U-Swirl, Inc. - Frozen Yogurt Franchise For Outstanding Capital Returns

Oct.24.13 | About: U-Swirl, Inc. (SWRL)

Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

U-Swirl, Inc. (OTCPK:SWRL) is an emerging self-serve frozen yogurt franchise that is growing rapidly. At present it has 90 locations in 26 states across the U.S. The company owns and franchises self-serve frozen yogurt cafes that operate under the names U-Swirl Frozen Yogurt, Aspen Leaf Yogurt, Yogurtini, Gracie Bleu, and Josie's Frozen Yogurt. The cafés offer frozen yogurt in up to 20 non-fat and low-fat flavors, including tart, traditional, and no-sugar-added options, along with fresh sorbet. Approximately 70 toppings such as fresh fruit, sauces, candies, and granola are available to customize each serving of yogurt to the customer's individual taste. Customers create their combination of delicious, soft-serve premium frozen yogurt, then finish it off with any toppings they choose. Customers serve themselves and pay per ounce instead of by the cup size. U-Swirl's slogan is "Worth the Weight" as its frozen yogurt is healthy and has beneficial probiotics.

Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) owns a majority of interest in U-Swirl. It has hundreds of stores across the U.S. International stores are located in Canada, Japan, South Korea and the United Arab Emirates. They are also in discussions with potential franchisees in eight additional countries and have business development activities under way in another 16 nations. The company's has solid track record with payment of 41 consecutive quarterly cash dividend.

One of the key strategies going forward for U-Swirl is to co-brand its frozen yogurt with Rocky Mountain Chocolate, both offering a variety of choices of desserts. A new strategy of co-branding was implemented in March of this year and so far they have already transformed 11 stores with the combination. They plan to add a few more by the end of this year. U-Swirl Frozen Yogurt/Rocky Mountain Chocolate Factory co-branded cafés can profitably capitalize upon the offsetting seasonal demand patterns for frozen yogurt and chocolate. This will also offer customers a more exciting selection of desserts on a year-round basis. You can see photos of few store locations that show the exterior and interior of U-Swirl cafés here. Also, here is a map showing some of the existing stores.

U-Swirl is the only publicly traded company in the self-serve frozen yogurt business currently. This year should be one of the best in company's operating history given many factors, but most importantly their growth strategy with consolidation in the fragmented premium frozen yogurt industry. Management expects to realize significant economies of scale and operational efficiencies from the past acquisitions/expansion and future acquisitions in the industry. Management is in discussions with a number of frozen yogurt chains that have expressed an interest in joining the U-Swirl family. During the second half of fiscal 2014, more franchised store openings are planned, and management hopes to complete additional acquisitions in the highly fragmented self-serve frozen yogurt segment of the $6 billion away-from-home frozen desserts industry.

The proliferation of store openings by small, undercapitalized chains in recent years has left a number of its competitors without the ability to expand or a viable exit strategy. Management believe U-Swirl offers such operators or franchisors an attractive opportunity to team up with a vibrant and growing company that has the support of a strong parent company, Rocky Mountain Chocolate Factory, Inc., which has over 31 years of franchising experience and success. Management also believes U-Swirl has the potential to emerge as a leader in the self-serve frozen yogurt industry and, in the process, deliver outstanding returns to shareholders in coming years. Management has also stated that it remains "confident that U-Swirl is now positioned to pursue a store expansion program and consolidation strategy that can prove highly rewarding to our shareholders in coming years."

Shares, Capital Structure, and Insider Holdings:

  • Total average common shares outstanding: 14.5 million
  • Public float: 4.2 million
  • More than 75% of stock equity is held by parent Rocky Mountain Chocolate Factory and management

Beneficial Owner, Number of Shares Beneficially Owned

  • Rocky Mountain Chocolate Factory: 8,641,253 - 57.0%

Directors and Executive Officers

  • Terry A. Cartwright: 770,833 - 5.0%
  • Ulderico Conte: 759,833 - 5.0%
  • Henry E. Cartwright: 661,833 - 4.3%
  • Scott G. Capdevielle: 150,000 - 1.0%
  • Franklin E. Crail: 150,000 - 1.0%
  • Clyde W. Engle: 150,000 - 1.0%
  • Bryan J. Merryman: 150,000 - 1.0%
  • Lee N. Mortenson: 150,000 - 1.0%
  • All directors and officers as a group: 2,942,499 - 18.6%

U-Swirl has demonstrated earnings turnaround with strong growth in the last two quarters by not only reporting higher sales and profits, but also reporting improvement in other areas such as boosting cash on hand. Below are detailed earnings reports for the last two quarters (they can also be found on the company's website along with links to their latest SEC filings):

Working capital increased from a negative ($61,045) as of Feb. 28, 2013, to $408,814 as of Aug. 31, 2013. Cash on hand increased 89% from $358,527 as of Feb. 28, 2013, to $676,691 as of Aug. 31, 2013. Based on currently available information, CEO Ulderico "Rico" Conte expects fiscal 2014 to be a record year for the company (a statement made in the earnings report).

Since there is no other self-serve frozen yogurt company that is publicly traded, it is hard to compare the valuations. Some ice cream companies that are in the dessert industry have been part of larger publicly traded companies with multiple businesses, so its unfair to compare to those. That's why I am adding the below list, which discusses some of the food franchise companies to show how they have been investors' delight. Again, their valuations can not be compared with U-Swirl.

You cannot really compare this stock with other highfliers in the food industry and their valuations, but given this is in the food-related franchise industry in a way you could put it in perspective. Valuations of other well-established players in the food franchise industry are pretty amazing. Although direct comparison of U-Swirl with any others listed below would be like comparing apples to oranges, the point to be emphasized is they are still both fruit (food industry). Current low market capital of about $12 million makes this an attractive investment opportunity, leaving ample room for capital appreciation in the coming years as the company and premium frozen yogurt/dessert industry flourishes.

Publicly Traded Companies in the Food/Dessert Industry

  • Panera Bread (NASDAQ:PNRA): market capital of about $4.75 billion
  • Chipotle Mexican Grill (NYSE:CMG): market capital of about $16 billion
  • Yum Brands (NYSE:YUM): market capital of about $30 billion
  • Green Mountain Coffee (NASDAQ:GMCR): market capital of about $10 billion
  • Starbucks Corp. (NASDAQ:SBUX): market capital of about $60 billion
  • Darden Restaurants (NYSE:DRI): market capital of about $6.75 billion
  • Dunkin Brands (NASDAQ:DNKN): market capital of about $5 billion

Some known ice cream brand names have been acquired or owned/operated by large corporations -- for example, Baskin-Robbins is owned by Dunkin Brands and Ben & Jerry's by Unilever. That shows how the dessert industry catches attention of larger corporations given the dessert market is a multibillion-dollar global opportunity.

Current market capital for U-Swirl is under $12 million, which makes the company's valuation appealing and the stock a very attractive investment for both short- and long-term investors. The company has aggressive plans to expand organic and inorganic with the ultimate goal of opening up to 3,000 locations as stated in their latest SEC filing. It has recently filed a trademark application for the "U-Swirl-n-Go." The company has also disclosed in its SEC filings that they have recently launched the offering of U-Swirl-n-Go Store franchises, which are limited-product stores within non-traditional locations, such as convenience stores, airports, hotels and other mass gathering areas.

The initial investment for these franchises is substantially less and flat royalty fees, instead of fees based on a percentage of revenues, are charged. U-Swirl-n-Go Stores will typically offer four to six flavors of self-service yogurt, with customers filing containers with as much of one or more flavors as desired, selecting from over 40 toppings, and then paying by the ounce for the yogurt and toppings. U-Swirl-n-Go Stores will typically occupy 50 square feet or less within the non-traditional location, and with no dedicated seating.

Are There Any Health Benefits to Frozen Yogurt? Why Eat U-Swirl Frozen Yogurt? Is This Just a Craze That Will Fade?

Many are skeptical about this current craze of frozen yogurt, saying it will fade. I don't think it is just a "flavor of the week," given the vast amount of health benefits it has to offer. With millions of people taking prescription drugs and antibiotics that have, at times, horrible side effects damaging the good flora in the gut, probiotics help replenish them with good bacteria -- which is good for overall bodily function. U-Swirl claims its frozen yogurt is beneficial to bone health, digestive health, immune system functionality promoting a healthy lifestyle given they use only the finest non-fat and sugar-free frozen yogurt that meets and exceeds the requirements set forth by the National Yogurt Association and carries the NYA Live and Active Cultures seal
(source: U-Swirl website).

Health Benefits From Probiotics Present in Frozen Yogurt

It's no wonder probiotics itself has become a multibillion-dollar industry as people learn of the great health benefits it has to offer. Yogurt related products offers best option to add probiotics to your diet as it contains numerous strains of live cultures. People worldwide are becoming more health conscious and consume food that is good. I don't believe the trend of eating health beneficial food will end anytime soon, so the U-Swirl frozen yogurt craze will only intensify as the popularity of the frozen yogurt industry increases globally.

A healthier alternative to a coffeehouse hang-out, U-Swirl endeavors to create a relaxing, social environment ideally suited for every member of the family, where they can indulge themselves while eating responsibly. It will even help plan and play host to children's birthday parties and other special occasions.

Some Negatives About the Company

  1. Stock has seen low trading volumes in the past, which makes it volatile.
  2. Liquidity is limited due to thin float and low trading volumes.
  3. Frozen yogurt is a cold dessert, which means it sells more during hot summer season and less during winter, making sales and earnings to fluctuate quite a bit.
  4. Competition is intense as there are many smaller and bigger private operators.
  5. Company currently has limited resources to grow the business. Raising more funds to pursue expansion via company-opened stores and acquisitions could result in dilution of shareholder equity.
  6. The stock currently trades over the counter, which deters many investors.
  7. Rocky Mountain Chocolate Factory management may be instrumental in setting the direction of the company as they own controlling stake.

Growth Prospects

Within the last 12 months the stores in operation have been tripled, with smooth integration of acquisitions and some improvements from reduced overheads. They should reap benefits of mass reach, volume discounts from suppliers, ease of logistics, streamlining of multiple systems and overall scalability of the operations as they add new stores along with future acquisitions. Management recently stated that they are in discussions with a number of frozen yogurt chains that have expressed an interest in joining the U-Swirl family. It would be great to see the acquisition of privately held Menchies, Sweet Frog, and/or Orange Leaf. There are numerous other privately held names in the self-serve premium frozen yogurt industry that could fit well with strategic acquisition targets, such as Yogurtland, Beaches, Fresh Berry, etc.

With the stock price under $1 presently, that prevents many small-cap funds from making an investment. Possible future listing on the Nasdaq small-cap market down the road should attract investments from many new retail investors, hedge funds, and small-cap mutual funds.

Factoring in everything, I firmly believe that U-Swirl offers great opportunity for investment given it is a fairly undiscovered stock to most investors. It provides a ground-floor investment opportunity in an exploding growth potential sector. Think of it as if you had made an investment in Chipotle Mexican Grill stock during its infancy stage. Look at where the company and its stock price is now. U-Swirl is currently in the early phases of growth, and with rapid expansion the company could see a higher valuation in the future.

10 Key Reasons to Invest in U-Swirl

  1. Profitable
  2. Growing sales
  3. No debt
  4. Support from Rocky Mountain Chocolate Factory, which has 30-plus years experience
  5. Strong, experienced professional management team holding about 75% of equity
  6. Popular dessert concept that has generated an enormous craze among people of all ages given it provides a healthy alternative to ice cream, cake, donuts, and coffee
  7. Currently the only publicly traded company in the exploding self-serve frozen yogurt/dessert industry
  8. Huge expansion and growth opportunities within the U.S. and international markets
  9. Low current market capital of under $12 million, leaving ample room for an increase as management executes its strategy to expand from 90 stores today to about 3,000 locations
  10. Great opportunity to invest as an individual investor in a promising food franchise before the mutual funds get in

Disclosure: I am long OTCPK:SWRL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: All the information on this report is believed to be true to the best of my knowledge. All the information has been public and have been gathered from company press releases, SEC filings, and/or U-Swirl website. Please use expert financial advice in making any investment decisions.