Heat is rising in Taco Bell kitchen as Guzman y Gomez in ASX IPO
Collins Foods, operator of Taco Bell and KFC in Australia, faces a number of challenges as rival Guzman y Gomez makes debut on the ASX.
Taco Bell is showing promising signs for Collins Food ahead of its full-year results next week as Citi warns the parent company faces a number of pressures in the near term from large wage increases and cost of living pressures.
The company’s results due on June 25 will be a test for the fast-food industry and comes as major competitor Guzman y Gomez makes its much anticipated $2.2bn listing on the Australian Securities Exchange on Thursday.
In a note to clients on Wednesday, Citi said while execution in KFC has been strong and Taco Bell is showing some promising signs, it was cautious about the company fortunes in the near term.
“We think sales momentum will slow, margin pressures (albeit abating) from large wage increases in Europe may lead to downside risks to guidance. Further, development delays in the Netherlands could mean the pace of the store rollout falls below expectations,” the broker said.
Collins Foods operates KFC in Australia and also in European countries such as Germany and the Netherlands, while it also holds the franchise rights to Taco Bell in Australia.
The company told investors in November that after a bumpy start for the Mexican themed fast-food brand, Taco Bell returned to sales growth in the first half with its Taco Bell stores posting a loss of $100,000 compared to $800,000 a year prior.
Markets expected Taco Bell would post same store sales growth of 6.8 per cent in the second half ending April after an initial strong start to the period.
“The Taco Bell brand being relatively new in Australia is unlikely to be immune to the broader macro weakness which is impacting QSRs in Australia, and it will be cycling tougher comps in the previous period, noting Taco Bell was launched onto Uber Eats in December 2023,” Citi said.
Financial markets forecast Collins Food to record a net profit of $62m for the 2024 financial year ending April, while Citi predicted sales revenue to be 10 per cent higher at $1.49bn.
Citi would also be look at what strategic changes interim chief executive Kevin Perkins, who holds $65m worth of stocks and was CEO for 29 years until 2019, had for the company as it looked to find a replacement to Drew O’Malley who resigned this month following the death of his wife Jola in April.
The broker, which has a $10.60 target price on Collins Foods, also saw the risk of a weak trading update because of the consumer backdrop remained challenging due to cost of living pressures.
Europe is now Collins Foods’s strongest market with the company looking to add to its 72 stores in Germany and the Netherlands. A total of 10 stores were expected to open in the half.
Citi warned that there could be downside risk to margin guidance as a result of KFC Europe, noting that the Netherlands may be facing greater-than-expected cost pressures.
“Domino’s Pizza Enterprises flagged a 15 per cent wage increase in January 2024, ultimately leading to some franchisees moving away from the company’s pricing strategy, suggesting store-level profitability is likely challenged in the market at the moment,” Citi said.
Current trading valuations for Collins Foods was 14.5 times compared to Domino’s on 21.85, which is well down from 60 times during the pandemic. IPO documents show that Guzman y Gomez will be 35 times.
Fellow Mexican fast-food chain Guzman y Gomez, which is known for its brekkie burritos and $3 tacos is expected to be the biggest ASX float since 2018 when Viva Energy debuted.
The $2.2bn valuation for Guzman y Gomez – which opened its first store in Sydney in 2006 and now has 210 restaurants across four countries, including 185 in Australia and four in the US – will have an offer price of $22 per share.
Shares in Collins Food rose 0.2 per cent on Wednesday to $9.25, reducing total losses since January 1 to 22.9 per cent
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