Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2017 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star then the number one on your telephone keypad. To withdraw your question, press the pound key. We ask that you please limit your questions to one question with one follow-up, and then you may re-enter the queue for any additional questions. Thank you. Tim McIntyre, you may begin your conference.
Thank you, Amy, and hello, everyone. Thank you for joining us on the call today about the results of our fourth quarter and full year 2017. As you know, this call is primarily for our investor audience. I kindly ask that all members of the media and others to be in a listen-only mode throughout the call. In the unlikely event that any forward-looking statements are made, I refer you to the safe harbor statement you can find in this morning's release and the 10-K. As always, we will start with prepared comments from Domino's Chief Financial Officer, Jeff Lawrence, and from our Chief Executive Officer, Patrick Doyle, followed by your questions. With that, I'd like to turn it over to CFO Jeff Lawrence.
Thank you, Tim, and good morning, everyone. We are thrilled to report our results for the fourth quarter and full year fiscal 2017. During the quarter, we continued to build on the positive results we posted during the first three quarters of the year and delivered strong results for our shareholders. We continue to lead the broader restaurant industry with 27 straight quarters of positive U.S. comparable sales and 96 consecutive quarters of positive international comps. We also continued to increase our store count at a healthy pace as we opened more than 400 net new stores in the fourth quarter. Our diluted earnings per share was $2.09, which is an increase of more than 41% over the prior year quarter. This increase primarily resulted from strong operational results and a lower effective tax rate. With that, let's take a closer look at the financial results for Q4.
Global retail sales, which are the total retail sales at franchise and company-owned stores worldwide, grew 11.7% in the quarter. When excluding the impact of foreign currency, global retail sales grew by 9.9%. This global retail sales growth was driven by an increase in the average number of stores opened during the quarter and same-store sales growth. Same-store sales for our domestic division grew 4.2%, lapping a prior year increase of 12.2%. Same-store sales for our international division grew 2.5%, lapping a prior year increase of 4.3%. Breaking down the domestic comp, our U.S. franchise business was up 4.2%, while our company-owned stores were up 3.8%. These comp increases were driven by ticket and to a lesser extent, continued order count growth. The ticket growth in the quarter resulted primarily from a higher number of average items per order in Q4 as compared to the prior year.
On the international front, all 4 of our geographic regions were again positive in the quarter, with Europe and the Americas leading the way. Canada, Russia, Turkey, and India were among the markets that performed particularly well during the quarter. Our Q4 2017 comps were negatively impacted when compared to the prior year, as our Q4 2017 fiscal calendar did not include New Year's Day. We estimate that both our domestic and international comps were negatively impacted by approximately half a point by this calendar shift in Q4 2017. We expect Q1 2018 to be positively impacted by this calendar shift. On the unit count front, we are very pleased to report that we opened 96 net domestic stores in the fourth quarter, consisting of 102 store openings and 6 closures. For the full year, we opened 216 net domestic stores.
We are also very pleased to announce that our international division added 326 net new stores during Q4, which included the opening of our 9,000th store internationally. The 326 net new stores were comprised of 339 store openings and just 13 closures. For the full year, we opened 829 net new stores in international. As a reminder, we converted more than 250 stores in 2016, which significantly impacts the year-over-year comparison. Our international growth continued to be strong and diversified across markets, driven by outstanding unit-level economics. When adding the domestic and international store growth together, we opened 1,045 net new stores globally in 2017, demonstrating the franchisees' continued excitement and commitment to our global brand. Turning to revenues. Total revenues for the fourth quarter were up $72.1 million or 8.8% from the prior year. This increase primarily resulted from 3 factors.
First, higher supply chain center food volumes driven by strong U.S. comps and store growth. Second, higher international royalties from store count growth and increased same-store sales, as well as the positive impact of changes in foreign currency exchange rates. Finally, higher domestic same-store sales and store count growth resulted in increased royalties from our franchise stores and higher revenues at our company-owned stores. Currency exchange rates positively impacted international royalty revenues by $2.1 million in Q4 versus the prior year quarter, due to the dollar weakening against certain currencies. For the full fiscal year, foreign currency negatively impacted royalty revenues by less than $1 million. Now, moving on to operating margin. As a percentage of revenues, consolidated operating margin for the quarter increased to 31.5% from 31.1% in the prior year, driven primarily by our global franchise business.
The operating margin in our company-owned stores decreased to 24.6% from 24.8%, driven primarily by higher labor wage rates and insurance expense. Lower occupancy costs and lower sales-based transaction fees benefited the operating margin and partially offset these decreases. The supply chain operating margin decreased slightly to 11.1%. The primary drivers of this decrease were higher labor, delivery, and insurance expenses as compared to the prior year quarter. Procurement savings benefited the operating margin and partially offset these increases. Before we leave operating margin, I'd also like to note that franchisees in both the U.S. and Canada continue to share in our success with record profit-sharing checks that they have earned in partnership with us, with great execution and performance. As I mentioned many times before, we expect to make additional investments in supply chain in the near to medium term to keep up with our rapid growth.
Let's now shift to G&A. G&A increased by $1.6 million in the fourth quarter versus the prior year quarter, driven primarily by our planned investments in technological initiatives, including investments in e-commerce, our point-of-sale system, and the teams that support them. Please note that these investments are partially offset by fees recorded as revenues that we receive for digital transactions from our franchisees. Continued investments in other strategic areas also contributed to the increase in G&A. Lower performance-based compensation and a $4 million pre-tax gain on the sale of 17 company-owned stores to franchisees partially offset these increases. Moving down the income statement. Net interest expense increased by $5.3 million in the fourth quarter, primarily as a result of increased net debt from our 2017 recapitalization. This was partially offset by a lower weighted average borrowing rate of 3.8% as compared to 4.6% in the prior year quarter.
Our reported effective tax rate was 31.7% for the quarter. There was a $6.8 million decrease in our fourth quarter 2017 provision for income taxes as a result of excess tax benefit on equity-based compensation. This resulted in a five-percentage point decrease in our effective tax rate. We expect that we will continue to see volatility in our effective tax rate related to equity-based compensation. As a result of the federal tax reform that was enacted before year-end, we revalued all of our deferred tax assets and liabilities, and the effect on the reported tax provision in Q4 was not material. When you add it all up, our fourth quarter net income was up $20.6 million or 28.3% over the prior year quarter. Our fourth quarter diluted EPS was $2.09 versus $1.48 in the prior year quarter. Here is how that $0.61 increase breaks down.
Our lower effective tax rate positively impacted us by $0.19, including a $0.15 positive impact related to excess tax benefits on equity-based compensation. Lower diluted share counts, primarily as a result of share repurchases during the year, benefited us by $0.18. Higher net interest expense resulting from a higher net debt balance during the period negatively impacted us by $0.07. Most importantly, our improved operating results benefited us by $0.31, including $0.05 from the gain on the sale of company-owned stores and a $0.03 benefit from the impact of foreign currency exchange rates on royalty revenues. Now turning to our use of cash. First, most importantly, we invested more than $90 million in capital expenditures for the full year as we continue to aggressively grow our technology capabilities and invest in supply chain to keep up with our rapid growth.
During the fourth quarter, we repurchased and retired approximately 277,000 shares for $51.5 million at an average purchase price of approximately $186 per share. We also received and retired nearly 660,000 shares in connection with the final settlement of our $1 billion accelerated share repurchase program, which we discussed on the Q3 call. For the full year, we repurchased 5.6 million shares for $1.06 billion at an average price of approximately $191 per share. During the fourth quarter, we also returned $39.7 million to our shareholders in the form of quarterly dividends and made $8 million of required principal payments on our long-term debt. Subsequent to year-end on February 14th, our board of directors increased our quarterly dividend approximately 20% to $0.55 per share and authorized a new program to repurchase up to $750 million of our common stock, which does replace our previous program.
As always, we will continue to evaluate the most effective and efficient capital structure for our business, as well as the best ways to deploy our excess cash to the benefit of our shareholders. As we look forward to 2018, I'd like to remind you of our 2018 outlook that we shared with you at our Investor Day in January. We currently project that the store food basket we use in our U.S. system will be up approximately 2%-4% as compared to 2017 levels. We estimate that the year-over-year impact of foreign currency on royalty revenues in 2018 could be flat to positive $4 million. If foreign currency rates today held for the full year, that impact would be more favorable.
In 2018, we expect our gross capital spending to be approximately $90 million-$100 million as we will continue to invest capital into technology innovation, supply chain capacity and capabilities, including our new supply chain center expected to open later this year, and to a lesser extent, company-owned store openings. We expect our G&A to increase due to our investments in e-commerce and technological initiatives. We expect total G&A expense to be in the range of $380 million-$385 million for 2018. Keep in mind that G&A expense can vary up or down by, among other things, our performance versus our plan, as that affects variable performance-based compensation expense and other costs. Separately, I would also like to remind you that we will be adopting the new revenue recognition accounting standard in the first quarter of 2018.
We will be required to report the franchise contributions to our not-for-profit advertising fund and the related disbursements gross on our P&L. We are currently assessing the proper classification of expenses on our P&L as a result of this change. We do not expect this guidance to have a material impact on our reported operating or net income. However, this new guidance will result in us reporting significantly higher revenues and expense, currently estimated to be well north of $300 million. Overall, our tremendous momentum continued, and we are very pleased with our results this quarter and for the full year. We will remain focused on relentlessly driving the brand forward and providing great value to our consumers, our franchisees, and our shareholders. Thanks for joining the call today, and now I will turn it over to Patrick.
Thanks, Jeff, and good morning, everyone. Many of you attended or listened to our Investor Day last month, and while the focus was on the state of the business, our strategy and outlook going forward, there was obviously some additional news that I addressed at the beginning of the event. While we have the opportunity today, I wanted to briefly reiterate one of the key accomplishments I noted in deciding to move on to the next chapter following my time at Domino's. Succession, and my emphasis on leaving the business in the hands of incredibly strong, capable leadership. This was an extremely important element of the decision process for me, and I look forward to more of you getting to spend time with Rich and gain an understanding of his skills, attributes, and strategic approach as the next leader of Domino's.
With our transition now underway, I want to officially welcome Rich to the table for his first earnings call since the announcement and note my confidence in passing the leadership baton to him this July. I'll provide further remarks on this during my final earnings call in April. Let's get to what's most important, our outstanding 2017. Make no mistake, I am very pleased with our quarter and the contribution to our overall 2017 performance, which continues to set the standard within our industry. We continue to set the bar high and deliver on bottom-line earnings performance, which we did nicely yet again in the fourth quarter. International full-year same-store sales were within our three-to-five-year guidance, while our full-year domestic results continued to impress well ahead of the top end of our guidance range, featuring a +30% comp on a three-year basis.
Unit growth continued to progress domestically, combined with the reliable engine of international store growth, we're delivering on the healthy blend of retail sales growth contribution we have discussed steadily throughout 2017. This is important. Both our corporate performance and, more importantly, that of our franchisees, is dependent on a mentality centered around long-term enterprise growth that doesn't just come with either comps or units within a silo. It takes both to truly build a fortress, and I am very pleased at the way this balance continues to come into shape. I discussed at last year's Investor Day my thoughts on the importance of store closures and how it is often a key and underrated metric on measuring the stability and potential for any business. It's been an issue for many within our category.
With that, our 13 domestic closings for the year, let me repeat that one just one more time, 13 domestic closings for the year, combined with only 62 around the rest of the world, for a total of 75 global closures in 2017, was the lowest amount of closures we have had in over two decades, one of the more favorable signs highlighting the continued momentum around our model, performance, and unit economic strength within this business. Our U.S. results in the face of the most difficult fourth quarter lap in our recent history were solid. In addition to our 27th consecutive quarter of same-store sales growth, I am extremely pleased with the net 216 domestic stores for the full year, and the impact it had on our impressive retail sales growth, which cannot be understated.
I'm proud of the team and our U.S. franchisees, who continue to show commitment to aggressive unit growth, which wasn't necessarily the case a few years back, all while staying focused on investing in re-imaging. We are now substantially completed and excited for our customers, particularly those helping grow our carryout presence, to get used to having one of the freshest new images and store designs in QSR be truly market wide. I'm also very pleased for the first time in over a decade to say that in 2017, the U.S. was our fastest-growing global market in terms of store growth. Year-end results always remind me to note the extraordinary performance and solid relationship and rapport we continue to demonstrate with our outstanding franchisees, a group that is absolutely second to none.
We came into 2017 wanting to maintain this impressive alignment, and I credit both our company and franchisee leadership for beginning 2018 in that exact same position of strength. While this cannot always be measured, the importance of this can in no way be underappreciated. To our franchisees who have impressed me with our continued refusal to be complacent, I thank you for continued passion for our customers and our brands, and look forward to winning together in 2018. Moving on to international, we have now reached 24 years of consecutive quarterly same-store sales growth. This unprecedented, and rather unbelievable streak is a continued testament to a team focused on retail sales growth, with a focus on fortressing territories and building to keep a leg up on competition for the long term. I am pleased our full-year results were within the three to five-year outlook.
While our comp for the quarter was below our range, and has shown a bit more volatility than usual of recent, I am confident the business will continue to deliver strong top-line results, and more importantly, continue to deliver tremendous unit growth, 829 net new stores for 2017 to be exact. The long game strategy of fortressing against the competition is highly visible, most notably and recently in India with the departure of a competitor. We didn't comp them out of the market, but instead relied on unit economics that encouraged rapid growth and continue making it extremely difficult for others to get their foot in the door. This approach, which is being executed globally, is perhaps one of the more exciting strategies around the future of our business. Needless to say, it's working.
The dialogue with all markets continues, particularly within an Asia-Pacific region that was fairly soft during the fourth quarter. Our master franchisee partners are assessing structural and leadership changes, and will address a situation that we see as fixable and correctable within the relevant markets. The remainder of our regions and territories performed quite nicely, including our large public master franchisees, notably the U.K., as well as India under its new leadership. All in all, while there are areas to correct and continue to improve, I am pleased with the results this extremely strong model continued to produce, and excited as ever about our future in continuing to aggressively grow and fortress in all markets and territories, driven by our strong master franchisee base that continues to get it done. We continue to set the bar on the importance of investing and innovating within technology.
2017 featured many highlights, including growth of our AnyWare suite of ordering platforms with another strong year for digital loyalty. The emergence of Voice and Alexa as a growingly popular ordering option, and more recently, our first meaningful test of self-driving vehicle delivery. As we discussed at our Investor Day last month, we are the technology disruptors. As is shown by the technology fee increase our franchisees committed to beginning this year, we pledge we will invest to stay ahead in 2018 and beyond, making every effort to keep the advantage we have worked so hard to build. In closing, I am pleased with the fourth quarter and feel tremendous about the momentum of our brand and business coming off of an outstanding 2017.
We continue to rely on a long-term strategy and approach, an emphasis on customer insights over our own, a disregard for complacency, and playing offense over defense in extending the competitive leads we have built, all on the path of reaching our goal of global dominant number one. Thanks. We'll now open it up for questions.
At this time, we will be conducting our question and answer session. In order to ask a question, please press star then the number 1 on your telephone keypad. We ask that you limit your questions to one question with one follow-up. Your first question comes from the line of Peter Saleh with BTIG. Peter, your line is open.
Great. Thanks. I just wanted to ask about the U.S. comp. I know the domestic number was a 4.2%. There was 50 basis points impact from New Year's Day. I think even if you include that, there was a pretty sizable deceleration on a two-year stack basis. Anything else you guys can call out in the U.S. market that maybe showed some softening this quarter?
No, we really feel good about it. If you kind of adjust out the New Year's Day, which will come back in the first quarter, kind of the same half point, rolling over at 12.2% from the previous year, with accelerating store growth through the end of the year, we feel very good about it.
Okay. On the international business, I think you said the Asia Pacific region was a little bit softer. Can you maybe elaborate a little bit on what you're seeing there and what steps you think you will be taking to resolve this issue?
Yeah. You probably saw that Domino's Pizza Enterprises out of Australia already released last week. There was some weakness in Japan in particular. Overall, we feel very good about the business. They've had a leadership change in Japan now. We're getting a little focused on value there. It's been a great business. I think it's going to continue to be a great business there. You may have seen in their release, they already called out the first, I think, five or six weeks of results heading into the new year, and those were already doing better. I think we feel good about the business over the medium and long term. Again, you already saw some re-acceleration of that business early in 2018.
Great. Just last question from me. On the G&A side, your G&A was a lot lighter than what we were anticipating. I know you called out the gain on the sale and the lower stock-based comp. Was there anything else in the G&A? Did any of the projects get pushed into 2018 that were supposed to be in 2017? Anything else, or are those the two items in G&A that would explain the difference versus your guidance?
Yeah, Pete, it's Jeff. First thing I would tell you is we're full speed ahead on all of the strategic investments. We're not going to slow down on that. You continue to hear us say that. Everything that we wanted to do, we did, and that will continue into 2018. The little bit of wonkiness is really the two items you mentioned. One was the gain on the store sales to franchisees, about 17 stores, in Q4. The other one was, we didn't do as well versus our plan this Q4 compared to Q4 back in 2016. Your year-over-year comparison there also led to lower overall expense. Most importantly, the strategic investments are on track, and we continue to invest in those areas.
All right. Thank you very much.
Thanks, Pete.
Your next question comes from the line of Karen Holthouse with Goldman Sachs. Karen, your line is open.
Hi. This is, I think, the first time we've heard you talk about some procurement savings on the supply chain side. Could you give any sort of color around that, magnitude, and then how to think about the cadence of that as we move through next year?
Yeah. Really, the procurement savings are really what you would come to expect from a brand that's really scaling pretty rapidly and has a little bit more market power than it had even two or three years ago. Our team in supply chain, fantastic job up there of just continuing to source very high quality, safe food ingredients, but at a lower overall cost. Of course, that flows through to the benefit of supply chain margin, which franchisees share with us 50/50 there. Everybody wins in that, but the important thing is, we're not going to degrade the product in that process. We're going to make sure that we continue to improve the ingredient quality and also drive down food costs at the same time.
Yeah. The only thing, Karen, I would add to what Jeff just said is, you did see confirmation from our competitor on their retail sales last year. We are now bigger than them, which we called out at Investor Day. I will tell you, our terrific procurement team may have made sure that all of our supply partners are aware of the fact that we are the largest and expect to be treated that way. Scale matters, and the fact that we're now the largest globally and in the U.S. in the pizza industry matters, and clearly, we're going to press that with our partners.
Also on the distribution margins, I think one of the reasons they surprised to the upside has been some pretty broad spread concerns about just freight costs in general, logistics costs, that we've heard through this earnings season. I think a big challenge has been managing through pretty large spikes on spot freight markets. Could you walk us through or give any sort of color on how much of your distribution are you relying on third parties versus doing it completely internally where you might not be exposed to that?
Yeah. This will probably not come as a surprise given our point of view on other parts of our business, but we own delivery of the food to the stores, just like we own delivery of food to our consumers, our customers. We have a very large fleet of leased tractors and trailers that enable those two to three deliveries a week to all of our stores in both the U.S. and Canada. We have not seen any material spike of cost in our business as a result of anything going on in the spot freight market. We're usually able to get out in front of that in a pretty good time. We don't expect any pressures there, and certainly there was no disruption for us in Q4.
Great. Thank you.
As a reminder, if you would like to ask a question, we do ask that you limit your questions to one question with one follow-up. You then may reenter the queue to ask additional questions as time allows. Your next question will come from the line of Will Slabaugh with Stephens Inc.. Will, your line is open.
Thanks, guys. I had a question on domestic comps. We've seen over the past year to two years, this comp's being heavily driven by transactions. It sounds now like that shifted a little bit in the quarter toward ticket playing a larger role. Can you talk about what's driving that ticket growth and the average items per order, as you mentioned earlier, and how comfortable you are with ticket growth rising over time?
It's Jeff. Again, we did a 4.2 in the quarter roll on a 12. A little bit more ticket than orders, but both were healthy and both contributed to the overall comp. We did have that half a point shift again on New Year's Day, which muted it a little bit. Really, there were a couple different things that contributed to a little bit more ticket in the quarter. The biggest one is the one I called out, which we just sold a little bit more food per order, which is kind of the best way to get ticket. What it wasn't about in Q4 was us getting undisciplined around pricing or our franchisees getting undisciplined around pricing. We remain in lockstep around delivering great value to our consumers.
The $5.99 mix and match, we were on TV a bunch with that in Q4, which is what you've come to expect. As we roll into 2018, the goal is to do what we always do, which is to grow orders and just be real thoughtful about ticket and the construct of ticket. Obviously can't comment on 2018, but there's no bad news for us in the fact that ticket was a little bit bigger in Q4.
Great. Thank you.
Your next question comes from the line of Gregory Francfort with Bank of America. Gregory, your line is open.
Hey, guys. Just the first one on, I think if as I look at your franchise revenue growth on the domestic side this quarter, it was up about 5%, even though you had a 4% increase in units and a 4% comp. Can you maybe explain what sort of dragged on that? Because I know that you took the fees up on your franchisees on the digital side versus last year. I'm curious what the offset is. Just a second question. Patrick, can you talk a little about, I know we saw your Australian partner comment on third-party aggregators in their release. Can you maybe update us on, in terms of how you think about external parties from an aggregator perspective versus a delivery perspective and sort of where you're coming from with that?
Yeah, Greg, it's Jeff. I'll take the first one, and then I'll kick third party over to Patrick for the second one. On the royalty revenues, really not a lot change in there. The contractual rates generally are still the contractual rates. You might see a little bit of bounce around. The one thing I would point out is we do offer some incentives for new store growth in the U.S., which as they get going, helps to defray some of the opening costs there. That might take down the effective rate a little bit. Again, that's been pretty consistent there. You mentioned the technology fee, which for 2017, was the same as it was in 2016. Really nothing there other than the additional mix of obviously increasing digital generally. Other than that, nothing really that we see bouncing around in revenues.
Yeah, Greg, on the aggregator, we really talked about this at length at Investor Day in January. First of all, the comments that came out of Australia. They're testing using some of the ordering portals, but not delivery. They're going to continue to control the customer experience, and we think that's very important. A reminder, nobody does more restaurant orders digitally than us, and nobody does more delivery than Domino's. We understand the economics of that, the customer behavior related to both the ordering and delivery process better than anybody. We've built real competitive advantage over the years by doing it ourselves. Accessing orders and customer base is something that's been tested many places. The delivery process and the efficiency of the delivery process is something that we know and understand very well.
That's not something that you're ever going to see us outsource because we believe, as we said in January, the only way to build long-term competitive advantage is to do something yourself. If you use a third party, you're basically deciding, all right, this is something where we're not going to build competitive advantage. If you do it yourself, the only reason to do it yourself is because you think you can do it better than you could do by accessing third parties.
Thank you for the perspective. Appreciate it.
Your next question comes from the line of Matt McGinley with Evercore ISI. Matt, your line is open.
Good morning. I have a question on the international revenue growth. It grew at around 26%, which is materially better than what would've been implied by the comp, the new units, and the FX. I guess the question is what drove that increase? Was it something with conversions now paying royalties or tech fees or AAV differences or something like that?
Yeah, Matt, it's Jeff. It's a little bit of all that stuff. As the older conversions start to roll off, they'll obviously start to pay a little bit more. You also have an acceleration in what Rich has talked about around the global online ordering platform and the deployment of Pulse more globally. Those are obviously bringing revenues into that line item as well. It's a little bit of all of that stuff, which is why you're seeing the increase there. In addition, obviously, the store growth and the comps.
Got it. On the asset sales, what was the rationale for selling those stores in the fourth quarter? It was only $4 million for, I think, 17 stores, so that would likely imply lower than average profit. I'm curious what the rationale was in this quarter, and then did that have any impact on the company on margins in the fourth quarter?
I'll answer first and then kick it over to Jeff. First of all, $4 million is just the gain. That's not the sale price. What we've said in the past is we are always going to look at our corporate stores and where they are. These stores that were sold were stores that were a little bit further out geographically from some of our others. We are also building stores, increasing density in some places where we're already operating. This is within the range of, if you will, ongoing portfolio management of our corporate stores. The specifics on it, I'll kick it over to Jeff.
Yeah, the only thing I'd add there to what Patrick, he covered it pretty well, is the sales actually took place a little later in the quarter, so you won't see as big of an impact on the U.S. margins or the franchise revenues. You'll really see that flowing through in Q1. As far as geographical, just happened to be a couple stores we had over on the East Coast in the Virginia, Carolina area. Again, that's less important than Patrick's point, which is it's normal portfolio management.
Okay, got it. Thank you.
Your next question comes from the line of John Glass with Morgan Stanley. John, your line is open.
Thanks, and good morning. First, you highlighted the carryout opportunity at the recent Analyst Day. How did carryout relative to delivery perform this quarter?
Yeah, they both did great.
Okay. Patrick, you had answered a few questions ago about never wanting to outsource delivery, but you didn't answer the question about whether the order aggregation could be something you would be willing to outsource. Meaning, is there an opportunity to expand the marketplace by using an aggregator's source orders, even if you deliver them, understanding that the economics have to be compelling? Is that a real opportunity in your mind in the U.S.?
Well, it's something that we've looked at. I guess what I would say is first you got to start by saying, okay, what is order aggregation? I could argue today that Google is an order aggregator, right? Because there are a lot of people who are looking for food, go in, and they start the process by googling the restaurant they want to go to. We use that. We buy keywords like our competitors do, and a pretty reasonable portion of our sales wind up going through portals like that. As those portals evolve, how we use them and the return on investment for those, we're always going to look at that. If you look at the largest order aggregator in the U.S. today, they're charging 15% of ticket on average to restaurants.
If you're big, you're going to pay less than that, and that's without delivery. That's something that for us is clearly not economic. Our franchisees are paying $0.25, which is a little bit over 1%. That's why we've got our loyalty program. We're generating the data. It's a terrific experience for the customer if they're going through us. It all ties into our point-of-sale system, so it's easier and more efficient in the stores. The answer is never say never because pricing may change dramatically, and how people operate as portals may change. It's certainly something we're looking at. Is that a big near-term opportunity moving outside of the places where we are sourcing today? I don't think the economics support it, but those economics may well change over time.
Thank you.
Your next question comes from the line of Jason West with Credit Suisse. Jason, your line is open.
Yes, thanks. Can you guys hear me?
Yep.
Okay. Yeah, just one. Going back to the aggregator question, which I know this comes up every quarter, if you could talk about the mix of urban sales versus suburban, if you're seeing any sort of divergence there that you may have referenced in the past.
Yeah. I mean, really no different than what we've said before. It is certainly those aggregators
Today are stronger in urban areas. If you dig down into their economics, they still struggle with how to take care of the customer, the driver of the restaurant. There have frankly been more articles coming out around the struggles that restaurants are seeing in generating incremental volume out of that. In terms of how that's shifting, there really has not been a real change in that.
Okay. The other question, just going back to the food inflation outlook, did you guys see that sort of accelerating through 2017? Is that something that you think is going to be higher as you move through the year? Anything on the pacing of that would be helpful.
Yeah. Again, it wasn't a bunch of commodity inflation or food basket inflation for us on the whole in 2017. Up a couple points, which was basically in the range that we told you we'd be in. A little bit more in the back half than the front half of 2017. Again, that's kind of splitting hairs a little bit. The point was, it was pretty favorable for the restaurants. Going into 2018, again, a 2%-4% over a real good 2017 year. We don't think commodities are going to be something that has a big impact on our store economics.
Great. Thanks a lot.
Your next question comes from the line of John Ivankoe with JPMorgan. John, your line is open.
Hi, thank you. Patrick, in your prepared remarks, you used the words fixable and correctable and relevant markets, I think referring to international. I thought that those were interesting words, and that they perhaps could be put in the context of these issues of being avoidable in the first place. I guess, kind of comment on that, whether you think your franchisees can be more proactive in terms of avoiding some of these things that need to be fixed. As we think about the corporation over the next three to five years, if you want to start getting more involved as a corporation in the affairs of the operations or maybe even a little bit more in the tactics of some of your larger international franchisees if comps aren't what they used to be.
John, I think it's interesting. If you look back over the course of 2017, we had a little bit of a slowdown early in the year with the U.K., and the U.K. is very much back on track. India had a period of time where it had slowed down and is now doing very well again. I think it's just a function of you're always going to do your best with the research that you have and make as logical decisions as you can. Every once in a while, you just don't get it right. When you saw the release from DPE about Japan, they talked about a promotion during the Christmas holiday time period that hadn't worked out well for them. Look, it was just a misfire.
What I would point out is a reminder that when they released their results, their first half results for them, that was a half. The problem that they were talking about was all within the fourth quarter because it was leading into the holiday. You already then saw them talking about how they were doing at the beginning of 2018. Part of the fixable comment was frankly normally I wouldn't talk about something within the quarter, but they had already released those numbers as part of DPE, and it was already doing better. Clearly it was fixable. I think the overall answer, John, is we are always giving opinions as asked, and we're talking to them about what we think the right approach is going to be.
Ultimately, that's the decision of the master franchisee, and we've got phenomenal master franchisees who understand their local markets and the dynamics there better than we're ever going to. Most of the time, because of the now multiple decades of positive quarterly performance, they do a pretty darn good job. Every once in a while, they're going to miss. In 2017, it seemed to kind of rotate around the world, who would have a little bit of a miss. Everybody is good at this, and we're confident that they can get it back on track.
Do you think that the global shared services model or the global shared data model is fully optimized? I assume there's always opportunity, but do you think there's any big opportunities to maybe apply some of the global learnings of Domino's even more to local markets when they have the little issues that appear?
Yeah, I think there are. It is part of why, if you look at our point-of-sale system that is now in the majority of our international stores, that means we've got better access to data not only for us but for them because we're making sure that the data is being cleaned properly and that it's going to help them make good decisions.
We still have a relatively small percentage of our stores on our online ordering platform outside of the U.S. It's currently what, 1,700? 1,300 stores outside of the U.S. on that platform. That helps. When we can do that, it gives us a little bit more visibility into it. I guess that kind of leads towards a bit more of your shared services comment, but it is why we think that's important, and why you continue to see more and more markets kind of getting onto our platform.
Thank you.
Thanks, Chuck.
Your next question comes from the line of Alton Stump with Longbow Research. Alton, your line is open.
Yes, thank you. Hi, good morning, gentlemen. Just a quick question. I think most of what I was going to ask has been asked already, but just from a competitive standpoint either in the fourth quarter or kind of what you're seeing to date in the first quarter, of course, there has been a lot of news out there as it pertains to Pizza Hut being more aggressive, maybe some smaller players responding to that. Did you see any impact from them in the fourth quarter and/or to date here in the first quarter?
No. Their retail sales were negative in the U.S. in the fourth quarter and over the course of the year. Ultimately from a competitive standpoint, it's going to be all about retail sales. No, we really didn't see any difference.
Okay, thank you. Then one quick follow-up, just on the commodity front being up 2%-4%, where cheese is at right now, is there any downside potential to that range as you kind of look out over the rest of the year, Jeff?
Yeah. Again, 2%-4% all-in is what we're currently estimating for what the stores will experience. We can over or underperform that based on what happens in the marketplace for different food items up and down the list. We're able to enter in at times into certain price agreements to lock up some of the volume at certain prices. Obviously, can't tell you what we have and haven't done for 2018. Listen, I don't know where cheese is going. I don't think anyone knows where cheese is going. I think the important part for us is we've shown a real good discipline with the U.S. franchisees around sticking on message and executing at a high level, regardless of what happens with food costs, regardless of what happens with labor rates. They're just doggedly determined to continue to build share the hard way.
Kind of regardless of where commodities may or may not go, I think our guys have the right attitude out in the field, and that's what matters the most.
Great. Thank you.
Your next question comes from the line of Brett Levy with Deutsche Bank. Brett, your line is open.
Thank you. Thank you. Good morning.
Good morning, Brett.
Good morning. If you think about some of the things we've been hearing out in the marketplace from the international players on fortressing and the splits, there seem to be some concerns about what it might mean, I know you are very focused on growing the global sales. When do you think in the U.S. we can start to see more of a material impact on the retail sales growth, and how should we be thinking about it in terms of returns at the existing units, what it means on the new units, and really what kind of impact this fortressing could have in terms of a drag on comps? How should we be thinking about it and really from a timing standpoint? Thanks.
Well, what I'd say is the return on investment for franchisees is as good as it has ever been, which is ultimately what's generating the energy around store growth that we've seen. When we look at the guidance that we've given to the market of 8%-12% on retail sales, we think the best way to do that is with a balance between comps and store growth. You have seen a very good balance from international for a number of years. I will tell you that if you express that there are concerns around that from international, it's not coming from our master franchisees. There may be people in the market who are talking about it, the returns for the franchisees are very, very strong, which is why they're continuing to generate strong store growth.
In terms of the effect on the business, we were over 200 net on growth for the U.S. this year, which means you're looking at something now approaching 4% growth in the store count. There already is some effect in there on our domestic comps. All of that is already taken into consideration when we reiterated our guidance of 3%-6% comps for both domestic and international at our investor day in January.
Thank you.
Your next question comes from the line of Chris O’Cull with Stifel. Chris, your line is open.
Thank you. Good morning, guys. Patrick, you mentioned sales trends have been more volatile in the past few months, I apologize if I missed this, did you say what you thought was causing the volatility?
I was referencing international. International over the course of 2017 was a little bit more volatile than it had been, and it was really from some specific markets.
Okay, I apologize. I thought you meant domestic. Jeff, any color on what the company did differently in the quarter to increase the ticket?
Yeah, Dan, the primary one was we sold more food per order. A little bit of that was probably due, or was due to the Bread Twists launch. We were on TV early in the quarter on that. There's always some coupon mix that goes on in quarter four. That happened to help us a little bit on ticket, but it's mostly those two things.
Okay. Just lastly, did the company pay annual cash bonuses at a target level or above in 2017, or how did it compare year-over-year with 2016?
It was above our 100% target level, but below the percentage that we earned in 2016.
Great. Thank you.
Your next question comes from the line of Stephen Anderson with Maxim Group. Stephen, your line is open.
Quick question on comps. I just want to ask, with regard to cannibalization, can you quantify how much you might have seen an impact on both international and domestic comps? Keeping in mind, though, that it's part of your longer-term strategy to build stores within the existing markets. Thank you.
Yeah, Stephen. Great question. We're not going to disclose how much of the comp gets eaten by splits, and again, we would just point you to the 3%-6% range for global comps and the 8%-12% on retail sales. Is there an impact? Yes, there is. But again, we think that that really distracts from the more important question, which is how do you profitably grow retail sales in total? And obviously, again, being led by international with an above range, again, when you strip out FX, above that 12% range for that business. It's more about the all-in retail sales than it is about how much impact do splits have here or there.
All right, thank you.
You're welcome.
Your next question comes from the line of Jeffrey Bernstein with Barclays. Jeffrey, your line is open.
Great. Thank you very much. Two questions. One, Patrick, I know just on the U.S. comp, it's been discussed, and I know you said you feel good about the trends, and you're leading the industry. I know it was talked about that the comp trend did slow on a one- and two-year basis. I'm just wondering if you don't think it's anything perhaps internal. I think you mentioned carryout and delivery were both doing great, and digital seems to be doing well. I'm wondering if there's anything you're seeing in terms of what would attribute to that or perhaps maybe the industry slowed down a little bit. I don't know with what regularity you get that industry data, but I know in the past you talked about the industry growing maybe 1%-2%.
Maybe you're seeing some sort of a modest industry slowdown that would attribute to the more recent easing of the U.S. comp. I had one follow-up.
Yeah, Jeff, first of all, I guess I'd reiterate, we're rolling over at 12.2 from the previous year. We had a half a point shift out of the fourth quarter into the first quarter of this year. We feel very good about the overall, in terms of the industry, we're not seeing anything that is showing really acceleration or deceleration materially over the ongoing trend.
Got it. Jeff, can you just remind us, because you have revenue streams from the franchisees and the company and then the supply chain, an incremental point of comp on an annual basis, ballpark, what's that worth to annual EPS, both for, I guess, U.S. and international or combined?
Yeah. We know that math. We don't give that math out, but a point of comp, particularly if it's from orders, is very good for us.
Good to know. Just lastly.
We can't do all your work, Jeff.
No, but I'll put that in our model. It does very good.
We had the same reaction here to his answer.
Yeah. Just lastly, the cash return. I know you talk about balancing share repo and dividend, and more recently it's been more about the repo. The dividend right now, I know with the healthy increase you just made, it's still roughly a 1% yield, which is kind of the low end of peers. I'm just wondering, why wouldn't you maybe be more in line with peers in a 2% plus type range and obviously have the strong free cash flow and still have the flexibility to do as you will in terms of the repo? Is there something that kind of keeps you more cautious in terms of upping that dividend even further?
Yeah. It's Jeff again. We returned $84 million to shareholders in the form of our ordinary dividend. Board just increased another 20%, which was on a 20-plus percent from the years before. While dividend yield is one metric we obviously track and we care somewhat about, we're also very interested in what the dividend payout ratio is and some other things. At the end of the day, it is a healthy dividend. We don't get to control the stock price directly, so that always has a chance to bounce around. A $0.55 a quarter dividend in 2018, we believe is a healthy return to shareholders in that form.
The one thing I'd add is, you know we've always talked about the fact that we're agnostic on how we use our cash. If you look backward, our return on investment for our shareholders on our decisions to buy shares have been extraordinarily strong. There is a balance in how we're approaching it, and we're continuing to move the dividend up with the latest announced increase. We've generated pretty darn good returns with the buybacks.
Absolutely have. Thank you.
Your next question comes from the line of Sara Senatore with Bernstein. Sara, your line is open.
Hi, thank you. One question and then one follow-up on technology spend. In the past, I know you said, you're an invest first company, and we'll continue to see you invest and grow G&A. I think sometimes we've seen companies prioritize investing, then top line has sort of decelerated, and they need to find ways to maybe balance that. I guess to the extent that maybe your comps start to fall globally more in line with that 3%-6% range rather than above, is there any way for us to think about that investment side, the growth OpEx, if you will, and how that might vary with top line? Then, like I said, I do have a follow-up, please.
Yeah. I'd go back to repeating what we said at Investor Day and I think earlier today, which is the investments that we're making, both on the G&A front and capital investments, are what is going to continue to drive our projection of 8%-12% global retail sales growth. We feel good about how we've performed against that previously, and we're going to continue to invest to do it. We don't start from a projection of sales and then work backwards to how much we can afford to spend. We look at the investment opportunities that are in front of us, what we think the odds are of those investments generating return for our shareholders, and as long as that expected return is strong, we're going to continue to invest.
Okay. Thank you. That makes sense. Then the follow-up is, you talked about, with respect to technology and delivery, needing to do it in-house if it's going to be a competitive advantage. One thing I was curious about is, do you think it is possible for a company to acquire kind of technology and delivery expertise sort of in one fell swoop? Or is that something that has to be grown organically in an organization over time? I guess, is there any way to kind of leapfrog through a big acquisition of talent and technology?
If you look broadly, people have acquired competitive advantage or built it themselves. It's always a choice you have. I think ultimately, if you're using a third party that is available to anybody in the market, by definition, that's a commodity if anybody can access it. Could you see somebody acquire that and build competitive advantage through that acquisition? I suppose if they restricted everybody else's access to that technology after they made that acquisition. If it continues to be available to everybody, then almost by definition, it's a commodity. It's something available to everyone. Only if you acquired it and then got everybody else off of that technology would there be an opportunity to really start to turn that into a competitive advantage.
Thank you.
Your next question comes from the line of Matt DiFrisco with Guggenheim Securities. Matt, your line is open.
Thank you. Good morning. I appreciate the opportunity. I know you guys are over an hour. I'll keep it pretty concise. A lot of questions about delivery and all the new entrants and third-party aggregators and everything. I'm just curious, behind the 3%-6% domestic, 3-5 year same-store sales guidance, what is embedded in there or what's your outlook for the delivery growth category for overall of food, if you could just remind us? Thank you. I have a follow-up.
I don't know that we've got a specific assumption around how that's going to grow. What you have seen so far is that people have talked about this being incremental to their business. There has been no incremental growth of the restaurant category. I frankly would take issue with the idea that this is incremental within the overall industry. What I think you have seen is some people's takeaway business or on-premise business to date shift to delivery. As long as all that's happening is it's shifting for one restaurant chain from a carryout transaction to a delivery transaction, for our purposes in projecting our business, I don't know that it really makes any difference. Overall, I guess I would give the same answer you've heard from me many times, which is, we just have not seen a really significant effect from this.
If we can identify it is still relatively small that it's had an impact on our business.
Well, I guess what I'm trying to get to is if the category is driving, if demand is increasing for delivery, should we see your traffic as well seeing it go a little bit more positive? It seems like it perhaps is in a little bit of a deceleration.
Yeah. If you talk about demand growing for delivery, what you've seen so far is more supply of delivery. You've seen some restaurant chains that didn't previously offer delivery now offering it, and it has shifted some relatively, to date, relatively small % of their customers from being a carryout customer to being a delivery customer. If that's how they're sourcing volume, then it doesn't really affect our business.
Okay. Thank you for that color. Then just the last question, bookkeeping. You mentioned a little bit about the facility coming on domestically. Is there any inefficiencies that we should see or factor into our first half of 2018 in the margin assumptions until that facility is fully efficient? Is capacity going to be met pretty quickly and it'll be up and running and not a drag on margins?
We're not giving guidance specifically around supply chain margins, short or long term. What I can tell you is, when we open up the facility outside of New York, there will be a lot of cost, but also some transportation savings that we're able to capture there. On a net basis, over the medium term, I don't expect the supply chain margins to dramatically be volatile, whether it be in Q4 or the first half of next year. Again, we're not giving specific guidance around it. Again, I think it's a big business. It's a $2 billion revenue business. Bringing on a very large center in the Northeast is a big deal. It's not something that I think is going to cause seismic shifts in margins.
What was the date for opening?
We're going to open it up in Q3 as the target.
Thank you.
gentlemen, your final question comes from the line of Jon Tower with Wells Fargo. Jon, your line is open.
Hey, good morning. Just quick ones from me. First, you have some paper or notes that are callable in April. I think it's $493 million at a 3.48% rate. I'm curious to know if you were to go to market today, how that rate would look, one. Then two, I know you don't have a formal targeted leverage ratio, but given U.S. tax reform, I'd be curious to hear your thoughts on leverage ratios today versus what you were thinking about in the past.
I'll take the last one first, which is tax reform. Obviously, we're a big winner on that helps us in everything. First and foremost, just gives us that much more confidence to go faster on investing and all the things that are going to grow the retail sales. It also is likely that some of that will fall to the bottom, we will adjudicate that as we do all free cash flow decisions, whether it be a buyback or a dividend, et cetera. On the leverage itself, we've generally said, three to six turns of EBITDA. The result of tax reform means that we can do a little bit more than that comfortably. Although at the same time, we're not ready to say that we're going to move the top range target up because the cost of equity is a funny thing.
Our shareholders need to be comfortable, we know it took us about a decade to train you all that six turns of leverage was good for our business model. We're not ready yet to say that we're going to go any higher than that. As far as the specific piece of debt we have from the 2015 deal, which is par callable in a couple of months, again, nothing to announce on that. We're always looking at what the market is doing and what the rates are. We've seen a flattening, as you know, of the yield curve. The longer-term stuff looks a little bit more attractive than maybe the shorter-term stuff. Again, that bounces around quite significantly really nothing to announce on that.
Great. Thank you.
This concludes our question and answer session. I will now turn the call back over to Patrick for closing remarks.
Thank you, everyone. We appreciate you joining the call today, and we look forward to discussing first quarter 2018 results on Thursday, April 26th.
This concludes today's conference call. You may now disconnect.