The market is trying to price uncertainty into the stock, and yes fear has something to do with it. Remember fear can be a hindrance, but it can also be a saving grace. Being afraid of the boogie man and being afraid of a grizzly bear charging at you are two different things. You haven't given me a reason not to have some "fear" that this company will underperform. If you think it will do better than the market then tell me why, but saying that it is about to get warm out is like saying newspaper companies will do well tomorrow because it will be morning and that is when they sell the most news papers.
Because the market is forward looking. You are not the only one that knows their busiest part of the year is coming. The market has priced into the stock how it thinks it will do during the busy season. You would sell a stock before their busiest part of the year if you think that they will not earn as much as anticipated during that busy season. According to your logic I would think you could just buy every retailer before holiday season and make a killing. It does seem that expectations are pretty low for this company, but since the best defense you can make for the stock is that "its busy season is coming" I don't see a real catalyst that would make the stock go up. Its not like you are saying "they are about to blow the doors off of earnings this busy season due to x,y,z." Warm weather will not help the structural and operational issues this company is having / will have. I really am not rooting against them, I hope they do well. I just think there are some flaws in your logic.
Agreed. I'm just saying, some people on this board (not you) seem to think that these are non-recurring costs, but the company is not necessarily saying that.
I actually would consider that break even, at this point I think the fourth will probably be a loss of around $100k, the company owned stores alone will bring it down this much. Reading between the lines (which I agree with I'm_grant on this topic) in the company report " Expense and income categories in the first nine months of FY2015 that were not incurred in the first nine months of FY2014 included $389,419 in franchise development costs, $628,077 in restructuring and asset acquisition expenses, and a positive adjustment of $333,193 related to the valuation of a derivative associated with the convertible note agreement with Rocky Mountain Chocolate Factory."
Notice the wording is "was not incurred in 2014" this is different than non-recurring. In reality the RMCF gain is a non cash gain that could likely swing the other way, but I don't think there is any way to know because I can't find any details on the RMCF derivatives. Also "franchise development" sounds like a recurring expense if you are continuing to develop franchises, right? Just seems shady to make seem like "yeah we made $495K, but look if we didn't have this $1M in expenses". Really its more like franchise development expenses will likely go up next year if they open more franchises and the RMCF income won't be there so that only leaves about $300k to add back, assuming they don't make another acquisition with "one time charges".
Sorry it took me a while to get back to you. Saying the company has negative tangible equity is not the same as saying the company has no assets. You have to look at both sides of the balance sheet. Basically negative tangible equity means that when the companies hard assets are compared to the companies liabilities the liabilities are higher than the assets. In this case, according to Yahoo, the company had $81M in intangible assets, and $30M in goodwill which means of its $227M in assets $111M of them are not tangible assets, this leaves tangible assets of $116M against total liabilities of $158M and boom there you have your negative $48M in tangible equity.
Having no tangible equity is not necessarily a bad thing neither are intangible assets, but if a company is not making money in the long run, then it is highly unlikely that intangible assets have any realizable value to shareholders. Essentially intangible assets were purchased, developed, and booked in accordance with how the company views their potential for earnings, without earnings there is no value (usually, sometimes for patents this can be different). Hope this helps.
I would just like to say if you are new to this I highly recommend educating yourself on accounting (the language of investing), and some business analysis techniques such as SWOT, DCF, and growth share matrix's. I think Morningstar's Investment classroom is a good place to start. http://www.morningstar.com/cover/Classroom.html I also can't recommend "Intelligent Investor" by Ben Graham, One Up on Wall Street by Peter Lynch, The Little Book that Beats the Market, Joel Greenblat, any letter from Warren Buffet to Berkshire Shareholders, and when you feel really confident in your skills you can work your way through "Security Analysis" By Graham.
Nothing you said is incorrect, but philt is right also, this is a marked departure from the way RMCF built their company. Also I think RMCF provides a more specialized product (niche) with less competition than these yogurt businesses. Also there is nothing wrong with intangible assets, in fact I think people get lulled into a false sense of safety with "hard" assets, but intangible assets have to be justified with cash flow. RMCF has become less transparent because 1. there has been no or very little financial information disclosed about the acquired companies. 2. The terms of RMCF's options to maintain its ownership % are not disclosed.
The problem with your analysis is 1. book value does not always (actually usually doesn't) correlate to real value. Further this comapny has negative tangible equity, which means there are not "real" assets backing the book value of the company. Basically when a company's equity is intangible assets there has to be cash flow to back up the intangibles or they don't have the value ascribed to them on the balance sheet. As of 8/14/2014 this company had ($47million) in tangible assets, based on your valuation method it would have a value of negative .68 per share.
I would say that our view of the status quo is different. You keep saying that they have to re brand immediately, that is not what I am saying at all. You seem to see the status quo as the company has made $500M in the first 6 months and you think they could still turn a profit in the cold winter months (yeah I bet Aspen Leaf stores in CO are full after the slopes close down...NOT!). So far the status quo has been to acquire chains with company stock, further diluting the stock by allowing RMCF to maintain its ownership %, passing off "non-recurring" as if it is something that should be ignored, borrowing money from RMCF at 9%, and a not being very transparent with the historical operating performance of what they have acquired. After RMCF exercises warrants to maintain its 60%, which it will since it is reorganizing as a holding company ( I believe 60% ownership is the minimum to report using this method), that will be 4.3 million or so MORE shares outstanding! I don't see any brand recognition or economic moat.
One more thing here is the quote from the most recent 10-q:
For the six months ended August 31, 2014, we had net income of $463,241. Operating activities provided cash of $1,886,561, with the principal adjustment to reconcile the net income to net cash provided by operating activities being the change in accounts receivable of $1,030,285 and the change in accounts payable and liabilities of $444,743. During the comparable 2013 period, we had net income of $327,871, and operating activities provided cash of $311,914.
here is the quote from last years 10-k:
Our 2014 café operating costs were $3,186,089 or 79% of net sales revenues, resulting in café operating profit of $865,700. For the 2013 Transition Period, café operating costs were $414,587 or 96% of net sales revenues, resulting in café operating profit of $18,497.
So from these two quotes I gather that last year the company had operating income of $327.9M after 6 months and finished with income of $18.5M (I use M for 1,000). Sounds like this year could come in pretty close to break even to me, larger network more stores lead me to think they could have more losses in the off season! Show me how I am wrong, this is fun!
For the record I am not a basher and I have and am seriously considering investing, but I will only do it if I feel it is that: and investment. I don't speculate with my money. To me there are too many variables and not enough operating history to value this company.
Please verify that last part I looked through all the docs I could stand I saw nothing that indicated the price of the warrants.
I am sorry you are correct I looked at the last statement and thought it said net income of $87M for the current quarter and thought it said for the first half of the year. On that I was wrong. So I will say $500K in net income next year, and about $350 this year after losses in the second half of the year. So by my calculations and I could be WAY wrong, that would be under .02 per share this year and around .025 a share next year, assuming no further dilution, even if we say $1,000,000 (very unlikely IMHO) in net income you are only looking at .5 a share. As far as if it is possible or necessary to re brand and re-supply, I don't know either, and I don't think it needs done immediately, I just don't see how you get any synergies from having a massive base of "franchises" when they are all operating as these small groups of individual chains.
"$628,000 in non-recurring charges related to the closure or sale of non-performing stores, changes in corporate management, and acquisition-related costs," Well it doesn't really break out what those acquisition related costs are does it? I have seen too many of these companies have annual non-recurring costs for me to just straight up believe them that this will drop off 100% next year, there will be store closures, there will be changes in corporate management, and there will probably be other new "non-recurring costs".
As far as RMCF's warrants to purchase additional shares, it does not say anywhere that I can find in the company's SEC documentation what the exercise price is, only that they are entitled to shares that keep their ownership at 60%. Since the 4MM shares used in the one acquisition are still considered "shares payable" RMCF has not exercised its warrant so there is no way of even backing into what they paid. Even at market prices I would argue that this agreement is still much less desirable than borrowing common stock holders since your ownership is diluted, debt is cheaper than equity.
I don't see it running at a profit now? For the 6 months ending in August, net income was .00 an and I don't see them turning a profit in these next two quarters. I think there is no logistical nightmare right now because they are likely using different suppliers and distributors in different areas of the country and not using robust tracking, production, and networking system nationwide like it will take to achieve the type of cost savings that the company and many posters on this board believe. I think next year will be close to break even, because there are upfront costs to implementing savings via economies of scale in roll up strategy such as this one. Transitioning stores to a unified brand, expanding internal distribution and manufacturing channels and meshing those efficiently with consistent suppliers, I don't think any of this will be easy. It is simple enough to buy some middling chains and leave them running exactly how it is, but you get very few of the benefits of scale when you do that.
Ok so there is one other thing that people do not realize about this stock. Dilution, these acquisitions that are stock based are essentially doubly dilutive because RMCF maintains its percentage (I think 70%) so they give stock for the acquisition and RMCF exercises options to maintain its percentage, while share holders own a smaller piece. This not the warrants is the worst thing happening with this stock IMHO.
This stock is interesting, but not for the reasons argued on this board. For me RMCF being majority owner at a much higher share price is more significant than warrants, hot summers, or even competition. I have listened to some of the RMCF calls though I might not have heard the last one. They sound committed to this thing. This summer will be important, but that does not mean it will be great! It could be horrible. The truth is there is no way to fundamentally project what this rag tag collection of brands will earn this summer or any summer. There needs to be some kind of brand recognition, but there would be some expense in changing over stores.
Didn't his company buy "Moxie" which makes Moxie soda(I have heard it is good) and I thought, ice cream toppings and candy? That should provide some vertical integration, the question is about distribution. Looking at this company's footprint and you have logistics nightmare. I am expecting some growing pains and likely a disappointing summer from a net income standpoint. Top line and average store sales will be important at this stage. They will likely need to trim some underperforming stores, but will hopefully find more franchisees in desirable areas.
I guess I would say I think they will show a net loss for 2016, and I don't think the stock gets back up above .75 for much if any of the year. I have been watching this for a while and have wasted a lot of time on it now, so I will be happy if it goes up even though I don't own any. I could see RMCF making an offer of .5 or so if the stock got down to .25 at the end of the summer. I am not a market timer in general, but if i get in this stock it will be at the end of the summer, not now.
For instance my bank had a competitive advantage in that we were formed in 2008, so we had an abundance of capital when other banks were short on capital. Over time with improvement in the economy this competitive advantage has been eliminated. Now our biggest competitive advantage is our experience with Dental deals and the speed and accuracy that we can underwrite such deals. We also have dental accountants, and dentists on our board of directors that refer deals to us. Not to brag but we also have a top notch credit department that is the envy of every community bank in our market. We recently had to add back ALLL to net income because we are experiencing almost no troubled loans. In spite of all of this, our interest rate margin has decreased from about 5% from 2008-2010 to about 3.25% today. Even though we have more assets and close more loans today our net income has only grown modestly due to the increased competition in the marketplace. We are also seeing ever loan have 3 other banks offering a client similar terms and structure, when three years ago we could essentially dictated terms. Competition has every thing to do with it.
You are correct, all companies have competition. Yes I absolutely know what my 401k is invested in. I annually reallocate and analyze the different mutual funds it is invested in. Also yes if you own a bank stock you should know its competitive position. If it is a community bank then maybe Citi or BOA is not the best comp. I work in the credit department of a community bank and I will tell you we are reacting to our competition daily. The competition in the marketplace dictates our rates, terms, margin and profitability GREATLY!!! Stocks (businesses) that do well have a competitive advantage, there is no way #$%$ a company's competitive advantage without comparing it to its competition. The complexity of an industry has nothing to do with its competition. Computer software is fairly complex, but Microsoft has enjoyed a near monopoly in an number of product catagories for a number of years, meanwhile clothing retailers are about as simple as you get in business, but APP and ANF have done terrible, all because they have failed in a competitive environment. Should I buy these stocks because kids are going back to school in the fall? How would I know that they are going to buy APP or ANF's products unless I look at GPS, AEO or other competitors.
I have owned this stock for almost 10 years now, and I would say it is more expensive (relative to earnings), hence less safe, than it has the entire time that I have owned the stock.
I fail to understand how you can gauge the prospects of U-Swirl if you are completely unfamiliar with their competition. Orange Leaf is another big one.