Collins Foods, The Earnings Comeback Kid?

Australia | Dec 05 2024

Collins Foods' navigation of a challenged consumer positions the company for an earnings rebound with cost deflation offering 2025 tailwinds.

-Margins to the FY24 earnings rescue
-KFC same store sales growth improving
-Digital offering provides cost and efficiency benefits 
-Collins Food leveraged to a consumer upswing

By Danielle Ecuyer

Rising to the challenge of a soft consumer

Collins Foods ((CKF)) is another victim of high interest rates and a challenged consumer, with investors snubbing the shares following the release of 1H25 results.

Morgan Stanley sums up the groan of disappointment well, suggesting the company's exposure to global quick-service restaurant (QSR) brands, usually associated with consistent same-store sales growth (SSSg), has led to "major concern" around soft results and earnings de-leveraging.

Not all analysts shares this downbeat view, depending on forecast positioning into the results. The numbers speak for themselves. Group revenue rose 1.2% in 1H25 over the previous year, while earnings before interest and tax fell -6.6% and net profit slid by -23.8%.

Given management provided a guidance update at the August AGM, Morgans emphasises the weak results still revealed some positives. The decline in net profit was better than consensus expected by around 5%, and margins were higher than the recent market update.

The broker also points to strong cash flow generation at $75.3m, including a 108% conversion rate, helping reduce net debt to $158.9m compared to $173m in 1H24. An 11c per share dividend was broadly in line with market expectations.

KFC SSSg in Europe declined -3.8% in 1H25 compared to 8.8% growth in the previous year, dominated by weakness in the Netherlands and Germany.

Citi gleaned from the earnings call that the Middle East conflict might be impacting SSSg in the Netherlands, while the new store roll-out in Europe remains challenged.

Green sales shoots offer earnings hope

As highlighted by Morgan Stanley, Morgans also noted the sluggish KFC SSSg over the period, describing it as not so "Finger Lickin' Good!"

However, there are signs of an improving sales trend. The analyst estimates SSSg rose to 0.3% for weeks 17-24 from 0.1% for weeks 8-16 of 1H25, with growth advancing to approximately 0.8% for the first seven weeks of 2H25.

Morgans also takes heart from the relative out-performance of KFC over peer QSR brands, suggesting market share has picked up.

Macquarie finds more reasons to be optimistic, noting an improving commodity outlook for KFC, which may not bode well for supplier Inghams Group ((ING)).

UBS explains the rolling nature of cost of goods sold contracts, particularly chicken, creates scope for cost deflation, which the company flagged at between -1% and -2% for 2H25. The analyst believes this deflation could surprise to the downside, potentially increasing into FY26.

Morgan Stanley highlights wage inflation of 3-4% and ongoing energy price inflation as offsets to the improving outlook for cost of goods sold. By comparison, Europe is experiencing more stable input costs and slowing wage growth.

On balance, this analyst believes indicators point to low single-digit cost growth. A return to SSSg is expected to underpin operating leverage and margin expansion, and is viewed as a "realistic" outcome for FY26.

Growth in digital channels continued to be a bright spot for Collins Foods, with 35% of sales generated, up from 28% the previous year. UBS notes digital channels enhance margins through higher average order values and a better product mix.

Citi explains the growth in digital sales underpins larger basket sizes, as consumers have more time to browse the menu. This also reduces costs to serve and marketing spend.

Poised for a Comeback
Collins Foods will be cycling easier comps as it moves through 2H25, with improving sales growth appearing in Australia, particularly if the RBA starts the rate cutting cycle.

 "The release of another quarter of tepid AU GDP has resulted in the Australian interest rate market pulling forward a first 25bp RBA rate cut into April from May", highlights Tony Sycamore from IG