Earnings Call Transcript - RAVE Q3 2020

Operator, Operator

Good day and welcome to the RAVE Restaurant Group, Inc. Third Quarter 2020 Financial Results. Please note, this event is being recorded. And I would now like to turn the conference over to Clint Fendley, Vice President of Finance. Please go ahead.

Clinton Fendley, Vice President of Finance

Good afternoon and thank you for joining RAVE Restaurant Group's Fiscal Third Quarter 2020 Earnings Conference Call. Everyone should have access to our third quarter 2020 earnings release that was published this morning. The press release can be found at www.raverg.com in the Investor Relations section. Before we begin, I would like to remind everyone that part of our discussions today will include some forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Please note that during today's conference call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. Any discussion of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of comparable GAAP measures is available in our earnings release. And with that, I would like to introduce our Chief Executive Officer, Brandon Solano.

Brandon Solano, CEO

Thank you, Clint. And good afternoon, everyone. Just so you know, that was Clint Fendley. He's our new Vice President of Finance and Principal Financial Officer. He's a new voice, and you haven't heard him before. Clint is a talent. We're lucky to have him, and he has absolutely been working tirelessly for our company, for our shareholders, and for our franchisees since the day he landed here. I'm absolutely lucky to have him. So thank you, Clint. In our last quarterly review, I shared the progress RAVE was making in developing a turnaround strategy for both Pie Five and Pizza Inn. At the beginning of the third quarter, we were working with our leadership team to implement improvements in a long-term plan for underperforming areas of our business. All that changed in March as our team worked to mitigate the challenges brought on by COVID-19 and related closures and shelter-in-place orders. Just as we were starting to gain traction in our mission of developing a sustainable and thriving business model, we faced a new threat to our business. Business is about overcoming obstacles, and this is about the biggest obstacle we've seen in the country for quite some time. But the U.S. consumer is resilient. After 9/11, people said the airline industry would never recover, but before the pandemic, domestic flights were at an all-time high. The restaurant industry will recover, and so will RAVE. It's been inspiring to see the tenacity of our franchisees and team members as we navigate this new landscape. As a team, we've all worked tirelessly to ensure that our restaurants remain a safe place to work and dine during the coronavirus outbreak. Our team is committed to financial stability, and we have all made sacrifices to ensure we emerge from this crisis together and stronger. We looked at all areas of our business where it made sense to reduce expenses, including furloughing two-thirds of our support staff and implementing a across-the-board 20% pay reduction for all other employees, including executive leadership late in the third quarter. But we are still fighting hard for our brands. As you may recall, Pizza Inn had 12 straight quarters of positive same-store sales. In fact, in the last quarter before COVID, Pizza Inn delivered same-store sales that beat industry leaders Domino's, Pizza Hut, and Papa John's. We are a strong brand. Although Pizza Inn's domestic comparable retail sales declined by 7.8% in the third quarter, we continue to look for ways to serve our guests and grow our sales. Our buffet locations, in particular, have been challenged by store and dining room closures. This system has not been traditionally focused on delivery or carryout. We changed that by launching the Contactless Buffet To-Go for carryout and delivery to provide guests customized buffet options in the comfort and safety of their own homes. We saw a very positive response from our guests and franchisees as they enjoyed the value and variety of Pizza Inn in their homes. We also recognize the need for off-premise solutions and quickly expanded our online footprint, negotiating favorable terms with third-party delivery services. For Pizza Inn, this has added or expanded a new revenue stream and given our restaurants a new way to serve guests. Last month, we introduced the Right Way Buffet that allows our buffet locations to open their dining rooms while practicing enhanced safety and health measures. Today, out of our 82 Pizza Inn dine-in locations, 70 buffet locations are currently open, up and running, and all of our convenience store locations are open. We consider this a win for our franchisees, team members, and guests in the communities we serve across the country. Pie Five's domestic comparable same-store sales decreased 21.4% during the third quarter of fiscal 2020 compared to the same period of the prior year, primarily driven by COVID-19-related store closures. Prior to the pandemic, we were working to restore positive momentum at Pie Five by strengthening unit economics and operational efficiencies. We are now squarely focused on working with our franchisees to mitigate the effects of store closures and social distancing efforts. We are not out of the woods and continue to enhance our everyday value offerings to ensure that all of our guests have access to affordable dining options throughout the crisis. With support from our guests, I'm also proud of our efforts to serve essential workers who have been bravely serving us in communities across the country. In closing, our top priorities remain improving profitability and implementing strategies that will deliver bottom-line results for both brands. But we are now squarely focused on emerging from the crisis as a stronger and more efficient brand. At a time when we are facing a global pandemic, closed dining rooms, social unrest, and even murder hornets, I continue to be inspired by our team's resilience. Our franchisees and team members have gone into quick action and are absolutely lights out in serving their communities during this time. I'm honored to be part of this team and look forward to a bright future. I'm now going to turn the call back over to Clint to discuss our financial results in further detail.

Clinton Fendley, Vice President of Finance

Thank you, Brandon. Total revenue decreased by $0.4 million to $2.7 million for the third quarter of fiscal 2020 compared to the same period of the prior year. Loss before taxes was $0.5 million for the third quarter of fiscal 2020 compared to a $0.3 million loss for the same period of the prior year. The company recorded a net loss of $4.5 million for the third quarter of fiscal 2020 compared to a net loss of $0.3 million for the same period of the prior year, primarily due to a $4.3 million increase against the reserve for net deferred assets and lease impairment charges. The company's net loss per share increased $0.28 per share to $0.30 per share for the third quarter of fiscal 2020 compared to $0.02 per share for the same period of the prior year. Adjusted EBITDA for the third quarter of fiscal 2020 decreased $0.2 million from the same period of the prior year. During the third quarter of fiscal 2020, Pizza Inn opened 3 domestic units and closed 4 units to finish the quarter at 152 domestic units. Pie Five closed 10 domestic units, bringing the domestic unit count to 43 restaurants at the end of the third quarter of fiscal 2020. The company's cash and cash equivalents decreased $0.4 million during the third quarter of fiscal 2020 to $1.5 million at March 29, 2020. The decrease in cash and cash equivalents resulted from payments for lease settlements, severance, and relocation expenses. With that, let's open the line for questions.

Operator, Operator

Our first question today will come from John Priscilla, private investor.

Unknown Shareholder, Investor

Brandon, Clint, my name is John. I've been a long-time private shareholder for quite a while. And I really want to ask the question -- it just seems at some point, the company needs to decide that one or the other of the brands that you're pursuing might be good to jettison so that you can focus 100% of your resources. Clearly, one of the reasons I started investing was back at the launch of Pie Five, and that has clearly not worked out sort of as anyone expected. That's fine; things happen; I understand that. But it seems that the progress you're having lately or certainly in the last year or so has been much more to do on the Pizza Inn side. I'm just really wondering if it's time to think about jettisoning Pie Five perhaps and refocus based on the resources that are available. And that's really my main question for you.

Brandon Solano, CEO

John, this is Brandon. Thanks for your question. And thanks for being a long-term investor; we appreciate it. Clint and I have not been here for a long time. Clint's been here about 6 months, and it's obviously been 3 months of trying to figure out the ins and outs of the business. The last 3 months have been a lot of crisis management for us. I appreciate your long-term investing. I will tell you, I've been asked that question by our franchisees, both Pie Five and Pizza Inn franchisees. We have absolutely no intention of giving up on Pie Five, and I think that was really your question. It wasn't, 'Hey, would you give up on Pizza Inn?' Both are challenged, but that said, we are turnaround folks. We have a long history of turning around brands, and we love a challenge. This business is not for the faint of heart. We have built a very rugged team that loves a challenge. We are not quitters. I will tell you, it's more than just hubris or bravado. We believe in the Pie Five brand. I believe in our franchisees. We've got folks who are absolutely coming along. The idea that this is a resource drain, I would argue, is not true. We're actually about 31%, 32% down in terms of headcount right now here at RAVE. So we've done a lot of restructuring, and we've done a lot of shared resources. Where we used to have people who were exclusively Pie Five, I think we only have 2 people on corporate staff who are Pie Five exclusive. These are not big complicated businesses. You obviously have Wendy's, and we had kids' meals and breakfast and late night and all kinds of different cooking platforms. This is a relatively simple business. We're pretty streamlined in terms of our overhead to support the business. We think Pie Five is very interestingly competitively positioned. We have some things we can do with our oven and cooking platform that we're working on right now, which we hope to introduce here before too long, which our competitors in the fast-casual pizza space can't do. We want to sharpen our focus to be more fast-casual. I would say we've been a follower in more QSR pizza and not nearly differentiated enough. We've hired an amazing agency in Siltanen & Partners to support a positioning reboot. One of the things that has slowed us has been COVID because we haven't been able to do all the research we wanted. Right now, we're going to do some concept testing or idea screening with consumers. 'Hey, do you like this positioning or this new product?' I mean they're hiding out under their beds, right? It’s a very difficult time to get good consumer data. That has slowed us a little bit, but we've put some things in the market, and we're continuing to test. We have to put a lot of kites in the air, but we have a strategy that we're focused on. We're continuing to get feedback from the market in terms of pricing, price points, new products, and new ideas. We have a long history of taking those ideas, distilling them down to the big ones, getting really maniacally focused on them, and executing effectively. So I joined Domino's Pizza in 2008. It was similar. The global financial crisis hit. We had 2,000 stores that were losing money. The stock hit $3. Today, Domino's trades at, I don't know, it was $360 and change when I looked earlier today. Listen, that's no guarantee that RAVE is going to do the same thing. We're a different brand, we have different folks. But I know the kind of key levers and platforms it takes to turn around a brand. We're subscale now. We're approaching -- and we're over 100 stores, and we have 32 open right now. It's a small business. In some ways, that's to our advantage because we can be nimble. I think you might have seen earlier when I came in, we took LeBron James and Blaze to task over freedom of speech in Hong Kong. We will fight hard and be a very difficult competitor. We've been slowed a little bit, and I would tell you, I hate it. I hate being slowed. The team will tell you we're not patient. We're not asking anyone to be patient with us. We are where we are. But we have plans, and we have a really amazing team. We ran this company with 17 people for a couple of months and realized that maybe we didn't need all the folks that we had on staff. We're going to be maniacal about cost-cutting, and Clint is really helpful with that. Mike Burns, who runs operations, is a lights-out operator. So we feel good about our ability to turn Pie Five around, and we're not giving up.

Unknown Shareholder, Investor

Yes. And just to say -- one follow-up anyway, and then I’ll hold on and let somebody else. But I guess really the question is -- and I understand you've been slowed down, believe me. I'm not being critical at all because I understand the situation. I used to be part of the start-up team for a regional pizza chain called Bertucci's in the northeast. We went like crazy. It was a highly differentiated model. Now, one of the things that frustrated me is that in going to a number of Pie Fives, I thought the product was significantly better than the Blaze product, which I also went to a number of. I just -- I haven’t been there in a long time, but at the time I thought that the Pie Five product was significantly better. I just -- now I haven't been to Blaze in a long time now. But anyway, I don't need you to go into why we're where we're at, but those are sort of some of my thoughts.

Brandon Solano, CEO

Yes, you got it, John. I'm going to go ahead and not accept your apology for being critical. Investors need to be critical. That's the market, that's the system. Our franchisees get to be critical. If any of us took this job, there'd be no criticism. We welcome it. It keeps us sharp and on our toes. I started my career in marketing, and if you ever worked in the franchise business as a marketer, that’s where everybody is most critical. We’re highly critical of folks who ran the ship here before we got there. We're highly critical of ourselves and each other. We should be. So what I would tell you about food quality and can we be better? When I got to Domino's, there was a belief that we were going to be fast at delivery but couldn't really touch Pizza Hut and especially Papa John's in product quality. I presented that to the management team and our system as a self-limiting myth. We can do anything that we want to do if we want it bad enough and we put our minds to it. Does that mean we're going to have 5,000 stores? I don't think that's in the offing, probably certainly not in my career span. But it's not what we're looking for. We have 32 Pie Fives up and running right now. There's a market opportunity that the big guys are missing.

Unknown Shareholder, Investor

Are those profitable stores right now?

Brandon Solano, CEO

Some of them are profitable; some of them are not profitable. To be honest, we have the right to collect franchise P&Ls, and we've not done that in several years. That was actually on Clint's to-do list when he came in. Given all of the crisis management we have, we haven't been able to do that. We want to collect our franchisees' P&Ls. We want to rack and stack them. Some folks are good at sales; some are good at cost management; some are good at labor; some are good at food. We want to find who in our system is doing the best and replicate that kind of across. On both brands, we will be collecting P&Ls. We've been threatening that, but we've yet to do it because of the pandemic. My point on product quality is that Pie Five is currently not advantaged in food quality. We have research and data that shows that we're at a significant disadvantage. I don't know what -- where we were when you were out at the store in Maryland. But I can tell you where we stand right now; we are disadvantaged, and that's unfortunate. The good news is we've got an amazing culinary and marketing team, and we can make good food. And we can do it at a price point and a value to consumers, and we can make money doing it. Product quality and product differentiation are critical. We also have a lot of things we do at Pie Five that add labor without enhancing quality. It's just work, and the food is not any better. Dessert is an example. We make desserts from scratch in Pie Five. I didn't know it, and I believe it contributes to labor without a discernable improvement in taste. We are working right now on some curated salads that have more value to consumers, require less labor, and we should get more take on them, expand ticket and reduce our labor and increase our throughput. There's a lot to do, but it's a small team. The executive team is deeply involved in the details, and we make decisions quickly. We don’t have 5,000 stores that are at risk or a $10 million inventory position on certain items as we look at making change. Just from a general appetite for change and pace, we move fast. We are having a lot of success taking a look at things, making calls, and moving on. We don’t have a big protracted bureaucracy where marketing is fighting finance. We make decisions and moves. I think our quality needs to improve, but we also can do things that other folks can’t. So pan pizza, for instance, Blaze and MOD have that oven, which I believe is an advantage. Certainly, it’s good window dressing and theater, but they can't cook pan pizza. Pizza Hut became the #1 pizza brand for about 50 years before Domino's took their crown a couple of years ago on a strategy I wrote. So we have a lot of places that we have an advantage, but we just haven’t looked at the business with a fresh set of eyes and a strategic mindset. We ask ourselves where do we play and how do we win? We go quickly down those areas; that’s what we're working on.

Operator, Operator

And our next question comes from Michael Disler, an analyst.

Unknown Analyst, Analyst

Brandon, you may recall, I was on your very first call as CEO and have been with you ever since and a long-time shareholder as well. And I wanted to welcome Clint. Your resume is equally impressive; just thought I'd throw that in there. I'll be much briefer. I have actually some really specific stuff that you can just answer really quickly, if you would. There was a mention, I believe, in the Dallas Morning News, that some northern Texas firms were returning their PPP funds. Did you have to return those funds?

Brandon Solano, CEO

Michael, let me start by saying this: everybody likes to pick on the government and big banks, and I'm no exception. I love to rail about those guys while having a beer; it makes me feel smart. But to be honest, the SBA did a great job of processing our applications. They've taken a lot of flak, and I think they've done an amazing job, and I mean that. Same with Chase; we were on the phone at midnight on a Sunday night with our banker. We are not returning our SBA loan for the simple fact that we're eligible for it. I got some heat from some of my friends about big rich companies like RAVE, publicly traded companies taking the money while small guys couldn't get it. But the fact is RAVE is not a big, rich company. We've not been profitable in 7 years. Our market cap is under $15 million. We have a loan for $656,830. I know that because I filled out the application at my kitchen table many times. We're eligible for the loan, so we’re grateful to the SBA.

Unknown Analyst, Analyst

I have that in front of me; go ahead.

Brandon Solano, CEO

At the end of the day, we are eligible for the loan. We are grateful to the SBA and those who made that possible. We don't have access to other capital, and that's the reality.

Unknown Analyst, Analyst

Okay, thank you for that response. Number two, regarding the $4.3 million increase in the reserve against the net deferred tax effects, could you just explain that in one sentence?

Clinton Fendley, Vice President of Finance

Yes. So we had a $4 million asset on our balance sheet. A lot of that is predicated upon the idea of a forward forecast of profitability. Once we had COVID, it became apparent that the idea of profitability would be a bit further down the road. Working with our auditors and considering that valuation, we decided we needed to write that off for the time being.

Unknown Analyst, Analyst

Just want to make sure people are aware that is the case, who may or may not be on this call will read it later. Okay, thank you for that clarity. Finally, I appreciate your efforts to protect every stakeholder, from customers, franchisees, employees, and even shareholders. I like the fact that you're going to play to your strengths, and that you're questioning the desserts and salads. That’s a great plan. My third question really is just in timing. I know you're not allowed to say too much, but COVID really didn’t enter into the picture until near the end of the third quarter. Now you've had a full quarter; I'm curious how much additional difficulty you've had in the last 10, 11 weeks since the close of the third quarter regarding sales, etc., beyond the disaster that befell you in March?

Brandon Solano, CEO

As we've noted in the Q, March was impacted by COVID. I would tell you that the fourth quarter is affected by COVID, and also our fourth quarter expenses were impacted by our response to COVID. Both of those statements are true, and I don't want to get into any more specifics other than to say we were on top of it.

Unknown Analyst, Analyst

I read the actual SEC filing where there’s a bit more clarity in the management's discussion. I just want to say I appreciate your commitment to hard times and obstacles. I followed your career for a long time, Brandon, and I hope you can pull the ship together in due course. Thank you and welcome Clint aboard. I hope you didn't get in right at the end; I think you’re going to get in right at the beginning. Thank you both for the effort.

Brandon Solano, CEO

Michael, thanks so much. We really appreciate it.

Operator, Operator

Thank you for attending today's presentation. You may now disconnect your lines at this time.