Collins Foods (ASX:CKF) is entering a potentially important phase as it simplifies its operations around its core KFC Business and works to improve performance across Australia and Europe.

The company has recently delivered stronger Earnings growth, improved operating performance and a healthier Balance Sheet , while its decision to exit Taco Bell removes a business that had struggled to reach sustainable profitability. The combination gives management a clearer strategic focus heading into the next stage of growth.

The key question is whether stronger KFC trading can continue while the European operations improve and the Taco Bell exit delivers the expected benefits.

What Collins Foods actually does

Collins Foods is a major KFC Franchise operator, with the majority of its business centred on restaurants operating under licence from Yum! Brands.

The group operates close to 300 KFC restaurants in Australia and also has KFC operations in the Netherlands and Germany. It previously operated Taco Bell restaurants in Australia as part of an attempt to diversify beyond its core fried-chicken business.

KFC remains the central part of the company's strategy. The business is increasingly focused on digital ordering, delivery, drive-thru services and restaurant technology, with digital sales accounting for more than 40 per cent of Australian Revenue .

The model provides Collins Foods with exposure to an established global Brand while allowing it to benefit from restaurant expansion, improved customer throughput and increasing digital engagement.

The FY25 challenges

The year to early May 2025 presented several challenges for Collins Foods.

Group revenue increased 2.1 per cent to $1,519.5 million, while underlying EBITDA was broadly unchanged at $228.5 million. Underlying net profit declined 14.8 per cent to $51.1 million.

The statutory result was significantly weaker after the company recognised approximately $40.8 million in impairments and provisions, including a $35 million write-down against 16 restaurants in the Netherlands and costs associated with historical wage underpayments.

KFC Australia remained comparatively resilient, with revenue increasing 3.0 per cent to $1,154.2 million. However, same-store sales growth was only 0.3 per cent.

Europe was more challenging, with revenue declining 0.4 per cent and same-store sales falling 2.7 per cent. The European segment's EBITDA Margin also declined to 12.6 per cent.

These results highlighted the importance of improving the performance of the European portfolio while protecting the Economics of the much larger Australian KFC network.

Exiting Taco Bell

A major strategic change is Collins Foods' decision to exit Taco Bell in Australia.

Under the agreement announced in March 2026, Collins Foods is transferring 20 of its 27 Taco Bell restaurants to an affiliate of Yum! Brands and Restaurant Brands Australia. The remaining seven locations are expected to close, with leases reassigned as part of the process.

The transaction includes approximately $24 million of Lease liabilities across the 27 restaurants, while one-off closure and Transaction Costs were estimated at approximately $1 million to $2 million.

Taco Bell had generated EBITDA losses for Collins Foods, meaning its removal should simplify the group and improve the overall earnings profile.

The strategic logic is straightforward: rather than continue allocating Capital and management resources to a business that has struggled to achieve scale, Collins Foods can concentrate on KFC, where it has a much longer operating history and greater competitive expertise.

The bull case

The strongest argument for Collins Foods is that the company can focus on a business it understands exceptionally well.

KFC Australia provides a large and established operating base, while digital ordering, delivery, drive-thru expansion and restaurant technology can continue to improve customer throughput.

The European operations provide another potential source of growth. Germany has demonstrated encouraging momentum, while improvements in the Netherlands could provide additional upside if trading conditions stabilise.

The Taco Bell exit also removes a source of recurring losses and allows management to simplify the group around its strongest brand.

A stronger balance sheet provides another advantage. Lower Leverage gives Collins Foods greater capacity to invest in restaurant openings, refurbishments and technology while maintaining its Dividend strategy.

If Australian same-store sales remain positive and Europe continues to improve, the company could potentially deliver earnings growth without requiring an aggressive increase in financial leverage.

The bear case and risks

The recovery is not without risks.

European trading remains uneven, particularly in the Netherlands, where consumer conditions and restaurant performance can fluctuate. A sustained deterioration could offset some of the improvement being generated in Germany.

Australian consumers also remain sensitive to household budgets. Fast-food operators are competing heavily on value, which can support customer traffic but potentially place pressure on margins.

The company's FY25 experience also demonstrates the risk of impairments and provisions. Restaurant Assets can lose value quickly if sales expectations deteriorate, while wage-remediation costs can create additional financial pressure.

The Taco Bell exit should simplify the business, but the transaction still involves closure and restructuring costs. Management will need to ensure that the resources released from Taco Bell are redirected effectively into KFC.

There is also execution risk around restaurant expansion. New locations require Investment , suitable sites and effective staffing, while established restaurants need ongoing refurbishment and technology upgrades to remain competitive.

What to watch next

Several operating indicators will help determine whether the recovery can continue.

First, investors should monitor Australian KFC comparable-sales growth and whether the improvement seen during FY26 can be sustained.

Second, the performance of the Netherlands and Germany businesses will be important. Germany has shown stronger momentum, while stabilisation in the Netherlands would strengthen the overall European earnings outlook.

Third, investors will want confirmation that the Taco Bell exit has been completed and that associated costs remain within management's expectations.

The company's underlying net profit guidance will also provide an important benchmark. Delivering mid-to-high-teens growth would demonstrate that the stronger first-half performance is translating into a meaningful full-year improvement.

Finally, the balance between Capital Expenditure , Debt reduction and dividends will remain important as Collins Foods determines how aggressively it can expand its KFC network.

The balanced outlook

Collins Foods (ASX:CKF) is becoming a more focused business.

The decision to exit Taco Bell removes an underperforming Diversification strategy, leaving KFC as the clear centre of the group. Australian trading has improved, Germany is showing encouraging momentum and the balance sheet has strengthened.

The main challenge is proving that these improvements can be sustained. European performance needs to stabilise, Australian consumers need to continue supporting KFC and management must execute its restaurant and technology investment plans without sacrificing margins.

The recovery therefore has a credible foundation, but the next stage will depend on consistent operational delivery rather than a single improved reporting period.