Collins Foods buys 44 KFC restaurants

Collins Foods (ASX: CKF) has announced that it is acquiring Competitive Foods, the franchisee of 44 KFC restaurants in Western Australia and the Northern Territory.

Collins Foods already operates 125 KFC fast food outlets, mainly in Queensland with a couple in NSW, as well as 27 Sizzler restaurants across Queensland, NSW and WA. Competitive Foods operates 40 KFC outlets in WA and 4 in the Northern Territory.

The acquisition will give Collins a total of 169 KFC stores as well as expand its coverage into new states, giving the company new store rollout and organic growth opportunities. The company says the acquisition, costing $55.6 million, will be immediately earnings accretive, suggesting a 15% uplift in earnings per share.

The acquisition will be funded entirely through debt, taking Collins Foods’ net debt to around $137 million. The company has also taken a 50% stake in Snag Stand, a retailer of gourmet hot dogs and sausages, with five stores across Australia’s eastern states.

The announcement comes as Collins Foods reported a 17% fall in net profit to $6.2 million for the six months to October 13, compared to the previous period. That does include an impairment charge of $1.2 million after tax, with underlying net profit up slightly over last year. Once again, Sizzler sales revenues have declined, this time by a hefty 9.1%, and Collins Foods may be fighting a losing battle trying to keep the 27 stores alive.

KFC same store sales growth was up 1.3%, fairly dismal when you consider competitor Domino’s Pizza (ASX: DMP) generated growth in same store sales of 5.2% in the three months to September 30. The issue for Collins Foods is that it needs to revamp its KFC menus to compete with established retailers such as Red Rooster, Oporto’s and Nando’s , as well as an influx of new fast food outlets including Guzman & Gomez, Grill’d Burgers and Crust Pizza – owned by Retail Food Group (ASX: RFG).

Foolish takeaway

While the move to expand into new geographies appears wise, investors may be concerned about Collins Foods’ debt levels post-acquisition. If the company can generate enough free cash flow to pay down its debt and lose the Sizzler anchor round its neck, Collins Foods may be worthy of a closer look.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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