People are still craving chocolate and this has led to Rocky Mountain Chocolate Factory, Inc. (NASDAQ: RMCF) and its stock price rise dramatically in the early 2020s when Coronavirus affected the stock market.
However, with the shares trading at $7.50 for a share, do you think there is chance of optimism or more price appreciation?
Recovery paired with a Beautiful Balance Sheet
RMCF is a leading global confectionery maker, international retailer and franchisor offering exquisite chocolate, confectionery and self-serve frozen yoghurt that runs over 300 Rocky Mountain Chocolate Factory and self-serve frozen-yogurt stores in the United States, South Korea, Qatar, the Republic of Panama along with The Republic of the Philippines.
In the year 2020, RMCF experienced significant business disruptions as a result of COVID-19 such as the extensive self-quarantines mandated of customers and the closing of non-essential operations across all of the United States and internationally. The result was that revenues in the fiscal year 2021 was impacted negatively by health-related measures to address COVID-19. Revenues fell by 26.3 percent to $23.5 million as compared with $31.8 millions in FY 2020. The company reported an unprofitable net loss of $900K , compared to a net profit of $1 million in the fiscal year 2020.
But from an operational perspective things have slowly returned to normal over the last few quarters, with revenues and margins regaining to reasonable levels in FY 2022.
Particularly the revenue was up 57.5 percent at $24 million during The first 9 months of FY 2022, compared to $15.3 million in the first one-quarter of FY 2021. In addition, we anticipate that FY 2022 will be higher than FY 2020’s revenue of $31.8 million, given that the most popular sales of RMCF’s goods are during major holidays (i.e. Dec-Jan-Feb) as well as during the summer vacation time.
The agreement in place with Edible Arrangements that was extended in March 2020 has played a significant part in the recovery of this company due to the fact that privately owned Edible Arrangements is the world’s largest franchisee of stores that offer natural fruit snacks, dips, as well as fresh arrangements of fruit. It has more than 1,100 stores across the globe.
In addition, due to the profit margin increase mentioned earlier, adjusted EBITDA was up from losing $(2.6) million during the first nine years of FY 2021, to an adjusted positive EBITDA in the amount of $3.7 million during the first nine years of FY 2022 however, we expect that to be. EBITDA for the fiscal year 2022 will not exceed levels pre-pandemic. In fact, we predict that the adj. EBITDA during FY 2022 would amount to $5 million, compared to $6.2 millions in FY 2020.
In addition, considering that the Enterprise Value currently stands at around $42 million. RMCF is trading around 1.3 times its FY 2022 revenues in addition to 8.8 times its FY 2022 adj. EBITDA therefore it’s quite valued.
Ailwinds And Headwinds
We’ll start with the tailwinds. And the luxury chocolate sector is predicted to grow at a rate of 5to 9 percent between 2021 and 2027 according to reports from the industry available here. While the top brands will remain the dominant players in the market We believe there is an opportunity for artisanal, high-quality chocolate makers to expand their business.
The second reason is that RMCF has been making chocolates by hand for over more than four decades. As a result it is a well-known and trusted brand across North America. Also, RMCF does not need to construct the brand entirely from scratch and this is an important aspect in growing in the retail sector.
However, the negatives for the business of RMCF are not going to go by unnoticed. The first is that RMCF’s chocolates are pricey and will likely be expensive due to the rising cost of living for the near future. In addition, given that market for chocolate will be fierce, customers will have a wide selection when trying to find good quality chocolate at reasonable prices.
We’re also not fans of frozen yoghurt as frozen yogurt doesn’t taste great. However, this is a subjective issue and we are aware that others do not share our opinions. But, it’s clear that frozen yoghurt is a mix of yogurt and ice cream that is like people who are trying to navigate in two boats. However, you cannot navigate on two vessels for very long. You must choose and prioritize one, or else you’ll be swept into the sea sooner than later.
We have predicted above that FY 2022’s revenues will increase to levels pre-pandemic and surpass FY 2020’s revenue of $31.8 million. However, we believe that they’ll barely reach FY 2019’s revenues that is $34.5 million. So, the most important issue is whether RMCF is able to be able to return to growth since its revenue has been decreasing since. We believe that growth will be an absolute possibility, provided that the company follows these steps:
1.) Resolution of disagreements in Edible, as quoted in the most recent quarterly report (emphasis added):
In the nine months that ended on November 30th, 2021 there were disagreements in the relationship between RMCF and Edible in connection with the strategic alliance and the ecommerce agreements that led to ongoing discussions the outcome of which is not yet clear. Purchases made by Edible in the nine and three months ending December 30, 2021, were roughly $413,400 as well as $1.2 million which is 4.9 percent and 5.0 percent of the company’s revenue in the respective months. The amount of purchases made by Edible during the three and nine months that ended December 30, 2020, were around $1.2 million, and $2.1 million equivalent to 16.3 percentage and 13.9 percent of the Company’s revenue in the respective months. There is no guarantee that the historical levels of revenue are the basis for future revenue. “
2.) Solution of the problem through Immaculate Confections, as reported in the most recent quarterly report (emphasis added):
3) Innovation in product design and expanding the product line: Currently, RMCF has a small selection of products. We think it is two of the primary driving factors for growth for all retailers is innovation in the product line and the expansion of the product line that is also applicable to RMCF. This is the way RMCF will draw new gourmet food enthusiasts and clients with a classy look.
For example, the recent launch of the ruby chocolate is a fantastic decision and we hope that the company will follow up with more carefully-crafted chocolates infused by fruits (i.e. exotic fruits, figs, the pomegranate, etc. ), specialty tea (i.e. matcha tea) and popular cocktails (i.e. mojito, daiquiri coca colada, cosmopolitan etc. ).
We also predict that CBD-infused chocolate will aid in the growth of the company over the coming years. In actual fact, RMCF needs to hurry up, as market competition within the CBD-infused chocolate market has grown significantly in the past few years.
Expanding into streetfronts and even airports The RMCF stores can be found located in six main locations. In particular, according to the most recent annual report the company’s franchises in the US are were operational at the time of February 20, 2021. In light of the fact that RMCF is not present in airports and streets and airports, it must focus on the growth of both. We would actually recommend that airports be the first priority because the majority of people go to airports to purchase expensive items typically as gifts.
From an operational perspective There are significant uncertainty both on the short-term horizon as well as the longer-term mid- and long-term time horizon.
Concerning momentary uncertainties, the talks are still in progress, and no one is aware of the outcome of the talks with Edible arrangements as well as Immaculate Confections. If the outcome is negative, it will affect the company’s top and bottom line in the coming months.
Concerning the future, both the long and mid-term The company is looking to hire a CEO which means we don’t know what the CEO who is chosen will possess the ability to increase efficiency of the operation as well as implement a successful growth strategy amidst intense competition.
Not to be forgotten, RMCF is a low-float microcap stock. As such it has a high volatility therefore it’s not recommended intended for day traders, speed investors or short-term traders. Buyers of RMCF must have an investment horizon of 12 months (at at the very least).
Investors must venture away from the main roads for unknown stocks that have high upside potential, and outperform the markets. The majority of these performers are small-cap stocks. They’re not among the coveted billion-dollar names. This is the reason we advised our readers of conduct a thorough study to purchase RMCF at the end of August in 2020 at a price of $3.50 per share.
From a fundamental perspective the balance sheet is solid with no debt and a substantial amount of cash. However, the dividend should be slowed until the company’s operations are stabilized.
From a practical standpoint there are a lot of moving parts to consider, such as the issues concerning Edible Arrangements, the issue with Immaculate Confections, and the new CEO, who will be charged with expanding the business and increasing profits to the point of being a profit-maker.
In the end, the waters are currently cloudy, therefore we’re neutral, and we advise investors to remain in the safe zone. There are more secure and less expensive options with higher upside available.
Value Digger is an ex-fund manager with over 30 years’ experience in investment. Since 2016, he has been consistently beating the market by utilizing selective long-term ideas (high-yield dividend stocks and value stocks) and short-term ideas from different industries. Since 2016 the investor has made money from around 140 picks, generating approximately 60% per selection (average yield).