Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) hired a new management team in late 2022, following a lengthy and costly proxy struggle. The team intends to revitalize the company, which has seen flat sales growth and dwindling earnings for more than a decade. Despite continuing earnings declines, the management team is clear on its strategy: do more with less while remaining focused on its core competency, its chocolate plant. It has unloaded one of its non-core businesses, intends to close failing stores, open new stores in high-viability locations, and expand e-commerce sales through third-party distribution partnerships. For FY24, we can anticipate cost-cutting efforts and a growth in e-commerce sales. However, management talks about a three to five-year turnaround plan. Because of the financial efforts required to implement the necessary operational reforms, I expect the company will burn a lot more cash before we see any favorable results. As a result, I keep a hold rating on this stock until further notice.

Company News

Rocky Mountain’s stock price has declined 7.2% year-to-date, and the company has sold off its yogurt business, U-Swirl, which accounted for 8.8% of revenues in FY23. While U-Swirl grew by 66.17% year on year, it is not part of the management’s three to five-year strategy, which focuses on eliminating non-core businesses, consolidating operations, and boosting its internet presence. The corporation was amassing a large number of low-volume, time- and cost-intensive items. It aims to save $1.2 million over the next eighteen months by closing down non-essential warehouses, reducing SKUs, and improving processes.

The company’s flagship manufacturing division generates the majority of its revenue. It also makes money from franchisee branding and retail. Over the next three years, management intends to eliminate 25 to 35 failing retail outlets with unit volumes well below $574,000 per store and open up to 100 new stores in high-visibility locations. The management team has set lofty goals for the stores, including generating $800,000 in revenue per year, restoring gross profit margins to 25 to 30%, and increasing e-commerce sales to 10% of overall sales. E-commerce currently accounts for less than 2% of overall revenues. It intends to sell via third-party supply partners including Amazon (NASDAQ:AMZN) and Costco (NYSE:COST).

Accounting and Valuation

The top and bottom line fundamentals of Rocky Mountain fell year on year. We made $4 million in gross profit, compared to $4.9 million in 2022. Gross profit margins fell from 20.9% to 16.4% in FY23 due to increased expenses, higher raw material costs, lower production volumes, and a $577,00 one-time write-off of obsolete inventory in Q4 2023. For fiscal year 2023, the corporation increased its net loss to $5.5 million.

Rocky Mountain had a negative levered free cash flow of $1.4 million in fiscal year 2023, and it burned through $2.1 million in the fourth quarter of 2023 due to higher spending and lower gross margins. The company’s balance sheet has always been excellent. We can see that there was $4.7 million in cash and no debt. However, the balance sheet has shrunk year on year, owing in part to the costly proxy struggle and current attempts to reform the business, which include divesting businesses, reducing old inventories, and closing down divisions that do not support core operations.

Rocky Mountain is a dangerous company to explore because it hasn’t had significant revenue growth in over a decade and hasn’t created positive profitability since FY14. Furthermore, the company’s stock price fell after the release of its FY23 earnings. The stock now has a market capitalization of $33.80 million and a short interest of 0.06%. One of the most appealing aspects is that a shareholder-led proxy has brought in a new management team eager for change and improvement. Although the company has yet to create earnings, its enterprise value to sales ratio of 1.03 shows that it could be a competitively priced and attractive investment opportunity if the new management team is successful in expanding revenue and creating profits.

Risks

It’s fantastic to see an energetic management team with a clear desire to develop a once-loved firm like Rocky Mountain. However, because of its micro-cap volatility, small size, and lack of liquidity, investing in this stock, especially early in the process, might be dangerous. It used up more cash in the latest quarter than it had in the preceding nine. Divesting, closing stores, removing outmoded inventory, and investing in the changes proposed by the management team will almost certainly result in the company incurring debt or borrowing capital, which may have an impact on shareholders. Over the last TTM, we can observe that cash from operations and investing are negative.

Bottom Line

Rocky Mountain’s new management team has established a clear plan to focus on its core strength chocolate and to accomplish more with less by streamlining procedures and divesting from non-essential companies. While we have yet to see a financial benefit, it is encouraging to see specific steps implemented and a three to five-year plan for enhancing top and bottom-line growth. As we await the financial repercussions of management’s actions in the coming months, I maintain a hold rating.

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