Q4 2023 Rocky Mountain Chocolate Factory Inc. Earnings Call
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Okay.
Good morning, ladies and gentlemen, thank you for standing by welcome to today's conference call to discuss the Rocky Mountain Chocolate Factory's financial results and new strategic transformation plan. At this time all participants are in a listen only mode. As a reminder, this conference is being recorded joining us on the call today.
The company's CEO , Rob Snarled, and CFO Allen Arroyo. Please be advised this conference call will contain statements that are not considered forward looking statements under the private Securities Litigation Reform Act of 1995.
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 those 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.
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.
The company's presentation also includes certain non-GAAP financial measures, including adjusted EBITDA as supplemental measures of performance of the business.
All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with S. E C rules.
You'll find reconciliation tables and other important information in the earnings press release and form 8-K furnished to the S. E. C 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 CEO .
Oh, Rob styles, Rob. Please go ahead.
Thank you and good morning, everyone I'm speaking with you in the presence of our entire leadership team in Chicago.
As we are all attending the suites of snacks trade show.
I'm excited to kick off today's call by introducing our strategic transformation plan to revitalize growth and profitability and Rocky Mountain Chocolate factory.
We aim to position our company as Americas preferred premium chocolate tier.
First class manufacturing and Omnichannel retail.
Since we assembled this new leadership team in late 2022.
We have spent significant time meeting with countless stakeholders across our business.
An important objective in our discovery process is determining the key drivers of our businesses underperformance over the better part of the past decade.
No secret that our struggles have been company specific best captured by the consistent growth of our industry has generated over the past seven years compared to our chocolate factory sales being down 11%.
Over the same timeframe the company fell behind its peers and lost market share allow me to share what led to the decline.
First a lack of manufacturing discipline contributed to elevated operating expense levels and compressed margins made more challenging by lower pound volume.
Franchise stores were underinvested and increasingly dated.
So filtered footprint shrunk meaningfully.
The company's focus drifted away from being customer and franchisee centric.
The company made too many investments that straight away from core chocolate manufacturing brand marketing franchising and brick and mortar retail.
Company ultimately lost its focus on what truly matters.
For the company to be better positioned to benefit from and capture market share in a highly fragmented U S. Chocolate confectionery market a complete transformation is required.
Formation that both brings rocky mountain chocolate back to its roots.
While evolving to the needs and preferences of today's consumer.
In order to develop and execute this plan the board of directors and leadership team.
Been near fully overhauled this new group of highly seasoned executives brings decades of experience in consumer packaged goods franchising branding marketing retail and most importantly, corporate resurrection.
We've worked together over the past year to change our company culture and develop a plan to transform our business over the next three to five years.
Going through that process. This group leads me excited and optimistic that we can continue to implement the meaningful changes required to take our company to new and exciting levels of growth and profitability.
The three part plan. We have developed is designed to streamline end to end operations and exit noncore businesses.
I like the in store experience revamp and expand our digital presence and elevate the Rocky Mountain Chocolate factory brand.
To achieve these outcomes, we need to focus on and win in three key areas.
First we need to do them.
Over the 18 months, our team expects to generate $1 2 million.
Recurring annualized cost savings in the areas of warehousing and transportation.
Manufacturing and process improvement.
In terms of warehousing.
You saw in this morning's press release.
<unk> begun to make progress we wrote off nearly 600000 and obsolete inventory during our fiscal fourth quarter to help us manage inventory levels more effectively going forward.
With appropriate inventory levels, we are shedding now unnecessary third party storage locations, both in Durango and in a nearby states.
From a transportation standpoint, we plan to outsource fulfillment of online deliveries as we increase the contribution and importance of omni channel selling efforts.
Third party logistical partnerships will provide us with additional distribution centers and market, leading technology without the costly capex and lengthy timelines associated with getting them up and running.
Additionally, we will get fresher products to online purchases faster increasing the velocity of this efforts.
Ask the deliveries the franchise stores, we see opportunities to utilize cross dock companies to reduce costs.
Jordan delivery lead times and increased store delivery frequency, which will also benefit our franchisees.
Moving on for manufacturing, we are narrowing our focus and allocating our resources to the highest volume S. Skus, while reducing the excessive degree of variation we have in our products.
For perspective, our defects and reworks have.
It had been over 6% and our goal is to reduce this to less than 1% over the next three to five years.
Cost savings will come from less labor manufacturing and waste.
And I'll provide more color here as we discuss the next pillar of our plan.
Moving onto our franchise development and operations.
We also have an opportunity to do more with less while also improving relations as reflected by our recently established franchisee Advisory Council.
Our recently completed my visit a 50 RMC have stores in 50 weeks.
It's an honor and a pleasure to meet a large universe of our dedicated franchisees as well as their hardworking and passionate staffers looked.
Looking ahead from a do more with less standpoint, we plan to partner with more multi unit operators for new store openings as opposed to having more single store operators.
Already 25% of our franchisees operate more than one store.
And by focusing on a more sophisticated and financially capable multi unit franchisee universe.
We can open stores faster and mutually benefit from economies of scale and concentrated targeted markets everything from administration and shipping to stronger benefits from marketing efforts.
I'll have more to touch on shortly with respect to new store openings in the years ahead.
The next part of our plan is to simplify and focus.
For over 10 years, the company migrated away from what made it successful not only did adventure into ancillary business lines unrelated to chocolate.
But it also went down the path of manufacturing too many low volume and toward time and cost intensive products.
I agree we've been reevaluating the need for segments outside of chocolate manufacturing Brad.
Marketing franchising e-commerce, and brick and mortar retail.
And earlier this month, we took a very important step.
Pleased to report that with the full exit from the frozen yogurt business with our divestiture of U swirl.
We are now.
Almost 13 years back to being just the chocolate company.
The frozen yogurt business was profitable however, the overall space for frozen yogurt shops has been very challenging but the multiple brands over 60 stores. We had no critical mass that was easily supportable without a major investment of dollars and human capital to consolidate the business under one banner.
And even if we did that we would not have the scale to compete with larger more developed players.
With the mindshare of freed up in addition to modest capital from the sale.
We can address our urgent need to invest in our factory, our franchisee network and our people.
Another area, where we can simplify our focus is in our product assortment, which I alluded to earlier.
Placing emphasis on high volume Skus and less product variability will help us simplify factory store management and consumer choices.
Where there are high volume products with variability and manufacturing complexity, we will utilize third parties to avoid the bottlenecks and added costs that have historically accompanied these types of products.
Beyond our products, we have evaluated our retail footprint.
And we will begin a process to right size the network by eliminating 25% to 35 underperforming stores.
By and large we will be eliminating stories that have struggled to perform well failed.
Fail to adhere to our brand and financial standards and do not meet our quality standards.
Some of these stores are located in retail formats that are on the wane and no fault of the operators.
While it's a tough decision to part ways. These exits are a necessary step to improve our growth and margin profiles.
And last but not least we are working to implement a new ERP and singular point of sale system to enable us and our franchisees to make better data driven decisions at both the factory and retail level.
Data and reporting systems are a critical component to constantly assess our product mix to ensure we are meeting our customers' ever changing consumer preferences.
The company has been behind the curve in this regard for awhile and we intend to make up for lost time.
So the third and final pillar of our transformation plan relates to amplifying and elevating both areas of our business. We currently do well, there's always areas that had been underinvested.
So take our franchising efforts. So that we are right sizing our store network by shedding 25 to 35 underperforming stores.
We will also look to expand in existing and more importantly, new markets with stronger operators and more desirable locations.
Our goal is to add 75 to 100, new stores and highly visible and traffic locations with multi unit developers as I mentioned earlier over the next three to five years.
In addition, we see an opportunity to further elevate our brand by developing a new premium plus concept under a different name.
Which would be a significantly smaller company owned store footprint and the top luxury retail locations to the United States.
Thank the Manhattan, Miami, Dallas, and Los Angeles is of the country, all targeting the premium plus consumer.
Another area to amplify and elevate as the RMC F experience, whether in store or through our Omnichannel consumer.
Consumer shopping habits are changing the company has fallen behind that being said, we were going to work with our franchisees to make modest improvements to upgrade their store look flow and functionality, while ensuring better use of in store promotions to upsell and cross sell.
From an ecommerce standpoint, there is a need to revamp our company website for user friendly digital shopping build the social media and Influencer presence.
Rollout, a new Rocky mountain chocolate App and loyalty program and strike new partnerships with online third party marketplaces, such as Amazon Prime.
The last area, we believe we can amplify and elevate as our product mix.
We've already hired our first head of R&D earlier this year.
And as much as new product introductions, and innovation will be a critical part of our future.
In the short term time has been spend on optimizing our product portfolio to remove less loved F. Skus.
And making sure that product quality and consistency.
Is the best it can be.
So what do we expect these initiatives to deliver to our business.
Over the next three to five years, we plan.
To firmly establish Rocky mountain chocolate is Americas preferred premium chocolate here with first class manufacturing and Omnichannel retail.
More than doubled revenue and factory pound volume.
Establish a network of 250, plus revitalized chocolate shops.
Doing over 800000 revenue per store.
Doubling our network's annual system wide sales increase.
Increased e-commerce sales to approximately 10% of the total revenue mix, which is currently less than 2% today.
Restore factory gross margins to between 25 and 30%.
Drive operating leverage through better efficiencies and more cost effective third party supplier partners.
Leading to $1 2 million of annualized cost savings in the next 18 months and as I mentioned earlier, we expect to launch a subset of premium plus company owned stores, providing an additional value creation channel.
The milder wise in a piecemeal fashion.
Operational improvements will come first.
And we will be reporting out on our progress in greater detail in future calls.
On the channel sales bottomed out last year, and we expect strong growth from doing more with great existing partners.
Dollar factory sales to franchisees have set new records, but we are focused on increasing throughput and velocity to the existing store network before we bring on stronger both financially and operationally multi unit operators to open clusters of stores in key markets.
And most importantly, we will be updating our brand look.
Trade dress and store design and the ladder can frankly take awhile.
And of course, we fully expect to hold ourselves accountable for measuring our results. This will be accomplished through a key set of kpis some of which will be reported on a quarterly basis, while others on an annual basis.
As mentioned earlier and more details around these kpis can be found in the investor presentation published on the Investor Relations website.
To briefly summarize we will report on.
<unk> a full chocolate stores in what we called chocolate equivalent stores in every 10 co owned or co brand stores consider the equivalent of one full chocolate store.
And we're seeking to reach 800000.
Average annual revenue per store by the end of fiscal 2028.
We will track average factory stores per chocolate store equivalent on an annual basis.
We will track factory gross margin on a quarterly basis, which is equal to total factory sales minus cost of sales.
We're targeting a return to 25% to 30% factory gross margin levels.
Also expect to realize $1 2 million of annualized Opex savings in the next 18 months, which we will report on periodically.
These additional savings will come from SKU optimization, less waste and scrap.
Better labor utilization and more machine uptime or OE.
To track our ecommerce initiatives, we will provide updates on customer lifetime value beginning at the end of fiscal 'twenty four and then turning to the quarterly updates going forward into fiscal 2025.
We will also report periodically on average customer transaction size frequency of purchasing and level of social media engagement.
And last we expect to report on ecommerce sales as a percentage of total factory sales on.
On a quarterly basis.
I will now hand, it over to our CFO , Alan Arroyo to discuss our fiscal fourth quarter and full year financial highlights before returning for closing remarks Alan.
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.
Jumping right into our fourth quarter results.
For the fourth quarter total revenue increased 5% to $8 1 million.
Breaking down our revenue further total factory sales increased 6% to $6 1 million.
The increase was driven primarily by higher shipments of product to our franchise and licensed retail stores.
Royalty and marketing revenue increased 5% to $1 7 million.
Retail sales were 270000 compared to 331000.
Same store sales at all domestic Rocky Mountain Chocolate factory locations increased one 5%.
Franchise free franchise fee revenue increased to 57000 compared to 43000.
Total factory and retail gross profit was 79000 compared to 899 899000.
With gross profit margin of one 2% compared to 14 seven.
The decrease was primarily due to 577000 of right. The write off of obsolete inventory as a result of our aggressive effort to rationalize the products, we offer and to reduce overall inventory levels.
We drove a significant draw down of our inventory in the fourth quarter.
To not only manage working capital more efficiently, but to position inventory more closely to our go forward sales and marketing efforts.
Inventory levels relative to our factory sales at fiscal year end, we're at the lowest point in 10 years.
Total operating expenses increased to $10 1 million compared to $7 2 million.
The increase was primarily driven by one time.
Items, including costs associated with solicitation of proxies severance payments and severance payments. Excluding these nonrecurring items fiscal Q4 operating expenses were $8 5 million.
Net loss from continuing operations was $1 9 million or 29 cents per share compared to net income from continuing operations, a zero point $4 million or <unk> <unk> per share.
Adjusted EBITDA, a non-GAAP measure defined below.
Was 56000 compared to $1 million with the decrease again, primarily driven by inventory write downs.
Our operating cash flow was $1 5 million in the fourth quarter compared to $2 million.
Now quickly reviewing our full year 'twenty three results.
Total revenue increased 3% to $334 million.
Total factory gross profit was $4 million compared to $4 9 million with gross margin of 16, 4% compared to 29%.
The gross margin decline was primarily due to lower production volumes expenses with the aforementioned efforts to rightsize our inventory levels.
Total operating expenses increased to $35 3 million compared to $32 million.
The increase was driven by the previously mentioned nonrecurring items in Q4, excluding those for the full year.
All of those for the full year 2023 operating expenses would have been $29 2 million.
Net loss from continuing operations was $5 5 million or <unk> 88 per share compared to net loss from continuing operations of 501000 or <unk> <unk> per share.
Our adjusted EBITDA.
Which is a non-GAAP measure was $2 6 million compared to $4 1 million.
Operating cash flow was a negative $2 1 million compared to a positive $2 9 million.
The previously mentioned drivers of our lower gross margin and higher operating expenses were the key drivers of the year over year decline in cash flow.
Now turning to the balance sheet, we ended the fourth quarter with a cash balance of $4 7 million compared to $7 6 million at the end of last the last fiscal year.
As of February 28, 2023, the company remained debt free.
With that I'd like to turn the call back over to Rob for closing remarks.
Thanks Alan.
This leadership team is fully committed and excited to affect this strategic transformation plan.
I look forward to sharing more details in the coming quarters.
Putting on our continued progress to all Rocky Mountain Chocolate factory stakeholders as we work to build the business to a potential of consistently and sustainably generating growth and profitability.
With the plan in place we can now entirely focus our attention on improving execution in the factory and retail stores and online.
This concludes our prepared remarks, and we will now open it up for questions for those participating in the call.
Operator back to you Sir.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Yeah.
One moment.
Yeah.
Okay.
One moment for our first question.
And our first question.
Will come from Roger Lipton of lift in financial services and your line is open.
Yes, good morning, gentlemen.
Thank you thanks for taking my question.
The $1 $2 million of savings.
As much of that in place at the moment or is that going to be kind of put in place in the course of the next 12 months.
Roger Good morning.
And thanks for your question, it's a good question.
We're going to be reporting our fourth first quarter earnings not too long from now and at that point, We will report the sum total of what's been already gathered and yes. There has already been a decent chunk of that $1 2 million already put into play some of it relates to some of my earlier comments.
Closing third party warehousing, that's not needed SKU rationalization and other process improvements that have already taken place in the factory.
Okay, and the 25% to 30% and the $1 2 million.
No doubt part of that 25% to 30% gross margin objective correct.
Absolutely of course, we'd love it to be more and more topline by getting the getting the opex right sets the stage in the table for.
More profitable business being added going forward.
And then can you can you.
Put a little.
More.
Precise timeframe on that and your hope grew 25%, 30% gross margin of $33 three to five years is a long time.
No it absolutely is.
But realize this is a 10 year resurrection that we're at.
We're all in basically the beginning to middle of year, one right. So the $1 2 million. If you were to put it against our current volumes is a pretty meaningful bump to the factory gross margins as a start.
<unk> for more of that to happen.
And as we basically achieved levels will be re updating right.
And I should know the answer to this but.
You know better than I, what's the price of truck is doing these days.
Price of chocolate price of cocoa prices sugar, all those things are rather hefty right now I believe sugars.
11 year high.
Cocoa has been not as an <unk>.
Cable is sugar prices, but it's been high ash.
And one thing that we're very excited about is this is a year for which.
The farm Bill in the United States has come up and you should know that this company and this leadership team has been working actively with.
Officials in Colorado to really apply efficient.
Directed.
Pressured to Congress to make amendments in the farm Bill so that the whole industry that utilizes sugar can get more of a leader.
Alright.
And lastly, along the same line.
I would imagine that your prices.
Fitness yourself price your product and your franchisees, Patrick director up materially versus a year ago.
Roughly what kind of a price impact there year to year.
We took a high single digit increase last fiscal year.
We should share with everybody is given our confidence in the progress we've been making in our Opex improvements we have promised our franchisees that short of a force majeure event.
We'll be no price increase in fiscal 2024.
Alright, Thats all Ive got for now a good presentation and talk to you soon thank you Raj I appreciate the questions.
Thank you.
Okay.
And now we will address questions that we've been received via email.
Great.
For our first question.
And the first question received was help us understand the investment both capitalized and expensed items necessary to fully execute your strategic transformation plan.
Well, that's a good question and I'm going to trade off some of that to Allen to finish to start.
And I said this as recently as yesterday some of our industry peers at the Sweetest snack show, which used to be called the Kansas show up on time.
The company was not thinking of itself as a manufacturer of candy first.
And so less than full attention was given to the optimization of what equipment is in the factory doing what and with whom.
All of those things have been given incredible amount of scrutiny by Scott.
Tyson Snyder and new other members of our team.
So a fair bit of investment will come in capital investment with new equipment in the factory.
Not only to streamline and get efficiency, but also gives us capabilities to meet new product demands of consumers.
And also.
Thinking about the labor situation, which is going to remain challenging we see for the foreseeable future as it is anywhere in the United States.
So we're more mindful to make capital investments so that we can do more pounds.
For factory employee that we have in the past and so if we can get some good <unk>.
Increases in volume without having to throw on top of the increase in people and then there is investment in things that aren't capital intensive for the factories that are more systems and data.
At the same benefit I'm going to turn it over to Alan to answer that yeah. Yeah, I would say that we have made investments as we've talked about.
On this call and previous calls too.
To bolster our cool normal manufacturing so we've made that forward investment, but on a capital basis.
We believe we're going to we're going to spend the lion's share of our budget.
<unk>.
Capital equipment.
Manufacturing facility, we also have money earmarked or ERP or CIS.
The upgrade that financial information, that's going to lead to better decisions.
The deployment of capital. So we had a sizable amount that we have allocated for that.
Next 12 months and then you know.
Based on our projections of the business that will continue but there is definitely a sizeable investment in capex in the next 12 to 18 months.
And our next question one moment.
Would be how should we think about the timing and impact of an acceleration or e-commerce sales and b the rationalization of your retail footprint and pace of new store openings.
Sure I'll answer the second part of that question first so.
All franchise stores like us in a normal course or closing stores on a regular basis.
We've.
And actually ironically, there have been fewer closings during the Covid period.
Then one might have expected.
So those will be slightly more accelerated than the pace of the past.
And a lot of the data gathered from my 50 50 visits from.
The highest number of field visits we've had by our team in many many years.
And gay Guinea also some analytical.
Additional information from third party sources.
We're going to be trying to get the bulk of those done in the next two years.
New store openings I think will continue a pace normal course, we have a whole bunch that are coming in the next two quarters.
But realize we will be pivoting to a new brand a new store look sometime in fiscal 'twenty four with all of that rollout with other sorts of enhancements to the attractiveness of investing in our Rocky Mountain chocolate franchise.
We expect the new store volume to be more meaningfully taking off in fiscal 'twenty five.
Beyond.
And then back to the Omnichannel and other spending related to E com.
That is more a function of.
Return on Ad spend.
And there has been a more concerted effort to put more dollars and focus on that that can be more immediate it's coming from a much smaller base because as I indicated earlier omnichannel sales hit a multiyear low in fiscal 'twenty three so frankly for fiscal 'twenty for Omnichannel sales should.
Look very robust compared to the prior two years.
And we have an additional question well new stores be open to under their current or revised format and what will be the financial impact of closing, 25% to 35 stores.
Okay I'll answer the second part of that first.
So with the analysis, we've done of our store universe and a good example of which is the stores that were closed in the latter part of fiscal year 'twenty three.
Virtually all of them fell far below our average unit volume.
Which was 574000.
So.
Realize many of our less successful stores.
Not only have lower <unk>.
Annual sales volumes. They also ironically make more product in store and buy less factory product.
So the financial impact of the stores, leaving our network will not be us.
Significant as one might think when you put all those factors in play.
It is closer to de Minimis than then.
And not.
And what was the first part of the question again I'm sorry.
One moment. The first part was will new stores be opened under their current or revised format.
Yeah. So new stores are opening right now and if you think of any franchise or doing a brand in store image upgrade.
The safest answer to the question is the stores that are opening right now are going to be the last stores.
If they want to wait to do some of the adjustments and accepting the new branding and the new store look.
And we're being mindful of that and being very open with new franchisees about.
What's coming down the Pike.
Thank you.
Yes.
One moment.
I am showing no further questions at this time, we do appreciate your attendance and participation you may now disconnect and have a wonderful everyone. Thank you. Thank you.
Yes.
Okay.
And I guess.
Yeah.
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Yes.
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