Fast food group Collins Foods Ltd (ASX: CKF) could soon be challenging its record high after management unveiled its full year result that came ahead of expectations.
Shares in the group jumped 2.3% to $2.72 and are within striking distance of February's record of $2.77. I suspect it will get there even though management all but admitted it got it wrong with the struggling Sizzler restaurant business.
While operating revenue jumped 34.4% to $571.6 million for the 12 months to May 3 this year and underlying earnings per share surged 37.4% to 26.4 cents, the group reported a statutory net loss of $11.1 million as it took a $38.3 million writedown that was largely related to Sizzler.
The writedown is perhaps the first concrete signal from management that it is looking to divest or close down the Australian restaurants. Selling the business would be the quicker and easier option as lease arrangements will probably make it harder for Collins Foods to shutter the restaurants for a few years yet.
The silver lining is Sizzler isn't draining cash from the group as it is still at least breaking even on an operating level, although management's comments that it will stop investing in the business means that this could quickly change.
Fortunately, Collins Foods KFC fast food chain is performing better than I had forecast and its decision last year to acquire a KFC franchisee in Western Australia and the Northern Territory is paying off nicely.
Collins Foods only operated in KFC restaurants in Queensland before and the acquisition makes the group the largest KFC franchisee in Australia.
Sales for 2014-15 from the KFC outlets reached $483.1 million compared with my forecast of $454.2 million and the division's earnings before interest, tax, depreciation and amortisation (EBITDA) margin has improved 20 basis points (0.2 of a percentage point) to 15.4%.
The only thing I am unsure about is its joint venture in a hotdog business called Snag Stand. Management has not given much of an update on how this business is performing except to say it's going well.
More capital is needed to grow this business and I remain a sceptic about the profitability and concept of this business unit.
Thankfully, Snag Stand represents only a small component of the group.
Collins Foods is unique in that it offers growth as well as income as I believe the stock is yielding close to 7% once franking credits are included. I can see the stock jumping over $3 in the coming months.
The stock is up 30% over the past year compared to a 5% gain by the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). It's not alone as fellow food franchise group Retail Food Group Limited (ASX: RFG) has also performed strongly as it has similar growth and income attraction as Collins Foods.
We don't have to even talk about Domino's Pizza Enterprises Ltd. (ASX: DMP) – just look at the chart above! Australians love fast food in more ways than one.
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