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Tickers in this Article: RMCF, CBY, HSY
Rocky Mountain Chocolate (Nasdaq:RMCF) released second-quarter earnings Thursday and showed a decline in revenue and earnings in a weakening economy. Nevertheless, the company remains profitable.

This company has a good growth record, but the stock should be avoided until the extent of the general economic downturn becomes more discernible. Investors should hold off purchases pending evaluation of full-year fiscal results ending February 2009. If investors already own it, it is probably too late to sell.

Second Quarter Results Mixed
Volatility in short-term results should be considered in view of favorable long-term catalysts for value creation: Franchisees opened eight new stores during the second quarter and 16 new stores during the first half of 2009. "We anticipate that the number of new store openings for the full year will approximate our earlier expectations of 35 to 40 units" said Bryan Merryman, Rocky Mountain's COO. Despite the turmoil in the credit markets, the company continued to increase the number of franchised units, and its fiscal year forecast for franchise openings remains unchanged. Hence, credit conditions have not, as yet, undermined the company's long-term growth plan.

In the second quarter, revenues declined 17% and net income declined 38%. Net income declined 22% on a 10% decline in revenue for the fiscal first half of 2009, with same store sales declining 2.3%. If present conditions continue, it is unlikely that management will be able to sustain historical margins, as expense reductions may be unable to keep pace with revenue declines.

A Sweeter Medium-Term Record
Rocky Mountain Chocolate manufactures and sells gourmet chocolate to the consumer, primarily through franchised retail outlets. The company has grown its cash dividend per share by 30% annually, on average, over the last five years. For the same period, RCMF has grown revenue by 12%, and earnings per share by more than 23%. Rocky Mountain Chocolate has been highly profitable, with returns on assets in excess of 15% since fiscal year 2005, and the company has no funded debt. This company is well-established with 329 stores, consisting of five company-owned stores, and 324 franchised stores.

A Potential Value Looking Beyond the Valley
Trading at a price-earnings multiple of only 10 times trailing, with no funded debt, a current ratio of 2.7 times, and with approximately $900 million in cash and cash equivalents (cash last reported in May), this company would normally provide an investment opportunity for growth at a reasonable price. But conditions are not normal and the prospect for a protracted economic decline in the U.S. has increased significantly in the past few months due to credit conditions.

Rocky Mountain Chocolate's valuation compares favorably with Hershey's (NYSE:HSY), which trades at a price-earnings multiple of 39 times and carries a significant debt load equivalent to 321% of equity capital. Rocky Mountain's valuation and balance sheet strength also compares favorably with another major competitor, Cadbury (NYSE:CBY), with a price-earnings multiple of 14 times and a debt-to-equity ratio of 72%. Short-term economic conditions could materially alter the company's performance. (For more info on the balance sheet check out Reading The Balance Sheet.)

Dividend Record and Stock Repurchase Program
Up to this point, RockyMountain has generated sufficient cash flow to support its operations, fund a $3 million stock repurchase program announced in February 2008 (ongoing), and satisfy its hefty cash dividend yield of 5%. The company declared its 21st consecutive quarterly dividend $0.10 per share in August and paid it in early September. Depending on short-term trends in revenues and cost control efforts, the dividend and stock program could support the stock price. However, the company could cancel the stock program or the cash dividend at any time. (To learn more, check out Is Your Dividend At Risk?)

Cash flow from operations, currently estimated at $1.0 million per quarter or $4.0 million annually, would cover annual estimated cash dividends of $2.5 million and capital expenditures of $0.5 million, or $3.0 million together, by a margin of 1.3 times. This estimated 1.3 times cash flow coverage ratio would likely erode if management is unable to reduce expenses commensurate with declining revenues.

The prospects for continuing the dividend depend upon the duration of the general economic downturn. If protracted, the stock program will be canceled, and the cash dividend could be in jeopardy. Investors should avoid this stock if they are unwilling to assume the risk of a possible reduction in the cash dividend or they expect a protracted economic downturn. Liquidity of the company is likely to deteriorate in the coming months. Retail-oriented firms can suffer immensely during economic downturns, depending upon their product offerings, including the price and income elasticities of these products.

Don't Bite
Despite appearances to the contrary, this stock is no bargain right now. The company will continue to be hurt by the cyclical aspects of the economy over the next twelve months. Existing shareholders can take solace in the fact that the company has a good long-term track record, no debt, and a long-term growth plan that continues to move forward - for now.

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