Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) Q3 2023 Earnings Call Transcript January 12, 2023
Operator: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today’s Conference Call to discuss the Financial Results for Rocky Mountain Chocolate Factory’s Fiscal Third Quarter Ended November 30, 2022. 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 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 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 revise or publicly release the results of any revision to any forward-looking statements. Our presentation also includes certain non-GAAP financial measures, including adjusted EBITDA as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You will find reconciliation tables and other important information in the earnings press release and Form 8-K we furnished to the SEC earlier today, which will be available on the company’s Investor Relations section of its website within 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.
Photo by Henry Becerra on Unsplash
Rob Sarlls: Well, thank you, and good afternoon, everyone. Our fiscal third quarter was highlighted by our strongest third quarter of sales since 2017 as well as our strongest third quarter of adjusted EBITDA since 2020. The groundwork our team has put in place since I arrived in May of last year has begun to generate strong momentum as evidenced in part by our flagship Durango store generating record sales in the fiscal third quarter, up 34% compared to the prior year. Although we are still early in the development and deployment of our strategic transformation, these initial wins are very encouraging. It may tell us that we’re on the right path. The combination of our transformation plan and extensive dialogue with our franchisees will help us continue to foster growth at both the manufacturing and retail level.
As we mentioned on our last earnings call, any business transformation starts with onboarding the right team. Earlier this fiscal year, we brought on a new Chief Financial Officer and Vice President, Sales and Marketing. And since our last conference call, we’ve made several key additional hires. In October, we announced the appointment of Scott Ouellet as our Senior Supply Chain Advisor. Scott brings more than two decades of supply chain and strategic planning experience to our team and over 10 years of which were with Hershey. His strong track record of identifying operating improvements and processes that expand margins and increase quality, flexibility and efficiency will serve us well and enable us to handle greater volumes in the future.
Just this last week, we hired two additional operations experts who are in the process of relocating to Durango to enhance our business. For the first time ever, Rocky Mountain Chocolate Factory will have a resident, trained R&D expert who will help us not only with product formulation and new product development, but also with quality and regulatory compliance. Additionally, we hired a Senior Director of Manufacturing with extensive operational efficiency expertise with the financial background as a major plus. Both these new hires are critical to the first phase of our strategic plan, which includes the improvement of our operations in the factory and the enhancement of our end-to-end supply chain. Separately, in November, we announced the appointment of Kelsey Smith as Flagship Operations Manager to oversee the conversion of our Durango, Colorado store into our world-class operation and a reinvigorated beacon for the Durango community.
She’s been working closely with various colleagues representing all aspects of the business, including operations, marketing, business development, franchise support and training. We’re excited to see the growth she will bring to our hometown of Durango in the year ahead and the potential scope of impact it could have throughout our network. Thinking about our franchise network. When I joined the company last May, I pledged to visit 50 franchisees in 50 weeks during my first year as CEO. I’m proud to say I’m well on the way to accomplishing my goal, having visited 27 stores so far. I can say confidently that our network feels more connected and energized with our team than they have in years. And the dialogue and feedback I have received during my business has already led to small but meaningful improvements.
A small example of this is when I learned in our stores we’re only getting one delivery by the company truck in December, one of our busiest months of the year. We added a second delivery by the company truck last month and store feedback on easing replenishment during this crucial selling season was well received. I look forward to completing the 50 visits in the spring, where I will go coast to coast visiting all our great airport locations. Furthering our commitment to our franchisee network, in December, we officially established our Franchisee Advisory Council and recently held our first meeting just this past Monday in Arizona. The council was formed to foster timely, consistent and transparent dialogue among franchisees at Rocky Mountain Chocolate Factory, which is critically important given the transformation underway.
Our goal with the council is to more fully align Durango with the franchisee network to collaborate on the changes needed for gradual, mutual success and a superior experience for our customers. During the meeting this week, we previewed the working aspects of our developing strategic plan, which were well received. The council also agreed to meet every other month to weigh in and advise the company on significant transformation changes coming down the pipe over the next 12 to 24 months. We will be holding our next convention and the first annual convention in decades in San Antonio in late September. Planning is already underway on making this highly impactful and very well attended and the Franchisee Advisory Council is partnering with us on this.
While our financial results this quarter were a strong step in the right direction, we’re still facing some level of macroeconomic pressure resulting in labor and supply chain challenges, albeit not as bad as the pressure we faced earlier in calendar 2022. And as I mentioned in our last conference call, we were dealing with labor shortages at our Durango manufacturing facility, which impacted productivity. During our fiscal third quarter, however, we rolled out several new hiring and retention policies at the factory, which included enhanced new hire retention bonuses, resulting in a 150% increase in applications versus the third quarter last year. We have an active strategic planning committee wholly focused on rebuilding our culture, which we believe will improve the attractiveness to new potential hires while also improving retention.
Outside of Durango, I’m happy to announce that we increased pay for our truck drivers, bringing them up to market to balance out the impact that inflation has had on so many Americans. Keeping our fleet of drivers happy has allowed us to deliver products on time and ensure an efficient cadence for our manufacturing facility to each of our franchisee stores. The benefit of this improved productivity far outweighs the cost of raising these truck driver wages. With respect to the supply chain, subsequent to the quarter, we met with our largest chocolate supplier to discuss opportunities for synergies and other process enhancements that can help us both reduce costs. They will be critical to our future growth, not only in terms of pound volume but in collaborating with our team and new R&D Head on innovation.
It’s worth noting, while we raised prices early in this fiscal year, which helped to offset inflationary cost pressure, our volumes have held up relatively well and are flat to slightly higher compared to the year ago quarter, which I believe speaks to the quality of our products and the loyalty of our customers. As another step in our business transformation, we have been actively identifying opportunities throughout the organization for margin and profitability improvements. Specifically, we’ve been working through an SKU rationalization to reduce our broad portfolio by at least 20%, removing products that account for an insignificant amount of revenue. Moving forward, our new R&D team will work to replace some of these SKUs with new innovative products throughout calendar 2023.
We look forward to bringing exciting new products to the menu for our customers. While the transformation of the business is still in its infancy, a very solid third quarter and recent holiday season has proved us not only that we are on the right track with our plan, but that our commitment to extensive dialogue with the franchisee network and other stakeholders have begun to bear fruit. We look forward to sharing the exciting results from the holiday season on our next call as well as the full details of our new strategic transformation plan. I will now hand it over to our CFO, Allen Arroyo to discuss the financial highlights of the quarter. Allen?
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Allen Arroyo: Thank you, Rob. Jumping right into our financial results, please note that all variants commentary is on a year-over-year basis, unless stated otherwise. Total revenue increased 11% to $9.5 million for the three months ended November 30, 2022, compared to $8.5 million. Breaking down our revenue, total factory sales for the third quarter increased 14% to $7.3 million compared to $6.4 million, primarily due to higher shipments of product to our franchised and licensed retail stores as well as higher sales to customers outside of the Rocky Mountain franchisee network. Same-store sales at all domestic Rocky Mountain Chocolate Factory locations increased 3% during the three months ended November 30, 2022, and same-store sales at the company’s domestic frozen yogurt cafes increased 14%.
Retail sales increased 7% to approximately $679,000 compared to $636,000 in the fiscal third quarter of ’23. Royalty and marketing revenue for the quarter was relatively flat at approximately $1.5 million. Franchise fee revenue was also relatively flat at approximately $60,000 compared to a year ago period. Total gross profit for the fiscal third quarter increased 17% to $2.1 million compared to $1.8 million. Total gross margin increased 50 basis points to 26.3% compared to 25.8% in the year ago period — the year ago quarter, with the increase — primarily due to increased pricing, which was partially offset by higher labor, material and inventory costs. Looking at our operating expenses for the quarter. Total OpEx decreased to $9.7 million compared to $10.5 million in the year ago period.
Operating loss was reduced to $216,000 for the three months ended November 30, 2022 compared to a loss of $2 million in the year ago period. The decrease in OpEx and operating loss was primarily driven by lower costs associated with the contested solicitation of proxies as well as increased operational efficiencies. Net loss in the third — in the fiscal third quarter improved significantly to $212,000 or $0.03 per share compared to a net loss of $1.5 million or $0.24 per share. Our adjusted EBITDA increased nearly 30% to $1.3 million for the three months ended November 30, 2022, compared to $1 million in the year ago quarter. Now turning to the balance sheet. We ended the quarter with a cash balance of $3.2 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 an increase in inventory as we stockpiled finished goods to prepare for the seasonally strong demand in the holidays. As of November 30, 2022, the company continues to remain debt free. With that, I’ll turn the call back over to Rob.
Rob Sarlls: Thanks, Allen. Overall, we were pleased with our results this quarter. We’ve made great progress in improving company culture and round out our executive team, and we are nearly complete with the development of our strategic plan. We already have a few early wins under our belts, which is great to see and validates that we are on the right path. I firmly believe that the best phase for RMCF are ahead as we improve value to our customers, our franchisees, our employees and shareholders. This concludes our prepared remarks, and we will now open it up for questions from those participating in the call. Operator, back to you.
Operator:
Operator: Thank you, ladies and gentlemen. This concludes today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
