Carl's Jnr drives growth at Restaurant Brands

Despite sales from Carl's Jr stores increasing 108% on last year to $3.7m, KFC sales still dominate Restaurant Brand's sales, accounting for 73% of total revenue. Photo / Duncan Brown

Restaurant Brands New Zealand, the nation's largest fast food operator, posted a 23 percent rise in annual profit after it boosted sales and margins even as increased rivalry forced it to cut prices. The company expects to increase earnings further this year.

Net income rose to $19.9 million in the 52 weeks ended Feb. 24, from $16.2 million a year earlier, the Auckland-based company said in a statement. Excluding the sale and leaseback of stores, earnings rose 6.8 percent to $18.9 million, at the top end of the company's October forecast of $18 million to $19 million. The company said today that profit on that measure will rise to more than $20 million in the coming year.

"The retail sector was not particularly robust in the first half of the year and competitive activity (particularly in price discounting) was aggressive," Restaurant Brands said. "The company met the dual challenges of both maintaining market share and margin in a competitive environment whilst building a new brand and Restaurant Brands will be in a strong position to benefit from the general economic recovery in the coming year."

Shares in the company rose 3.2 percent to $2.94, the highest since March 28, taking their gain this year to 1.4 percent.

Restaurant Brands is tweaking its store mix in an effort to boost earnings. The company is selling its regional and lower volume Pizza Hut stores to independent franchisees, has closed unprofitable Starbucks Coffee outlets and has added burger chain Carl's Jr. to better compete with rivals McDonald's Restaurants (NZ) and Burger King Corp. In the coming year it plans to pick up the pace of store upgrades at its main KFC fried chicken chain, as it targets a complete revamp of the network in the next two years.

In the past year, the company's KFC unit, which accounts for 83 percent of earnings, posted a 1.6 percent drop in earnings before interest, tax, depreciation and amortisation to $44.5 million as increased rivalry dented margins. KFC's margin fell to 18.4 percent from 19.1 percent the year earlier.

"The pace of store transformation was slowed but will pick up again in the New Year as the brand moves to fully complete the upgrade of its entire KFC network by FY16," the company said. Some 71 of KFC's 90 stores are new or fully refurbished, it said.

"KFC will see significant capital investment over the new financial year as the brand focuses on bringing the remainder of its network up to new store standard," the company said. "With some management changes and a renewed focus on operational performance, the brand is expected to deliver both sales and margin growth in the FY15 year."

The Pizza Hut chain boosted earnings 45 percent to $5.5 million as it benefited from increased sales volumes, improved its operational efficiency and sold six lower margin stores. The pizza chain's margin improved to 11.4 percent from 7.9 percent a year earlier.

The company expects to maintain its sales and margin momentum to grow earnings in the coming year. The sale of lower margin stores to independent franchisees will continue at a slower pace as demand picks up following the improved profitability of the brand. Restaurant Brands currently owns 51 of 84 Pizza Huts.

Earnings at the company's Starbucks chain lifted 19 percent to $3.5 million as it benefited from operating efficiencies, some of which came from a higher New Zealand dollar. Restaurant Brands said it has closed non-performing stores in the chain, leaving it the remaining 27 stores well positioned for consolidation and future steady growth with higher profit.

The company's newest chain, Carl's Jr., which opened in November 2012, broke even by the end of the year, from a $500,000 loss the year earlier. It opened six Carl's Jr. stores during the year, adding to the two opened the previous financial year, and another four to five are planned for the coming year.

Carl's Jr. margins improved as the company changed to sourcing local raw ingredients such as beef patties and improved labour efficiencies and cut wastage as the new stores established more stable trading patterns.

The group's annual sales, which it first reported last month, rose 5.6 percent to $330.4 million. It will pay a dividend of 10 cents a share on June 27.