Collins Foods (ASX.CKF) reported underlying net profit after tax from continuing operations of AUD 61 million for fiscal 2026, up 13% year on year. Low-single-digit same-store sales growth and new store openings in the core Australian market underpinned group sales of AUD 1.6 billion, up 9%.

Why it matters: Earnings were in line with our expectations, but Australian profit margins were lower than we expected. The delivery channel in Australia is growing strongly, supporting sales growth. Yet, while delivery sales are profitable, they are less so than in-store sales, diluting margins.

  • We expect strong growth in delivery sales to be a structural headwind to margins in Australia, where penetration is relatively low. Delivery accounts for about 40% of Collins’ Australian sales, compared with close to 70% and 80% in the Netherlands and Germany, respectively.
  • Benefits from rising sales and operating efficiencies should offset cost inflation and the margin dilution from a shift in sales channel mix to more deliveries. But we no longer expect gross margins to recover meaningfully, with competition constraining price hikes above inflation.

The bottom line: We cut our fair value estimate for no-moat Collins Foods by 14% to AUD 12.50 per share. Australian EBITDA margins have structurally reset lower, at around 19%. Previously, we had forecast margins to expand to 21%. Nevertheless, shares are undervalued.

  • The market is too pessimistic on the sales growth and margin outlook for KFC Australia, which accounts for 75% of forecast midcycle EBITDA and most of our valuation. Renewed cost-of-living pressures in Australia and Europe are a near-term risk to consumer spending and earnings.
  • But Australian same-store sales growth is solid so far in fiscal 2027, and in line with our full-year and long-term average estimates of 4%. Recent European same-store sales are declining, but we think mostly due to transient factors, including geopolitics and unsuccessful limited-time offers.

Collins Foods’ Australian delivery channel underpins sales growth but dilutes profit margins

We think the success of the Australian KFC network will prove crucial for Collins Foods. Despite KFC expansion into Europe, Collins’ Australian KFC network should drive the vast majority of operating earnings over the next decade. Collins is the largest KFC franchisee in Australia with around 295 restaurants of a total of around 800 stores in the country. Its long-term earnings growth is mainly dependent on increasing sales, by increasing same store sales and adding to its store network. Collins grows its network through both new builds and acquisitions of existing restaurants from other franchisees. Similar drivers underpin growth of the smaller European business, although we forecast new builds to play a more important role.

Recently, the KFC brand has prioritized sales volumes and market share over profit margins. In both Australia and Europe, Collins has strengthened its value proposition to customers by raising menu pricing less than cost inflation. Collins’ delivery channel is experiencing strong growth. While the channel has added sales and profits in absolute terms, online sales are slightly dilutive to operating profit margins. In the medium term, continued strong growth in online could risk cannibalizing higher margin drive-through and carry-out sales.

As a franchisee, Collins relies on agreements with Yum Brands to operate KFC restaurants. In return, Yum receives royalty payments and mandates store rollout targets for Collins. These targets, typically extending over a period of five to 10 years, partially underpin Collins’ growth outlook and our valuation.

In Australia, we expect Collins to achieve its development target of 55 new KFC restaurants by fiscal 2028. In Europe, we forecast Collins to expand its footprint, focusing on Germany in the medium term.

Bulls say

  • The KFC brand is relatively underpenetrated in mainland Europe. There is potential for Collins Foods to both grow its existing European operations and to expand into other countries.
  • Normalized minimum wage increases should stabilize operating margins and improve menu and pricing planning capabilities.
  • Further consolidation of the Australian KFC market should grow earnings.

Bears say

  • Organic growth potential for the core Australia business, over and above population growth, is capped by the relative maturity of the KFC brand in Australia.
  • In the Netherlands, store rollout targets outlined in Collins Foods’ franchise agreements are ambitious and may prove challenging.
  • After absorbing cost pressures to capture market share, a recovery in gross margins once inflation eases could come at the expense of top line growth.