August 14, 2018 / 6:33 AM / a year ago

Growth cools at Domino's Pizza, investors slice shares

SYDNEY (Reuters) - Australian fast-food chain Domino’s Pizza Enterprises Ltd (DMP.AX) posted its slowest profit growth in five years on Tuesday, missing expectations, as a heatwave sent Europeans to cafes rather than pizza shops and earnings from Japan fell.

FILE PHOTO: A Domino's Pizza restaurant is seen in Los Angeles, California, U.S. July 18, 2018. REUTERS/Lucy Nicholson

Although annual profit hit a record, it was the second year in a row that the one-time market darling fell short of its own guidance, prompting investors to question the longevity of its growth strategy, and sending its shares tumbling.

“They’re probably thinking this is the start of the slide,” said Mathan Somasundaram, market portfolio strategist at Blue Ocean Equities, after Domino’s stock dropped 9 percent to a near two-month low in morning trade.

“Early in their story, the market was paying for future growth and that worked well. But in the last two years, it’s been the perfect growth market and Domino’s has actually gone the other way.”

The largest Domino’s franchisor outside the United States also gave no profit forecast. It was looking for acquisitions to bolster same-store sales growth it otherwise predicts to be steady at 3-6 percent for three to five years.

“I know that can sometimes look more modest than some of our history, but the reality is that’s still going to get significant market share growth,” Chief Executive Don Meij said of the growth forecasts on a conference call.

Domino’s underlying profit, which strips out one-off costs, rose 12.4 percent to A$133.2 million (£76 million) for the year to June 30, below analyst forecasts of A$136.6 million and behind guidance for a 20 percent jump.

A Christmas promotion that went disastrously wrong in Japan was the biggest drag, contributing to a fall in earnings from what had been Domino’s biggest market.

It also missed sales growth targets in Australia and Europe, now its largest market comprising just over a third of revenue.

Germany’s early exit from the football world cup, plus a slew of matches falling outside dinnertime, kept a lid on fans’ appetite for the company’s pizzas, Domino’s Europe Chief Executive Andrew Rennie told investors on a conference call.

“On the top of that we’ve had an abnormally hot summer in Europe ... therefore what happens is they go to cafes and outside because they don’t have air conditioners and it’s too hot to sit inside, so that probably took the edge off.”

Meij said the miss in Australia was due to lacklustre promotions and the rescheduling of a rugby league derby from a Wednesday night to Sunday, when pizza deliveries are less popular.

By the close, Domino’s shares had recovered slightly but were still down 7 percent, while the broader market rose 0.7 percent.

Reporting by Tom Westbrook in Sydney; Additional reporting by Nikhil Kurian Nainan in Bengaluru; Editing by Paul Tait and Tom Hogue

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