Noble Roman's Is A 44-Year-Old Brand Attempting To Re-Establish A Growth Trajectory

| About: Noble Roman's, (NROM)

Summary

Forty-four years of serving high quality pizza products may finally pay off.

Current licenses with almost 2,000 grocery stores, 710 non-traditional locations, plus a start within Wal-Mart and Circle K.

About to open their New Generation Franchiseable Concept, balance sheet is being strengthened.

The Company

Noble Roman's, Inc. (OTCQB:NROM) is over forty years old as an Indiana Corporation, having operated, franchised and licensed versions of the "Noble Roman's Pizza" brand. The company also owns the "Tuscano's Italian StyleSubs" brand, but it is not material at this point in time. Executive Chairman, Paul Mobley, formed NROM in 1972, still leads the company from a strategic standpoint, and his son, Scott, is President and CEO. While the company has operated and franchised stores with varying degrees of success over the years, I believe the underlying reputation for serving a generally high quality product has been maintained throughout. The original base of operations in Indianapolis, Indiana has been expanded over the years so that locations selling NROM Pizza today include 50 states plus D.C., Puerto Rico, the Bahamas, Italy, the Dominican Republic and Canada.

Three Primary Areas of Focus

Per the company's nine month update: Noble Roman's today has three primary areas of focus: (1) Licenses to sell Noble Roman's products within grocery stores and (2) Franchises/Licenses have been awarded for "non-traditional" locations, primarily in convenience stores (often affiliated with gas stations) and entertainment facilities. (3) Development of a new generation of "Noble Roman's Craft Pizza & Pub," which will presumably be franchiseable after opening one or two company-operated locations.

Relative to grocery store licensing, over the last several years, Noble Roman's has licensed, by way of a supply agreement, sales of its products to approximately 1,950 grocery stores. The licensed grocery store must purchase proprietary ingredients through a Noble Roman's approved distributor. The deli department of the grocery store then assembles the products and displays them using Noble Roman's point of sale marketing materials. The distributors collect for Noble Roman's a fee in lieu of royalty as they sell ingredients to the grocery stores. The distributors are obligated to remit this amount within ten days of each month end. It is naturally a requirement of this distribution approach to have regional grocery store distributors in addition to their regional food service distributors through which to reach the grocery stores and the non-traditional franchisee locations. In 2015, seventeen new distributors were added, bringing the total at year-end 2015 to twenty nine, and two additional distributors were added at the end of Q3'16. A total of 402 grocery store locations have been licensed during the first nine months of '16, of which about 200 have opened. The total number of grocery store licenses has grown steadily over the last several years as new distributors have been selected. This segment generated $1.54 million of license revenues for the nine months ending 9/30/16, up about 12% from the $1.37 million in '15. With the number of grocery store licenses increasing steadily, this source of revenues should continue to grow, and could be increased further by NROM's ongoing efforts to make each location more productive. For example, NROM management is exploring with distributors the possibility of assembling the pies at the distribution level, reducing the labor requirement (a big challenge these days) at the individual grocery store. This revenue source, spread among almost 2,000 locations and growing, should, at the least, grow steadily, and possibly accelerate by way of "productivity" enhancements.

Relative to franchising of non-traditional locations, the company has franchised about 715 units, including convenience stores, travel plazas, entertainment venues, hospitals, most recently Wal-Mart, and recently sold three franchises to Circle K locations. This has also been a steady source of revenues, amounting to $3.3 for nine months of '16. While this segment generated flat revenues in '16, a prototype counter top unit was introduced in early '16 and has resulted in 26 new licenses signed in '16, versus 13 signed through Q3 of '15. There is obviously a time lag from when a new license is signed to when a location opens for business, so revenues from this source can be expected to build in the future. Of special note is the first franchised location within a Wal-Mart which opened this past summer. Four more locations are expected to open within Wal-Marts by 12/31/16, and discussions are taking place for locations beyond that. Additionally, the company announced in their Q3 report a new agreement with the Circle K franchised system (nearly 1,000 locations) to become a preferred supplier for all existing and prospective franchisees. Three Circle K licenses have already been signed and NROM says that discussions are taking place with approximately 135 additional locations. This source of income has clearly picked up momentum during the course of 2016, and should be able to generate increased revenues as the company moves forward.

The third important focus for the company is the pursuit of a successful "stand alone" franchiseable restaurant concept. Over the forty-four year course of the Noble Roman's brand, there have been several franchiseable versions. The most recent was a "Take 'n Bake" outlet, which was "educational" but unsuccessful. That effort has been phased out over the last couple of years, so write-offs have "muddied" the reported financial results, and created the need for additional capital to fuel the next stage of growth. The company has now completed design and initiated construction of their next generation, "Noble Roman's Craft Pizza and Pub." It will feature two styles of crust, both thin and Deep Dish Sicilian, with their well known breadsticks served with spicy cheese sauce, new specialty salads, four pasta dishes, all "designed to be fast, easy to prepare and delicious to eat." New pizza oven technology will provide bake times of only 2.5 minutes, with the dough preparation room visible to customers. The first location is scheduled to open in hometown Indianapolis in January '17. A second location is planned but the site has not been chosen. This "new generation" fast casual concept is designed to capture the customer as demonstrated by rapidly growing fast casual pizza chains such as MOD, Blaze, and Pieology, at the same time providing the full service customer with an "experiential" environment. While success cannot be predicted with certainty, Noble Roman's products have been respected for many years. They have operated and franchised pizza restaurants before. Their hometown of Indianapolis should be receptive, and management should be able to react quickly to any "retweaking" necessities. Obviously, success in this area could be very important to overall corporate prospects.

Recent Results and Balance Sheet Progress

Financially, there are a number of "moving parts." The stock has been trading around $0.40 per share, with about 21 million shares outstanding. While Income Before Taxes from continuing operations was $1.3 million for nine months of '16, up from $1.2 million, there has been quite a bit of "noise" flowing through the income statement, largely related to phasing out of the Take 'n Bake effort. There is always one or more reasons that stocks trade under $1.00/share. For nine months ending 9/30/16, the bottom line net income after taxes (though no taxes are paid due to a tax loss carryforward of $21 million) was $708,430 versus a loss of $611,000, which provided $.03 profit vs. $.03 loss.

The balance sheet shows current assets of $5.0 million against $3.7 million of current liabilities. However, cash at 9/30/16 was a modest $175,000 and $2.3 million of the current assets are accounts receivable (from licenses) and that will come in over time. On the liability side, a $1.5 million bank loan due March 31, 2017 has been classified as a current liability. Another $1.25 million, part of $2.0 million borrowed early in 2016, repayable bi-monthly over the two year period, has been classified as current. As a result of less financial "flexibility" than the Company would like, they are in the midst of raising up to $2.0 million, in the form of convertible notes (convertible at $.50 per share), maturing in three years, plus warrants to purchase 2 million shares at $1.00. As of the Company's nine month update, $950,000 had been closed.

Relative to the recent stock performance, even considering the less than powerful balance sheet and write offs from past stumbles, it is natural to question why NROM would be trading at a multi-year low, considering the potential in each of their lines of business. I've followed NROM for decades, watched the stock carefully for almost two years now, and conclude that between about $1.00 per share about a year ago, and the current level, something like 5 million shares have been liquidated by impatient institutional investors. Only time will tell whether that process is at an end and fundamental success with new licenses and/or successful openings could quickly dry up potential supply anywhere close to this level.

Conclusion

My conclusion is that this low priced "speculative" situation has more potential than most "penny stocks" you might come across. You don't find blue chips at $0.40/share or thereabouts, but now and then a speculative situation such as this grows up to be far more substantial and successful. This brand has been around for over forty years, management has more at stake than any of us will ever have. The Mobleys own about 16% of the equity and directors own another 4%, seemingly dedicated to "monetization" of their decades of effort. With 25 million shares outstanding, fully diluted after the current financing, the total enterprise value including debt (at $0.40) per share would be in the area of $11-12 million. Considering that NROM has been generating EBITDA from continuing operations in excess of $3.0 million annually in '14 and '15, distorted below the EBITDA line with "adjustments" from previous missteps, it does not seem outlandish for NROM to be generating comfortably over $3 million in the near future, and with a long runway ahead for substantial growth from that level. Whether it be grocery stores, convenience stores such as Circle K, more Wal-Mart locations, or exploitation of the "new generation" Noble Roman's, potential catalysts for fundamental growth and a materially higher stock price, seem numerous. Short-term financing issues could always get in the way, but it appears to me that management has quite a few cards to play, including completion of the current financing and renegotiation of the current bank line that seems modest relative to cash generation potential.

Successful investing is all about reward versus risk, and this could be a reasonable bet for an appropriate investor. I encourage interested investors to study the company's reported financials, and nine month update, all available at www.nobleromans.com before investing. Liquidity can always be a concern, depending on the size of an investor's position, with a low priced stock such as this, but NROM has traded almost 15 million shares over the last 12 months.

Disclosure: I am/we are long NROM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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