Q1 2025 Rocky Mountain Chocolate Factory Inc (Delaware) Earnings Call

Participants

Jeff Geygan Geygan; Interim Chief Executive Officer; Rocky Mountain Chocolate Factory Inc

Sean Mansouri; Investor Relations; Elevate IR

Presentation

Operator

Good evening, ladies and gentlemen, thank you for standing by. Welcome to today's conference call to discuss Rocky Mountain Chocolate Factory's financial results for the fiscal first quarter '25. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded.
Joining us on the call today is the company's CEO, Jeff Geygan. Please be advised that this conference call will contain statements that are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Theses forward-looking statements are subject to certain known and unknown risks and uncertainties well as assumptions that could cause actual results in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward-looking statements, which are being made only as of the date of this call.
Except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements. The company's presentation also includes certain non-GAAP financial measures, including adjusted EBITDA as supplemental measures of performance of the business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.
You will find reconciliation tables and other important information in the earnings press release and Form 8-K furnished to the SEC earlier today, which are currently available on the company's page, on the SEC's website, and will be available on the company's Investor Relations section of its website within approximately 24 hours.
I will turn the call over to the company's Interim CEO, Jeff Geygan. Jeff, please go ahead.

Jeff Geygan Geygan

Thank you and good evening, everyone. We've been working through a transitional period at Rocky Mountain Chocolate Factory as we revamped the framework of our transformational plan. My intention is to utilize today's call to address recent developments and to elaborate on the components of our updated three-year strategic plan.
Before I continue, I'd like to take a moment to formally introduce myself. This marks the first occasion where I've had the privilege of addressing our shareholders, employees, and franchisees in this forum. My background includes over three decades of experience in the capital markets and investment management with an emphasis on strategic financial analysis, active engagement.
In August of 2021, I was appointed to the Board of Directors of RMCF, serving as Board Chair from May of '22 to June of '24 where I advised prior leadership on the development of RMCF's transformational plan. While the company achieved several key objectives during the initial launch of our strategic plan, including the divesture of the non-core use of our frozen yogurt business, earlier this year, it became clear to the Board that adjustments to our strategic framework and executive team would be necessary to refocus the operational turnaround we were seeking.
Recognizing the need for direct on-site leadership on our production facility on May 16, I made the decision to move to Durango and step into the role of Interim CEO, relinquishing my duties as our RMCF's Board Chair in accordance with the governance policies while also taking a leave of absence from Global Value Investment Corp, in order to do dedicate my full time and attention to returning RMCF to profitability and long-term growth. We're in the final stages of appointing a new CFO to lead our finance team, one who live and work in Durango. We expect to release more detail shortly.
The mandate from the Board of Directors is clear. First, identified and rectified deficiencies in our prior multiyear strategy to more effectively build towards a profitable future for the business. Second, improve our near-term liquidity to position the company. Third, return our retail store count to growth as we exit fiscal '25 and establish a foundation upon which we can achieve our three-year growth target. And finally, oversee the reconstruction of the strong executive team based on-site and our Durango production facility who possess the skills to execute our strategic plan and the recent groundwork we've laid to improve our liquidity position.
For those newer to our story, Rocky Mountain Chocolate Factory is a decade-old Colorado business that has developed notable brand equity, a loyal franchise base and generations of chocolate loving consumers. Our business strategy is designed to better align sales, marketing, and production, which will in turn enable us to strategically expand our store network and increase our production throughput with targeted capital investments. This line will also ensure more timely delivery of products and services to customers across each of our three sales channels and specialty markets.
We intend to execute our strategic plan by empowering our employees, franchisees, and co-branding partners with data-driven insights and analytics to improve their merchandising, product assortment, and customer experience. We've committed to enabling our franchisees to make timely and well-informed decisions to improve store level profitability and sales growth.
We believe our best and most immediate revenue opportunity lies with our current franchise store network. Supporting our franchisees remains our number-one priority. To further our commitment to improving the franchisee experience, we are deploying dedicated business consultants who will visit our franchisees nationwide to implement business optimization strategies to provide insights intended to allow stores to operate profitably. For example, we need to better communicate our industry-leading volume-based royalty payment program, which creates mutually beneficial relationship that offers discounted royalty rates for franchisees that emphasize the most profitable products made in our Durango facility.
Our initial analysis of the opportunity within our retail store network is promising, and we believe we can return to same-store sales volume growth as we exit this fiscal year on top of 15% price increase to franchisees that went into effect on June 1. An additional to improving store level economics, our total network of stores must return to growth. Over the past few months, we've initiated agreements with several new stores as well as newly designed kiosk concept that will be launched soon.
A recent and important change to our expansion strategy has been de-emphasized store transfers in place with store closures. Rather than having the franchisee close the store that we believe is in a favorable location but under operated, we're now actively taking steps to keep location and replace the operator. We've successfully transferred ownership of two legacy stores recently.
For fiscal year '25, we're targeting net store growth, marking the end of our multiyear pattern of store contraction. This will be accomplished by opening new stores across each strategic markets that we have identified, including Boston, New York City, Atlanta, Chicago, Portland, Seattle, and a few others. These markets have been selected based upon convenient distribution routes and favorable consumer demographics.
Beyond our store network, another key growth opportunity is within our e-commerce channel. And this necessary in support of sales channel with the opportunity to drive incremental revenue and build greater brand awareness. Improving inventory management is imperative to success of our e-commerce strategy, but certainly have sufficient stock with products for our franchisees as well as online customers.
Today, e-commerce accounts for just 3% of the total revenue. We expect to significantly increase that mix over the next three years. Additionally, our updated strategic plan recognizes the important role played by our specialty market retailers and co-branded partners.
The presence of RMCF products in stores like Costco not only creates favorable economics for the company, but more importantly, serves as means through which we can increase awareness and reach of our products with the ultimate goal of driving more traffic to our franchise stores. And remiss, if I didn't mention the synergies and brand exposure creative to work with our primary co-brand partner, Cold Stone Creamery, which includes more than 100 locations today.
Over the next three years, we intend to develop these strategic relationships to further drive brand awareness and throughput while expanding our tool set for inventory management. Our mission to deliver high quality confectionary products, along with the seasonal nature of our business create a challenging paradigm for aligning inventory levels with consumer demand.
As we look to increase our production output in the years to come, these channels outside of our franchise network represent to means through which we can manage incremental inventory produced outside our traditional peak seasonal demand. Expanding on this point as well as our production and supply chain, our performance during the holiday season of fiscal '24 did not meet our expectation and was a key factor that led to the implementation of many of the strategic and organizational change I've outlined.
Unfortunately, the shortfall is attributable primarily to business execution missteps, bottlenecks in our production output, and general inefficiencies across our supply chain. We deploy million an excess of $3 million in CapEx towards new equipment and production efficiency investments over the past year. In part to address the supply chain challenges, and we intend to continue investing in the business at a more measured pace to further support and augment our prior investments all designed to improve product quality, predictability, and cost effective production from our Durango facility.
We believe these investments will enable us to drive material improvements in our output, increase in current capacity in tandem with providing refinements across sourcing and procurement and will deliver cost savings as we scale our efforts. To finance these investments and initiatives, we'll need to improve our liquidity profile. We're currently negotiating agreements to add several million dollars of additional liquidity through a combination of non-core asset sales and new term loan agreement and replacing our current credit facility.
We're also improving our supply chain and logistics systems with the implementation of a new ERP system that will deepen our insights into operations and serve as a foundation for many of our data-driven initiatives. It was apparent to our business to acquired a current generation ERP solution that can provide better real-time insights into our production and business operations. Our updated ERP system will improve our responsiveness at the manufacturing level and will allow us to orient our production around our fastest moving products. We expect to deploy our new ERP system this fall and holiday season. We're also in the process of launching a new POS system across our network of franchised stores.
To date, we've installed 24 units with an additional 51 stores scheduled to be installed within months. We expect to have over 100 stores using our new POS by fiscal year end. This will provide additional insights for our business consultants and if they continue to engage with operators to approve store level sales and profitability. All this is being managed under the steady hand of our Senior Vice President of IT, Ryan McGrath, who has done an excellent job remaining on schedule and within budget.
In closing, I'd like to share a few operational targets we've established for both the year ahead and the three years out. Exiting fiscal '25, we believe we can return to a 20% gross margin. We expect total store footprint to return to growth in fiscal '25 were returning to adjusted EBITDA profitability as we exit the year.
Looking ahead three years to the conclusion of fiscal year '27, we believe we can generate gross margins in the range of 25% to 30%, driven by a combination of consistent revenue and volume growth, disciplined operating expense control, and franchise store expansion. When combined with returned to revenue growth, increased store count and prudent OpEx management, we believe the business can generate 10% to 12% adjusted EBITDA margin in fiscal '27.
Before I open the call to Q&A, I'd like to reiterate a few key themes. Despite the significant challenges that necessitated a broad range of senior management departures and a strategic realignment, we have a well-conceived strategic that we expect to lead to a renewal of growth. The steps have outlined, refining our strategic framework, strengthen our liquidity position, upgrading our leadership team, expanding our retail e-commerce presence, and investing in production and supply chain improvements are all aimed at driving sustainable growth and profitability to enhance shareholder value.
The company continues to have a well-recognized brand, a loyal consumer following, and a resilient customer base. We're confident the initiatives we've begun to implement since I arrived in Durango will position us to achieve our future targets and return Rocky Mountain Chocolate Factory to a state of sustainable and profitable growth.
I want to thank our Board of Directors for their support during this challenging time. I'd also like to recognize our senior leadership team in Durango and beyond who have been outstanding and their support in helping to stabilize our business and engage wholeheartedly in a newly developed strategic path forward.
Operator, I'll now take questions.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, before we open the call for live Q&A, the company would like to address questions that have been received via e-mail over the past weeks. Rocky Mountain Chocolate Factory's external investor relations advisor.

Sean Mansouri

Thank you, Latif, and thank you to everyone who submitted questions over the past week and even this recently over the past hour after issuing our results. So our first question to address here, Jeff, what's the current status of the search for permanent CEO and CFO?

Jeff Geygan Geygan

Thanks, Sean. Well, moving forward, we both searches and expect to have announcements shortly.

Sean Mansouri

Okay. And can you expand on your highest priorities for capital allocation in the next 12 to 36 months?

Jeff Geygan Geygan

Yes, of course. Investing in production facility in Durango to improve cost efficiency and uptime operations and committing to expand store count with multiunit operators while investing in our brand and store design.

Sean Mansouri

Great. And can you expand upon the product mix that you believe will help to reinvigorate sales and expand gross margins? What are your fastest moving and highest margin products?

Jeff Geygan Geygan

Yes, sure. Our most popular items are milk pecan bears, peanut butter pails, and English toffee, all of which are high-volume items. It's most efficient to produce our popular items, all of which have leading profit margins. We'll drive creator sales penetration across our system by ensuring we have our most popular products in all locations and available inventory to meet demand.

Sean Mansouri

Great. And how are you thinking about the geographic expansion strategy for Rocky Mountain Chocolate Factory?

Jeff Geygan Geygan

We're focused on developing market in which there are favorable demographics and easily expandable distribution lanes such as say Boston, New York City, Atlanta, or Seattle, Portland, and into California.

Sean Mansouri

Okay. And last question here. What is the Board's long-term vision for the RMCF brand, the franchisee, and the manufacturing operations?

Jeff Geygan Geygan

Yes, great question. To develop the best-in-class franchise offering based upon a broad network of stores continuing to provide premium confectionary products supported by expanded e-commerce sales.

Sean Mansouri

Great. Latif, that wraps up the Q&A that came in via e-mail. If you'd like to open it up for live Q&A, please.

Operator

(Operator Instructions) This does conclude today's conference call. You may now disconnect your phone lines at this time and have a wonderful day.