The boom in fast food sales has faded as the lockdowns have vanished – weak sales data from the likes of Domino’s Pizza and Retail Food Group have suggested the fall off in consumer spending and on Tuesday the interim financial report from Collins Foods provided corroboration.
A less than stellar upbeat for the early weeks of the second half didn’t help investor confidence in the stock.
Even though Collins lifted interim sales 14%, that didn’t translate to a similar sized jump in earnings as the company encountered the downside of rising raw material costs for chicken, bread and fresh vegetables and fruit (tomatoes, in particular) as well as energy.
As a result, the shares slid nearly 20% at one stage to $8.05 as investors wondered why the surge in sales to $322.1 million for the six months to October 15 could only produce a 3.7% rise in underlying profit to $17.4 million.
Statutory net profit did worse, more than halving to $12.7 million for the first half after an impairment of $11.9 million write down in the value of eight Taco Bell outlets.
Interim dividend was left unchanged at 12 cents a share.
That’s not great news because directors are really saying they want to keep cash outflow controllable because costs are building and might give margins a bigger nibble in the second half.
Certainly the shares fell yesterday because investors are now worried that the company’s full year results won’t meet market expectations.
Collins Foods owns 225 KFC franchise stores around Australia and is its core business. It acquired 28 stores from Yum! Brands in June this year and has opened KFC outlets in Germany and Netherlands.
The Sizzler Restaurant business is still struggling in Australia and management hopes its expansion into Asia will help turn the fortunes of this division.
It is also shuttering its Snag Stand food truck business following a strategic review and has booked associated costs of $1.2 million in the half year result.
Debt rose $17.9 million (or around13.5%) to $151 million and interest rates are only headed one way – up.
Despite all this CEO Drew O’Malley was upbeat in yesterday’s ASX release.
“In a challenging consumer landscape, we’ve seen the brand strength of KFC on full display in the first half. Top- line growth has continued at an impressive rate, which has allowed us to mitigate some of the considerable margin headwinds experienced across the business while maintaining the brand’s value proposition.
“Whilst we expect inflationary pressures to remain in the near-term, we continue to pursue our long-term growth agenda, and will continue to invest in new restaurant builds, as well as equipment, technology, and operational innovations to provide unmatched experiences for our customers and our people.”
Looking to the second half, the CEO was not gushing about the performance.
“The solid top-line performance in our KFC businesses has continued into the first six weeks of the second half, with same store sales growth of +5.6% in Australia, and +14.8% in Europe. Significant inflationary headwinds are continuing in both markets, with margin pressure expected to remain for the balance of FY23. In the longer term, we are committed to margin recovery while maintaining KFC’s value proposition to ensure continued growth and transactions.
“Our KFC development outlook remains robust with nine to 12 new restaurants planned for KFC Australia this financial year. In the Netherlands, we expect to deliver three new restaurants next month, unlocking CFA incentives, and are building the market development pipeline under the CFA to meet our long-term target of up to 130 net new restaurants by 2031. We continue to monitor the Australian and European landscapes for M&A opportunities to increase scale for Collins Foods.
“Despite the current pause on new store development, we expect Taco Bell Australia’s rollout of delivery with Uber Eats, product quality upgrades and enhanced value marketing will return the brand to sustainable positive same store sales growth in FY23, establishing a more robust foundation to reignite development for this brand.”
In reality that’s a retreat with Taco Bell’s expansion halted and Sizzler’s future pinned to the unknown markets of Asia, Collins Foods could face a margin slide in the current half.
