NASDAQ:RMCF Rocky Mountain Chocolate Factory
Sector financial performance:
This company, an international franchiser (65-70% of total revenue), confectionery Manufacturer, and retail operator (10-15% of total revenue), was grouped into chocolate &confectionery sector of Candy industry.
It seems sales volume is declining for those chocolate manufacturers in this sector probably as a result of generally declining demand in US market. Our data indicates that there are two different stories for traditional in-store retail sales channels and for massive merchandise or online sales channels. Sales pressure seems to be bigger for traditional mall-based store sales (presented an annual decrease of about 3%). Decrease in sales volume seems to be slower for other manufacturers with diversified sales channels (presented an annual decrease of 1%), a result attributable to retail traffic’s shifting from mall-based stores to mass merchandise stores.
However, we think that another reason that caused a difference may lay in competition in price, which usually significantly relies on margins in different sales channels. After experienced high margins due to low costs for years, companies in this sector started to feel pain brought by rising ingredient costs and labour costs started since 2015. And this is a strong incentive for them to raise selling price and caused huge pressure on margins of their retailers. Obviously, traditional candy stores have the least flexibility in dealing with the balance between raising price/cutting expenses and thus lose sales.
Our data indicates, however, that while, due to being more flexible to lower price, chocolate companies with diversified retailers experienced less decrease in sales, due to increasing production costs and general pressure on top of wholesale price the companies in both stories have had to endure shrinking margins and profitability. At the current level, the average gross margins for chocolate manufacturers vary between 28% - 36%. They usually spend 24% of the total sales on SG&A and can generate a 13% operating margin.
According our analysis, the sector’s ratios of enterprise price/adjusted EBI ranges 19-52, which is a big gap because of the industry trend discussed above about their retailer types.
It seems the demands for in-store chocolate products of this company from both franchised and company owned stores have been experienced downturn pressure in the past several years as indicated by continuously decrease in same store sales. However, the decrease may be slowing down in 2018 as stores were closed. It also seems that this company’s sales are heavily depending on the demands for its products from outside its franchised network (31% of total company sales). Demand from outside company and franchise network may also be shrinking.
For first six months of fiscal 2019 compared with same period of 2018(20180830)
Wholesales decreased 6.5% due to a large decrease to outside franchises network and decrease to inside network. Same store pounds sold by franchise decreased 1.4%.
Same store (company owned) sales was flat.
For fiscal 2018 compared with 2017(20180228)
Wholesales increased 2.5% due to increase to outside franchises network offset by decrease to inside network. Same store pounds sold by franchise decreased 4.9%. Franchise stores number decreased 2.6%.
Same store (company owned) sales decreased 3.9%.
For fiscal 2017 compared with 2016(20170228)
Wholesales decreased 3.5% due to decrease to outside franchises network and decrease to inside network. Same store pounds sold by franchise decreased 4.7%. Franchise stores number decreased 3%.
Same store (company owned) sales increased 0.5%.
For fiscal 2016 compared with 2015(20180228)
Wholesales increased 1.8% due to increase to outside franchises network offset by decrease to inside network. Same store pounds sold by franchise decreased 1.5%. Franchise stores number decreased 5.3%.
Same store (company owned) sales decreased 0.8%.
The gross margin (excluding franchise fee revenue) went down to around 28% in 2018 due to decrease in wholesales and discount of retail as a result of store closure. While we can see this company’s efforts in reducing its G&A expenses (SG&A%:24%), we have seen the decrease in its operating margin (14.5% in 2018).
This stock currently has an enterprise price/EBI ratio of about 19, presenting concerns that market has on its sales prediction. This relative low multiple can, we think, be explained by the vertical changes in whole economy situation and its struggling in in-store sales. However, horizontally our valuation methods and analysis concluded that the market may currently undervalue this stock.
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