Bad puns aside, Collins Foods Ltd (ASX: CKF) provided solid returns to investors, with its share price doubling over the last year to trade near all time highs. Comparatively, the S&P/ASX 200 Index (ASX: ^XJO) has gone backwards for the year to date and fellow food stock Retail Food Group Limited (ASX: RFG) has lost a fifth of its value over the same period.
This out performance by Collins Foods in 2015 begs the question of whether 2016 will be equally tasty for shareholders. Here's why I think it will.
KFC = CKF
Collins Foods is the largest Australian franchisee of Yum! Brands (NASDAQ: YUM) owned KFC restaurants. Collins Foods operates 197 KFC restaurants throughout Australia, which account for approximately 85% of the group's total income. In 2015, Collins Foods' KFC division grew revenues by 46.7%, generating underlying revenue of $483 million. Its first half of 2016 was equally as strong, with same store sales growing 5.2%.
Management intends to capitalise on this growth by opening another eight stores in 2016, with plans to refurbish some existing stores as well. If all goes to plan, Collins Foods should be able to replicate its previous success and grow earnings within this division, laying the scene for another bumper year ahead.
Unsung earners
Collins Foods' 2015 results were dragged down by disappointment in its Sizzler division, particularly in Australia. As a result, management proactively categorised its Sizzler Australia business as non-core, stating it will re-focus efforts on its other brand, Snag Stand.
Accordingly, Sizzler Australia will not be allocated any new capital for growth; nonetheless, management expects the Sizzler brand to provide a positive contribution to group earnings (EBITDA) in 2016 as a result of continued strength in the Sizzler Asia brand. At the same time, Collins Foods will invest in its Snag Stand franchise by aggressively expanding, having already refined its customer offering. This move should see earnings grow to provide a second major contributor to group results, behind KFC.
International expansion
The white elephant in the room is international expansion. Collins Foods predominantly operates in Australia, with its small foray in Sizzler Asia being its only offshore venture. In the coming years, there's likely to be a push for international expansion as earnings across its brands stagnate.
Like what Dominos Pizza Enterprises Ltd (ASX: DMP) did, the natural extension would be to acquire KFC franchises in key foreign markets. However, a risk to any international acquisition is ensuring proper execution (i.e. not overpaying for a business).
Foolish takeaway
Collins Foods is well positioned to capitalise on growth in its core KFC business. With Sizzler and Snag Stand forecast to increase earnings in coming years, Collins Foods should be able to deliver solid results in 2016. A catalyst to growth would be international expansion, however the key to this would be successful execution.
As a result, Collins Foods remains a sound investment proposition for 2016 with excellent domestic and international growth opportunities, making it a long-term buy in my view.
