Collins Foods Ltd (ASX: CKF) shares are crashing deep into the red on Thursday morning.
At the time of writing, the KFC restaurant operator's shares are down over 11% to $7.81.
Why are Collins Foods shares crashing?
Investors have been selling the company's shares this morning following the release of a trading update before the market open.
According to the release, for the first 16 weeks of the FY 2025 financial year (29 April to 18 August 2024) total company sales grew 1.1% over the prior corresponding period.
This reflects a 2.5% increase in KFC Australia sales, which was partially offset by a 1.8% decline in KFC Europe sales.
It is also worth noting that KFC Australia's sales growth has been driven by new store openings, with same store sales down 0.3% on the prior corresponding period.
It is a similar story in Europe with new store openings helping to limit its sales decline. KFC Netherlands same store sales were down 2.6% and KFC Germany sales were down 4.5% compared to the same period last year.
Management advised that this sales performance continued to reflect weaker consumer sentiment in Australia and Europe, as well as the impacts arising from the conflict in the Middle East, which has affected sales in the Netherlands.
Inflationary pressures
As with many businesses, Collins Foods is being impacted by inflationary pressures. Management notes that the "profit gains on higher sales were more than offset by the impact of persistent inflation on cost of sales, labour and energy."
As a result, first half margins are expected to be lower year on year.
Management expects its group underlying EBITDA margin to fall by 1.3% to 1.6% (from 15.8% in FY 2024). Whereas underlying EBIT margins are expected to decrease in the range of 1.5% to 1.8% (from 8.8% in FY 2024).
Store network expansion
One thing that is still growing is its store network. Management advised that its Australian KFC portfolio development remains on track with planned new restaurant additions in line with the previous financial year.
The European portfolio will see an additional four to five company-owned restaurants added at the end of the 2024 calendar year.
Challenging conditions
Commenting on the trading update, the company's interim CEO and managing director, Kevin Perkins, said:
Current conditions remain challenging for consumers. This, and the impact of continued cost inflation, albeit moderating, will impact H1 margins. However, the fundamentals of our business remain strong. Collins Foods will continue to provide value and affordability for our customers and protect the long-term health of our trusted brands. While timing is uncertain, Collins Foods is well-positioned to take advantage of improved consumer conditions when they emerge.
