Rocky Mountain Chocolate Factory, Inc.
Q4 2017 Earnings Call Transcript

Published: 23 May 2017

[Operator:]

Hello and welcome to the Rocky Mountain Chocolate Factory Fourth Quarter and Fiscal Year End 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. Some of the statements made during this call maybe 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; the availability of qualified franchisers to support new stores; and 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 maybe 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, CEO. Mr. Crail?

[Franklin Crail:]

Thank you, operator. Good afternoon, everyone and welcome to Rocky Mountain Chocolate Factory’s fourth quarter of fiscal 2017 year end conference call. I am 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 the fourth quarter and fiscal 2017 year end operating results. And at the conclusion of his presentation, we will be happy to answer any questions that you may have. So at this time, I’d like to turn the call over to Bryan.

[Bryan Merryman:]

Thanks, Frank. I would also like to welcome everyone to today’s call and I will start with the fiscal year. Total revenues decreased 5.3% this year versus last year. Factory revenues decreased 3.5% due primarily to a 5.6% decrease in shipments to customers outside of our network of franchised stores and to a lesser extent, a 4.7% decrease in same-store pounds purchased by our franchisees and licensees and a decline of 3% in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation. Retail sales were down 11%. This was due to the sale of a certain company-owned location and the closure of an underperforming company-owned location. Same-store sales at all company-owned stores and cafés increased 0.5%. Royalty and marketing fees were down 5.3%. This was a 12.3% decrease in franchised units. Same-store sales at Rocky Mountain Chocolate Factory franchised stores increased 0.9%, while same-store sales at domestic U-Swirl franchised cafés declined 3%. Total same-store domestic franchise sales across all brands decreased 0.2%. Franchise fees decreased 40.8%. We had international license fees in the prior year of $263,000, with only $9,000 in the current year. Factory margins decreased 270 basis points. This was due to maintenance, equipment issues, increased cost of labor and overhead and it was slightly offset by a decrease in certain commodities. Excluding retail expenses, operating expenses decreased 8.9% on lower G&A expense and lower franchise costs. Adjusted EBITDA was $7,459,000 versus $8,223,000 last year. Net income for the year was $3,450,000 compared to $4,426,000 last year. Diluted earnings per share for the year was $0.58 compared to $0.73 in the prior year. During the year, we opened 40 stores, 8 Cold Stone Rocky Mountain Chocolate Factory co-branded stores, 4 domestic Rocky Mountain Chocolate Factory standalone stores, 22 international locations and 5 domestic U-Swirl locations and 1 international U-Swirl location. We finished the quarter with $5.8 million in cash, a current ratio of 1.9

[Franklin Crail:]

Thanks, Bryan. Okay, operator, at this time, we’d be happy to answer any questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Bryan London, a Private Investor. Please go ahead.

[Bryan London:]

Yes. I asked a couple of conference calls ago and I just wanted to follow-up and see if you had any more color on selling candy bars or the tote bags to the grocery stores?

[Bryan Merryman:]

Our sales – our wholesale sales to larger retail chains were down significantly this year over last year. I think we actually performed pretty well, but we weren’t able to keep a lot of the shelf space that was allocated to us and it was never a really large number in terms of revenues. But that business is down and I can tell you in the future, we will be really trying a more regional approach as opposed to a national approach with chains like Target. I think that we will more look to retail on more regional players to move our product and continue to grow with our existing partners outside of our stores.

[Bryan London:]

Okay. Yes, I had – I live in California. And I noticed the tote bag from Target for a little while. And I know this is a little anecdotal, I noticed Ghirardelli and Lindt with similar-sized tote bags were selling for $3 or $4 each and Rocky Mountain Chocolate Factory ones were selling for $6 each. And I was also wondering if you guys have any kind of leverage or control over the price or maybe if you guys are having – are you faced with slotting fees with – when you go to the grocery stores, just kind of curious about any kind of feedback in terms of that?

[Bryan Merryman:]

Well, we don’t. I mean, we certainly don’t have any pricing power. I mean, those kind of retailers dictate prices. Our cost structure and our product quality is such that we are not going to compete with Lindt and Ghirardelli and the other big players that have the lion’s share of shelf space. I think there’s the opportunity to get rotated in and be in for a period of time, and then you get replaced with another specialty chocolatier. And so you can be in and out of these retailers. But to get a permanent shelf space allocation, as you would say, requires slotting fees. We don’t do that, and we just don’t have the cost structure to compete on price.

[Bryan London:]

Correct. Okay, thank you.

[Operator:]

Our next question comes from David Luebke of Summit Brokerage. Please go ahead.

[David Luebke:]

Hi. My question, you had the machinery maintenance and equipment issues in the fourth quarter, would that be a one-time event or not?

[Bryan Merryman:]

Well, actually, it – we had issues in our factory around maintenance and equipment. And in the first quarter, we were way down with sales to a particular large customer, and those problems really plagued us all year. It was the worst in the fourth quarter. We made the decision that we were going to get the product out and we were going to get it to our customers no matter what. So we spent way more on labor and overhead than we typically do. We have seen a nice improvement in March and April, do not expect those fourth quarter trends to continue into next year and would expect pretty good margin improvement next year over this year. We have worked, I wouldn’t say through all of the issues but most of them. And we will be investing heavily in maintenance and equipment this year as well. And so I don’t foresee any of the kind of large issues that we have this year. I think we will have another year of investment, and the factory will, I think, be in tiptop shape by the end of this next fiscal year, and we have already seen an improvement.

[David Luebke:]

Okay. And as far as other expenses, costs, I see where dairy farmers can hardly give away milk, and the price of cocoa was – has dropped a lot, too. Is that affecting your cost structure yet or is that going to take a while?

[Bryan Merryman:]

Well, I mean, it has helped. Unfortunately, we have other costs that are growing, and that has certainly helped us. Unfortunately, cocoa butter hasn’t come down to the extent like the cocoa contract has and sugar and some nuts. So we are definitely benefiting from lower commodity costs, and we should see – again, we shouldn’t have the recurring issues that we have this last fiscal year. We will see margin improvements from that, and we should also see some margin improvement from commodities as well. It’s not going to be huge, but I do expect that we will have incrementally better margins than we did in fiscal 2016.

[David Luebke:]

Okay thanks. I have one more question, but I can wait.

[Bryan Merryman:]

No, you go ahead. You don’t have to get back in queue.

[David Luebke:]

Well, any outlook on the dividend increase, decrease, stay the same?

[Bryan Merryman:]

I think that if the company executes, it can grow this fiscal year. Again, I think we are off to a good start and put a couple of well-executed quarters behind it. I think we would be in a position to consider a dividend increase, but I think we are going to have to see execution in our business for a few more quarters before we do.

[David Luebke:]

Okay, thank you.

[Operator:]

[Operator Instructions] Our next question comes from Vincent Rudisill, a Private Investor. Please go ahead.

[Vincent Rudisill:]

Thank you. My question is looking longer term the company has kind of been plodding along for a number of years now. You just spoke about the dividend, and most quarters, you are covering the dividend as presumably that’s going to be maintained and possibly increased, as you mentioned. But other than paying dividends and occasionally repurchasing stock, what’s the long-term vision for the company? I guess stated another way, if we were to look back 5 years from now, what in particular should we as shareholders look to, to measure whether or not the goals for the company were achieved? Thank you.

[Bryan Merryman:]

I think longer term, we need to open more domestic Rocky Mountain Chocolate Factory franchised stores, and we have been evaluating a number of ways to help that happen. And I think that’s critical to our future. Over the last 5 years, we have not been opening as much domestically as we would like. We have had some international success, some ups and down, but had some success growing there. And so I think we need to accelerate our domestic franchise openings for sure. We need to continue to grow our sales outside of our system. This year was definitely a setback, and for the first time in a number of years, specialty market sales, as we term them, are down this year over last year. It’s the first time that that’s happened in the last 5 years. We would expect going forward that we would see year-over-year increases there. We would like to see, just like I said, an acceleration in domestic franchise openings, continued international growth. But we definitely need to get the company’s top line going, and we are doing everything we can to try to make that happen.

[Vincent Rudisill:]

Okay thank you. And I mean, are there any metrics that you are using to have long-term goals that are possibly related to compensation, bonuses and so forth? Do you use metrics of any sort other than just indicating you would like to open more franchised stores? Again, I am kind of trying to understand where you want to take the company longer term.

[Bryan Merryman:]

Well, we don’t – I mean, what we have disclosed is what we disclose. We don’t disclose anything else than what we have disclosed in our filings. And those are – you can find metrics on the company in our filings. But of course, we would like to grow our same-store sales. That’s important to us. We would like to see unit growth. We don’t talk about it super specifically. We don’t do – we don’t give guidance. And so I am not sure I can give you the detail that you are looking for in terms of what we disclose and what we are willing to disclose. But we would like to see the company expand internationally, would like to see it expand domestically. And we would like to continue to grow our sales profitably outside of our system. We would like to see rockymountainchocolatefactory.com play a larger role in sales going forward. Our franchise system had rmcf.com really until this last year. It was our first year with it. We saw large increases in sales there. We would like to continue to grow that and see it grow rapidly at least in terms of percentages. And so that’s as specific as I can get for you, and that’s my answer.

[Vincent Rudisill:]

Okay thank you.

[Operator:]

We show no further questions at this time. I would like to turn the conference back over to Mr. Crail for any closing remarks.

[Franklin Crail:]

Right. Thank you, operator. Thank you, everyone, for listening to our conference call this afternoon, and we look forward to talking to you at the end of our first quarter. Have a nice day. We will be talking with you soon. Thank you.

[Operator:]

To access the digital replay of this conference, you may dial 1877-344-7529 or 1412-3170088, beginning at approximately 6