Pizza Express has paid the price for scrimping on refurbishment, warning that its oldest and most tired restaurants have seen a drop in sales.

The firm said it was accelerating a restaurant makeover programme to help revive sales growth, which fell to 1% in the year to the end of June.

Pizza Express blamed much of the slowdown, which fed through into falling profits, on an "increasingly competitive market", with London outlets hit by the tourism slump prompted by the 11 September strikes.

But it also admitted that "restaurants over 10 years old produced the most disappointing performance", with sales 3% lower than the previous year.

Shares fall

Many of these sites were "overdue for complete refurbishment", a statement on Tuesday said.

"Therefore an increase in capital expenditure is planned this year to ensure that our restaurants continue to be pleasant places to dine, are pleasing on the eye and retain their existing customers.

"Our experience to date with refurbishments of older restaurants is that like-for-like sales performance can be restored to levels consistent with more modern restaurants."

But the comments failed to reassure investors, with Pizza Express shares losing almost one quarter of their value on Tuesday.

The shares closed down 92.5p at 312.5p, their lowest since the firm was floated on the London Stock Exchange five years ago.

The stock started 2002 at 884p.

City reaction

Many City observers had expected to Pizza Express to report rising profits, with Evolution Beeson Gregory, forecasting an increase to �40.3m ($62.5m) .

Pizza Express's report of pre-tax profits down �200,000 to �39.7m prompted some analysts to reassess their forecasts for the firm.

WestLB Panmure analyst Douglas Jack said: "Given that both current trading and sales expectations for this year are not exciting and cost pressure will continue, we are not expecting a major recovery in fortune."

HSBC Securities downgraded its rating of Pizza Express shares to "reduce" from "add", advising restaurant investors to consider switching their cash into Ask Central.

Ask, which runs the both the Ask and Zizzi chains of pizza restaurants, last week reported profits up by more than one quarter.

Fast food

The fall in Pizza Express profits came despite the launch of supermarket products, which the firm credited for a 30% rise in long-term pizza sales.

There were fears that the initiative would draw customers from Pizza Express outlets but the firm said: "Retail sales are having a minimal effect on restaurant sales.",

The company is also trialling a fast food arm, Pizza Express To Go, at Paddington station, with a second outlet set to open this autumn in Victoria station.

"We are in negotiations to trial more locations to find out where this new form of product distribution works best," Tuesday's statement said.

Pay rises

Pizza Express has also undergone a boardroom reshuffle which has seen Nigel Colne installed as chairman, and former Sears and House of Fraser executive Ian Thomson appointed director.

The company warned shareholders that, besides changes including menu revisions and a regional management rejig, extra pay would be needed to incentivise company leaders, and a consultant had been commissioned to investigate salary packages.

"We need to reward properly both the current and future leadership of Pizza Express if they deliver results that meet stretching performance measures both in real terms and by comparison with others," Tuesday's statement said.