Boston Pizza: Dividend Returns, But Several Long-Term Risks Loom

(Boston Pizza OTC:BPZZF Chart – Seeking Alpha)

Boston Pizza (TSX:BPF.UN) (OTC:OTC:BPZZF) is a popular restaurant chain in Canada and saw its share price tumble as a result of the COVID shutdowns. The current dividend yield is 9.07% after the fund announced it was resuming dividend payments starting in October. We believe that the company will continue to pay out the current rate of 0.065 CAD for the near future, however, we are quite concerned with the company’s long-term position. Although we will be discussing downsides in this write-up, we establish a neutral position on the stock given the long history of a high-yielding dividend. Please note that Boston Pizza primarily trades on a Canadian stock exchange and we are unaware of the stock or dividend implications for Americans – the analysis below will be based on Canadian dollars.

(Boston Pizza Investor Presentation, 2020)

Boston Pizza collects around 5.5% of franchise sales, which does not include alcohol sales. There are 395 Canadian contributing restaurants for 2020.

Boston Pizza is not a fast-food restaurant, nor is it known as a popular food delivery restaurant, and current restaurant restrictions will impact revenue figures

It is worthy to note that 44% of all contributing restaurants for the royalty fund are either located in British Columbia or Alberta. Both provinces are seeing increases in daily COVID cases, which greatly impacts many groups’ desires to dine-in. British Columbia’s top doctor noted that it is unlikely that restaurants will shutdown fully again, but restaurants need to continue to adhere to spacing restrictions. In Alberta, the same sentiment is shared, and the government body will likely not impose further restrictions on the restaurant industry despite an uptick in cases.

We believe that a big reason why Boston Pizza resumed its dividend payout is that despite an uptick in cases, top doctors feel that restaurants are generally safe and have low rates of transmission. However, just because Boston Pizza restaurants are open, it doesn’t mean that individuals and families will want to dine at the restaurants. A general trend in the industry is that dine-in rates within families are much higher in the summer than the winter (Higuera, 2019), and even with the relatively-lax restaurant restrictions this summer, same-restaurant sales were down 16% in August (Boston Pizza, 2020). Therefore, since a majority of Boston Pizza’s will be open in the winter, franchisees have to bear close-to-normal operating costs while earning double-digit percentage drops in revenue, which could pose a threat to potential permanent restaurant closures. Moreover, Boston Pizza is not really known for its delivery service and competes directly with other chains such as Pizza Hut and Domino’s, therefore we do not believe that their online sales will produce a nominal effect on revenue figures.

Boston Pizza has grown steadily for the last decade, but how much room is there left?

(Boston Pizza Investor Presentation, 2020)

Boston Pizza has been a great investment over the years due to the high dividend yield, but we believe that the combination of COVID-19 and little space for growth left in the Canadian market will eventually lead to long-term decreasing rates of franchise sales. Boston Pizza has seen stagnancy in total franchise sales in the last 3 years pre-COVID.

(Boston Pizza Investor Presentation, 2020)

Boston Pizza is already the clear-cut leader in the casual dining industry by a large margin in terms of the number of locations, and although management suggests that there is room for much more growth, we believe that the introduction of dozens of new Boston Pizzas may hurt existing locations’ same-store growth. In fact, same-store growth has declined for the last 4 years (Boston Pizza Investor Presentation, 2020). We also believe that Boston Pizza will see several permanent restaurant closures within the next year, and will not chase an aggressive expansion strategy in the near future due to COVID complications.

The casual dining space is growing, and Boston Pizza faces fierce competition

The pictured list of ‘top 10 casual dining restaurant chains’ does not allude to the fact that new and upcoming chains are taking over considerable market share. In British Columbia and Alberta, chains like Cactus Club, Earls, and Joey’s are expanding rapidly and offer a more upscale dining experience for relatively similar prices. According to review sites, a new chain like Cactus Club is much more popular and better rated. On TripAdvisor, the most popular Boston Pizza location in Vancouver has 171 reviews and 3.5 stars, whereas the most popular Cactus Club Vancouver location has 1,639 reviews and a 4.5-star rating. Cactus Club is also known to have a much nicer interior design and modern look. The abundance of reviews for Cactus could be attributed to that younger generations are more active on social media.

Boston Pizza is more well-suited for older generations, especially those who have been attached to the restaurants for a long time given that the chain is an iconic Canadian brand. However, the younger generation, especially teenagers and young adults, are not as interested in Boston Pizza and appreciate the upscale dining experience. As these smaller chains continue to expand, they will gain a significant portion of Boston Pizza’s market share. Moreover, we believe that the shift in consumer interest will be permanent, given that younger generations are not paying much attention to Boston Pizza.

In terms of pure strategy, we believe that Boston Pizza’s new initiatives will fail to provide any sort of competitive advantage.

(Boston Pizza Investor Presentation, 2020)

We can certainly agree that these menu items are quite unique, but apart from the fact that existing loyal customers may want to try something new, we believe that these items will not provide additional incentives for new customers such as teenagers and young adults to try out the chain. New potential customers wouldn’t even know about the ‘innovative’ menu in the first place, given that Boston Pizza’s advertising strategy doesn’t cater to younger generations. Boston Pizza doesn’t have a big influence on TikTok or Instagram but instead relies on T.V. commercials to provide traction. The addition of new items on the menu causes operational complications more than anything.

It’s hard to bet against a long-time leader in the casual dining industry

Although this article points to the negative aspects of Boston Pizza, the Canadian chain has been a dominant force in the casual dining industry for decades and has a very strong management team with a long track record of success. Given the quick resumption of a dividend, it would be tough to sell the stock at the current moment. We believe that long-term, a successful return on investment depends on whether or not Boston Pizza can maintain their market share and keep revenues at least relatively flat. Your action to buy or sell should mostly depend on whether or not you think that new casual dining establishments, which appeal far more to the younger generations, will significantly disrupt Boston Pizza’s franchise sales.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.