KFC and Pizza Hut operator Restaurant Brands feels margin squeeze

Restaurant Brands operates the KFC, Carl's Jr, Pizza Hut and Taco Bell restaurants. Photo / Tracy Neal

Restaurant Brands’ margins are losing their sizzle as the New Zealand segment’s profitability stumbles.

The fast-food restaurant operator posted earnings for the six months ended June 30 on Tuesday. While group sales grew 2.3% to an interim record $703.2 million, net profit after tax (npat) dipped 5.6% to $11.9m compared with the prior comparable period.

The company said the decrease reflected “the slower-than-anticipated improvement in macroeconomic conditions across key regions”.

Group store earnings before interest, taxes, depreciation and amortisation (ebitda) as a percentage of sales, known as ebitda margin, fell to 12.9% from 13.8%.

Shares were down 1c to $2.90 in late afternoon trading. The stock is down just over 4% for the year-to-date.

New Zealand sales flat

Sales in the company’s largest and historically most successful market, New Zealand, were flat at $309.7m.

This was despite the opening of five new stores in the second half of last year and one further KFC store opening during the disclosure period.

New Zealand same-store sales fell 3.1% and ebitda margin dropped to 15.1% from 15.9%, having reached 16.6% at the end of the previous financial year.

The company said higher aggregator costs and increased labour rates offset margin improvement initiatives.

The result comes at a time when KFC restaurants are facing increased competition in the New Zealand market due to the launch of Popeyes by competing retailers Tahua Group.

Same-store sales likewise dropped in Australia, though Restaurant Brands highlighted “early signs of recovery following interest rate reductions announced earlier this year”. Australian ebitda margins fell 20 basis points (bps) to 10.8%.

The group said it expected stronger sales in both Australasian markets in the second half, “as inflationary pressures and interest rates ease, coupled with innovation and strong marketing campaigns”.

The United States

Both of the firm’s United States markets, Hawaii and California, reported respective same-store sales gains of 5.5% and 1.9%.

However, earnings margins at both segments fell. Margins in Hawaii, which includes Guam and Saipan, were 16.1% at the end of the period, while California’s tumbled to 3.2% from 4.9%.

Store ebitda in California fell 34.6% to US$1.7m ($2.91m). A 29% minimum wage increase in the state was cited as a catalyst for the contraction.

Shareholders at the company’s annual meeting in May criticised the company’s decision to operate in California and suggested it leave the market.

The group’s total assets fell $85.5m to $1.4 billion at June 30, mainly due to asset revaluations from a stronger New Zealand dollar against the US dollar. Cash dropped $0.9m over the same period.

Restaurant Brands had 522 stores at year’s end, including 156 in New Zealand, 83 in Australia, 70 in Hawaii and 71 in California. In New Zealand, 137 of the 143 Pizza Hut outlets are run by franchisees.

The group did not declare a dividend, but in recent years has made a habit of declaring special dividends.

“As we continue to build scale and resilience across the group, we remain confident in our pathway toward achieving our $2b store sales target and delivering long-term value for all stakeholders,” the company said.