Q2 2018 Rocky Mountain Chocolate Factory Inc Earnings Call
Oct 05, 2017 AM EDT
RMCF.OQ - Rocky Mountain Chocolate Factory Inc
Q2 2018 Rocky Mountain Chocolate Factory Inc Earnings Call
Oct 05, 2017 / 08:15PM GMT
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Corporate Participants
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* Bryan J. Merryman
Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director
* Franklin E. Crail
Rocky Mountain Chocolate Factory, Inc. - Co-Founder, Chairman of the Board, CEO & President
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Conference Call Participants
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* Timothy Colin Call
The Capital Management Corporation - President, CIO, and Chairman of the Investment Policy Group
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Presentation
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Operator [1]
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Hello, everyone, and welcome to Rocky Mountain Chocolate Factory's Second Quarter Operating Results Conference Call. (Operator Instructions) Please note today's event is being recorded.
The statements made on this conference call, which are not historical fact, are forward-looking statements based upon the company's current plan and strategies and reflect the company's current assessment of the risks and uncertainties related to its business, including such things as product demand and market acceptance, the economic and business environment and the impact of government pressures, currency risks, capacity, efficiency and supply constraints and other risks detailed in the company's press releases, shareholder communication and Securities and Exchange Commission filings. For additional information, the company urges you to consider reviewing its 10-Q and 10-K SEC filings.
At this time, I'd like to turn the conference call over to Mr. Frank Crail, President. Sir, please go ahead.
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Franklin E. Crail, Rocky Mountain Chocolate Factory, Inc. - Co-Founder, Chairman of the Board, CEO & President [2]
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Thank you, operator. Good afternoon, everyone, and welcome to Rocky Mountain Chocolate Factory Second Quarter of Fiscal 2018 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 Financial Officer.
We're going to start the call today with Bryan providing you a summary of both our second quarter and first 6 months of fiscal 2018 operating results. At the conclusion of this presentation, we'll be happy to answer any questions that you may have.
So at this point, I'd like to turn the call over to Bryan.
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director [3]
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Thanks, Frank. I would also like to thank everyone that attended today's call.
I'll start with our year-to-date results and then cover the second quarter. For the first half of fiscal 2018, overall revenues decreased 2%, driven by decreases in royalty fees and retail sales, mostly offset by increases in factory sales and franchise fees. Factory revenues increased 3.1% due primarily to a 22% increase in shipments to customers outside our network to franchise stores, partially offset by 1.2% decrease in same-store pounds purchased by franchisees and licensees and a decline of 2.6% in the average number of domestic Rocky Mountain Chocolate Factory franchise stores and operation. Retail sales decreased 15.4% due to the sale of certain company-owned locations and the closure of an underperforming company-owned location. Same-store sales at all company-owned cafés and stores decreased 5%.
Royalty and marketing fees decreased 12.3%. This was driven primarily by 15.9% decrease in domestic franchise units. Same-store sales at domestic Rocky Mountain Chocolate Factory franchise stores decreased 2.1%. Same-store sales at domestic U-Swirl franchise cafés declined 4.8%. Total same-store domestic franchise sales across all brands decreased 3.2%. Franchise fees increased 165.9%. We had international license fees in the current quarter with no international licensees in the prior year. Factory margins increased 90 basis points to 26.6% from 25.7%. This was driven primarily by decrease in the cost of certain commodities.
Excluding retail expenses, operating expenses decreased 4.8% on lower G&A expense and lower sales and marketing costs. Adjusted EBITDA was $3,762,000 versus $3,755,000. Net income was $1,742,000 compared to $1,707,000. Diluted earnings per share came in at $0.29 in the current year compared to $0.28 in the prior year. During the first 6 months, we opened 5 stores, 3 Cold Stone Rocky Mountain co-branded stores, one domestic Rocky Mountain Chocolate Factory franchise opening and one international location. We finished the quarter with approximately $5.7 million in cash, a current ratio of 1.9:1. And on September 15, 2017, the company paid its 57th consecutive quarterly cash dividends to shareholders in the amount of $0.12 per share. We also executed license agreements covering the countries of Vietnam, the Republic of Panama and the State of Qatar.
In the second quarter, total revenues decreased 3.9%. Factory revenues decreased 1.9%, primarily due to a 4.2% decrease in same-store pounds purchased by franchisees and licensees, a decrease of 2.1% in the average number of domestic Rocky Mountain Chocolate Factory franchise stores in operation, partially offset by 39.5% increase in shipments to customers outside our network of franchise stores. Retail sales decreased 11.9% in the quarter, the result of the sale and closure of certain company-owned stores and cafés. Same-store sales at company-owned stores and cafés decreased 4.1%.
Royalty and marketing fees decreased 8.8%. This was due to a 15.8% decrease in domestic franchise units in operation. Same-store sales at domestic Rocky Mountain Chocolate Factory franchise stores decreased 3% in the quarter. Same-store sales at domestic U-Swirl franchise cafés decreased 1.5%. Total same-store domestic franchise sales across all brands decreased 2.4%. For the quarter, franchise fees increased 229%. This was the result of the international license fee associated with the State of Qatar. Franchise margins increased 130 basis points in the quarter to 29.1% versus 27.8% last year. Again, this is due to the decrease in cost of certain commodities.
Excluding retail expenses, operating expenses decreased 2.2% in the quarter. Adjusted EBITDA was $2,014,000 versus $2,019,000. Net income came in at $928,000 versus $975,000 last year. Diluted earnings per share were $0.16 in the current quarter and in the prior year quarter. We opened 5 stores during the 3 months ended in August, 3 Cold Stone co-branded stores, one domestic Rocky Mountain Chocolate Factory store and one international store. We finished the quarter again with $5.7 million in cash, a current ratio of 1.9:1. And as I said earlier, we paid, on September 15, the company's 57th consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share.
Those are my prepared remarks. With that, I'll turn it back over to Frank.
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Operator [4]
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Mr. Crail, is it possible your phone is on mute?
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Franklin E. Crail, Rocky Mountain Chocolate Factory, Inc. - Co-Founder, Chairman of the Board, CEO & President [5]
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Yes, it was. I'm sorry. Thanks, Bryan. And at this time, we'd be happy to answer any questions you might have.
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Questions and Answers
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Operator [1]
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(Operator Instructions) And our first question today comes from Tim Call from Capital Management Corporation.
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Timothy Colin Call, The Capital Management Corporation - President, CIO, and Chairman of the Investment Policy Group [2]
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I was wondering where you see future international growth and if you could quantify any of that opportunity.
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director [3]
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Thanks, Tim. I really can't quantify the future opportunity. We're working in a number of countries, including China. But I really don't want to speculate or create expectations as it relates to international expansion. We have a very good operation in Canada and South Korea. We've sold some smaller countries, and we'll see how those go. It's going well in the Philippines. But I really don't want to create any kind of expectations in the future as it relates to international operations.
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Timothy Colin Call, The Capital Management Corporation - President, CIO, and Chairman of the Investment Policy Group [4]
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With your huge operating cash flow, you've spent some of that -- some additional amounts to -- in reinvesting in your company, manufacturing and mail order operations website. What's the time line of that spending? When will that spending decline? And when will we see the benefits from that spending? And where should we -- not knowing when should we see it, but where should we see it?
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director [5]
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I hope that we see the benefits of last year's spending in our factory in the back half of this year. The first half of this year went as expected. We saw some margin improvements. I think we saw some efficiency improvements. We've built some inventory more so in the past for the back half of the year and really expect to see some margin expansion in the next 6 months. So I think we'll see that. Most of the capital that we have allocated to the factory will be spent in the last 6 months of the year, and most of what was spent in the first part of the year were maintenance CapEx. And so hopefully, we'll see the benefits of the last 2 years of spending in the factory, in margin improvement next fiscal year. In terms of mail order and the efforts we put there, really not mail order, Internet, and we are seeing good percentages, up very, very small numbers right now. Most of -- over 50% of our sales from our Internet site, rmcf.com, happened in the month of December. We're going to spend some advertising in this year that we haven't done in the past, and we'll see if we can significantly increase our sales. We have big increases in it now, but the numbers are so small. It's really not worth talking about. So we, hopefully, will see that. And I don't know if I answered all of the -- all of your questions. If I didn't, go ahead and ask it again.
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Timothy Colin Call, The Capital Management Corporation - President, CIO, and Chairman of the Investment Policy Group [6]
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You did.
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Operator [7]
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(Operator Instructions) We do have a follow-up question from Tim Call from Capital Management Corporation.
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Timothy Colin Call, The Capital Management Corporation - President, CIO, and Chairman of the Investment Policy Group [8]
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As your cash flow, your free cash flow's significant and will grow, not only with your operations, but it's going to grow due to this increase of spending in your operations and Internet and so forth, that's going to be over soon. So as that spending subsides, your free cash flow will grow even more. Given that, should there be an expectation that over the next 2 years that you increase the dividend or have more significant share buybacks to benefit your loyal long-term shareholders?
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director [9]
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That's great question, Tim. Over the next 2 years, we'll completely repack -- repay all of our long-term debt. Our debt service is right about $1.4 million annually. We've been investing in the factory. We invested heavily last year, and in the back half of the year, we'll invested heavily. We do have some initiatives that we are working on that are very preliminary that could use free cash flow. And -- but having said that, with the debt service going away, there's -- obviously, that could be a source to significantly increase the dividend as well as the factory getting back to mainly maintenance CapEx. So both of those areas could produce some free cash flow that we could use to increase the dividend. So I think that it is possible over the next 2 years. And if there was also -- if we have some tax reform and our rate was lower, then that could produce some significant cash flow too. And all of that could be used for a variety of uses, to hopefully increase revenues, increase the dividend as well. So yes, there's some positive events that we hope materialize, and that's -- your question is exactly right.
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Timothy Colin Call, The Capital Management Corporation - President, CIO, and Chairman of the Investment Policy Group [10]
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And so there's a possibility of no debt in 2 years and so interest expense might fall by 100% over the next 2 years.
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director [11]
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Don't -- if we started to use the credit line, for instance, maybe it wouldn't be 0. But we would definitely -- the interest expense we're incurring now would go to 0.
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Operator [12]
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(Operator Instructions) Our next question comes from [Jason Cassidy].
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Unidentified Analyst, [13]
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I was wondering if there was any update to the litigation matter. I believe in the call last quarter, you had said you thought it would be over or at least have an update by the end of September.
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director [14]
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The company won the litigation and summary judgment. The claims were completely dismissed, and we expect no activity as it relates to those matters in the future.
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Operator [15]
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And ladies and gentlemen, at this time and showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.
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Franklin E. Crail, Rocky Mountain Chocolate Factory, Inc. - Co-Founder, Chairman of the Board, CEO & President [16]
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Thank you, operator. Again, thank you very much for listening to our Second Quarter Conference Call. We look forward to talking with you and giving you an update in 3 months.
Have a great day, and thanks again. Bye-bye.
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Operator [17]
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And ladies and gentlemen, to access the digital replay of this conference, you may dial 1 (877) 344-7529 or 1 (412) 317-0088 beginning at 5:30 Eastern Time today. You'll be prompted to enter a conference number, which will be 10112572. Please record your name and company when joining.
Today's conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.
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