Good day, and thank you for standing by. Welcome to the Domino's Pizza Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised, today's conference may be recorded. [Operator Instructions].

I'd now like to hand the conference over to your host today, Jenny Fouracre, Director of Public and Investor Relations. Please go ahead. .

Thank you so much, and thanks to all of you for joining us for our conversation today regarding the results for the third quarter of 2021. Today's call will feature commentary from Chief Executive Officer, Ritch Allison; and from the office of CFO, Jessica Parrish. [Operator Instructions].

I want to remind everyone that the forward-looking statements in this morning's earnings release and 10-Q also apply to our comments on the call today. Both of these documents are available on our website. Actual results or trends could differ materially from our forecast.

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. [Operator Instructions].

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 CEO, Ritch Allison. .

Thank you, Jenny, and thanks to all of you for joining us this morning. Overall, I'm happy with our results this quarter, which, once again, demonstrated the powerful growth potential of the Domino's brand around the world. The third quarter presented significant challenges related to COVID and specifically the rise in the Delta variant.

Across the U.S. and around the world, our system had to pivot yet again in response to the resulting changes in public health guidance and requirements. .

As this pandemic extends deep into its second year, I'm proud to say that our franchisees have continued to step up to meet the ongoing challenge in service of their customers, their communities and their team members.

Throughout the Domino's system, we remain committed to serving our customers with outstanding food through safe and reliable delivery and carryout experiences. .

Now you've heard me say it many times, global retail sales growth is the engine that drives our business model. During the third quarter, we delivered 8.5% global retail sales growth, excluding foreign currency impact, driven by a combination of store growth and same-store sales. That 8.5% result was lapping a 14.8% from the third quarter of 2020. .

The third quarter extended our unmatched streak of international same-store sales growth to 111 consecutive quarters. While a 41-quarter streak of positive same-store sales in the U.S. ended during the quarter, I'm pleased that we still grew our U.S. retail sales during the quarter while rolling over 21.3% retail sales growth in Q3 2020. .

During the quarter, we also accelerated our pace of global store growth. On a trailing 4-quarter basis, we have opened 1,124 net new stores. That's an increase of 500 relative to where we were in Q4 2020. Over the last 4 quarters, we've averaged just a touch above 3 net new stores every day. So overall, the Domino's brand continues to deliver. .

I'll turn the call over now to Jessica Parrish, our Controller and Treasurer. She will take you through the details of the quarter, and then I'll come back to share some additional thoughts about the business. Jessica, over to you. .

Thank you, Ritch, and good morning, everyone. We are pleased to share our third quarter results with you today. Overall, Domino's team members and franchisees around the world continued to generate healthy operating results, leading to a diluted EPS of $3.24 for Q3. .

In Q3, we sustained our positive momentum in both our U.S. and international businesses, resulting in year-over-year global retail sales growth. Global retail sales, excluding the positive impact of foreign currency, grew 8.5% in Q3 as compared to Q3 2020. .

Breaking down total global retail sales growth, U.S. retail sales grew 1.1%, rolling over a prior year increase of 21.3%. International retail sales, excluding the positive impact of foreign currency, grew 16.5%, rolling over a prior year increase of 8.5%. .

Turning to comps. During Q3, we continued our streak of 111 consecutive quarters of positive international comps. Same-store sales for our international business grew 8.8%, rolling over a prior year increase of 6.2%. The U.S. comp was negative in Q3, following 41 straight quarters of positive same-store sales growth. Same-store sales in the U.S.

declined 1.9% in the quarter, rolling over a 17.5% increase in same-store sales in Q3 of 2020, the highest quarterly U.S. comp we have ever achieved since becoming a publicly traded company in 2004. .

Breaking down the U.S. comp, our franchise business was down 1.5% in the quarter, while our company-owned stores were down 8.9%.

We continue to observe a larger spread between the top line performance of our franchised stores and our company-owned stores than we've historically observed which we believe is a function of the heavily urban and higher-income footprint of our company-owned store markets relative to a more diverse mix across our franchise base.

More aggressive fortressing in our company-owned store markets also contributed to the same-store sales gap between our corporate store and franchised store businesses. .

The decline in U.S. same-store sales this quarter was driven by lower order counts. Our U.S. order counts during Q3 were pressured by a very challenging staffing environment, which had certain operational impacts, such as shortened store hours or customer service challenges in many of our stores.

Additionally, since the onset of the pandemic, our comps had also benefited from significant economic stimulus activity in the U.S., the effects of which largely tapered off in the third quarter, which we believe pressured our order counts as compared to Q3 2020. .

Ticket growth partially offset the decline in order counts as we continued to see consumers order more items per transaction during Q3. The ticket comp also benefited from increases to our transparent delivery fee as well as the mix of products we sell. .

The international comp was primarily driven by order growth due to the return of nondelivery service methods across a number of international markets as well as the resumption of normal store hours and the reopening of stores that were temporarily closed in certain of our international markets in Q3 2020 due to the COVID-19 pandemic. .

Shifting to unit count. We and our franchisees added 45 net stores in the U.S. during the third quarter, consisting of 46 store openings and only 1 closure. Our international business added 278 net stores comprised of 287 store openings and 9 closures. .

Turning to revenues and operating margins. Total revenues for the third quarter were up approximately $30.3 million or 3.1% over the prior year quarter. The increase was driven by higher retail sales which generated higher international royalty, supply chain and U.S. franchise revenues.

Changes in foreign currency exchange rates positively impacted our international royalty revenues by $1.3 million in Q3. .

Our consolidated operating margin as a percentage of revenues increased to 38.6% in Q3 2021 from 37.4% in the prior year due primarily to higher revenues from our global franchise businesses. Company-owned store margin as a percentage of revenues was flat year-over-year at 19.8%.

As a percentage of revenues, food and occupancy costs were higher year-over-year, offset by lower labor costs. Recall that we incurred additional bonus pay in the third quarter of last year for frontline team members.

And although we did make investments in frontline team member wage rates during Q3, we continue to experience staffing shortages in certain of our company-owned stores. .

Supply chain operating margin as a percentage of revenues increased to 10.7% from 10.2% in the prior year quarter.

While the market basket increased 2.1% year-over-year, higher product and supplies expenses related to certain COVID-related safety and sanitizing equipment negatively affected the supply chain operating margin in Q3 2020 which did not recur in the current quarter.

This year-over-year decrease in product cost was partially offset by higher labor cost. .

G&A expenses increased approximately $4.7 million in Q3 as compared to Q3 2020, resulting from higher travel and labor cost, including higher noncash compensation expense, partially offset by lower professional fees. .

Net interest expense increased approximately $7.1 million in the quarter driven by a higher average debt balance due to our recent recapitalization transaction completed in Q2. .

Our weighted average borrowing rate for Q3 decreased to 3.8% from 3.9% in Q3 2020 due to lower interest rates on our outstanding debt as a result of this recapitalization transaction. .

Our effective tax rate was 10.7% for the quarter as compared to 19.9% in Q3 2020. The effective tax rate in Q3 2021 included a 10.4 percentage point positive impact from tax benefits on equity-based compensation. This compares to a 2.8 percentage point positive impact in Q3 2020. This increase was due to more stock option exercises in Q3 of this year.

We expect to see continued volatility in our effective tax rate related to these tax benefits from equity-based compensation..

Combining all of these elements, our third quarter net income was up $21.3 million or 21.5% versus Q3 2020. .

Our diluted EPS in Q3 was $3.24 versus $2.49 in the prior year quarter.

Breaking down that $0.75 increase in our diluted EPS, most notably, our improved operating results benefited us by $0.36; our lower effective tax rate, primarily due to higher tax benefits on equity-based compensation, positively impacted us by $0.34; a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.19; and higher net interest expense negatively impacted us by $0.14.

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Shifting to cash. Our strong financial model continues to generate significant cash flows. During Q3, we generated net cash provided by operating activities of approximately $189 million. After deducting for CapEx, we generated free cash flow of approximately $172 million.

Regarding our capital expenditures, we spent approximately $17 million on CapEx in Q3, primarily on our technology initiatives, including our next-generation point-of-sale system and our new supply chain center. Our strong free cash flow generation allowed us to continue our long-term commitment to returning cash to shareholders..

As we discussed on the Q2 earnings call, we completed our $1 billion accelerated share repurchase transaction during Q3. Subsequent to the settlement of the ASR, during Q3, we repurchased and retired approximately 153,000 shares for $80 million or an average price of $521 per share.

As of the end of Q3, we had approximately $920 million remaining under our current Board authorization for share repurchases. We have continued to repurchase and retire shares subsequent to the end of the quarter.

And through October 12, we had repurchased and retired an additional 205,000 shares for approximately $100 million or an average price of $488 per share. We also returned $35 million to our shareholders during Q3 in the form of a $0.94 per share quarterly dividend..

Shifting gears, as we look toward our fourth quarter, we wanted to provide an update on our annual guidance measures for full year 2021 provided earlier this year. We previously provided guidance that our store food basket pricing in our U.S. system would increase approximately 2.5% to 3.5% over 2020 levels.

We previously provided guidance that foreign currency could have a $4 million to $8 million positive impact on royalty revenues as compared to 2020. We previously provided guidance of $415 million to $425 million for G&A expense. Based on our current outlook, we expect each of these 3 measures to come in at the high end of these current estimates.

We continue to expect that our full year CapEx investments will be approximately $100 million. .

Keep in mind that these metrics can change based on economic and other factors outside of our control. Our G&A expense is also affected by our own performance versus our plan, which affects variable performance-based compensation expense.

These estimates also reflect our normal 16-week Q4 which will be rolling over the 17-week Q4 we had in 2020 due to the inclusion of a 53rd week in our fiscal year. Recall that the 53rd week last year contributed an incremental $0.39 to our EPS in Q4 2020 due to the additional week of revenues and the costs attributable to the 53rd week.

This amount was adjusted as an item affecting comparability in our Q4 2020 earnings release..

In closing, our business continued its solid performance during the third quarter, and we are proud of the results our franchisees and team members around the world delivered. .

Thank you all for joining the call today, and now I will turn it back over to Rich. .

Thanks, Jessica. I'll begin my comments with a look at our U.S. business. Retail sales grew 1.1% in the third quarter, lapping a 21.3% increase from Q3 2020. Our 1.9% same-store sales decline during the quarter was offset by the positive impact of 232 net new stores that we have opened over the trailing 4 quarters. Domino's trailing 4-quarter U.S.

retail sales, excluding the impact of the 53rd week of 2020, were up 9.5%, a truly impressive achievement by our franchisees and operators which shows the tremendous amount of growth in the brand across the U.S..

store growth and same-store sales. Our 45 net new stores in Q3 was a sequential improvement over Q2 but still came in softer than we would like to see. While cash-on-cash returns remained very strong and we continue to see a robust pipeline of future openings, we and our franchisees had a number of store openings delayed due to a variety of factors.

We and our franchisees saw delays in construction, equipment, utility hook-ups and inspections. In addition, franchisee staffing challenges also resulted in some delays. We remain very bullish on the unit growth potential in the U.S. but believe that we may continue to see some of these challenges in the months ahead..

Now let's turn to same-store sales. As we continue to experience COVID overlaps, we believe it's instructive to look at the cumulative stack of comparable U.S. same-store sales anchored back to 2019 as a pre-COVID baseline, and we'll continue to do so for as long as we believe it is useful in understanding our business performance.

At 15.6% for Q3, we saw a sequential decline of the 2-year stack when compared to the second quarter, bringing us back more in line with the 2-year stack we saw in Q1 of this year..

So what changed from Q2 to Q3? Jessica highlighted several key drivers that I'll expand on here. First, we believe that government stimulus had an impact on our sales in Q2 that waned in the third quarter as we moved further away from the spring onetime payments and as other enhanced benefits tapered off.

Second, we saw more pronounced staffing challenges across the country, resulting in reduced operating hours and service challenges in a number of stores across the network. We believe these challenges posed a more significant headwind on orders and sales during the third quarter than they did during the first half of this year..

We and our franchisees are taking a number of actions to address the staffing issues. A new applicant tracking system rolled out a few weeks ago that will make it easier for candidates to apply for openings and to be onboarded at both corporate and franchise locations across our U.S. system.

We are also sharing operational best practices to eliminate unnecessary time-consuming tasks in the operation of stores, like pre-folding boxes, for example, that can drive both team member and customer satisfaction.

In our corporate stores, we have recently implemented meaningful increases in team member compensation and are also piloting new approaches to team member onboarding, training and development.

While I'm optimistic about the efforts that we and our franchisees have underway, we believe that staffing may remain a significant challenge in the near term as the labor market continues to evolve..

service and value. I'm very pleased with our Carside Delivery performance as our franchisees and operators have enthusiastically embraced this new service method. Our research shows it's also bringing in new customers. We have consistently averaged below 2 minutes out the door and on our way to the customers' cars.

In fact, we have many stores across the country that are consistently below 1 minute. It's a great technology-enabled way to serve our customers and will remain an important part of our long-term strategy to serve our existing carryout customers and to attract new QSR drive-through-oriented customers going forward..

baked apple, five cheese, and my personal favorite, cheesy marinara..

Turning to our delivery business, Q3 saw same-store sales decline relative to 2020, but delivery sales remained significantly above 2019 levels. During the quarter, we believe that the stimulus wind-down and the staffing challenges that I referenced earlier had a disproportionate impact on our delivery business. .

value and transparency..

I'll also share a few important milestones that occurred in the U.S. during the quarter. First, we broke ground just a few weeks ago on a new supply chain center in Indiana, which we expect to complete and open by the end of 2022.

And second, we are now running a pilot version of our new PULSE point-of-sale system in a live store environment, and we will continue to invest in that multiyear project going forward..

So as we look forward in the U.S. business, I remain optimistic about our ability to continue driving long-term growth. We'll manage through the staffing and other challenges in the short term. Frankly, that's what Domino's franchisees and operators do and have always done.

And we'll continue to lead the brand with a clear focus on long-term profitable growth for our franchisees and DPZ. I'll end the U.S. discussion with a big thank you to our U.S. franchisees, our corporate store operators and our supply chain team members for their ongoing efforts to serve their customers, their team members and their communities. .

Now moving on to international. It was another outstanding quarter of performance for our international business. Our 16.5% international retail sales growth, excluding foreign currency impact, was supported by a very strong 8.8% comp.

When you look at it on a trailing 4-quarter basis, excluding the impact of foreign currency and the 53rd week of 2020, Domino's international retail sales grew by 16.2%. As I discussed earlier with our U.S. business, we are also watching the 2-year comp stacks for international anchoring back to pre-COVID 2019.

Q3 represented a 15% 2-year stack, which was very consistent with the second quarter..

International store growth was a highlight during the quarter. Our international master franchisees opened 278 net new stores during the quarter, which increased the trailing 4-quarter pace to 892 stores for the international business. This acceleration in international store growth, combined with our U.S.

store growth, has driven the global pace of store growth back into our 2- to 3-year outlook range of 6% to 8% global net unit growth..

first, our outstanding unit-level economics; and second, and very importantly, the strong commitment of our franchisees across the globe. .

During the quarter, COVID continued to have a significant impact on many of our international markets, and we expect COVID to remain a challenge in many parts of the world for some time to come. At the end of the quarter, we estimate Domino's had fewer than 175 temporary store closures with many of those located in India and New Zealand.

I'll highlight a few of the international markets that contributed significantly to our growth during the quarter..

We successfully converted 52 stores in Poland as Dominium Pizza rebranded to become part of the Domino's family. This provides important scale for us in Poland, fast-forwarding us to 119 total stores in the market at the end of the third quarter. We now have 24 international markets with 100 or more Domino's stores. .

We opened our 93rd international market during the quarter, officially welcoming Lithuania to the Domino's family. We're off to a great start there with the first store opening, and we have a second one coming very soon..

India resumed an impressive pace of store growth by becoming the first Domino's market outside the U.S. to reach 1,400 stores. I could not be more proud of Jubilant, our master franchise partner, and the efforts they have made to fight through COVID, taking care of their people while still growing their business..

Japan had another outstanding quarter, passing the 800-store milestone and continuing its impressive streak of growth. The transformation of the market by a master franchisee, Domino's Pizza Enterprises, has been remarkable. .

China delivered double-digit same-store sales growth while continuing its strong pace of store growth. With each passing quarter, we become even more confident about the long-term growth potential for the Domino's brand in China..

In addition to those markets, the U.K., Mexico, The Netherlands, Turkey and Colombia were additional large market highlights and a strong quarter of performance across our international business. And along with those markets, we also saw robust regional growth across the Middle East and Northern Africa during the quarter..

I've long been convinced that we have the best international franchise partners in the restaurant business, and they certainly proved me right during the third quarter. As we look forward, we have so much opportunity ahead of us to continue driving long-term growth for Domino's outside the U.S..

So in closing, I'm pleased with our third quarter results. Our outstanding franchisees and operators continued to battle through a challenging set of circumstances while delivering strong growth for the Domino's brand around the world.

These passionate Dominoids, combined with our outstanding unit-level economics, position us incredibly well for the future..

There is no doubt that we will continue to experience challenges with COVID, with staffing and other factors.

We also expect inflationary headwinds to continue impacting Domino's and the broader restaurant industry over the coming quarters, but we will face all of these challenges and headwinds from a position of strength and with the unwavering commitment of our franchisees and team members who proudly wear the Domino's logo.

My team and I are proud to serve them each and every day..

So thank you again for joining us today, and we'll now be happy to take your questions. .

[Operator Instructions] Our first question comes from Brian Bittner with Oppenheimer. .

Rich, the labor staffing issues was obviously highlighted as an incremental challenge in the quarter.

Do you guys have any data to try to help us, on the outside, quantify how these capacity and service issues from labor staffing challenges maybe impacted the trends in the quarter? And also these staffing issues, are they specifically preventing you from deploying traffic-driving initiatives throughout the system, like utilizing the 50% boost weeks, et cetera?.

Sure, Brian. Thanks for the question. Staffing has been a challenge, most certainly during the quarter, as we highlighted. It's -- I don't have a lot to share with you today in terms of specific stats about what that headwind is on the comp because it's always difficult to say what sales might have been without staffing challenges..

But what I can tell you is that when you look at the third quarter relative to the first half of the year, we certainly saw more of an impact in the system around some things like reduced operating hours and some challenges with respect to delivery service times in particular. .

And when we look in our own corporate store business, we certainly saw our staffing levels, relative to ideal, were lower than we saw during the first half of the year. So the impact on the comp in the U.S. was more pronounced in the third quarter than it was in the second quarter. .

And as it relates to how we think about the business going forward, the staffing challenges do impact our ability to be more aggressive as it relates to promotional activities in the marketplace. So we're continuing, obviously, to monitor the levels across our system.

In our corporate store business, we are doing things proactively, like looking at our wages, compensation for our team members, and as I spoke about earlier, working across the system, rolling out an applicant tracking system to help with team member acquisition and hiring.

And then we're also working on a number of operational improvements inside of our stores to allow us to operate more efficiently, and frankly, with less labor for every order that goes out.

And then finally, I'd just highlight the carryout business will continue to be a focus of ours given the significantly lower amount of labor involved in those transactions and the fact that's been a big growth driver for us anyway. We're going to continue pushing there. .

Our next question comes from Peter Saleh with BTIG. .

Great. So Rich, you mentioned on a couple of occasions the impact of the labor challenges on the comps.

But can you talk a little bit about the labor challenges and maybe the impact on the industry on independents? Are you seeing more closures there? I suspect if you're seeing these issues and feeling these issues on labor that your competitive set is feeling it just as much, if not more.

Any comments on closures in the industry?.

Pete, thanks. I certainly believe that the staffing challenges are impacting the restaurant industry more broadly. As I take a look across the industry and talk to leaders in the industry, it's certainly a common theme that you hear. .

In terms of how that's impacting independents, I don't have great statistics for you about what's going on with closures there, but I can tell you that I think the impact of staffing and rising labor costs and also, frankly, rising commodity costs, where independents are typically less able to buy -- are less able to buy with the scale and also to lock in pricing as the larger players, like we are, I suspect that there is a lot of pressure on the P&L among some of the independents and smaller regionals out there.

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Our next question comes from Brian Mullan with Deutsche Bank. .

Ritch, last call, you indicated the carryout order counts in the U.S. had not quite reached the 2019 levels. Just wondering if they got back to even or close to in the third quarter relative to where they were in 2019. The country was dealing with Delta, but there was also a broad reopening.

So just any color on the carryout business order counts would be great. .

Sure. When we look at our carryout order counts, we are still not quite back to where we were 2 years ago on carryout order counts despite having positive carryout same-store sales in the third quarter.

But it continues to be a focus for us and an area where we continue to see strong opportunity to continue the long-term growth trajectory of that side of the business..

We just launched these Dips & Twists that just went on air this week as just yet another tool coming from our innovation team to help us continue to push carryout and push it at that $7.99 hero price point that we've got there. .

Our next question comes from John Glass with Morgan Stanley. .

Ritch, just 2 follow-ups. One is, is the labor issue most focused on drivers that would make that maybe more of a delivery company issue? Or do you think it's -- is it in the restaurants as well? I just want to make sure we understand if it's more specific to your type of business versus others..

And can you talk about -- I know you talked about independents, but is there -- how do you think you are on a market share basis this quarter, just so we can understand how maybe you think you're doing versus your largest peers to the extent you have insight into that? Did you gain share or lose share? Is everyone sort of in the same boat given the external factors you've cited?.

Thanks, John. First, on the labor, what I would tell you is that it is more pronounced with respect to drivers, but we see labor challenges really across our business.

And as I look broadly across the industry, the restaurant industry, both the retail side and the distribution side of that, I think -- and frankly among suppliers, I think labor continues to be a significant challenge. You look at the number of open job positions across the U.S. right now, it's a pretty staggering number.

And a lot of those are certainly related to our industry. But drivers, in particular, have been challenging as we look over the last -- the third quarter..

And then as it relates to market share, we don't get great real-time data on that. And we always take -- when we do get it on a quarterly basis, we always like to see a few quarters of trend before we get really comfortable about what those external views of the market look like.

But we do continue to believe that we and the larger players in the market continue to gain share at the expense of some of the smaller chains and some of the locals. .

Our next question comes from Jared Garber with Goldman Sachs. .

Obviously, labor continues to be a topic of discussion, but I wanted to maybe take it a little bit of a different route. The offset there would obviously be pricing.

So Ritch, I wanted to ask how you're thinking about pricing across the menu and if there's any thoughts about maybe potentially increasing those $5.99 and $7.99 platforms that you're so well known for and just how you think about offsetting some of these highly inflationary pressures. .

Sure, Jared. Thanks. As we are -- currently, as we do, on a very frequent basis, taking a look at our price points. We test them on a pretty frequent basis over time and really with an eye to what are the price points in the marketplace that can help us to drive long-term profitable growth for our franchisees.

So we are certainly taking a look at those again. Here, as we look forward into 2022, there are cost pressures across the business, as you highlight, both on the labor side, but also inflationary pressures as it relates to commodities as well..

So we're taking all of those things into account as we think about what our pricing looks like in 2022. And what I'll tell you there is that we will, as always, do it with the long-term profitable growth of the franchisees in mind. And while we are wedded to value, we are not specifically wedded to any individual price points.

And if a better price point yields better long-term profitable growth for our franchisees, then that's where we're going to go. .

Our next question comes from Andrew Strelzik with BMO. .

I appreciate the commentary on some of the sales constraints that you mentioned.

But I'm just curious, and I know, historically, you said these are 2 distinct occasions, but do you think as we're kind of normalizing from an operating environment perspective and trying to find an equilibrium or normal, do you think you're seeing more switching between carryout and delivery? Or do you continue to believe that that's really not the case, even kind of in this unique period here?.

Yes. It's a great question because -- and as you highlight, historically, we've not seen a lot of switching across those 2 service methods. And in fact, only about 15% of customers would go back and forth between the 2.

But it's an interesting question that I think opens up to your point as we work our way out of COVID and as we and across the industry continue to see some of these staffing challenges and labor cost increases which do result in higher delivery fees..

As Jessica highlighted earlier, we've seen some increase in our single transparent delivery fees across markets. And we've certainly seen prices go up as it relates to delivery charges or even what it takes you to go across town when you hail an Uber or a Lyft.

So I think it is an open question as to how much more switching we might see when the cost of delivery continues to rise for consumers. So those are some of the things that we're obviously thinking about and testing here..

We're also really pushing on this Carside Delivery as a service method to try to make things significantly more convenient for customers to pick up product.

Eliminating the need to go into the store and pay and carry your own food out, we think is a significant improvement in the consumer experience and may tip some more consumers over to come into the carryout channel as opposed to delivery. .

Our next question comes from John Ivankoe with JPMorgan. .

The question is on U.S. unit development. Certainly, we understand labor. We understand the construction-related issues, but there was a comment made that fortressing is affecting company stores more than franchise stores. And if you look at -- excuse me, company store development is up something like 5% year-over-year.

The comp is down whatever it is, 8.9%.

If one were to assume that half of that comp decline is due to fortressing, would basically mean that the new stores actually aren't -- are basically getting all their volume from nearby stores? I know that's -- it's very bad math to mention this on a conference call, but the numbers are -- could potentially look fairly exaggerated in terms of the amount of sales transfer that's happening to a new store that acts as a fortress store..

So can you comment on just kind of what the current algorithm is in fortressing, I mean, when you open new stores for both company and franchise, the percentage of sales that it expects to get on its own versus the percentage of sales that it expects to get elsewhere.

And considering the labor and the construction environment that we've talked about, are you prepared to talk about how materially lower potentially fiscal '22 development in the U.S. could be relative to '21, which I think would be consistent with some comments that you made of units being delayed in the overall U.S. system. .

John, yes, I'll try to pick off some of the parts of your question there. First of all, on U.S. unit development, I'll just make a macro comment overall. There is still a very healthy demand out there among our franchisee base for unit development. I've highlighted some of the challenges in the near term of getting these stores open.

But when we take a look at the profit of the 4-wall profitability at the store level and the resulting cash-on-cash returns for Domino's, which is ultimately what drives store growth, it's still very, very strong..

And as we continue to dust off our models to take a look at what the U.S. holding capacity is for Domino's stores, we continue to be very bullish about that holding capacity. I've talked about 8,000 store potential in the past, and we believe it's at least that, if not more, as we continue to dust it off. .

When we open new stores, a significant portion of those are fortress stores in that they do take some number of addresses from existing store service areas. When we take a look at the impact that, that has on the comp, I have spoken in the past about that being 1 point, 1.5 points or so.

If you take a look at the third quarter, it was about 1 point when you look across the system and a bit higher than that on the corporate store side because, to your point, we have been a little bit more aggressive in terms of percentage opens off the base, but also basically every store we open in our corporate store business is a fortress store. .

But when we take a look at what the cash-on-cash return expectations are for those openings and we look at it, not only on the individual new store, but we look at it on the impact of the store cluster that, that store is a part of, we still see very positive returns on those stores, and that's why we continue to be aggressive in the growth of our corporate stores.

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So it -- fortressing is going to continue to be a key part of our strategy, John, and I haven't seen anything in the quarter that gives me any sense that we should be slowing down. There is still a lot of opportunity out there to continue opening Domino's stores around the country. .

And just because I think that there's going to be such a point of conversation, I mean, can we -- can you give us at least a soft guide of '22 U.S.

development relative to '21? Is that something that you're prepared to do at this point?.

We're not going to do that today, John. .

Our next question comes from Gregory Francfort with Guggenheim. .

My question is on the technology upgrades. But do you have staffing as a percent of maybe where your target was in the quarter? Just any quantification on that. But my question is, Ritch, I know you've been putting a lot of investments and focus on upgrading the technology platforms, PULSE 2.0.

Can you just help us understand where that stands and when that may have an impact on the business?.

Sure. Yes, Greg, in terms of staffing relative to where we'd like it to be, I don't have a specific percentage to share with you today. It varies pretty significantly market by market because the labor markets around the country are so unique.

And obviously, we've got direct visibility into the corporate store markets that we operate but not direct visibility into all of our franchise locations who obviously manage their own employment base. .

On tech, I made brief reference to this earlier in my prepared remarks, but we've had a really exciting milestone over the course of the last several months where we now have our new version of PULSE operating on a continuous basis in a live store.

So the team has just done a terrific job of developing that to the point where we've got the minimum viable product to have out in a store today that allows us to continue to test and learn. And our expectation is that we continue to expand the initial phase of that rollout with a few more stores this year.

And then as we continue to learn and improve the product, we'll be able to come back to you in subsequent quarters and give you a little bit more of a sense of the pace of rollout of that product. .

But when we go in and have a look at how it's operating in the stores, it is easier to manage transactions inside the store and significantly easier to get new team members up to speed on the use of PULSE. .

And then as it relates to our ongoing development and evolution of the product, the architecture that we've used with PULSE is a -- is transformational for us in terms of our ability to respond more quickly and add enhancements and updates to the product versus the architecture that the current version of PULSE is on.

So we're excited about it, and you'll hear a lot more about it from us in the future. .

Our next question comes from David Tarantino with Baird. .

Ritch, I want to circle back on the issue related to staffing and get your thoughts on what you think needs to happen for you and the industry to get this resolved.

It seems like the industry needs to consider maybe a structural step change in wage rates here and maybe much more aggressive than what's already been done, and I'm wondering if you agree with that..

And then secondly, how your franchisees are approaching it. It seems like they entered the year with all-time high profitability and should be willing to fund that to get the staffing levels right, but maybe I'm missing that. So any perspective you can offer would be helpful. .

Yes, David. It's a great question, and I can tell you it's something we spend a lot of time on around here each and every day and have a lot of conversations with our operators and franchisees about it.

When you think about what has to happen in the labor market,for our industry, I think there are a couple of things that are under our control, and then there are a couple of things that are more macro factors.

If I start with kind of -- with the macro factors, most certainly, there have been a significant number of Americans who have removed themselves from the workforce over the course of COVID and haven't come back yet. If you look at labor force participation rates, they are down rather significantly from pre-COVID. .

We have not seen it yet, as much as we would like, but we do expect there to be some relaxing of the labor market as COVID continues to subside and as folks get more comfortable, have more options to care for their children, et cetera, to get back out into the workforce.

I have no doubt that this Delta variant, over the course of the last several months, has made that recovery more challenging. .

We also have not had much in the way of immigration into the U.S. here over the course of the last couple of years. And in a country whose population is not growing as it used to, we, in our industry and a number of others, will need more immigration, I think, to continue to have a robust workforce, particularly in the younger age groups. .

So those are some macro things that we can't really control. What we spend our time thinking about is what we can control. Wages is one of those levers. I spoke earlier about the fact that we have made some significant moves in our own corporate store business, and we've done that in our supply chain business as well.

And as we talk to franchisees, we don't control their employment practices or wages, but we hear from many franchisees that they are also investing in their team members. And frankly, with the profitability levels that we have in our stores, we are much better positioned than many players in the restaurant industry to be able to invest in our teams. .

But then also, as an industry and as a company, we also have to think about the jobs themselves and how do we make those jobs easier and more appealing to team members. And we're spending a lot of time on that inside our business and piloting a number of exciting things in our corporate stores where we're looking fundamentally at the jobs themselves.

How do we make them easier? How do we keep drivers in their cars 100% of the time and not have them do tasks inside the stores that they don't enjoy doing and that don't drive tips for them? How do we bring more technology into the stores to allow us to operate more efficiently with fewer labor hours per unit of sales?.

So we're looking at all of these elements.

And while it's a challenge, I feel like we're very well positioned with the profitability that we've got in our stores and also really well positioned, just based on the innovation and technology teams that we've built over time, who -- this is power alley for them to go in and figure out how to solve these problems alongside our great operators. .

Our next question comes from Dennis Geiger with UBS. .

Great. Ritch, you talked about the impact from the waning benefits of stimulus. And specifically curious if you're kind of able to identify any specific shift that you've seen in customer behavior from that benefit fading or anything else that you would kind of point out that changed from 2Q into 3Q with that benefit starting to fade some. .

Yes. Dennis, thanks for the question. We saw a boost back in the second quarter when the $1,400 stimulus payments went out. You had the onetime payment, and then you also had the unemployment which was introduced at that time and ultimately completed, I believe, in first or second week of September.

And I think what we saw was, as consumers spent off that $1,400 and as some of those unemployment benefits waned, the impact was really more pronounced, we believe, on our delivery business than it was on the carryout business.

So I think we had more customers with money in their pockets also worried about COVID, and more of those were ordering delivery into their homes, and we saw that taper off in the third quarter relative to what we saw in the second quarter. .

Our next question comes from Lauren Silberman with Credit Suisse. .

Another one on labor. More broadly, it feels like some structural headwinds, increased competition from 3P platforms, people have left the industry and then just higher manual labor costs.

A follow-up to your response to David's question, can you expand on the technology you're exploring to address labor headwinds over the medium to long term like automation perhaps more so than you would have considered, call it, 6 to 12 months ago?.

Sure, Lauren. And we're looking at that really in several areas of our business.

At the store level, which we've spent most of the time talking about today, one of the key things that we're working on is in an environment where driver staffing is one of the constraints, key question is how do you keep drivers in their car more? And how do you get more deliveries per hour through those drivers?.

We introduced some time ago our GPS tools that are in the hands of drivers. That's a core technology that helps them to be more efficient. The technology underpinning of Domino's Carside Delivery and the operational practices that we've instituted around that are also key ways for us to think about driving more efficiency with our delivery drivers.

Because if we can identify when a customer pulls into the parking lot and run a pizza out to that customer's car, there's no reason why -- and we're doing it in a lot of stores around the country, no reason why we can't just run pizzas out to drivers' cars as well. .

And when I think about the Domino's I would like to see in the future, I don't see why drivers should ever have to get out of their cars.

Why can't we keep them turning to the store, back to the customer and maximizing deliveries per driver per hour which also maximizes the wages that those drivers earn? So there are a number of different things going on there inside the stores.

Our next-generation version of our point-of-sale system, along with other store technology innovations, are also helping us to get more productivity, to drive more productivity in the stores. .

And then lastly, outside of the stores, if I shift gears over to our supply chain centers, as we build these new centers and as we go back and replace assets in existing centers, we're putting in place equipment and technology that reduce the amount of labor that is required to produce our dough balls and to manage the distribution of product out to our stores as well.

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And our last question will come from Chris Carril with RBC Capital Markets. .

So I wanted to ask about the surprise frees promotion. I mean to what extent do you think the promotion helped to offset some of those declining stimulus tailwinds and other delivery headwinds that you had pointed out? And I think the promotion continues into November.

So are you planning on marketing it more over these next few weeks?.

Yes. Chris, we just rolled it out a few weeks back, and we're getting a lot of exciting press out of it. And I think it really -- it plays on a tension, a consumer tension. And that's one of the things we think about always when we think about great advertising at Domino's is how does it play on a consumer tension.

And consumers tell us that they get increasingly irritated about all of these fees that they get charged, so we've decided to do the flip side of that and do surprise frees..

So far, we're pleased with the customer reception to the campaign. We're going to continue to run it in the weeks ahead and excited about how that can continue to position Domino's as the transparent and value-oriented player in the market. So we remain excited about it. Look forward to sharing results as we -- as the program continues to evolve.

And as we see how it behaves in the quarter, we look forward to talking to you about it in more depth when we report our fourth quarter results out. .

All right, folks. Well, thank you so much for joining us on the call this morning, and I look forward to getting back together with you in February to discuss our fourth quarter and full year 2021 results. .

This concludes today's conference call. Thank you for participating. You may now disconnect..