Rocky Road Ahead For Rocky Mountain Chocolate Factory

By Ryan C. Fuhrmann | May 13, 2011 AAA

Rocky Mountain Chocolate Factory (Nasdaq:RMCF) operates a growing number of confectionary stores across the U.S. and a small handful of international locations. It closed out its fiscal year on a high note, with profits growing for the first time since the credit-fueled global recession started three years ago. Its business model is quite lucrative and expansion prospects are robust; unfortunately, the current earnings valuation is unappetizing. Let's take at whether this stock can hit a sweet spot once again.

TUTORIAL: Stock Basics

Rocky Mountain's Fourth Quarter
In the fourth quarter report release February 15, revenue increased 1.9% as the top line reached $9 million. Same-store sales at the company's franchised retail restaurants eked out 0.1%, growth but fell 8.2% at franchised factory stores that are located in larger tourist areas. Factory and retail sales accounted for 82% of total sales, while lucrative franchise, royalty and marketing fees made up the rest.

Total costs rose 4.2% to outpace sales growth and sent operating income down 6.5% to $1.75 million. Lower income taxes helped temper the net income decline to 3.2% as the bottom line came in at $1.16 million. Higher shares outstanding caused earnings per diluted share to fall 5.3% to 18 cents per share.

Full Year Review
The full-year results were stronger; revenues jumped 9.5% to $31.1 million on new store openings and positive comparable store sales of 0.6%. The opening of additional locations sent retail sales ahead 31.5% to account for just less than 12% of the top line. Profit growth was nearly as strong as net income, increasing 9.2% to $3.9 million, or 62 cents per diluted share. The company did not provide full balance sheet or cash flow statements in its press release.

Sweet Prospects for Rocky Mountain Chocolate Factory?
Rocky Mountain saw a needed recovery to its sales and profits during the year and reported profit growth for the first time in three years. With only 357 stores, there is plenty of room to expand its footprint across the United States. Furthermore, its franchise model means high margins for the parent company.

That said, the confectionary market is highly competitive, with rivals that include Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) See's Candy. Cold Stone Creamery is also a competitor, although Rocky Mountain has recently entered into a number of co-branding agreements with the ice cream vendor. Privately-held Mars Inc., Hershey (NYSE:HSY), and Tootsie Roll (NYSE:TR) also count as competitors, even though they don't focus on their own retail concepts.

The Bottom Line
Given the intense competition and a rather lofty trailing P/E multiple of close to 17.5, the investment appeal of Rocky Mountain Chocolate Factory is not overly appetizing. It does sport an above-average dividend yield of 3.7%, but needs to report a longer string of strong sales and profit growth before investors will consider paying an above-average earnings multiple. (Learn the underlying theories behind these concepts and what they can mean for your portfolio. Refer to The Importance Of Inflation And GDP.)

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