Noble Roman's, Inc. - Second Quarter Report Demonstrates Sound Base For New Growth Phase

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About: Noble Roman's, Inc. (NROM)
by: Steve Crichlow
Summary

Franchising profit margins improve.

Nontraditional franchising continues impressive growth.

Craft Pizza & Pub improves prime costs by 300 basis points.

It’s About The Brand

Noble Roman’s (OTCQB:NROM) has been reinvented recently and this revival is focused on the customer and driving Brand loyalty. As an ex multi-unit restaurant operator, there is nothing more important than the core values that define a brand. When we think of successful businesses in today’s environment, we usually find at the essence of their success a very strong loyal customer base. Companies like Chick-fil-A, In & Out Burgers, Apple, Starbucks, Nike, and Disney are just a few. NROM is doing this at Craft Pizza & Pub through their WOW Initiative which focuses on creating an exceptional, consistent guest experience that exceeds customer expectations from the time the guest opens the front door until they depart. Every aspect of the guest’s touch points has carefully been taken into consideration to WOW the guest and deliver value in every phase. The company’s emphasis is on their meticulous attention to details. Things like putting the WOW in employee management attitude, featuring a glass enclosed temp-controlled Dough Room, open kitchen, fast pizza baking times (average cook time is 5 minutes). Even their marketing efforts are structured to exceed guest expectations. All these efforts take time to mature; but the Social Media commentary, including photos, provides documentation of success in this regard.

For the nontraditional franchising model, management’s redesigned WOW initiatives are woven into the entire program with emphasis on additional new site support from improved training to assistance in openings to the updating of equipment and marketing. The successful results of these initiatives are readily found in the increase of new store openings and development and the sales record set by the Red Mesa location on the Navajo Indian Reservation in New Mexico. Brand Loyalty, increasingly apparent in the nontraditional segment, now encompasses exceeding franchisee expectations as well as that of customers. Again, as an ex operator, we can’t overstate the importance of the franchising culture.

FRANCHISING PROFIT MARGINS IMPROVE (Source: Qtr-2 Results Press Release 8/14/19)

From the latest earnings call, management focused on the highlights of the quarter and several key developments, both during the quarter and upcoming expectations for the balance of 2019. Most notably:

  • Net income for the 3-month and 6-month periods ending June 30 were $580,000 or $.03 cents/share, up 5.5%, and $1.21 million or $.06 cents/ share, up 11.0% compared to $550,000 or $.03 cents/share and $1.09 million or $.05 cents/share for the same periods of 2018. Net income is protected for approximately $15 million due to their deferred tax credits.
  • Margin contribution from franchising venues increased for the 3-month and 6-month periods ending June 30, increasing to $1.08 million (66.4% of revenues) from $948,000 (58.1% of revenues) during the 3-month period and increasing to $2.17 (67.6% of revenues) from $1.84 million (58.0% of revenues) for the 6-month period compared to 2018.

The following table (Source: Qtr-2 Press Release 8/14/19) sets forth the details of revenue, expense and margin contribution of the company’s franchising venue and the percent relationship to its revenue:

For the three-month period ended June 30, 2019 compared to the three-month period ended June 30, 2018:

  • Total revenue from this venue was $1.6 million compared to approximately the same for the comparable period in 2018. Royalties and fees from franchising grew to $1.34 million compared to $1.28 million for the comparable period in 2018. This increase was partially offset by a decrease in royalties and fees from grocery store take-n-bake, which decreased to $285,000 from $356,000 compared to the comparable period in 2018. The increase in franchise fees and decrease in license fees from grocery stores reflects the change in emphasis on franchising versus licensing to grocery stores to sell take-n-bake pizza.
  • Salaries and wages, trade show expense and other operating costs decreased to $545,000 from $685,000. In January the company undertook an in-depth review of this venue to find ways to further reduce its costs while still accomplishing its objectives. These efforts resulted in the reduction of various operating expenses.
  • Gross margin increased to 66.4% from 58.1%, increasing margin dollars to $1.075 million from $948k.

NONTRADITIONAL FRANCHISING CONTINUES IMPRESSIVE GROWTH (Source: Qtr-2 Press Release 8/14/19):

Management also discussed the expansion and improvements made to their nontraditional franchising business model that has resulted in much better average unit sales. Part of their announcement stated that from January 1, 2019 through August 14, 2019, the company opened twenty-one new nontraditional franchise operations compared to seventeen opened during the comparable timeframe of 2018. Most impressively, the first two weeks sales of those new locations opened in 2019 averaged 32.8% higher sales than the average of the previous two years. Management noted that the location on the Red Mesa Indian Reservation set an all-time record for opening sales. Management emphasized that the decisions made in January 2019 to improve all aspects of the nontraditional business model are proving to be successful. The major improvements have been made in the overall kiosk design, marketing, operating systems and opening support. Indications are that these improvements will have significant impact on future growth, both in growing sales as well as attracting additional franchisees.

CRAFT PIZZA & PUB IMPROVES PRIME COSTS BY 300 BASIS POINTS:

Management also discussed other initiatives from their January 2019 review of business focus. These initiatives were finding ways to reduce costs of the Craft Pizza & Pub operations while still accomplishing overall company objectives. The resulting efforts reduced total operating expenses. These cuts were in costs of sales and costs of labor. Costs of sales improved by 140 basis points to an impressive low of 20.9%. Costs of labor improved by 160 basis points to 28.6%. At the same time, management discussed that restaurant level margins were impacted by poor weather early in the second quarter as well as surprisingly high adjustments to occupancy expense, based on common area charges. The company is vigorously questioning these charges, as well as renegotiating insurance coverage and working hard to advertise more efficiently. In any event, more stores will leverage the advertising effort. The four existing company stores are still annualizing above $1.3M of revenues, with an immediate cash on cash return in excess of 30%. At the same time, the first franchisee of the Craft Pizza & Pub is searching for a second location and a second franchisee is under construction in Evansville, IN, hoping for an opening in Q4. Very important, management indicated on the conference call that they are actively negotiating for a much larger long-term banking arrangement, which will pay off all existing debt and allow for five new company locations.

CONCLUSION:

In consideration of all the above, Noble Roman’s is consistently profitable, generating sufficient cash flow to service all existing debt and slowly add to the company operated base. Should the current banking negotiations bear fruit, a new growth spurt would ensue. Since each new company operated location is capable of generating from $200-300k of store level EBITDA, and the nontraditional franchised locations are expanding as well, the increment on the base would be substantial. The company is generating corporate EBITDA at the approximate rate of $3.5M annually, so the current enterprise value just north of $15M seems more than reasonable and the upside could be substantial. We believe that NROM continues to offer a compelling investment opportunity; especially observing management’s tireless efforts at building Brand loyalty.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.