Collins Foods shares slump 19pc as supply chain pressures crunch margins and Taco Bell rollout pause

The fast food group had hoped Taco Bell would take off in Australia but sales have been poor and its rollout has been paused, as KFC faces mounting inflationary pressure.

Collins Foods chief executive Drew O'Malley will pause the roll out of Taco Bell in Australia as same-store sales growth for the chain drops.

Shares in Collins Foods fell 19 per cent after the KFC fast food operator warned supply chain and inflationary pressures would slash its profits this year, while the once promising roll out of the Taco Bell chain in Australia would be halted for a review as its sales sink.

The fast-food chain will also lift its menu prices again, after raisingup prices in January and June to combat higher input costs in its own business from chicken and chips to oil and lettuce, but will balance that with maintaining its competitive edge and ensuring KFC and Taco Bell are still viewed as good value by consumers.

Meanwhile, the company’s investment in its Taco Bell roll out, which long was lauded as a new growth engine for the business, would now be impaired by almost $12m against 8 sites which has blotted its latest financial results and help drive down its net profit.

Such is the cost pressure – from higher energy, food and staff expenses – that not even a price hike will mitigate the impact on margins. It could be 2025 before they fully recover, the company said.

The former high-flying fast food company has suffered in the last year as analysts downgraded their earnings forecasts. Collins Foods owns KFC stores in Australia and Europe as well as Taco Bell in Australia and Sizzler in Asia.

Collins Foods shares dropped 19 per cent to $8.05 after the company released its interim results, which showed a 58.2 per cent slide in net profit to $11m as revenue for the 24 weeks to October 16 rose 15 per cent to $614.3m. Collins Foods declared an interim dividend of 12c per share, flat with last year, payable on December 29.

Sales in the domestic KFC restaurants segment were $479.6m, up nearly 11 per cent, revenues in the Europe KFC restaurants segment were $111.8m, up 32 per cent and Taco Bell revenues were $21.1m, up around 43 per cent.

First half sales in Australian KFC restaurants were up nearly 11 per cent to $479.6m.

The company warned that, for its KFC Australia network of stores, additional supply cost pressure were now expected to compress full-year EBITDA margins into the 15 to 16 per cent range.

Additional menu pricing and procurement initiatives were expected to mitigate further cost inflation into the 2024 financial year, though full margin recovery may extend into 2025 and beyond. For the first six weeks of the second half of 2023 KFC Australia sales were up 5.6 per cent.

In Europe, KFC sales for the first six weeks were up 14.8 per cent, with the Netherlands stores up 15.1 per cent and Germany up 13.9 per cent. Its margins in Europe would also be constricted.

In Taco Bell, where Collins Foods has 24 stores, same-store sales were in decline in the first half, down 7.8 per cent, and down 8.5 per cent for the first six weeks of 2023. Collins Foods said 5 to 6 restaurants currently under development will be completed before pausing expansion. The pause will allow Collins Foods to work closely with the US owner of the brand, Yum!, to review the strategy.

“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,” said Collins Foods chief executive Drew O’Malley.

Jarden analyst Ben Gilbert said Collins Foods missed sales estimates by 2 per cent as higher costs hit its earnings, with margin guidance for KFC Australia and KFC Europe sliced by around 100 basis points. “Result a small miss, quality looks ok albeit the second half is expected to see greater-than-previously expected margin impact,” Mr Gilbert wrote in a note to clients on Tuesday.