Domino's Pizza Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.25.14 | About: Domino's Pizza, (DPZ)

Domino's Pizza (NYSE:DPZ)

Q4 2013 Earnings Call

February 25, 2014 10:00 am ET

Executives

Lynn M. Liddle - Executive Vice President of Communications, Legislative Affairs & Investor Relations

Michael T. Lawton - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

J. Patrick Doyle - Chief Executive Officer, President and Director

Analysts

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Ivan Holman - Goldman Sachs Group Inc., Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Alvin C. Concepcion - Citigroup Inc, Research Division

Mark E. Smith - Feltl and Company, Inc., Research Division

Peter Saleh - Telsey Advisory Group LLC

Operator

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Domino's Pizza Q4 Year End Financial Results Earnings Call. [Operator Instructions] Thank you.

Ms. Liddle, you may begin your conference.

Lynn M. Liddle

Great. Thank you, Jessica, and good morning, everybody. We're very pleased to be here to review our 2013 financial results. We'll spend some time with prepared comments, but then open it up for Q&A. And a couple of housekeeping items, do look at our earnings release and refer to our Safe Harbor statement regarding forward-looking statements. And then, also as always I would ask the members of the media to please be in listen-only mode as this is primarily an investor call. So again, thanks for all of your participation. Now I'd like to introduce Mike Lawton, our Chief Financial Officer to open it up today.

Michael T. Lawton

Thank you, Lynn, and good morning, everyone. We're very pleased with the results for the fourth quarter and our fiscal 2013. During the quarter, we continued to build on the positive results we posted during the first 3 quarters of the year, and we delivered another solid quarter for our shareholders. We opened a significant number of new stores, both domestically and internationally. Our international and domestic divisions posted strong same-store sales growth, and our EPS grew by 21.9% over the prior-year quarter.

Now I'll start my review of the quarter by looking at our system-wide sales, which are also known as global retail sales. And these are the total retail sales at franchise and company-owned stores worldwide. Global retail sales grew 7.2%. Foreign currency was the headwind again this quarter. And when you exclude the adverse impact of foreign currency, global retail sales grew by 9.9%. Drivers of this growth included domestic same-store sales, which rose 3.7% in the quarter lapping a positive 4.7% in the fourth quarter of 2012. This was comprised of franchisee same-store sales, which were up 4% and company-owned stores, which were up 1.2%. Although we don't provide specifics of order account and ticket for competitive reasons, we did drive an increase in order counts and ticket this quarter.

Also we're pleased to report that we opened 47 net domestic stores in the quarter consisting of 62 store openings and 15 closures. For the year, we've opened a net 58 stores in the United States. This represents the most domestic openings we have completed in the recent past, and we plan to remain focused on growing our store count in the United States in the future. Now our international division had another solid quarter as same-store sales grew 7%, lapping a strong prior-year quarter increase of 5.2%. Our international division also grew by 273 stores this quarter, made up of 286 store openings and 13 closures. For the full year, we had a record international growth of 573 net new stores.

Turning to revenues. Total revenues were up 26.9% or 5% from the prior year. This increase was primarily a result of 3 factors: First, higher supply chain revenues resulting mainly from favorable mix, an increase in commodity prices, and an increase in equipment sales resulting from the initial reimaging of our stores; second, higher international royalty and supply chain revenues due to an increase in same-store sales growth and store count growth; and third, higher domestic royalty revenues due to same-store sales growth and the positive impact of increase in our store count over the past year.

Moving on to operating margin. As a percentage of revenues, consolidated operating margin for the quarter improved to 30.5% from 29.8% in the prior-year quarter. Some of the drivers of this improvement included the following: A change in our mix of revenues positively impacted our operating margins as a percentage of our revenue came from franchise royalties -- a higher percentage came from a franchise royalties, which have no cost of sales; company-owned store operating margins improved as a percentage of revenues due to favorable product mix and a slightly higher ticket. Our supply chain margin percentage increased from 10.3% to 10.8% due to both lower insurance costs and lower repairs and maintenance cost, offset in part by an increase in commodity cost. Now the average cheese block price in the fourth quarter was $1.83 per pound versus $1.93 per pound in the same period of last year. Changes in other commodities more than offset this decrease as our overall market basket increased 1.6% during the quarter. As a reminder, food commodities are generally priced on a constant dollar markup to our franchisees, therefore, higher commodity prices did not impact our supply chain dollar profit. They do, however, negatively impact our supply chain margin as a percent of revenues. Now as I stated on our Investor Day in January, we currently expect that the commodities we use in our system will be flat to down 2% in 2014 versus the 2013 levels. Now despite the fact that we have diversified monetary risk, currency exchange risk negatively impacted us this quarter by $1.9 million versus the prior-year quarter due to the dollar strengthening against most currencies. And if the dollar remains at current levels, our comparisons to prior years will continue to be a headwind for us.

Turning to G&A expenses. G&A increased by $2.2 million or 3.1% quarter-over-quarter. The increase was primarily due to e-commerce and technology support, an increase in non-cash compensation expense, as well as investments to expand our international team. Our G&A for the full year of 2013 was $235.2 million. As we look to 2014, we expect to have increases for e-commerce and technology support, international support team and other strategic initiatives, and these will be offset by lower non-cash comp expense. The result is an expected increase of $5 million to $9 million over our 2013 reported levels. Keep in mind that our 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.

Regarding income taxes, our reported effective tax rate was 36.7% for the quarter, which is slightly below our expected range. We currently expect our effective tax rate for the foreseeable future to be in the 37% to 38% range. Our fourth quarter net income was up $7.1 million or 18.9%. This increase was primarily driven by higher domestic and international same-store sales, international store growth and a lower effective tax rate, offset in part by higher G&A expenses and a negative impact of foreign currency exchange rates. Our fourth quarter diluted EPS was $0.78 versus $0.64 in the prior-year quarter. The $0.78 is a $0.14 or 21.9% increase from the 64% -- $0.64 in the fourth quarter of last year. Here's how that $0.14 difference breaks down: first, our foreign currency exchange rates negatively impacted us by $0.02; our lower diluted share count primarily due to our share repurchases benefited us by $0.015; lower interest expense benefited us by $0.01; a lower effective tax rate benefited us by $0.01; and importantly, our improved operating results benefited us by $0.125.

Now turning to our use of cash. During the fourth quarter, we repurchased and retired approximately 297,000 shares for $20.2 million at an average price of $68 per share. We also returned over $11 million to our shareholders in the form of a $0.20 per share quarterly dividend. We ended the quarter with $14.4 million of unrestricted cash, but I want to point out that we posted $42.3 million of cash as collateral for our letters of credit during the quarter. While that cash is classified as restricted cash, we do have the ability to access that cash quickly if needed.

Looking forward, we believe that we will continue to generate cash over and above what we need to reinvest in our business. When considering this excess free cash flow, we have 3 options. We can pay dividends, we can buy back stock or we can pay down debt. Based on our historically consistent free cash flow and our strong performance over the past year, the Board of Directors has increased our quarterly dividend to $0.25 per share from their previous level of a $0.20 per share. This is a 25% increase, which reflects our increasing free cash flow and commitment to return value to our shareholders. We also will continue to use some of our excess free cash flow to repurchase stock. Already in the first quarter, we have repurchased 221,000 shares. We anticipate meeting the threshold where we are no longer required to make principal amortization payments in the first quarter of 2014.

Regarding our capital expenditures. In 2013, we invested over $40 million in capital expenditures, primarily in our stores, our supply chain centers and our technology initiatives. We will continue to have low capital expenditures relative to our earnings, but are increasing our spend as we see continuing opportunities to invest in our industry-leading technology platform, the reimaging of our corporate stores and other initiatives to grow our brand. Going forward, we have raised our long-range outlook on capital spending to approximately $35 million to $45 million a year annually, as we will invest capital into reimaging our corporate stores and also invest in our technology platforms.

Overall, our strong fourth quarter continued our consistent performance throughout 2013. Our focus remains on improving our operating performance, growing our global store base and utilizing our free cash flow to drive shareholder value.

Thank you for your time today, and now I'll turn it over to Patrick.

J. Patrick Doyle

Thanks, Mike, and thanks to all of you who attended our investor day in Florida last month, where we reported on the consistent progress we're making towards building an increasingly bigger and stronger Domino's Pizza brand. What I wasn't able to share with you in Orlando though was how well our global team performed in the fourth quarter. Mike outlined our financials in detail for you, but my headline take on our full year is simply to say that we again drove great results, and we are very happy with the progress made in 2013. We had strong global momentum in sales, store growth, and innovation, which culminated in a terrific year overall.

Looking first at our domestic business, we had another strong sales quarter and year, continuing a consistent sales trend that was driven by many of the levers we've discussed in the past: Great promotions, quality products, strong service, compelling advertising and customer-friendly technology innovations. As we look back over a 20 year span, we noted that in the vast majority of these years, we posted positive sales gains with an overall average of up 2.5 -- or 2.6%. This represented a pretty wide swap of macroeconomic climates, as well as industry driven events, yet we performed pretty steadily throughout most of those 2 decades. The past few years have exceeded that average, propelled by the momentum we've experienced since relaunching the brand. This long record of consistent performance gave us the confidence to raise our long-term outlook up a point from the previous 1% to 3% to the now up 2% to 4%. Our sales success has also driven success at the store level. Store profits have been increasing every year since the 2008 trough, and we expect that when the 2013 final numbers are in from our franchisees, store EBITDA will fall between $81,000 to $85,000 per store, which makes our franchisees happy and we hope more willing to reinvest. We saw more evidence of that again this year as we began to gain some traction in domestic store growth. We delivered on our promise of modest store growth and feel that momentum can continue into the coming year.

On the international front, we hit an absolutely huge milestone, 20 years of positive quarterly same-store sales. We've looked and we can't find evidence of another restaurant brand doing this ever. I'm so proud of our team and franchise community for this incredible and unprecedented achievement. With about 95% of the world's population living outside the US, clearly, the majority of opportunity to grow stores is in international markets and international will generate the majority of our expectation of 4% to 6% global annual store growth. This year certainly reinforced that point with a record 573 net stores built internationally out of a total of 631 built globally. The returns have been there for international master franchisees to keep a robust stream of new stores opening around the world and 2013 proved particularly strong.

Once again, we saw strength across the board with balanced growth as we discussed at investor day. Not only did established countries such as Canada, the U.K. and South Korea post strong growth again, but we also made great progress in emerging countries such as Brazil and Indonesia. We also recently opened in a new market, Paraguay. Another important brand initiative for us is the store reimage mandate we announced for all new and existing stores worldwide. This is an important program for us, as it solidifies the evolution of our brand and better represents what Domino's has become, open, welcoming restaurants that are focused on the quality of our food. We received a very positive response from our franchisees who haven't had a mandated new store image in the U.S. in nearly 20 years. Considering all the work we've done on the brand since 2009, this move makes sense to the franchisees, and they're embracing the new image. As is our protocol, we've also research-tested this new store image, and we know that the new stores resonate very positively with customers and team members as well. We have a plan in place for our entire system to be reimaged by the end of 2017. In the U.S., a number of stores will be mandated to improve their locations, and some of them will have an opportunity to receive incentives for these moves.

We've also announced that we have identified third-party lenders to help with financing for our U.S. franchisees, which should help move the process along more smoothly. Our brand momentum will also continue to feature technology and innovation, as we meet the needs of customers worldwide who are redefining convenience and demanding more of from every experience with us. Our recently launched pizza profiles, which is the ability for consumers to store orders and information, is one of those innovations that's not only delivering convenience and ordering speed for customers, but also providing a building block for other technologies. Our latest announcement with Ford SYNC would not have been possible if profiles weren't in place first. And there are other advances that will be possible in the future because of the flexible and scalable technologies we're introducing. We plan to continue to build the platforms and provide the experiences our customers are demanding, more along the lines of what technology companies are doing and be a technology pioneer for the restaurant industry. These advances continue to push our digital sales percentages higher. I'm pleased to report by the end of 2013, well over 40% of our domestic sales were coming through digital channels. And our technology dominance is just -- isn't just domestic, it spans the globe.

As I announced at investor day, we ended the year with a run rate of about $3 billion in digital sales around the world. It took our company 38 years to hit $3 billion in global retail sales, but just over 5 years to hit this number in global digital sales, which demonstrates the rapid growth of this platform. Lastly, 2013 proved to be another year of strong free cash flow, and excellent top and bottom line financial results, with adjusted annual EPS up over 21% compared to last year. Results like these mean we have the good fortune to keep giving back to shareholders in meaningful ways, by both increasing the regular quarterly dividend by 25%, and resetting our share repurchase authorization once again. As we have demonstrated in the past, we plan to continue to look at our earnings and free cash and find appropriate ways to return value to our shareholders. We believe we've made a name for ourselves as a reliably shareholder friendly company, one that is flexible with its use of free cash year after year.

So in conclusion, I'd like to congratulate our franchisees and team members for 2013. Domino's is gaining market share, leading in the use of technology and evolving this quintessential pizza brand into a global leader.

With that, we'd be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Bittner with Oppenheimer.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

So on the domestic business, you had a little bit over 1% net unit growth in 2013 and this is actually great. It's I think the best it's been since 2006, I believe. So how do you see this playing out in 2014 and beyond, given the introduction of this mandated reimaging campaign?

J. Patrick Doyle

Yes. So I think there are kind of 2 questions in there. One is we want to build on the momentum that we've started to show. I think the most important factor in this, in addition to great work by the development team in getting this going, is that we've improved the economics of the stores. The cash flow coming out of the stores is better, which makes it a better product ultimately for our franchisees to buy and to build. So their return gets better and it's generating more interest and that's ultimately what's generated the store growth and we'd like to continue to build on that. In terms of how the reimaging may affect store growth, I think the answer is at the margin, could it affect it a little bit, probably, but the reality of it is we've got almost 1,000 franchisees in the U.S. The ability to access capital is quite good now particularly for the largest franchisees. And you're still with -- 58 stores being built last year out of nearly 1,000 franchisees, you're still looking at a relatively small minority of our franchisees who are building stores and those are being built by the franchisees, who on average are a little better capitalized, their existing stores are doing better. So ultimately, I don't see it really affecting store growth much. I don't know that I could argue that it wouldn't affect it at all, but I think the overall effect will be pretty modest because you're looking at a relatively small group of well finance-funded franchisees. The other thing that I'd point out that's important was, while we only just announced the specifics of this and the timeframe for this, our franchisees have known for at least a year now. We said quite publicly to them as we were testing this that, look, we're still working through this, but if you're wondering as you're looking at your financing and your cash flow, whether we're going to be mandating this at some point, the answer is yes. And we said that to them almost, I think almost exactly a year ago, very publicly. So they've known this was coming. You've already seen that kind of built in to what was happening in 2013.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Okay, that's very helpful. I know you addressed the reimaging a lot at the analyst day, but at the end of the day, is this really just a huge push into driving the catering business? Is that really what at the end of the day, this reimaging is meant to do?

J. Patrick Doyle

No. It's really about opening up the kitchens, making them more inviting, making the carryout experience far more positive I think than that it has been. Catering, I mean...

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

I'm sorry, I mean carryout. If I said catering, I mean carryout. My fault.

J. Patrick Doyle

That was why you see the quizzical look on my face through the speaker phone.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Yes. I'm sorry. I mean catering. I mean carryout.

J. Patrick Doyle

Yes, absolutely. I mean, it's largely about carryout, but I will tell you even delivery customers want to know where their food is coming from. If they've seen the store once, they're driving by the restaurant, they want to see that it's a good-looking place. And so while this is certainly more going to be about carryout than necessarily delivery, the fact is I think it helps both. It helps the brand overall, which is ultimately going to help sales overall.

Operator

Your next question comes from the line of Michael Kelter with Goldman Sachs.

Ivan Holman - Goldman Sachs Group Inc., Research Division

This is Ivan Holman sitting in for Michael. I was just wondering, given robust EBITDA growth, it seems reasonable that you would just naturally do well over time. And so I was hoping if you will provide a little bit of incremental color around how we should understand priorities for cash and how you're thinking about dividends versus for the share repurchases?

Michael T. Lawton

Well, as you can see we're continuing to do both. In terms of the use of cash, we've increased the dividend nicely. And the fact that we're continuing to buy shares both fourth quarter and as I said on the first quarter, gives you an indication of our intentions that we're going to keep doing both ends. As it relates to the deleveraging, we're currently at about 4.5x EBITDA. That's right in the middle of the range that we've talked about as being appropriate for us, which we think is somewhere up 6% on the high end and 3% on the low end, 6x -- 6x on the high end, 3x on the low end times EBITDA. And so we're very comfortable where we're at. Obviously, we'll continue to look at where that takes us over time.

Operator

Your next question comes from the line of John Ivankoe with JPMorgan.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

I was hoping you could shed some more color on, I mean, what's really been some exceptional performance in your supply chain or your distribution business. Even -- it looks like the U.S. is performing even better than what store growth or as you mentioned, order counts may have been on the comp side in this last quarter so, if you can explain the fourth quarter and how that might influence profit growth in the segment for 2014 and beyond?

J. Patrick Doyle

Yes. John, I think there are couple of things. First, overall, as you heard in Mike's commentary, I think the team has done a really nice job of controlling kind of the controllable costs. But I think the other thing you are just seeing is the value of variable margin. And as volume is going up, you're leveraging fixed costs, you're leveraging capacity in our supply chain centers. And the team has done a very good job of having that flow down to the bottom line. And what I remind you of is as they're looking at initiatives for making that system more profitable, we're unique in our profit sharing model. So 1/2 of the profits out of our supply chain system are going to our franchisees, and so they're excited when we are able to bring initiatives to them that are going to make it more profitable overall for all of us. But overall, I think the answer is just simply good management of the system combined with importantly, increasing volume going through the system.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Has there been -- it looks like the G&A was actually down year-over-year. I mean, was there any structural change that happened, I mean, consolidation of facilities that maybe I missed or you maybe you're distributing a little bit more product this year than you would have been last year? I don't know what that would be exactly, but just trying to get a sense if there is some kind of a change and if there is a lapping point that we should be sensitive to as we look into '14?

J. Patrick Doyle

Yes, I think GA was pretty flat in the distribution business year-over-year. So what that means is the increased volume that we're putting through is on the contribution margin, there is pretty much flow into the bottom line, which is what gets you some increase in margin overall.

Operator

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

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

A couple of questions. Just first, this is a follow-up on the franchise investment and the remodel program. I know you talked about at the analyst day that it was long overdue. I think that the feedback from franchisees is pretty positive. I'm just wondering how you're selling them on this idea, whether it's just long overdue and if were mandated or whether you're giving them kind of sales into a profitability expectations or whether there's any of those expectations that you would be willing to share with us?

J. Patrick Doyle

Yes. I think the answer of that is we did go out and as you say kind of sell it to them, but we do have the ability to mandate it as well contractually, given how long it's been. But I would tell you that the overall take from the system was really very positive. And frankly, I'd even go so far as to say maybe even a little more positive than one would expect when you're going out and asking people to make a pretty substantial reinvestment into their system. They get it, they understand it. Our franchise system is very engaged, I think as engaged and positive about where we are as a brand that I've seen in the 17 years I've been at Domino's. And so overall, the reaction was really quite positive and very quickly kind of moved into questions around implementation, and tell me exactly how quickly I need to do it and what this means for me and relocations and all those sorts of questions. So overall, I think it's really about talking to them about how it's going to continue the momentum in the overall brand as opposed to kind of any specific selling around it. They get it, they understand now it's driving the momentum in the business.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. And just 2 quick sales questions. One, I know you don't give inter period sales, but with the unusual nature of the weather we've seen in the fourth quarter and into first quarter, just remind us whether sequentially through the fourth quarter, you saw things move when weather hits in certain markets or whether you can give us some regional color in terms of the comp? I know the company operate comp on a small base was much lower maybe they were hit harder. I'm just trying to size up your defensive nature in the increment weather environment.

J. Patrick Doyle

Yes. Well, what I'd say, Jeff, is not kind of get into the breaking down the trends within the fourth quarter or certainly not talk about what's happening in the first quarter. What I will tell you is I think what we've said before, which is on average, bad weather, extreme weather and it actually can be also when it's particularly hot, will be at the margin somewhat more helpful for us than the opposite, but we have not in the past, seen that be a particularly materially effect in over the course of a full quarter. So 3 or 4 inches of snow, coming into a market or a lot of rain or particularly cold or particularly hot will in the short term be helpful to us because of the delivery nature of our business. But it's -- we've never seen it at the point that it is a particularly material change on a full quarter.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. And then just lastly then, looking at the menu in U.S. in '14, I think you talked about it at the analyst day that it in '13, you really didn't tap into your what I think you characterized it as a fairly strong product pipeline and you were more focused on online and whatnot. So in '14, just wondering any color you can give in terms of whether we should be expecting more new product news or whether you're focused more on main items versus sides or value versus premium or any color in terms of the '14 outlook?

J. Patrick Doyle

Yes. I guess the first thing I'd say is referencing kind of our comments at the investor day. Now you know why you we were saying some of the things we were with confidence. I mean, the fourth quarter lapping pan was still very strong, despite the fact that we didn't have new product news coming in. We knew that it was the overall momentum in our business and great advertising and execution and technology coming on the business that was driving what we knew at that point were quite good results in the fourth quarter. That said, I think it would be pretty unusual for us to go in the U.S., a full year without a new product launch. And so while I think you will continue to see far fewer new product launches from us than we may have done 5 or 10 years ago over the course of the year, I also think 0 is not going to be a particularly common outcome either.

Operator

Your next question comes from the line of Alvin Concepcion with Citi.

Alvin C. Concepcion - Citigroup Inc, Research Division

And I just wanted to ask more about the sales trends. There's a view out there that consumers doing more online shopping this holiday season impacted traffic and that trend will continue. That seems like a trend that should benefit you because of your leadership in digital. Did you see a difference in online ordering mix this fourth quarter year-over-year or even to date?

J. Patrick Doyle

I think really, we've just seen continued growth on digital. So I don't know that we saw anything kind of more or less than we would have expected given what we were doing with profiles and everything else in the fourth quarter. But what I would point out is that about 10% of our business is people walking into our stores, placing an order there for carryouts. So 90% of our business is order ahead, either over the phone or over digital. And we are now basically right at the point where we are doing just about equal amounts of sales digitally versus over the phone. And so I mean, we've come a long way in just 5 or 6 years on the digital front. We're continuing to see nice robust growth out of that channel. And we think that's going to continue. So nothing particularly unusual in the fourth quarter about the growth, except that it continued to be strong.

Alvin C. Concepcion - Citigroup Inc, Research Division

Okay, great. And then just a follow-up on the reimaged stores. I'm just curious, if you'd be able to share anything on your tests in terms of what the comp look does, what it does to store economics and mix between carryout and delivery?

J. Patrick Doyle

Yes. I think the answer is as you're doing individual stores, it's pretty modest. But we know what it's going to do to the overall brand. And that's really where it's more important. So it is ultimately going to be about a better customer facing experience overall, with stores that really look like the brand that people are now expecting from Domino's and the experience that they're expecting. And so even as we've put together a terrific digital experience and great service and great advertising and dramatically improved product, they're walking into our stores and they're just not having a comparable experience from entering our stores. And so it's about making that yet one more area, where we're really leading and we think doing it with this image, opening up our kitchens so that people can see the quality of the food that we're using to make their meal is a really positive step forward for us.

Operator

Your next question comes from the line of Mark Smith with Feltl.

Mark E. Smith - Feltl and Company, Inc., Research Division

Maybe a question for Mike. It sounds like you're standing by your guidance for commodities to be flat to negative 2%. Looking at cheese prices today, are you assuming that we see an easing from current levels?

Michael T. Lawton

Yes. As you're pointing out correctly, cheese prices are at very high levels. They've come down a little bit, but they're very high. We certainly do expect that to moderate and most of the other commodities that we've got we think are going to be in pretty decent shape for the year. But if cheese prices stayed where they are, my forecast of down 0 to 2% would certainly be inaccurate.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. Is there a long-term opportunity as we see the big international players in pizza continue to take share from mom-and-pops and the regional guys? As we see cheese move high, is there an opportunity that maybe some of the smaller guys are pushed out of business and shut their doors, whereas you are able to withstand that a little better?

Michael T. Lawton

I would think that whenever you look at commodity pressures, you've got that tendency to raise prices and it's easier to not raise prices and continue to do what's right for the customer to keep your prices at the price points that they're looking for as long as possible when you're running good volume through your stores. And as you saw for the past year, each of the last 4 quarters, at least, what we've been talking about is we've had good solid order count growth. We were getting it in the prior years as well. I would certainly hope that, that puts us in a stronger position to withstand short-term commodity bumps than somebody who is being stretched out on lesser volume.

Mark E. Smith - Feltl and Company, Inc., Research Division

And then lastly, just looking at the strong results from your distribution business. Are there any investments that need to be made as your volume increases?

Michael T. Lawton

We're in pretty good shape as it relates to volume. We do continue to make some investments just because some of the plants are older in some cases, and the investments that we're making are more to maintain the productivity or in some cases, improve them. But there's enough capacity out there in general that you won't see a lot of CapEx going into supply-chain just because we need to expand capacity in the U.S. We're in pretty good shape.

Operator

Your next question comes from the line of Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group LLC

Just wanted to ask about the media and advertising budget, how you're forecasting that for 2014, is there going to be any portion that's going to go local or is this all going to be on a national scale?

J. Patrick Doyle

Yes, some gets spent locally, but that's relatively small now versus what we're spending at a national level. The percentage of sales is -- that goes into the national fund is going to be consistent in 2014, with what it was in 2013. But if we can continue to generate sales growth and we can continue to generate store growth, that means that the absolute amount will be up year-over-year.

Peter Saleh - Telsey Advisory Group LLC

Great. And just a nontraditional kind of question. I mean, there's a lot of chatter that the new iPhone this year will have a bigger screen. Have you found that bigger screens on some of these smartphones, is that helping to drive more of your digital sales?

J. Patrick Doyle

Interestingly, I don't know that it necessarily drives more in the way of sales. I would tell you that the larger the screen, the more people can see great food photography and an appetite appeal. And so there may be some very -- I may haven't really thought about it before, but there may be some very small correlation between screen size and ticket size. I don't think it would be particularly big. Now that you've asked the question, I may go back and ask somebody to look at it, but I don't think it's going to have much effect, but at the margin, it might a little bit.

Operator

There are no further questions at this time.

J. Patrick Doyle

Thank you for listening today, and I look forward to reporting our first quarter results to you in early May.

Operator

This concludes today's conference call. You may now disconnect.

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