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Text: Today's call will feature commentary from Chief Executive Officer.
Ritch Allison and from the office of CFO, Jessica Parrish.
I ask that members of the media and others to be in a listen-only mode.
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 for you to accommodate that -- we would like to accommodate as many of you as time permits.
So we encourage you to ask only one one-part question on the call if you could, please.
Overall, I'm happy with our results this quarter, which once again demonstrated the powerful growth potential of the Domino's brand around the world.
The third quarter presented significant challenges related to COVID and specifically the rise in the Delta variant across the U.S. and around the world.
Our system had to pivot yet again in response to the resulting changes in public health guidance and requirements.
As this pandemic extends deep into its second year, I'm proud to say that our franchisees have continued to step up to meet the ongoing challenge in service to their customers, their communities and their team members.
Throughout the Domino's system, we'll remain committed to serving our customers with outstanding food through safe and reliable delivery and carryout experiences.
Now, you've heard me say it many times.
Global retail sales growth is the engine that drives our business model.
During the third quarter, we delivered 8.5% global retail sales growth, excluding foreign currency impact, driven by a combination of store growth and same store sales.
That 8.5% result was lapping a 14.8% from the third quarter of 2020.
The third quarter extended our unmatched streak of international same store sales growth to 111 consecutive quarters.
While our 41 quarter streak of positive same store sales in the U.S. ended during the quarter, I'm pleased that we still grew our U.S. retail sales during the quarter, while rolling over 21.3% retail sales growth in Q3 2020.
During the quarter, we also accelerated our pace of global store growth on a trailing four-quarter basis, we have opened 1124 net new stores, that's an increase of 500 relative to where we were in Q4 2020.
Over the last four quarters, we've averaged just a touch above three net new stores every day.
So, overall the Domino's brand continues to deliver.
She will take you through the details of the quarter and then I'll come back to share some additional thoughts about the business.
Jessica, over to you.
We are pleased to share our third quarter results with you today.
Overall, Domino's team members and franchisees around the world continue to generate healthy operating results, leading to a diluted earnings per share of $3.24 for Q3.
In Q3, we sustain our positive momentum in both our U.S. and international businesses, resulting in year-over-year global retail sales growth.
Global retail sales excluding the positive impact of foreign currency grew 8.5% in Q3 as compared to Q3 2020.
Breaking down total global retail sales growth, U.S. retail sales grew 1.1% rolling over a prior year increase of 21.3%.
International retail sales excluding the positive impact of foreign currency grew 16.5% rolling over a prior year increase of 8.5%.
During Q3, we continued our streak of 111 consecutive quarters of positive international comps.
Same store sales for our international business grew 8.8% rolling over a prior year increase of 6.2%.
The U.S. comp was negative in Q3 following 41 straight quarters of positive same store sales growth.
Same store sales in the U.S. declined 1.9% in the quarter rolling over a 17.5% increase in same store sales in Q3 of 2020, the highest quarterly U.S. comp we have ever achieved since becoming a publicly traded company in 2004.
Breaking down the U.S. comp, our franchise business was down 1.5% in the quarter, while our company-owned stores were down 8.9%.
We continue to observe a larger spread between the top line performance of our franchise stores and our company-owned stores than we historically observed, which we believe is a function of the heavily urban and higher income footprint of our company-owned store markets relative to a more diverse mix across our franchise base.
More aggressive purchasing in our company-owned store markets also contributed to the same store sales gap between our corporate store and franchise store businesses.
The decline in U.S. same store sales this quarter was driven by lower order counts.
Our U.S. order counts during Q3 were pressured by a very challenging staffing environment, which had certain operational impacts such as shortened store hours or customer service challenges in many of our stores.
Additionally, since the onset of the pandemic, our comps had also benefited from significant economic stimulus activity in the U.S., the effects of which largely tapered off in the third quarter, which we believe pressured our order counts as compared to Q3 2020.
Ticket growth partially offset the decline in order counts as we continue to see consumers or there are more items per transaction during Q3.
The ticket comp also benefited from increases to our transparent delivery fee as well as the mix of products we sell.
The international comp was primarily driven by order growth due to the return of non-delivery service methods across a number of international markets as well as the resumption of normal store hours in the reopening of stores that were temporarily closed in certain of our international markets in Q3 2020 due to the COVID-19 pandemic.
Shifting to unit count, we and our franchisees added 45 net stores in the U.S. during the third quarter, consisting of 46 store openings and only one closure.
Our international business added 278 net stores comprised of 287 store openings and 9 closures.
Turning to revenues and operating margins.
Total revenues for the third quarter were up approximately $30.3 million or 3.1% over the prior year quarter.
The increase was driven by higher retail sales, which generated higher international royalty, supply chain and U.S. franchise revenues.
Changes in foreign currency exchange rates positively impacted our international royalty revenues by $1.3 million in Q3.
Our consolidated operating margin as a percentage of revenues increased to 38.6% in Q3 2021 from 37.4% in the prior year, due primarily to higher revenues from our global franchise businesses.
Company-owned store margin as a percentage of revenues was flat year-over-year at 19.8%.
As a percentage of revenues, food and occupancy costs were higher year-over-year, offset by lower labor costs.
Recall that we incurred additional bonus pay in the third quarter of last year for frontline team members and although we did make investments in frontline team member wage rates during Q3, we continue to experience staffing shortages in certain of our company-owned stores.
Supply chain operating margin as a percentage of revenues increased to 10.7% from 10.2% in the prior year quarter.
While the market basket increased 2.1% year-over-year, higher product and supplies expenses related to certain COVID related safety and sanitizing equipment negatively affected the supply chain operating margin in Q3 2020, which did not recur in the current quarter.
This year-over-year decrease in product costs was partially offset by higher labor costs.
G&A expenses increased approximately $4.7 million in Q3 as compared to Q3 2020 resulting from higher travel and labor costs, including higher non-cash compensation expense, partially offset by lower professional fees.
Net interest expense increased approximately $7.1 million in the quarter, driven by a higher average debt balance due to our recent recapitalization transaction completed in Q2.
Our weighted average borrowing rate for Q3 decreased to 3.8% from 3.9% in Q3 2020 due to lower interest rates on our outstanding debt as a result of this recapitalization transaction.
Our effective tax rate was 10.7% for the quarter as compared to 19.9% in Q3 2020.
The effective tax rate in Q3 2021 included a 10.4 percentage point positive impact from tax benefits on equity-based compensation.
This compares to a 2.8 percentage point positive impact in Q3 2020.
This increase was due to more stock option exercises in Q3 of this year.
We expect to see continued volatility in our effective tax rate related to these tax benefits from equity-based compensation.
Combining all of these elements, our third quarter net income was up $21.3 million or 21.5% versus Q3 2020.
Our diluted earnings per share in Q3 was $3.24 versus $2.49 in the prior year quarter.
Breaking down that $0.75 increase in our diluted EPS, most notably, our improved operating results benefited us by $0.36.
Our lower effective tax rate, primarily due to higher tax benefits on equity based compensation positively impacted us by $0.34.
A lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.19 and higher net interest expense negatively impacted us by $0.14.
Shifting to cash, our strong financial model continues to generate significant cash flows.
During Q3, we generated net cash provided by operating activities of approximately $189 million.
After deducting for capex, we generated free cash flow of approximately $172 million.
Regarding our capital expenditures, we spent approximately $17 million on capex in Q3, primarily on our technology initiatives, including our next-generation point-of-sale system and our new supply chain center.
Our strong free cash flow generation allowed us to continue our long-term commitment to returning cash to shareholders.
As we discussed on the Q2 earnings call, we completed our $1 billion accelerated share repurchase transaction during Q3.
Subsequent to the settlement of the ASR, during Q3, we repurchased and retired approximately 153,000 shares for $80 million or an average price of $521 per share.
As of the end of Q3, we had approximately $920 million remaining under our current Board authorization for share repurchases.
We have continued to repurchase and retire shares subsequent to the end of the quarter and through October 12, we had repurchased and retired an additional 205,000 shares for approximately $100 million or an average price of $488 per share.
We also returned $35 million to our shareholders during Q3 in the form of a $0.94 per share quarterly dividend.
Shifting gears, as we look toward our fourth quarter, we wanted to provide an update on our annual guidance measures for full year 2021 provided earlier this year.
We previously provided guidance that our store food basket pricing in our U.S. system would increase approximately 2.5% to 3.5% over 2020 levels.
We previously provided guidance that foreign currency could have a $4 million to $8 million positive impact on royalty revenues as compared to 2020.
We previously provided guidance of $415 million to $425 million for G&A expense.
Based on our current outlook, we expect each of these three measures to come in at the high end of these current estimates.
We continue to expect that our full year capex investments will be approximately $100 million.
Keep in mind that these metrics can change based on economic and other factors outside of our control.
Our G&A expense is also affected by our own performance versus our plan, which affects variable performance-based compensation expense.
These estimates also reflect our normal 16-week Q4, which will be rolling over the 17-week Q4 we had in 2020 due to the inclusion of a 53rd week in our fiscal year.
Recall that the 53rd week last year contributed an incremental $0.39 to our earnings per share in Q4 2020 due to the additional week of revenues and the costs attributable to the 53rd week.
In closing, our business continued its solid performance during the third quarter and we are proud of the results our franchisees and team members around the world delivered.
I'll begin my comments with a look at our U.S. business.
Retail sales grew 1.1% in the third quarter, lapping a 21.3% increase from Q3 2020.
Our 1.9% same store sales declined during the quarter, was offset by the positive impact of 232 net new stores that we have opened over the trailing four quarters.
Now let's take a few minutes to further break down the U.S. retail sales growth into it's two components: store growth and same store sales.
Our 45 net new stores in Q3 was a sequential improvement over Q2, but still came in softer than we would like to see.
While cash on cash returns remain very strong and we continue to see a robust pipeline of future openings, we and our franchisees had a number of store openings delayed due to a variety of factors.
We and our franchisees saw delays in construction, equipment, utility hookups and inspections.
In addition, franchisee staffing challenges also resulted in some delays.
We remain very bullish on the unit growth potential in the U.S., but believe that we may continue to see some of these challenges in the months ahead.
Now let's turn to same store sales.
As we continue to experience COVID overlaps, we believe it's instructive to look at the cumulative stack of comparable U.S. same store sales anchored back to 2019 as a pre-COVID baseline and we'll continue to do so for as long as we believe it is useful in understanding our business performance.
At 15.6% for Q3, we saw a sequential decline of the two-year stack when compared to the second quarter, bringing us back more in line with the two-year stack we saw in Q1 of this year.
So what changed from Q2 to Q3.
Jessica highlighted several key drivers that I'll expand on here.
First, we believe that government stimulus had an impact on our sales in Q2 that waned in the third quarter as we moved further away from the spring one-time payments and as other enhanced benefits tapered off.
Second, we saw more pronounced staffing challenges across the country, resulting in reduced operating hours and service challenges in a number of stores across the network.
We believe these challenges posed a more significant headwind on orders and sales during the third quarter than they did during the first half of this year.
We and our franchisees are taking a number of actions to address the staffing issues.
A new applicant tracking system rolled out a few weeks ago that will make it easier for candidates to apply for openings and to be onboarded at both corporate and franchise locations across our U.S. system.
We are also sharing operational best practices to eliminate unnecessary time-consuming tasks in the operation of stores, like pre-folding boxes, for example.
They can drive both team member and customer satisfaction.
In our corporate stores, we have recently implemented meaningful increases in team member compensation and are also piloting new approaches to team member onboarding, training and development.
While I'm optimistic about the efforts that we and our franchisees have underway, we believe that staffing may remain a significant challenge in the near term as the labor market continues to evolve.
Now I'll share a few thoughts specifically about the carryout and delivery businesses.
We saw a positive carryout same store sales growth during Q3, as we continue to build awareness of Domino's car side delivery.
We are on air for several months with a fun campaign highlighting our car side delivery two-minute guarantee.
This campaign hits on two key elements of the Domino's brand.
I'm very pleased with our car side delivery performance as our franchisees and operators have enthusiastically embraced this new service method.
It's also bringing in new customers.
We have consistently averaged below two minutes out the door and on our way to the customer's cars.
In fact, we have many stores across the country that are consistently below 1 minute.
It's a great technology enabled way to serve our customers and will remain an important part of our long-term strategy to serve our existing carryout customers and to attract new QSR drive through oriented customers going forward.
I'm also excited to talk about our latest menu innovations.
Just this past Monday, we went on air to launch three great new products to support our signature $7.99 carryout offer.
We call them dips and twists and they hit the mark for great taste and consumer appeal with terrific economics for our franchisees.
I'm excited about the impact these can have on sales and on store level profitability.
I really hope you'll get out and try them.
We have one sweet and two savory dip options in this new product line.
Baked apple, five Cheese and my personal favorite cheesy marinara.
Turning to our delivery business.
Q3 saw a same store sales decline relative to 2020, but delivery sales remain significantly above 2019 levels.
During the quarter, we believe that the stimulus wind down and the staffing challenges that I referenced earlier, had a disproportionate impact on our delivery business.
Just a few weeks ago, we launched a new ad campaign to support the delivery business.
It plays on a key tension that consumers have with third-party delivery apps, the surprise fees that are often charged for service, for small orders or simply because you live in a certain zip code.
Consumers also tell us that they hate the fact that these charges are often confusing, hidden or buried in the receipt.
Domino's and our franchisees never charge surprise fees.
We charge one transparent delivery fee.
So, we decided to give our customers surprise frees instead of surprise fees.
During this campaign, one out of every 14 digital delivery orders receives a free item.
That item could be a pizza, stuffed cheesy bread, lava cakes or any one of a number of other great items.
Over the course of the campaign, Domino's and our franchisees will give away $50 million worth of surprise frees to delivery customers.
Now this campaign supports two of our key brand attributes: value and transparency.
I'll also share a few important milestones that occurred in the U.S. during the quarter.
First, we broke ground.
Just a few weeks ago on a new supply chain center in Indiana, which we expect to complete and open by the end of 2022.
And second, we are now running a pilot version of our new Pulse point-of-sale system in a live store environment and we will continue to invest in that multi-year project going forward.
So, as we look forward in the U.S. business, I remain optimistic about our ability to continue driving long-term growth.
We'll manage through the staffing and other challenges in the short term.
Frankly, that's what Domino's franchisees and operators do and have always done and will continue to leave the brand with a clear focus on long-term profitable growth for our franchisees and DPZ.
Now moving on to international.
It was another outstanding quarter of performance for our international business.
Our 16.5% international retail sales growth, excluding foreign currency impact, was supported by a very strong 8.8% comp.
When you look at it on a trailing four-quarter basis, excluding the impact of foreign currency and the 53rd week of 2020, Domino's International retail sales grew by 16.2%.
As I discussed earlier with our U.S. business, we are also watching the two-year comp stacks for international, anchoring back to pre-COVID 2019.
Q3 represented a 15% two-year stack, which was very consistent with the second quarter.
International store growth was a highlight during the quarter.
Our international master franchisees opened 278 net new stores during the quarter, which increased the trailing four-quarter pace to 892 stores for the international business.
This acceleration and international store growth combined with our U.S. store growth has driven the global pace of store growth back into our two to three-year outlook range of 6% to 8% global net unit growth.
I was also very pleased to see that we had only nine closures in international and only 10 closures on a global basis during the quarter.
This low level of store closures is driven by two factors.
First, our outstanding unit level economics and second and very importantly, the strong commitment of our franchisees across the globe.
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 estimate Domino's had fewer than 175 temporary store closures, with many of those located in India and New Zealand.
I'll highlight a few of the international markets that contributed significantly to our growth during the quarter.
We successfully converted 52 stores in Poland as Dominion pizza rebranded to become part of the Domino's family.
This provides important scale for us in Poland, fast-forwarding us to 119 total stores in the market at the end of the third quarter.
We now have 24 international markets with 100 or more Domino's stores.
We opened our 93rd international market during the quarter, officially welcoming Lithuania to the Domino's family.
We're off to a great start there with the first store opening and we have a second one coming very soon.
India resumed an impressive pace of store growth, while becoming the first Domino's market outside the U.S. to reach 1400 stores.
I could not be more proud of Jubilant, our master franchise partner, and the efforts they have made to fight through COVID, taking care of their people, while still growing their business.
Japan had another outstanding quarter, passing the 800-store milestone and continuing its impressive streak of growth.
The transformation of the market by master franchisee Domino's Pizza Enterprises has been remarkable.
China delivered double-digit same store sales growth, while continuing its strong pace of store growth.
With each passing quarter, we become even more confident about the long-term growth potential for the Domino's brand in China.
In addition to those markets, the U.K., Mexico, the Netherlands, Turkey and Colombia were additional large market highlights in a strong quarter of performance across our international business.
And along with those markets, we also saw robust regional growth across the Middle East and Northern Africa during the quarter.
I have long been convinced that we have the best international franchise partners in the restaurant business and they certainly prove me right during the third quarter.
So in closing, I'm pleased with our third quarter results.
Our outstanding franchisees and operators continue to battle through a challenging set of circumstances, while delivering strong growth for the Domino's brand around the world.
These passionate Dominoids combined with our outstanding unit level economics, position us incredibly well for the future.
There is no doubt that we will continue to experience challenges with COVID, with staffing, and other factors.
We also expect inflationary headwinds to continue impacting Domino's and the broader restaurant industry over the coming quarters.
But we will face all of these challenges and headwinds from a position of strength and with the unwavering commitment of our franchisees and team members who proudly wear the Domino's logo.
My team and I are proud to serve them each and every day.

user
q3 earnings per share $3.24.
qtrly u.s. same store sales decline of 1.9%.
qtrly diluted earnings per share up 30.1% to $3.24.
qtrly international same store sales growth of 8.8%.

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