Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) Q2 2023 Earnings Conference Call October 12, 2022 5:00 PM ET
Company Participants
Rob Sarlls – Director and Chief Executive Officer
Allen Arroyo – Chief Financial Officer
Conference Call Participants
Operator
Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the conference call to discuss the financial results for Rocky Mountain Chocolate Factory’s Fiscal Second Quarter of 2023 ended August 31 of 2022. At this time all participants will be in a listen-only mode. As a reminder, this conference is being recorded.
Joining us on the call today is the Company’s CEO, Mr. Rob Sarlls and CFO, Mr. Allen Arroyo.
Please be advised that the 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 or any forward-looking statements, which are made only as of the date of this call. Except as required by law the Company undertakes no obligation to revise or publicly release these results of any revision to any forward-looking statements.
Our presentation also includes certain non-GAAP financial measures, including adjusted EBITDA and supplemental measures of performance of our business, all non-GAAP measures have been reconciled to the most directly compared GAAP measures in accordance with the SEC rules. You will find reconciliation tables and other important information in the earnings release — earnings press release in Form 8-K we furnished to the SEC earlier today, which will be available on the Company’s Investor Relations section of its website approximately 24-hours after this call has ended.
And now, I would like turn the call over to the Company’s CEO, Mr. Rob Sarlls. Rob, please go ahead.
Rob Sarlls
Thank you, and good afternoon, everyone. Our fiscal second quarter marks my full first quarter as CEO of Rocky Mountain Chocolate Factory. Although we are very early in the process of affecting our business transformation, I’m proud of the work we have put in over the past several months to lay the groundwork. The macro environment continued to present its share of challenges this summer, with inflationary pressure on consumer wallets, and higher input costs resulting from supply chain bottlenecks.
However, I firmly believe that the strategic initiatives we are developing and implementing today will guide us through this period and into our next phase of growth and profitability. As with any business transformation, one of the most important drivers in effecting meaningful change is onboarding the right team. And I could proudly say we have worked diligently these past few months to strengthen our bench with highly seasoned executives.
In August, Allen Arroyo joined us as our Chief Financial Officer a 30-year veteran in the food, franchise restaurant and hospitality industries. Allen brings extensive and complementary experience in corporate finance, strategy and operations and expertise in banking and capital markets. He previously served as CFO for Blaze Pizza, which expanded from 10 to 225 stores in less than four years, as well as CFO of Mastro’s Restaurants and Due North Holdings.
Next, we hired Andrew Ford as our Vice President, Sales and Marketing. Andrew is an exceptionally passionate leader with over two decades of retail and consumer packaged goods experience. He brings with him a strong track record of building successful brands and businesses within the food and beverage industry. Andrew is responsible for leading our branded efforts across the entire business, as well as driving strategic initiatives within public relations, marketing communications, digital marketing and events.
In addition, we are looking to add and enhance resources in factory and franchise operations and expect to have new announcements shortly. The bottom line is that we will continue to bolster the team to enhance our growth and profitability.
As I mentioned on our last earnings call, transparency and communication will not only pertain to our investors, with all of our meaningful stakeholders and employees, including our franchisee network and business partners. Our goal with franchisees is to create a continuous, free flowing dialogue to learn what we can do to help them prosper in this challenging environment.
To that end last quarter, I pledged a visit with 50 franchisees in 50-weeks during my first year as CEO. I’m well on track to complete this goal. This past weekend, I visited with four franchisee owners representing six stores in the Denver area, and I will meet with a similar number of franchisees in Southern California by the end of this month. At which point, I will have achieved 40% of the 50 franchisee goal. As we push into our busiest season of the year, I will be more judicious with our franchisees’ time, but we’ll continue to make store visits. I look forward to sharing the excitement of our loyal customers coming in for their annual holiday purchases.
Further, in late September we hosted our biannual national franchisee convention in Indio, California. The three day event was the first since 2018, due to the COVID-19 pandemic. We brought together 117 store owners and managers, representing 77 franchise stores and nearly 40% of network sales, as well as three executives from our management team. The goal of this event was to learn firsthand what we can do as a company to help their businesses excel, as well as reaffirm our commitment to their success and growth.
Additionally, we brought in 21 of our critical Rocky Mountain partner suppliers to showcase new products and services, which will help store owners more effectively manage their sales, inventory and labor. To further demonstrate our commitment to the franchisee network, we recently announced our plan to establish at Rocky Mountain Chocolate Factory franchisee advisory council. This group of individuals will have input on the brand and design changes for stores and will also provide insights on operational strategy for franchisees.
We are communicating far more frequently internally as well. Organizations at our stage evolve rapidly, so it’s critical we share information and changes in real time, as well as the why for the changes we are making. What the benefits will be? And how we expect those changes to deliver value to all our stakeholders.
As mentioned earlier in the call, we faced some level of macroeconomic pressure during the quarter, in line with most other companies that have expressed challenges with labor and the supply chain. In particular, persistent labor shortages at our factory in Durango impacted productivity during the quarter. However, we are actively working to enhance our operational and supply chain efficiencies, as well as rollout new hiring and retention policies in Durango. We should have more updates here on our next quarterly call. We also contend with higher input costs during the quarter with elevated commodity prices across the board, as well as higher distribution and transportation costs.
That said, we’re not standing idly by while our overhead increases. During our fiscal first quarter, we implemented a price increase that helped offset some of these inflationary pressures. And we are also in the early stages of implementing various cost saving initiatives around procurement and transportation.
As previously noted, we are actively identifying opportunities throughout our organization for margin and profitability improvements. No stone is going to be left unturned, especially at the manufacturing level. Reality is that this business has been less than optimally managed for many years and we’re keenly focused on improving operational efficiencies top to bottom, including and most especially at our factory in Durango. There are plenty of opportunities to improve manufacturing processes and SOPs at our factory, which can lead to more efficient and sustainable volumes.
Additionally, we’ve gone too long without a full and critical review of the items made in Durango and we will be applying the 80/20 rule to make important and intelligent cuts to our product portfolio. For that end, we have identified 100s of SKUs that collectively account for less than 5% of total revenue. We plan to eliminate many of these SKUs going forward given their lack of significant contribution to the business.
Hopefully, we’ve made it clear that we are highly focused on improving margins and profitability at the company. We are evaluating all our assets, processes and products and rationalizing where it makes sense. As I mentioned, this business has been under optimized for far too long. And there are many addressable ways for us to improve margins and create better operating leverage even without a single dollar of incremental revenue. And experience shows that for businesses in our situation getting the model right before a huge volume push, ensures that each new dollar of revenue is more profitable, which is our ultimate goal both now and in the future.
We certainly intend to return to growth, as well as reflected by a renewed commitment to our franchisees, which we believe will lead to more consistent store growth, as well as better productivity at the store level. We recognize that our franchisee success will result in our success. And then, in turn, that will deliver the most value to our shareholders as we build this back up to deliver sustainable, profitable growth going forward.
I will now hand it over to our CFO, Allen Arroyo to discuss the financial highlights of the quarter. Allen?
Allen Arroyo
Thank you, Rob. Turning to our results. All variants commentary is on a one year-over-year basis unless otherwise noted. Total revenue was $7.5 million for the three months ended August 31, 2022, compared to $7.9 million.
Looking at the revenue drivers in the quarter, total factory sales for the second quarter of fiscal 2023 were $4.8 million, compared to $5.2 million for the year ago period, primarily due to lower shipments of product to certain non-Rocky Mountain customers, as well as lower sales to franchised and licensed retail stores.
Same-store sales at all domestic Rocky Mountain Chocolate Factory locations were down 3% during the three months ended August 31, 2022. And same-store sales at the Company’s domestic frozen yogurt stores increased 16%. Retail sales were relatively flat at approximately $0.8 million for the second quarter of fiscal 2023.
Royalty and marketing revenue was also relatively flat at approximately $1.9 million for the three months ended August 31, 2022. Franchise fee revenue increased to $54,000 for the three months ended August 31, 2022, compared to $47,000 in the year ago period.
Total gross profit for the second quarter of fiscal ‘23 was $1.5 million, compared to $1.9 million. Total gross margin was approximately 27.2%, compared to 31.5% in the year ago quarter. The decrease in margin was primarily driven by higher input costs associated with cocoa and packaging, as well as higher labor costs.
Operating loss was $2.2 million for the three months ended August 31, 2022, compared to operating income of $0.3 million in the year ago period. The decrease was primarily driven by higher costs associated with the contested solicitation of proxies, as well as a one-time severance payment.
Net loss in the quarter — second quarter of fiscal 2023 was $3.6 million or $0.59 per share, compared to net income of $0.2 million or $0.03 per share. Adjusted EBITDA for the quarter was $1 million, compared to $1.6 million in the year-ago quarter. The decrease was primarily driven by the aforementioned lower gross margin.
Now turning to the balance sheet, we ended the quarter with a cash balance of $5.4 million, compared to $7.6 million at the end of our last fiscal year, which was February 28, 2022. The decrease in our cash position was driven by $2 million increase in inventory as we stockpiled finished goods to prepare for the seasonally strong demand through the holidays. At August 31, 2022, the company remained debt free.
With that, I’d like to turn the call back over to Rob for closing remarks.
Rob Sarlls
Thanks, Allen. Our financial results for the quarter excluding one-time impacts were not unexpected given the comparison to the same quarter last fiscal year when high levels of consumer personal savings and pent up demand drove outsized results. Despite high inflation, high fuel costs and high commodity costs, our core customers continued to enjoy our products and our franchisees adjusted to the tough macro environment.
In less than six months, we’ve made excellent progress in building the foundation for our business transformation and future. We’ve made significant additions to the team with more to come; improved relations with our franchisee network and business partners and are in the early stages of implementing various strategic initiatives as highlighted throughout the call. With the core team mostly in place, we’re working towards finalizing our multi-year strategic plan with a critical focus on store growth, from new branding, new franchisee models and new store looks, improved factory throughput in Durango, sustainable and substantial cost and efficiency gains and building a more data-driven and digitally present business at every level. We expect to present our strategic plan towards the latter part of our fiscal year.
This team is ready to deliver on our goals as we enter this next phase of growth and profitability. We fully intend to maintain our status as America’s best chocolate and candy store and we are working diligently to enhance value creation for the company and our franchisees.
Thank you everyone for joining and have a great evening.
Operator
Thank you, ladies and gentlemen. This concludes today’s conference call. You may now disconnect your lines at this time and have a wonderful day. Thank you for your participation.
Question-and-Answer Session
Q –
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