Rock Mountain Chocolate Factory (Nasdaq:RMCF) operates a small international base of chocolate confectionery stores, as well as a concept set to grow along with the frozen yogurt craze that is currently sweeping the U.S. With the vast majority of stores owned by franchisees, the parent company is able to collect lucrative royalty fees, which it uses to pay an above-average dividend. The only problem is that growth trends have been anemic since the credit crisis and management is blaming tight credit for an inability to open new locations.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Third Quarter Recap
Rock Mountain Chocolate Factory's sales advanced 4.6% to $8.3 million. The vast majority of company sales consist of factory sales, or namely the sale of chocolate to its franchised stores, as well as other retailers that end up selling its chocolates, candies and related confectionery products. For the quarter, factory sales made up 74.7% of total sales and advanced 5.6%. Royalty and marketing fees from franchisees were basically flat at $1.2 million, or 14.3% of total sales. Franchise fees were actually negative, as "the result of a change in the franchise fee associated with Aspen Leaf Yogurt." Aspen Leaf is the company's frozen yogurt store base. The remainder of the top line consisted of retail sales made at company-owned stores and grew a healthy 21.4% to just under $1 million.

As of quarter end, the total store base was 365 stores: 243 were franchised namesake stores, nine were company-owned and the rest consisted of a mix of Cold Stone Creamery locations, Aspen Leaf stores and internationally-licensed locations. The only other large confectionery rival is Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) See's Candy. Privately-held Mars Inc., Hershey (NYSE:HSY) and Tootsie Roll (NYSE:TR) also count as competitors, even if they don't focus on their own retail concepts.

Higher operating costs ended up sending operating income down 16.8% to $1.1 million. Net income declined by a similar amount, falling 17% to $725,000, or 12 cents per diluted share. Profit trends have also been weak so far in Rocky Mountain's fiscal year, with net income falling 7% to $2.6 million. Free cash flow trends have been weaker, with free cash flow falling nearly 19% to $1.5 million. (To know more about income statements, read Understanding The Income Statement.)

For the coming year, the lone analyst following the stock projects earnings of 64 cents per share, or annual growth of approximately 6.7%. Sales growth will likely be strong, as it is up 10.5% for the first nine months of Rocky Mountain's fiscal year.

The Bottom Line
Rocky Mountain Chocolate Factory currently offers an appealing dividend yield of 4.7%, but has not been able to grow sales or earnings over the past three years. Management continues to cite tight credit conditions for the inability of franchisees to secure financing to open new stores, which is likely why they were only able to open five new locations during the quarter.

At a forward P/E below 14, the stock is reasonably valued, but likely won't see much appreciation until the company can string together a number of quarters of growth. While the dividend yield is currently high, it also won't grow until profits start moving consistently forward. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  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 >>

You May Also Like

Trading Center