Rocky Mountain Chocolate Factory Hits The News And My Screen Again

May. 4.12 | About: Rocky Mountain (RMCF)

When I was doing research for my article China Loves Chocolate And You Can Profit, I came across a company that I didn't mention in the article because it didn't have operations in China yet.

But things are going to change soon. The company I am talking about is called Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF), an international franchiser of gourmet chocolate, confection and self-serve frozen yogurt stores and a manufacturer of an extensive line of premium chocolates and other confectionery products. The company is dedicated to becoming the premier Chocolatier in the United States and the world through a strong commitment to product excellence and the expansion of its franchise system. The company is headquartered in Durango, Colorado, and is a publicly held corporation that was founded in 1981 and has been franchising since 1982.

As of April 30, 2012, the company and its franchisees operated 307 chocolate stores, 51 co-branded stores, and 13 self-serve frozen yogurt stores in 40 states, Canada, Japan, and the United Arab Emirates.

International expansion

On April 30, the company announced the launch of its international expansion strategy with the signing of a Master Licensing Agreement covering the country of Japan with a strategic partner based in Hong Kong. The international expansion will result in the opening of 100 stores across Japan.

Franklin Crail, chairman and CEO of Rocky Mountain Chocolate Factory, said Japanese consumers "have exhibited great enthusiasm for our brand and our products …"

RMCF Asia Ltd., which was formed to open Rocky Mountain Chocolate Factory stores throughout Asia, opened a test store in a Tokyo suburb in December. The company intends to open test stores in Hong Kong and Shanghai, China, later this year.

"With our entry into Japan and potentially into China, we believe an international expansion in Asia and other countries could play a very significant role in our company's growth for the foreseeable future," Crail said in a statement.

RMCF Asia's agreement with Rocky Mountain Chocolate Factory calls for the opening of at least 10 new stores a year for 10 years. The company also has the right of first refusal to acquire a master license to open stores in China, Taiwan, and South Korea.

What Else?

I already mentioned that the company manufactures an extensive line of premium chocolate candies and other confectionery products. The company's revenue is derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the company; the collection of initial franchise fees and royalties from franchisees' sales; and sales at company-owned stores of chocolates and other confectionery products.

The company typically produces approximately 300 chocolate candies and other confectionery products, using proprietary recipes developed primarily by its master candy maker. These products include many varieties of clusters, caramels, creams, mints and truffles. During the Christmas, Easter and Valentine's Day holiday seasons, the company may make as many as 100 additional items, including many candies offered in packages specially designed for the holidays.

A typical Rocky Mountain Chocolate Factory store offers up to 100 of these candies throughout the year and up to an additional 100 during holiday seasons. Individual stores also offer more than 15 premium fudges and other products prepared in the store. The company uses chocolate, nut meats and other ingredients in its candies and continually strives to offer new confectionery products in order to maintain the excitement and appeal of its products.

Why I get enthusiastic?

With an increased dividend to $0.11 per quarter you buy a stock with a dividend yield above 4%. With diluted net earnings per share of $0.62 in FY2012 you have a P/E of around 17, while the Sector P/E is around 21. A successful expansion of its Asian plans but also of the self-serve frozen yogurt business via its Aspen Leaf Yogurt stores could give a tremendous boost to earnings per share. Personally I believe $0.80 could be a realistic possibility this fiscal year.

This sleeping beauty is thinly traded but is going to get awakened soon enough. I think this company is an attractive investment opportunity for income- and growth-oriented investors with intermediate-to-long-term time horizons.

Disclosure: I am long RMCF.