Margin Pressure Dims Collins Foods’ Outlook

Small Caps | 1:41 PM

Strength in Australia offset weakness in Europe for Collins Foods' KFC business leading to a solid FY26, but margin pressure remains a prominent feature.

• Collins Foods posts a solid FY26 result, though margin pressure is a negative
• Australian strength offsets European weakness
• New initiatives and Germany store rollout offer upside, but also upfront costs
• Cost of living challenge suggests ongoing pressure on margins

By Greg Peel

Back in early June, Macquarie suggested the outlook for the Australian consumer had weakened materially, driven by economic and policy measures domestically as well as geopolitical events. Modelling suggested expenditure growth of 1.5% in FY27, well below the long-run average.

To that end, Macquarie favoured relative defensive stocks and expected grocery to be the net beneficiary as consumers pull back from other categories, implying discretionary spending, such as at quick serve restaurants (QSR), would be muted.

Macquarie slashed its target for Collins Foods ((CKF)) and retained a Neutral rating.

Morgan Stanley also slashed its target, and downgraded Collins Foods to Equal-weight from Overweight. This broker forecast mid single-digit increases in FY27 for food and wages inflation, and noted QSR operators were already finding pricing challenging.

Collins Foods is fully exposed to restaurant-level economics, Morgan Stanley declared.

Collins Foods has now delivered a solid FY26 result (April year-end), with record group revenue, up 8.6% year on year, underlying earnings up 6.3% and underlying profit up 13.0%, in line with guidance and consensus forecasts.

Its share price, however, has not responded positively, sagging towards $8 from circa $8.50 prior to the market update.

Tale of Two Regions

Collins Foods operates KFC and, until recently, Taco Bell restaurant operations in Australia and Europe, with a vision to be “the World’s Top Restaurant Operator”.

Collins Foods offloaded its Taco Bell franchises to a rival in March after that brand failed to resonate, despite the success of another listed Mexican food chain.

The company’s website claims it operates 296 restaurants in Australia (almost all in NSW), 63 in the Netherlands and 25 in Germany.

However, this has not yet been updated to include the Taco Ball exit. Suffice to say, most of them are KFC.

The key positive for Bell Potter from the FY26 result was KFC Australia’s resilience, with 2.7% same-store sales growth in FY26, up from 1.6% in FY25, and 4.0% growth in the first eight weeks of FY27.

The key negative was KFC Europe, where eight weeks of FY27 saw sales growth in Germany fall -7.2% (compared to 1.3% in FY25) and fall -7.8% in the Netherlands (-0.2%), reflecting Middle East conflict impacts, higher fuel prices weighing on confidence, and the cycling of a strong prior promotional period.

Australia

Strong second half FY26 sales growth and the FY27 trading update were partly driven by lower delivery fees, Citi notes, implemented on 1 July 2025 on Door Dash and shortly after on Uber Eats.

Citi’s 3% sales growth forecast for the first half FY27 implies a slowdown to 2.5% for the rest of the first half from the 4.0% eight-week achievement.

To offset cost pressures, primarily labour, Collins will focus on menu innovation (Kwench, boneless and sauces) and “daypart” expansion (late night and breakfast trial) which may help drive sales.

The impact from the abolishment of junior pay rates will continue to increase, Citi notes, until it peaks in FY31.

Kwench is a specialty drinks brand launched by KFC, offering handcrafted beverages like boba, shakes, iced coffees, and sparkling lemonades.

The KFC brand appears to be resonating with consumers, Macquarie suggests, supported by brand management and price reinvestment. The upcoming expansion of dayparts into breakfast and the national rollout of Kwench are welcome initiatives as management drives store utilisation.

In the short term, however, Macquarie sees margin deterioration is a risk as consumers chase value driving promotional intensity, mix shifts more toward the lower-margin delivery channel, while labour cost pressures continue.

The key to alleviating these pressures will be in maintaining top-line momentum through FY27, Macquarie suggests.

The Australian business posted an FY26 earnings margin of 19.1%, Ord Minnett reports, the lowest in six years, but more concerningly, second-half FY26 margins “crumbled” -101 basis points year on year as Collins made price investment and slashed delivery charges to drive top-line growth.

Ord Minnett expects margins to remain under pressure in FY27 given incoming increases in junior pay rates and minimum wages.

New revenue initiatives, such as extended opening hours, a new breakfast offering, and the rollout of its Kwench drinks range, are in the pipeline, but they will need to prove successful, Ord Minnett warns, if Collins is to repair its margins in the Australian business, which accounts for more than three-quarters of group sales.

Europe

The European business once showed strong potential, Ord Minnet notes, but performance in the Netherlands, where the company has 63 stores, has been rapidly eroded by weak store economics, while Germany, where it has 25 stores, and where it has agreed with KFC global master franchisor Yum! Brands to expand to 45–90 stores over the next four years, remains a work in progress.

Sales in Germany and the Netherlands slumped the first eight weeks of the new fiscal year seemingly due to external factors, such as the heatwave and the Middle East war, but also due to the lack of a promotional campaign that matched the successful Squid Game campaign a year ago.

The magnitude of the early FY27 sales decline in Europe came as a surprise to Citi given the company just invested some $50m on its Bavaria acquisition, and sales were reasonably strong over FY26.

Europe sales appear to be structurally more variable, Citi notes, given the “limited time offer” (LTO) marketing calendar is longer and less adaptable than in Australia. LTO windows last for six to nine weeks in Europe versus four weeks in Australia.

While Collins is working with Yum! Brands to shorten the windows to best practice seen in Australia and the UK, this may take some time, Citi warns, and first half FY27 sales may remain challenged especially with near-term comparables becoming more difficult to cycle.

Canaccord Genuity agrees Europe sales were impacted by LTO performance and timing year on year, prolonged heatwave conditions and higher fuel prices impacting on consumer confidence.

The cost environment has otherwise been relatively stable.

Management highlighted the significant runway in its German business, providing further detail on the trajectory of openings through to FY30.

Macquarie estimates in Collins Foods’ base case, the profit contribution of these new stores over the next three years will be circa 14%, all else equal, while in the upper case, this could exceed 30%.

While the expansion opportunity provides significant upside to earnings, the base case is now captured in Macquarie’s forecasts and focus will shift to the company's ability to execute annually on its stated targets, given its limited track-record in Europe over recent years.

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