Noble Roman’s: Last Gasp Effort to save its Franchise

I have previously criticized Noble Roman’s (NROM.OB) for being over-aggressive in its expansion and for management blaming its franchisees when those franchises failed. Noble Roman’s has now taken over six struggling Indianapolis-area stores from a franchisee in a bid to prove that its franchisees can operate profitably. This reeks of desperation, and it is also a repudiation of the company’s recent strategy of owning no stores.

Additionally, Noble Roman’s did not file a form 8-k to announce the move, something that appears to be required giving the materiality of the takeover for Noble Roman’s shareholders. See Cory Schouten’s excellent article at the Indianapolis Business Journal for more details.

Noble Roman’s has also announced that it has retained an investment bank to seek ’strategic options’ including selling itself. The one problem with this strategy is that Noble Roman’s is likely not worth its current market cap of $29 million. I do not believe there is any chance of the company finding a buyer willing to pay more than $1 per share.

The company’s profits fell 31% from Q4 2006 to Q4 2007, and I believe it likely that few of the area developers will actually build out new stores. As no new franchises or area developers are added, profits will continue to fall; new franchise and area developer fees have recently comprised a large portion of Noble Roman’s revenues. If we use the Q4 numbers and annualize them, we see Noble Roman’s trading at a lofty 20x its expected 2008 profit.

Why would anyone want to purchase a struggling restaurant chain at such a price when much more established restaurants are trading at prices such as Brinker’s (EAT) [$19.79 0.00%, market cap: $2.002B] 12x this year’s expected earnings?

From the 10Q:

Disclosure: After publication of this article I remembered that I bought (LONG) and sold NROM four days prior to this article, losing a tiny bit of money and violating my disclosure policy by publishing this. I regret this error.