Domino's Pizza, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

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*NEW* We are providing this transcript version in a raw, machine-assisted format and it is unaudited. Please reference the audio for any questions on the content. A standard transcript will be available later on the site per our normal procedure. Please enjoy this timely version in the interim.

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Domino’s Pizza, Inc.. The fourth quarter year and 2020 earnings webcast at this time, all participants are in additionality mode. Later, we’ll conduct a question and answer session, and Stetsons will follow at that time. If anyone should require assistance during the conference, please press star then zero on your tax on telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host speaker, Chris Brandon, director, Investor Relations, the levy. Go ahead.

[Chris Brandon:]

Appreciate it, Nora. And good morning, everyone. Thank you for joining us for our conversation today regarding the results of our fourth quarter and full year 2020. Today’s call will feature commentary from Chief Executive Officer Ritch Allison and Chief Financial Officer Stu Levy. As this call is primarily for our investor audience, I ask all members of the media and others to be in a listen only mode. I want to remind everyone that the forward looking statements in this morning’s earnings release and 10K also apply to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecasts. And for more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8-K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today’s call or request to our coverage analysts. We, as always, want to do our best to accommodate all of you today. So we encourage you to ask only one part question on this call, if you would, please. Thank you. Today’s conference call is being webcast and is also being recorded for replay via our website. With that, I’d like to turn the call over to our chief financial officer, Stu Levy.

[Stu Levy:]

Thanks, Chris. And good morning, everyone. We’re excited to discuss our fourth quarter and annual results with you today. Overall, we had a very strong Q4 and full year. Twenty twenty. Despite the ongoing. Overall, we had a very strong Q4 and full year, twenty twenty. Despite the ongoing global challenges presented by covid-19, before we jump into the numbers, I would first like to remind everyone once again that our fourth quarter included an extra week this year, which also included New Year’s Eve and New Year’s Day, both of which are typically major sales days. We have an extra week in our fiscal year every five or six years, depending on how the calendar falls. Typically, our fiscal year consists of three 12 week quarters and a 16 week fourth quarter. But in twenty twenty, our fourth quarter consisted of 17 weeks. In the earnings release we filed this morning, the impact of this additional week has been adjusted out of our twenty twenty results as an item affecting comparability.

[Ritch Allison:]

We invested in equipment and processes designed to ensure their safety and an enhanced sick pay and benefits and enhanced hourly wages, recognizing the unique challenges of working during the pandemic, including the nearly 10 million dollars in bonuses that we paid to our corporate store and supply chain team members in the month of December. And we invested in our communities throughout twenty twenty partnering with our franchisees to donate 10 million slices to first responders, frontline workers and families in need responding to natural disasters by getting food to people in need. Launching a national hiring campaign to provide thirty thousand jobs to workers who may have been displaced from their launching a national hiring campaign to provide 30000 jobs to workers who may have been displaced from theirs, launching a national hiring campaign to provide 30000 jobs to workers who may have been displaced from their. Committing three million dollars to support black communities in the US, including one million dollars to establish the Domino’s black franchise, the Opportunity Fund, and partnering with our franchisees to raise one hundred million dollars over the next 10 years for St. Jude Children’s Research Hospital, we and our franchisees raised thirteen million dollars for St. Jude in twenty twenty alone. Now, looking ahead to 2020 and our U.S. business, we will continue as a work in progress brand, striving to get a little better each and every day. And I’ll highlight a few focus areas. And not surprisingly, most of these areas will not be new news to you. First, we will continue to forger’s our markets, driving faster and more consistent service, lower delivery costs, better economics for drivers and incremental carry out traffic. Forecasting will continue to drive overall store growth, and in twenty twenty one, including in our company owned markets, we will continue to deliver new product innovation in twenty, twenty one. We will continue to produce World-Class advertising and we’re excited to begin our relationship with work and progress as our new advertising agency. We will continue to invest in technology to enable great customer experiences to drive speed, accuracy and efficiency inside our stores to improve our corporate store team members ability to support our business. Value is always a key focus for us, and that won’t change in twenty, twenty one more than ever. With many Americans out of work in these uncertain economic times, value matters and we are committed to maintaining our unquestioned position of value leadership within the QSR pizza segment. We’re ramping up our focus on service in twenty twenty one, getting pizzas out the door to our customers hotter, fresher and more reliably than ever before. Through innovation within our stores, we’re doubling down with technology, with training and with communications. We will continue to invest in our frontline team members across our corporate stores and supply chain centers, increasing hourly wages in many markets and enhancing our team member benefits. We will also be taking a comprehensive look at our environmental impact within the next one to three years. We will set science based, time bound commitments in accordance with the science based targets initiative process to reduce the company’s total contribution to climate change. And as always, we will remain obsessed, absolutely obsessed with franchisee profitability. Stu shared our initial 20 20 store level EBITDA estimate with you in January and we will share the final number with you when that figure is ready. But we do expect it to be higher than the estimate that Stu shared with you last month. While we believe this level of profitability and associated cash on cash returns exceeds any player in our category, we recognize that some of our franchises and our corporate stores are under intense cost pressure. You know, despite higher overall levels of unemployment across the country, many local labor markets remain tight and wages continue to rise. Across the country, fixed costs such as rent and insurance also bring added pressure. But my team and I recognize these challenges, and we remain intensely focused on helping to drive efficiency and profitability at the store and enterprise level for our franchisees, just as we are for our corporate markets. As I look back on the fourth quarter and on the full year, I’m very happy with our U.S. performance, we achieved our thirty nine consecutive quarter of positive same store sales growth and we surpassed eight billion dollars in U.S. retail sales for the very first time. I am confident that we are well-positioned to continue playing the long game in our US business. Now I’m going to move on to international. During the fourth quarter, our pandemic recovery continued as we reopen stores and delivered the strongest quarterly. We’ve reported in four years we marked our one hundred eight straight positive quarter, that’s twenty seven full years, an incredible run that seemed in doubt when covid struck early in the year. And I’m particularly pleased that our master franchisees continue to invest in the business, opening 270 to net stores in the quarter and three hundred and ninety five net for the full year. Now, when you consider that we had about twenty four hundred stores temporarily closed back in Q2, this is truly a remarkable achievement and it highlights the terrific unit level economics that our master franchisees have built in many markets around the globe. There is no question that we had more closures in twenty twenty eight. In fact, we had over three hundred than you would normally see from Domino’s in a typical year. This was driven by strategic choices in several markets to close some previously underperforming units, including a number of units with formats that admittedly would have struggled in the new operating environment rather than reopening them after the pandemic. So when I look forward, I am very optimistic about our master franchisees ability to ramp up our unit growth across the international business, and I want to thank our international partners for their engagement. Throughout the year, we dramatically increased our communication across the system and master franchisees from all over the world really leaned in sharing best practices throughout the year to help their peers and to help our US team manage through the pandemic. This truly demonstrated the power of the global Domino’s system, and we could not have responded so effectively to covid without this level of partnership. Now, I’d love to share a few, 20, 20 market highlights. We open for the first time in Croatia, welcoming the team there to the Domino’s family. We opened ninety five net stores in China and grew retail sales by over 30 percent, accelerating growth in this very important market. We were also very pleased to invest in Dasht Brands, our master franchise partner with a 40 million dollar investment in twenty twenty and the subsequent forty million dollar investment which we completed in Q1 of this year. We are excited to partner more deeply with their terrific management team and investors, and I am more optimistic than ever about the potential for Domino’s in China. Japan was an incredible success story in 20 20, passing the 700 store milestone with one hundred net stores and over 40 percent in retail sales growth. Germany is another market that saw outstanding retail sales growth of over twenty five percent with one hundred excuse me, where we are fast approaching three hundred and fifty stores with much potential for future growth. I’d also like to thank our teams that worked incredibly hard to reopen stores throughout the year following the covid driven closures, India, France, Spain, Mexico, New Zealand and Panama are a few of the markets, along with many others around the world that have pushed hard to bounce back from significant temporary closures and to position themselves for growth in twenty twenty one. Based on the latest reports, we now have fewer than one hundred and fifty temporary international store closures. Now, when we look at this recovery in our international business, India deserves a specific mention. After some strategic store closures earlier in the year, jubilant Foodworks, our master franchise partner, dramatically accelerated growth with 50 net stores in their most recent reported quarter. And as we look forward into twenty twenty one, I remain very optimistic about the long term growth potential of our international business. The opportunity is there. Our unit economics are strong and our master franchisees are committed. Combined with our corporate support and best practice sharing around the globe, we have the recipe to take this business to its full potential. So in closing, 20 20 was a year like none other. But Domino’s is a brand like none other. I am proud of our franchise partners and our team members who once again proved to me that they are the best in the restaurant business. And as we look ahead to twenty twenty one, we are sure exactly what the new normal will look like or when we’ll get there. But we will remain diligently focused on delivering for our customers, our team members, our franchisees, our communities and. Shareholders. At Domino’s, we have a long track record of profitable growth driven by a disciplined operating model. This model served us well and 20 20 and will continue to be the foundation for our growth in twenty, twenty one and beyond. This gives me a great deal of confidence in our ability to grow the Domino’s brand over the long term. That confidence is demonstrated in this morning’s release, where we announced our new two to three year outlook of six to 10 percent global retail sales growth and six to eight percent global net unit growth, as well as our new one billion dollar share repurchase program. So I’ll end my remarks this morning with a heartfelt thank you to our franchise partners and team members. And that’s not just for your efforts in twenty twenty, but also for your continued perseverance in twenty twenty one as we battled covid and the recent winter storms across the US. I am proud to serve you each and every day. And with that, Stu and I will be happy to take your questions.

[Operator:]

Ladies and gentlemen, if you have a question at this time, this press star, then the number one key on your touchtone telephone, if your question has been answered or you wish to remove yourself from the queue, this press the pound key. Just a reminder, you are only allowed to ask one question on your turn. Thank you. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brian Bittner with Oppenheimer. Your line is open.

[Brian Bittner:]

Thanks. Good morning, Rich. Good morning. Appreciate all the remarks and I appreciate the reinstatement of a two to three year sales outlook. And I understand that this year you’ll be lapping in an unprecedented situation from 2020 and that, you know, the visibility may not be as high as normal, but when you’re talking about six to eight percent unit growth, six to 10 percent retail sales growth, does this view also specifically apply to how you are thinking? And we should think about 2021, at least on the unit growth side. You know, it seemed like you had a really nice step up in trends in the fourth quarter, so any additional color would be really helpful. Thank you.

[Stu Levy:]

Sure. Thanks, Brian. Appreciate the question. And, you know, you know, our new outlook that we’ve published is a two to three year look. But specifically to your question on the unit growth. You know, we were really pleased to see some significant momentum building in the fourth quarter of the year, as you saw in in in the store growth numbers that we published both for the U.S. business and for the international business. And, you know, the reality is there was a lot of pent up demand out there throughout the course of the year where we just had challenges getting stores opened up, you know, due to due to construction and permitting and other issues. But the fundamental unit level economics in the business have never been better. You shared a preliminary look at US store level EBITDA last month. And as we as we tabulate the final numbers, we expect it to be at least that one hundred and fifty eight thousand or higher. So terrific economics in the business. Our approach to forecasting in the U.S. and in our international markets is still is still working very, very well for us. And then as it relates to the to the global retail sales growth number, you know, while covid gave us some tailwind on that in the US, it was actually a headwind in the international side of the business. When you look at all the temporary store closures that we had back in in the second quarter where we were up around twenty four hundred units that were closed, which had a significant impact, as you know, on retail sales back then. So we’re optimistic, Brian, as we look forward and that optimism is reflected in in that new outlook that we published this morning.

[Operator:]

Your next question comes from the line of Sara Senatore with Bernstein. Your line is open.

[Sara Senatore:]

Oh, thank you. I wanted to ask about the U.S. kind of competitive background. I was interested. You said the story of 20 20 was really about increased orders and span from existing customers. I know that you always get a lot of questions about consolidation and independence, but I guess my sense would be then, based on what you’re talking about in your business, that maybe the whole category saw a nice tailwind, including both big competitors and independents. So maybe less about share shifts to Domino’s and more about an aggregate kind of. A rising tide. I was just wondering if you could talk a bit about that now that we’re a year into the pandemic, you know, if you have a better sense of maybe where the traffic was coming from are going to and what the interest segment dynamics look like. Thank you.

[Ritch Allison:]

Sure. Thanks, Sarah. And, well, as I answer your question, I’ll break it down a bit across the two businesses that we run out of, each of our out of each of our boxes, you know, across the country. So if you start with the delivery business, you’re most certainly the pandemic brought a tailwind in the delivery business, you know, not just for Domino’s Pizza, but across the category and frankly, across categories. And, you know, during the year we saw, you know, strong growth in both order counts and also growth in ticket in that delivery business as customers tended to order more pizzas. As I mentioned in my prepared remarks, you know, we also saw that in particular, our twenty seven million active loyalty members, you know, ordered more from us. Their frequency increased during the year. If you contrast that with the carry out business carry out in the carry out business, covid actually brought a headwind. You know, for us in terms of customer activity is as fewer as fewer customers during the pandemic. You know, we’re comfortable going out and walking into restaurants even to pick up carry out. Know, we did see some pressure on order counts in the carry out business in the growth story there in twenty twenty. It was really around ticket. Now, prior to the pandemic, that carry out business has been a terrific source of customer acquisition and order count growth for us. So as we look forward into twenty, twenty one, you know, that is one of the important drivers that we see in terms of our ability to continue to grow sales in the US is, you know, the is the restart of that growth on the carry out side of the business.

[Stu Levy:]

And so one thing I’d add to that is, you know, keep in mind, I think as we’ve said before, in a lot of cases, the carry out customer is different from the delivery customer. So it’s not necessarily a shift from carryout to delivery with the same customer base. It’s an increase in delivery and a headwind and carry out. And that’s one of the reasons that we have such a high degree of confidence and kind of excitement about what that business can bring to us moving forward.

[Sara Senatore:]

Thank you.

[Operator:]

Your next question comes from the line of Chris O’Cull with Stifel. Your line is open.

[Chris O’Cull:]

Thanks. Good morning, guys. Rich Several restaurants have accelerated their investments in technology, given the increase they’ve seen in digital orders. And some of these companies are probably starting with newer technology that I’m guessing Domino’s might have even. So do you believe Domino’s needs to ramp up its investment or accelerate plans to ensure its tech does not get surpassed by some of the competitors?

[Ritch Allison:]

Yeah, Chris, a great question. And the answer is, you know, we’ve been investing for a long time and we continue to increase that investment each and every year in technology, because you’re absolutely right. You know that the half life of any lead that you have is pretty short on that side of the business. And, you know, our investments will continue. They did in twenty twenty and we’ll continue to going forward. We’re continuing to make great progress with the development of our next generation of our pulse software, which is really the heartbeat of our of our stores. We’re continuing to invest in our digital ordering platforms. As well, and we saw a really nice growth in in digital ordering, you know, during 20, 20 hour digital sales for the year went up about five points over twenty nineteen. You know, we ran about seventy five percent digital sales throughout twenty twenty. So we will we’ll continue to make investments there to drive the business on the customer side. We’re also ramping up our investments in technology as it relates to how we operate our stores. So I’ve talked a little bit about GPS tracking where we invested in that in twenty 20, substantially rolled that out across the entire US system. We’ll continue to invest there and also additional technology tools at the make line and at the cut table inside our stores to make the jobs easier for our team members and to help us to get pizzas out the door faster to our customers.

[Chris O’Cull:]

Thank you.

[Operator:]

Your next question comes from the line of Lauren Silberman with Credit Suisse. Your line is open at.

[Lauren Silberman:]

Padbury is outpacing international competition from the growth of third party delivery, customer and geographic expansion.

[Ritch Allison:]

Lauren, we can’t we can’t hear you here. I wonder if you could start over maybe a little closer to your mike.

[Stu Levy:]

So, yeah, you’re breaking up.

[Lauren Silberman:]

Go back to.

[Ritch Allison:]

Why don’t we go to the next question and Lauren will come back and try again later?

[Operator:]

The next question comes from the line of John Ivankoe with J.P. Morgan. Your line is open.

[John Ivankoe:]

Hi. Thank you. I know you guys aren’t going to for a lot of logical reasons, give quarterly comp guidance, especially with the comparisons that are about to change so meaningfully, you know, in coming weeks. But I did just want to get your overall thoughts, especially as you do have some leading indicators of markets that have reopened. And, you know, most people talk about the reopening trade of people going back and dining in restaurants. And, you know, a lot of the consumer packaged food companies seem to suggest that they’re not going to lose very much of their own business that they’ve generated through grocery in 2020. You know, so the question is, as we think about the second half of 2001 versus second half of nineteen, or even if we think about, you know, 22 versus 19, you know, what’s your sense? And I guess at this point, you know, it’s a guess, but you guys get to make an educated guess using some of the early market data that you have, you know, of kind of being able to grow sales versus the nineteen level, even if we do, you know, say, hey, you know, comping against, you know, high teens classes is just always going to be difficult for any business. And we just shouldn’t expect that. But how are we feeling second half a 21 or 22 versus 19, given what might be a way for at least certain groups of people to go back to dining inside of restaurants?

[Ritch Allison:]

Hey, John, thanks. Thanks for the question and, you know, I guess what I what I would say, you know, at a at a high level is that, you know, we see a lot of not even with the tailwind that we had in in twenty twenty in the delivery business, you know, we had a headwind on the carry outside of the business, as I talked about earlier. So when I look across, you know, twenty, twenty one, you know, one important growth driver for us is going to be to reaccelerate that growth on the carry outside of the business because we know lapping, you know, some of the delivery tailwind is going to be difficult. We we’re also going to continue to invest in in value in the business as we always as we always have and making sure that, you know, as our customers, you know, continue to manage their households through what is going to be a fairly difficult economic time for a lot of Americans. We believe that continuing to stay focused on value is also going to help us. You know, as a lot of folks who have been paying a lot to have food delivered to their houses, you know, as behaviors start to change and other options open up, you know, we’re going to continue to have dominos as the unquestioned value leader in the in the QSR pizza segment and frankly, broadly across the restaurant industry, when you think about what it costs to have food delivered to feed a family of four, we really like our positioning in that space will also look throughout the year to reinitiate some of our boost weeks, you know, our aggressive value weeks that have been an important part of our strategy to acquire customers, you know, over the last a number of years. So we’re not going to do anything. You know, John, just to lap a cop, that’s not how we that’s not how we manage the business here. Everything that we do is going to be around. How do we continue to drive sustained and profitable long term growth for our franchisees and ourselves?

[Stu Levy:]

And the only other thing I’d just add to that is, you know, we also think we benefit from the fact that our store base is, you know, is everywhere. We’re not urban dominated or suburban dominated. We hit on markets. And, you know, when you when you hear folks talking about the wave of people that are going to rush back in to dine in restaurants, they’re generally coming from more densely populated urban perspective. Where there’s restaurants are more prevalent as you start looking across the landscape. And you look at that relative to our store footprint, it gives us a lot of a lot of confidence to be able to weather some of that.

[John Ivankoe:]

And do you have any evidence of markets like, you know, Georgia, Mississippi, Alabama, Tennessee, maybe, you know, certain parts of Florida that suggests that you are, you know, holding on to that business as.

[Unidentified Analyst:]

Thanks and good morning all I wanted to come back to the market share question, I think you shared ICR, some market share, the delivery, and it was, if I remember correctly, like three six percent. And that really didn’t change from nineteen. So if that’s correct or if it’s not correct, let me know. But why do you glozier here in the past and this year you’d think would be a year where you could have grown share more just given your capability. So why do you think that’s the case? Is it just everyone got better with independents suddenly got stronger? What is it in that dynamic that maybe changed in twenty twenty? And how do you think what were the causes of it?

[Ritch Allison:]

Yeah John, I think what we saw in twenty twenty, it was just broad growth across the categories. So while we had terrific growth in our delivery business, if there was broadly across the category, a lot of growth, you know, a lot of independents, you know, that maybe didn’t have a big delivery business back in 18 and 19, they jumped in with both feet into delivery to stay alive in twenty twenty and, you know, through the use of third party aggregators to deliver their product. And that certainly, certainly resulted in some delivery growth coming from some of the some of the independents and regionals that maybe weren’t wasn’t there in the past.

[Unidentified Analyst:]

Thank you.

[Operator:]

Your next question comes from the line of Eric Gonzalez with KeyBanc. Your line is open. Hey, thanks for the question and good morning.

[Eric Gonzalez:]

Regarding the potential wage increases, I was wondering how that might impact your ability to hold on to those five nine nine seven ninety nine price points, which set a different way, recognizing that all good things might eventually come to an end. What would have to happen from an inflation perspective for you to need to back away from those platforms and what can be done to protect those price points without having to interiorly wide gap versus other items on the menu? Thanks.

[Ritch Allison:]

Sure, Eric. So the interesting thing is today, as it relates to wage environment, we operate in a really wide spectrum of wage rates across the country as it as it is today. And I know, you know, minimum wage in particular is certainly a topic that everybody is thinking about out there. But, you know, today we operate in states that are at the federal minimum wage all the way up to places like Seattle, which are already in excess of six, 15, sixteen dollars an hour. And we’ve still been able to offer the five ninety nine and seven ninety nine platforms across the country. And there’s a couple of things that enable us to do that. One is the volumes that we run at. You know, there’s no way you can stay at that value level without having a high volume business like we have today. Second is that our franchisees at the local level have flexibility around menu pricing and around delivery fees and their transparent delivery fees at the local level. They’re going to be higher in these higher wage markets than they are in some of the others. So we’ve been able to manage our way through a lot of minimum wage increases across the country. And I’ll tell you, quite honestly, you know, in our in our corporate store business, you know, we’re not paying the federal minimum wage anywhere. You can’t go out there and hire people at that rate. Anyway, we’re above the minimum wage, you know, both for our folks that work inside the stores and our tip drivers on the road and then in our supply chain business, you know, we’re in excess of fifteen dollars an hour everywhere we operate.

[Stu Levy:]

Yeah, I mean, if you think about the offers, they’ve been we’ve had them for years and every year we basically have wage rate increases in food cost increases and continue to drive additional profit. And, you know, for us, it’s that we do a ton of deep market research and analytics around where that profit maximizing price point is for us. So it’s not you know, it’s certainly not set arbitrarily. And that is certainly a place where we provide a ton of value to the to the consumer and we’ve been able to do it, do it profitably and continue to do so.

[Eric Gonzalez:]

Thanks.

[Operator:]

Your next question comes from the line of Lauren Silberman with Credit Suisse. Your line is open. Thank you, guys. Hear me better now. Yes, much better. Thanks, Lauren.

[Lauren Silberman:]

I’m sorry about that. So coming into covid Domino’s Pizza category in general is facing incremental competition from the growth in third party delivery results. You mentioned back covid the delivery channel overall has benefited with the acceleration of adoption. Then you look at the competitive environment today. Do you think Domino’s any better and any better positioned with respect to third party delivery now that restaurants will likely be more focused on bringing back in-store traffic and there’s some kind of regular more regulatory requirements or in a more challenging position? Kind of regulated more regulatory requirements or in a more challenging position, given the breadth and depth of competition has increased.

[Stu Levy:]

Yeah, Lauren, you know, for us, it’s, I guess a little bit less about regulatory, you know, I think for us we should be honest. We struggle a little bit, understanding the long term economics and some of the aggregator businesses. You know, in 60 years, we’ve never made a dollar delivering a pizza. We make money on the product, but we don’t make money on the delivery. So we’re just not sure how others do it. And in a world where, you know, we’re trying to shrink our delivery area to get closer to our customer for better service, a lot of these third parties are trying to expand to reach more customers, which we think just takes away from service. And, you know, when you think about the profit equation, you know, you get somebody who inserts themselves into the value chain and they have to make their money somewhere. And it’s either got to come from the restaurant or it has to come from the customer. And we think over time that’s going to put a lot of pressure, particularly on the independent restaurants, to be able to continue to make margins in rising cost environments while paying these aggregators. And the customers over time are going to start looking at the free delivery that costs them fifteen dollars to get twelve dollars worth of food when they start digging in to look at service fees and service charges. So we’re just not sure how it all plays out. And you’ve seen that with some of some of the public players in that space who have commented about the challenge of driving long term profitability as an aggregator. So, you know, for us, we continue to just be the low cost delivery provider, provide great value. And we think as long as we’re providing a great product with great service at a great value, we’ll let everything else shake out. And certainly we don’t know how long it will take to all shake out. But from our perspective, we’re in a pretty good spot.

[Lauren Silberman:]

Thank you.

[Operator:]

Their next question comes from the line of Dennis Geiger that you’ve got ideas. Your line is open.

[Dennis Geiger:]

Great. Thanks for the question. Rich, I wanted to ask a little bit more on loyalty and new product innovation as we think about 20, 21 and even going forward. Just wondering if you could talk more about those two opportunities, you know, and kind of how those might allow you to keep some of the new customers that you might have gained in twenty twenty, you know, I guess, and or attract new customers going forward. You know, I just you know, how those initiatives may help you to kind of hold or even gain category share going forward. Thanks.

[Ritch Allison:]

Sure. Thanks for the question. So I’ll talk about loyalty, maybe even just even a little bit more, you know, more broadly, because there were a couple of metrics that I shared earlier that I think are important on this front. One is, you know, the increase in the number of active members of our piece of the Pie Rewards program, which was up to twenty seven million plus. We also saw an increase in engagement in frequency among that group as well, which is a big focus of ours. You know, once that program gets to that level of scale, you know. Twenty seven million plus and you know, we’ve got beyond that, we’ve got 40 million plus that at some point have been enrolled in the program and we’ve got 80 million plus customers that are in our in our database. So we spent a lot of time on initiatives thinking about, you know, how can we continue to mine, you know, that treasure of customers and find ways to better serve them at their time of need to drive to drive higher frequency. Another metric I shared earlier that is also important is, you know, the increase that we saw in digital engagement with our customers, you know, with digital sales going up from 70 percent to 75 percent during the year, you know, broadly across the customer base, that’s yet another opportunity because those customers, you know, tend our ticket tends to be higher because we do a better job with upswell on them. And once they start ordering digitally, they tend to be stickier with us over the long term. So we’ll continue, as we always do, many efforts focused in that space. And then you asked about new products also. We had, as I mentioned earlier, three that we successfully launched in twenty twenty. And that’s going to continue to be part of our playbook going forward. We’ve got some exciting things that our culinary team has been working on that I certainly like and based on our testing, a lot of our customers do as well. So you’ll see some more news coming from us in that in that space during twenty twenty one as well. What’s your next question?

[Operator:]

What’s your next question comes from the line of Chris Carril with RBC Capital Markets. Your line is open.

[Chris Carril:]

Hi, good morning. Thanks for the question. So just following up on the comments around carry out as well as on labor costs, how are you thinking about the carry out opportunity in the context of carry out margins versus delivery margins, just especially with the increasing focus on minimum wage and potential for increased incrementally higher labor costs?

[Ritch Allison:]

Yeah, it’s a great question. And, you know, prior to prior to the pandemic, we had taken the carry out mix up to about forty five percent of our orders. And that mix came down a bit during covid, as we talked about earlier. Given the just the changing customer behaviors, we are very much focused on growing that carry out business in twenty, twenty one and forward. And, you know, while the ticket is lower on a carry out order, you know, to your point, there’s so much less labor cost associated with each of those carry out orders that the higher the higher the average hourly labor rate gets in your market, you know, the more the profitability equation tilts toward those carry out orders. And this is something that we’ve seen, frankly, in some of our international markets as well, which have much higher labor costs than the US does. Driving that carry out business has been a really important part of continuing to grow profitability at the store level for our franchisees. But we are profitable on both channels. Absolutely.

[Chris Carril:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Brett Levy with MKM Partners. Your line is open.

[Brett Levy:]

Great. Thank you. Good morning. Just following up on I think it was Eric’s question with all of the moving parts that are going on there throughout the system with tough compares and just rising costs, how flexible and what are you hearing from the franchisees in terms of how they’re thinking about approaching 2021, whether that is from a marketing standpoint or a pricing or a willingness and ability to add to their labor pool? Thank you.

[Ritch Allison:]

I’m sure you have great, great question. What I would tell you is that. We have such a fantastic base of franchisees across the U.S. who are excited and eager to lean in in twenty, twenty one, and that’s in a couple of ways. You know, one that you mentioned, you adding team members to their stores. I can tell you that everyone I go out there and talk to is aggressively trying to hire and add to their teams, because funny thing happens, when you add more delivery drivers to your business, your sales go up over time. But also franchisees are also excited about, you know, continuing to invest in their businesses and build and building new stores, because as we’ve continued to grow sales and as profits have increased the equation around those new store openings, particularly when we’ve got places where we’re forecasting earsplitting gets even gets even more attractive. So we’ve got we’ve got a committed and committed group that’s ready to lean in and invest in twenty, twenty one.

[Operator:]

Your next question comes from the line of Jeffrey Bernstein with Barclays. Your line is open.

[Jeffrey Bernstein:]

Great. Thank you very much. Just to follow up on the aggregator question, I know you had previously talked about consolidation within that subgroup and maybe promoting more aggressively and you guys were keen to remain solo. You know, with that said, I think we’ve all seen that covid has driven large increases in at least traffic on these sites. So even if you were to never allow aggregators to do your delivery, as you mentioned, which would allow you to retain the service levels and make sure you’re still profitable, but would you ever think about having your brand on that platform just to reach the additional eyeballs and generate the sales? I’m just wondering what the risks might be on that front just to drive the traffic, but not necessarily pay the risk or pay the fees and have the risk of it impacting service. Thank you.

[Ritch Allison:]

Yeah, Jim, you know, we’ve looked at it many, many times over the last couple of years. And as you know, some of our international markets, you know, do, you know, gather some of their orders through aggregators? We don’t allow aggregators to deliver our food anywhere. But in some context, in our international markets, it’s made some sense. Every time we look at it here in the U.S., it just doesn’t make sense for us or our franchisees economically. And if it doesn’t make sense economically, it certainly doesn’t make sense to take the risk of sharing. Side delivery and, you know, our aspiration here, which is well within reach, is that we get to a point where you can get a car side delivery at Domino’s faster than you can, you know, wait in line at a QSR, drive through to get your food through the through the window and to your point on unmixed. You know, we don’t we’re not sharing that externally yet for competitive reasons. But we have seen a dramatic increase in customer usage of Domino’s car side delivery since we launched it. And part of our 20, 20 plans are going to be to drive that even higher.

[Operator:]

All right. Our next question comes from the line of Andrew Charles with Common. Your line is open.

[Andrew Charles:]

Great. Thank you. You mentioned you guys grew the loyalty program 20 20 to a record 27 million members from about twenty five million at the end of 2019. But it looks like the level of growth slowed from roughly 20 million members in twenty eighteen to twenty five million in 2019. Can you help reconcile this, given efforts utilized in 2020 to help enroll customers in the program while there is obviously a more sedentary U.S. population? Thanks.

[Ritch Allison:]

Sure, Andrew. So part of it is, you know, with these types of programs, you know, as they get bigger and bigger, you know, the growth in active membership gets more difficult, you know, year on year. But a couple of things that we were most pleased with. When we look back at the loyalty program, over 20, 20 was one that we grew it without, you know, in the final three quarters, the use of any of our more aggressive, massive boost weeks, you know, which are an important tool to drive customer acquisition. And then the second thing is that we were able to grow the number of customers active in the program while also still growing the frequency with which those customers order. And when you take a look at, you know, drive in volume in the business, it really is, you know, those to those two metrics in combination with one another that drive the overall increase in an engagement and sales with those loyal customers.

[Operator:]

Your next question comes from the line of Alex Slagle with Jefferies. Your line is open.

[Alex Slagle:]

Hey, thanks. Good morning. On the franchisee profitability, obviously 20/20 was an opt out. You’re just curious how much the reduced discounting and promotional efforts impacted the franchisee profitability and thoughts on what you think it’ll look like into twenty one and beyond.

[Ritch Allison:]

Yeah, you know, we did a terrific year on franchisee profitability and in twenty twenty and what it’s really driven by, you know, it is driven by, you know, increasing order counts, you know, across the business, particularly on the delivery side of the business, but also, you know, increasing ticket, but smart ticket, not increases in prices, but increases in the number of items that customers bought on average for each of the four each of their orders. So even in the face of some increases in labor costs and other fixed costs in the business, it really is that volume increase that drove that drove the uptick in profitability during the year. And that item, that uptick in the item count really basically gets your operating leverage in the store.

[Operator:]

Your next question comes from the line of James Rutherford with Stephens, your line is open.

[James Rutherford:]

Thanks for taking the question. I’m curious about how dominos will navigate this mix shift that you’re expecting back to carry out after the big year of delivery gain. It seems like from previous comment, the carry out transaction is possibly more desirable than delivery from operators perspective, given the margins. But I’d love to hear more color about the top line impact. I mean, to the extent that certain customers turn a delivery order during covid into a carry order, you know, for example, on the way home from work or something like that with the typical check size difference there. And what are some things you could potentially do to elevate that carry out ticket without compromising the value proposition to try to understand that potential impact your royalty revenue stream. Thanks so much.

[Ritch Allison:]

Sure, sure, and, you know, the objective for us will be to grow both of those channels, you know, covid. Yeah, we don’t we don’t have all the data out of covid yet to understand to fully understand all of the customer behavior changes. But, you know, prior to covid, there’s only about 15 percent of customers that were both delivery and carry out because customers tend to be one or the other. So as we look at the business going forward and think about how do we grow it in twenty, twenty one and beyond, it is going to be through a unique set of strategies around each of those two channels. Unique set of strategies around each of those two channels. So while we’re certainly going to be aggressive on the carry outside with Dominos, car side delivery and other initiatives that we have in place, we absolutely are not stepping away from the delivery side of the business also. And we’ve got a set of strategies that we’re going to continue to execute on the delivery side as well so that we could hold on to those customers that we that we that we gained during the course of twenty 20.

[Stu Levy:]

We’re not looking at it so much as a shift from one to the other as it is a reemergence or, you know, kind of gaining back some of those carry out customers that have been on the sideline. The most notable difference, obviously, from a ticket perspective is just the delivery fee.

[Ritch Allison:]

And typically, it’s a little bit lower item count in those orders as well, but both channels very attractive and profitable businesses for our franchisees.

[Operator:]

There are no further questions at this time. I would like to turn the call back over to Chief Executive Officer, Ritch Allison for closing remarks. Go ahead, sir.

[Ritch Allison:]

Thank you. And listen, thanks, everybody, for joining us on the call this morning. And Stu and I look forward to speaking with you in late April when we’ll discuss our first quarter. Twenty twenty one results.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.