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Domino’s CEO focuses on carryout in a world of delivery competition

Carryout has become a bright spot for Domino’s Pizza as the restaurant chain battles in a tough, low-margin food delivery environment, CEO Ritch Allison told CNBC’s Jim Cramer on Thursday.

Shares of the Ann Arbor, Michigan-based pizza franchise popped almost 26% during the trading day on a strong fourth-quarter report that smashed Wall Street estimates.

“While most of the industry is running headlong into delivery, which is inherently a more profitable channel to serve, we’re working hard to hold serve on that delivery side of the business while really growing that carryout channel,” Allison said in a “Mad Money” interview. Carryout “is going to be an important part of the profit equation going forward.”

Domino’s reported a profit of $129.3 million, or $3.13 per share, on $1.15 billion of revenue in the December quarter. As competition from food delivery aggregators such as UberEats and GrubHub continues to pressure Domino’s delivery business, the company managed to grow same-store sales in the domestic market for the first time in almost two years.

U.S. comp sales improved by 3.4% in the three-month period, beating analysts’ expectations of 2.3%. Additionally, Domino’s loyalty program has reached 25 million active members, which Allison called a “milestone.”

“In the fourth quarter it certainly didn’t get any easier from a competitive standpoint, but it just didn’t get incrementally more difficult,” Allison said. “So we kept our focus on the things that we know will drive our business. We had an opportunity to go out and tap the capital markets and take another $675 million on in debt, and we worked hard to deploy that during the fourth quarter so we could set the business up for 2020 for another strong performance.”

Domino’s executives said on the shareholder call that they are seeing positive results from its “fortress” plan. In an April interview, Allison said the company has a goal of expanding its store count to 25,000 locations in an effort to build market share and achieve its top objectives. To combat third-party delivery services, Domino’s wants to open more restaurants in hopes of increasing service speeds and lowering delivery costs by being closer to customers.

By opening up more stores closer to neighborhoods, it creates an incentive for customers to pick up their own orders, particularly in states like California and New York where minimum wages are $12 and $13, respectively. In San Francisco, where the cost of living is among the highest in the nation, the minimum wage is $15.59.

In that case, the takeout business can be a profit driver for Domino’s. Domino’s opened up 141 net new U.S. restaurants in the fourth quarter.

“This gets particularly pronounced on the coastal regions of the country where minimum wage has risen so rapidly,” Allison explained. “The cost of carrying that food to the customer is only getting more expensive. So we look at it as, you know, a nice mix of two businesses that we can run in the same box that when you combine them together create a great profit equation for our franchisees.”

Domino’s kept its two-to-three-year outlook intact. The company is forecasting U.S. same-store sales growth between 2% and 5% and global sales growth of 7% to 10%.

Prior to Thursday, Domino’s shares traded virtually flat. Since the beginning of the year, the stock has risen 27% to $373.16 per share.

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