UK's Domino's warns of higher losses in German expansion push

Wed Jul 3, 2013 5:23am EDT

LONDON, July 3 (Reuters) - Britain's Domino's Pizza warned that annual losses at its fledgling German business would be higher than anticipated due to increased training costs and a poor performance at some of its stores, sending its shares down 7 percent.

Britain's biggest pizza delivery firm said on Wednesday it expected losses for the year at its two-year-old German arm to be between 2 million and 3 million pounds more than first thought, taking the total anticipated loss to as much as 6 million pounds, according to analysts.

"The group's German expansion has hit its first speed bump," Panmure Gordon analyst Simon French said in a note, as he cut his full-year pretax profit forecast for the group by 4 percent to 47.5 million pounds ($72 million) to reflect the higher losses.

Shares in the firm, which opened on Wednesday up 29 percent on a year ago, were down 7.4 percent to 619 pence at 0919 GMT, one of the top FTSE 250 fallers.

Reporting on trading for the 13 weeks to June 30, Domino's said like-for-like sales at its six German stores open for more than a year rose 11 percent in the period, representing a big slowdown from growth of 40 percent in its first quarter.

Of the 25 stores now in Germany, the stores it manages directly were significantly underperforming those run by franchisees and would be switched to a franchised model "as soon as practicable", it said.

"It is time to drive our German expansion using our tried and tested franchise model," Domino's chief executive Lance Batchelor said. "We are excited about the future in this fledgling territory."

Domino's has previously said the German business could eventually outgrow its core British arm, which owns the master franchise to own and operate the Domino's brand in the UK, Ireland and other European countries.

It has said it expects its German business to be profitable by the end of 2015 and will open another 12 stores in Germany in the second half of this year.

The higher anticipated losses took the shine off a better than expected performance in the UK, where the firm has over 700 stores. Like-for-like sales rose 6.1 percent in the second quarter, boosted by new promotions and growing online sales.