Confectionery retail store operator Rocky Mountain Chocolate Factory (NYSE:RMCF) opened the first quarter of its fiscal year with strong sales results. However, profits struggled as the company spent to try and boost future growth at its namesake stores and a new frozen yogurt concept. A weak lending market and rich earnings valuation are other near-term negatives, though there is still plenty of growth potential over the long haul.

TUTORIAL: Investing 101

First Quarter Recap
Sales jumped 13.4% to $8.6 million according to its interim unaudited consolidated numbers. This was made up of a modest same store sales improvement of 0.3%. In the quarter the company also experienced a 7.7% rise in factory sales to franchisees and outside parties, which accounted for just over 68% of total sales. The rest consisted of lucrative royalty, marketing and franchise fees, and collectively grew 2.8%. During the quarter, about eight franchised locations were opened as well as four Aspen Leaf Yogurt locations, which sell frozen yogurt. (What people buy and where they shop can provide valuable information about the economy, check out Using Consumer Spending As A Market Indicator.)

Costs grew at a faster rate than sales, rising to $7.2 million in the quarter ending May 31, 2011. This was made up of a 14.4% increase in sales costs while retail operating expenses jumped 57%. As a result, operating income fell 2.9% to $1.4 billion but still represented a healthy operating margin of 16.2%. Higher interest income and lower income taxes helped temper the net income decline to 1.3% as earnings fell to $920 million, or $0.15 per diluted share. Rocky Mountain didn't provide a full balance sheet or cash flow statement as part of its quarterly earnings release.

For the full fiscal, the single analyst currently covering Rocky Mountain expects earnings of $0.67 per diluted share. This would represent modest year-over-year growth of just more than 3.1%. (Learn more about these financial professionals, read What You Need To Know About Financial Analysts.)

The current recession has been tough on Rocky Mountain Chocolate Factory. Over the past three years, from 2008 to 2011, sales have fallen close to 1% annually while profits are down around 8% annually from $4.96 million in 2008 to $3.91 million in 2011. Tighter credit markets continue to make it difficult for franchisees to secure funding for opening new locations, and management doesn't see growth ramping back up until credit conditions and the overall economy improve.

The Bottom Line
At a forward P/E close to 14, the earnings valuation is a bit rich given that growth projections still remain weak. Rival food and dessert retailers, including Sonic (Nasdaq:SONC) and Krispy Kreme Doughnuts (NYSE:KKD), are also struggling to grow in the current economic environment. The company's dividend yield is appealing at 4%, though last year it took nearly all of the company's free cash flow to maintain its dividend payout. But with only 361 total stores as of quarter end and the newer frozen yogurt initiative, there remains plenty of expansion potential in the United States, as well as overseas.

Other competitors, including Tim Hortons (NYSE:THI) and Caribou Coffee (Nasdaq:CBOU) are growing briskly and have equally compelling expansion prospects, but trade at even higher forward earnings multiples of 21 and 38, respectively.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this article, risk free!