Rocky Mountain Chocolate Factory
The numbers were somewhat bittersweet, from what I could tell. Revenues increased 26% to $6.8 million, and earnings 24% to $931,000. These were driven by factory sales to stores, while the high margin royalty fees (including marketing) were up by 10% and franchise fees were down 22% year over year because of a timing difference. In addition, management said that factory margins fell by 210 basis points, from 36.6% to 34.5%, which was due to a shift in product mix.
That being said, I thoroughly enjoyed my visit to the Factory on Saturday. The store was delightfully modern, with delicious chocolates carefully arranged on tables and behind the counter. The look was definitely more upscale than BerkshireHathaway's
However, from an investor standpoint, I'm concerned about the efficiency and sustainability of the business model. Same-store sales growth has been negative in two of the past five years, and only increased 0.4% last quarter. Same-store chocolate pounds purchased have also been flat for two years. Essentially, all of the growth in the business is coming from opening new franchise stores and not from existing stores, which could be a problem if the concept reaches a saturation point anytime soon.
Given that the product is a gourmet one and not predisposed to daily consumption, the market size is probably limited. Franchise models can be successful -- one only needs to look at Tim Hortons (NYSE: THI) to see an outstanding track record, with 97% of its store base franchised, along with a 10-year average of 7% same-store sales growth. With McDonald's
For more cocoa-flavored Foolishness:
Check out our suite of newsletters with a 30-day free trial to the investing newsletter service of your choice.