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Text: Today's call will feature commentary from Chief Executive Officer, Ritch Allison and from the office of the CFO, Jessica Parrish.
Both of these documents are available on our website.
Actual results or trends could differ materially from our forecast.
I'll request to our coverage analysts, we would like to accommodate as many of you as time permits.
With that, I'd like to turn over the call to our CEO, Ritch Allison.
Overall, I am very pleased with our results this quarter, which once again demonstrated the strength of the Domino's brand around the world.
We are still navigating through the COVID pandemic across the globe.
Throughout the last 18 months, our franchisees have continued to step up to the challenge in service to their customers, their communities and their team members.
I continue to be extremely proud of our global franchisees and their extraordinary efforts to provide outstanding food through safe and reliable delivery and carryout experiences.
You've heard me speak often about the importance of global retail sales growth and how that drives our business model.
During the second quarter, we delivered 17.1% global retail sales growth, excluding foreign currency impact, driven by a powerful combination of growth in US same-store sales, international same-store sales and global store counts.
The second quarter marked our 41st consecutive quarter of US same-store sales growth and our 110th consecutive quarter of international same-store sales growth.
We also reinforced our leadership position in the pizza category with a very strong quarter of global store growth, highlighted by the opening of our 18,000th store.
We celebrated this terrific milestone with the opening of a beautiful store in La Junta, Colorado.
The pace of net store growth has accelerated significantly during the first half of this year.
When you look at it on a trailing four-quarter basis, our pace of net store growth is increased from 624 in Q4 2020 to 884 in Q2 2021.
During the quarter, we also completed our $1.85 billion refinancing transaction, lowering the cost of our debt and giving us the capacity to return $1 billion to our shareholders through our recently completed accelerated share repurchase transaction.
Overall, the Domino's brand continues to deliver, as our strong same-store sales, store growth and resulting retail sales growth deliver great returns to our franchisees and our shareholders.
She will take you through the details of the quarter and then after that, I'll come back and share some additional observations about the quarter and some thoughts around how we are approaching the business going forward.
Jessica, over to you.
We are excited to share our strong second quarter results with you today.
Overall, Domino's team members and franchisees around the world generated impressive operating results, leading to a diluted earnings per share of $3.06 for Q2.
Our diluted earnings per share as adjusted for certain items related to our recapitalization transaction completed during the quarter with $3.12.
In Q2, we continued to see positive momentum in both the US and international businesses in both same-store sales performance and net unit growth, leading to strong global retail sales growth.
Global retail sales grew 21.6% in Q2, as compared to Q2 2020.
When excluding the positive impact of foreign currency, global retail sales grew 17.1%.
Breaking down total global retail sales growth, US retail sales grew 7.4% and international retail sales grew 39.7%.
When excluding the positive impact of foreign currency, international retail sales grew 29.5% rolling over a prior year decrease of 3.4%.
The prior year decrease in international retail sales, excluding foreign currency resulted primarily from temporary store closures, changes in store hours and service method disruptions in certain international markets as a result of the COVID-19 pandemic.
Turning to comps, during Q2, we continue to lead the broader restaurant industry with 41 straight quarters of positive US comparable sales and 110 consecutive quarters of positive international comps.
Same-store sales in the US grew 3.5% in the quarter lapping a prior-year increase of 16.1%.
Same-store sales for our international business grew 13.9% rolling over a prior year increase of 1.3%.
Breaking down the US comp, our franchise business was up 3.9% in the quarter, while our company-owned stores were down 2.6%.
As we noted on our Q1 call, we continue to observe a larger spread between the top line performance of our franchise stores and our company-owned stores than we have historically seen.
We believe this is primarily a function of the heavily urban and higher income footprint of our company-owned store markets relative to the more diverse mix across our franchise space.
The US comp this quarter was driven by ticket growth due to increases in items per order in our transparent delivery fee as well as the mix of products we sell.
Order count on a same store basis were consistent with Q2 2020 levels, which were higher than Q2 2019 levels, as a result of customer ordering behavior during the pandemic.
The international comp was driven by order growth due to the return of non-delivery service methods, the resumption of normal store hours and the reopening of stores that were temporarily closed in certain of our international markets in Q2 2020.
Shifting to unit count, we and our franchisees added 35 net stores in the US during the second quarter, consisting of 39 store openings and foreclosures.
Our international business added 203 net stores comprised of 217 store openings and 14 closures.
Turning to revenues and operating margins.
Total revenues for the second quarter were up approximately $112.4 million or 12.2% over the prior year quarter.
The increase was driven by higher global retail sales, which generated higher revenues across all areas of our business.
Changes in foreign currency exchange rates positively impacted our international royalty revenues by $4 million in Q2 2021 as compared to the prior year quarter.
Our consolidated operating margin as a percentage of revenues increased to 39.5% in Q2 2021 from 38.8% in the prior year, due primarily to higher revenues from our US franchise business.
Company-owned store margin as a percentage of revenues increased to 24.5% from 23.1% primarily as a result of lower labor costs, partially offset by higher food costs.
Recall that we incurred additional bonus pay in the second quarter of last year for team members on the front lines during the COVID-19 pandemic.
Supply chain operating margin as a percentage of revenues decreased to 11% from 11.9% in the prior year quarter, resulting primarily from higher insurance and food costs, as well as higher fixed operating costs driven by depreciation and our new supply chain facilities opened last year.
These increases were partially offset by lower labor costs.
G&A expenses increased approximately $12.3 million in Q2 as compared to Q2 2020, resulting from higher labor costs, including higher variable performance-based compensation and non-cash compensation expense, partially offset by lower professional fees.
Additionally, as we discussed on our Q1 call, we completed our most recent recapitalization transaction during the second quarter in April.
Net interest expense increased approximately $6.7 million in the quarter, driven by a higher average debt balance.
Our weighted average borrowing rate for Q2 2021 was 3.8%, down from 3.9% in Q2 2020.
Our effective tax rate was 19.6% for the quarter as compared to 4.7% in Q2 2020.
The effective tax rate in Q2 2021 includes a 2.3 percentage point positive impact from tax benefits on equity-based compensation.
This compares to an 18.5 percentage point positive impact in Q2 2020.
This decrease was due to significantly fewer stock option exercises in Q2 of this year.
We expect to see continued volatility in our effective tax rate related to these equity-based compensation tax benefits.
Combining all of these elements, our second quarter net income was down $2 million or 1.7% versus Q2 2020.
On a pre-tax basis, we were up $20.6 million or 16.5% over the prior year.
Our diluted earnings per share in Q2 was $3.06 versus $2.99 in the prior year.
Our diluted earnings per share as adjusted for the impact of the recapitalization transaction was $3.12, an increase of $0.13 or 4.3% over the prior year.
Breaking down that $0.13 increase in our diluted earnings per share as adjusted, most notably, our improved operating results benefited us by $0.53, net interest expense adjusted for the impact of the items affecting comparability I discussed previously negatively impacted us by $0.08, a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.12, and finally our higher effective tax rate, resulting from a lower tax benefits on equity based compensation negatively impacted us by $0.44.
Shifting to cash, our strong financial model continue to generate significant cash flow throughout the second quarter.
During Q2, we generated net cash provided by operating activities of approximately $143 million.
After deducting for capex, we generated free cash flow of approximately $126 million.
Regarding our capital expenditures, we spent approximately $17 million on capex in Q2, primarily on our technology initiatives, including our next-generation point-of-sale system.
As previously disclosed, during Q2, we also entered into an accelerated share repurchase transaction for $1 billion.
We received and retired approximately 2 million shares at the beginning of the ASR.
The ASR settled yesterday and we received a retired an additional 238,000 shares in connection with this transaction.
In total, the average repurchase price throughout the ASR program was $444.29 per share.
We also paid a $0.94 quarterly dividend on June 30.
Subsequent to the end of the quarter, our Board of Directors declared a quarterly dividend of $0.94 per share to be paid on September 30.
In closing, our business continued its strong performance during the second quarter and we are very pleased with the results our franchisees and team members around the world delivered.
And I'll begin my comments with a look at our US business.
For months now, many of you have been asking how we would lap the tough comparisons from Q2 of last year.
My answer has always been that we're not focused on managing to a 12-week quarter.
We are focused on building the business for the long term and that long-term focus on great product, service, image and technology is precisely why we were able to deliver a terrific quarter, highlighted by 7.4% US retail sales growth, lapping 19.9% from Q2 2020.
Turning to same-store sales, perhaps the thing I'm most pleased about when I look at the 3.5% US comp is the fact that we were able to hold orders flat while overlapping the big gains from Q2 2020.
I'm also pleased that our ticket growth was driven by a very healthy balance of more items per order and modest menu price and delivery fee increases.
We achieved positive comps in both our delivery and carryout businesses, with delivery driven by ticket and carryout driven by a balance of order count and ticket growth.
We continue to see strong growth across our business in the quarter.
You've often asked, if our sales growth might be weaker in markets that had more fully reopened, but to the contrary, the opposite trend emerged through the second quarter where we saw higher levels of sales growth in the second quarter in the markets with fewer COVID-related restrictions.
Similar to Q1, we saw the comp growth in rural areas outperformed urban areas, and less affluent areas outperformed more affluent areas.
These differences, combined with the impact of more aggressive fortressing, accounted for much of the same-store sales gap between our corporate store and franchise store businesses.
We saw sales benefits during the quarter from the federal government stimulus, particularly the checks that we delivered back in March.
It's difficult to quantify the magnitude of the impact of the one-time distributions and the ongoing unemployment and other government payments to consumers, but we believe that they do continue to have some positive sales impact on our business.
Due to the strong sales throughout the quarter, we once again elected not to run any of our aggressive boost week promotions, but instead remain focused on providing great service and offering great value to our customers every day.
As we continue to experience COVID overlaps, we believe it will be instructive to continue to look at the cumulative stack of comparable US same-store sales anchored back to 2019 as a pre-COVID baseline.
At 19.6% for Q2, we saw a material sequential improvement of the two-year stack when compared to the first quarter.
Beyond the comps, when you look at the absolute dollars, our second quarter same store average weekly unit sales in the US exceeded $27,000, another sequential uptick from the levels seen in the first quarter.
Now turning to the other critical component of our retail sales growth, new store openings, our addition of 35 net stores was softer than we expected.
We have a very strong pipeline of future openings, but had a number of stores delayed due to store level staffing challenges and construction, permitting or equipment delays.
We hope to accelerate the pace of openings during the second half of the year as some of the delays in unit growth may subside.
I'll turn and speak now about the carryout and the delivery businesses.
We saw the return of carryout order growth in Q2 and we continue to build awareness of Domino's car-side delivery.
We ran a brief 49% off car-side delivery awareness campaign during the quarter and just recently launched a campaign highlighting our Car Side Delivery 2-Minute Guarantee.
This campaign hits on two key elements of the Domino's brand, service and value.
Our franchisees and operators have fully embraced car side delivery and we are consistently averaging below 2 minutes out the door and on our way to the customer's cars.
This is a great technology enabled way to serve our customers and will remain an important part of our strategy as we continue to evolve the carryout experience, not only to enhance the loyalty of our current carryout customers, but also to reach a new different and largely untapped drive-through oriented customer going forward.
For the delivery business, I was also very pleased to see positive delivery same-store sales growth during Q2, while facing very difficult overlaps.
We brought back the noise to highlight our partnership with Nuro for autonomous delivery.
This campaign hits on our technology and innovation leadership, while having a little bit of fun with our old nemesis, The Noid.
We continue to learn as we pilot a true autonomous pizza delivery experience to select customers in the Houston market.
Now turning to staffing, I'll reiterate something I said back in April.
We continue to operate in a very difficult staffing environment for our stores and our supply chain centers.
The combination of COVID, strong sales, the accelerating economic growth across the country and the ongoing government stimulus continue to result in one of the most difficult staffing environments that we've seen in a long time.
And frankly, this led to higher margins in our corporate store business than we would like to see.
The reality is that we were operating during the quarter with fewer team members than we would like to have in many of our stores.
This puts pressure on our operators to meet demand, while continuing to deliver great service.
In the back half of the year, we expect to implement additional wage increases across certain corporate store markets and positions.
And as we look forward in the US business, we will continue to make the necessary investments to drive retail sales growth into the future.
We recently announced our plans to build another supply chain center in Indiana, which we expect to complete by the end of 2022.
We are making solid progress on the rewrite of our POS point-of-sale system and we'll continue that multiyear investment, along with additional investment in our enterprise systems to support the business.
We will continue to invest in technology, operations and product innovation to support our carryout and our delivery businesses.
We are continuing to raise wages and invest in our hourly team members and of course as always we will remain focused on value for our customers.
So I'll close out our discussion of the US business by simply saying that the Domino's brand has never been stronger and I remain confident in our ability to drive sustainable long-term growth.
Now let's move on to international.
It was an outstanding quarter of performance for our international business.
Our 29.5% international retail sales growth, excluding foreign currency impact was supported by an exceptional 13.9% comp, continuing the momentum we had in the first quarter.
As I discussed earlier with our US business, we're also watching the two-year comp stacks for international, anchoring back to pre-COVID 2019 and we'll continue to do so throughout 2021.
Q2 represented a 15.2% two-year stack, a sequential improvement over the first quarter.
I'm particularly pleased with our strong momentum on store growth as international provides a significant push toward our two to three-year outlook of 6% to 8% global net unit growth.
Our 203 net stores in Q2 increased our trailing four quarter pace of international store growth to 653 net stores.
Our accelerated store growth continues to be driven by our outstanding unit level economics and the strong commitment of our international master franchise partners.
During the quarter, COVID continue to have a significant impact on many of our international markets and we expect COVID to remain a challenge in many parts of the world for some time to come.
At the end of the quarter, we had fewer than 175 temporary store closures, with many of those located in India, which has been hit particularly hard by COVID.
The company mounted a series of initiatives to support their employees and families through this unprecedented crisis.
This included a cross-functional team that provided employee assistance 24/7 as well as several COVID isolation centers with oxygen concentrator banks.
Jubilant mounted a massive vaccination drive for all of their employees and dependent family members.
Challenging times always bring out the best in Domino's franchisees and I could not be more proud of our leaders in India and how they have responded to this crisis.
I'd also like to highlight a few international markets that drove terrific growth during the quarter.
China passed the 400 store milestone during Q2 and once again Dash, our master franchise partner delivered outstanding retail sales growth for the brand.
China is without question, one of the most exciting businesses in the Domino's system with significant long-term runway for growth.
Japan reached the 800 store milestone in the weeks following the close of our second quarter and continued the outstanding performance under master franchisee Domino's Pizza Enterprises ownership.
The UK, Germany, Mexico and Turkey were also large market highlights in a strong quarter of performance across our international business.
I am proud of our master franchisees and their operators for their great work thus far in 2021, and I remain optimistic about our international retail sales growth opportunity over the long term.
So in closing, I'm very happy with our Q2 results.
Great franchisees and operators, combined with outstanding unit level economics place us in an enviable position within our industry and give us a strong foundation for future growth.
There is absolutely no question that Domino's is the global leader in QSR pizza, but there is still so much opportunity ahead of us to drive global retail sales growth and to grow market share around the world in both our delivery and carryout businesses.
As we look to the back half of the year and beyond, you can be confident that we will remain focused on winning the long game.

user
compname reports q2 earnings per share of $3.06.
q2 adjusted earnings per share $3.12.
q2 earnings per share $3.06.
qtrly international same store sales growth of 13.9%.
qtrly u.s. same store sales growth of 3.5%.completed $1.0 billion accelerated share repurchase transaction in july 2021.
given our current operating environment, we are watching our two-year sales trends anchored to pre-covid fiscal 2019 results.

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