QSR Special Report

October 27, 2020 FAT-AUS-969

Fed up with the lockdown

With much of the world still in varying stages of their lockdowns, ‘stay at home’ stocks continue to do well. This includes many of the well branded ‘quick service restaurant’ operators, who are enjoying strong take-away and delivery demand as many people literally get ‘fed up’ with cooking. This has also provided a strong earnings offset in most cases to dine-in operations which largely remain shuttered.

This has certainly remained the case for our two key QSR exposures in the Fat Prophets Portfolio, in Collins Foods and Domino’s Pizza Enterprises. Both have released positive trading updates over the past 10 days, including one from Collins out earlier today. This has continued a stellar rebound in the shares since March – Collins has rallied almost 75% since the March lows. Domino’s which didn’t see as much downside during the pandemic, is up around 27% since the March lows. The market has rightly recalibrated the fact that drive-thru/takeaway account for the lion’s share of turnover, and is thriving amidst the lockdown.

With talk of restrictions easing, can the upward share rerating process continue?

We believe it can, and expect the high quality QSR operators such as Collins and Domino’s however will likely continue their rollout plans, helped by the fact rents are set to fall given the likely closures of some more traditional retail outlets. The lower price point and ‘brand comfort’ of KFC and Domino’s will also come into their own if people look for cheaper ways to eat out and in.

Both companies will arguably talk up the Covid shutdown as a “unique opportunity” to grow and expand into the high street retail vacuum where “choice sites” are becoming available at attractive rents.

We retain buys on both Domino’s and Collins Foods cover off their most recent updates below:

Collins Foods has provided another Covid update earlier today, and it makes for very encouraging reading. The trading period covered is the last five weeks of FY20, being from Monday 30th March to Sunday 3rd May 2020.

Management reports that KFC Australia has continued to show improvements in sales trends. Same store sales (SSS) were down only marginally at -0.9% despite many Food Courts having been heavily affected due to the significant decline in shopping mall foot-traffic. Excluding the net effect of Food Courts, the remainder of the network (predominately drive-thru restaurants) traded positively, with +4.0% SSS growth over prior year. Increased drive-thru and home delivery sales more than offset any negative impact from the current Government ban on ‘dine-in.’

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