A Short History of Pizza Pizza

A few months ago, I posted the following on the ol’ Twitter:

(Pretty sure you can click on each picture to embiggen)

I’ve held the stock on the right, Pizza Pizza, since mid-2015. We’re getting pretty close to a whole decade of holding, making it one of the longest held stocks in my whole portfolio.

The thought process back then was pretty simple. The company — which owns the trademarks behind popular Canadian pizza brands Pizza Pizza and Pizza 73 — had a solid two pronged growth approach. It was planning to expand Pizza Pizza from its Ontario base into Quebec, Manitoba, and the Maritimes. Pizza 73, meanwhile, was posting excellent same-store sales growth buoyed by Alberta’s strong economy and investments in technology. In 2015, both brands had an iPhone app you could order through, which was a pretty big deal.

The valuation wasn’t cheap — it traded about 16x trailing earnings, but I thought it was a reasonable price to pay for what I viewed as the top pizza brands in Canada. Like most royalty trusts, it also paid a handsome 6%+ dividend. When you combined the dividend with same-store sales growth (which I pegged around 2% per year) and the ability to grow the footprint another 1-2% a year, I saw a company that I thought would do around a 10% annual return while offering better than average capital protection.

It didn’t quite work out that way. Here’s the last decade’s stock chart:

Your author’s average cost is $13.48.

The investment started out pretty well, with shares eventually peaking at $18 in 2017. The dividend continued to go up and same-store sales were going in the right direction. And then the company started to struggle as the big U.S. players upped their game. Suddenly Domino’s, Pizza Hut, and Papa John’s leapt ahead in the technology world, combining that with a significant influx of new locations. Delivery apps also first appeared on the scene around the same time, opening up all sorts of other kinds of food to delivery.

Business declined, same-store sales struggled, and the stock tanked to the point where the monthly dividend represented an almost 10% yield. It was basically flashing red that a dividend cut was coming. Then Covid happened, and the company embraced the excuse and slashed the dividend from 7.13 cents per share each month to 5 cents.

The warning signs were there, too. After years of consistent dividend growth, the payout plateaued at the 7.13 cent per month level for a few years. That’s always the first step.

You’d think the pandemic would have been good for pizza, the quintessential delivery food. While Pizza Pizza held up better than most, sales still declined more than 12% in 2020. It also closed a bunch of underperforming restaurants permanently.

2021 has been better. Same-store sales crept higher in its most recent quarter and fell only 3.4% through the first nine months of 2021, with full-year results scheduled to be released in March. The company also opened a bunch of new locations to offset the ones that closed, which should have a net positive impact on sales. And the dividend was increased twice, raising the payout from 5 cents per month to 5.5 cents to 6 cents.

News has been particularly positive in the last few months. The company announced an agreement to begin franchising locations in Mexico this year. And just last week it announced another dividend increase (that’s three in about a year), a few weeks before full-year results are scheduled to come out. The stock rallied about 5% on the news.

Now that you’re all caught up, let’s look forward. Is Pizza Pizza a good investment over the next 5-10 years? Or should your author sell and put the money towards CumRocket, by far the best and most stable crypto coin out there?

The future

The end of Covid restrictions look to be mixed bag for Pizza Pizza.

On the one hand, more people out and about bodes well, especially for the walk-in business and for the 200+ locations they have in places like sporting venues and movie theatres. But when it comes to the take out business — which is the company’s bread and butter — it may struggle as many folks go back to fast casual restaurants for the first time in a couple years.

Pizza Pizza is just one of hundreds of different options on food delivery apps these days. You can get anything delivered in 2022. It’s not just pizza and Chinese food anymore.

In terms of expansion, Pizza Pizza has potential in a number of different markets. It still hasn’t cracked Atlantic Canada. It has 48 locations in Quebec compared to more than 500 in Ontario, meaning it still has plenty of room to expand in La Belle Province. It has also started to open Pizza Pizza branded locations in Alberta, which they’re hoping doesn’t take away too many sales from the 100+ Pizza 73 locations in the province. They’ve barely cracked B.C., too. And there’s the aforementioned foray into Mexico that will hopefully drive some growth.

Another short-term catalyst should be inflation goosing the top line at all its locations, which should help overall royalty revenue. These top line royalty companies look like they’ll end up as surprisingly good inflation hedges.

But overall, I don’t see anything that suggests Pizza Pizza will outperform the market over the long-term. That still doesn’t mean it’s not worth owning though. It’s essentially a perpetual bond with a 6.2% yield today and a little upside potential. I see the downside as fairly minimal today and total return potential in the 8-9% range if everything goes right. I’m the first to admit that isn’t enough to get me really excited, but there’s still a place for such securities in a portfolio.

My long-term investment hasn’t gone quite to plan. I was hoping for a 10% annual return. I ended up earning the dividend while also losing about 5% on my investment, which works out to about a 6% annual return on my initial investment, all in the form of dividends. That’s not great, but the succulent yield and the nature of the business protected me and I didn’t lose my shirt. If you view Pizza Pizza as basically a bond, then 6% isn’t such a bad floor.

I wouldn’t buy today, but I’m also not ready to sell either. I’ll continue to hold and hope for some upside in the future. To be completely honest even though I’m a big holder of the royalty trusts in my portfolio (I own A&W, Pizza Pizza, The Keg, and Boston Pizza, ranked by size), I probably wouldn’t buy any today. I just think most of the upside is gone. But I’ll continue to hold, view them all as bond substitutes (with a little dividend growth upside), and reinvest those dividends into more interesting opportunities.