The Collins Foods Ltd (ASX: CKF) share price is on watch tomorrow after the fast-food retailer announced a drop in sales at KFC. Overall sales for KFC Australia were down 8% last week compared to the prior year.
Sales previously strong
Sales for the 20 weeks of H2FY20 (14 October 2019 to 1 March 2020) were strong. KFC Australia saw same-store sales growth of 3.5% while in Germany, sales grew 5.6%. KFC in the Netherlands saw same-store sales decline 3.6% but early signs of recovery were apparent.
In-restaurant dining restricted
In response to the coronavirus pandemic, Collins Foods closed in-restaurant dining areas at KFC Australia and Taco Bell from 18 March. Focus was shifted to take away, drive through, and delivery. For KFC Australia, these channels represent at least 80% of total sales.
In Europe, the Netherlands is operating take away, drive through, and delivery. In Germany, take away, drive through and delivery are available, and in-restaurant dining remains open at reduced hours as directed by the Government.
Sales down
Since the introduction of restrictions on in-restaurant dining, overall sales at KFC Australia have declined. As expected, drive-thru restaurants have performed better than food courts due to reduced foot traffic in shopping centres. Sales in the last week were down 8% compared to the prior year.
In Europe, where drive-thru is not as prominent, sales in the Netherlands have fallen 30% to 40% compared to the prior year. In Germany, sales have dropped by around 50%.
Financial impact
If the reduction in sales continues for a prolonged period it will likely have a material impact on full year earnings. The outlook for sales in the closing weeks of Collins Foods' financial year (which ends on 3 May) is therefore uncertain.
Nonetheless, the company says it is well-placed to deal with the current situation as the KFC Australia business has a large proportion of drive-thru restaurants within its network. It also has the ability to offer delivery from the majority of restaurants.
Cash preservation
Collins Foods has implemented initiatives to maximise sales and introduce operational changes to preserve cash. These include minimising operational expenditure and delaying capital expenditure. The balance sheet remains strong and the company has significant headroom in its current debt facilities and covenants.
As at Collins Foods' half-year result ending 13 October 2019, it had net debt of $217.3 million against credit facilities of $395 million. The net leverage ratio at the first half was 1.84 against the covenant maximum of 2.75. The lease adjusted interest cover ratio was 2.75 against the minimum 1.75.
CEO Graham Maxwell said, "our business is showing strong resilience despite very challenging macro conditions and is well positioned for when the overall environment improves."
