October 12, 2016 - 7:03pm EST by
2016 2017
Price: 10.50 EPS .65 .75
Shares Out. (in M): 6 P/E 16.2 14
Market Cap (in $M): 62 P/FCF 11.7 10.5
Net Debt (in $M): 0 EBIT 6 7
TEV ($): 62 TEV/EBIT 10.3 8.9

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  • Food Manufacturer


The opportunities for the value investor remain extremely limited in this market environment. The low lying fruit has been throughly harvested! Rocky Mountain Chocolate Factory, Inc. (RMCF) provides an opportunity to purchase a Company with solid long term performance at a reasonable price. The stock has recently sold off due to short term challenges, which we believe do not threaten the franchise.


More than anything else RMCF is a cash flow story. In September the Company paid its 53rd consecutive quarterly cash dividend. In addition, the Company continues to repurchase shares. This year repurchases have been lighter due to one-time capital expenditures to upgrade the factory. At a price of $10.50 the shares yield 4.6% and sell for about 12 times free cash flow. A consistent dividend is extremely valuable, we believe, in this no-yield environment.


Founded in 1981, RMCF is an international franchiser, confectionery manufacturer and retail operator. The Company operates mainly in the North West section of the US and manufacturers an extensive line of premium chocolate candies. A Company subsidiary, U-Swirl, franchises and operates soft-serve yogurt cafés. Revenues are derived principally from the Company's franchise/license of retail stores that feature chocolate, frozen yogurt and other confectionery products. Some products are also sold outside the Company's retail network. As of August 31, 2016 the Company owned or operated 570 locations with and additional 11 under construction. These stores were mostly franchised or licensed, with 368 under the rocky Mountain Brand and 202 under the U-Swirl and associated brands.


Second quarter results were not exciting, but the Company remains solidly profitable and can easily fund the dividend and share repurchase program. Total revenues decreased 7.3% in the second quarter as compared to last year. Same store sales for internal sales decreased 2.1%.  Factory sales declined 3,8% due to a 44.5% decrease in shipments to customers outside the network. Franchise fees decreased 56.4% due primarily to fewer international sales. The Company closed or sold underperforming Company stores during the quarter. The elmination of non-controling interest resulted in an increase in the bottom line to $.17 per share versus $.13 share last year. Hence despite many challenges the Company improved the botom line and easily covered the dividend.


The Company is currently optimizing its franchise network by investing in its factory to improve efficiency and eliminating underperforming stores. This should lead to improved profitability in the coming years. The Company has been consistently profitable over the past eight years and has consistently increased its dividend. There is no reason to believe , at this point, that there is any fundamental problem with the business. Some short term restructuring has hit the shares, providing an attractive entry point.


Management owns 15.3% of shares outstanding, with 10% held by CEO Crail. Fidelity holds 8.8% of the shares and Renaissance Tehnologies holds 7%. Management compensation is not unreasonable with a total comp of $400k for the CEO last year.


I totally recognize tha this is not a table pounder, but it is a solid holding in diversified portfolio looking to generate income with limited risk.





I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


-Improved performance as a result of portfolio optimization

- Continued share repurchases

- Increases in the dividend

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