Domino’s credits same-store sales momentum for accelerated growth

Officials for Ann Arbor, Mich.-based Domino’s Pizza Inc. said the chain’s recent successes, from a 15.6-percent increase in second-quarter profit to $38.5 million to accelerated store growth in the United States and abroad, comes down to the traction the company has sustained in same-store sales.

In the June 15-ended second quarter, Domino’s comparable sales rose 5.4 percent in domestic restaurants and 7.7 percent in stores in its completely franchised international division.

“Our dependable franchise model, robust global business and leading digital strategy worked together to drive great, consistent results,” chief executive Patrick Doyle said, during the company’s earnings call with investors.

Domino’s drove increases in both order counts and average check during the second quarter, Doyle said, citing sales of the chain’s Specialty Chicken, which was its main promotion for the period. He added that Specialty Chicken helped Domino’s and its franchisees deal with higher commodity costs for cheese and pork during the quarter.

“It was good for store-level margins at the time when there were cost pressures from food costs,” he said.

Domino’s chief financial officer Mike Lawton noted that the brand’s overall cost of goods sold rose 5.8 percent in the second quarter and 6.5 percent year-to-date. The average cheese block price for Domino’s in the second quarter was $2.20 per pound, compared with $1.77 per pound a year earlier.

But more beneficial to Domino’s second-quarter results than the add-on effect of Specialty Chicken was the brand’s sustained momentum of sales growth from prior quarters, helped most significantly by Domino’s investments in digital ordering, Doyle said.

The chain derives more than 45 percent of its domestic sales from online, smartphone or tablet orders, and that number should reach 50 percent soon, he said. Nearly half of all Domino’s digital orders are coming from mobile or app orders.

“Every part of the digital mix has been growing, but mobile has been growing clearly much faster than laptops and desktops,” Doyle said. “But we’re still continuing to see growth on the computers as well, which is interesting. It hasn’t been about cannibalization; it’s really been about just faster growth coming from mobile than from computers.”

The tailwind digital provides to average unit volumes has helped franchisees mostly mitigate the volatility in their food costs and largely hold the line on pricing with “judicious” increases, Doyle said.

He would not definitively forecast the future of Domino’s main value offering the past four years, the $5.99 price point in the chain’s mix-and-match offer for medium two-topping pizzas, in a pizza segment that remains as competitive on price and value as ever.

“Clearly it’s done very, very well for us,” he said, “and we like the fact that we’ve been able to be consistent with that, because, frankly, it means that the price isn’t the news. What we’re doing with the brand really becomes the news.”
 

More unit expansion in store

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The momentum from same-store sales growth is fueling an acceleration of store growth as well, both domestically and internationally, Doyle said. On a trailing-12-month basis, Domino’s has opened 70 net new restaurants in the United States, where store growth had all but stopped for years until recently, he said.

Internationally, Domino’s has opened 611 net new stores outside the United States in the trailing 12 months, an 11.1-percent growth rate off its base of 5,508 international locations a year ago. Doyle pointed to the division’s consistent same-store sales growth, which in the second quarter exceeded Domino’s long-term projections between 3 percent and 6 percent.

“I just don’t believe that stores get built because of what’s in a contract,” Doyle said. “Stores get built because they’re going to generate a good return for the people investing in them. The continued strength of the markets and of same-store sales, which is flowing through in the unit economics, certainly correlates to the continued strength in store growth.”

The company is currently trying to prove the economic case for its worldwide reimaging program, which requires all franchisees to adopt Domino’s new look by the end of 2017. Doyle said about 10 percent of all Domino’s stores in the United States have been remodeled or relocated with the new design, including one-quarter of the chain’s 376 company-owned units.

Reimaged stores are producing modest same-store sales increases, but the brand’s leaders are more concerned with the remodeling program’s long-term benefits, he said.

“The real play here is the overall strength and relevance of the brand over the long term,” Doyle said. “Remember, as a business that still does more delivery than carryout, it takes some time for customers to even see the fact that we reimaged the store if they are primarily delivery customers. We really believe in what it means long term for the brand.”

New domestic stores born with the “Pizza Theater” design have been opening with much stronger sales than Domino’s historical averages, he added. The international system has about 20 percent of its 6,119 restaurants reimaged.

Domino’s operates or franchises 11,121 restaurants in the United States and more than 70 foreign markets.

Contact Mark Brandau at [email protected]
Follow him on Twitter: @Mark_from_NRN