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Date : 07/12/2022

Collins Food (ASX: CKF) shares Dropped 20% on HY23 Results

On Tuesday morning, Collins Food (ASX: CKF) announced its 1HY23 financial results, which painted a nuanced view. Australia and Europe saw increased KFC same-store sales (SSS) of 5.1% and 10.4%, respectively. Sales at Taco Bell, however, fell 7.8%.

The company’s sales increased by 15% to $534 million in HY23. However, that figure includes the impact of building additional outlets (open for less than a year). The underlying EBITDA increased by a small amount, to $95.4m. This divergence in expansion highlights a problem that Domino’s Pizza (ASX: DMP) and other QSRs face: significant cost inflation.

CKF: HY23 Results Highlights

CKF shares dropped 20% to $8.05 when the company announced HY23 results. The company has a current market cap of $943.41 Million.

Collins Food Shares News & Analysis

  1. Revenue for Collins Food rose to $614.3 million in HY23 from $534.2 million in HY22, an increase of 15.0%.
  2. The company’s statutory EBITDA increased to $93.4 million in HY23 from $92.5 million in HY22.
  3. Underlying EBITDA went up 0.5% to $95.4 million (from $94.9 million in HY22) after AASB 16.
  4. The company’s statutory NPAT in HY23 was $11.0 million, down from HY22’s $26.4 million due in part to the $11.9 million after-tax non-cash impairment of 8 Taco Bell restaurants.
  5. From HY22 to HY23, its underlying NPAT decreased by 14.2% to $24.8 m.
  6. In HY23, they were able to generate $69.1 million in Net Operating Cash Flow (after implementing AASB 16).
  7. Its Net Debt declined by $6.5 million, to $191.1 million, from $197.6 million, in HY23, while its Net Leverage Ratio decreased from 1.41 to 1.31 from HY22.
  8. The company has announced a 12.0 cents-per-share interim dividend that is fully franked.

CKF: What Happened During the First Half?

Collins Foods had a 15% rise in sales to $614.3 million for the six months ending October 16th, owing to increases in every division.

Taco Bell’s sales jumped 42.6% to $21.1M, while KFC Australia recorded a 10.6% gain to $479.6M, and KFC Europe produced a 32% increase to $111.8M. KFC Australia’s primary business expanded thanks to opening new locations and a rise of 5.1% in same-store sales. This is because of higher average ticket values despite generally stable transaction volumes.

When adjusted for taxes, the company’s underlying net profit after tax dropped by 14.2% to $24.8 million, indicating that things were not nearly as significant for the business’s profitability. As reported by management, inflationary pressures on costs were the primary factor.

NPAT fell by a dreadful 58% to $11 million, using the more conservative statutory method. Included is a non-cash impairment of eight Taco Bell locations that will cost the company $11.9 million after taxes.

CKF: Roaring Inflation

Collins Food saw widespread price increases across the board in Europe, including raw materials, labour, and overhead. More chicken buckets may be sold under these conditions but at the expense of profit. And if you’re craving Mexican cuisine, Taco Bell is the place to go.

CKF: Avoid Anything That Isn’t Fried Chicken

Same-store sales were down; thus, Taco Bell’s performance was disappointing. Overall revenue increased by 43% due to establishing new stores in Australia, increasing the total number of outlets to 24. However, Taco Bell had to write down $11.9m in impairments and shut outlets owing to poor performance. According to CKF, it is temporarily pausing its plan to open additional Taco Bell outlets.

The conclusion is that Colonel Sanders should focus on what they know best: and that is fried chicken for sure!

CKF: Outlook

Management disclosed that KFC sales had been high but offered no outlook for HY23. KFC’s same-store sales increased by 5.6% in Australia and 14.8% in Europe during the 1H23. Significant inflationary pressures continue in both regions, and margin pressure is likely to persist into FY23.  However, no information on Taco Bell’s sales performance was disclosed.

Conclusion

After the earnings report was released, the CKF stock price dropped and is currently trading at a level not seen since June 2022 (just over $8). From a technical perspective, the next support level is relatively far away, so if this one fails to hold, things might worsen for Collins Food shareholders. Long-term investors willing to ride out the present inflation cycle may buy CKF at a discount of almost 40% compared to where it was trading a year ago. That seems lucrative but, on the other hand, reflects a huge risk!

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