We are adding Rocky Mountain Chocolate Factory (RMCF) to our ValueHuntr Portfolio. Although it is not a Special Situations play, we were recently impressed by the company’s performance even when cocoa bean prices trade near all-time highs. In short, the company is a cash machine. It generates earnings from 9 owned stores and more than 300 franchise stores (no Capex). For analysis, see HERE.
Rocky Mountain Chocolate Factory (RMCF)
March 8, 2010 · 13 Comments
Categories: Investing · Valuation · Value Investing
Tagged: RMCF, rocky mountain chocolate
13 responses so far ↓
shaun // March 8, 2010 at 3:28 pm |
AWESOME. I probably would never have heard of this tiny company but amazingly well run. Great hedge for a book with some short retailers. Certainly going to look into it more.
What are your 2011 FCF per share numbers you’re getting if you don’t mind sharing?
Would be interesting to hear your thoughts on DLIA also, remember to add back the op leases but still looks very cheap.
Daniel Vincer // March 8, 2010 at 6:36 pm |
awesome find, however this pick seems to dependant on people having extra cash to buy chocolate and icecream with. If the economy slides again this company may have trouble.
A Rocky Mountain Chocolate High | Franchising News // March 8, 2010 at 7:58 pm |
[...] Rocky Mountain Chocolate Factory (RMCF) « [...]
sam // March 8, 2010 at 9:25 pm |
Cool! A write-up of a stock I’m already in. (for a year or two.)
I like the analysis. I got in this one when I figured it was close to the cost WEB paid for See’s which he outlines fairly well in a couple of shareholder letters.
Franchising makes me nervous. that seems like the big risk here, if they leave their franchisees out in the cold, it will haunt them.
Candy making is a great return on capital, the machines last a long time, and can be ramped up to meet higher production.
I’m not sure I agree with the thesis that they will open up company owned stores with any regularity. My understanding is that they are not really interested in that.
(from a conference call way back.)
L.Z // March 8, 2010 at 11:46 pm |
Nice write-up! The only concern I have is that management was a bit vague in their Q3 conference call this Jan. about the specifics of their Cold Stone co-branding agreement. This could be a bit problematic for valuations. For example, the latest 10Q suggests that co-branded franchise license fees are potentially ~32% lower than normal franchise license fees (Don’t get too caught up in this! – I’m not claiming this is definite, but simply an example of a potential fee structure that fits the numbers. I can post the math if anyone is interested though).
Of course, this could easily be offset by the royalty agreement. The point is, it certainly seems that any incremental co-branding earnings per share would depend on knowing a little more about the fee and royalty agreement with Cold Stone.
I’m very interested if anyone has a sense of how the fees or royalties of the co-branded stores differ from the regular franchises. Overall, I think this was a great find though – definitely impressed by the stable cash flows, and the growth opportunities are worth looking into.
PlanMaestro // March 10, 2010 at 6:47 pm |
I like very much the presentation. I think as one of the above comments mentioned, the main risk is if the franchisees are actually profitable. Other site (wide moat investing, barel karsan?) expressed this concern a year ago and the possibility of several of them closing.
ValueHuntr // March 11, 2010 at 8:34 pm |
PlanMaestro, that is a risk. But keep in mind that almost 80% of revenues come from company-owned stores. I think management recognizes the risks with franchise model, which is the reason why not they have been hesitant to expand the model. I think a lot of the growth in the future will come from their co-branded stores with Stone Cold Creamery
sam // March 11, 2010 at 8:49 pm |
V-H,
check out page 12 of the latest 10-Q
80% of revs come from factory sales.
retail sales from company stores are less than 10% of revs
all the boxed chocolate is sold to the franchisees, and company stores, and a royalty fee is charged on the treats that are made onsite by franchisees.
(next part is from the 10-K)
depending on the deal. Older stores buy the chocolate and pay a royalty fee on all sales.
newer contracts only pay royalties on sales of franchisee store manufactured goods, not the company manufactured stuff.
franchise fees are collected when new stores are opened.
John H // April 2, 2010 at 7:10 am |
I read their 2009 annual report and I wouldn’t bet the farm on their partnership with Coldstone. They’re just going to be two stores sharing the same space and there are only 7 of them, of which 3 will be run by RMCF. I think this guy’s assessment of the value of this new line of business is a bit bright-eyed and bushy tailed.
John H // April 2, 2010 at 7:20 am |
That being said, my valuation of this business on a strictly DCF is pretty much in line with this excellently prepared report. I estimate it being worth around $90 million right now.
Ankit Gupta // May 15, 2010 at 10:27 pm |
I went to an airport location in North Carolina on Thursday and didn’t see what I was hoping for. I saw an empty store with just 1 customer, while other places nearby had long lines and customers were willing to wait for their items.
Maybe this cold stone creamery combination will increase sales, but I’m disappointed to say that I did not see the activity I expected.
ValueHuntr // May 16, 2010 at 2:40 am |
Thanks Ankit. What time of the day was this? Just curious.
Ankit Gupta // May 19, 2010 at 2:43 am |
I think it was around 5:30PM.
The difference possibly comes from the fact that the other places require more time to prepare the food. Jamba Juice was nearby, and it was probably a 5 minute wait to get your order, probably 5 people waiting for an order and 5-6 people in line to order.
If RMCF’s food is served quicker, customers don’t need to stand around and so it could appear less busy even with the same revenue.
Because of this, my observation could be flawed, but my point is that the level of activity was different than I expected.