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.

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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.)

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

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