Collins Foods pauses Taco Bell roll-out amidst $16.9m impairment crunch

Brisbane-based Collins Foods (ASX: CKF) reported a net profit after tax (NPAT) of $11 million for the half year ended in mid-October, representing a 58 per cent fall year-on-year.

Revenue and profit actually improved for the group's KFC operations in Australia and Europe, as well as its Sizzler Asia business which has shown signs of recovery in Thailand and Japan, but its more recent expansion into Taco Bell has proved a messy experience as ingredients continue to fall out of the figurative shell.

In its interim financial report released today, the company noted four of the company's 24 Taco Bell restaurants had already been impaired over the preceding two financial years, and in the more recent period management conducted an assessment of the remaining 20.

Of the 11 stores that showed impairment indicators, eight were impaired with the charge comprising $9 million in right-of-use assets, $7.4 million in property, plant and equipment, and $300,000 in franchise rights. 

After tax the impairment from the eight stores came to $11.9 million, leading to a remaining net book value of $26.1 million for Collins Foods' Taco Bell restaurants as at 16 October. 

The issue cast a shadow over a positive headline revenue result figure of $21.1 million for Taco Bell, up 42.6 per cent while the underlying loss stood at $800,000 for the chain. 

CKF shares were down 14.24 per cent per cent at the time of writing this morning, trading at $8.61 each.

"We are refining every element of the business, from marketing and media spend to portioning and product quality, to ensure we meet and exceed customer expectations," Collins Foods managing director and CEO Drew O'Malley said.

"We have paused new restaurant builds, other than the five-six already committed, to enable us to work with Yum! (brand owner) to regain traction on sales before further recommencing the rollout and scaling the brand.

"We are confident in the future prospects of Taco Bell given its value position within the fastest growing QSR (quick service retail) segment."

He said despite the pause on current development, the group expected Taco Bell to be rolled out on Uber Eats, with the hope that product quality upgrades and enhanced value marketing would return the brand to sustainable positive same-store sales growth in FY23.

Taco Bell represents but a tiny fraction of Collins Foods' total revenue at 3.4 per cent, although this makes the impact of the impairment on the total group's bottom line all the more noteworthy. The group rolled out its first store in Brisbane in 2017, and in 2018 had originally planned to open 50 stores by December 2021, of course without the knowledge that these plans would be hampered by a pandemic.

Nonetheless, the KFC Australia business saw a 10.6 per cent lift in revenue to $479.6 million and the same brand in Europe was up 32 per cent at $111.8 million, with these two operations notching underlying earnings margins of 19.8 per cent and 11.8 per cent respectively.

“In a challenging consumer landscape, we’ve seen the brand strength of KFC on full display in the first half. Topline growth has continued at an impressive rate, which has allowed us to mitigate some of the considerable margin headwinds experienced across the business while maintaining the brand’s value proposition," O'Malley explained.

"The resilience of the QSR, and KFC’s brand strength in particular, allow us to be well-positioned to appeal to consumers regardless of economic conditions.

"Whilst we expect inflationary pressures to remain in the near-term, we continue to pursue our long-term growth agenda, and will continue to invest in new restaurant builds, as well as equipment, technology, and operational innovations to provide unmatched experiences for our customers and our people."

The CEO added same-store growth rates for KFC stores were at 5.6 per cent and 14.8 per cent in Australia and Europe respectively in the first six months of the second half.

"Significant inflationary headwinds are continuing in both markets, with margin pressure expected to remain for the balance of FY23," he said.

"In the longer term, we are committed to margin recovery while maintaining KFC’s value proposition to ensure continued growth and transactions.

"Our KFC development outlook remains robust with nine to 12 new restaurants planned for KFC Australia this financial year. In the Netherlands, we expect to deliver three new restaurants next month, unlocking CFA incentives, and are building the market development pipeline under the CFA to meet our long-term target of up to 130 net new restaurants by 2031."