Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) Q1 2018 Earnings Conference Call July 6, 2017 4:15 PM ET
Bryan Merryman - CFO, COO and Treasurer
Tim Call - The Capital Management Corporation
Hello and welcome to Rocky Mountain Chocolate Factory First Quarter Fiscal Year 2018 Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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 economic and business environment and the impact of government pressures, currency risk, 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 Bryan Merryman, the company’s Chief Operating Officer. Please go ahead, sir.
Thank you, operator. I’m Bryan Merryman, Chief Operating Officer of Rocky Mountain Chocolate Factory. Thank you for attending our first quarter of fiscal 2018 conference call to discuss our operating results. Mr. Frank Crail, President and CEO of Rocky Mountain Chocolate Factory couldn’t attend today’s meeting due to the family commitment.
With that, I’ll begin discussing our operating results for the first quarter. Total revenues decreased 0.3%. Factory revenues increased 7.3%, driven primarily by a 17.6% increase in shipments to customers outside of our network of franchise stores, and a 1.3% increase in same-store pounds purchased by franchisees and licensees, partially offset by a decline of 2.1% in the average number of domestic Rocky Mountain Chocolate Factory franchise stores in operations.
Retail sales decreased 19%. This is the result of the sale and closure of certain company-owned stores and cafés in the previous fiscal year. Same-store sales at all company-owned stores and cafés decreased 6%. Royalty and marketing fees were up 15.8% due to a 15.8% decrease in domestic franchise units in operation, due almost entirely to frozen yogurt café closures.
Same-store sales at domestic Rocky Mountain Chocolate Factory franchise stores decreased 1.4%, while same-store sales at domestic U-Swirl franchise cafés declined 8.6%. Total same-store domestic franchise sales across all brands decreased 3.9%. Franchise fees increased 136.1%. This was the result of international license fees received for the licensing rights covering Vietnam and Panama, partially offset by a decline in domestic franchise openings.
Factory margins increased 80 basis points from 23.9% to 24.7%. This was driven by decrease in the cost of certain commodities, primarily chocolate and almonds, partially offset by increased labor and overhead expenses. Excluding retail operating expenses, operating expenses decreased 7%. Adjusted EBITDA came in at 1,749,000 versus 1,736,000 last year.
Net income was 814,000 for the quarter versus 732,000 for the same quarter last year. Diluted earnings per share increased 16.7% to $0.14 in the current year compared to $0.12 in the prior year. No stores were opened during the quarter. However, we have 19 stores that are sold, but not opened this year versus eight stores last year. Again, we executed international license agreements covering Vietnam and Panama.
We finished the quarter with approximately $7.6 million in cash, with a current ratio of 1.8 to 1. And on June 16, 2017, the company paid its 56th consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share.
With that, I’ll turn it back over to the operator for questions and answers.
Thank you, Mr. Merryman. We will now begin the question-and-answer session. [Operator Instructions] And we have a question from Tim Call of The Capital Management Corporation. Please go ahead.
Congratulations on the earnings growth. When you look at your factory sales being stronger in the quarter, are there any new products or new retail relationships that – provided that strength, and do you expect any of that to continue in the future?
Mainly what was primarily driving increased sales was a 17.6% increase from a single customer and more in line with the previous, not last fiscal year, but the year before this quarter back up more to a level that they were two quarters ago in the first quarter. We do expect that to continue for the balance of the year. We expect growth of that customer. We also saw some positive same-store pounds purchased from our franchise system and saw a 2.4% increase in sales to our franchisees and licensees and have no reason to believe that that wouldn’t continue.
When looking at your strong cash flow, it’s been used to reinvest in the business with factory improvements and efficiencies, and that – you might be done with that project over the next year. And then you’ve used a lot of your free cash flow to pay down debt, so interest expense is falling by over 20% year-over-year, and eventually, you’re going to run on the debt to pay down. What do you see your uses of cash flow in future years?
If the company continues to grow at a fairly modest rate as it has in the past then I would imagine we would start considering dividend increases, as well as share buybacks. Right now we have some litigation going that we’re reserving some cash for. We think it’s not probable that we’ll lose, and we also have another year of healthy capital expenditures planned in the factory.
So I think if the business performs over the next couple of quarters like it did in the first quarter here, we would begin to entertain a dividend increase. I think the company is from a cash standpoint in great shape, given every contingency that we know that’s out there right now. And I think this litigation would be over by the end of September.
So heading into the fourth quarter of this year, we’ll have a better understanding where our cash position is and what we want to do in this fiscal year.
Thank you, and congratulations.
[Operator Instructions] And we see no additional questions. We will conclude the question-and-answer session. I would like to turn the conference back over to Bryan Merryman for his closing remarks.
I just want to thank everyone again for attending the call today, and we look forward to having our next call in three months, and have a great summer, everyone. Thank you.
Ladies and gentlemen, this concludes our question – our conference call for today. Thank you very much for attending today’s presentation. To access the digital replay of this conference, you may dial 1877-344-7529 or 1412-317-0088, beginning in approximately one hour. You will be prompted to enter a conference number, which will be 10109639. Please record your name and company when joining. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.