達美樂 (DPZ) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 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. Jeff Lawrence, CFO.

Please go ahead, sir.

Thanks, Catherine, and hello, everyone.

This is Jeff Lawrence, CFO of Domino's.

Thanks for joining the call today about the results of our second quarter 2020.

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.

If forward-looking statements are made today, I refer you to the safe harbor statement you can find in this morning's release and the 10-Q.

We will start with my prepared comments, which will be followed by prepared comments from CEO, Rich Allison, followed by analyst questions.

(Operator Instructions)

With that, I'd like to walk you all through the results for the second quarter while reminding everyone that we have communicated select preliminary estimated information for the first 8 weeks of the second quarter in a business update that we released on May 26.

As we stated in the last business update, we intend to return to our normally quarterly earnings cadence going forward effective with today's release.

Before I dive into Q2 results, I'm sure most of you have now seen the announcement this morning that after more than 20 years at the company and 5 as the Domino's CFO, I've decided to retire from Domino's.

Domino's is about opportunity.

And in the past 20 years, I've had the chance to learn, grow and lead at one of the best brands and companies in the entire world.

From a lead role early in my career in our IPO, to traveling the U.S. and to more than 50 countries around the world helping our global franchisees grow to #1, to helping the team shape our digital transformation over the past decade, I could not have asked for more, and I'm proud of the results we've achieved together.

Like anything, you cannot do it alone.

I want to thank our Board of Directors, Rich and his leadership team and my global finance team.

And I'd like to personally thank all the franchisees and frontline team members worldwide.

You are the heart of this great brand.

And most of all, my wife and my family who have gone along with me on this unbelievable and awesome ride.

I've achieved every goal I'd set out for myself here at Domino's, and I'm going to take a well-earned break with my family and see what the next adventure is for us.

We are very, very excited.

I've agreed to stay on until year-end and to assist Rich and the Board in identifying my successor and know that Domino's will be in great hands and that our best days are yet to come.

I will remain Domino's #1 and biggest fan.

Thanks to everybody again.

With that, let's get into the second quarter.

In the second quarter, we continued to lead the broader restaurant industry with 37 straight quarters of positive U.S. comparable sales and 106 consecutive quarters of positive international comps, a truly outstanding accomplishment and testament to the strength and resiliency of the Domino's brand globally.

We also continue to increase our global store count as we opened 125 gross new stores and 84 net new stores in Q2.

Our diluted EPS in Q2 was $2.99, an increase of 36.5% over the prior year quarter, primarily resulting from strong operational results and a significantly lower effective tax rate.

With that, let's take a closer look at the financial results for Q2.

Global retail sales grew 5.7% 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 8.1%.

Retail sales were positively impacted by strong U.S. same-store sales but were negatively impacted by temporary store closures in our international markets.

Same-store sales for the U.S. grew 16.1%, lapping a prior year increase of 3%.

And same-store sales for our international business grew 1.3%, rolling over a prior year increase of 2.4%.

Breaking down the U.S. comp.

Our franchise business was up 16%, while our company-owned stores were up 16.9%.

The U.S. comp this quarter was driven by both ticket and order growth and was significantly impacted by customer ordering behavior during the COVID-19 pandemic.

During the pandemic, we have continued to attract new customers to our brand while focusing on safety, convenience and value.

We also note that existing customers, many of whom are part of our best-in-class loyalty program, continue to order in larger order sizes.

Our delivery comp was also positively impacted by higher order counts in addition to larger order sizes.

The accelerated levels of demand we saw during the middle of the second quarter remained elevated through the end of the quarter with no discernible drop-off.

The international comp was driven by ticket growth during the quarter.

We were particularly proud of our international comp for the quarter as it was positive despite the negative impact on the comp in many markets from partial week openings and closings, abbreviated store hours and limited service methods.

Other markets in our global portfolio saw dramatic increases in sales much like the U.S. business.

We continue to believe we are well positioned to grow our global market share both during and after this pandemic.

On the unit count front, we opened 39 net U.S. stores in the second quarter, consisting of 40 store openings and only 1 closure.

Our international division added 45 net new stores during Q2, comprised of 85 store openings and 40 closures.

We believe the pandemic has had a net negative impact on store openings globally in part due to delays in approvals and government restrictions in addition to general construction delays.

Importantly, unit economics remained strong in most markets, particularly in the U.S. business, and we will continue to work with our franchisees to responsibly grow their businesses.

Turning to revenues.

Total revenues for the second quarter were up 13.4% from the prior year driven primarily by higher retail sales, which drove higher supply chain and U.S. store revenues.

These increases were partially offset by lower international franchise revenues resulting from temporary store closures as well as pressure from the negative impact of changes in FX.

Moving on to operating margin.

As a percentage of revenues, consolidated operating margin for the quarter decreased slightly to 38.8% from 39% in the prior year quarter due primarily to investments made related to the COVID-19 pandemic, partially offset by higher revenues from our U.S. franchise business and the positive impact of the sale of our New York stores to franchisees last year.

Company-owned store margin was down year-over-year and was negatively impacted by higher labor costs, partially offset by lower food and occupancy costs.

Supply chain operating margin was up year-over-year and was positively impacted by lower delivery costs.

G&A expenses decreased approximately $1 million as compared to the prior year quarter primarily due to lower travel expenses resulting from the COVID-19 pandemic and a $2.4 million pretax loss recorded in the prior year related to the New York store sale.

These decreases were partially offset by higher professional fees.

We continue to see the benefit of improved discipline and focus in this important area while continuing to invest in strategic initiatives throughout our business.

Interest expense increased approximately $6 million in the quarter driven primarily by a higher weighted average debt balance resulting from our 2019 recapitalization and borrowings under our variable funding notes during the quarter.

Our reported effective tax rate was 4.7% for the quarter, down 8.2 percentage points from the prior year quarter.

The reported effective tax rate in the quarter included an 18.5 percentage point positive impact from tax benefits on equity-based compensation.

We expect to see continued volatility in our effective tax rate related to these tax benefits.

When you add it all up, our second quarter net income was up $26.3 million or 28.5% over the prior year quarter.

Our second quarter diluted EPS was $2.99 versus $2.19 in the prior year, which was a 36.5% increase.

Here is how that $0.80 increase breaks down.

Our lower effective tax rate resulting primarily from higher tax benefits on equity-based compensation positively impacted us by $0.32.

Lower diluted share count resulting primarily from share repurchases in 2019 benefited us by $0.14.

Higher net interest expense resulting from higher average debt balances negatively impacted us by $0.11.

And most importantly, our improved operating results benefited us by $0.45.

Let's turn to cash.

We continued to generate positive cash from operations through Q2, and as of the end of the second quarter, we had more than $306 million in available cash and an additional $102 million of available borrowing capacity under our variable funding notes.

Our financial standing is and remains strong.

During the second quarter, we generated net cash provided by operating activities of approximately $116 million.

After deducting for CapEx, we generated free cash flow of approximately $100 million.

We also invested $40 million in Dash Brands Ltd., our master franchisee in China.

For accounting purposes, this is an equity investment recorded at cost and will be adjusted in the future for impairments.

We have agreed to invest another $40 million in Q1 of 2021 subject to certain performance conditions being met and may alternatively invest this amount in Q2 -- I'm sorry, Q1 2021 at our option if such conditions are not met.

During Q2, we returned $30 million to our shareholders in the form of a $0.78 per share quarterly dividend.

And finally, we have not repurchased any shares under our authorized share repurchase program since the first week of January.

As a reminder, we have $327 million remaining under our Board authorization for future share repurchases.

Before wrapping up the financial update, I want to get you current on some estimates we shared with you on the last earnings call.

We remain steadfast in our commitment to lead with our values and invest in our team members, our customers and our communities.

We had previously estimated that the total Q2 impact from frontline bonuses, safety and cleaning equipment, community giving and enhanced sick pay would be approximately $15 million.

The actual Q2 impact for these items came in at $11 million.

Separately, we had previously estimated that the total Q2 impact on international royalty revenues from partial store closures would be approximately $5 million.

The estimated Q2 impact came in at $7 million.

Finally, we continue to estimate that FX for the full 2020 fiscal year could have a $10 million negative impact on royalty revenues.

Going forward, we do not anticipate providing additional forward-looking estimates on the aforementioned items.

In closing, we remain in very good shape financially, and we will continue to closely monitor all aspects of our business as we operate in these uncertain times.

We will continue to focus on doing the right thing for our team members and communities today while ensuring we not only survive but are best positioned to thrive coming out of this crisis tomorrow.

Thanks again for joining the call today.

And now I'll turn it over to Rich.

Thanks, Jeff.

You've been a trusted teammate for more than 2 decades, a true Dominoid with pizza sauce in your vein.

Over the course of your career, you have been a key contributor to the success of our global brand, working across all aspects of the business.

As our CFO, you have an outstanding track record of creating strategic value for our great system.

Your accomplishments speak for themselves, and I want to thank you on behalf of the entire Domino's global community.

We wish you all the best.

I also want to personally thank you for staying on through the end of the year as we identify a worthy successor and also for agreeing to serve as an adviser to me personally through the end of the year.

All right.

Let's now talk a bit about the business.

The COVID-19 pandemic set the background for the second quarter, creating challenges that were certainly unlike anything we've ever seen as a brand and unlike anything I've ever seen as a leader or, frankly, would hope to see again.

We operate in over 90 markets in across 6 continents, none of which were spared by this virus.

And our hearts go out to those around the world that were directly impacted.

Throughout the quarter, our focus as a global brand and the focus of our local operators remained steadfast on serving our customers and our communities and doing that with a convenient, affordable and safe food and service experience.

Given the unprecedented nature of the conditions surrounding the quarter, I do want to take a few moments to say thank you, first, to our customers for giving us and our franchisees the privilege to serve you around the world; to our franchisees and our operators for your incredible resiliency, your passion, your innovative spirit, willingness to support each other and share best practices and for your commitment to your teams and your communities; and to our corporate teams, truly across every aspect of our business, from our supply chain to corporate operations, to our functional support teams, for leading with our values and for your unyielding commitment to supporting the brand around the world.

I have never been more proud than I am today to wear the Domino's logo and to serve as your CEO.

I also want to share some of the work that we've been doing as a brand aligned with our purpose and values.

Our purpose as a brand is to feed the power of possible, one pizza at a time.

Our values are do the right thing, put people first, create inspired solutions, champion our customers and grow and win together.

During the quarter, this purpose and these values drove us, drove us to partner with our franchisees to feed the need in giving away 10 million slices of pizza in our local communities; drove us to pay out nearly $8 million in Thank You bonuses to frontline hourly team members in our corporate stores and supply chain centers; and drove us to speak out against racism and to commit $3 million over the next 3 years to make a difference in Black communities, including $1 million, which will be invested to establish the Domino's Black Franchise Opportunity Fund.

We sold a lot of pizza in Q2, but I can tell you, I'm even more proud of the good that our company, our team members and our franchisees did along the way.

Now I'm going to turn my attention to our second quarter results.

I'll discuss our U.S. and our international businesses while leaving in a few additional topics and some perspectives on the dynamics around food delivery in the pizza category in these times, which certainly have been a tailwind for many of us within the industry.

We'll share some of the latest updates related to operations and execution as we continue to navigate our way through the pandemic.

And also, I'll talk about the areas where I believe we can continue to differentiate ourselves from the competition and drive shareholder value over the long term.

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

So let me get started with a discussion about our U.S. business.

The second quarter marked a rather unprecedented acceleration for food delivery in the U.S., and we were certainly no exception, our 37th consecutive quarter and strongest in that 9-plus year run for same-store sales, with evidence of this tailwind in delivery.

Beyond the numbers, I'm most proud of our energy and execution at the store level.

We absorbed unprecedented volume while maintaining high service levels and continuing to provide tremendous value for our customers.

And I can't say enough about our supply chain division, which did a terrific job handling heavy volumes and ensuring continued supply of product to our stores.

So while there remains much to sort out and still much left to unfold regarding the future of customer behavior, we realize there's an opportunity to capitalize on the engagement with both new and returning customers.

We believe value and convenience are bringing customers to us, and we hope it will continue to bring them back.

Nearly 75% of our sales in the U.S. are coming through digital channels through the second quarter.

This, combined with loyalty adoption, give us a good proven chance at driving additional customer frequency.

And I am glad more than ever that we have this direct digital and loyalty relationship with our customers and that we're not dependent upon a third party to bring us orders.

Beyond anything else, executing a terrific delivery and carryout experience will be the ultimate way to convince these customers to come back and to remain Domino's customers for the long term.

I'll now turn my attention to operations.

We spent much of the quarter retooling almost 60 years of standard operating procedures and doing that over a matter of weeks.

Our teams and franchisees have done an outstanding job of implementing many things rather quickly, including protocols around contactless delivery, including the innovation of the pizza pedestal to deliver pizzas to our customers' front doors; the rollout of Domino's Carside Delivery, which provides an incredibly convenient and contact-free carryout experience for our customers; and many digital enhancements that our teams have developed to make ordering, selecting service methods, paying and tipping even easier.

During all of this, our innovation and supply chain teams continued to work on our menu.

Just last Monday, we began rolling out a new product, our new chicken wings with a greatly improved wing and terrific new sauces.

We've added these to our $7.99 platform, offering a 10-piece wing option in addition to our pizza offerings.

And we're promoting the product and the offer today through our digital channels.

Wings are a rapidly growing category, as many of you know, in delivery and carryout.

And as we're honest with ourselves, our wings needed to improve.

And this is a sign that continued menu innovation doesn't always have to be something brand new but can be a major renovation of existing products that customers have simply told us need to be better.

Our customers are mixing and matching within our value platforms more than ever before, and our new wings are a nice addition to our $7.99 carryout offer.

We're very excited about this launch, and we look forward to bringing additional new product news to our customers over the next few months.

Let me remind you once again how we think about new products.

Now while product innovation is very important for any restaurant brand, at Domino's, we don't launch new products just to create news.

Our strategy in launching new products focuses on, first, driving incremental sales and orders and incremental profitability for our franchisees at the store level.

We focus on permanent menu items and simple operations, and very importantly, whenever possible, fitting new menu items into our existing value platforms.

Now turning to store growth.

The pandemic certainly created obstacles for new store openings during the second quarter, but I'm very pleased that we and our franchisees still managed to open 39 net new stores in the U.S. during Q2.

Our development team and our franchisees did a great job remaining focused on smart growth across our markets.

And while near-term challenges remain in many cities and towns, I'm optimistic about the medium- and long-term opportunity to accelerate unit growth and to take advantage of the certain opportunities that we're seeing in the marketplace.

Looking forward, I can tell you that we don't know exactly what the new normal is going to look like in the U.S. COVID-19 has accelerated some of the trends that we were already seeing in motion around delivery, carryout and digital adoption.

And we expect that customer expectations around safety and contactless experiences will remain heightened for the foreseeable future.

Now while we don't have all of the answers on the future, we will continue to focus on the fundamental areas where we know we have to compete aggressively.

Value.

We talk about value often.

It's always important, but even more so when we're facing a recession and a high unemployment that we see today.

Fortressing and unit growth will continue to be a focus.

And the higher sales levels that we're experiencing and the service expectations that we have for our business make this even more important.

We will continue to expand our supply chain capacity.

We opened our Columbia, South Carolina supply chain center in Q2, and we are on track to open another supply chain center in Katy, Texas, and a thin crust manufacturing facility in New Jersey during the back half of this year.

Innovation across all areas of our business, in digital and delivery and carryout and in food, will continue to be important.

And a focus on service, a constant focus on service with plenty of opportunities still for us to improve, is always a focus for us at Domino's.

So in closing for the U.S. business, I'd like to highlight a special recognition we received this summer.

For the first time since 2009, we've been recognized as the leader in customer satisfaction for the pizza category as part of the ACSI's most recent restaurant report.

That just makes me incredibly proud of our U.S. business leaders, our franchisees and our operators.

Turning our attention to international.

We've now achieved 106 consecutive quarters of positive same-store sales growth.

And to be honest with you, back in April, I thought this incredible run was in doubt.

I'm in my 10th year here at Domino's, and I have never observed such wide variations in performance across our international business.

During the quarter, we had several markets which saw significant increases in sales driven in part by pandemic-driven changes in consumer behavior.

China, Japan and South Korea are leading examples.

And these markets are also responsible for pioneering many of the contactless delivery and carryout innovations.

The U.S. and dozens of international markets have benefited from the incredible ingenuity and creativity in these markets.

However, we've had other markets which have had to deal with complete shutdowns or significant closures across their businesses.

France, Spain, New Zealand, Panama and several others were completely closed for a period of time.

India and Saudi Arabia and others had significant portions of their markets temporarily shuttered.

And dozens of markets had to deal with service method restrictions and business hour restrictions during the quarter.

In an environment with so many challenges, I am very pleased with the resiliency and performance of our international business.

Our global group of terrific master franchisees once again demonstrated that they are the absolute best in the restaurant industry.

At our peak, we had about 2,400 stores closed in the international business.

As markets and stores have gradually reopened over the quarter and as service methods have resumed, we've seen consistent improvement in the business.

Now there is still much work left to return the business to where it was pre-pandemic.

We are at fewer than 600 stores fully closed as of July 8. At the same time, however, many markets are partially closed or still restoring service methods.

These factors have continued to pressure retail sales, and we expect continued volatility in the international business in the months ahead.

In addition to the pressure on retail sales and same-store sales, the pandemic has also slowed our international store growth momentum.

We opened 45 net new stores in the quarter, and that's far below our typical performance.

We expect that it will take some time for store growth to ramp back up in the markets that have been most impacted by COVID-19.

But with all that said, as I look forward, I remain very optimistic about our international business and about the growth opportunity ahead.

The pandemic has accelerated delivery adoption around the world, and that is good for our business, good for our business over the long term.

We're the clear #1 in QSR pizza on a global basis, and we're #1 in roughly half of the international markets where we compete.

And while we're #1 in all of those places, we still believe that we have significant room for market share growth within the pizza category around the world.

We feel that unit economics, cash-on-cash returns and franchisee profitability fundamentals are still very strong in the majority of our international markets.

Over the recent weeks, I've spoken with many of our international master franchisees, and they remain very optimistic and very committed to investing in the long-term growth of their businesses.

We've also taken advantage of an opportunity to invest in an international market.

As Jeff shared with you earlier, we now hold a minority ownership interest in Dash Brands, our master franchisee in China.

We're very happy with where the business stands today.

We recently opened our 300th store in China, and we are excited about the long-term growth potential there.

We believe that we can play a role in helping Domino's China reach that potential and view this as a good long-term investment for DPZ.

As I wrap up the discussion on our international business, I just want to say thank you to our incredible master franchisees and to the operators of our more than 11,000 store network outside the U.S.

So in closing, we will likely never forget the second quarter of 2020 as a chapter in our path toward dominant #1.

We're rising to the challenge of today, and we are looking forward to capture the opportunities of tomorrow.

And that opportunity is driven by the fact that we continue to bring more customers into this incredible brand.

Each day, we have more opportunities to delight our customers and to convert them into loyal Domino's fans.

We're still very much a work-in-progress brand with plenty of areas to address and improve.

And while we cannot predict the future nor will we try to do so, we will do all that we can to come out of this challenging time period even stronger than we've ever been.

The resiliency of our brand and our business model, the strength, the fortitude, the vigor of our global franchisees and operators has never been more evident in the 60-year history of our company.

And most importantly, we're going to continue to lead with our values.

And the health and safety of our store team members, franchisees and customers will remain our top priority.

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

(Operator Instructions) And our first question comes from Brian Bittner with Oppenheimer & Co.

Jeff, certainly going to miss your positive energy and definitely going to miss your wittiness.

So congratulations on a terrific career at Domino's.

Rich, I understand the tailwinds from the pandemic on your business in the U.S. They make sense.

But what can you specifically do to take advantage of these tailwinds and retain and convert these new customers and really enable this current strength to pay dividends in the future in the form of future sales gains?

Sure, Brian.

Thanks for the question.

We are getting an incredible opportunity today to bring more customers into the brand.

And as you look at the delivery business, in particular, we've seen a significant increase in new customer acquisition over the course of the second quarter.

And our task there is to take those new customer opportunities and convert them into the second purchase and the third and ultimately loyal customers going forward.

We've been working hard on that, and the second quarter was our best quarter for driving new active loyalty members, best quarter we've had since Q1 of 2019 when we ran our Points for Pies promotion.

So working hard to convert these customers into loyal customers such that we can continue to earn their business over time.

Our next question comes from Matthew DiFrisco with Guggenheim.

Congratulations, Jeff, on a great run as well and your next chapter and the time ahead that you get to spend with your family.

Very envious.

I was hoping to learn more about the Dash investment.

Can you share with us the percentage of the ownership that, that gives you now with Dash?

And then also just to clarify your development comments, it sounds like 2Q was obviously a very tough environment for development both domestically and internationally.

Is it correct to assume the environment has gotten better, that 3Q, it would be logical to have an environment that can support more growth both domestically and internationally on a net basis?

It's Jeff.

I'll take the China part of that, and then I'll kick it over to Rich for the development outlook.

We're not disclosing the percentage ownership.

It is a minority investment.

We put in $40 million.

We may be required and/or we have the option to put in another $40 million at the beginning of 2021.

And listen, as Rich said in his prepared remarks, this is just a very exciting growth market for us.

Rich and I have a lot of personal experience spending a lot of time there.

And we know that if we want to hit our long-term aspirations as a brand, we have to have China be a thriving market for us.

So we're viewing this very strategically in addition to being what we think will be a good financial investment, but more importantly, really a strategic investment where we can bring to bear all of our capabilities, our centers of excellence and really partner with that master in just a more intimate and close way to help accelerate the growth long term.

So very excited about the investment.

We think that it will be great for all of our stakeholders.

And with that, I'll kick it over to Rich to talk a little bit about development outlook.

Sure.

So Matt, I'll talk about that in kind of 2 parts.

First, on the U.S. side of the business, certainly, during the quarter, we had challenges around the country with construction delays, with permitting delays, et cetera, driven by the pandemic.

But still really pleased with the store growth that we were able to achieve during the quarter.

And as I look out into the future, I expect us to see more and more opportunities to accelerate unit growth in the U.S. When you look at the increase in the business that we're seeing today and I think also as you look at some of the real estate opportunities that may present themselves that weren't available in the past, I think we've got a strong opportunity to continue to accelerate that U.S. store growth.

On the international side, the situation is very different from market to market.

In markets around the world where we did not have significant store closures or trading restrictions, the business has been very, very strong.

And those markets have continued to press ahead with their development goals in the near term.

And then we've got other markets where we've had significant numbers of temporary store closures where really the near-term focus of those master franchisees is to get those stores open again and reestablish those operations.

So I expect on the international side for things to remain choppy here in the near term.

But when I think about the medium to the long term, I still have a very high level of confidence around the growth opportunities that we've got outside the U.S.

Our next question comes from Nick Setyan with Wedbush Securities.

Any way to give us a little bit more incremental clarification around the new customers you've acquired?

Just looking at the digital mix, it's not quite clear where those new customers have been coming.

So maybe if you could maybe disclose some of the loyalty numbers, that would be helpful.

Nick, the new customer acquisition during the quarter was really concentrated around our delivery business, which is probably not surprising to many of you as customers sought a contactless experience and an experience where they didn't have to leave their homes to get their food.

So more so than in the carryout side of our business where there was a lot of caution out there among customers about going out into public and to places of business during the quarter.

So that's really where the bulk of the customer acquisition came in.

And then also we saw improvements in our customer retention across the delivery side of the business as well.

So a strong quarter really on both fronts as it relates to our delivery business.

The digital -- our digital percentage ran about 75% during the quarter, popping up as much as 80% in any given week, which has given us yet another opportunity to grow that engagement with our customers and an opportunity to continue to bring them on and into our loyalty program.

And as I mentioned earlier in my prepared remarks, Q2 was the best quarter we've seen in over a year in terms of adding active new members to our Piece of the Pie Rewards loyalty program.

Our next question comes from Jeff Farmer with Gordon Haskett.

Great.

And best of luck, Jeff.

Good luck with everything moving forward.

You guys did briefly touch on it, but can you compare consumer behavior in some of your largest international markets, I'm thinking about places like India and Mexico just as 2 examples, to what you're seeing in the U.S.?

Just trying to figure out how consumers are behaving there in those important international market versus what we've seen in the U.S.

Yes.

There are -- Jeff, there are a lot of consistent patterns.

When you look around the world, the desire on the part of customers to have a contactless experience is certainly high.

And when our international master franchisees do their customer research, they see a lot of the same things that we see in the U.S., which is safety has really risen very high in terms of customer needs.

The other things that have always been there, like value, consistent service, great product, still there but safety has risen pretty high on the list.

So generally, what you do see then is more growth on the delivery side of the business.

And then in some of our international markets where we had more of a dine-in component -- and again, we don't really do table service anywhere around the world, but we do have in a number of our emerging markets larger dining rooms and a higher percentage of customers who choose to sit down and eat their food in our stores.

That part of the business certainly saw a lot of pressure in a number of cases where those dining rooms were closed or where customers were just very cautious about going in and eating in a public place.

And you take all those things into account and you end up with some -- as I mentioned earlier in the prepared remarks, some fairly disparate impacts, with some markets really seeing a tailwind as we have had in the U.S., and then some other markets which have seen a lot more pressure on their business in their comps.

We have a question from Chris O'Cull with Stifel.

Jeff, I would also like to offer my congratulations on a very successful career at Domino's.

We're going to miss the interaction.

Rich, you mentioned additional new products planned for later this year.

Is this a change from your original plan for this year?

And could you explain maybe why product innovation has just become -- it seems like it's become a higher priority for the company.

Yes.

Chris, so no, it isn't.

But to the first part of your question, not a change from our plan this year.

We had planned to have several new products coming out during 2020.

And as I mentioned earlier, very excited that we began the rollout last week of our new wings, and we'll have more product news coming over the course of the next couple of months.

We've taken -- I've talked a lot about and I talked in my prepared remarks about the approach that we take to new product development.

We don't do it just for news, but we're looking for products that can remain on the menu and deliver great incremental sales and profit to our franchisees.

One of the things that we've observed as we've seen this huge boom in delivery over the course of the last couple of years is we're trying to keep an eye on product categories that customers are really adopting at higher rates for delivery.

And certainly, wings is one of those, one of the fastest-growing categories out there.

And so we saw an opportunity, number one, to improve our wings based on the feedback that we got from consumers, but also a great opportunity to bring terrific value by putting a 10-piece wing offer into our $7.99 platform.

You'll recall that we started some years ago with our large 3-topping pizza at $7.99.

And then over time, we've expanded that across the remaining crust types.

And now we're looking at wings as yet another great opportunity to add to that mix-and-match platform.

So I think you're going to see us -- we're going to continue stay focused on new product development, but with the parameters that I always talk about, which is we don't do it just for news, we're going to do it if we think it brings sustained sales and profit to the franchisees.

Our next question comes from Lauren Silberman with Crédit Suisse.

Jeff, congratulations on next steps and a great tenure at Domino's.

You mentioned comp sustained momentum until the end of 2Q.

Are you seeing any differences regionally on how customers are engaging with the brand?

And what changes do you see in customer behavior as markets reopen for dine-in?

Any shift in carryout or delivery performance?

Yes.

So Lauren, we've not seen, honestly, a lot of discernible difference when we look across -- regionally across the U.S. in the second quarter.

I will say that our rural and suburban locations have generally performed better than some of the denser, more urban centers around the country.

And as all of you know, our brand relative to some of the other restaurant brands is more tilted in terms of our sales coming from more of those rural and suburban locations.

And then as it relates to how our business performed in the quarter relative to what was going on with sit-down restaurant reopenings and things like that, I would tell you that it's still pretty early to draw any discernible conclusions there.

As Jeff said, we didn't see any slowdown in momentum all the way through the end of the second quarter.

And that was as a number of states and cities around the country were reopening dine-in.

But even with that said, those that were reopening were only reopening at 50% and at most, 75% capacity.

And as we're all aware, some of those things are actually being reversed as we speak and as we see another spike unfortunately in COVID-19 cases.

So still a very dynamic and evolving marketplace out there for us.

Our next question comes from Peter Saleh with BTIG.

Great.

And congratulations, Jeff.

You will definitely be missed.

I wanted to ask about the recent announcement couple of days ago a partnership with Vonage.

It sounds like it might be related to the voice ordering and Dom capability.

Can you guys elaborate on what you're seeing there and your expectations on rolling out the voice ordering capabilities?

Pete, I appreciate the kind words, and I'll take a chop at this one.

You know that we continue and have for as long as Richard and I have been here and before that to be very serious about investing in our technological capabilities going forward.

I think everybody who follows Domino's knows that we're a believer -- a big believer in voice technology generally.

You can order obviously on your digital -- or your mobile phone right now using a voice assistant.

And we've been working on phone Dom, trying to use artificial intelligence to take a full order.

We've made great strides in that.

The partnership that you referenced, again, is just part of our overall strategy to continue to invest and get smarter in this area.

But more than that starts to get into kind of future strategic stuff that we're quite frankly not going to disclose because of competitive reasons.

But do know that one of the great things that we've been able to do and even during this pandemic is continue to invest with the long-term brand in mind.

We have not slowed down in our technological investments.

And in some ways, we've actually accelerated as you've seen us roll GPS.

You've seen us roll Carside Delivery.

So I think that this crisis has really shown us that we can move faster.

We can, with our great franchisees, execute a little bit faster.

And we're meeting the customers where they want to meet us on technology, and voice is just part of that.

So that'd be the color I'd give you on that.

But just know that we are and remain committed to all the technological investments that we've talked to you all about.

Really encouraged by what we've been able to roll out over the last 3 or 4 months and, quite frankly, gives us a lot of confidence that we'll be able to do some more of that in the future.

We have a question from David Tarantino with Baird.

My congrats to Jeff as well.

My question comes back to the strength you're seeing in the U.S. business.

And I was wondering, Rich or Jeff, if you can help us understand how much of the increase that you saw during Q2 was related to the new customers you're acquiring versus potentially existing customers increasing their frequency or order sizes.

So could you help bucket those 2 things for us?

David, it's Rich.

We're not going to break down those specific numbers for competitive reasons.

But back to some of what I was describing earlier, if you take a look at the delivery business, we saw a significant uptick in new customer acquisition on the delivery side of the business and also very strong retention or repeat purchases from existing customers.

If you look on the carryout side of the business, great repeat purchase from existing customers but not as strong on the acquisition side on the carryout business.

And that's not surprising.

Honestly, when you think about the fact that during the quarter, many consumers were very reluctant to go outside of the home and to places of business.

Now as we watched those patterns evolve over the course of the quarter, we moved very aggressively to implement our Domino's Carside Delivery.

And we're actually on TV advertising that today.

You've probably seen our ads.

But that is really an effort to, number one, create a terrific carryout experience for the customer where they never even have to get out of their car.

It is contactless in that our store team members will bring the pizza out of the store and will put it in the customer's trunk or backseat, wherever they want to put it.

So in the near term, it really is all about driving customer acquisition and frequency for the carryout business.

But over the long term, it's a great way for us to compete against the drive-through that so many other QSRs have but that we have in a very limited number of our U.S. stores.

So just one example of an innovation there that we are focused on not only to address the demand dynamics of the near term but also as we think about how we position the brand for success in the future.

Great.

Very helpful.

If I could ask just one follow-up.

Rich, when you acquire a new delivery customer, what's been your historical retention rate on that?

Do you have any metrics you can share on that front?

David, we've got a lot of metrics on, but we don't share that publicly.

So...

All right.

Fair enough.

Worth a shot.

Thanks, David.

It's a great try, I love it.

We have a question from John Glass with Morgan Stanley.

Jeff, wow and hats off.

And my question, Rich, really 2 things.

One is, how does this pandemic change your view or modify your view maybe on the fortressing strategy, right?

This is a moment where delivery is expanding and accelerating.

Is it still right to do fortressing?

I understand one of the primary reasons fortressing originally was that carryout business.

Are you as enthusiastic about that business as you were prior?

And Rich, I'd also be really interested in your comments and thoughts on what's happening in the third-party aggregator business.

There's been a couple of acquisitions and transformations in those businesses.

What do you think that means for Domino's as that industry gets consolidated but you also get some new competitors in the U.S.?

Thanks, John.

First, on the fortressing, I am, if anything, more enthusiastic about fortressing given what we've seen during the pandemic and the increased sales and momentum that we've had there around our delivery business.

And carryout has been growing in a very strong way for quite some time also.

So when I take a look at it, I just see more opportunity to get more stores on the map from a demand standpoint.

Also, when we think about the real estate environment out there, I also think that we are going to have in the near and medium term a fairly unprecedented opportunity in terms of the availability and affordability of real estate out there as -- an unfortunate reality of the pandemic is that there will be a number of retail stores and restaurants that will close, quite a few of which will be in a similar footprint kind of environment to what we look for.

And then I think also we may see a more favorable market in terms of rents that we can go out there and get with landlords.

So I'm as optimistic and even more so than ever around fortressing.

On your second question around the third-party aggregator market, certainly, it's been a very interesting quarter as it relates to news out there about possible consolidation.

I've been talking for a long time about the fact that the only way that business gets to profitability is through some form of consolidation over time.

Given what has happened recently with a couple of deals that have been announced, frankly, I don't see that changing the competitive dynamic a whole lot, certainly for the near term.

I expect those aggregators to still remain very promotional in terms of how they're going out to acquire customers.

And I expect them to remain pretty aggressive, in particular, with how they go out and cut deals with the largest QSRs.

So when we take a look at it from Domino's perspective, we expect it to continue to be a highly competitive environment that we'll participate in, and we expect it to continue to be a pretty tough environment for the third-party aggregators in terms of their ability to drive profitable transactions.

Our next question comes from Dennis Geiger with UBS.

Jeff, congratulations on a great run and great and good luck.

Just wondering if you guys could share any thoughts on sort of how important the enhanced unemployment checks have been on the business.

I guess more importantly, how you're thinking about any kind of strategy tweaks as and if they roll off.

Does this change your strategy with respect to marketing or promotional activity?

Anything you can comment there on a high level?

Sure.

I think, certainly, the initial stimulus checks and the additional unemployment, I think, no doubt have enabled a lot of consumers to continue to eat out, to order food delivery, et cetera.

How much of the business is driven by that, we honestly don't know.

I can tell you that as we look forward, there's a lot of uncertainty obviously around what that stimulus might look like post July.

But we're remaining very focused on value, frankly, as we always have been because we're going to be in a recession for some period of time here where consumers' pocket books are going to be under pressure.

And so we've got to have great value with our national offers, great value on our menus.

And we got to have great value with respect to what we charge customers to deliver that food.

And I feel very good about where Domino's is positioned on those fronts.

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

Jeff, congratulations on a great career at Domino's and all the best in the next steps.

So as a follow-up to John's question on fortressing, given your commentary around real estate opportunities and together with presumably another strong franchisee cash flow year, does the current environment change your thinking at all about the long-term store development opportunity in the U.S.?

Chris, I think if anything, it increases potentially the opportunity over time.

Obviously, we don't know exactly how long we're going to be in this COVID-19 -- we don't know when we're going to have a vaccine or effective therapeutics.

But significant disruptions like this do tend to accelerate changes in market share and create opportunity.

And as we take a look at this, we are looking for opportunities to move even more aggressively to get stores open.

And so if anything, I see an opportunity that could only grow over time.

We have a question from Katherine Fogertey with Goldman Sachs.

So Jeff, congratulations on an impressive tenure and track record at Domino's.

Best wishes on your next step.

I have a few questions here.

So the first is, can you help us understand the cadence in the quarter on both the carryout and the delivery business in the U.S.?

Given us the split historically, I'm just kind of wondering a few things.

How is it tracking now?

The commentary you gave suggests that delivery was the strongest business and intuitively, that makes a lot of sense.

But as the economy started to reopen in the back half of the quarter, are you seeing improvements in carryout?

And also on the delivery side, did that improvement kind of continue and accelerate as the economy reopened?

Or have you seen some moderation?

And I have a follow-up question.

So Katie, I think we heard you a little bit on that.

I'll take a shot at it.

What I would tell you is this customer behavior that we're seeing during the pandemic is really meeting Domino's where we already were, with great carryout, great delivery, a frictionless technological experience, great value.

And so in many ways, I think this pandemic has just accelerated a lot of what we thought we probably would have earned over time but that it came to us quickly.

And as it relates to delivery versus carryout, those 2 different service methods, when we see places that have restrictions lifted around carryout, we sell more carryout while still having a great delivery business.

So to us, it's less about is a certain daypart shut down, does a certain regulation happen.

We know that when customers have unfettered access to Domino's that we will build -- we have every chance to build sustainable relationships and sales with these customers over time.

We clearly saw that during Q2, again, with no discernible drop-off in demand through the end of the quarter.

And that gives us a lot of confidence that for the foreseeable future, customers are going to continue to really value both delivery and the carryout experiences as allowed by local and state ordinances depending on where you're at.

So for us, again, we feel like this has just been us meeting the customer where they were already going.

The pandemic, I think, has accelerated that.

And then, again, on our side, we've tried to meet the customer where they want to be by rolling out the innovations faster and more efficiently.

And by the way, kudos to our 800 franchise partners in the United States.

The job that they have done, as Rich mentioned in his prepared remarks, with rewriting operational procedures, executing at a high level, keeping service up during this pandemic has been nothing short of just outstanding.

So that would be the commentary that I think we could give you around that.

But we're in the right businesses.

You want to be in carryout, you want to be in delivery, whether there's a pandemic or not.

And with that, I'll pause, and I think you had a -- I think we'll allow you a quick follow-up if you talk louder.

Great.

So on the point you kind of mentioned -- that color, by the way, was very helpful.

You talked about higher tickets being a helpful contributor to the comp.

Can you help us understand the extent of which that was helpful?

And even if you would dive into delivery versus carryout, do you see the ability to sustain the ticket growth in the U.S. in the coming quarters?

Maybe that's menu innovation, maybe it's bundling.

Or should we factor that in dying down as the recovery plays out?

So Katie, it's Rich.

On the ticket dynamic, a little different across the 2 businesses.

Growth in delivery really driven both by order count growth and also ticket but with a pretty heavy growth in order count.

On the carryout business, growth for the quarter really driven more by ticket.

And in both cases, it's more items.

Customers are ordering larger basket sizes, and it's really interesting.

One of the things that we have heard over the quarter is that customers are actively putting more food in the basket to have leftovers the next day.

So they're thinking about not just that evening's meal but how they're planning for the following day.

How much of that dynamic continues following COVID-19?

We honestly don't know today.

We're continuing to obviously track it and follow it.

But at this point, it is really hard to say given where we are in the cycle of this pandemic.

Our next question comes from John Ivankoe with JPMorgan.

(Operator Instructions)

Just one question.

Congratulations, Jeff.

I can't wait to hear what's next.

Just a comment on Dash, obviously, you guys are investing from a position of strength.

You're accelerating unit development from a position of strength.

Do you think that, that -- you could have the potential, would you want to have majority ownership stake at some point?

And obviously, I asked the question, this is the first time you have made a direct investment in an international franchisee, and this is a related question.

Are there any opportunities for you to provide capital or cash flow assistance to any large franchisees elsewhere outside of China that could also be converted into a significant equity stake as clearly some operators must exist that could benefit from some cash flow from a working capital perspective?

It's Rich.

First, on Dash, we're quite happy to be a minority partner in that business.

It's got -- there's a great group of partners that owns the rest of the equity in that business and a terrific management team on the ground to lead that.

So we see this as a great opportunity to create value for DPZ but also to be a great thought partner and strategic partner with the Board there and the management team as we grow the business.

Looking elsewhere around the globe, we've never said never on investing in these international businesses.

Dash happened to be a terrific opportunity to do that.

If others were to come around at some point in the future, we would -- we might consider that.

But the bar is very high.

You've only seen us do this onetime in any recent memory.

So it's not something that you should expect us to do in wide scale.

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

Jeff, congrats on retirement.

I'm definitely going to miss our interactions.

Rich, I had a question for you.

Just -- there seems to be a lot that's changing with COVID.

And I'm curious what you think are the biggest changes to Domino's strategy post COVID versus pre-COVID.

I don't know if that's a greater focus on unit growth or focus on the supply chain or focus on value.

If you could just kind of comment on what you think is the biggest change and how Domino's is approaching kind of the strategy to grow, that would be helpful.

Sure, Greg.

When I think about what's going on, at least so far with COVID, I think the reality is it has accelerated a lot of trends that were already in place in our industry.

When you think about digital adoption, when you think about the migration from on-premise to off-premise through delivery and carryout, those things have just accelerated and leapt forward by a year or 2 or 3 years.

So when I look at what we need to do going forward, a lot of it is doubling down on the things that we've been doing, fortressing, for example, to make sure that we continue to get closer and more convenient to our customers.

We haven't slowed down a bit in terms of our investment in the digital side of our business and making the ordering experience easier for customers, ordering all the way through paying and receiving your food, both for the delivery and the carryout experience there.

I will tell you that one thing that is very different in COVID is just the heightened sensitivity around food safety and contactless methods.

So we've invested heavily there.

And my expectation is that, that is going to continue to be important to customers for quite some time to come.

So I think that is one thing that is likely to be a bit different.

As customers have -- many customers have ordered delivery that had never ordered delivery before, I think our ability to offer variety is going to be even more important in the future than it is today.

So that's why you've seen us renovate a product in wings that needed to be renovated.

It is a category that is growing rapidly here as we look through COVID.

And we're looking to other opportunities around menu innovation as well to take advantage of the fact that customers are just choosing to order delivery more often and across a much wider variety of food.

So Greg, doubling down on some of the same strategies but then also leaning in maybe a little bit more on some of the other things that we believe we need to do to be very competitive going forward.

Our next question comes from Jeffrey Bernstein with Barclays.

Great.

And Jeff, congratulations.

Hard to imagine any future endeavors as much fun or successful as your years at Domino's.

But primary question is just on the U.S. delivery business.

Rich, just wondering, you commented on the third-party aggregators and perhaps a little bit of consolidation going on here.

I'm just wondering whether your thoughts have changed at all in terms of perhaps using an aggregator to generate some incremental sales on different platforms as we've seen their popularity increase even if you continue to be the one doing the delivery.

And just to clarify, did you make any mention of -- I know you did last quarter, you talked about weekday, weekend, lunch, dinner or any third quarter, quarter-to-date momentum?

Any color would be great.

Sure, Jeff.

First, on the third parties, it's only strengthened by a point of view that we don't need to be on those platforms.

I cannot imagine that we would have been able to move as quickly as we have in meeting our customers, as Jeff described, where they wanted to be if we didn't have full control over that digital experience and the actual contactless experience at the point of delivering the food.

And we've had pretty strong growth in demand without having to pay significant -- without having to ask our franchisees to pay high fees to a third party.

So my point of view has strengthened.

Your second part of your question around dayparts, since the last time Jeff and I spoke to you about the business, at that time, I think we talked about lunch growing pretty rapidly, dinner being softer.

We see more balance there in terms of growth at lunch, growth at dinner.

I will tell you that the evening daypart is still relatively weak versus what it's -- in terms of growth compared with the growth that we're seeing across some of the other dayparts in the business, but by and large, continuing to see strong at lunch and strong at dinner.

Our next question comes from Brett Levy with MKM Partners.

Great.

And Jeff, congratulations to you.

When you think about the franchisees right now, obviously, they're all -- as you said, the profitability is relative -- is quite strong.

What are they asking for right now?

What do they think you need to do from an investment standpoint aside from just the new product?

And as you implement more of this technology, is there a need to reassess the digital fee?

Yes.

So Brett, franchisee profitability, as I think we shared last time, 2019 was our strongest year.

So we were pleased to come into this pandemic in a position of strength.

And that has really continued through the course of the pandemic.

Certainly, some franchisees see stronger profits than others depending upon where you're located around the country, but continues to be very strong with the sales growth that we have seen.

When you -- you're asking what franchisees are asking for, well, I'll tell you, during the second quarter, it really was about helping them adapt to this new environment.

So we were -- we've been on a cadence of more frequent franchisee communication than we've probably ever had in the history of our brand, of really working together, literally day by day, hour by hour, to implement new operating procedures across the business, working together to implement new technology solutions to better enable these contactless experience.

So those were things that franchisees were craving and where we worked very hard to meet their needs and worked together to get those things rolled out.

And as we look forward, we're going to continue to invest in tech across our business from the technology that you hold in your hand with your smartphone when you order from us, all the way through the store and how we run and operate our business inside the 4 walls of the box.

That's going to continue to be a big focus for us and an area where our franchisees would love to have us continue to help them when we think about how they continue to run efficient businesses and continue to drive their bottom line profitability.

If I could sneak in one other quick one.

Where do you think you are on capacity within the supply chain given that these are, as you said, unprecedented sales levels?

And -- yes, just where do you think you are in terms of the existing -- you've already mentioned where you're building out.

Yes.

I can tell you, we're awfully glad that we had already opened our centers in New Jersey and that we got the center in South Carolina opened this year to help us keep up with all of this unprecedented demand.

As I mentioned earlier, we're going to open in Katy, Texas, later this year, and we're going to add some thin crust capacity to our system.

We are continuing to look at our supply chain network.

And as we've talked about in the past, you should expect to see us continue to add centers over time, which is a great problem or opportunity, depending on however you want to describe it.

We're going to have to continue to add more capacity to support our franchisees around the country.

Our next question comes from Jon Tower with Wells Fargo.

Great.

And Jeff, to echo everybody else, congratulations.

I hope you have fun in "retirement" or whatever it is you decide to do next.

I am curious, I know you guys aren't necessarily tied directly to any specific sports, but we are coming upon a season where pizza consumption seems to be a bit higher fall and winter than rest of year.

And the sport schedule seems to be a bit up in the air.

So can you discuss how you plan on attacking this during a period where viewing, particularly on the weekends, might be gone or significantly lower than it's been in years past?

Yes, Jon, I mean, it is so hard to tell, as you know, what's going to happen with respect to sports.

For us, it doesn't matter if people are sitting in the stands at all.

If it's on TV, people will gather and order pizza.

So from where we are today, here in the summer, I guess there's only upside as we look through the back half of the year as sports come on the TV.

It is remarkable what we find ourselves watching on TV now as we crave live-action sports.

But I wish I knew, Jon.

I really wish I knew.

And hopefully, we'll get back to more of a state of normal around some of those sports as we work through the fall and winter.

And then just following up to your earlier comments, Rich, on kind of the landscape or at least real estate landscape potentially easing up a little bit in future windows.

It does seem like the whole pizza category itself has thrived during the pandemic, both chain and independent.

But I'm curious to see or hear from you if you're actually seeing something else in the marketplace, perhaps how independents are faring versus the chains right now in the pizza category.

Yes, Jon.

What I would say is that the stronger you were in digital and the stronger you were in off-prem, the better off you're doing.

If you go down the scale on both of those 2 dimensions, I think whether it's chains or independents, there's more of a struggle if you were weak in digital and weak in off-prem.

And our next question comes from Andrew Charles with Cowen.

Great.

And just to echo everyone else, Jeff, it's been a pleasure working with you and wish you best of luck in your next endeavor and hopefully some more time to enjoy your time-off.

I wanted to ask a question, are you able to disclose how many active U.S. loyalty members you had at the end of the quarter?

And as you look globally, are there penetration levels that you've seen in some international markets on a per capita basis with loyalty program that suggest there is more room for growth in this program and especially opportunities obviously as well for conversion to make these users more active?

We're not going to disclose today the number of active members.

We do that -- about once a year or so has been our past practice, and we'll stick with that.

When you talk about penetration in other markets, as we look across the globe, we have -- we're the #1 pizza player in about half of the 90-odd international markets that we operate in.

And we have a number of markets where our share is significantly higher than the share that we hold in the U.S. business today.

And that is one of the things that continues to give us some confidence that there's a big opportunity to continue to earn more business from the customers in the U.S. We still only serve about 1 out of every 5 QSR pizzas that are going to get eaten tonight.

And our share is significantly better than that in a number of the international markets around the globe, which gives us a lot of confidence.

And I am showing no further questions at this time.

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

Well, listen, thanks, everybody.

It certainly has been an eventful Q2, and we really appreciate all of you for joining us this morning.

I'll offer one more time my thanks to Jeff Lawrence.

Jeff, thank you for everything you've done for the business.

And I look forward to speaking with all of you in October when we get together once again to discuss our third quarter 2020 results.

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

Thank you for participating.

You may now disconnect.

Everyone, have a great day.