Boston Pizza Royalty results disappointing May 15 2018

The Boston Pizza Royalty units results for Q1 are out this morning and are weak and disappointing although not devastatingly so.

In this particular case GAAP net income means little and the value of the units is driven by growth (or decline) in same-store franchise (royalty-eligible) sales per store which is BY FAR the main driver of growth (or decline) in the all-important distributable cash per unit.

“On a Franchise Sales basis, SSSG was negative 0.8% for the Period compared with negative 0.3% for the first quarter of 2017. The SSSG for the Period was attributable to menu re‑pricing, offset by weak general economic conditions in regions directly connected to the Canadian oil and gas industry and the adverse impact of the Saskatchewan 6% provincial sales tax on restaurant purchased food. ”

“The decrease in Distributable Cash per Unit of $0.007 or 2.2% was primarily attributable to the British Columbia provincial government increasing the general corporate income tax rate by 1% effective January 1, 2018, which increased the Fund’s SIFT tax rate by 1% to 27% for the Period. ”

“The Fund’s Payout Ratio for the Period was 113.1% compared to 110.6% in the same period in 2017.  … The Fund’s Payout Ratio is likely to be higher in the first and fourth quarters each year compared to the second and third quarters each year since Boston Pizza restaurants generally experience higher Franchise Sales during the summer months when restaurants open their patios and benefit from increased tourist traffic.  Higher Franchise Sales generally result in increases in Distributable Cash. On a trailing 12-month basis, the Fund’s Payout Ratio was 100.7% as at March 31, 2018. “


Overall, this is certainly weak and disappointing as same-store royalty eligible sales were down 0.8% and then distributable cash per unit was down even more at 2.2% due to the income tax increase.

The weaker sales per store come despite menu price increases (the percent annoyngly undisclosed).

The result is blamed on the weaker energy-recession affected areas and there was no sign of immediate improvement.

Perhaps that will improve this summer as oil prices have improved…

But at some point the fear is that Boston Pizza has become a bit less popular as a brand and /or has reached saturation whereby new restaurants cannabalise existing ones and cause lower same store sales. New units (shares) are issued for new restaurants and basically do not increase distributable cash per unit (other than by a very very tiny amount and then only if there is no cannablization).

Nevertheless the units pay an attractive 6.9% and they will likely do their best to maintain the distribution and if there is a cut it should be relatively minor since same-strore royalty elegible sales and distributable cash flow is only down quite modestly.

The market reaction will depend to what extent the analysts anticipated the weak result and to what extent they believe things can improve going forward.