Shares in Collins Foods (ASX:CKF) have recovered strongly since mid-2025. The key factors supporting the recovery include strong same-store sales growth, operational efficiencies and attractive growth prospects in Germany. Despite upgrading guidance, the Company are still cautious about the current consumer environment across all regions.

With the shares having retraced from a recent high of $11.64 in early December, is this as good as it gets for CKF?

About Collins Foods

Collins Foods (CKF) is a Kentucky Fried Chicken (KFC) franchisee in Australia and Europe (Netherlands and Germany) with a total of around 386 KFC restaurants (285 in Australia). The Company is also a Taco Bell franchisee in Australia, with 27 restaurants. However, CKF is seeking to exit Taco Bell after a sustained period of underperformance, with an exit expected within 12 months.

CKF is the largest KFC franchisee in Australia. The KFC brand is owned globally by Yum! Brands. CKF’s franchises are held through individual agreements with Yum! Brands and CKF are required to pay Yum! Brands annual loyalty payments. KFC Australia is the main value driver for the Company, as it accounts for ~75% of group sales and a higher portion of overall earnings.

Key Fundamental Drivers

Strategies to Combat Challenging Sales Environment

Despite an improvement in Same Store Sales growth (SSSg) in the current half, the outlook for group sales looks more challenging. Notably, intense competition in the domestic QSR market intensified late in 1H26 and shows no signs of abating.

The Company is focussed on KFC Australia as the key growth driver over the medium-term. Improvements in accuracy, speed, and customer service and considered the key pillars of continued growth in Australia. CKF is implementing new store designs when stores are remodelled with what it calls T-line kitchen layouts, dual lane or tandem drive-thrus, waiting bays and connected kitchens.

CKF has also had strong success with rostering tools to match labour with peak sales periods. Since July, CKF has been trialling AI powered forecasting. This is expected to improve accuracy and better optimise customer experience and reduce food and labour costs driving further margin improvement.

At a group level, the Company is expected to benefit from new store growth moving forward. A target of 7-10 new stores per annum for Australia was reaffirmed, while the store rollout program in Europe will focus on Germany. In that market, there is potential for an accelerated store rollout from the current target of 40-70 stores for the next five years given the region’s strong store economics (likely to occur from in FY27 onwards).

Mixed Outlook for Margin

Operating leverage was evident at a group level for the six months to 12 October 2025 (1H26). EBITDA growth of +9.4% was well ahead of revenue growth (+5%), as CKF implemented productivity initiatives to improve labour utilisation and waste.

Looking forward, management is cautious given interest-rate uncertainty/subdued consumer confidence and Cost of Goods Sold (COGS) inflation, limiting margin upside in the near term. The key factors underpinning expectations for EBITDA margin expansion in FY26 at a group level include:

i. Efficiency gains – Through programs matching labour supply with volume demand via dual lane drive-thru, T-lines kitchen layout and rostering tools.
ii. Technology – Further enhancements to the digital menu that improves order accuracy, and kiosks showing strong performance, now c15% of mix with plans to roll-out in 87 more restaurants in the next 12 months. CKF is planning on investing further into the kiosk model and additional digital formats, with the latter having a higher average order value and lowering costs.

To balance the argument, the risks to EBITDA margin expansion include:

i. Sales mix – Whilst growth in digital is positive, at 41.7%% of KFC Australia sales (versus ~33.7% in pcp), it is margin-dilutive, given reliance on the aggregators. However, given that kiosks also drive digital growth, this can act as an offsetting factor.
ii. Limited scope for price increases – CKF has invested in value for customers recently and the QSR industry Is unlikely to materially increase prices. This is because consumers in the Australian market remained value-conscious and continue to down-trade and shift towards cheaper alternatives in light of cost-of-living pressures ongoing.
iii. Inflation in Cost of Doing Business – While CKF expects labour costs to normalise, utilities, rent and insurance costs for the industry continue to rise in Europe and, to a lesser extent, in Australia.

Balance Sheet Capacity to Fund Merger & Acquisition Strategy

The balance sheet remains in a strong position, with gearing (on a net debt to EBITDA basis) remaining relatively flat – at 0.89x as at 7 October 2025 compared to 0.9x as at 27 April 2025. Coupled with undrawn debt facilities of ~$227m, the balance sheet is well capitalised to fund Merger & Acquisition (M&A) activity. The focus for M&A is Germany, where unit economics are favourable and where the Company is looking to build scale. To this end, KFC parent Yum! has committed to investing in Germany, with brand marketing, and is working with franchise partners across various initiatives to drive growth.

CKF believes the KFC brand and chicken category is under-penetrated in Germany in comparison to McDonald’s and Burger King. At the Investor Day in October 2025, CKF noted it was targeting 40-70 net new KFC restaurants in Germany, representing significant growth from the 17 at present. The group said it has a healthy development pipeline and “several” openings planned in 2026. Further, it is assessing bolt-on acquisitions.

Fundamental View

While the current 1-year forward P/E multiple of ~17x is undemanding in the context of an EPS growth profile of +18% over FY25-28 on a CAGR basis, it remains towards the top end of the range over the last two years. Accordingly, the risk-reward is looking increasingly balanced, considering: i) The more challenging short-term outlook for SSSg in KFC Australia, ii) A yet-to-be-proven expansion strategy in Germany (which would be the next growth leg for the Company) and iii) The absence of a decision on Taco Bell remaining an overhang for the shares.

Charting View

When we looked at the CKF chart in early August 2025 in The Dynamic Investor, we noted that it was likely to rally up and hit $10 in the short-term. The shares managed to briefly exceed that before falling away again. We can now see on this weekly chart that the stock tried to break above the resistance line but was sold down heavily . This is a sign of weakness and it implies that the sellers are still in control and lower levels are a high possibility. The next area of support down from here is near $9.

 

Michael Gable is managing director of Fairmont Equities.

 

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