Against the backdrop of continued inflation and industry-wide staffing shortages, Domino’s Pizza delivered positive domestic Q3 results Thursday morning, including a same-store sales increase of 2%.
This is compared to a negative 2.9% in Q2. In fact, three of the past four quarters have been negative for the brand – a trend the company hasn’t experienced in a decade as it lapped anomalously positive trends throughout the first two years of the pandemic.
In a statement, CEO Russell Weiner said, “Our team members and franchisees around the world continued to show the agility and perseverance required to operate in a volatile macro-economic environment. As we begin 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 CFO Sandeep Reddy outlined reasons for their optimism. For starters, the company is experiencing sequential improvements on staffing, which has been a major hindrance throughout the past several quarters, leading to unfulfilled orders and trimmed operating hours at some locations.
Domino’s breaks down its system in quintiles based on how fully staffed restaurants are. The gap between the top and bottom quintiles has been shrinking every quarter – from 17 points in Q1 to 11 points in Q2 and 8 points in Q3 – and service times are improving accordingly. Weiner said the number of job applications and new hires in corporate stores are “more or less” at 2019 levels.
“There is still more work to be done, but we continue to make progress,” Reddy said. “Every quarter, sequentially, I’ve seen an improving (franchisee) sentiment because solutions are being found, there are improvements in performance and the latest decision on our national offer has been well received.”
That national offer features a 20% discount for digital orders, which have not impacted franchisee margins, according to Reddy.
“There are two strategic reasons we did (the discount). First, as a brand, what Domino’s tries to do whenever there is a big tension in society is show we’re advocates for our customers,” Weiner added. “With inflation, everything is up, so Domino’s offering a 20% discount is a strategic communication move more than anything else.”
Domino’s is adding a second communication tactic next week when it moves its carryout mix-and-match deal from $5.99 to $6.99. The 20% discount “gives us room” to do that, Weiner said.
It also follows the company’s recent move on the delivery side to increase mix-and-match from $5.99 to $6.99. Overall, pricing in the U.S. system was up 5.4% on the quarter and will increase to approximately 7% once the adjusted carryout pricing goes into place.
“Going from $5.99 to $6.99 on delivery was the right move. Given the inflation we’ve seen and our analytics, we should take pricing on our national carryout deal as well as we continue to balance consumer value and franchisee profitability,” Weiner said.
The chain may have some leverage on the carryout side. Domino’s began targeting the carryout channel in 2011 and last year became the top carryout pizza brand, according to Weiner, citing The NPD Group data. The carryout business continues to grow and is up by about 31% over 2019.
This is an important lever for inflationary-weary consumers who may balk at the fees and tips involved with delivery orders. By comparison, for example, delivery is down 7.5% relative to 2021. That said, the delivery market remains up almost 30% versus three years ago, which will be a benefit for Domino’s as staffing levels improve.
“Our market share, with delivery, dine-in and carryout, has held steady over the past year and is up by over 200 basis points versus three years ago. The overlap of customers who order delivery and carryout is modest, pointing to each channel as a relatively unique business,” Weiner said.
Executives are also confident Domino’s is well positioned as a value leader, despite its recent pricing increases. The chain’s 7% uptick remains below the average inflation rate for food away from home, which rose 0.9% in September and 8.5% year-over year, according to Consumer Pricing Index data released Thursday. Full-service prices are up 8.8% year-over-year, while limited-service prices are up 7.1%.
“Our role in an inflationary environment is to be a strong relative value for customers. When we went from $5.99 to $6.99, we remained a great relative value on the delivery side. Prices, costs, inputs have changed, and our research indicates we can do the same on the carryout side and maintain relative value,” Weiner said. “I joined the company in 2008 and what I learned then is more true today. In a world where consumer confidence is shrinking, Domino’s will succeed. What we have today that we didn’t have in 2008 is a strong carryout business. We’re a more complete restaurant business today.”
Other quarterly highlights
Also during Q3, Domino’s sold 114 U.S. 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 Q3, consisting of 27 openings and three closures, for a total of 6,643 stores. Executives said new stores are averaging three-year paybacks and are bullish the company will get to 8,000 units in the long-term.