Rocky Mountain Chocolate Factory, Inc.
Q2 2016 Earnings Call Transcript

Published: 13 Oct 2015

[Operator:]

Hello and welcome to the Rocky Mountain Chocolate Factory, Second Quarter Fiscal Year 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Some of the statements made during this call may be considered forward-looking statements that involve a number of risks and uncertainties. There are several factors that could cause actual results of Rocky Mountain Chocolate Factory to differ materially from these forward-looking statements. These factors include, but are not limited to the potential need for additional financing, the availability of suitable locations for new stores, and the availability of qualified franchisees to support new stores, customer acceptance of new products, dependence upon major customers, economic and consumer spending trends, and such other factors listed from time-to-time in public announcements and in Rocky Mountain Chocolate Factory's SEC reports. In addition, please be advised that the financial results for the fiscal periods presented in this call do not necessarily indicate the results that may be expected for any future quarters or the upcoming fiscal year. To Rocky Mountain Chocolate Factory's knowledge, the information relayed in this conference call is correct as of the date of its transmission and the company does not undertake any obligation to update this information in the future. I would now like to turn the conference over to Franklin Crail, Chief Executive Officer. Please go ahead, sir.

[Franklin Crail:]

Thank you, operator. Good afternoon everyone and welcome to Rocky Mountain Chocolate Factory's second quarter of fiscal 2016 conference call. I’m Frank Crail, President of Rocky Mountain Chocolate Factory, and with me here today is Mr. Bryan Merryman, the company’s Chief Operating Officer. We are going to start the call this afternoon with Bryan giving you a summary of both our second quarter and six months operating results, and at the conclusion of his presentation we’ll be happy to answer any questions you may have. So at this point, I’ll turn the call over to Bryan.

[Bryan Merryman:]

Thanks Frank. I’d also like to welcome everyone today to our call. I’m going to start with operating results from the six months ended August 31, 2015, and then I’ll get into some detail on our second quarter of this year. For the six months, total revenues declined slightly from $19.8 million last year to $19.6 million this year. This was a result of increased factory sales more than offset by decreases in royalty and marketing fees, franchise fees, and retail sales. Factory sales increased 8% for the six months, primarily due to a 37.4% increase in purchases by customers outside our network of domestic franchise and licensed stores. This increase was partially offset by lower domestic RMCF’s stores in operation and a slight decrease is same store pounds purchased. Royalties in marketing fees decreased 5%. This was due to a decline of 9.7% in total franchise units and operations, the result of store closures in acquired yogurt franchise systems in line with expectations that poor performing stores would close. We also had fewer acquisitions in the first six months and store openings to offset the decline in units. System wide same store sales declined 2.9%. Franchise fees increased 87.1%. This was due to an international license fee for the province of Ontario, Canada, and was recorded in the current year with no international license fees recorded in the prior year. Retail sales declined 23.6%. This was a result of sale of three useful company-owned locations toward the end of last year -- towards the end of this August last year, and also we closed an underperforming U-Swirl company-owned location. We also sold a Rocky Mountain Chocolate Factory company-owned location in the current year. We also had a 1.5% decrease in company-owned same-store retail sales. Factory adjusted margins decreased 280 basis points. This was due to a change in customer and product mix resulting from the addition of new customers and products that are sold outside our system of franchise and license locations and higher commodity costs; specifically cocoa, nuts, and dairy have been near historical highs. Adjusted EBITDA was $4,298,000 versus $4,694,000 in the prior year. Non-GAAP adjusted net income was $1,730,000 versus $2,244,000. Non-GAAP adjusted diluted earnings per share decreased to $0.28 in the current year compared with $0.35 in the prior year. Net income was approximately $1,543,000 compared to $1,589,000. Fully diluted GAAP earnings per share were $0.25 in both the current and prior years. On September 12, the company paid its 49th consecutive quarterly cash dividend of $0.12 per share. During the first six months, we continued to repurchase shares buying approximately 221,000 shares or 3.7% of shares outstanding in the six month period ended August 31, 2015. During this first six months, we opened 19 new locations, including seven U-Swirl locations, six co-branded Cold Stone locations, three international locations, and three domestic Rocky Mountain Chocolate Factory franchise openings. For the second quarter, total revenues decreased 1.9% from $9.5 million to $9.3 million. This was a result of increased factory sales more than offset by decreases in royalty and marketing fees, franchise fees, and retail sales. Factory revenues increased 8.2%. This was driven by a 52.9% increase in shipments to customers outside of our system of franchise stores. Retail sales declined 18.3% in the quarter. This was the result of the sal of thee U-Swirl company-owned locations and the closure of an underperforming U-Swirl company-owned location. We also sold a Rocky Mountain Chocolate Factory location during the quarter, and same store sales at all company owned locations increased 0.4%. Royalty and marketing fees decreased 7.4%. This was due to a decline of 10.3% in the total franchise units in operations and was a result of store closures and acquired franchise systems in line with expectations. Franchise fees decreased 23.2%. Last year, we had franchise fees from the sale of three company operating locations with no comparable fees recognized in the current period. Factory margins decreased 240 basis points in the quarter from 32.7% to 30.3%. This was due to a change in customer and product mix resulting from the addition of new customers and products outside our system of franchise and licensed locations and higher commodity costs; specifically cocoa, nuts, and dairy have been near historical highs. Adjusted EBITDA was $2,201,000 for the quarter versus $2,551,000 in the prior year. Non-GAAP adjusted net income was $805,000 versus $1,320,000 in the prior year. Non-GAAP adjusted diluted earnings per share was $0.13 in the current year versus $0.20 in the prior year. Net income was approximately $780,000 in the current year versus $878,000 in the prior year. Fully diluted GAAP earnings per share was $0.13 versus $0.14 last year. During the quarter, we opened eight new locations including four U-Swirl locations, two co-branded Cold Stone locations, and two domestic Rocky Mountain Chocolate Factory franchise openings. We finished the quarter with approximately $5.9 million in cash and the current ratio of 1.9

[Franklin Crail:]

Thanks Bryan. All right, at this point, we’d be happy to answer any questions you may have.

[Operator:]

Thank you. [Operator Instructions]. And we have a question from Jason Cassidy, a Private Investor. Please go ahead.

[Jason Cassidy:]

Hi, good afternoon. I was wondering if you could give any update on your grocery or your other licensing initiatives.

[Bryan Merryman:]

Sure. Are you asking about licensing initiatives or are you asking about our sales into grocery from our product sales?

[Jason Cassidy:]

Well, I guess both.

[Bryan Merryman:]

Okay, as we talked about on our last conference call, we are currently in approximately 200 Target stores, and our program with King Soopers in City Market was expanded from 88 stores to 800 stores. It’s a corporate program, so we increased our number of locations that we are operating in with Kroger substantially, and those programs are both very, very early on, but we are getting good feedback and we expect that they will continue. On the licensing front, our cereal with Kellogg's continues to be sold in approximately 50% of Kellogg’s distribution, and it continues to go well.

[Jason Cassidy:]

Okay, thank you.

[Operator:]

[Operator Instructions]. The next question will come from Mike Schellinger of MicroCapClub. Please go ahead.

[Mike Schellinger:]

Yes, thank you for taking my questions. Regarding your subsidiary U-Swirl, I noted that they have debt with Rocky Mountain that’s coming due in January, and which is currently under default, and I was kind of wondering what options you or they might be pursuing to deal with that debt as it comes due?

[Bryan Merryman:]

Well that, as you said, the debt is in default and Rocky Mountain Chocolate has a variety of options based on the senior secured debt agreement between Rocky Mountain Chocolate Factory and U-Swirl. The options are listed in our press release, and we have the option to convert the debt, we have the option to actually foreclose on the security, which is all of the operating assets of U-Swirl. All the operating assets are in the subsidiary of U-Swirl called U-Swirl International. We have the right to foreclose on those assets if we choose, so we have a variety of options, but we’ve made not decision in terms of what we will ultimately do when the debt matures, so all the options are on the table just as we’ve disclosed in our press release.

[Mike Schellinger:]

Is outside financing for U-Swirl an option that could be pursued?

[Bryan Merryman:]

It’s difficult because Rocky is in a senior secured position, and the company is highly leveraged right now, so if you look at the leverage on the company, it’s about five times EBITDA right now. The trends in U-Swirl have improved, but there is still negative trends in the overhead industry, so finding someone willing to lend the money to take us out is going to be difficult, but it is an avenue that’s going to be pursued.

[Mike Schellinger:]

Okay, thank you very much.

[Operator:]

[Operator Instructions]. And we show no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

[Franklin Crail:]

Thank you, operator. Thank you again for attending our second quarter conference call, and we look forward to talking with you in January. Have a great day and thank you again. Good bye.

[Operator:]

To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 6