Collins Foods’ Finger-Lickin’ Turnaround

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Collins Foods FY25 result suggested growing momentum coming out of the cost of living crisis, with KFC Australia outperforming alongside mixed results in Europe.

-Collins Foods posts strong beat in FY25 earnings and margins
-KFC Australia showing strong signs
-KFC Germany outperforms, Netherlands disappoints
-Vale Taco Bell

By Greg Peel

Collins Foods ((CKF)) operates 285 of the 750 KFC stores in Australia, with up to 10 additional KFC openings planned every year. The company also runs 27 Taco Bell stores in Queensland, Victoria and Western Australia, with smaller franchisees operating another 12.

The company reported FY25 underlying profit of $51.1m, 15% ahead of consensus expectations. However, statutory profit of $8.8m was materially below $26m consensus, Citi reports, primarily due to The Netherlands’ impairment of -$36.4m being above the guidance of -$25.5m to -$32.7m plus -$4.4m of other unexpected impairments.

Analysts are not too fazed about those impairments.

The strong performance ‘beat’ was driven by better-than-expected results from both KFC Australia and Europe, lower corporate costs and lower net interest. Margins, again, were well ahead of the top end of guidance and increased both on the first half and a year ago driven by improved same-store sales growth in the second half versus the first, deflation in cost of goods sold (COGS) and improved operational efficiency.

The beat was also delivered, Morgans notes, amid significant weather disruptions due to Cyclone Alfred.

Momentum Turning

Macquarie highlights sequential improvements in sales growth across Collins Foods’ key geographies as consumer sentiment improves and the group executes on strategic initiatives.

In Australia and Germany, comparable sales have turned positive in FY26 to date, while in the Netherlands, sales are down -0.2%. With more rate cuts to come domestically, and cost deflation in key categories (chicken and potatoes), Macquarie sees an opportunity for earnings margin expansion in the KFC Australia business.

The first eight weeks of FY26 have seen same-store sales growth of 1.6% for KFC Australia (compared to -0.8% a year ago), -0.2% for KFC Netherlands (-2.3%) and 1.3% in KFC Germany (-2.8%). Whilst this was weaker than Morgans’ previous forecasts, improved sales growth was seen across all regions compared to the second half FY25.

Australia

Australian sales growth of 0.3% proved below consensus of 0.5%, however, commodity price deflation and wage efficiencies drove a beat on the earnings line.

KFC maintains brand leadership in Australia relative to quick-serve restaurant (QSR) peers, notes RBC Capital, and Everyday Value menu items (particularly $7.95-$9.95 price points) provide value while cost of living remains at the forefront.

Digitisation and digital adoption continue to grow, with digital reaching 34.2% of sales in FY25 versus 29.4% in FY24, while app adoption is being driven by exclusive offers. Point-of-sale self-service kiosks were rolled out into a further 106 restaurants which builds on cost efficiencies.

Europe

In a tale of two neighbours, KFC Germany has outperformed expectations while KFC Netherlands continues to disappoint.

The Dutch business posted -2.5% sales growth in FY25 and -0.2% for the first eight weeks of FY26 and has been impacted by soft consumer sentiment, US brand boycotts, 30% minimum wage increases over the past three years and a challenging regulatory environment. Dutch unit economics are soft with restaurant earnings margins of 6.7% less than half that of Australia and Germany, notes RBC.

New store rollout remains challenging, Citi notes, as expected. The company has moderated its store development targets in the short term as it tries to improve operational performance.

Meanwhile, Collins Foods continues to target 40-70 new stores in Germany over the next five years, with 1-2 stores expected to open in FY26, 5-7 to open in FY27 and further ramp-up in FY28. Unit economics are strong, Morgans notes, with the existing stores in Germany delivering similar store-level earnings to KFC Australia stores, despite significantly less scale.

The large under-penetration of the KFC brand in Germany should underpin unit economics in line with its existing stores. Collins Foods’ strong balance sheet means it is well positioned for accretive M&A, which Morgans believes should not be too far away.

Macquarie agrees, forecasting 58 net new stores by FY30, and acknowledging the market is under-penetrated, with store density and absolute store count well below key QSR competitors in Germany and KFC in Australia. Management is open to acquisitions, which would accelerate its ability to build scale in the market and drive operating leverage, Macquarie suggests.

Sayonara

It was not a major point for analysts with regard the FY25 result, but Collins Foods decided in April to give up on Taco Bell. The company opened its first Taco Bell in Queensland in 2018, and signed an agreement with Taco Bell and KFC US owner Yum! Brands to open 50 stores across multiple states.

That number was not reached, and Taco Bell has failed to gain any traction with Australian consumers. Maybe the ready availability of DIY taco kits in supermarkets had something to do with it, albeit Taco Bell offers a range of Mexican dishes aside from just tacos.

The final nail in the coffin was the runaway success of Mexican food competitor Guzman y Gomez ((GYG)).

Collins Food is in discussions with Yum! Brands about an exit from Australia in the next year. It is considering selling the business or transferring it back to Yum! Brands. Otherwise, Taco Bell stores will be closed step by step, or in one go.

Wilsons treats Taco Bell as a discontinued business, with pre-tax losses of -$6.5/5.5/5.0m in FY26-28 modelled as significant items. The exit is nonetheless planned for FY26.

Guidance

Collins Foods has provided FY26 underlying profit guidance for low to mid-teens growth on FY25. Assuming growth of 10-15% implies a range in line with consensus, Morgans notes.

A focus on operational excellence is expected to drive sales growth, while labour productivity and disciplined cost management are expected to deliver margin improvement.

KFC Australia will continue to benefit from deflation across some COGS (chicken and potatoes). On Morgans’ estimates, guidance implies only around 10 basis points of margin expansion in FY26 versus the second half FY25, which “should prove conservative”.

UBS “needs to understand” the FY26 Australian chicken outlook to “understand” guidance, but also suggests guidance looks potentially conservative given operating leverage.

On the Bounce

Collins Foods’ share price had fallen -40% from early 2024 on the cost of living crunch, heading into the FY25 result, which drove a 17% bounce on the day (Tuesday, with another 8.5% gain on Wednesday at the time of writing). This should challenge broker ratings.

Morgans is nevertheless attracted to the stock for its strong leverage to an improving domestic consumer and cost environment which should underpin double-digit earnings growth over the near term, as well as an undemanding valuation, the KFC brand, Europe growth opportunity, cashflow generation, and a solid balance sheet.

Morgans retains Buy, while reducing its target to $10.30 from $10.50.

UBS’ expectation that guidance will prove conservative also keeps this broker on Buy, retaining a $9.20 target.

Wilsons is also positive, maintaining an Overweight rating with a target increase to $10.20 from $10.13, suggesting earnings growth associated with a full margin recovery in KFC Australia and expanded store network in KFC Europe can drive significant upside in valuation over the medium term.

Furthermore, evidence of success in store network expansion in KFC Europe may be rewarded with a higher valuation multiple, in Wilsons’ view.

The result shows that conditions appear to be heading in the right direction, which Citi believes can continue as the Australian consumer improves. The company is on the hunt for acquisitions, particularly in Germany where unit economics are favourable and this represents upside to guidance, Citi suggests.

Citi retains Buy, with a target increase to $10.13 from $9.60.

Macquarie echoes peers in citing positive momentum in the business and an improving outlook, particularly in the key Australian market. Germany also provides significant opportunity. However, the strong result update was reflected in share price reaction, hence Macquarie sticks with Neutral, lifting its target to only $8.40 from $8.20.

RBC Capital is also at the low end, with an $8.50 target and Sector Perform rating.

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