Domino’s Pizza, Inc. chief executive Patrick Doyle Tuesday called the company’s second quarter the “perfect example” of how Domino’s long-term business model could produce growth in earnings, same-store sales and store counts, though he acknowledged that the company has much it still needs to accomplish in the United States and abroad.
“To me, the one disappointment in the quarter is that we’ve got to be positive on order counts domestically over time,” Doyle said during the company’s earnings call with securities analysts.
Despite transactions falling an unspecified amount, however, Domino’s improved its operating margin 1.7 percent to 30.5 percent on the way to an 11.3-percent increase in net income for the June 17-ended quarter.
For the period, net income rose to $28.1 million, or 47 cents per share, compared with $25.2 million, or 40 cents per share, a year earlier.
Revenue fell 2.3 percent for the quarter to $376.1 million, compared with $384.9 million a year earlier. Domino’s attributed the decrease mostly to lower supply chain revenues, the sale of several company-owned stores to franchisees over the past 12 months, and negative effects of foreign currency translation.
In the United States, same-store sales rose 1.7 percent, reflecting gains of 1.9 percent at franchised stores and 0.3 percent at company-owned locations. International same-store sales increased 5.7 percent.
Focusing on transactions before growth in U.S.
Much like its domestic results in the first quarter of 2012, Domino’s increased its same-store sales in line with its long-term guidance between 1 percent and 3 percent in the United States. Again like the first quarter, same-store sales were positive and margins and average check improved, though transaction counts were down.
Domino’s mostly marketed its Artisan Pizzas in the second quarter after focusing on advertising side items like Parmesan Bread Bites in the first quarter. Doyle reiterated that Domino’s officials are not satisfied whenever transactions decrease, so the chain will make marketing changes in the back half of the year, though he would not elaborate. The brand began the third quarter by marketing its sandwiches.
“The pizza category looks to be up a little bit, but the U.S. consumer is still pretty darn conservative,” Doyle said. “Until we get certainty resolved around the economy or taxes, I think they’ll stay conservative.”
Another key metric Domino’s is tracking in the United States is net unit growth, which was positive in the second quarter with three net openings. The result comprised eight new stores and, more importantly, only five closures, which was the fewest for Domino’s in quite some time, Doyle said.
“We want to get back to some modest positive net growth domestically, but it’s still going to take some time,” he said. “Financing is now much better for our larger franchisees, but for one- and two-store folks who want to open another location it’s still relatively tough out there.”
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Domino’s will focus domestic-growth efforts on improving unit-level economics and increasing franchisee profitability, Doyle said, adding that franchisees’ per-unit profitability was running $5,000 ahead of last year’s results through the first six months of 2012.
The brand has no plans to deploy its cash into development incentives for franchisees, he added.
International system remains robust
Though Doyle described the macro global economy as “tepid,” especially for Europe, he nonetheless was pleased with the international division’s 5.7-percent increase in same-store sales — which lapped a 7.4-percent gain from a year earlier. The sales success was “very broad-based,” he added, reflecting the fact that Domino’s is spread out over a diverse group of markets and does not rely disproportionately on any handful of countries.
“As you see a weakening global economy, particularly in Europe, we’ve looked at it very closely, and [the volatility] just hasn’t been there,” Doyle said. “We’ve seen weakness in Greece, but we have only 35 stores there. We’ve seen weakness in Spain, but only a little. Really, after that, the rest of Europe is strong for us, and Asia is strong.”
In the second quarter, the chain opened a net 111 restaurants in its international division, bringing its trailing-12-months total to 481 net openings. Domino’s will be devoting more attention to emerging markets like Brazil and China in the coming years, which do not have the sales of other developed markets like Mexico and Australia but hold a lot of promise for the brand.
“Brazil is relatively small for us, but it’s growing nicely,” Doyle said. “We’re getting good results and have a strong partner down there. It doesn’t crack our top 10 yet, but given the size and scale of the market, we’re pleased with where we are. … China is kind of like Brazil, in that it’s a big market, so it’s an area that’s going to get a lot of focus over the years.”
Given that the pizza category is growing in most international markets and that Domino’s has been able to take market share in many countries, Doyle said, the company has no plans to start competing with other Western restaurant chains that have announced plans to discount aggressively, as McDonald’s has done in India, for instance.
Domino’s reached the 5,000-unit milestone for its international system during the second quarter.
Ann Arbor, Mich.-based Domino’s operates 387 restaurants and franchises another 4,514 units in the United States, and it franchises 5,023 locations in more than 70 international markets.