June 17, 2020 / 6:47 AM / 25 days ago

UK's Domino's Pizza outlook weighed down by virus-led costs

(Reuters) - Domino’s Pizza Group (DOM.L) on Wednesday said core earnings for the first half would be lower than last year, dragged down by weak results from its Irish operations and the cost of social distancing measures at its restaurants.

FILE PHOTO: A Domino's pizza delivery driver rides a motorbike in a residential street in West London as the spread of the coronavirus disease (COVID-19) continues, in London, Britain, March 24, 2020. REUTERS/Toby Melville

Shares in the United Kingdom’s largest pizza delivery chain fell 7.4% in mid-session trade after the company also withdrew its full-year guidance, citing uncertainties related to restrictions to limit the spread of the novel coronavirus.

The stock has risen 22% since March 23, when the British government imposed a nationwide lockdown.

Group like-for-like sales were strong in the year to June 14, with an increase in the delivery order count and growth in items per order.

But costs related to measures, such as re-routing to stop two-person deliveries, ensuring all restaurants remain closed during restocking and contact-free delivery boxes, offset any benefits.

The company also made less profit from the average basket size of orders during the lockdown, as people ordered more sides and desserts, which compared to pizzas, have much lower margins.

“The expenses relating to increased health and safety procedures have worried traders,” CMC Markets analyst David Madden said. “It is a case of two steps forward and one step backwards.”

Domino’s said it could not predict how long the changes related to social distancing and associated costs would continue, but said this year’s EBITDA (earnings before interest, tax, depreciation and amortisation) would be lower than last year’s.

Like-for-like sales in the United Kingdom grew 3.7% for the first half to June 14, with sales from March 23 onwards up 5.1%.

In contrast, sales at its smaller Ireland unit fell 5.9%, which Domino’s blamed on a deeper fall in consumer spending during the lockdown.

“Strong delivery performance is helpful...but we think current operational difficulties will add to ongoing challenges to franchisee profitability,” brokerage Jefferies said.

Reporting by Tanishaa Nadkar and Siddharth Cavale in Bengaluru; Editing by Krishna Chandra Eluri and Barbara Lewis

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