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The Pizza Pizza location at the corner of Yonge and Cumberland Sts. in Toronto on April 29, 2014.Fred Lum/Globe and Mail

Tempted to feast on Pizza Pizza Royalty Corp.’s 8.5-per-cent dividend? Remember the old saying: There’s no such thing as a free lunch.

Back in August, after Pizza Pizza’s same-store sales had fallen for a fourth consecutive quarter, I sold the shares (PZA) personally and in my model Yield Hog Dividend Growth Portfolio. Since then the company’s troubles have only deepened, as same-store sales skidded 0.8 per cent and 2.1 per cent in the third and fourth quarters, respectively

For Canada’s largest pizza chain, the competitive landscape has rarely been so challenging. The proliferation of third-party delivery apps such as SkipTheDishes and Uber Eats, growing competition from U.S. pizza giants Domino’s and Papa John’s and a fast-food consumer hooked on discounts have all contributed to Pizza Pizza’s woes.

So far, management’s efforts to stem the slide haven’t worked.

In the fourth quarter, for instance, the company tried to generate sales by offering a “magical holiday shirt” with the purchase of two large pizzas. The T-shirts featured designs that can only be described as bizarre: a gingerbread man clutching a slice of pizza in each hand while riding a dolphin, for example, and a cat with a piece of pizza for a body.

Not surprisingly, the promotion flopped.

“While enhancing our brand’s perception with a novel, new creative message, consumer traffic did fall short of expectations,” Paul Goddard, chief executive of parent company Pizza Pizza Ltd., said on the royalty company’s fourth-quarter conference call in early March.

Pizza Pizza has also rolled out more traditional promotions, such as a buy-one, get-one-for-$5 large pizza delivery offer, but the deals failed to gain traction with consumers who already have a plethora of cheap fast-food options. In a further bid to get sales growing, the company is in the midst of updating its store network, and later this year it plans to relaunch its website and smartphone apps.

For all of these efforts, however, if you walk by a Pizza Pizza store on any given night and peer past the two-slices-for-$5 window stickers, you’ll likely see a lot of empty tables.

“It’s a very tough market,” Douglas Fisher, president of food-service and franchise consultants FHG International Inc., said in an interview. “But I don’t see [Pizza Pizza] pounding the airwaves. I don’t see them doing anything innovative, new and dynamic.”

All of this has taken a toll on Pizza Pizza Royalty’s stock price. The shares, which closed Tuesday at $10.09, have dropped more than 40 per cent from their 2017 high of about $18, and the yield – which moves in the opposite direction to the price – is now a lofty 8.5 per cent. Such a high yield indicates that the market is baking in little, if any, growth for the company.

Is the dividend safe? The answer is yes – for now. As Mr. Goddard said on the fourth-quarter call, the company has a $4.2-million cash reserve (as of Dec. 31) whose “sole purpose … is to support our dividend in the event of short to medium weakness in system sales, which we certainly have experienced just recently.”

But that reserve shrank by $838,000 in 2018, largely because of Pizza Pizza’s negative same-store sales. And with the company now distributing more cash than it brings in – the payout ratio was 104 per cent last year – clearly this can’t go on forever. “If these reserves are significantly reduced, Pizza Pizza GP [the managing general partner] may determine that it is necessary to reduce its distributions,” the company said in its 2018 annual information form.

For Pizza Pizza Royalty – which earns a royalty of 6 per cent on sales of Pizza Pizza restaurants and 9 per cent on Pizza 73 stores in the “royalty pool” – same-store sales are the biggest driver of the dividend. That’s why it is crucial for the company to get same-store sales moving in the right direction if it wants to sustain its dividend and, ideally, get it growing again.

“We need more customers through the store and that equates to offering customers a little more value,” Curt Feltner, chief financial officer of Pizza Pizza Ltd., said in an interview.

We know T-shirts and BOGO deals weren’t the answer. Given the growing competition Pizza Pizza is facing, not just from other pizza chains but from delivery services that can bring burgers, sushi and everything else to your door, it’s hard to know what will work.