The Collins Foods Ltd (ASX: CKF) share price is having a day to forget.
In morning trade, the quick service restaurant operator's shares are down 17% to $8.33.
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Why is the Collins Foods share price sinking?
Investors have been selling down the Collins Foods share price on Tuesday following the release of the company's half year results. Here's how it performed:
- Revenue up 15% to $614.3 million
- Underlying EBITDA up 0.5% to $95.4 million
- Statutory net profit after tax down 58% to $11 million
- Underlying net profit after tax down 14.2% to $24.8 million
- Fully franked interim dividend flat at 12 cents per share
What happened during the half?
For the six months ended 16 October, Collins Foods reported a solid 15% increase in revenue to $614.3 million thanks to growth across all business units.
KFC Australia reported a 10.6% increase in revenue to $479.6 million, KFC Europe delivered a 32% increase in revenue to $111.8 million, and Taco Bell posted a 42.6% increase in revenue to $21.1 million. The key KFC Australia business' growth was driven by a combination of new store rollouts and same store sales growth of 5.1%. The latter reflects increased ticket value and broadly flat transaction numbers.
Things weren't quite as positive for the company's earnings, with underlying net profit after tax falling 14.2% to $24.8 million. Management advised that this was driven by margin headwinds from cost inflation.
On a statutory basis, net profit after tax was down a disappointing 58% to $11 million. This includes an $11.9 million after tax non-cash impairment of eight Taco Bell restaurants.
Taco Bell's struggles
The Taco Bell brand has failed twice before in the Australian market and things weren't looking good during the half. Although it delivered strong overall revenue growth, this was driven by new store openings, which offset a 7.8% decline in same store sales.
In order to prevent it failing a third time in Australia, management has decided to pause new restaurant builds beyond those already committed and refine the business from top to bottom. Nevertheless, Collins Foods' CEO, Drew O'Malley remains positive on the brand. He said:
We are refining every element of the business, from marketing and media spend to portioning and product quality, to ensure we meet and exceed customer expectations. We have paused new restaurant builds, other than the five-six already committed, to enable us to work with Yum! to regain traction on sales before further recommencing the rollout and scaling the brand. We are confident in the future prospects of Taco Bell given its value position within the fastest growing QSR segment."
Outlook
No guidance was given for the second half, but management revealed that sales have remained strong for its KFC operations.
During the first six weeks of the half, it has achieved KFC same store sales growth of 5.6% in Australia and 14.8% in Europe. However, it has warned that "significant inflationary headwinds are continuing in both markets, with margin pressure expected to remain for the balance of FY23."
No sales data was provided for the struggling Taco Bell brand.
O'Malley concluded:
Operating in the resilient QSR sector, we believe we are well positioned to navigate the current challenging environment. When combined with Collins Foods' focus on operational excellence, supported by a highly capable and experienced management team, and the flexibility that comes with a healthy balance sheet, we retain our recipe for success to deliver sustainable earnings growth over the long term.
