Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) Q2 2024 Earnings Call Transcript

Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) Q2 2024 Earnings Call Transcript October 12, 2023

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today’s conference call to discuss Rocky Mountain Chocolate’s Financial Results for the Fiscal Second Quarter 2024. [Operator Instructions] 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 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 publicly update or revise any forward-looking statements. The company’s presentation also includes certain non-GAAP financial measures, including adjusted EBITDA and supplemental measures of performance of the business. All non-GAAP measures have been reconciled to the directly comparable GAAP measures in accordance with SEC rules, you will find reconciliation tables and other important information in the earnings release and Form 8-K furnished to the SEC earlier today which are currently available on the company’s page on the SEC’s website and will be available on the company’s Investor Relations section of its website with an 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 morning, everyone. During the quarter, we continued to remove impediments to the growth of the business through the execution of the 3 pillars of our Strategic Transformation Plan, do more with less simplify and focus our operations and amplify and elevate the Rocky Mountain Chocolate brand. These initiatives are expected to generate material revenue growth in the quarters ahead as we enter the holiday season. Specifically, the improvements we have made to our e-commerce business and the strong demand for products during the holidays are expected to lead to outsized results in the back half of our fiscal year. In fact, we expect the combination of e-commerce and Specialty Retail Sales. In our fiscal second half to exceed the sales from these channels for all of fiscal 2023.

To begin with, I’d like to highlight the progress we’ve made towards the implementation of our long-term strategy. First, to do more with less. During the quarter, we reduced our driver fleet by 33%, while maintaining consistent and ever-increasing pound volume shipped from our Durango facility. This is a direct result of our logistics optimization efforts which include increasing the use of third-party logistics partners to deliver products. We believe there is additional leverage to be realized in our existing operations. And we recently announced that supply chain industry veteran, Scott Ouellet has been appointed as Senior Vice President of Manufacturing and Supply Chain to help further this objective. Since joining as an adviser last October, Scott’s strong background in the confectionery industry has made him an invaluable asset to our leadership team.

And I look forward to continuing to work with him as we execute our plan. During the quarter, we increased our employee compensation structure at the Durango production facility to reduce turnover and help establish a long-term foundation for more efficient and ultimately higher throughput. This has helped us to manage attrition and enabled us to attract former Rocky Mountain Chocolate employees to return to the company which provides a quicker ramp for productivity compared to new hires. Despite the increase in base pay for our processing team, we experienced a 16% reduction in labor salaries per pound produced compared to our fiscal first quarter. Second, to simplify and focus the operations, we completed the implementation of our streamlined franchisee Royalty Structure and Volume Discount Program.

Which we recently showcased some of our highest performing franchisees during our 2023 Annual National Franchisee Convention in September. In addition to providing a royalty rate of as low as 4%, our franchisees, especially those with multiple units are now eligible to receive a volume-based discount of up to 5% of all purchases of products and supplies from Durango. We believe this empowers our top franchisees to deliver even more sales of Rocky Mountain Chocolate products, while also incentivizing franchisees to become multiunit operators. We’re making continued progress towards our 25% SKU reduction target as we work to sunset underperforming SKUs and increase production of our most popular items. In time, we anticipate the alignment of product offerings with consumer preference will result in higher sales, cost savings through reduced waste and lower storage expenses as well as an improved experience for our customers and better store economics for our franchisees.

Third, to Amplify and Elevate, we unveiled a transformational brand refresh during our 2023 Annual National Franchisee Convention which was our highest attended convention in the history of the company, a real reflection of our reenergized franchisee network. Our brand refresh provides a streamlined trade name and logo, building upon our rich history of bringing the Rocky Mountain Chocolate experience to customers for over 40 years. As I mentioned earlier, we made significant improvements to our e-commerce experience, including the removal of shipping fees at checkout. This has resulted in a more transparent online shopping experience leading to higher volumes. Since activating this benefit, we have experienced a tripling of transaction volume and a more than doubling of sales compared to the same couple of months last year.

In addition to the shipping fee removal, we have increased our coverage for 2-day delivery service with shipments commencing from third-party facilities in California to serve our customers throughout the Western region. By adding California, we can now reach over 90% of the U.S. population within 2 days, something we could not do cheaply or easily from Durango. These enhancements were made possible by the recently completed rollout of our partnership with a nationally renowned cold chain logistics company. We expect these initiatives will support our return to growth as we enter the all-important holiday season. To further Amplify and Elevate, we participated in our first investor conference in nearly a decade this past quarter, inaugurating our reengagement with the investment community under the new leadership team.

Our active participation in these events not only serve to reaffirm our commitment to proactive engagement with shareholders and prospective investors but also amplifies the reach of our message about the plans for the future of Rocky Mountain Chocolate. The improvements we’re making today are foundational to our 3-year to 5-year transformation plan. Our strategy implementation is yielding strong operational improvements and we can continue to expect these initiatives to result in short and long-term financial benefits. In Other news, I’d like to highlight a few additional developments from company-owned stores, our Durango production facility and network and logistics. We increased sales by 7% year-over-year at our Durango retail store for the quarter, driven by higher average revenue per customer transaction.

We celebrated the grand reopening of our Corpus Christi location in July which is now a company-owned store. This store exemplifies how our Rocky Mountain Chocolate store should be run, clean and well lit, fully stocked with fresh product, ample sampling and a passionate caring staff attending to our local customers. I was privileged to work with the team at that grand reopening. With the new management, sales for August were up 48% versus the prior year and has since remained well above 20%. Corpus Christi is a classic example of the impact store transformations can have on our underperforming locations and of the potential of generating substantial incremental sales from within our existing franchise network. We expect to see this trend continue, as we roll out updates of our storefronts nationwide as part of our brand refresh.

Excluding the planned exit of 2 wholesale customers during our prior fiscal year, second quarter sales from our Durango facility increased modestly, despite headwinds from record high temperatures over the summer which impacted consumer demand for chocolate and confectionery products. Likewise, the same-store is pound shipped across the domestic franchise and licensed locations. We’re also approximately unchanged compared to the prior year. And lastly, this fall, we partnered with a respected third-party co-packers to fulfill all our final consumer packaging needs, where final assembly of our box items will now take place. Labor has been a continuing challenge in Durango and we accelerated this planned move to handle not only this year’s base holiday volumes but also to remove any labor constraints as our future Durango production volumes increase.

This is crucial to the fulfillment of our strategic plan and necessary to handle higher volumes in the second half of this fiscal year and beyond. To summarize, we are working hard to implement our strategic transformation plan and our efforts are bearing fruit. We continue to position Rocky Mountain Chocolate for long-term growth and profitability and we’re building a strong foundation to execute our plan as we progress through the remainder of this fiscal year. I will now hand it over to our CFO, Allen Arroyo to discuss our fiscal second quarter financial highlights before returning for closing remarks. Allen?

Allen Arroyo: Thank you, Rob. Please note that all financial results discussed today are for continuing operations. While all variance commentary is on a year-over-year basis, unless otherwise stated. Now, moving on to our results. Total revenue of $6.6 million was unchanged from the $6.6 million in the prior year. We benefited from the reopening of the Corpus Christi store in July which mostly offset lower shipments of products related to the planned exit of two out-of-network customers earlier this year. Looking further at our sales. Total product sales were $4.7 million compared to $4.8 million. Royalty and marketing revenue increased to $1.5 million compared to $1.4 million. Retail sales at our company-operated stores increased 17% to $309,000 compared to $263,000.

This increase was partially due to a store closure in the prior year and the reopening of the Corpus Christi store. Same-store sales for our company-owned store in Durango were up 7% year-over-year. Same-store sales at all domestic Rocky Mountain Chocolate locations increased 2.3% during the quarter compared to the prior year. And franchise fee revenue was $41,000 compared to $45,000. Moving on, total product and retail gross profit was $0.4 million compared to $1.2 million with a gross profit margin of 7.6% compared to 23.3%. The decrease was primarily due to lower production volume and higher costs related to wages and inflation as we resolved a labor shortage. This was partially offset by higher retail gross margins primarily attributable to cost, better cost management following the creation of the flagship operations manager role in our Durango store.

Total operating expenses were $7.6 million compared to $9 million. The improvement was primarily due to lower professional fees associated with the contested solicitation of proxies in the prior year, as well as lower costs related to employee severance and relocations. This was partially offset by increased franchise and personnel costs. Net loss from continuing operations improved 68% to $1 million or $0.16 per share compared to a net loss from continuing operations of $3.2 million or $0.51 per share. Adjusted EBITDA loss was $600,000 compared to adjusted EBITDA of $700,000. The year-ago period benefited from a $2.8 million add-back related to professional fees associated with the contested solicitation of proxies as well as costs associated with employee severance and relocation.

Turning to our balance sheet; we ended the second quarter with a cash balance of $4 million compared to $4.7 million at the end of fiscal 2023. The decrease in our cash position was primarily attributable to purchases of property and equipment, partially offset by inventory reductions. We ended the second quarter with total inventories of $3.2 million compared to $3.6 million at year-end fiscal 2023. And as of August 31, 2023, the company remains debt free. With that, I’d like to turn the call back over to Rob for closing remarks.

Rob Sarlls: Thanks, Allen. We remain laser-focused on executing our strategic transformation plan in an orderly and methodical sequence, designed to create sustainable value for all of our stakeholders over the long run. While some short-term pain was necessary to solidify the foundation for the future of our business, we are confident in our plan and believe we have laid solid groundwork to build a great company into the future. We look forward to providing updates as we continue on our journey and fortify Rocky Mountain Chocolate’s position as America’s premier chocolate ear. This concludes our prepared remarks. We will be glad to answer any questions now. Operator, back to you.

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Q&A Session

Operator: [Operator Instructions] Our first question coming from the line of Roger Lipton from Lipton Financial Services.

Roger Lipton: Good, just a couple of quick questions. The refresh that helped Corpus Christi so much, what did you spend? And what are you asking our franchisees to spend in terms of — you’re encouraging them to refresh their stores?

Rob Sarlls: Yes. Thanks, Roger, for the question. That’s really — it’s a 2-part question. Corpus Christi still has the “old look” although it’s a relatively newer-looking store than most of our network. What we refresh there is how that run a good store and simply running it correctly with everything that I just went through. And you know from your experience, a well-run store with a great store experience which is what we deliver and offer and seek to do consistently across the network. That’s where we’re going. So we didn’t have to spend a whole lot in Corpus. I mean it was maybe less than $20,000. As to the store refresh, you’re talking about. That is a bigger deal. That will happen with our network over the next 12 to 24 months.

We’re in the process of engaging the firm that’s going to help us with that right now and we’re going to start with our Durango and Corpus Christi stores. And then spread it out sooner thereafter. And that’s going to be a meaningful lift for our franchisees. It will be high 5 figures to low 6 figures.

Roger Lipton: And what, there are a lot of moving parts here, obviously, in terms of, across your operations. The factors that so substantially affected your shipments in the most recent quarter, to what extent do you think over the next 6 months which is a large part of your year, those factors can be alleviated?

Rob Sarlls: Well, a lot of that groundwork was laid in, in the last 2 quarters, primarily with things that are logistical barriers to greater success. So I want to remind all of our shareholders, we used to send trucks from Durango to every single store. We just sent a truck from Durango every single co-brand store. All of those things have now been changed where the super majority of our full chocolate shops and nearly all of our non-full chocolate shops are having the final miles of delivery of product done to them by somebody not us. And that’s part of the simplify and focus effort of our pillars which is we ran a full trucking company out of Durango and that’s not our core expertise. And so if there’s benefits to having that in terms of management focus and ultimately benefits to the franchisees in getting product fresher and done more quickly overall.

In terms of E-com, there were fundamental limits to how many packages could leave Durango in a single day. And as I noted in my remarks, Gift2day [ph] was prohibitive or impossible from Durango. All those barriers are now gone. So our E-com can benefit from this. Our delivery to stores now and there’s other enhancements coming down the line to make it easier for stores to buy more pounds. So we’re looking to realign even the structure of how they order. All of those things are enabling them to ramp up and sell more.

Roger Lipton: Okay. But e-commerce, you talked about the combination of e-commerce and specialty retail sales, obviously a lot higher in the second half. How much is that of your total revenue base?

Rob Sarlls: Well, if you look at fiscal year ’23, what we called omnichannel in the 10-K was about 12%, 13% of total sales. And so we’re looking for that number, the nominal number to be significantly higher in fiscal ’24 and the super majority of that, of course, all hits in the back 6 months.

Operator: Our next question coming from the line of Peter Sidoti with Siodti & Company.

Peter Sidoti: Two quick questions. One Allen, can you speak to, so your cash on hand, your cash burn and any need for future financing at this point?

Allen Arroyo: So we started the year in good, great cash position. We have made significant investments in equipment, as we’ve mentioned and obviously, the first 6 months has not been cash accumulative. However, we believe with the cash on hand and with the cash coming in, in the last 6 months of the year, we still feel strongly about our cash position. We did recently renew our line of credit with Wells Fargo. And so we do have a revolver that we could tap into temporarily if we had to. So again, there’s no again, there’s no forecasted needs for long-term financing. However, if there is some necessity, we could go into the line of credit. But we feel very confident about our cash balance. Again, with a strong position we came in the year and with the back half of the year, the cash we’re going to generate we should end the year in great shape.

Rob Sarlls: Also, our equipment is unencumbered and there’s a possibility we’ll look to put on some equipped financing. We’re exploring that right now.

Allen Arroyo: That is correct.

Peter Sidoti: Rob, you came on board, you had [indiscernible] to get done. Can you give me a sense how far along you feel you’re in the process? Are you in the first inning, the third inning, the fifth inning? How do you feel about it in terms of where you are at this point?

Rob Sarlls: Well, it’s funny, Peter. The winning scorecard changes once you’re in and that’s true with all situations. Like this. I don’t know, I’m feeling sort of late second to mid-three [ph], in terms of the total transformation. I think we’ve done a lot of the gruntwork, still more to go. I mean, really, the brand refresh is a huge thing for our network and a huge thing to present ourselves to consumers that have not encountered Rocky Mountain Chocolate before. We’re insanely excited about the store refresh and with the new brand and new packaging come on, that gives us a lot of opportunity in specialty retail that we’re bringing something to a buyer that’s going to be really exciting. So we get to really hit the afterburners really come next year.

Peter Sidoti: Okay. Well, you must be doing something right to have Roger Lipton on the call. So, thank you very much.

Operator: And I’m showing no further questions in the queue at this time. 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.

Allen Arroyo: Thank you.