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Domino's same-store sales cool off, derailing stock rally

FILE PHOTO: A staff member prepares a pizza at a Domino's Pizza restaurant in Moscow, Russia, July 14, 2017. Picture taken July 14, 2017. REUTERS/Sergei Karpukhin/File Photo

By Sruthi Ramakrishnan and Lisa Baertlein

(Reuters) - Domino's Pizza Inc's (DPZ.N) same-store sales growth cooled in the latest quarter, dashing the expectations of bullish investors and sending shares in the pizza delivery chain down almost 5 percent on Thursday.

Sales at company-owned outlets open at least one year were up 8.4 percent for the third quarter. But that result, which topped Wall Street estimates as well as results from rival Pizza Hut (YUM.N) and other chains, was less robust than the 13.8 percent gain Domino's reported a year earlier.

Company shares, which are trading near all-time highs, were down 4.6 percent to $199.70 in afternoon trading. They dropped nearly 6 percent in earlier in the session.

Prior to Thursday's quarterly report, Domino's shares had chalked up a year-to-date gain of just over 31 percent, including a 10 percent jump in the past month.

"In some ways, DPZ is a victim of its own success, as tremendous sales and margin performance makes it challenging to see where (the) upside will emerge going forward," Credit Suisse analyst Jason West wrote in a client note.

Domino's third-quarter profit grew 19.5 percent to $56.4 million.

Per-share profit, excluding items, was $1.27 per share, above Thomson Reuters I/B/E/S market consensus measure of $1.22.

Total revenue rose 13.6 percent to $643.6 million (488.24 million pounds), above the average analyst estimate of $627.4 million.

New accounting standards for share-based compensation have reduced tax expenses and appeared to add as much as 7 cents to Domino's third-quarter earnings, Maxim Group analyst Stephen Anderson said in a note.

The company's UK business (DOM.L) also fueled optimism, after reporting on Tuesday that online orders drove a pickup in the third quarter.

Domino's has for years been ahead of most fast-food rivals when it comes to investing in technology. It leads the industry on digital ordering, customization and promotions.

It also has deep experience with delivery at a time when McDonald's Corp (MCD.N) and other chains are ironing out strategies in the hopes of gaining a competitive edge.

Domino's on Jan. 1 is raising the fee it charges franchisees to recoup its technology investments. That fee will rise to 25 cents per order from 21 cents currently, Chief Financial Officer Jeffrey Lawrence said on a conference call with analysts.

Domino's last raised that fee about three years ago, Chief Executive Patrick Doyle said.

When pressed on whether Domino's third-quarter results were hurt by a nationwide delivery promotion from McDonald's, Doyle said: "If there was an effect, you're looking at it being relatively modest."

The hurricanes in Texas and Florida hurt Domino's company-owned same store sales by about one percentage point in the third quarter, Lawrence said, but the effect is expected to be "immaterial" for the fourth quarter. ​

(Reporting by Sruthi Ramakrishnan, Uday Sampath Kumar and Karina Dsouza in Bengaluru, Lisa Baertlein in Los Angeles; editing by Sriraj Kalluvila, Patrick Graham and G Crosse)