The Beginning of the End for Collins Foods’ Sizzler Restaurants

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Collins Foods Limited [ASX:CKF] released its FY15 results today. And they weren’t good news for investors.

Collins Foods made a $10 million loss for the year. And it’s all Sizzler’s fault.

Collins Foods’ revenue was up by 29.7%, to $571.6 million. But they had to take a $34.4 million hit to the value of the brand, goodwill, and plant/equipment associated with Sizzler.

Sizzler’s sales in Australia have gone down 8.5% over the past year. Their earnings are down even more — $3.3 million, or 42.6%. In the directors’ report, they blamed the fact that ‘retail conditions in the casual dining market have remained challenging and increasingly competitive’. ‘Casual dining’ is putting it politely. Personally, I think part of the turn-off of eating at places like Sizzler is that the fact that the buffet setup makes you feel like you’re eating at a big trough — but hey, some people like that kind of thing.

The company doesn’t consider Sizzler to be ‘core to the strategic growth of the Group’ anymore. They’re going to focus on their KFC franchises instead. Collins CEO Graham Maxwell said ‘Over the past twelve months we have seen a strong performance across our core KFC business. The performance of KFC restaurantswhich we acquired in 2014 has been very pleasing, and we continue to see opportunity for growth across all KFC regions.’

They’re also going to roll out more of their Snag Stand gourmet hotdog stores — or ‘haute dog’, as they call it.

Source: Egg Tarts and Apple Pie
[Click to enlarge]

Patronage of the stores has been growing and we believe the business presents a viable avenue for growthThe steady rollout of Snag Stand will remain in place’, said Mr Maxwell.

There was one bright spot for Collins Foods’ shareholders. The company will pay a final ordinary dividend of $0.06 per share. That will take their total dividend per share for the year to $0.11.

What happened to Sizzler?

Remember when Sizzler was a big deal back in the ‘90s? You could get a ridiculous amount of food for $8.95. And for kids, the dessert toppings buffet was a dream come true. Well, probably more of a nightmare for the adults who had to deal with them post-sugar rush, but anyway.

The thing about the buffet setup is that people will take much more per person than the restaurants budget for. Sometimes they decide they don’t like it, and they don’t even eat it all. Or kids will waste food making gross combinations and daring each other to eat them.

So the restaurant has two choices. They can lower the cost of the ingredients to keep the buffet price as low as possible. But this usually means lowering the quality, or lowering the amount of more expensive ingredients in each item — think hot dishes with sparse dots of meat, or cheap macaroni salads. Or, they can maintain (or improve) the quality of the dishes in a way that encourages people to eat more slowly and really savour their meal. But that also means raising the price, because not only are the ingredients more expensive, the labour is more expensive. It’s part of the reason that hotel breakfast buffets are so good, but so much more expensive than an a la carte breakfast.

But taking the latter option can have its advantages. Take, for example, Victorian mini-chain China Bar Signature Asian Buffet, part of the privately owned China Bar Group. They’ve got a buffet which costs $69 per adult for a dinner sitting. That’s nearly four times what it costs for the salad bar at Sizzler. But the price includes premium dishes such as Peking duck, seafood, and freshly cut sashimi. And the dining environment is noticeably less sticky-looking than your average Sizzler.

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Sizzler seems to have taken the former option. And now they’re suffering for it. Collins is planning to close a ‘limited’ number of Sizzler restaurants over the next year. The rest will be watched very closely.

How the market reacted

It seems as though the market approved of Collins’ decision to shed Sizzler and focus on their other businesses. Or perhaps it’s the dividend yield they find attractive. At the time of writing, Collins Foods shares were trading up 1.88% at $2.71.

Source: Google Finance
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Collins’ stock price has grown steadily since they listed in 2011. But with a market cap of just under $250 million, it’s still technically a small-cap stock. By the way, if you’re curious about investing in small-caps, don’t miss Sam Volkering’s report ‘The At-Home Investors Guide To Profiting From Australian Small Caps’. In this report, Sam goes over a smart but simple four-step guide to finding quality small-cap stocks — before the big fund managers get to them. Click here to find out how to download your free copy.

Eva Mellors,
Contributor, Money Morning

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