Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) Q2 2017 Earnings Conference Call October 11, 2016 4:15 PM ET
Franklin Crail - President and CEO
Bryan Merryman - COO and CFO
David Luebke - Summit Brokerage
Tim Call - The Capital Management Corporation
Hello, and welcome to the Second Quarter Fiscal 2017 Operating Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Further, please note this event is being recorded.
The statements made on this conference call which are not historical fact are forward-looking statements based upon the company's current plan and strategies, and reflect the company's current assessment of the risks and uncertainties related to its business including such things as product demand and market acceptance, the economy and business environment, and the impact of government pressures, currency risks, capacity, efficiency and supply constraints, and other risks detailed in the company's press releases, shareholder communication and Securities and Exchange Commission filings. For additional information, the company urges you to consider reviewing its 10-Q and 10-K SEC filings.
I would now like to turn the conference over to Mr. Franklin Crail, President. Please go ahead.
Thank you, Operator. Good afternoon everyone. I am Frank Crail, President of Rocky Mountain Chocolate Factory, and I would like to welcome you to our second quarter of fiscal 2017 conference call.
With me here today is Mr. Bryan Merryman, the company's Chief Operating Officer. We're going to start the call this afternoon with Bryan giving you a summary of our operating results for both the second quarter and first six months of fiscal 2017. And after his presentation, we will be happy to answer any questions you may have.
So, at this time I would like to turn the call over to Bryan.
Thanks, Frank. I would also like to welcome everyone to today's call. I will start with the first six months of the year and then get into a little bit more detail in the quarter.
Total revenues for the first six months of the year decreased 8.5%. This was due primarily to a 6.6% decrease in factory revenues, which was driven by 26.7% decrease in shipments to customers outside of our network of franchise stores, and to a lesser extent a 3.7% decrease in same-store comps purchased by franchisees and licensees. And a decline of 3% in the average number of domestic Rocky Mountain Chocolate Factory franchise stores and operation.
Retail sales decreased 12.1%. This is the result of the sale of a certain company-owned locations, and the closure of an underperforming company-owned location. Same-store sales at all company-owned stores and cafes increased 0.9%. Royalty and marketing fees decreased 6.6%. This was due to an 11% decrease in domestic franchise units and operation, mostly frozen yogurt locations. Same-store sales at domestic Rocky Mountain Chocolate Factory franchise stores increased 2.1%, while same-store sales at U.S. -- or at U-Swirl franchise cafes declined 4.6%.
Total same-store domestic franchise sales across all brands decreased 0.2%. Franchise fees decreased 59.7%. International license fees that were recorded in prior year did not repeat in the current year. Factory margins decreased 10 basis points from 27.6% to 27.7%. This was due to a decrease of certain commodities, primarily chocolate and almonds offset by increased cost per pound on lower volume. Excluding retail, operating expenses decreased 6.6% from lower G&A and franchise costs. Adjusted EBIDTA was $3,755,000 versus $4,298,000.
Net income was $1,707,000 compared to $1,543,000. Diluted earnings per share were $0.28 in the current year, compared to $0.25 in the prior year. During the first six months of the year, we opened 25 stores including five Cold Stone Rocky Mountain Chocolate Factory co-branded stores, one domestic standalone Rocky Mountain Chocolate Factory franchise opening, 14 international Rocky Mountain Chocolate Factory locations, and four domestic U-Swirl locations, and one international U-Swirl location. We finished the quarter with $4.9 million in cash, with the current ratio of 1.8 to 1. We repurchased approximately 35,000 shares of our common stock at an average price of $10.01 per share during the first six months.
On September 16, 2016, the company paid its 53rd consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share. During the first quarter of the year, we acquired certain assets of two small confections companies, FernCreek Confections and Elaine's Toffee Company. These acquisitions allowed us to acquire an all-natural gluten-free line of products and a high-end toffee line, and also expanding our customer relationships.
In the second quarter, total revenues decreased 7.3% due primarily to a 3.8% decrease in factory revenues. This was due to a 44.5% decrease in shipments to customers outside of our network of franchise stores, and to a lesser extent a 2.1% decrease in same-store pounds purchased by franchisees and licensees.
Retail sales decreased 13.5%. This is the result of a sale of a certain company-owned location and the closure of underperforming company-owned location. Same-store sales at all company-owned stores and cafes increased 0.2%. Royalty and marketing fees decreased 8.4%. This was due primarily to a 12.9% decrease in domestic franchise units. And again, the decrease in those units was mostly due to frozen yogurt location closures.
Same-store sales at domestic Rocky Mountain Chocolate Factory franchise stores increased 2.9%, while same-store sales at domestic U-Swirl franchise cafe declined 5.7%. Total same-store domestic franchise sales across all brands decreased 0.1%. Franchise fees decreased 56.4% in the quarter with fewer U-Swirl franchise openings and less revenue associated with international license agreements.
Factory margins decreased 50 basis points to 29.8% versus 30.3% in the second quarter of last year. This was due to a decrease in the cost of certain commodities, primarily chocolate and almonds offset by an increased cost per pound and lower volume.
Excluding retail expenses, operating expenses decreased 8.5% on lower G&A expense and lower franchise costs. Adjusted EBIDTA was $2,019,000 for the quarter versus $2,201,000 in the second quarter of last year. Net income was $975,000 compared to $780,000 last year. Diluted earnings per share were $0.16 per share in the current year compared to $0.13 per share in the prior year. During the second quarter, we opened 12 stores, four Cold Stone Rocky Mountain Chocolate Factory co-branded stores, six international Rocky Mountain Chocolate Factory locations, and one domestic U-Swirl location, and an international U-Swirl location.
We finished the quarter with approximately $4.9 million in cash, current ratio of 1.8 to 1. During the quarter, we repurchased approximately 20,700 shares of our common stock at an average price of $9.97 per share. On September 16, 2016, again the company paid its 53rd consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share.
And with that, I will turn the conference back over to Frank for questions and answers.
Okay. Thanks, Bryan. At this point in time, we would be glad to answer any questions that you might have.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from David Luebke of Summit Brokerage. Please go ahead.
Thank you. And just for the record, I am not an analyst, I am a registered representative. The opening of the international Rocky Mountain Chocolate Factory stores and U-Swirl stores, can you tell us where -- which countries?
Almost all of the international stores that opened were Rocky Mountain Chocolate Factory stores in South Korea.
Interesting. That's all I have
[Operator Instructions] Our next question comes from Tim Call of The Capital Management Corp. Please go ahead.
Could you review your operating cash flow/free cash flow outlook, and whether that will continue to be used to pay off debt as it comes due, and the excess cash flow above that, above your operating and CapEx needs, how do you foresee using that for future dividends and share buybacks?
Well, I think this year is a little different than the past few years, and will be a little different than what we will see in the future. We are investing quite a bit in the factory this year, much more than just maintenance CapEx this year to improve our factory and make it more efficient. And so that typically would have -- that free cash flow typically would have went to buying back stock. So we will see less stock buybacks this year than you had in past years, but I would expect that would return to more of a historical level in the future.
And then how often does the Board consider dividend increases? Do you consider that every seven or eight quarters?
Well, it's something that you know, we look closely at the performance of the business, the CapEx needs for primarily our factory and how the company is performing. And so, while it doesn't happen quarterly, it's considered often.
[Operator Instructions] It seems that we have no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Franklin Crail for any closing remarks.
Thank you, Operator. We would like to thank you again for attending our second quarter conference call, and we look forward to talking to you again in January. Have a nice day, and thank you again. Goodbye.
To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088, beginning at 5:45 PM Eastern Standard Time today. You will be prompted to enter a conference number, which will be 10093506. Please record your name and company when joining.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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