It’s hard to shake Domino’s CEO Russell Weiner’s confidence.
The longtime executive entered the brand in 2008 during the initial stages of the Great Recession, so he’s familiar with economic turmoil. What he learned during that time still holds weight.
“In a world where consumer confidence is shrinking and inflation is high, Domino’s will succeed because we have strong, profitable franchisees, a team that makes disciplined decisions based on insights, and have the digital supply chain and delivery expertise to offer best-in-class value and customer experience,” Weiner said during the chain’s Q3 earnings call.
The CEO declared Thursday to investors that Domino’s brand is “as strong as ever.” Internal research shows the chain’s health remains at pre-pandemic levels and that it’s maintained its lead over quick-service competitors when it comes to net promoter scores, taste, and value. Domino’s market share, inclusive of dine-in, carryout, and delivery, has held steady over the past year and is rising more than 200 basis points versus pre-pandemic comparisons.
Carryout continues to be the biggest opportunity. Weiner explained that Domino’s originated as a delivery business, but began inserting offers targeted at carryout in 2011. At the end of last year, the chain became the No. 1 pizza carryout brand in the U.S., according to The NPD Group. Carryout same-store sales were up almost 20 percent year-over-year in Q3, and grew 35 percent on a three-year stack.
Meanwhile, delivery same-store sales declined 7.5 percent compared to last year, a notable improvement from the 11.7 percent decrease in Q2 and the 10.7 drop in Q1. When comparing the top 20 percent of stores (fully staffed) to the bottom 20 percent (struggling with labor), there was an 8 percentage point gap in delivery performance, versus an 11 percentage point margin in Q2 and an even greater 17 percentage point gap in the first quarter.
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Delivery’s sequential increases were attributable in part to a better labor situation. The number of job applications and new hires have increased throughout year, and by the end of Q3, Domino’s was “more or less” back to pre-COVID levels. Additionally, half of stores are connected to call centers, allowing staff to dedicate time to other tasks.
“We delivered around one out of every three pizzas in the United States before the pandemic, and we deliver around one out of every three pizzas today,” Weiner shared.
In March, Domino’s decided to raise the price of its national $5.99 Mix and Match promotion—introduced in December 2009—to $6.99 for delivery orders to offset the higher costs of that transaction. After more than six months of monitoring, the chain found customers responded well to the increase, and as a result, the company will implement the same price hike to carryout orders starting October 17.
“For us here at Domino’s, our approach, whether it’s an inflation environment or a noninflation environment, we need to be the best relative value out there in the [quick-service restaurant] industry,” Weiner said. “Interestingly enough, and it was exactly what our internal research predicted, when we went from $5.99 to $6.99, we still remained a great relative value on the delivery side. Things have changed. Pricing, costs, inputs have changed, and our research now indicates we can do the same thing on the carryout side, and we’ll still remain a large relative value.”
Weiner warned that higher delivery costs may lead customers to make more food at home, a trend that could become more prevalent around the holiday season when wallets are constrained. He also noted that Domino’s is seeing loss of delivery volume from a resurgent dine-in business.
“That’s just the risk factor. We’re in unprecedented inflationary times. How consumer behavior evolves right now is still a little bit more to be seen, but our testing models show that there’s a higher likelihood of switch if inflation remains at these elevated levels,” said CFO Sandeep Reddy.
After same-store sales drops of 3.6 percent and 2.9 percent in the first and second quarters, Domino’s returned to the black with a modest 2 percent rise in Q3. The growth was fueled by 5.4 percent pricing actions and partially offset by declines in order count. Realized pricing will increase to 7 percent in Q4 due to the impact of the Mix and Match carryout bump. The top 20 percent of restaurants, in terms of overall sales, outperformed the bottom 20 percent by fewer than 6 percentage points, a sequentially improvement from the 7 percentage point difference in the second quarter.
The company ran a boost week (50 percent off menu-priced items) in the third quarter—it’s second of 2022 after not running any since the pandemic began. Another is planned for Q4, which brings Domino’s back to its historical boost week cadence. Since early September, the brand has run an “Inflation Relief Deal” in which all menu-priced items—via carryout and delivery—are 20 percent off. The company said franchisee margins were not impacted in a significant way by the promotions.
“Whenever there’s a big tension in society, obviously now the macro tension is around inflation, we try to do a brand action that shows that we are the advocates for our customers,” Weiner said. “So in a time when there’s inflation, and everything’s going up, Domino’s being able to offer 20 percent off was really a more strategic communication move than anything else.”
Domino’s opened a net of 24 U.S. shops in Q3, pushing its domestic count to 6,643. The growth is a steep slowdown from last year, when the U.S. segment opened a net of 45 units. Reddy owed the sluggish movement to delays in permitting and construction. But he added that those headwinds are temporary, and once Domino’s gets past those, he’s confident the pizza chain will reach its long-term of 8,000-plus stores in the U.S.
Subsequent to the end of Q3, Domino’s refranchised 114 corporate stores in Arizona and Utah for $41.1 million. The units were acquired by 11 operators, three of which were first-time franchisees. Six of them bought the first store they worked in.
Internationally, where same-store sales dropped 1.8 percent, the footprint grew by a net of 201 restaurants to 12,876. In total that’s 19,519 stores globally. In Q3 2021, the international business saw a net increase of 278 units; this year’s slower pace was due in large part to the exit from Italy and optimization of the system in Brazil.
“I wouldn’t really read too much into this in terms of where the long-term international trends are going,” Reddy said. “It is very strong in terms of potential.”
Domino’s earned $1.1 billion in revenue in Q3, up from $998 million in the prior year. Net income decreased from $120.4 million to $100.5 million, and income from operations slipped from $180.3 million to $176.5 million.
