Pizza Pizza Royalty Corp. just reported its Q1 2024 earnings, and on the surface, it's a good news story. Same-store sales are up for the 12th consecutive quarter, a remarkable achievement in a challenging economic environment. Pizza 73, the company's Alberta-based brand, saw a whopping 8.5% surge in same-store sales, driven by a combination of menu innovations and aggressive promotions. But buried within these positive headlines lies a subtle shift in consumer behavior that could unleash a powerful domino effect, leading to a significant dividend increase in the near future.

The clue is hidden in plain sight: a dramatic rise in Pizza Pizza's pickup orders. While the company doesn't disclose precise figures, CEO Paul Goddard emphasized that "our in-store pickup channel has grown steadily over the last three years and it is at the highest sales level it has ever been." This is more than just a fleeting trend; it's a fundamental shift in how customers are interacting with the brand, driven by economic pressures and evolving preferences.

The implications of this pickup boom are profound, especially for a royalty corporation like Pizza Pizza. Here's how the dominoes fall:

Domino 1: Increased Profitability for Franchisees: Pickup orders translate to higher margins for franchisees. Delivery comes with inherent costs: driver wages, insurance, fuel, and in some cases, fees paid to third-party delivery platforms. Pickup eliminates most of these expenses, allowing franchisees to pocket a larger share of each sale. Domino 2: Accelerated Network Expansion: With higher profitability, existing franchisees are more likely to invest in new locations. They see the potential for healthy returns, even in a challenging economic climate. Additionally, the success of the pickup model makes it easier for Pizza Pizza to attract new franchisees, as the lower operating costs make the business more accessible. Domino 3: Surge in Royalty Pool System Sales: A larger network of profitable restaurants translates to higher overall system sales. Remember, Pizza Pizza Royalty Corp. receives a royalty based on the total sales of the restaurants in its Royalty Pool. More restaurants generating more revenue means a larger pie for the royalty corporation. Domino 4: Dividend Increase: The final domino is the most exciting for shareholders: a dividend increase. With a larger stream of royalty income, Pizza Pizza Royalty Corp. will have more cash available for distribution. The company has already increased its dividend three times in 2023, signaling its commitment to returning value to shareholders. The pickup boom provides a compelling reason for another dividend hike, potentially a substantial one.

Here's where the hypothesis gets interesting. Let's assume, conservatively, that the pickup channel now accounts for 40% of Pizza Pizza's sales, up from an estimated 25% three years ago. If we further assume that pickup orders generate a 10% higher margin for franchisees compared to delivery, this shift alone could have boosted franchisee profitability by a significant margin.

This, in turn, could be fueling the ambitious network expansion plans. Pizza Pizza aims for 3% to 4% growth in its traditional restaurant network in 2024. If the pickup boom accelerates this growth to, say, 5%, the combined impact of more locations and higher profitability could result in a 10% or greater increase in Royalty Pool system sales.

This scenario would create ample room for a substantial dividend increase. A 10% hike in the dividend would bring the annual payout to $0.9783 per share, a significant boost for income-oriented investors.

Hypothetical Impact of Pickup Boom on Royalty Pool System Sales

The following chart illustrates a possible scenario where the pickup boom drives a 10% increase in Royalty Pool system sales.

Of course, this is just a hypothesis, and actual results may vary. However, the domino effect triggered by the pickup boom is a powerful force that deserves close attention. Pizza Pizza Royalty Corp.'s unique business model, combined with this subtle yet significant shift in consumer behavior, could be a recipe for a dividend explosion in the not-too-distant future.

"Fun Fact: Pizza Pizza was one of the first Canadian quick-service restaurants to embrace online ordering, launching its website in 1994! This early adoption of technology has positioned the company as a leader in digital innovation within the QSR industry."