Boston Pizza Stock: A Look At The 8.3% Yield After Q1 Results (TSX:BPF.UN:CA)

Note: All amounts discussed are in Canadian Dollars and the stock price refers to the TSX stock price and not the OTC one.

Boston Pizza Royalties Income Fund (TSX:BPF.UN:CA) earns 4% royalties on the gross sales of Boston Pizza Franchisees in the royalty pool. It also makes another 1.5% in distribution income due to its ownership interest within this rather simple structure. The financial reports also provide details (tad less aggressively) on this fund and its relation to sources of income.

We were neutral on this fund when we covered it in March of this year and the price has been more or less flat since then.

On a total return basis, it has kept afloat and outperformed the other two top-line royalty plays that we cover, Pizza Pizza Royalty Corp (TSX:PZA:CA) and A&W Revenue Royalties Income Fund (TSX:AW.UN:CA). Coming back to Boston Pizza, our rating was based on the expectation of a slowdown in growth and even a potential sales and consequently a distributable cash flow decline in the event of a recession. What it had going for it was the benevolent ( we use it very loosely here) immigration policies of its home country, boosting demand. Being a top line business, its bottom line was not a slave to volatility in expenses bought on by inflation either. Its 8% yield was attractive, but we only liked it under $15.

We think the yield is attractive even if we assume a very low growth rate and focus on just the distributions. Intuitively we feel this is almost there, but we will likely get it a bit cheaper. We are maintaining this at a hold and increasing our “buy under” price to $15.00 to account for the growth that we have seen since our last update.

Source: Boston Pizza: 8.5% Yielding Royalty Play Looks Attractive

We will review the Q1 numbers next to see if we need to raise our buy under price, since the price did not come to us.

Q1-2024

This was not a good quarter for Boston Pizza. We had small declines in every relevant metric vs Q1-2023. Total franchise sales were down 1%. Same store sales were down 1% and cash flows from operating activities decreased 1.3%. Interestingly enough distributable cash flow increased by about 1.8% total as interest paid on debt dropped by about 10%. We will note here that this was the difference in interest paid and not the interest expense itself. The latter was actually higher as one might expect with a slightly larger debt load and higher interest rates. The summary here was that key metrics were lower, but timing factors on cash movement, boosted distributable cash flow. Of course those will reverse in the other direction within 1-2 quarters so it is important to pay attention to the key fundamental changes and not be assuaged by the higher distributable cash flow seen.

The tone was grim during the conference call as well.

The first quarter of 2024 presented certain macroeconomic challenges for the full service industry, prevailing economic conditions characterized by high interest rates and inflationary pressures have influenced consumer behavior, impacting discretionary spending and leading to a cautious approach toward dining out.

Source: Boston Pizza Q1-2024 Conference Call Transcript

That was probably influenced by the fact that Boston Pizza got here despite some aggressive marketing and promotional campaigns.

From a marketing standpoint, we began the first quarter of 2024 with our Pasta Tuesday all month-long promotion, where guests were able to enjoy pastas every day of the week, starting at $11.99 and gourmet pastas for $15.99 all-month long in January.

The promotion was supported by significant TV, digital and social media channels, along with in-restaurant promotions at participating Boston Pizza restaurants across the country.

Source: Boston Pizza Q1-2024 Conference Call Transcript

Outlook & Verdict

The sales slowdown continued into April.

But Nick, more to your question in terms of the trend within the quarter. So yes, looking at January, February, March results for Q4 2024, same-restaurant sales was pretty consistent within the quarter. So meaning the 1% where we ended the quarter, it was pretty consistent throughout Q1. There was some kind of lumpiness week-to-week as you would expect as there were certain kind of calendar timing differences that drive that, but just kind of by and large from a trend perspective, yes, it was a pretty consistent trend throughout the quarter.

And then in terms of April, what I would share there is there’s not a dramatic swing kind of upwards or downwards. It’s really kind of a consistent trends that we’re seeing compared to the Q1 results.

Source: Boston Pizza Q1-2024 Conference Call Transcript

Some further context here is that on average, prices on the menu are definitely higher than they were a year back. We did not get an exact figure on this from management but our estimate is that this is close to 4%. So when you combine that with a 1% drop in sales, you can extrapolate that traffic is down about 5%.

We would get more optimistic here if, we were at the tail end of a recession. The biggest macro issue here, whether or not we hit the official recession criteria, is the payment shock as mortgages reset. This is one time where Canada’s penchant for 5 year mortgage term (vs the 30 year in US), is really going to matter.

Offsetting this pressure, on a marginal level, is the increase in the country’s population from unchecked and (totally bonkers) immigration policies. Valuation is not the worst we have seen either. On a price to sales basis, the stock actually looks modestly relative to its history. Of course most of that decade was colored with ZIRP so context is key.

The dividend yield also looks at the higher end of its decade long range.

The slightly higher price point relative to the two other Canadian royalty plays we cover is a weakness that makes us cautious. Overall, we think this remains a buy only under $15.00. We maintain our hold rating for now.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult a professional who knows their objectives and constraints.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.