July 27, 2010 / 12:29 PM / in 7 years

UPDATE 4-Domino's U.S. sales disappoint; shares fall

* Q2 adj EPS 33 cents vs Street view 28 cents

* Revenue up 14.5 pct to $362.4 mln

* Q2 U.S. same-store sales up 8.8 pct; int‘l up 6.2 pct

* Shares down 2.4 pct (Adds company and analyst comments, additional byline; previous dateline NEW YORK)

By Martinne Geller and Lisa Baertlein

NEW YORK/LOS ANGELES, July 27 (Reuters) - Domino’s Pizza Inc (DPZ.N) posted weaker-than-expected sales at established U.S. restaurants and signaled it may still need promotions to lure cautious consumers, sending its shares down over 2.4 percent.

The shortfall overshadowed a much better-than-expected second-quarter profit that was boosted by robust sales at the pizza delivery chain’s locations abroad.

U.S. same-restaurant sales rose 8.8 percent, fueled by a new pizza recipe. But the gain fell short of many analysts’ estimates and the 14.3 percent rise in the first quarter.

Oppenheimer restaurant analyst Matthew DiFrisco said he was expecting an increase of about 10 percent.

“Expectations were set pretty high. There’s got to be some profit-taking here,” DiFrisco said of the stock’s sell-off.

Domino’s introduced its reformulated pizza in the United States in December to address concerns about its taste.

The new pizza, which uses a different cheese blend and has a more garlicky crust, helped Domino’s shares more than double since the start of December and led to the strong first-quarter results.

The Ann Arbor, Michigan-based company declined to forecast U.S. sales for the rest of the year, except to say consumers were responding well to the new recipe and ordering it again.

“Customers love this new pizza, so we feel very good about where we are and the momentum in the business,” said Chief Executive Patrick Doyle on a conference call.

Domino’s has not changed its pizza recipe outside the United States.

Rival Pizza Hut, part of fast-food company Yum Brands Inc (YUM.N), posted an 8 percent rise in same-restaurant sales for its quarter ended June 12.

In late December Domino’s began offering two medium pizzas for $5.99 as a way to lure consumers who are still cautious after the recession. The company signaled that the promotion may be in place for some time.

“Consumers are still hurting out there. We think giving them good value is important,” said Doyle. “We’re seven months into (the promotion) ... and there’s an indication in there that we haven’t changed it for a reason.”

GOING MORE GLOBAL

Second-quarter net income rose to $22.6 million, or 37 cents per share, from $14.5 million, or 25 cents per share, in the year-earlier period.

Excluding a 4 cent-per-share gain related to early debt repayment and tax benefits, Domino’s earned 33 cents per share -- topping analysts’ expected profit of 28 cents per share, according to Thomson Reuters I/B/E/S.

Total revenue jumped 14.5 percent to $362.4 million, helped by the addition of new stores in international markets and higher sales at existing stores.

Sales at established restaurants rose 6.2 percent in international markets such as Mexico, Britain and Australia, double the 3 percent rise Buckingham Research Group analyst Mitchell Speiser had expected.

“The international story continues to strengthen,” said Speiser, who has a “buy” rating on Domino’s shares even though they were up 62 percent year-to-date through Monday’s close.

“This stock should really be viewed as a multinational company, and that typically gets a better valuation than 10 times earnings,” he added, referring to the company’s trading multiple before it reported quarterly results on Tuesday.

The company said the benefit it saw in the first two quarters from foreign exchange rates was eroding and that the impact on third-quarter results looks “fairly flattish.”

Domino’s shares fell about 2.4 percent, or 32 cents, to $13.27 on the New York Stock Exchange at mid-afternoon. (Reporting by Martinne Geller in New York and Lisa Baertlein in Los Angeles; Editing by Dave Zimmerman, Maureen Bavdek and Richard Chang)

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