REFILE-UPDATE 1-UK's Domino's Pizza shares drop as Germany falters

Tue Jul 30, 2013 12:50pm EDT

(Adds dropped words in paragraph 8)

* Breakeven expectation in Germany put back to 2016/17

* H1 pretax profit incl international drops 46 pct

* Pretax profit excluding international up 10.3 pct

* Shares drop 7 pct, hit near four-month low

By Neil Maidment

LONDON, July 30 (Reuters) - Britain's Domino's Pizza has slowed expansion plans for its fledgling German business, as higher wage and training costs there meant the unit would break even as much as two years later than forecast.

Shares in Britain's biggest pizza delivery firm dropped 7.4 percent to 555.5 pence at 0828 GMT, leading the fallers on the FTSE 250 index of mid-sized companies and carrying the stock to a near four-month low.

Domino's, which makes almost all of its sales of pizzas such as Pepperoni Passion and Meatilicious in the UK and Ireland, has set its sights on expansion into continental Europe, focusing on Germany but also sealing franchise ageements for Switzerland, Luxembourg and Liechtenstein in 2012.

"The German expansion will be a longer and steeper road than originally predicted," the group, with more than 800 stores, said, adding it expected losses in Germany to peak in 2013 and steadily reduce thereafter.

The group's two-year-old German business, which has 25 stores, hit its first speed bump earlier this month when the group warned that losses there would be as much as 6 million pounds ($9.2 million) this year.

That loss was higher than anticipated due to training costs and a poor performance at some of its managed stores.

Domino's - which bought the master franchises for the UK and Ireland in 1993 from Domino's Pizza Inc - said on Tuesday those factors, together with recent legislation in Germany's North Rhine-Westphalia to impose a minimum wage that could spread to other regions, meant expansion would slow.

It said fewer stores in Germany meant it would break even in 2016 or 2017, as opposed to an original aim for 2015.

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Domino's said one-off charges of 12.3 million pounds relating to writedowns against its German master franchise agreement and directly-operated stores there led to first-half pretax profit falling 46 percent to 11.6 million pounds.

But profit before tax excluding Germany and Switzerland rose 10.3 percent to 25.7 million pounds, as increasing online demand and new products such as hot-dog stuffed crusts and chocolate brownie deserts proved popular with hungry Britons.

The group said UK like-for-like sales were up 6.4 percent, with group sales up 13.8 percent to 326.5 million pounds.

Some analysts said the company's German experience was particularly negative.

"The performance of the German business is of increasing concern. Whilst management highlight German like-for-like sales up 23.8 percent, at the same time there is a writedown of German assets," analyst Wayne Brown at brokerage Canaccord Genuity said.

To improve its German performance, Domino's is converting its managed stores into better-trading franchised outlets at a one-off cost of between 5 million pounds and 7 million in the second half of this year.

"It is very important we don't send a mixed message here. We are extremely committed to the German plan, we are very excited about Germany," Domino's Chief Executive Lance Batchelor said.

"We've learned a lot of lessons during those first two years and so we are very focused on ensuring that the way we grow out from here on is extremely efficient and focused."

The company said it would raise its interim dividend by 7.6 percent to 7.10 pence per share and also said long-standing Chief Financial Officer Lee Ginsberg is to retire in 2014.

($1 = 0.6515 British pounds) (Editing by David Holmes and Louise Heavens)

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