Well, a lot to unpack in the question itself. So -- but I'd say overall, let's have with pricing. And our pricing, we have multiple levers on pricing. Mix & Match is one of them and it's part of the national offers, but I think there's menu pricing, which I think would have been activated well before any of the changes on national offers that we talked about. There's the national offer update that we made in the first quarter. And then I think local pricing is actually an option that the franchisees have at their disposal and delivery fees are something that has been activated all the time by the franchisees. So all of those elements would have gone into pricing effectively both in the first quarter as well as the second quarter, and it's not just national pricing. So the average of all of that was about 6% in the second quarter. So that's one thing I would actually take away from that.

And so I think when we look at pricing and ticket versus order count, what we had in the second quarter was order count was definitely down. And I think when you look at the pressure that we actually faced, the pressure was really significantly more on the delivery side. And then when I look at the overall offset, we saw ticket offsetting order count declines to end up with a minus 2.9% that we saw in the quarter. Even though we have these headwinds, I think sequentially same-store sales did accelerate to the point that we made. And I think we are very happy because from a sequential standpoint, it's clear that the actions that we're taking to address the issues in terms of capacity to serve on the delivery business are helping us. And we're seeing the demand coming through. And that's why we saw the acceleration because it's reflected both in the order count as well as the ticket and the combination of those. So happy with what we're seeing. But I think as we go through the subsequent quarters, we'll have more information on all the drivers that we've been talking about all year.

And I show our next question comes from the line of Jared Garber from Goldman Sachs.

I wanted to revisit the U.S. unit growth commentary. I know it's been asked a couple of times, but if we look back historically, the unit growth annually has certainly continued to decelerate even if we look back to several years ago into the 2018 or '19 time frame. So can you just help us understand what gives you the confidence that, that pace of development can reaccelerate maybe after, say, 2024 kind of time frame, given some of the headwinds you talked about? Maybe there's a way to frame what the pipeline of demand looks like from franchisees?

And then as a follow-up, just as we think about the carryout opportunity, is that changing how the discussions are going with franchisees maybe in terms of site location, making those a little bit more accessible to consumers versus, I think, the base delivery business is one that doesn't necessarily need to be main and main to drive that delivery business, but that may change the carryout as a greater focus going forward.

So Jared, thanks for the question. There's 2 pretty significant components in that. So let me start with the second, and then I'm going to go to the first because -- from a carryout momentum standpoint, I think Russell talked about it earlier in one of the previous answers as well. The carryout business and the delivery business are 2 separate businesses. What we are seeing is a very significant acceleration in the carryout business, which is very encouraging for us because we basically are able to penetrate a new market. And I think a much significantly larger market in addition to the delivery business. The delivery business, 1 in 3 pizzas, like Russell told you last time, is delivered by us. So we have a very strong position in that.

So the thesis in terms of unit development is based on both businesses being fulfilled from the box. And the potential that we have continues to be very strong. If anything, this actually gives us even more runway in terms of unit development versus what was there before. But in no way is this a trade between carryout and delivery. They are 2 separate businesses. The carryout should be incremental to the delivery business, and we're doing all the work that we're doing on the delivery business.

So in terms of U.S. unit growth and the deceleration that's been happening, there's few puts and takes that are going on in there. I think it's -- a few years ago, we had to reclass [Hawaii] and some of the market. That's basically out of the United States into -- out of international into the United States, which helped the United States. That was the 1 year, it ticked above 5%. But other than that, it's been in the 4-ish range pre-pandemic. And I think the trailing 12 months of 3 is more reflective of some of the headwinds that we've been seeing since the pandemic started in terms of supply chain, macroeconomic factors, including staffing. So overall, I think once we get past these headwinds, there's no reason we can't get to a normalized unit development growth, especially given the drivers I just talked about with this carryout business being an incremental opportunity that we seem to be seeing gathering steam as we go along and the delivery business being what baseline thesis was about anything. So that's answering both of your questions, and I hopefully gave you enough information on that.

Yes, Sandeep, I think I would just add. There is every incentive for our franchisees to continue to build. Obviously, the EBITDA per store is still at a very strong place. The returns on the new store still at a very strong place. When we look at the top quintile stores on delivery, the ones that are really doing well, those are the ones that have fortressed the most. And so what happens when you fortress is you get closer to your customers. Getting closer to your customers from a delivery perspective during a capacity-constrained, labor-constrained environment helps delivery. We also know the majority of the carryout volume, the overwhelming majority of the carryout volume when you open up a new store is incremental. So there's every incentive financially and also in helping us deal with capacity to go ahead and continue to do that.

And I show our next question comes from the line of Andrew Strelzik from BMO Capital Markets.

I just wanted to follow up on a comment, Sandeep, that you made in your prepared remarks about after the first full quarter, excuse me, seeing a lot of efficiency opportunities. Can you elaborate a little bit on what you're seeing, maybe where the biggest opportunities are and the time line to which we might see that start to come through the P&L?

Yes, Andrew, thanks for the question. And so I think the opportunities are multifaceted, right? So I think we talked about 3 different components. On the first one, we talked about the consumer pricing architecture. And I think there, it's really about looking at, given the different cost pressures that we're dealing with, how do we make sure that we deliver terrific back to the consumer, but at the same time, taking our price where it makes sense, and still deliver that value to the consumer. So we'll keep on looking at that as time goes along.

The second was just making sure that operating revenues are growing faster than -- revenues are growing faster than expenses. And from an operating margin standpoint, we did see some sequential improvement. We went from a 270 basis points decline in Q1 to 180 basis points decline in Q2. So that includes some G&A discipline as well that we talked about and you saw that we lowered our guidance for the year on G&A based on that. And it's really about prioritizing our expenses to make sure that we're making investments and opportunities that are driving near-term growth. And actually, continuing to invest in critical areas like technology and supply chain, which we have over the years, we'll keep doing that. But it's that proposition that is critical.

But the most important thing, honestly, is the third one that I talked about which is how do we accelerate our capacity to serve the demand that we see? And then that's what Russell talked about earlier in the call. And I think that's been very encouraging to see the progress that we've actually made in the last quarter. We continue to work on similar drivers in the coming quarters as well. So as much as we can make progress on that, I think we'll be able to get to a much better place.

Yes, I would just add. Sandeep talks about efficiency and answers your question from a financial standpoint. I would, maybe, do that also from -- to add some color on the operations standpoint. Essentially, on the delivery side, efficiency is what we need to drive, simplification is what we need to drive. So our folks in stores are focused on the most added value parts of their jobs. And if you think about a couple of the programs we talked about last quarter and we continue to give some input on here. For example, one of those things is taking calls out of the store. We ended last quarter with 29% of our stores on call center.

We ended this quarter at 43%. Our operation simplification projects are -- there are many of them, one we spoke about last time, which is eliminating multiple box folding times within a store, which doesn't sound like a lot actually, adds up to 40 hours a store a week, and that program is now in 90% of our stores around the country. So efficiency on the operations standpoint leads to unlock of capacity and then that flows down through the financials.

And I show our next question comes from the line of Dennis Geiger from UBS.

I appreciate all of the commentary on your efforts to address the driver staffing challenges and then sort of a lot of the metrics that you provided as a result there. Just wondering if you could speak a bit more to sort of where you are on the journey to address the challenges? Is the plan to address the driver situation internally, is that finalized? Or are you still kind of tinkering with different opportunities internally to address that? And I guess, really, the question is, if you could kind of frame up what inning you think you're in with respect to addressing those challenges internally, maybe before you look at other options, if there's a way to frame that up?

I don't know about innings, Dennis. It's the All-Star break. So -- although my -- our Yankees, Michael Stanton won the MVP. So we're pretty happy there. We are a work-in-progress brand, and we are never going to be satisfied with our ability to fulfill capacity until we can fulfill every single order that is coming our way. So in that case, we will never be in the final 3 innings as far as I'm concerned because we can always get better. We did say we do think and our first priority is to try to fulfill this stuff internally. We have a lot of stores who are doing that, a lot of franchisees are doing that. We are 100% committed to getting this done ourselves, and we're seeing improvements. But until we get where we need to be, we will continue to explore all options and -- but our big focus there is for us to be able to serve our own customers.

And I show our next question comes from the line of Lauren Silberman from Crédit Suisse.

I had one on boost -- the boost week. So one was run in early June, and I think you talked about plans to do another one by the end of the summer, which I believe is more frequent than historical. So can you talk about how you're thinking about the cadence of boost week promotions from here? And is there any read-through on underlying demand? Or do you see this more as a catch-up from not running promotions over the last couple of years? Just trying to understand how that all plays out.

Yes. No, I mean, if you look historically, we ran, call it, 3 to 4 boost weeks a year. Obviously, we are planning one at a time. And so we want to work with our franchisees. Obviously, everyone thought the last one went well. We're going to see how the next one goes. And we will announce anything further after that happens. So nothing more than just one step at a time, one pizza at a time.

And I show our next question comes from the line of Chris Carril from RBC Capital Markets.

And thanks for the detail thoughts on pricing so far. Following up on those earlier comments, though, can you tell us how you're thinking about pricing power today? Do you see greater risk to any potential further pricing action given that there is more pressure on the consumer today? Or do you see yourself as well positioned should you pull that pricing lever if necessary?

So Chris, it's a great question. And I think it really ties back to what I talked about in the prepared remarks, which is, in the end, pricing in itself is fine, but it's about making sure there's a terrific value to the consumer. And that really is the key threshold for us. And so we continue to do testing. And by the way, the testing has been done for the last decade, not just the last quarter. And that's a process that is always going on inside the company.

And look, when the macroeconomic situation is as volatile as it is, things keep on shifting and we continue to do consumer testing to ensure based on the shifting sands what makes sense and what doesn't make sense. We're pretty clear that there is definitely an increasing cost environment. So there's a balance between making sure that terrific value is being delivered to the consumer and they're making sure that, from a profitability standpoint, our franchisees are able to make the profits on their stores. That isn't what the paybacks they need from a long-term perspective. And we and our franchise partners basically look at it from a long-term perspective because most of them have been with us for decades or a number of years and signed long-term commitments with us, and it's a shared journey. So we work on it together with them. And I think there's -- that thoughtfulness will continue to go into what we do.

Yes, I would just add to that, to Sandeep's point on balance, the balance for us as we go into this quantitative testing, like he said, we've done this over a decade, is essentially the balance, how do we optimize (inaudible) EBITDA, but also how do we optimize value to the customer. And all of those inputs would help us get to where we want to be. We know at the end of the day, though, order counts are much more correlated to profitability than ticket. So it's about driving order count.

We'll talk about the macro environment. To me, it all started at Domino's right in the middle of a recession back 14 years ago, this is a category where for folks who want to continue to beat out when times are tough, they will maybe down switch from a sit-down or what have you, into pizza. So we actually think we're -- our concept, our business is strong as we may be go through more difficult times.

And our last question will come from the line of Mr. Jon Tower from Citi.

First, a clarification and then a question. I'm curious if you could clarify or at least explain perhaps the check differences in the carryout business versus the delivery business and what that might mean for your same-store sales just in a normalized environment. And then I guess the question is, you did the Stranger Things promotion this quarter, and I believe it's the first time since -- I want to say Batman in 2008, that you've done anything with really any other brand at least in the TV or streaming businesses. So I'm curious to know if this is a one-off or if you believe this is something that could persist with other TV shows or whatever in the future?

Yes. So John, I'll go through the clarification question, and then Russell will definitely answer the question of the Stranger Things question that you have. So I think from a check difference standpoint, always, I think, between the delivery fee and other components of the cost structure. So delivery ticket tends to be higher than the carryout ticket. There's a few other dynamics in terms of some of the national offer changes that we made as well that go into it. But that is pretty much what we would say. It is a higher ticket than carryout. And -- but I think it also is pretty obvious when you look at the relative trends of delivery versus carryout, carryout had a 14.6% same-store sales increase in the quarter, delivery was down 11.7% and comps were down minus 2.9%. So you can actually make the conclusion from that, too.

Yes. And on Stranger Things, I just -- you have an amazing memory. My first day, I remember looking at that Batman box that still is pretty amazing. You're right, though, interestingly enough, we have not done a tie-in in a big way since then, and that's because I believe -- we believe that we really don't have any interest in getting lost in the laundry list of brand tying. Most of the time nowadays, whether it's with sports or with movies or what have you, that's what it is. At the end of the day, I'm not sure if anyone knows what brand is associated with what. I think you just get lost there.

And I think that was one of the reasons why this promotion was so strong because we don't do it a lot and Netflix and particularly the Stranger Things property, they don't do that a lot. And so when 2 brands that are really strong brands in and of itself without being barred equities come together and do something, this is so powerful. And so we have an opportunity like this comes around again, you could see us do this. But our logo will not be pasted at the bottom of a dozen others in a partnership.

This concludes our Q&A session. At this time, I'd like to turn the call back to Russell Weiner, CEO, for closing remarks.

Thanks so much, everybody, for joining the call this morning. Sandeep and I look forward to speaking with you in October to discuss our third quarter 2022 results. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.