Pizza Pizza Royalty (TSX:PZA) raised its dividend last month, depicting the management’s confidence in its future earnings. It raised its monthly dividend from $0.055 to $0.06 per share, with its forward yield standing at 6.39%. Due to its highly franchised business model and extensive investment in strengthening its digital channels, the company fared better than its peers during the pandemic.
Meanwhile, with the easing of restrictions, Pizza Pizza has reopened its dining spaces and non-traditional restaurants. Also, the improvement in economic activities and the continued sales from its digital channels could boost its financials in the coming quarters. So, I believe Pizza Pizza’s dividend is safe.
Second Quarter Highlights:
Royalty Pool sales increased 3.9%
Same store sales increased 0.8%
August 2021 monthly dividend increased 9%, to $0.06 per share from $0.055 previously.
Adjusted earnings per share increased by 2.2%
Restaurant network increased by five locations during the Quarter
Paul Goddard, CEO, Pizza Pizza Limited said, "With the lifting of restrictions in Ontario late in the Quarter, we immediately experienced an increase in our walk-in sales and saw the reopening of a few, key non-traditional locations. This is positive momentum as we head into the back half of the year which have historically been our strongest sales quarters. As a result, our Board was pleased to announce a 9% increase in the shareholder dividend effective August 2021. Also, despite a particularly challenging economic backdrop in Alberta, we continue to maintain our market share."
Paul Goddard added, "From a high level perspective, we find it encouraging to see the strong vaccination rates across Canada leading to gradual re-openings and lifting of restrictions. That being said, the recurring virus waves and lockdowns we experienced last year and through the first half of this year continue affecting important sales channels, particularly, walk-in sales and our non-traditional sales. Nevertheless, our restaurant construction and renovation plans for the year continue to accelerate, especially in British Columbia and Quebec."
Year-to-Date Highlights:
Royalty Pool sales decreased 5.5%
Same store sales decreased 6.5%
Adjusted earnings per share decreased 6.6%
Restaurant network increased by 12 locations during the Period
Royalty Pool of restaurants for 2021 decreased by 24 net restaurants on January 1, 2021
SALES
For the three months ended June 30, 2021, System Sales from the 725 restaurants in the Royalty Pool increased 3.9% to $118.0 million from $113.5 million in the same quarter last year when there were 749 restaurants in the Royalty Pool. By brand, sales from the 622 Pizza Pizza restaurants in the Royalty Pool increased 7.1% to $98.6 million and the 103 Pizza 73 restaurants decreased 9.8% to $19.3 million for the Quarter.
For the six months ended June 30, 2021, System Sales decreased 5.5% to $226.2 million from $239.3 million in the prior year comparative period. For the six months ended June 30, 2021, sales from the 622 Pizza Pizza restaurants in the Royalty Pool decreased 4.3% to $188.9 million and sales from the 103 Pizza 73 restaurants decreased 11.1% to $37.3 million.
Total Royalty Pool System Sales for the Quarter and Period continued to be impacted by COVID-19 as restaurants comply with government imposed COVID-19 restrictions, including the closure of restaurant seating areas. Additionally, while the number of stores in the Royalty Pool are less than the comparative periods, the negative impact on Royalty Pool System Sales has been mitigated by the Make-Whole Carryover Payment.
SAME STORE SALES GROWTH ("SSSG")
SSSG, the key driver of yield growth for shareholders of the Company, increased 0.8% for the Quarter (2020 – decreased 16.3%), and decreased 6.5% for the Period (2020 – decreased 11.4%).
When comparing the results of 2021 to 2020, it is important to remember that the COVID-19 pandemic began impacting business in mid-March 2020. While it is over a year since the initial and sudden impact of the pandemic began, the effect continued through the second quarter of 2021.
SSSG is normally driven by the change in the customer check and customer traffic, both of which are affected by changes in pricing and sales mix. For the Quarter, the SSSG for Pizza Pizza was driven by an increase in traffic and a decrease in the average check, while for Pizza 73 the SSSG was impacted by the decrease in traffic and a relatively consistent cheque. Beginning in mid-March 2020, SSSG was negatively impacted as a direct result of the COVID-19 pandemic and the government-mandated social distancing policies. As a result of closing restaurant seating, walk-in sales decreased significantly, negatively impacting overall customer traffic on a year-to-date basis. The decline in walk-in sales resulted in an overall increase in the average check at both brands as the average check of a walk-in customer is much lower than a delivery order check amount. The negative sales effect from the decline in customer traffic, as well as the decrease in non-traditional sales, more than offset the effect of the increase in the average check, resulting in negative SSSG for the Period. Walk-in sales began increasing during the Quarter which resulted in the average check decreasing when compared to the prior year period.
MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
Today, the Company's Board announced a 9% increase to its monthly dividend. The August dividend increased to $0.06 per share from $0.055 per share. Annualized, the dividend will increase $0.06 per share to $0.72 from $0.66 per share. The August dividend will be payable to shareholders of record at the close of business on August 31, 2021, and will be paid on September 15, 2021.
The Company declared shareholder dividends of $4.1 million for the Quarter, or $0.165 per share, compared to $3.7 million, or $0.15 per share, for the prior year comparable quarter when the dividend was decreased for COVID-19's impact on sales. The payout ratio was 95% for the Quarter and was 83% in the prior year comparable quarter.
For the Period, the Company declared shareholder dividends of $8.1 million, or $0.33 per share, compared to $9.0 million, or $0.3639 per share, for the prior year comparable period. The payout ratio was 100% for the Period and was 103% in the prior year comparable period.
The Company's policy is to distribute all available cash in order to maximize returns to shareholders over time, after allowing for reasonable reserves. Despite seasonal variations inherent to the restaurant industry, the Company's policy is to make equal dividend payments to shareholders on a monthly basis in order to smooth out income to shareholders. After the reduction in the monthly dividend in April 2020, the increase in November 2020, and today's increase, any further change will be implemented with a view to maintaining the continuity of consistent monthly distributions. It is expected that future dividends will continue to be funded entirely by cash flow from operations and the cash reserve.
The Company's working capital reserve is $5.4 million at June 30, 2021, which is an increase of $0.2 million in the Quarter due largely to the improvement in Royalty Pool System Sales. With a healthy working capital reserve in place, the Company's Board announced a 9% increase to its monthly dividend. With the increase in the monthly dividend, the Company believes that there is sufficient cashflow to service the Company's obligations as they fall due, while also partly restoring the monthly dividend to pre-COVID levels. The Company continues to closely monitor System Sales and royalty income, and will consider further changes to the monthly dividend taking into account the duration and impact of the COVID-19 pandemic on restaurant operations, and the timing and pace of economic recovery in the markets that Pizza Pizza and Pizza 73 service.
INTEREST EXPENSE
Interest expense for the Quarter and Period increased due to a higher effective interest rate on the facility. The interest rate swap agreements fixed the facility interest rate at the Bankers' Acceptance rate of 1.81% plus a credit spread that moves with the results of the covenants.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter was consistent with the prior year comparable quarter at $1.2 million. For the Period, current income tax was $2.3 million, which decreased when compared to the prior year comparative period of $2.5 million. The Company's decrease in royalty income resulted in the slight decrease in tax expense.
Of particular note is that the Company's adjusted earnings from operations before income taxes differs significantly from its taxable income due largely to the tax amortization of the Pizza Pizza and Pizza 73 Rights and Marks, as well as the taxable income allocated to PPL. The amount of tax amortization deducted is based on a declining balance basis and will decrease annually.
EARNINGS PER SHARE ("EPS")
Fully-diluted basic EPS decreased 6.4% to $0.177 for the Quarter compared to the prior year comparable quarter.
As compared to basic EPS, the Company considers adjusted EPS[1] to be a more meaningful indicator of the Company's operating performance and, therefore, presents fully-diluted, adjusted EPS. Adjusted EPS for the Quarter increased 2.2% to $0.185 when compared to the same quarter in 2020.
RESTAURANT DEVELOPMENT
As announced earlier this year, the number of restaurants in the Company's Royalty Pool decreased by 24 locations to 725 on the January 1, 2021 Adjustment Date, and consists of 622 Pizza Pizza restaurants and 103 Pizza 73 restaurants. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2021.
During the Quarter, PPL opened seven traditional Pizza Pizza restaurants; one traditional and one non-traditional Pizza Pizza restaurants were closed. During the Period, PPL opened 10 traditional and four non-traditional Pizza Pizza restaurants, and closed two traditional and one non-traditional restaurant. Additionally, at the Pizza 73 brand, the Company opened two traditional restaurants and closed one non-traditional restaurant. These restaurants will be added to the Royalty Pool on January 1, 2022.
During the Quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open for delivery and pick-up customers across Canada; however, the majority of non-traditional Pizza Pizza and Pizza 73 locations remained closed, with the exception of a few locations in hospitals and gas stations. As the provincial governments began lifting restrictions, some of our non-traditional locations, which initially closed, have reopened and others should reopen in a limited capacity as allowed by each province.
New restaurant construction continues across Canada and PPL expects to accelerate restaurant network expansion and increase renovations for the remainder of 2021, assuming pandemic effects are mitigated in the coming months.