Pizza Pizza Royalty Corp. is tempting investors with a big dividend yield and an impressive one-day rally from its recent lows. But is that enough to offset weak quarterly sales and well-heeled competition from the likes of Domino’s Pizza Inc.?
Pizza Pizza’s third-quarter results, released on Tuesday after markets closed, didn’t exactly point to pizza dominance.
Profit declined to 21 cents a share, down from 22 cents in the same period last year. Same store sales, or sales at restaurants open for more than one year, declined 0.8 per cent, continuing a dismal trend.
Yet Derek Lessard, an analyst at TD Securities, upgraded his recommendation on the stock to a “buy” on Wednesday, noting that sales appear to be stabilizing after a steeper decline of 3.3 per cent in the prior quarter.
“These were not great results (and still below potential); however, they were improved results, highlighted by a broad based stabilization of same store sales,” Mr. Lessard said in a note.
The shares rebounded 6.1 per cent to $9 on Wednesday, halting a demoralizing decline of more than 50 per cent since May, 2017.
For anyone who has been waiting for a rebound, this is a promising start. However, the backdrop remains troublesome for the franchise operation, which takes a cut of sales from its 655 Pizza Pizza restaurants (mostly located in Ontario) and 112 Pizza 73 restaurants.
Yes, the dividend yield reached a high of about 10 per cent recently, thanks to the falling share price. But keep in mind that the monthly payout hasn’t risen since mid-2016, the longest stretch without an increase since the financial crisis.
What’s more, the dividend payout ratio is 106 per cent, year to date. That’s above the company’s target of 100 per cent and means that Pizza Pizza must dip into its reserves to fund the cash distribution. In other words, forget about a dividend hike until sales improve.
But Pizza Pizza is struggling. Same store sales have fallen 1.4 per cent so far this year.
The problem, as management sees it, relates to Ontario’s higher minimum wage, which rose from $11.60 an hour to $14 an hour at the start of 2018. Rising labour costs pushed Pizza Pizza to raise prices on its menu items, which discouraged customer traffic.
That’s not the only problem Pizza Pizza faces. Its declining fortunes coincide with the rise of Domino’s – a U.S.-based pizza chain that has been dazzling investors.
In its third quarter results, released in mid-October, U.S. same store sales rose 6.3 per cent. Revenue increased 22.1 per cent and profit surged 49.2 per cent. Its largely franchised store count grew to 15,354, up 920 stores over the previous four quarters.
Canada is an important part of this growth. At the end of 2017, Domino’s operated 472 restaurants here, marking an increase of 70 restaurants, or 17.4 per cent, since 2015. By comparison, Pizza Pizza has expanded by just 21 restaurants, or 2.8 per cent, over the same two-year period.
Pizza Pizza isn’t the only restaurant chain struggling to grow. Pizza Hut, owned by Yum Brands alongside KFC and Taco Bell, reported that its global same store sales fell 1 per cent year-over-year.
But Yum Brands is spending big bucks to revitalize the Pizza Hut brand, partly by aligning its marketing with professional sports leagues. It has the heft to do so: Yum Brands generated profit of US$454-million on sales of nearly US$1.4-billion in the third quarter alone.
This raises the question of how Pizza Pizza – tiny, next to some of its global competitors – is going to fight back.
The modest improvement in its third-quarter results and the encouraging pop in its share price on Wednesday suggests that some investors are willing to bet that Pizza Pizza has what it takes to make a comeback. Be warned, though: These are early days.