KFC franchisee takes hit as costs eat into profit

Rising costs and flat sales have left KFC and Taco Bell franchisee Collins Foods taking a hit to its underlying profit.

The company announced on Tuesday it made $23.7 million in underlying net profit from continuing operations in the half-year to October 13, down 24 per cent from $31.2 million the year before.

Revenue was up 1.2 per cent to $703.5 million, with modest growth in Australia offset by softness in Europe.

In Australia, revenue from Collins Foods' KFC stores was up 2.7 per cent to $536.8 million thanks to six new restaurants in the chain, bringing its domestic total to 285.

But adjusting for the new stores, sales were down 0.1 per cent.

Collins Foods also faced higher wage, energy and input costs during the half, as underlying earnings at its Australian KFC business fell 3.1 per cent to $102.2 million.

The company remodelled 22 Australian restaurants during the half, and said it retained its status as the top-rated fast food chain in the country.

It plans to add three restaurants in Australia and four in Europe in the second half.

Sales at Collins Foods' 27 Taco Bell stores in Queensland, Victoria and WA were down two per cent to $24.6 million, and the division's loss grew to $900,000, from $100,000 a year ago.

Expansion of the company's Taco Bell network is on hold as it tries to learn from what it is doing well in Victoria, where its freestanding drive-thru stores are its strongest performer.

RBC Capital Markets analyst Michael Toner said the company's European operations appeared to be the main drag on Collins Foods' earnings.

Collins has 59 restaurants in the Netherlands and 16 in Germany, and revenue from those European operations was down 3.4 per cent to $142.1 million, with same-store sales down 3.8 per cent amid continuing cost-of-living pressures.

In the first seven weeks since October 13, KFC Australia's same-store sales were up 0.8 per cent, while Taco Bell's were down 1.4 per cent.

In Europe, same-store sales in the first seven weeks of the second half were down 3.5 per cent in the Netherlands and 0.4 per cent in Germany.

Collins Foods said its European sales, particularly in the Netherlands, had been hurt by the conflict in the Middle East.

Some pro-Palestinian activists have called for boycotts of US fast-food brands because of their perceived support for Israel.

Xavier Simonet, who started as Collins Foods' managing director and chief executive in November, said the business had strong fundamentals and was well-positioned to benefit as consumer confidence returned.

Late Tuesday afternoon, Collins Foods shares were down 3.6 per cent to $8.31.