Like Mr. Wonka's legendary empire, Rocky Mountain Chocolate Factory
Unlike Mr. Wonka, Rocky Mountain founder Frank Crail (also the president and CEO) appears quite sane and not at all prone to skipping around in a top hat -- not necessarily a bad thing, mind you. In fact, before opening his first store in 1982, he wasn't sure whether he would open a car wash or a chocolate shop. He took the company public four years later and was recently included as the final selection in Fortune magazine's list of the 100 fastest-growing companies, so it seems he made the right choice. Rocky Mountain is the only publicly traded independent chocolate manufacturer, franchisor, and retail operator in the country.
Although there's no chocolate river to wade through, when you walk into a Rocky Mountain store, your senses are indulged by the smell of melting caramel in huge copper vats and the sight of fudge rolled out on granite slabs. These sorts of in-store candy-making demonstrations set the company apart from chocolate retail competitors such as Fannie May, a wholly owned subsidiary of privately owned Alpine Confections; See's Candy, a wholly owned subsidiary of Berkshire Hathaway
Rocky Mountain stands alone among its competitors in using a franchising model, in place since 1982. Franchising is a key ingredient to the company's success, representing its primary revenue stream. The company collects an initial $24,500 franchising fee, monthly 5% royalties from franchisee sales, and 1% marketing and promotion fees, as well as sales of the company's products to franchisees.
Rocky Mountain's financials
Its rich cash flow stream allows the company to indulge its shareholders with super-sweet treats. Rocky Mountain not only pays a dividend -- unusual for a small growth company -- but also has increased the payout five times since first paying a dividend in the third quarter of fiscal 2004. The firm's dividend yield is 1.1%, lower than Mathew Emmert looks for in Motley Fool Income Investor, but still not too shabby.
The company also credited its cash flow for its announcement last month that it had repaid all its $1.4 million outstanding debt ahead of schedule, leaving it debt-free with more than $2 million in cash, a $2.5 million line of credit, and a current ratio of 4 to 1. Furthermore, it's been free cash flow positive on an annual basis since 2000.
The company's financials appear rather tasty when melted down, too. Rocky Mountain reported first-quarter 2006 results last week, and its earnings continue to reach lofty altitudes. We must also praise the firm for filing its 10-Q with the SEC the same day it released earnings. This is quite handy for Fools like us, interested in more than just the company's income statement.
For the quarter, Rocky Mountain amassed record revenues of $5.4 million, a 13% increase over the first quarter of 2005. Each component of the company's revenue stream improved from the prior-year period, with same-store sales at franchises rising 4.1% and same-store sales of confectionery products purchased from the company increasing 0.7%. At $753,000, net earnings climbed 27% year over year -- particularly impressive since those earlier earnings were, in turn, 55% higher they'd been the year before. Fully diluted earnings per share grew 22% to $0.11.
Management anticipates earnings growth of 20% to 25% if current trends in unit openings, same-store sales, and same pounds sold continue. The company has now achieved eight straight quarters of double-digit earnings gains.
Bittersweet aspects of Rocky Mountain
Has this whetted your appetite? Before gorging on its shares, take note that like its products, Rocky Mountain doesn't come at a discount. Its shares now trade at all-time highs, carrying a weighty trailing P/E in the mid-40s. Still, given America's sweet tooth, the company's niche, and strength of its franchise system, I don't currently get too big a bellyache from the thought of investing spare change in Rocky Mountain. I do, however, worry that its dividends may distract me from potential fiscal cavities caused by rising commodity and transportation costs, or soaring real estate prices that might make franchising less attractive.
Also, despite the apparent strength of the franchise system, some investors are concerned that Rocky Mountain has phased out most of its company-owned stores in favor of franchises. If the company anticipates future sales growth, it will benefit more from owning stores directly rather than collecting only 5% royalties from the franchises. Could this be a warning sign of future problems?
And what prevents an existing player from copying components of its model, or a newcomer from entering this arena? The barriers aren't high -- one need only glance at the frozen-dessert franchise market to find a segment bloated with competing ice cream and gelato vendors. (Speaking of which, Kilwin's, a privately held company founded in 1947 and offering nationwide franchise opportunities, might be able to take a lick out of Rocky Mountain. It sells both chocolate and ice cream, using similar in-store candy-making demonstrations.)
Some golden tickets come hidden in candy bar wrappers; others may appear listed in the stock tables. Charlie Bucket and Warren Buffett each own chocolate factories -- now might be your chance to take a bite of Rocky Mountain. The company's looking pretty tasty, and you could enjoy a sugary high. Just don't overindulge.
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