Domino's Pizza profit misses view; shares dive

NEW YORK Tue Oct 14, 2008 10:24am EDT

A Domino's Pizza in an undated photo. Domino's Pizza, the biggest independent U.S. pizza chain, posted a weaker-than-expected quarterly profit due to a drop in U.S. sales that overshadowed strong results from its international operations. REUTERS/Handout

A Domino's Pizza in an undated photo. Domino's Pizza, the biggest independent U.S. pizza chain, posted a weaker-than-expected quarterly profit due to a drop in U.S. sales that overshadowed strong results from its international operations.

Credit: Reuters/Handout

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NEW YORK (Reuters) - Domino's Pizza Inc (DPZ.N) posted a weaker-than-expected quarterly profit due to a sharp drop in U.S. sales, the biggest independent U.S. pizza chain said on Tuesday, and its shares fell as much as 19 percent.

The company also said it was looking for alternate sources of funding, after Lehman Brothers, a large lender to the pizza chain, filed for bankruptcy.

The company's chief executive warned that improving its fortunes in a sputtering U.S. economy would be "very tough."

"Our operators face the powerful forces of high commodity prices, consumers who are reluctant to spend, and a credit crunch that has slowed domestic new store growth, reinvestment in stores and our ability to expedite the turnover of poor-performing franchisees," CEO David Brandon said in a statement.

Like other pizza sellers, Domino's has faced weak domestic demand and higher costs for items like wheat and cheese. At the same time, U.S. consumers are more likely to prepare their own meals at home to save money.

The company, which competes with Papa John's International Inc (PZZA.O) and Yum Brands Inc's (YUM.N) Pizza Hut chain, has been replacing underperforming store operators and cautiously raising prices to cover higher food costs.

It has also added oven-baked sandwiches to its menu in a bid to lift sluggish U.S. sales.

In the fiscal third quarter, which ended September 7, the company's net profit fell 8 percent to $10.1 million, or 17 cents per share, from $11 million, or 17 cents per share a year earlier.

Excluding a gain on the sale of company-owned stores and a reversal of tax reserves, Domino's earned 13 cents per share, missing analysts' average expectation of 21 cents per share, according to Reuters Estimates.

Revenue fell 4 percent to $323.6 million from $337.3 million. Sales at U.S. restaurants open at least one year fell 6.1 percent in the quarter. International same-store sales rose 5.4 percent.

Domino's also said its ability to draw upon its variable funding notes has been reduced after Lehman Brothers, the primary provider of those funding notes, declared bankruptcy. Domino's said it is looking for alternate sources of funding.

The pizza chain operator noted that it has no borrowings under its available variable funding notes as of September 7. Domino's said its ongoing cash flow from operations and the estimated $21.7 million available under the variable funding notes facility is enough to fund its operations for the foreseeable future.

"We believe 'cash is king' in today's uncertain market conditions," Brandon said.

Domino's said its free cash flow was $25.8 million in the first three quarters of 2008. Free cash flow is earnings before amortization and depreciation, but includes capital spending.

The company's shares were down $1.47 at $8.54, after falling as low as $8.09 on the New York Stock Exchange.

(Additional reporting by Lisa Baertlein, editing by Dave Zimmerman and Derek Caney)

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