Domino's Pizza Inc (DPZ)

DPZ 
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0.49
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Industry: Consumer Non-Durables
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Domino's Pizza, Inc. (DPZ)

March 08, 2013 11:15 am ET

Executives

Michael T. Lawton - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Analysts

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Presentation

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Good morning. John Ivankoe, JPMorgan. I'm very pleased to have Mike Lawton, who is Domino's Pizza CFO, here with us today. It's really been a terrific story in the past couple of years. It's been one of the better performing stocks in the entire stock market. From many perspectives, in terms of product development, international store growth stability, U.S. store growth and quite frankly, just not only from an analyst observation but a customer observation, some of the most substantive, meaningful and quick changes in terms of the in-store experience that I've ever seen in a brand. So really do want to congratulate Mike, his entire team, Lynn Liddle -- who many of you know from Investor Relations is also here -- and the great job that they've done in the past couple of years. So thank you very much for supporting our event and we look forward to hearing from you today.

Michael T. Lawton

What can I say after such a glowing introduction. We appreciate the fact that John has been very close to us, not just since the last 3 or 4 years, but John was involved going back before we were even a public company or before we had public equity, so he's followed us closely. He's seen some of our ups and downs and we appreciate the recognition.

Let me tell you a little about Domino's. I'll try and be relatively brief. We are a system with over 10,000 stores around the world, about half of which are in the United States, and half of which are now in international markets. Our global retail sales, which are the sales that happened at the store level, not necessarily what's in our income statement, are broke out with 48% outside the United States, and 48% in the U.S., 52% outside the U.S. In the U.S., of our 5,000 -- roughly 5,000 stores, we own 388 of them directly and we operate those, primarily in major urban centers. The rest of the business in the United States is operated through franchisees, many of which have only one store; the largest, which has about 160, and on average, they have 4 stores. In addition to the royalties that we collect from our franchisees and the profits from our corporate stores in the U.S., we also operate a value-added supply chain. We think that it's great to have a commissary business and there are 18 centers spread across the U.S. It provides a good financial return to us. It makes it easy for a franchisee to focus on running their store and we really feel a lot more comfortable about the quality and the consistency of the product that's going into the stores if it's coming out of our supply chain. Franchisees are not required to buy from us. We have to provide an alternative but virtually all of the stores buy all of their product from our U.S. supply chain.

In the international business, which represents about 43% of the retail sales and this has been our high-growth opportunity, we have over -- again, over 5,000 stores. We are entirely franchised. We operate primarily through master franchisees; 4 of these big master franchisees are actually public companies, so you can get additional transparency about our international business if you choose to look in depth into those markets, and that would be the U.K., Australia, our Indian business and the business in Mexico. But the master franchisee model has worked well for us. We collect a royalty from them. In many cases, we split royalties. Obviously, very good profits, very good stability of cash flows and it's resulted in very solid growth. In fact, we've had 76 consecutive quarters without a negative blip and we've been doing a very consistent 4%, 5%, 6% same-store sales growth year after year. We're in over 70 markets spread very well across the world, a lot of geographic diversity.

One of the things that we spend a lot of time and money on in the last few years is to improve our technology. We really do think that we can do a lot to improve our consumer experience by getting them off the telephones and onto either digital ordering platforms or online platform or through mobile. People love our service. We've always been known as a delivery company but we've known, for many, many years, that sometimes, that communication between somebody on the phone in a store and somebody at their home isn't best, plus they don't have a menu in front of them many times if they're at home. By having gone online with very good platforms and we're not the only ones who do it, but we think we're very close if not at the front end of what's going on, we've now got to a point where about 35% of the transactions in the United States and on average, about the same level outside of the U.S., are coming from online ordering. Great benefits to us because the consumers can see that we have a wider range of product than a pepperoni pizza and a coke. They buy more different things from us. We get a little bit of labor leverage, particularly in our busier stores. And most important, the customers say, we really like this experience. And if they really like what we're doing, one would hope that they keep coming back on a more frequent basis. Pizza is not a particularly loyal industry. There aren't many people that buy just from us, so we're looking to continue to try to increase the percentage of occasions that people will buy, instead of going to a competitor and this is just one more thing that we think will help.

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