Australia | 11:42 AM
Collins Foods produced record interim results in a difficult environment, prompting management to issue a 'conservative' upgrade to FY26 guidance.
- Collins Foods delivers record interim revenue
- Margin ‘beats’ in Australia & Europe
- Market disappointed by management's rather conservative FY26 profit upgrade
- UBS highlights outperformance of KFC Australia relative to peers
By Mark Woodruff
Quick service restaurant operator Collins Foods ((CKF)) released interim results this week with net profit exceeding the consensus forecast by 12% on stronger Australian and European margins. Management also lifted FY26 profit guidance.
At first glance, the share price reaction appears counterintuitive, falling -3.45% on the day of the result, plus a further -4.55% the day after. After an initially weak start yesterday, the share price managed to stabilise.
The pullback may reflect mixed sentiment, with some analysts questioning the quality of the result, while others express disappointment the FY26 upgrade wasn’t more substantial, attributing conservatism to management’s cautious stance amid an uncertain macroeconomic backdrop.
This conservatism is highlighted by the implied 17% profit growth for FY26, suggests RBC Capital, given the consensus forecast would need to fall by -6% in the second half to meet the target.
While the business displayed positive momentum in Australia accompanied by operating leverage, sales momentum is still subdued in the Netherlands.
The company owns almost 400 KFC and Taco Bell stores in Australia and internationally, operating 292 of the 800 KFC outlets in Australia.
Collins Foods posted a record $750.3m in H1 revenue, a rise of 6.6% year-on-year, driven by a margin beat from KFC Australia and Europe.
Sales grew by 5% for the key segment KFC Australia and 15% for Europe to respectively $563.8m and $162.9m.
Underlying earnings rose by 11% to $113.9m at a margin of 15.2% (up 59bps), reflecting stronger sales and productivity gains. Percentage earnings growth nearly doubled that of revenue as management implemented productivity initiatives to improve labour utilisation and waste, Macquarie explains.
While earnings growth was solid year-on-year, Macquarie notes around half was driven by favourable currency movements, while Morgans highlights the 12.7% rise in net profit to $27.2m was significantly supported by a lower-than-expected depreciation charge and tax rate.
The key KFC Australia segment delivered same-store sales growth of 2.3% year-on-year, supported by ongoing value investment.
UBS points out few Australian retailers have achieved like-for-like sales growth in the past four months, pointing out KFC Australia has lifted to 3.6% from 2.3% in early FY26 trading.
Second half trading and FY26 profit guidance
Macquarie views early second-half trading for KFC Australia as encouraging, supported by value-focused initiatives such as menu innovation and limited-time offers.
While consumer sentiment remains subdued, this broker notes sales momentum is contributing to earnings margin expansion, as shown by the 80bps year-on-year increase in the first half.
While noting the second half faces a stronger prior year comparable than the first half, management stated KFC Australia same store sales (SSS) were trending well in the first seven weeks with delivery channel growth after a fee reset.
Lower delivery fees have supported a 2% uplift in delivery mix, alongside growth in basket size driven by higher platform pricing, notes Morgan Stanley, after attending a conference call with management post the interim release.
In Germany and the Netherlands, respective SSS growth was 4.8% and 0.4% in the first half, but in the first seven weeks of the second half only 2.3% and down -0.5%, respectively.
Citi attributes the softer performance in the Netherlands to weaker macroeconomic conditions, while in Germany the timing of promotional activity is seen as the key driver of recent slowing.
According to Citi, management is effectively driving same-store sales and transaction growth through limited-time offers (LTOs), ongoing menu innovation such as the Kwench trial in seven Cairns restaurants this week, and a strong focus on everyday value, despite continued challenges in the overall consumer environment.
Kwench is a line of KFC-branded, “innovative” cold drinks positioned as an add-on to the core fried chicken offering. Expanding dayparts (e.g. introducing breakfast) also remains a medium-term opportunity, suggests Citi.
This broker concedes consumers are actively seeking value and discounts in both the Netherlands and Australia, costs remain high in Australia, and the company is cycling a stronger period in the second half.
Compared to the prior 15.7% consensus figure, management upgraded FY26 profit guidance to mid-to-high teens from low-to-mid teens previously, implying circa 7% growth in second-half profit compared to around 30% in the first half.
Jarden sees signs of conservatism in the company’s guidance, noting the 3.6% SSS for KFC Australia so far in the second half, underpinned by a robust innovation pipeline.
The analysts also point to improving consumer sentiment, while in Europe easing poultry input costs and a reduced VAT rate on dine-in sales in Germany should provide margin tailwinds.
Remaining a drag on the group, points out UBS, Australian Taco Bell sales declined by -3.9% in the half as management continues to assess the sale of the business, most likely to Yum! Brands.
Return on equity (ROE) rose by 190 basis points compared to 14.1% for the first half of FY25.
Net debt fell by -$20m from the prior year to $138.9m, with strong cash flows enabling network investment, debt reduction, and dividend payments.
The Board raised the fully franked interim dividend to 13 cents from 11 cents at last year’s interim result.
Varying views on the outlook for margins
The group’s interim gross margin of 51.6% came in 70bps ahead of consensus, while the underlying earnings margin of 15.2% was slightly below the 15.3% expected by the market.
Morgan Stanley notes Australian margins are benefiting from lower commodity prices and operational efficiencies, while Europe is seeing gains from fixed-cost leverage despite mixed same-store sales.
The analysts also highlight ongoing store expansion, strengthening margins in Germany, and supportive trends in both chicken input costs and VAT settings across Europe.
Margins in the second half for the Netherlands are expected to improve due to the easing impact of Avian flu and ongoing labour and waste optimisation.
Jarden forecasts management will deliver margin expansion of 16bps in Europe and 40bps in Australia in FY26. If current Australian same-store sales growth can be maintained, the analysts see upside risk to second-half Australian margins and full-year guidance.
In contrast, Ord Minnett expects margins to contract half-on-half, and potentially year-on-year, despite same-store sales growth accelerating to 3.6% in the first seven weeks of the second half.
Competitive intensity in the fast-food sector escalated late in the first half and remains elevated, this broker cautions, while input costs are showing signs of renewed inflation.
Morgans also expects margin pressure to emerge in Australia during the second half, driven by a renewed uptick in commodity price inflation.
Management remains cautious amid interest rate uncertainty, subdued consumer confidence, and ongoing cost-of-goods inflation.
This combination has the potential to constrain near-term margin expansion.
Restaurant rollout
The total number of restaurants under management has increased by 10 to 396 since the previous interim result.
Eight new restaurants opened in Australia with one additional store left to open before year-end, in line with management’s target for seven-to-ten new restaurants annually.
Noting quick service restaurant growth is outpacing 2025 GDP growth in Germany, management also highlights a large addressable market with over 80m consumers and presently only 215 KFC restaurants relative to McDonalds and Burger King with 1,400 and 750, respectively.
The expansion opportunity is considered “significant” with help of Yum! Brands and its marketing capabilities.
Management opened its 17th KFC restaurant in Germany during the period and several sites were approved for development. In the Netherlands, management notes portfolio optimisation resulted in the opening of two restaurants, the closure of one, with another to close soon.
As part of the Investor Day in October, management committed to accelerate KFC expansion, including plans for 40–70 new KFC restaurants in Germany over five years.
This target for Germany remains and guidance in Australia is now for between 7-10 new store openings per year.
Macquarie remains cautious on the outlook for German store growth, forecasting only 40 net additions by FY30 given other quick service restaurant operators have historically struggled to achieve organic expansion in the region, with network growth typically flat or declining over the past decade.
Management noted it is actively assessing bolt-on opportunities, which could accelerate German growth ambitions.
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