October 8, 2019 / 11:34 AM / 9 days ago

Domino's cuts cost outlook after third-party delivery hit

(Reuters) - Domino’s Pizza (DPZ.N) surprised investors by resetting its long-term growth goals on Tuesday and said it would cut costs and investment this year as it battles the growing popularity of third-party delivery services and small pizzerias.

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

The company’s shares, which fell 6% on a results release that showed growth slowing and profit below expectations, recovered to trade up 4% when executives laid out details of the spending plans on a call with analysts.

Chief Financial Officer Jeffrey Lawrence said he now expected general and administrative expenses to be between $380 million (311.30 million pounds) and $385 million in 2019, down from a previous range of $390 million to $395 million.

He also said Domino’s would invest as much as $20 million less than previously planned this year, prioritising its major investment projects.

Reaction was mixed to the company’s move to replace its three- to five-year forecast with a shorter-term outlook which included lower percentage growth targets than those given previously for the longer period.

Chief Executive Officer Richard Allison said he did not know how long competitors delivering through Uber Eats UBER.O, Postmates or GrubHub (GRUB.N) could maintain subsidised pricing, making it impossible to predict sales over the next five years.

Domino’s, whose shares surged to $305 last year after a successful two-year push on online ordering, has struggled since in the face of the arrival of other restaurants in the delivery space in tandem with the app-based delivery services.

“These players are currently pricing below the cost to serve, offering free delivery or other deep discounts that are currently enabled by investor subsidies,” he said.

“So when we take all that into consideration, we no longer believe that a long-term outlook with a 3- to 5-year time horizon is that instructive to our investors.”

The company’s same-store sales at restaurants open for more than a year in the United States rose 2.4% in the three months to Sept. 8, the slowest growth in at least 15 quarters and below a 2.84% rise forecast by analysts.

The company said it now expects U.S. same-store sales to rise 2% to 5%, and its international segment by 1% to 4% within two to three years, compared with a previous target of 3% to 6% growth at either segment over three to five years.

Ann Arbor, Michigan-based, Domino’s has been opening new restaurants in a move it calls “fortressing” to facilitate faster delivery to locations beyond homes and offices, ranging from beaches to bus stops.

It gave no indication of what investment it would scale back, with finance chief Lawrence saying only that it was reducing its 2019 capex spending forecast to a range of $95 million to $100 million, from $110 million to $120 million.

The company earned $2.05 per share in the third quarter ended Sept. 8, missing expectations by 2 cents. Total revenue rose 4.4% to $820.8 million, missing analysts’ estimate of $823.9 million.

Reporting by Praveen Paramasivam in Bengaluru; Editing by Maju Samuel and Patrick Graham

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