UK Domino's sees hit to profits by boost in franchisee support, customer deals

By Radhika Anilkumar

(Reuters) - Britain's Domino's Pizza Group lowered its full-year profit outlook on Tuesday as it decided to pass on expected lower food costs to franchisees and offer more value deals to customers.

The franchise of U.S. based Domino's Pizza said it new expected adjusted annual core profit at the lower end of market expectations. In May, it predicted its profit to come within the forecasted range.

The company's shares, which rose nearly 5% in early trade, were down more than 3% at 0812 GMT.

Analysts currently forecast annual profit to come in the range of 144 million pounds ($183 million) to 149 million pounds in a company-compiled consensus.

CEO Andrew Rennie said the outlook downgrade reflected a tough first half of the year and a decision to share cost savings in the second half of the year with franchise operators and customers to drive growth.

"We've decided to strategically pass on more of our food cost savings to our franchises in half two, which in turn they've been passing on to their customers, which is why that's promoting that good momentum in customer growth," Rennie told Reuters.

Domino's Pizza Group has a profit-sharing agreement with its own franchise partners in the UK and Ireland.

Analysts at Investec said the decision made strategic sense even as the outlook downgrade might disappoint.

"While revisited guidance may impact short-term numbers, the decision to pass through cost deflation to franchisees is totally consistent with the business strategy and helpful for the long-term sustainability of the model," they said in a note.

Domino's Pizza Group said orders had swung back to growth in the second quarter, helped by strong demand for its pizzas during the European soccer championship.

It posted a marginal 0.4% increase in underlying core profit for the half-year ended on June 30 to 69 million pounds and also announced a 20 million pound share buyback.

($1 = 0.7864 pounds)

(Reporting by Radhika Anilkumar in Bengaluru; Editing by Sherry Jacob-Phillips)