Rocky Mountain Chocolate Factory Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 13, 2023

There are 4 speakers on the call.

Operator

Afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss Rocky Mountain Chocolate Factory's Financial Results for the Fiscal First Quarter of 2024. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded.

Operator

Joining us on the call today are the company's CEO, Rob Sarles and CFO, Alan 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 certain 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.

Operator

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 SEC rules. You will find reconciliation tables and other important information in the earnings press release and form 8 ks 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.

Operator

And now, I will turn the call over to the company's CEO, Rob Sarles. Rob, please go ahead.

Speaker 1

Thank you and good afternoon everyone. During the quarter, we continued to lay the foundation of our strategic transformation plan and have begun to develop critical groundwork for the future of the business. I'd like to spend time reviewing the 3 pillars of our strategic plan and highlighting the initial progress we have made to do more with less, simplify and focus our operations and amplify and elevate the Rocky Mountain Chocolate brand. 1st on doing more with less, major progress has been achieved on multiple fronts. By the end of our 1st fiscal quarter, we have successfully identified and executed on over $700,000 Annualized cost savings were more than 60% of the $1,200,000 annualized cost savings target introduced last quarter, ahead of our original expectations in terms of both magnitude and timing.

Speaker 1

These savings stem from 1st mitigating certain store delivery logistics towards now utilizing third party cross docking to reduce trips and maximizing pound volume on our own trucks shipped from Durango. 2nd, eliminating 2 off-site third party warehouses year. 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 and scrap due to better staff training and the elimination of underperforming SKUs. Our second key pillar is to simplify and focus the operations.

Speaker 1

As we upgrade our infrastructure to better enable data driven decisions, bring 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 is best reflected by our recent exit of the frozen yogurt business as it was not true to our core operation or brand. Further, to simplifying our focus and operations, we are midway through a plan to reduce 25% of underperforming chocolate SKUs, increasing our ability to produce significantly higher volumes of our most popular items going forward. Reducing underperforming items has already led to cost savings on third party storage and changeovers, while generating more efficient throughput to meet the high demand of our top selling SKUs. And our 3rd 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.

Speaker 1

And we've sped up the deployment of resources to increase sales and improve store level profitability and provide a critical bandwidth to grow our omni channel sales. We have simplified our royalty structure and added incentives to increase the selling of Durango sourced product. The new royalty structure is now in line with other franchisor market offerings, but also has the added benefit of reaching a low 4% rate on store gross sales for those operators who sell Durango sourced product in excess of our new higher target. This should have the win win benefit of both improving store level economics while boosting sales from Durango and provide strong incentive 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, we allocated 2 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.

Speaker 1

Only 2 months into their newly created roles, momentum is underway on helping franchisees maximize their selling opportunities through shifting store staff towards selling as opposed to making in store product. We are also focusing the network on selling our most popular and delicious items, ensuring case planograms 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 whenever and wherever they enjoy a premium Rocky Mountain chocolate product. We're excited about our omnichannel experience. We have begun to implement a new revenue enhancing logistics partnership with a nationally renowned cold chain logistics company to provide efficient nationwide 2 day delivery for online customer purchases, something we simply could not offer with Durango as the shipping origin. In addition to faster delivery, online customers will begin to experience significantly reduced shipping costs.

Speaker 1

Rollout of this partnership will continue over the next 12 weeks with an anticipated increase in sales volumes for both online customers And other key omni channel customers. We expect to see increased sales from this initiative for the upcoming holiday season And this is to diminish the 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, Elevating and upgrading our brand and trade dress and refreshing our identity. We will share more with you in the near term as this exciting evolution of our proud heritage and beloved Rocky Mountain chocolate experience continues. The improvements we're making at the Durango production facility are all geared to drive improvements for our franchise network, which will take some time to see the downstream effect.

Speaker 1

However, the best example of the more immediate impact of all the changes we have been in our making are the results of our flagship store in Durango, our only company owned store at this time. Fiscal first quarter revenue at the Durango store was up 16% year over year with June revenues coming in over 27% and customer count of 9%. Average transaction size, an important key performance indicator, was up 15% during the quarter as customers walk away with more of our delicious product in their basket after each visit. These metrics are early indicators that our efforts to improve the store are taking hold and Durango is well on its way to becoming another $1,000,000 plus revenue store. As I mentioned, the downstream effect of our transformation plan for our franchise network will take time, but we are seeing improvements for the 2nd quarter.

Speaker 1

Monthly pound shift increased in June on a year over year basis for the first time since November 2022, rising roughly 6%. Network same store sales were also up mid single digits 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. Store activity is also robust. We opened 2 new stores in the Q1 and transferred 3 existing stores to new owners.

Speaker 1

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. We are well on our way in positioning Rocky Mountain Chocolate to gain market share in what is a highly fragmented U. S.

Speaker 1

Chocolate confectionery market. Our strategic transformation plan is designed to do just that. We remain focused on laying the foundation of our multi year 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 Arroyo, to discuss our fiscal Q1 financial highlights before returning for closing remarks. Alan?

Speaker 2

Yes. Thank you, Rob. Please note that all financial results discussed today are for continuing operations, while all variance commentary is year over year on a year over year basis unless otherwise stated. Now moving on to our results. Total revenue in the Q1 was $6,400,000 compared to $6,900,000 The decrease was primarily due to $300,000 of lower shipment of products related to the planned exit of customers.

Speaker 2

To further break this down, total Durango production facility sales were $4,800,000 compared to $5,200,000 royalty and marketing revenue remained roughly flat at $1,400,000 Retail store sales at our company operated stores were $192,000 compared to $250,000 We had one less unit this year. Same store sales at all domestic Rocky Mountain Chocolate Factory locations decreased 2.7%. And franchise fee revenue was $45,000 compared to 54,000 Total Durango production and retail gross profit was $300,000 compared to $900,000 with gross margin of 5.1% 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, reduced waste and scrap and lower warehousing expense.

Speaker 2

Total operating expenses were $7,900,000 compared to $7,200,000 The increase was primarily due to increased staffing costs driven by new mid level and senior leadership, including 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 that were previously biannual. Net loss from continuing operations was $1,500,000 or negative $0.24 per share Compared to net loss from continuing operations of $300,000 or negative $0.05

Speaker 1

per share. Adjusted

Speaker 2

EBITDA loss was $800,000 compared to an adjusted EBITDA of 700,000 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 Q1 with a cash balance of $5,100,000 compared to $4,700,000 at the end of fiscal 2023. As of May 31, 2023, the company remained debt free. We also generated $400,000 in cash during the quarter. The cash increase was primarily driven as a result of the $1,400,000 in proceeds from the sale of Usurral and a positive working capital change.

Speaker 2

These were partially offset by a net loss and CapEx spend of $500,000 The working capital change was mostly a result of the reduction in inventories $2,700,000 from $3,600,000 at year end. With that, I'd like to turn the call back over to Rob closing remarks.

Speaker 1

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 chocolatier, but as a business generating sustainable growth and profitability. This concludes our prepared remarks. We would now open it up for questions. Operator, back to you.

Operator

Thank you. To withdraw your question, please press star 1.1 our first question will be from the line of Roger Lipton from Lipton Financial Services. Your line is open.

Speaker 1

Roger, we're having a tough time hearing you.

Speaker 2

$700,000 of annualized savings. My assumption is that not too much of that flow through in the recent quarter. That's probably the annual and rent statement. Yes.

Speaker 1

Operator, we're having a difficult time hearing Mr. Lipton. Can you hear him on your end or Should he be dialing back in?

Operator

Roger, if you have your line on speaker, please take it off speaker. Roger, if your line is on speaker, please take it off speaker. Okay. You might have to dial back in.

Speaker 1

All right. Well, hopefully, yes, hopefully he dials back in.

Speaker 2

Next question.

Operator

Roger, please dial back in.

Speaker 3

Yes. Hello. I'm sorry. Are you there?

Operator

There you go. Much better.

Speaker 1

Yes, we can hear you perfectly clear now.

Speaker 3

Oh, I'm sorry. Did you hear the question?

Speaker 1

No, we did not. Sorry, Roger.

Speaker 3

Yes, I'm sorry too. The question was the $700,000 of annual of savings that you've already implemented, my assumption is that not too much of that flowed through in the quarter that's sort of the rate that's in place as the quarter ended. Is that correct?

Speaker 1

Yes. So everything in the 700,000 was realized and partially recognized in at least the last month of Q1, which means they all start flowing in the second quarter.

Speaker 3

Right. Okay. And just another question, which occurs to me since you mentioned the flagship store is now, it looks like another $1,000,000 store. I'm curious to know how many stores in the system do over $1,000,000

Speaker 1

Well, sure. Actually our top 37 stores average over $1,000,000 and we have some Phenomenal outperformers dragging that up. But I would say that our store count in the 1,000,000 plus range At current rates, it's somewhere in the high teens to low 20s.

Speaker 3

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?

Speaker 1

Yes, we had an e commerce and wholesaling relationship that we had exited in the last fiscal year. So we weren't expecting recurring volume. And the recurring volume. And the biggest impact of that happens to have been in the Q1. There will be no additional impact on results going forward.

Speaker 3

Okay. And then you made reference to the higher G and A because of the new staffing. Is that pretty much in place at this point? Another way to put it, will the G and A build further From the rates shown in the Q1 or is that kind of the going forward rate of supporting G and A?

Speaker 1

No, it's a good question. So the staffing that was coming on Started with me in May, Alan 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 more.

Operator

Okay.

Speaker 3

Okay. And lastly, 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 proceed through the balance of the February year?

Speaker 1

Sure. Well, Roger, in our business, if we're not building inventory now, we have to build for the holiday. So The spigot is really being turned on as we speak. So that will come up. Suffice it to say, it will be less on a year on year basis, all things being equal.

Speaker 1

We will be doing some pre positioning of inventory with our 3rd party logistics partner and that's again to make sure that the product can get consumers within 48 hours. But you can expect with this team tighter inventory management going forward, all things being equal.

Speaker 3

Okay. Okay. That's interesting. Thanks very much. Appreciate it.

Speaker 1

I appreciate the call, Roger. Thank you.

Speaker 3

Okay.

Operator

Thank you. I'm not showing any further questions in the queue. That will conclude our Q and A for today. Thank you, ladies and gentlemen. This concludes today's conference call.

Operator

You may now disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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Earnings Conference Call
Rocky Mountain Chocolate Factory Q1 2024
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