UPDATE 3-Domino's Pizza shares rise on international sales

(Adds company comment, background, byline; updates share activity; changes dateline from NEW YORK)

By Lisa Baertlein

LOS ANGELES, July 22 (Reuters) - Domino's Pizza Inc (DPZ.N) on Tuesday reported quarterly earnings that just missed Wall Street estimates, but strength in international operations helped drive its shares up more than 16 percent.

The biggest independent U.S. pizza chain, which is replacing underperforming store operators and tweaking pricing to cover higher food costs without alienating customers, also said it saw a "light at the end of the tunnel" at its struggling U.S. business.

"The earnings release was not as bad as some people had expected," said William Lefkowitz, options strategist at brokerage firm vFinance Investments. "In addition, their comments about the future were somewhat positive."

Domino's and other pizza sellers have been wrestling with weak domestic demand and higher costs for key ingredients like cheese and wheat.

Ann Arbor, Michigan-based Domino's said net profit jumped to $18.7 million, or 32 cents per share, in the second quarter ended on June 15 from $2.3 million, or 4 cents per share, a year earlier, when it booked a large charge related to a recapitalization.

Excluding a gain on the sale of 27 company-owned stores and a reversal of tax reserves, Domino's earned 22 cents per share, just shy of the analysts' average forecast of 23 cents, according to Reuters Estimates.

Revenue fell nearly 2 percent to $334.3 million.

Same-store sales at international restaurants rose 7 percent, but declined 5.4 percent at domestic locations.

JPMorgan analyst John Ivankoe said in a client note that international store performance topped his estimate calling for same-store sales growth of 4 percent.

In the U.S. market, Ivankoe said company-owned stores were better than he had expected, while franchised store results missed his estimate.

Restaurant companies have been reluctant to raise prices to offset rising commodity costs for fear of losing customers who are already paring discretionary spending to compensate for higher food and fuel prices.

"Everybody has to take pricing up," Domino's Chief Executive David Brandon said in a conference call.

Brandon said Domino's was reviewing price increases made by owners of its franchised stores to find a balance that will keep customers.

"Some local operators priced product beyond what consumers would endure," Brandon said. "We're going back, and we're fixing that."

Domino's already has taken several steps to improve domestic results, including replacing underperforming domestic store operators with owners with proven track records.

"Returning to positive (same-store sales) in the United States has proven difficult, as the external environment continues to make it tough to regain lost sales momentum," Brandon said in a statement.

"We are in a turnaround mode, which is not fun," Brandon added. "However, we see a light at the end of the tunnel and we plan to be growing our domestic business again soon."

As of March 23, Domino's had 5,128 U.S. stores and 3,513 stores abroad.

Domino's shares were up $1.70, or 16.4 percent, at $12.09 in afternoon New York Stock Exchange trade.

At Monday's close, the stock was down 21.5 percent this year, hit as the weak economy has caused U.S. consumers to spend less on dining out. The Standard & Poor's 500 Index .SPX fell 14.2 percent in that time. (Additional reporting by Martinne Geller and Doris Frankel; Editing by Mark Porter and Derek Caney)