Even though Domino’s finished the final quarter of 2018 with positive results, overall those results failed to meet the mark of analysts’ predictions.
The company’s same-store sales increased 5.6 percent, which fell below analysts’ predictions of 6.9 percent growth for the quarter. As a result, Domino’s stock fell as much as 9 percent on February 21. Domino’s system-wide revenues rose $190 million or 21 percent, year over year, to $1.08 billion, which was lower than analysts’ expectation of $1.1 billion.
While investors and the market might feel shaky about Domino’s at the moment, the company is confident in the trajectory of its growth over the next year. Domino’s chief executive officer Ritch Allison is proud of the healthy results of the last quarter, which marked the 31st consecutive quarter of positive U.S. same-store sales growth.
“I'm pleased with what was a terrific fourth quarter, one that capped another outstanding year for Domino's,” Allison said on a conference call.
An increase in traffic, higher order counts, and larger transaction amounts are driving the continuous growth. Domino’s company-owned stores were up 3.6 percent and franchises rose 5.7 percent. Domino’s chief financial officer, Jeff Lawrence, said consumers are responding positively to the brand’s overall experience.
“We're really happy with the comp growth in the U.S. in the fourth quarter,” Allison said. “It's a traffic-driven comp, which is exactly what we like to see with the business: really healthy across all dimensions.”
By analyzing data from customers, Domino’s is figuring out ways to grow ticket sizes, resulting in what Lawrence called “smart tickets.”
Domino’s continues to refine its off-premises strategy. Delivery times are the best they’ve ever been for the brand, Allison said.
“On execution we're never satisfied,” Allison said. “We are as fast as we've ever been in getting out to the customer, and we believe we're better than the competition, but we're never satisfied there. We need to get better, both in terms of the average time that it takes us to get pizza to our customers and also with the variability around those times. And that's something that we're working on each and every day.”
Increasing wages and staffing of drivers also plays into the off-premises target.
Domino’s is using technology to make smarter scheduling decisions for both carryout and delivery staff. These decisions will help streamline the flow of the product from store to customer. It’s a balance to make sure the brand is being smart about how drivers are being used, especially in markets where compensation is rising, Allison said.
In the future, the radius of delivery areas will decrease, which in turn will reduce the cost of delivery for the consumer and operating costs for the company. “It just makes sense," Allison said. "Of course, the shorter the distance, the shorter the drive time, getting that driver out from the store to the customer and back to the store, the lower the labor costs for that specific delivery.”
The “fortressing” strategy, which some markets are already using, has cut down delivery times from 9 minutes to as low as 5 minutes. In those markets drivers are making more money and there is less turnover, Allison said.
“The real game-changer over time on labor is going to have to come from our efforts to fortress our markets,” Allison said. “The most expensive thing that we do is take a pizza from point A to point B.”
Delivery drives compensation, so in order for the brand to compete with other pizza chains, Domino’s needs to create processes that allow drivers to complete deliveries efficiently.
“It is a very tight labor market right now,” Allison said. “We've got to make sure and our franchisees have got to make sure that Domino's Pizza is the best place for those drivers to work when they have many more choices today than they had five years ago. The most important thing in terms of driver wages and satisfaction is how many deliveries per hour these drivers get. That drives the compensation.”
Allison also points out that many Domino’s franchisees—about 90 percent—began as drivers or answering phones in the stores. By supporting delivery drivers, Domino’s is investing in the future of its franchisees.
“We're attracting drivers, not only for the near term wages, but also for those that have the vision around the longer-term opportunity to potentially be a franchise owner at Domino's Pizza,” Allison said.
Prepping for growth
2018 marked a massive year of growth for Domino’s, both internationally and domestically. Growth was slower toward the beginning of the year but ramped up at the end. In the fourth quarter, 127 stores opened and two closed.
Domino’s opened 258 U.S. stores in 2018, which was the “most U.S. net store openings we have had since 1988,” Lawrence said. Domino’s also opened its 10,000th store outside the U.S. last year.
In 2018, the company closed nine U.S. stores and 125 global stores.
Moving forward, it expects store growth to remain between 6–8 percent for 2019. “We don't see any concerns in the quarter from our corporate store growth,” Allison said. “We feel very good about the growth and profitability in that business.”
Some markets are fully saturated, but Allison said there is still white space for Domino’s to fill.
“One of the really terrific things that is happening right now with the resurgence in store growth in the U.S. is that we are developing new franchisees at a faster pace than we have in many years,” Allison said.
“The health of our business and system is heavily reliant on our franchisees' success,” he added. “When we look at unit growth going forward and we engage in conversations with our franchisees about building new stores, we absolutely take into account what type of impact we might have on the comps in the existing stores.”
Winning with loyalty
Domino’s is using its Piece of the Pie loyalty program and app as another way to drive traffic. Not only is the program a way for customers to interact with the brand, but it’s also allowing Domino’s to increase brand awareness and engagement on the digital side of the business.
During the Super Bowl, the company launched a revolutionary loyalty program through its app where customers could earn points by taking pictures of any pizza on the app.
"Instead of advertising during Sunday's game, we decided to invest in a breakthrough program that rewards everyone who loves pizza as much as we do," said Art D'Elia, Domino's senior vice president and chief brand officer, in a statement.
Since the app launched three years ago, it has grown to 20 million active users.
“The Points for Pies program is a terrific enhancement to that program and our loyalty program does have a half-life, and our approach was not to wait until we hit ours, but to continue to bring more news and to bring more interesting ways for consumers to sign on with our program and get actively involved in it,” Allison said.
Since the app launched, Domino’s transformed the platform to increase engagement and transactions from existing customers, while testing out new promotions—like the new loyalty program—to get new customers on the platform.
“We're continuing to drive sales and engagement with existing loyalty members, while we continue to bring new members into our program,” Lawrence said. “And we continue to see terrific engagement from those that joined us three years ago.”