Restaurant Brands lifts first-half profit 41% on overseas expansion

Thursday 19th October 2017

Restaurant Brands New Zealand lifted first-half profit 41 percent after the fast-food operator expanded its footprint through Australia and Hawaii.

The Auckland-based company said net profit rose to $19.1 million, or 15.5 cents per share, in the 28 weeks ended Sept. 11, from $13.5 million, or 13.3 cents, a year earlier. Sales jumped 51 percent to $386.1 million.

First-half profit excluding non-trading items lifted 27 percent to $20.2 million and the company said it expects full-year profit on that measure of about $40 million.

Restaurant Brands holds the rights to the KFC, Pizza Hut, Starbucks Coffee and Carl's Jr brands in New Zealand and has recently turned its focus to overseas expansion to drive future earnings growth. In April 2016 it expanded into KFC in Australia and in March 2017 bought the company which operates Taco Bell and Pizza Hut in Hawaii.

"The current strategies across all geographic markets are delivering positive results," the company said. "The acquisition of the Taco Bell and Pizza Hut brands in Hawaii has made a pleasing contribution in the first period of ownership, with the strong performance of the KFC brand in Australia and New Zealand expected to continue in the second half."

The company will pay an interim dividend of 10 cents per share on Nov. 30, up from 9.5 cents a year earlier.

In New Zealand, the company's KFC stores lifted earnings before interest, tax, depreciation, amortisation and administrative expenses by 5.7 percent to $35 million as sales advanced 8.2 percent to $170.3 million, which the company attributed to successful product promotions and the introduction of a delivery service in some stores. Its ebitda profit margin shrank to 20.5 percent from 21 percent, although the company said it "remained strong". After the year-end balance date, Restaurant Brands opened a new format KFC store in Fort Street in central Auckland, which it said has "significantly outperformed expectations" and is expected to be the prototype for other central city stores.

Its New Zealand Pizza Hut stores posted an 18 percent decline in earnings to $2 million and its margin contracted to 8.6 percent from 11 percent as it faced increased costs for labour and ingredients. Sales at its stores advanced 3.8 percent to $22.9 million even after it sold three stores to independent franchisees, taking its company-owned store numbers down to 34. The number of independent franchisees increased to 60, bringing the total network to 94.

Restaurant Brands said negotiations with franchisor Yum! Restaurants International on the establishment of a master franchise agreement for the New Zealand market are well advanced and expected to be concluded shortly.

Earnings at its Starbucks Coffee stores edged up 0.4 percent to $2.2 million as sales declined 2.6 percent to $13.4 million after two stores were closed, taking the total to 23. The margin improved to 16.5 percent from 16 percent.

Its 20-year Starbucks Coffee franchise expires in 2018 and the company said it's in talks with the franchisor about renewal options for the franchise.

Carl's Jr earnings jumped 58 percent to $600,000 as sales slipped 2.8 percent to $18.8 million. The margin expanded to 3 percent from 1.8 percent.

"This is a reflection of rolling over the new opening volumes for two stores opened in Christchurch last year, and strong sales driven by a higher level of promotional activity in the equivalent period last year," the company said. "In contrast, the focus in the first half of 2018 has been on generating more profitable sales rather than driving sales through discounting and promotional activity."

Restaurant Brands added Carl's Jr to its New Zealand chains in November 2012 to better compete with rivals McDonald’s Restaurants (NZ) and Burger King Corp, and said it was eyeing a potential of 60 Carl's Jr stores for the country. In the first half, it was operating 19 of the stores after closing one in Otahuhu in the second half of the 2017 financial year.

In Australia, earnings at its KFC business jumped 43 percent to A$9.8 million while sales rose 61 percent to A$66.7 million, reflecting the acquisition of five extra stores at the start of this financial year to take the total to 47, and the full impact of the acquisition of its other stores, which only became effective part way through the first half of last financial year. The margin shrank to 14.7 percent from 16.6 percent.

The company has agreed to buy a further 13 KFC stores in New South Wales for A$38.2 million, funded by bank debt. Seven have settled since balance date, with a further six expected to settle in the third quarter. These, together with a further new store opening early in the third quarter will take its Australian network to 61 stores.

Its 37 Hawaiian Taco Bell stores posted earnings of US$7.2 million on sales of US$36.6 million, helped by strong promotions. Its margin was 19.6 percent.

The company said it has embarked on a store rebuild and refurbishment strategy for the Taco Bell stores similar to that undertaken for its KFC business in New Zealand, and the one store which has been significantly transformed to date has delivered same-store sales growth of more than 60 percent.

Its Pizza Hut business in Hawaii posted earnings of US$1.9 million on sales of US$27.3 million, with a margin of 7.1 percent.

"There has been some margin pressure from participating in value-led marketing promotions together with some higher commodity costs and rising direct labour expense," the company said. Like Taco Bell, the stores were also earmarked for refurbishment to move away from larger restaurants into smaller, more cost-effective delivery and carry out models.

The company's net finance costs rose to $2.7 million from $1.4 million a year earlier after it borrowed more to fund acquisitions. Its bank debt increased to $133.1 million from $46.5 million. General and administrative expenses rose to $14.9 million from $9.2 million, reflecting the impact of the acquisitions and a new corporate structure for its bigger size and expanded geographic footprint.

The shares slipped 1.4 percent to $6.90 and have jumped 38 percent this year.

(BusinessDesk)

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