Amid continued inflation and industry-wide labor shortages, Domino’s Pizza reported positive national third-quarter results Thursday morning, including a 2% increase in same-store sales.
This is compared to a negative of 2.9% in Q2. In fact, three of the past four quarters have been negative for the brand — a trend the company hasn’t seen in a decade, as it tracked abnormally positive trends in the first two years of the pandemic.
In a statement, CEO Russell Weiner said, “Our team members and franchisees around the world have continued to demonstrate the agility and perseverance needed to operate in a volatile macro environment. As we enter the fourth quarter, I believe Domino’s is poised to emerge from these volatile times stronger than ever.”
During the company’s earnings call Thursday morning, Weiner and Chief Financial Officer Sandeep Reddy explained the reasons for their optimism. For starters, the company is experiencing sequential staffing improvements, which has been a major hurdle in recent quarters, resulting in unfulfilled orders and reduced hours of operation in some locations.
Domino’s breaks down its system into quintiles based on restaurant headcount. The gap between the top and bottom quintiles is narrowing each quarter – from 17 points in the first quarter to 11 points in the second quarter and 8 points in the third quarter – and service times are improving accordingly. Weiner said the number of job applications and new hires at company stores was “more or less” at 2019 levels.
“There’s still work to be done, but we’re still making progress,” Reddy said. “Each quarter, sequentially, I’ve seen an improvement in (franchisee) sentiment as solutions are found, performance improvements are made, and the latest decision on our domestic offering has been well received.”
This national offer includes a 20% discount for digital orders, which did not impact franchisee margins, according to Reddy.
“There are two strategic reasons why we did (the discount). Firstly, as a brand, what Domino’s tries to do whenever there is a big tension in society is to show that we stand up for our customers,” Weiner added. “With inflation, everything is up, so Domino’s offering a 20% discount is a strategic communications move more than anything else.”
Domino’s is adding a second communication tactic next week by increasing its mix and match deal from $5.99 to $6.99. The 20% discount “gives us room” to do that, Weiner said.
This also follows the company’s recent decision on the delivery side to increase the mix-and-match from $5.99 to $6.99. Overall, pricing in the US system increased 5.4% in the quarter and will increase to around 7% once adjusted deferral prices are in place.
“Going from $5.99 to $6.99 on delivery was the right decision. Given the inflation we’ve seen and our analytics, we should price our national deferral agreement while continuing to balance consumer value and franchisee profitability,” Weiner said.
The chain can have some leverage on the carry side. Domino’s began targeting the delivery channel in 2011 and last year became the No. 1 take-out pizza brand, according to Weiner, citing data from the NPD Group. Deferral activity continues to grow and is up approximately 31% from 2019.
This is an important lever for inflation-weary consumers who may be reluctant to deal with packing slip fees and tips. By comparison, for example, delivery is down 7.5% from 2021. That said, the delivery market is still up nearly 30% from three years ago, which will be a advantage for Domino’s as the workforce improves.
“Our market share, with delivery, food service and takeout, has remained stable over the past year and has increased by more than 200 basis points compared to three years ago. The overlap of customers ordering delivery and delivery is modest, designating each channel as a relatively unique business,” Weiner said.
Executives are also confident that Domino’s is well positioned as a value leader, despite its recent price increases. The chain’s 7% rise remains below the average inflation rate for out-of-home food, which rose 0.9% in September and 8.5% year-on-year, the data showed. of the consumer price index published on Thursday. Full-service prices were up 8.8% year over year, while limited-service prices were up 7.1%.
“Our role in an inflationary environment is to be a strong relative value for customers. When we moved from $5.99 to $6.99, we remained a relative big value on the delivery side. Prices, costs, inputs have changed and our research indicates that we can do the same on the delivery side and maintain relative value,” Weiner said. “I joined the company in 2008 and what I learned then is even more true today. In a world of shrinking consumer confidence, Domino’s will succeed. What we have today that we didn’t have in 2008 is strong carryover activity. We are now a more complete restoration company.
Other Quarterly Highlights
Also during the third quarter, Domino’s sold 114 American company-owned stores to franchisees in Arizona and Utah for $41.1 million. The company expects to record a gain on this transaction in the next quarter.
The company opened 24 net new stores in the third quarter, including 27 openings and three closings, for a total of 6,643 stores. Executives said the new stores are averaging three-year repayments and are optimistic the company will hit 8,000 units in the long run.
