Candy and confectionary retailer Rocky Mountain Chocolate Factory Inc. (Nasdaq:RMCF) reported second quarter results, on Tuesday, that saw sales advance solidly in the double digits. Higher food costs tempered the profit gains and tight credit markets are slowing new store expansion, but the long-term outlook for the company continues to look decent, as does a dividend yield close to 5%. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Second Quarter Recap
Sales jumped 14.3% to $7.6 million on an 8% increase in factory sales to $4.5 million to account for almost 60% of total sales. Factory sales consist of revenue from franchisees and other outside customers. Royalty and franchise fees accounted for another 19% of total sales, and experienced a more modest 4.9% growth. The remaining 19% of the top line consisted of retail sales at company-owned units and jumped 58.6%, primarily due to the opening of four Aspen Leaf Yogurt locations that are capitalizing on the growing popularity of frozen yogurt across the country. (For related reading, see A Look At Corporate Profit Margins.)

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Same-store sales at company-owned locations were healthy at 4.1%, but fell 1.9% at franchised stores. At the end of the quarter, 366 total stores were in operation and consisted primarily of the namesake franchise, with a smaller amount of Cold Stone Creamery, eight Aspen Leaf Yogurt locations and 58 international stores that are licensed to outside operators.

Higher costs, primarily from a jump in sales costs due to higher food commodity expenses, pushed operating income down 2.4% to $1.4 million. Lower interest income sent net income down a bit more as it fell 3.3% to $912 million. Higher shares outstanding sent earnings per diluted share down 6.7% to $0.14.

Outlook
The lone analyst covering Rocky Mountain Chocolate Factory projects full-year earnings of 64 cents that would represent year-over-year growth of only about 3%. The company didn't provide any guidance, but did state that "A scarcity of available credit for small businesses in the current economic environment continues to make it very difficult for existing and prospective Rocky Mountain Chocolate Factory and Aspen Leaf Yogurt franchisees to finance new store openings." As such, revenue trends are likely to remain anemic for the foreseeable future.

The Bottom Line
Despite much tougher sales growth trends since the economy started slowing in 2007, Rocky Mountain Chocolate Factory has stayed firmly profitable, and generates about as much free cash flow as it reports in annual net income. It also boasts solid double-digit net profit margins, and doesn't have any long-term debt.


The majority of free cash flow is used to support a current annual dividend yield of 4.8%, which is about as high as investors are likely to find in the restaurant space. Firms that come close include Bob Evans Farms (Nasdaq:BOBE) with a 3.3% yield, Darden Restaurants (NYSE:DRI) at 3.8%, P.F. Chang's (Nasdaq:PFCB) at 3.7% and Frisch's Restaurants (AMEX:FRS) at 3.4%.

These are much larger firms in the more traditional restaurant space. Rocky Mountain stands out for an even higher yield, a more unique focus on confectionary sales and the ability to grow more rapidly given its smaller store base, especially once credit markets open up further. Negative stock market sentiment has also sent its forward P/E into a more reasonable territory at less than 13. (For related reading on the forward P/E, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

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