Q1 2024 Rocky Mountain Chocolate Factory Inc Earnings Call

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Good afternoon, ladies and gentlemen, thank you for standing by walking through today's conference call to discuss Rocky Mountain Chocolate Rocky Mountain Chocolate Factory's financial results for the first for the fiscal first quarter 2024. At this time all participants are in a listen only mode. As a reminder, this call.

Is being recorded joining us on the call today are the company's CEO , Rob Sorrows 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.

She was 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.

The company's presentation also includes certain non-GAAP financial measures, including adjusted EBITDA.

Supplemental measures of performance of the business all non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with FCC rules, you'll find reconciliation tables and other important information.

Earnings press release, and form 8-K furnished to the FCC earlier today, which will be available on the company's Investor Relations section of its web site within approximately 24 hours. After this call has ended.

Now I will turn the call over to the company's CEO , Rob Chausse, Rob. Please go ahead.

Thank you and good afternoon, everyone.

During the quarter, we continued to lay the foundation of our strategic transformation plan.

And it began to develop critical groundwork for the future of the business.

I'd like to spend time, reviewing the three pillars of our strategic plan.

Highlighting the initial progress we've made to do more with less.

Simplify and focus our operations.

And amplify and elevate the Rocky Mountain Chocolate brand.

First of all I'm doing more with less major progress has been achieved on multiple fronts.

At the end of our first fiscal quarter, we have successfully identified and executed on over $700000.

Annualized cost savings of more than 60% of the.

The $1 2 million annualized cost savings target introduced last quarter.

Of our original expectations in terms of both magnitude and timing.

These savings stems from <unk>.

First mitigating certain store delivery logistics.

Towards now utilizing third party cross stocking to reduce trips and maximizing pound volume on our own trucks ships from Durango.

Second eliminating two Offsite third party warehouses, and we have become more efficient with inventory management and demand planning as reflected by a 46% reduction of inventory compared to the prior year.

And finally, we significantly reduced waste scrap did a better staff training.

The elimination of underperforming skus.

Our second key pillar is to simplify and focus the operations.

As we upgrade our infrastructure to better enable data driven decisions, bringing high volume skus back to the forefront of our production schedules and reinforce our chocolate first approach.

Our commitment to running a chocolate first operation.

That's reflected by our recent exit of the frozen yogurt business.

As it was not true to our core operation or brand.

Further simplifying our focus in operations, we are midway through a plan to reduce 25% of <unk>.

Underperforming chocolate S skus.

Our ability to produce significantly higher volumes of our most popular items going forward.

Are you seeing underperforming items has already led to cost savings on third party storage and changeovers will.

While generating more efficient throughput and meet the high demand of our top selling skus.

And our third pillar amplify and elevate.

We recently completed a full overhaul of our franchise offering and documentation.

Establishing for the first time, an area development opportunity to better attract multiunit operators and we sped up the deployment of resources to increase sales and improve store level profitability and provide a critical bandwidth to grow our omnichannel sales.

Have simplified our royalty structure and added incentives to increase the selling of domain Durango sourced product.

Royalty structure is now in line with other franchise or market offerings, but also has the added benefit of reaching a low 4% range on store gross sales because those operators, who sell Durango source product in excess of our new higher target.

It should have the win win benefit of both improving store level economics.

We're seeing sales from Durango.

And provide strong incentives for more store openings, both from new operators as well as our existing franchisees that are looking to expand their portfolios.

With the close of the sale of the frozen yogurt business reallocated to senior franchise, operator executives, whose full time efforts are to generate additional sales and improve store level profitability as well as encourage network wide Rocky mountain chocolate brand consistency across our.

Entire franchise network.

Only two months into the newly created roles are.

Momentum is underway on helping franchisees maximize their selling opportunities with <unk>.

Shifting store staff towards selling as opposed to making in store product.

We are also focusing their network on selling our most popular and delicious items, ensuring case planet grants are optimized and removing non conforming and low volume products from the stores.

All of which are designed to ensure our customers have the same delightful experience.

However, and wherever they enjoy a premium rocky mountain chocolate products.

We're excited about our omnichannel experience.

We have begun to implement a new revenue enhancing logistics partnership with <unk>.

Actually we are now on cold chain logistics company to provide efficient nationwide two day delivery for online customer purchases something we simply could not offer with Durango is shipping origin.

In addition to faster delivery online customers will begin to experience significantly reduced shipping costs.

This partnership will continue over the next 12 weeks.

With an anticipated increase in sales volumes for both online customers and other key omnichannel customers.

We expect to see increased sales from this initiative for the upcoming holiday season.

And this is too.

Diminish.

Cart abandonment that had occurred in the past.

With respect to our image transformation, our sales and marketing team is working closely with crown creative our new branding agency on elevating and upgrading our brand and trade dress and refreshing our identity.

We'll share more with you in the near term as this exciting evolution of our proud heritage and 11 to Rocky Mountain Chocolate experience continues.

The improvements we're making at the Durango production facility are all geared to drive improvement for our franchise network.

Which will take some time to see the downstream effect. However, the best example of the more immediate impact of all the changes we have been and are making are the result of our flagship store in Durango are only company own store at this time.

Fiscal first quarter revenue to Durango store was up 16% year over year.

With tooling revenues coming in over 27% and customer count up 9%.

Average transaction size and important key performance indicator.

15% during the quarter as customers walked away with more of our delicious product in their basket after extensive.

These metrics are early indicators that our efforts to improve the store are taking hold.

And during those long its way to becoming another million dollar plus revenue store.

As I mentioned in the downstream effect of our transformation plan for our franchise network will take time, but we are seeing improvements for the second quarter.

Monthly pounds shipped increased in June .

Year over year basis for the first time since November 2022.

Rising roughly 6%.

Network same store sales were also up mid single digits.

For the month of June as well.

Since many of our improvements were implemented across the quarter seeing these good results in June tell us that our plan is working.

So our activity is also robust.

Two new stores in the first quarter and transfer three existing stores to new owners.

Our transferred store owners are excited and with that excitement comes motivation that can significantly improve lackluster performance.

To summarize we continue to concentrate our efforts on laying the groundwork and implementing the initial phase of our transformation strategy.

We made significant progress across all three strategic pillars.

And we're pleased with our progress.

Yeah, well on our way and positioning Rocky mountain chocolate to gain market share in what is a highly fragmented U S chocolate confectionery market.

Our strategic transformation plan is designed to do just that.

We remain focused on laying the foundation of our multiyear plan and expect to continue seeing tangible results as we progress through the periods ahead.

I will now hand, it over to our CFO , Alan a royal to discuss our fiscal first quarter financial highlights before returning for closing remarks.

Yes. Thank you Rob. Please note that all financial results discussed today are for continuing operations, while all various commentary is year over year on a year over year basis, unless otherwise stated.

Now moving on to our results total revenue in the first quarter was $6 4 million compared to $6 9 million.

The decrease was primary primarily due to zero point $3 million of lower shipment of products.

Related to the planned exit of customers.

To further break this down total Durango production facility sales were $4 8 million compared to $5 2 million.

Royalty and marketing revenue remained roughly flat at $1 4 million.

Retail store sales at our company operated stores were 192000 compared to 250000.

Had one less unit this year.

Same store sales at all domestic Rocky Mountain Chocolate factory locations decreased two 7%.

And franchise fee revenue was 45000 compared to 54000.

Total Durango production and retail gross profit was <unk> 3 million compared to 0.9 million.

With gross margin of five 1% compared to 16, 3%.

The decrease was primarily due to lower production volume, resulting from our strategy to produce finished goods closer to final consumption.

The reduction of non core skus and higher costs related to new key production positions.

This was partially offset by cost savings, we realized from lower transportation expenses.

Use waste and scrap and lower warehousing expense.

Total operating expenses were $7 9 million compared to $7 2 million.

The increase was primarily due to increased staffing costs driven by net new mid level and senior leaders leadership.

<unk> our CEO .

And our senior supply advisor working with our teams to drive previously noted operational improvements.

Increased franchise support costs related to an increased network store visits new store openings and transfers and annual convention costs. There were previously biannual.

Net loss from continuing operations was $1 5 million or negative <unk> 24 per share compared to net loss from continuing operations of <unk> 3 million or negative <unk> <unk> per share.

Adjusted EBITDA loss was 800000.

<unk> to an adjusted EBITDA of 700000 with a decrease primarily driven by lower revenue related to the planned exit of certain customers as well as the aforementioned drivers of gross profit and Opex.

Now turning to our balance sheet and cash flows. We ended the first quarter with a cash balance of $5 1 million compared to $4 7 million at the end of fiscal 'twenty three.

As of May 31, 2023, the company remained debt free.

We also generated 100 zero point $4 million in cash during the quarter.

The cash increase was primarily driven as a result of the $1 4 million in proceeds from the sale of use role and a positive working capital change.

These were partially offset by net of net loss and Capex spend.

Zero point $5 million.

The working capital change was mostly a result of a reduction in inventories too.

$2 7 million.

From $3 6 million at year end.

With that I'd like to turn the call back over to Rob for closing remarks.

Thanks Alan.

We are committed to our strategic transformation plan.

And look forward to providing updates in the quarters ahead.

As we work to position Rocky Mountain chocolate not only as America's preferred premium chocolate here, but as a business generating sustainable growth and profitability.

This concludes our prepared remarks, we will now open it up for questions operator back to you.

Thank you can I ask a question. Please press star one on your telephone.

Wait for your name to be announced to withdraw your question. Please press star one again.

Once again Thats star one for questions placed on buying we compile the Q&A roster.

One moment for our first question.

Our first question will be from the line of Roger Lipton from Lipton Financial services. Your line is open.

Yes, good afternoon.

Hey, Roger.

Sure.

Progress.

Roger we're having a tough time hearing you.

Hum.

Savings.

Not.

Not too much of that.

This quarter.

Right.

We are having a difficult time hearing Mr. Lipton can you hear them on your end or should we be dialing back in <unk>.

Roger If you have your line on on Speaker, Please take it off speaker.

Roger If your line is on speaker, please take it off speaker.

Well.

Yes.

You might have to dial back in.

And hopefully.

Hopefully you guys Bracken.

Next question.

Roger Please dial back in.

Hello, I'm, sorry, you're there.

Much better yes, we can hear you perfectly clear now.

I'm sorry did you hear the question.

Now we did not sorry Roger.

Yes, I am sorry to your other question was just 700000 of annual of savings that you've already implemented my assumption is that not too much of that flowed through in the quarter, but thats sort of the rate that's in place as the quarter ended.

That correct.

Yes, so everything in the 700000 was realized and partially recognized in at least the last month of the first quarter, which means they all start flowing in the second quarter.

Alright, okay.

And then just another question, which of course makes sense you mentioned the flagship stores now.

Instead, it looks like another $1 million store I am curious to know how many doors in the system do over $1 million.

Well sure.

Our top 37 stores average over a $1 million and we have some.

Nominal outperformers dragging that up.

But I would say that our store count in the million plus range.

At current rates of somewhere in the high teens to low twenties.

Okay. Okay, and then you mentioned of course, the lower volume because of the so called planned exit of a couple I mean could you.

Elaborate a little bit on what that was all about the planned exit from a couple of.

Customers.

Yes, we have we have an e-commerce and wholesaling relationship that we had exited in the last fiscal year. So we werent expecting recurring volume and the biggest impact of that happens to have been in the first quarter. There will be no additional impact on results going forward.

Okay.

And then you made reference to.

The higher G&A because of that the new staffing.

That pretty much in place at this point.

I got a way to put it what the G&A build further from the rates shown in the first quarter or is that kind of rate going forward.

Supporting G&A.

No, let's say good question.

So.

<unk>.

The staffing that was coming off started with me and May Allen in August and then we brought on.

Scott our supply chain advisor September so as the numbers roll forward in the.

Subsequent quarters.

Those comparisons will start evening out market.

Okay.

Okay, and lastly for them for the moment anyway.

The lower inventory is obviously encouraging.

Can you keep it down that way for the rest of the year or.

How do you expect the inventory to.

To proceed through the <unk>.

<unk> of the.

February year sure.

Sure Roger in our business it sounds like inventory now.

So the holiday so.

This figure is really being turned on as we speak so that will come up suffice it to say it'll be less on a year on year basis, all things being equal.

We will be doing some pre positioning of inventory with our third party logistics partner and Thats again to make sure that the product can get the consumers within 48 hours, but you can expect that this team tighter inventory management going forward all things being equal.

Okay. Okay.

Interesting thanks, very much I appreciate it I appreciate the color. Thank you.

Okay.

Thank you I'm not showing any further questions in the queue that will conclude our Q&A for today. 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.

For your participation.

Thank you operator, thanks, everyone Goodbye.

Okay.

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