February 13, 2018 / 10:32 PM / 2 years ago

UPDATE 2-Australia's Domino's Pizza says it 'completely misread' Japanese promotion

* Net profit up 17 pct but below market expectations

* Faltered at Christmas in Japan, trims Australia/NZ sales outlook

* Shares fall 7 pct, biggest drop in 6 months (Recasts on Japan promotion, adds shares and quotes from CEO and analyst)

By Tom Westbrook

SYDNEY, Feb 14 (Reuters) - Australian fast-food chain Domino’s Pizza Enterprises Ltd on Wednesday said it had made such a hash of a Christmas promotion in Japan that it had to throw away pizza dough, sending its shares sliding.

Domino’s decision to offer only enormous pizzas during the important year-end trading period, and not its full menu, backfired so badly that first-half revenue in its largest market by sales dropped 8.8 percent.

“We completely misread that for our business ... we actually lost some of our heavier users, and that resulted in a much weaker Christmas which resulted in a much weaker result for Japan,” Domino’s Chief Executive Officer Don Meij said on a conference call with journalists.

“I mean, we even had to throw away food, it was that disappointing in that Christmas window.”

The mistake comes six months after Domino’s blamed problems with its French delivery app, which struggled with apostrophes in Gallic addresses, for falling short of its growth targets last year.

Together with soggy sales growth in Australia and New Zealand, where the company trimmed its same-store growth forecast by a percentage point, the fumbled promotion in Japan put profits for the biggest Domino’s operation outside the United States below analyst forecasts.

Net profit for the six months to Dec. 31 rose 17.3 percent to A$58.7 million ($46 million), tracking behind a Deutsche Bank forecast for annual profit of A$144 million, even though the company promised a stronger second-half.

That spooked investors expecting steep growth to justify the stock’s lofty multiple, since it trades at a price-to-earnings ratio of 43.5, compared with an average of 15.5 across the broader S&P/ASX 200 index.

Domino’s shares shed 7 percent, their largest daily drop since last August when the company first mentioned its problems in France, to trade at their lowest in a week.

“Seventeen percent profit growth is still a very good number but this stock has been priced for higher growth,” said Michael McCarthy, Chief Market Strategist at brokerage CMC Markets.

“To justify that you really need strong growth rates and you certainly don’t want to see downward revision of those growth rates and that is, unfortunately for Domino’s shareholders, exactly what’s happened today.”

The company, which holds the rights to the Domino’s franchise in seven countries from Japan to France, declared an interim dividend of 58.1 cents, compared to 48.4 cents per share from a year ago.

It reaffirmed its expectations for full-year net profit growth “in the region” of more than 20 percent, with same-store sales improvements in all markets. ($1 = 1.2724 Australian dollars) (Reporting by Tom Westbrook in Sydney. Additional reporting by Ambar Warrick in Bengaluru; Editing by Stephen Coates)

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