Rocky Mountain Chocolate Factory, Inc.
Q1 2024 Earnings Call Transcript

Published: 13 Jul 2023

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss Rocky Mountain's Chocolate -- Rocky Mountain Chocolate Factory's financial results for the fiscal first quarter 2024. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. Joining us on the call today are the company's CEO, Rob Sarlls; and CFO, Allen Arroyo. Please be advised this conference call will contain statements that are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time-to-time in the company’s filings with the SEC. Do not place undue reliance on any forward-looking statements, which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements. The company’s presentation also includes certain non-GAAP financial measures, including adjusted EBITDA as supplemental measures of performance of the business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You will find reconciliation tables and other important information in the earnings press release and Form 8-K furnished to the SEC earlier today, which will be available on the company’s Investor Relations section of its website within approximately 24 hours after this call has ended. And now, I will turn the call over to the company’s CEO, Rob Sarlls. Rob, please go ahead.

[Rob Sarlls:]

Thank you, and good afternoon, everyone. During the quarter, we continued to lay the foundation of our strategic transformation plan and begun to develop critical groundwork for the future of the business. I'd like to spend time reviewing the three pillars of our strategic plan and highlighting the initial progress we have made to do more with less, simplify and focus our operations and amplify and elevate the Rocky Mountain Chocolate brand. First, on doing more with less, major progress has been achieved on multiple fronts. At the end of our first fiscal quarter, we have successfully identified and executed on over $7 million in annualized cost savings or more than 60% of the $1.2 million annualized cost savings target introduced last quarter, ahead of our original expectations in terms of both magnitude and timing. These savings stem from

[Allen Arroyo:]

Yes. Thank you, Rob. Please note that all financial results discussed today are for continuing operations, while all variants commentary is year-over-year -- on a year-over-year basis, unless otherwise stated. Now moving on to our results. Total revenue in the first quarter was $6.4 million compared to $6.9 million. The decrease was primarily due to $0.3 million of lower shipment of products related to the planned exit of customers. To further break this down, total Durango production facility sales were $4.8 million compared to $5.2 million. Royalty and marketing revenue remain roughly flat at $1.4 million. Retail store sales at our company operated stores were $192,000 compared to $250,000. We had one less unit this year. Same store sales at all domestic Rocky Mountain Chocolate Factory locations decreased 2.7%. And franchise fee revenue was $45,000 compared to $54,000. Total Durango production and retail gross profit was $0.3 million compared to $0.9 million, with gross margin of 5.1% compared to 16.3%. The decrease was primarily due to lower production volume resulting from our strategy to produce finished goods closer to final consumption, the reduction of non-core SKUs and higher costs related to new key production positions. This was partially offset by cost savings we realized from lower transportation expenses, reduced waste and scrap and lower warehousing expense. Total operating expenses were $7.9 million, compared to $7.2 million. The increase was primarily due to increased staffing costs driven by new mid-level and senior leadership, including our CEO and our Senior Supply Advisor, working with our teams to drive previously noted operational improvements. Increased franchise support costs related to an increased network store visits, new store openings and transfers and annual convention costs that were previously biannual. Net loss from continuing operations was $1.5 million or negative $0.24 per share, compared to net loss from continuing operations of $0.3 million or negative $0.5 per share. Adjusted EBITDA loss was $800,000 compared to an adjusted EBITDA of $700,000 with a decrease primarily driven by lower revenue related to the planned exit of certain customers, as well as the aforementioned drivers of gross profit and OpEx. Now turning to our balance sheet and cash flows, we ended the first quarter with a cash balance of $5.1 million compared to $4.7 million at the end of fiscal 2023. As of May 31, 2023, the company remained debt free. We also generated $0.4 million in cash during the quarter. The cash increase was primarily driven as a result of the $1.4 million in proceeds from the sale of U-Swirl and a positive working capital change. These were partially offset by net loss and CapEx spend of $0.5 million. The working capital change was mostly a result of the reduction in inventories to $2.7 million from $3.6 million at year end. With that, I'd like to turn the call back over to Rob for closing remarks.

[Rob Sarlls:]

Thanks, Allen. We are committed to our strategic transformation plan and look forward to providing updates in the quarters ahead as we work to position Rocky Mountain Chocolate not only as America's preferred premium chocolate tier, but as a business generating sustainable growth and profitability. This concludes our prepared remarks. We would now open it up for questions. Operator, back to you.

[Operator:]

Thank you. [Operator Instructions] Our first question will be from the line of Roger Lipton from Lipton Financial Services. Your line is open.

[Roger Lipton:]

Yes. Good afternoon. [Technical Difficulty]

[Rob Sarlls:]

Roger, we are having a tough time hearing you.

[Roger Lipton:]

[Technical Difficulty]

[Rob Sarlls:]

Operator, we're having a difficult time hearing Mr. Lipton. Can you hear him on your end or should he be dialing back in?

[Operator:]

Roger, if you have your line on speaker, please take it off speaker. Roger, if your line is on speaker please take it off speaker. You might have to dial back in.

[Rob Sarlls:]

Hopefully, he's dialed back in. Next question.

[Operator:]

Roger, please dial back in.

[Roger Lipton:]

Hello. I'm sorry. Are you there?

[Operator:]

There you go. Much better.

[Rob Sarlls:]

Yeah. We can hear you perfectly clear now.

[Roger Lipton:]

I'm sorry. Did you hear the question?

[Rob Sarlls:]

No, we did not. Sorry, Roger.

[Roger Lipton:]

Yes. I'm sorry too. The question was, the $700,000 of savings that you've already implemented. My assumption is that not too much of that flowed through in the quarter, that that's sort of the rate that's in place as the quarter ended. Is that correct?

[Rob Sarlls:]

Yes. So everything in the $700,000 was realized and partially recognized in at least the last month of first quarter, which means, they all start flowing in the second quarter.

[Roger Lipton:]

Right. Okay. And just another question which occurs to me since you mentioned, the flagship store is now -- that looks like another $1 million store. I'm curious to know how many stores in the system do over a $1 million?

[Rob Sarlls:]

Well, sure. Actually, our top 37 stores average over $1 million and we have some phenomenal outperformance dragging that up. But I would say that our store count in the $1 million plus range at current rates is somewhere in the high teens to low 20s.

[Roger Lipton:]

Okay. And then you mentioned, of course, the lower volume because of the so called planned exit of a couple. I mean, could you elaborate a little bit on what that was all about? The planned exit from a couple of customers.

[Rob Sarlls:]

Yes. We had an e-commerce and whole selling relationship that we had exited in the last fiscal year. So we weren't expecting recurring volume. And the biggest impact of that happens to have been in the first quarter, there will be no additional impact on results going forward.

[Roger Lipton:]

Okay. And then you made reference to the higher G&A because of the new staffing, is that pretty much in place at this point? Will -- another way to put it, will the G&A build further from the rates shown in the first quarter, or is that kind of the going forward rate of supporting G&A?

[Rob Sarlls:]

No, it's a good question. So the staffing that was coming on started with me in May, Allen in August, and then we brought on Scott, our Supply Chain Advisor in September. So as the numbers roll forward in the subsequent quarters, those comparisons will start evening out more.

[Roger Lipton:]

Okay. And lastly, for the moment anyway, the lower inventory is obviously encouraging. Can you keep it down that way for the rest of the year? Or how do you expect the inventory to proceed through the balance of the February year?

[Rob Sarlls:]

Sure. Well, Roger, in our business, if we're not building inventory now, we have to build for the holiday. So the [indiscernible] really being turned on as we speak. So that will come up. Suffice it to say, it'll be less on a year on year basis, all things being equal. We will be doing some pre-positioning of inventory with our third party logistics partner, and that's again to make sure that the product can get the consumers within 48 hours. But you can expect with this team tighter inventory management going forward, all things being equal.

[Roger Lipton:]

Okay. That's interesting. Thanks very much. Appreciate it.

[Rob Sarlls:]

I appreciate the call, Roger. Thank you.

[Operator:]

Thank you. I'm not showing any further questions in the queue. That will conclude our Q&A for today. Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

[Rob Sarlls:]

Thank you, operator. Thanks, everyone. Bye-bye.