Changes to the Position Monitor
- We are moving DRI down to the Long Bias list from Best Idea Long
- Adding DPZ back to the LONG bias list (see Below)
- Removing ARCO and YUMC (see below) from the LONG bias list
Domino's Pizza Delivers Sizzling Q1 Results, Hungry for MORE Strategy Drives Growth
We are adding DPZ back to the LONG bias list - the Q1 2024 results for Domino's Pizza show how effective their "Hungry for MORE" approach is. Domino's created a winning formula that connects with consumers and new product innovation, digital engagement, operational excellence, and iconic value.
Domino's reported 1Q24 earnings, demonstrating the effectiveness of its "Hungry for MORE" approach. Strong same-store sales in the US and reasonable overseas performance drove the company's 7.3% worldwide retail sales growth (excluding the impact of foreign exchange). Domino's reported a domestic +5.6% increase in domestic same-store sales, driven by orders for carryout and delivery. The redesigned Domino's Rewards reward program was a big driver, encouraging greater participation from new, lapsed, and light users. Introducing lower redemption tiers (20 and 40 points) was especially successful in increasing the frequency of orders. In 1Q24, customers are responding favorably to Domino's "famous value" promos, which include the reintroduction of "Carryout Special Boost Week" and the well-liked "Emergency Pizza" BOGO offer. These promotions generated a positive feedback loop and repeat business by enticing customers to sign up for the loyalty club. Carryout outperformed the competition, with same-store sales rising 9.5%. The reward program's lower minimum expenditure requirement for accruing points on carryout orders, which appealed to budget-conscious consumers, was also responsible for this rise.
Despite consistent labor concerns, the company improved delivery times and delivered more pizzas than Q1 2023. The "More Delightful Operations" training program guaranteed uniform product quality and efficiency by emphasizing dough handling, product creation, and cooking. Innovation was still at the forefront with introducing "New York Style Pizza" after the quarter. This slimmer crust option is a permanent addition to Domino's menu, and it should draw in additional customers looking for a unique pizza experience. International markets are implementing the "Hungry for MORE" strategy to help improve same-store sales internationally, even though comparisons stayed soft as expected. Management anticipates that as more markets adopt the winning model, international comps will speed up in the second half of 2024.
The leverage in Domino's model drove operating income to increase by 19.4% (excluding the impact of foreign exchange). The organization profited from decreased food costs, more efficient sourcing, and lower supply chain delivery costs. Thanks to the effective loyalty program and value promotions, franchise profitability remained good. Domino's is optimistic about the future and believes it can maintain its current pace. For the entire year, the company anticipates 7%+ worldwide retail sales growth (excluding currency), with the "Hungry for MORE" approach as a tailwind. While international comps are anticipated to increase in the year's second half, U.S. comps are predicted to stay above the 3% long-term target, with a softening in 2Q24.
In summary, Domino's Pizza's Q1 2024 same-store sales performance was driven by successfully implementing the "Hungry for MORE" strategy in the U.S., with strong contributions from the revamped loyalty program, effective value promotions, and robust carryout channel growth. While international SSS growth was softer, management remains confident in the strategy's ability to drive improvement in the back half of the year. Domino's expects to maintain strong SSS momentum throughout 2024, supported by ongoing initiatives and the "Hungry for MORE" strategy rollout in international markets.
Domino's Pizza's Q1 2024 operating margin improvement was driven by procurement productivity, lower food costs, reduced delivery expenses, and adjustments to the ad fund contribution and tech fee. While the company is not solely focused on margin percentages, these factors contributed to strong profitability in the quarter. Looking forward, Domino's expects relatively flat operating margins for the full year as cost savings are reinvested in growth initiatives, with the potential for modest leverage if food basket pricing remains favorable.
Yum China Doubles Down on Value and Innovation to Drive Growth in Challenging Environment
We are removing YUMC from the LONG bias list - YUMC Reported a $0.06 EPS BEAT and revenue miss with comps (3%) vs. SA (2.5%); KFC (2%) vs. SA (2.3%); Pizza Hut (5%) vs. SA (3.7%)
Overall, management anticipates the near-term choppiness to continue as China's recovery happens piecemeal. As expected, they expressed confidence in Yum China's long-term prospects in China as well as its business model and strategy. The company's main goals include controlling expenses, increasing retail expansion, bringing value to customers, and responding to changing consumer preferences.
The overall tone of business in China:
- Provided a cautious outlook for Q2
- Yum China acknowledges the challenging and competitive environment but "delivers solid results through its resilient business model and agile execution."
- Remaining bullish on the long-term growth opportunity in China despite near-term choppiness.
- Seeing an uneven recovery across regions, city tiers, and locations but leveraging their diversified footprint.
- "We expect a choppy outlook for Q2 with tougher comparisons and evolving consumer behavior, but we focus on value, cost management, and store expansion to drive traffic."
- Continuing to innovate and adapt to shifting consumption trends like increased delivery demand.
- Given the macro backdrop, the management team balanced near-term caution and long-term confidence in Yum China's business fundamentals and growth potential.
In 1Q24, YUMC's operating margin came at 12.6% of revenue. The restaurant level margin was 17.6%, a decline of 270bps YoY (ex fx, the restaurant margin decreased by 130bps). The margin pressure came from:
- Increased value promotions contributed to a 32.1% cost of sales, up 200bps YoY (or 170bps ex fx), somewhat offsetting the favorable commodity prices.
- Labor costs grew to 25.4% YoY (or 60 bps on a comparable basis) due to higher rider costs from a greater delivery mix and wage inflation. Improvements in labor productivity somewhat countered this.
- Due to decreased rent and marketing expenditures as a percentage of revenue, occupancy and other costs improved by 10 basis points YoY (or 60 basis points on a comparable basis).
- G&A costs improved from 5.6% of revenue to 4.7% in Q1 2024, a 10% year-over-year drop. For FY24, management hopes to maintain a G&A ratio of about 5%.
