Price rises ahead at KFC – Collins Food posts bumper profit
Collins Foods (ASX:CKF) has posted a better-than-expected profit result for the financial year, which has pushed the share price up more than 11 per cent. Revenue was 11.1% higher, to $1.18 billion, and underlying EBITDA was up 12.6% to $209.2 million, with strong margin improvement in Europe. Underlying profit was up 25%, to $59.7 million. These were all great figures, with net debt down $2.5 million to $174.9 million, and a final fully franked dividend of 15 cents.
The European performance is what boosted the double-digit growth in sales for the company. But it wasn’t just Europe driving the good performance: Australia’s KFC and Taco Bell restaurants managed to deliver great numbers as well. There were 31 restaurants added across the group in FY22, including 16 new openings.
Some of the profitability increase stems from rises in menu prices owing to increases in raw material costs and wider margins. For the KFC Australia business, the company saw a 6.1% increase in revenue to $955.5 million boosted by same-store sales growth of 1.4%, together with ten new restaurant openings. The brand also experienced growth from its digital and delivery offerings. The Taco Bell business posted a 27.5% increase in revenue to $35.8 million in FY22, and the Sizzler Asia business posted a 10.8% increase in revenue, to $2.8 million.
Overall, it was a great result. KFC management said, “KFC Australia managed to deliver positive same-store sales growth for the full year, despite cycling (that is, having to compare against) unprecedented growth in the prior year. The KFC brand has never been stronger in Australia, and metrics around quality, value, and purchase intent are at record levels, particularly important in times like these. At the same time, we continue to amplify our strengths in convenience with further growth in digital, delivery and innovation, including the introduction of drone delivery and, more recently, UberEats.”
However, some margin compression is expected, especially in the first half of FY23, with the full-year target to stay within the low-to-mid 16 to 17% historic range; recovery to the higher end of the range expected in FY24.
By 2023, Collins Foods is well suited to navigate a turbulent environment, having a healthy balance sheet, world-class scalable brands, proven track record of growth via both M&A and new store builds, and the company is opening new stores across its major business units.
Only one broker has released a report so far, UBS, which has a neutral recommendation, with a target price of $9.15. The broker agrees that Collins Foods’ brands are “well-positioned on a relative basis and the sector should fare better in a softer consumer environment.” Going by the past, consumers tend to stick with quick-service value offerings despite price increases. It must be noted that KFC remains at a material discount to McDonald’s. Nevertheless, UBS says the market “needs to account for material cost inflation” before considering a more positive view.