Pizza Pizza, a Canadian pizza chain that has become synonymous with the country’s love for pizza, could see a rise in profits, thanks to an increase in national pride. While its name may seem repetitive, the second word—“Pizza”—is a testament to the company’s commitment to offering one of the most popular foods in the nation. The Canadian flag within its logo could attract even more attention in today’s geopolitical climate, especially if the company aligns itself more closely with its Canadian roots.
This shift in patriotism has led me to examine Pizza Pizza Royalty Corp (TSX:PZA:CA), a royalty company that has recently piqued my interest. Despite my personal preference for other pizza chains, I believe Pizza Pizza is a solid investment right now.
A Snapshot of Pizza Pizza’s Journey
Founded in 1967 in downtown Toronto by Michael Overs, Pizza Pizza has grown from humble beginnings to become one of Canada’s largest pizza chains, with nearly 775 outlets across the country. This puts it ahead of American giants like Domino’s Pizza, Pizza Hut, and Papa John’s in terms of local presence. Pizza Pizza Royalty Corp was established shortly after Overs’ passing in 2010, allowing the company to earn royalties from its pizza chains. It collects 6% of system sales from Pizza Pizza outlets and 9% from the Pizza 73 chain, which it acquired in Alberta.
As of September 30, 2024, there were 774 restaurants in the royalty pool, with Pizza Pizza outlets contributing about 80% of the royalties and Pizza 73 about 20%. The number of outlets continues to grow, with a 4% increase year-over-year.
Recent Results and Challenges
Pizza Pizza’s recent performance has been mixed. For Q3 2024, same-store sales (SSS) decreased by 5.3% compared to the previous year, and adjusted earnings followed a similar decline. The Royalty Corp even declared distributions that exceeded its distributable income. However, this downturn follows a period of strong growth, with gross sales rising more than 14% in 2022 and approximately 10.4% in 2023.
Management attributed the recent slowdown to tough comparisons from last year, heightened competition, and stagnating check sizes. While this is not unexpected, it reflects a broader trend in the restaurant industry, where rising food and labor costs have made it difficult for many fast-food chains to raise average check sizes.
Looking Ahead: Patriotism as a Growth Driver
Although Pizza Pizza faces challenges, it may benefit from the growing wave of Canadian nationalism. Canadians are increasingly turning to homegrown brands, even if they are less convenient or more expensive. This trend could provide a boost for Pizza Pizza, which, although not premium-priced, could see increased patronage as Canadians embrace local businesses.
In contrast, competitors like Boston Pizza—despite its Canadian roots—might not benefit as much from this surge in patriotism due to its name and business model. Boston Pizza operates as a casual dining lounge, which differs from Pizza Pizza’s focus on value and take-out/delivery services. With Canadians becoming more budget-conscious amid economic uncertainty, Pizza Pizza’s more affordable offering positions it well to capitalize on the demand for local brands.
Financial Outlook and Investment Potential
As of its most recent financial report, Pizza Pizza Royalty Corp is trading at a price-to-earnings (P/E) ratio of around 13.8x, offering an earnings yield of 7%, which aligns with its current distribution yield. Although the company’s payout ratio recently exceeded 100%, raising concerns about sustainability, the distribution is unlikely to be at significant risk, especially given the potential for a sales boost tied to national pride.
With shares currently trading near their value at the time of the last quarterly report, there is an opportunity for investors to see growth if the patriotic trend holds. If this happens, it’s possible that shares could rise back to the $15 range, offering a distribution yield of 6.2%.
In light of these factors, I maintain a Buy rating on Pizza Pizza Royalty Corp and have recently made a purchase. While the company faces challenges, its potential to benefit from the current surge in Canadian pride makes it an attractive investment.
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