Fast food company Collins Foods Ltd (ASX: CKF) just found out a 14% jump in interim sales just isn't enough to keep shareholders onside with the stock tumbling 5% in early trade to $5.93.
The problem isn't so much sales, which have jumped to $322.1 million in the six months to 15 October, 2017, but profit.
Statutory net profit tumbled 17.5% to $12.7 million for the first half, although if one-off costs were excluded, underlying net profit would be up 3.7% to $17.4 million.
That's still not great news. Cost pressures are obviously building as underlying profit growth is a fraction of revenue growth. What's worse, investors are now worried that the company's full year results won't meet market expectations.
Consensus forecasts on Reuters for FY18 are calling for earnings per share (EPS) of 36.95 cents. This compares to the underlying half-year EPS of 15.4 cents, or 12.2% below the first half of FY17 due to the issue of more shares for acquisitions.
Management will really have to pull its socks up in the second half if it is to meet analysts' expectations for the current financial year.
Collins Foods owns 225 KFC franchise stores around the country. This 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 German operation is in the midst of a turnaround and management has a bit of a mixed track record when it comes to turnarounds.
Its 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 business following a strategic review and has booked associated costs of $1.2 million in the half year result.
Meanwhile, debt is up $17.9 million (or ~13.5%) to $151 million. Its gearing ratios are not at alarming levels but the growth in these liabilities will put additional pressure on management to deliver better growth numbers sooner rather than later.
Overall, the quality of the first half result is poor, especially if you consider that the stock is trading on a forward price-earnings (P/E) multiple of ~17 times. It isn't very expensive, but stocks trading at these levels should have better earnings clarity.
What this means is there is still lots of room for the stock to de-rate. You only need to look at the disappointing performance of its peers Domino's Pizza Enterprises Ltd. (ASX: DMP) and Retail Food Group Limited (ASX: RFG).
Both these stocks have crashed 27.6% and 37.8% since the start of this calendar year, while Collins Foods is down a more modest 12.3%.
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