Domino’s Pizza’s promotional strategy in the first quarter highlighted side items like Parmesan Bread Bites, and while the move did not spur incremental traffic, it did drive gains in the average check and profit margins at the unit level, which is the first step toward eventually growing in the United States again, officials said.
While the company’s domestic unit count declined a net nine restaurants in the first quarter, Domino’s aim is to set itself up for renewed domestic expansion in the future by shoring up unit-level economics, according to chief executive Patrick Doyle.
“We know that profitable franchisees make for a healthy system, and the goal is to turn those profits into new stores so our domestic store growth rate improves over the long term,” Doyle said.
For the March 25-ended first quarter, Domino’s net income decreased 23.6 percent to $20.7 million, or 35 cents per share, compared with $27.1 million, or 43 cents per share, a year earlier. The company said expenses incurred for its recent recapitalization, which was completed in the first quarter, negatively affected earnings by 12 cents per share.
Revenue fell 1.2 percent to $384.6 million during the quarter, due mostly to less company-owned sales following the divestiture of 58 corporate restaurants to franchisees in 2011, as well as lower supply chain revenue. The lower order counts from Domino’s commissary resulted from the company’s move to promote the Parmesan Bread Bites and Stuffed Cheesy Bread side items, which improved store-level profitability.
Same-store sales rose 2 percent in the United States, including gains of 1.6 percent at company-owned restaurants and 2.1 percent at franchised units. International same-store sales rose 4.7 percent.
Promoting profitability in the U.S.
In the first quarter, Domino’s promotion strategy drove the brand’s domestic same-store sales result far more than mild winter weather and high gas prices, Doyle said. Traffic was slightly negative due to the lack of advertising for core pizza products, “but we love what it did for store profits, and we’re pleased that we’re still growing [comparable sales] off a higher base,” he said.
Corporate store margins rose 2.9 percent during the quarter, and though Domino’s did not quantify the increase in profitability for franchisees, Doyle and chief financial officer Michael Lawton disclosed that franchisees’ profitability averages were slightly higher than those for corporate stores.
The 2-percent increase in same-store sales is exactly in the middle of Domino’s long-term guidance, which is growth between 1 percent and 3 percent for the United States, the executives added. The results show the company's potential to consistently grow sales in the low-single digits off a much larger base of sales it earned with the reformulated pizza launched in early 2010 — which produced a 14.3-percent increase in same-store sales in the first quarter of that year.
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The marketing of side items to build the average check already has given way to new-product news in the second quarter, in which Domino’s is promoting its new flavor of Artisan Pizzas. Doyle said the brand would balance its messaging the rest of the year between core-pizza and side item messaging to even out growth in traffic, average check and profit margins.
Ultimately, he said, once franchisees have their profitability at levels they have targeted they can resume unit growth in the United States in a few years. “If you look at domestic unit growth, we haven’t moved for two decades, really,” he noted. “We’re going to fix that over the medium term, and part of that is getting unit-level profits to a higher level than they’ve been.”
Over the short term, domestic franchisees may grow their unit totals through acquiring company-owned stores or underperforming units from distressed franchisees being weeded out of Domino’s system. “While I’d like them to build new stores, we’re better off as a brand and a system when they buy underperforming stores,” Doyle said. “That trend is easing, which is why there were fewer store closures in the first quarter.”
International gets even bigger
The vast majority in short-term unit growth would come from the international division, Doyle said.
“Stores get built because they should be built,” he said. “It takes some time for that to cycle through, but our franchisees are in a much better place with their overall profitability than they’ve ever been. It’s why we’re seeing incredibly robust results in our international store growth.”
Doyle and Lawton also noted that Domino’s international division’s net opening of 77 locations is the highest first-quarter total in the brand’s history. That expansion led the international system to overtake the United States market in terms of overall number of stores, with 4,912 compared with 4,898 domestic restaurants.
They noted that Turkey and India were particularly strong performers in the first quarter. Surprisingly, Europe’s sales tracked well despite a very weak economy and a few spots of severe unemployment, including rates of more than 24 percent in Spain and in the high teens in Greece, Doyle said.
“Europe has held up really well, and while pizza is not recession-proof, it at least is still recession-resistant,” he said. “Employment levels continue to be the true best predictor of the health of this category, so as you see the extremes in Europe, we feel that. But otherwise, weakness in Europe isn’t showing up in our business.”
Domino’s is based in Ann Arbor, Mich.