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!

Related Articles
  1. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  2. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  3. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  4. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  5. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  6. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  7. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  10. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center