Domino’s Falls as German Loss Prompts Analyst Cuts: London Mover

Domino’s Pizza Group Plc declined the most in three months as three analysts downgraded the U.K. maker of Hot Dog Stuffed Crust pizza after greater-than-expected losses at its fledgling German outlets.

The shares fell 4.1 percent, the biggest drop since April 3, to 641.5 pence in London, paring the gain this year to 29 percent. Domino’s was the fourth-worst performer in the FTSE 350 Index, and the volume of shares traded was more than double the three-month daily average.

The loss in Germany, where Domino’s has 25 stores following seven openings in the first half, may exceed the chain’s original forecast by as much as 3 million pounds ($4.6 million), the Milton Keynes, England-based company said in a statement.

That would double this year’s expected losses in Germany, Douglas Jack, an analyst at Numis Securities Ltd. who downgraded the stock to add from buy, said in a note to clients. Jack cut his estimate of pretax profit by 2 million pounds to 48.5 million pounds, including an increase in his U.K. prediction by 1 million pounds.

Domino’s same-store sales in the U.K. rose 6.1 percent in the second quarter and 6.4 percent in the first half. First-half revenue in the U.K. rose almost 12 percent to 147.6 million pounds, it said.

Domino’s U.K. stores include 634 in England and 51 outlets in Scotland. Sales from the Internet and mobile devices accounted for 63 percent of U.K. sales in the first half, up from 52 percent a year earlier, the company said.

Franchise Margins

The drivers of first-half same-store sales growth may not be sustainable and may hurt franchise margins, said Wayne Brown, an analyst at Canaccord Genuity Ltd. who cut his recommendation to sell from hold and lowered his 12-month price prediction to 550 pence from 570 pence.

The key to full-year success will be the “ability to maintain margins against a backdrop of increased promotions and input cost rises,” Brown said. The trading update was “disappointing,” as growth in Germany will probably be “much more muted than originally anticipated,” he said.

Jeffrey Harwood, an analyst at Oriel Securities Ltd., cut his recommendation to hold from add.

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