TD take on quarter, year and 2024Strong Q3, Pulling Away from the Competition
PZA reported Q3/23 SSSG of 7.0% versus 14.0% LY, above our 5.6% estimate. This pushed adjusted EPS to $0.26 (up from $0.23 LY), a penny above expectations. Concurrently, PZA increased its monthly dividend to $0.0775/share (+3.3%). Following Q3/23 results, we increased our 2023-2025 system sales estimates by a modest ~1-2%, reflecting the Q3 beat and improved outlook (i.e., around successful menu innovations, marketing and digital improvements). However, we lowered our valuation multiple range to 15x-16x (from 16x-17x) given the high interest rate environment. Consequently, our $16 target price is unchanged.
Impact: SLIGHTLY POSITIVE Q3/23 was a really solid quarter, highlighted by encouraging trends and a positive tone struck by management on the conference call. Despite lapping doubledigit comps, PZA reported 7.0% SSSG stemming from both volume (bigger contributor) and pricing, led by walk-in/pick-up (given PZA's vast reach and scale) and non-traditional channels. We believe this was supported by: 1) PZA's strong value proposition; 2) effective marketing (i.e., "Growflation Pizza" campaign); 3) successful menu innovation (i.e., Stromboli launch exceeded expectations, deepfried pizza helped double CNE sales, new menu items satisfied increased snacking demand); and 4) digital/technological improvements (i.e., push notifications, visual order tracking, increased online presence). All this enabled PZA to outpace industry growth and gain market share, according to management. Looking ahead, we expect continued strong momentum in Q4 (i.e., PZA's seasonally strongest quarter), although 2024 should get progressively challenging from an industry standpoint, as slower economic growth could lead to: 1) reduced consumer discretionary spending and 2) more aggressive competitive behaviour. Consequently, we forecast more modest 3.5% SSSG starting Q1/24.
TD Investment Conclusion While we argue that both the royalty structure and attractive value proposition make PZA more recession-resistant, we are wary of raising valuation multiples in an uncertain high interest rate environment, and consequently still think that a HOLD recommendation is appropriate. That said, while restaurant stocks typically perform better early in a recovery, we would not be opposed if investors wanted to start building a small position in PZA as they would be paid a favourable 6.5% dividend yield (versus 4.35%/4.17% for 5-yr/10-yr Canada Government Bond) to wait for a turn in the cycle.