Earnings Call Transcript - RMCF Q4 2025

Operator, Operator

Good morning, everyone. Thank you for being here. Welcome to today’s conference call where we will discuss Rocky Mountain Chocolate Factory’s financial performance for the fourth quarter and the full year 2025. As a note, this call is being recorded. With us today are the company’s interim CEO, Jeff Geygan, and CFO, Carrie Cass. Please note that this call will include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements carry known and unknown risks and uncertainties, as well as assumptions that may lead to actual results differing significantly from those projected. Additionally, these forward-looking statements are subject to other risks and uncertainties outlined in the company's SEC filings. Please do not put excessive trust in any forward-looking statements made today, as they are valid only as of the date of this call. Except as legally required, the company has no responsibility to publicly update or alter any forward-looking statements. Now, I will hand the call over to the company’s Interim CEO, Jeff Geygan. Jeff, please continue.

Jeffrey Richart Geygan, Interim CEO

Thank you. Good morning, and welcome. This was a year of hard behind-the-scenes work, a year where we understood, confronted and corrected deeply rooted problems ingrained in our operations systems and company culture. While fiscal Q4 did not deliver the profitability we desired, the actions we took during the year were foundational to transforming Rocky Mountain Chocolate Factory into a more accountable, resilient and focused business. Understanding the past helps us navigate the present and plan for our future. Our efforts over the past year were broad and structural. We revamped core systems, realigned pricing to rethink how we serve both franchisees and end customers. We rebuilt nearly every core process while redesigning our organizational structure, upgrading our IT and manufacturing systems, all while bringing on new executive talent, transforming how the company operates at nearly every level. Just as important, we reset business culture. We made difficult decisions to part ways with individuals unable to meet the standard of excellence and accountability required in this next phase of business growth. We're building a team of motivated, detail-oriented and results-driven leaders who are propelling our transformation. Today, I'll walk through key milestones from the past year and how they align with our long-term strategic business. I'll first discuss our consumer packaging transition in fulfillment. One of the most significant operational pivots we made was our decision to bring consumer packaging back in-house to Durango. The previous partnership with a third-party provider in Salt Lake City, Utah resulted in delayed fulfillment, inflated logistics costs and inefficiencies that eroded margins, particularly during the holiday season. Since relocating our consumer packaging lines in early January and mid-February, we've improved execution, fulfillment reliability and cost management, setting a stronger foundation for future seasonal demand. This move has also allowed us to better control labor, streamline workflows and eliminate costly back and forth shipping between facilities, issues that were previously contributing to unnecessary time and expense with both e-commerce and franchise fulfillment. This was a critical step in addressing fulfillment challenges that severely impacted our operations since the move was made in October of 2023. By unwinding this costly and inefficient third-party packaging arrangement, we not only eliminated unnecessary complexity, but will also avoid approximately $1.5 million in annual losses. Regarding specialty market repricing, we took decisive steps to reevaluate all of our specialty markets customer relationships. In certain cases, we chose to discontinue partnerships that no longer supported our pricing objectives. At the same time, we worked closely with key customers to implement more favorable pricing that reflects our current costs. These actions were not easy, but they reflect our discipline and willingness to prioritize long-term financial health over production volume for volume's sake. The response from our partners has been constructive, and we're seeing signs of positive contribution from these sales channels after our repricing. These changes were part of a broader effort to reestablish operational discipline. Regarding new stores, we continue to build a healthy franchise network through strategically planned new openings and store transfers. While we did not open any stores in the fourth quarter, we are actively evaluating development opportunities with new and existing franchisees in markets such as Atlanta, Sacramento, Park City and even the Jersey Shore, to name just a few. On June 3, we opened our newest store in Charleston, South Carolina, our first location built with our refreshed design and branding. Construction is scheduled to begin shortly on a flagship location in downtown Chicago at 1 State Street, an absolutely outstanding location. Additionally, our Corpus Christi store, one of two company-owned stores, is being remodeled with our new store design, serving as a prototype for future franchise upgrades. Our goal is to build deeper regional density with fewer, stronger operators with multi-unit development plans. We have actively worked to transfer existing locations to stronger operators while closing underperforming units. These moves are helping us preserve high-quality locations and reinvigorate store-level performance with motivated and ambitious operators who are interested in increasing their commitment to our brand. Our experience with store transfers has been positive, with high year-over-year sales growth recorded when existing stores are placed under new management. Regarding pricing, March 1 was a critical inflection point for Rocky Mountain Chocolate Factory. Backed by our recently installed ERP and improved business visibility, we moved away from a historic one-size-fits-all pricing model and introduced a dynamic model that reflects actual input costs per item. This change allows us to adjust prices on a frequent basis, keeping target profit margins aligned with ever-changing input costs. We saw an immediate improvement in gross margins as a result of our March 1 price adjustment. We now adjust pricing on a quarterly basis or more frequently if needed, ensuring tighter cost alignment while managing to a targeted gross margin percentage. We estimate this initiative alone will capture several million dollars in additional gross profit in fiscal '26. We expect to return to historic gross margin rates over the coming years. The execution of this strategy would not have been possible without the technology and visibility provided by our new ERP system and input from both current and newly hired data and analytics personnel. Regarding operational visibility and infrastructure. For the first time in our company's history, we now have daily store level visibility into sales and inventory across the majority of our network, allowing us to make smarter, faster decisions about production, pricing and marketing. This is a result of our newly rolled out POS system, which is now operating in over 100 of our current stores, with nearly all stores scheduled for installation. This allows us to monitor real-time sell-through, inventory trends and product performance at a store level. The system has given us newfound insights into franchise operations and is critical to the effective alignment of production, marketing and pricing strategies. Regarding our ERP system implementation, as I mentioned, in January, we launched our new ERP system, a major milestone in our transformation. This platform integrates all of our core functions, including production, procurement, inventory and finance. It has already enabled smarter planning, tighter SKU rationalization, and more precise cost controls. ERP was the backbone behind the pricing adjustments we made in March, and it will continue to guide data-driven decision-making across the business. The ERP infrastructure upgrade represented a significant investment totaling nearly $1 million in capital expenditure during fiscal '25. With this system now fully implemented, we expect capital spending in fiscal '26 to be modest, focused primarily on maintenance. Regarding seasonal orders, we are pleased with the fulfillment performance we delivered to our franchisees this past holiday season. After several challenging quarters of focused efforts, we achieved nearly a 100 fulfillment rate for franchisee demand during Q4, and this trend continues in our new fiscal year. This improved performance represents a significant turnaround, reinforcing our ability to reliably meet demand and rebuild trust across our franchise and specialty markets channels. It's a testament to the operational changes we've made and the focus and resilience of our team. Regarding brand repositioning, as we look to the quarters ahead, we're excited to begin unveiling the updated Rocky Mountain Chocolate Factory brand. This includes a new logo, modernized store design and elegantly updated packaging. The full rebrand will launch later this year. As I mentioned earlier, we expect the first remodeled store to open in mid-July. Initial feedback on the updated store concept has been fantastic. We're finalizing cost models and network-wide build-out timelines. Interest from current and prospective franchisees is growing as they see our premium updated aesthetic and vision. System-wide signage upgrades are already underway. In fact, our Durango, Colorado location's new signage was installed yesterday. Our elegantly updated packaged offerings are expected to begin shipping to stores in late July. All of these refreshed updates reflect a modern premium brand identity, which we believe will elevate the customer brand experience and attract stronger franchise partners. Regarding e-commerce, our e-commerce business delivered record sales this past holiday season, but profitability was challenged due to inefficient fulfillment and elevated advertising spend. With consumer packaging now back in Durango and disciplined oversight of marketing costs, we expect profitable contribution from our e-commerce in fiscal '26, which we are already seeing. We will introduce a newly designed and easy-to-use e-commerce site in mid-July with a vastly improved user interface experience. rmcf.com has been thoughtfully designed. As a result, we believe it will drive additional interest in our upcoming new packaged item offerings and establishes a platform to drive future e-commerce sales. Together, these initiatives are helping us build a stronger digital foundation to complement our in-store experience while driving customer traffic to a local store. Regarding new store pipeline, we expect to show positive store growth this year, ending more than 10 years of declining store counts. We are targeting prime retail locations operated by highly motivated franchisees, many of whom work with us now and others who will be new to the RMCF family of franchisees. We are identifying well-capitalized, financially sophisticated and entrepreneurial operators to join us and become our next generation of franchisees. We are building a healthy pipeline of new stores and expect to provide ongoing communication to investors as we get locations under lease and into permitting. Fiscal '25 was a design period, not a construction period. We are now positioned to grow, having built a foundation of what, when, where and how we were meticulous in our planning efforts. Looking ahead, as we look into fiscal '26, we're already seeing signs that the heavy lift from fiscal '25 is bearing fruit. Our systems are stronger. Our cost structure is leaner. Our franchisee network is healthier. There's more to do, but we're gaining momentum as we now visit each franchise location several times a year and engage in on-site audits and annual business planning sessions. We're optimistic about our plans to return Rocky Mountain Chocolate Factory to growth and are focused on returning to profitability this year. Our leadership team has taken a business in long-term decline and begun to rebuild it from the ground up. Over the past year, we made significant strides in positioning the company for future success. To support our transformation, we raised $2.2 million in equity capital last August, and refinanced our $4 million credit facility into a $6 million term loan in September. These actions gave us the financial flexibility to invest in systems, human talent, and the brand refresh we needed to drive our business through this transformational process. The steps we've taken put us on a solid path toward long-term value creation. Most importantly, we're building a corporate culture of excellence, transparency, and accountability. After experiencing three years of operating loss, we fully expect to return to profitability in fiscal '26 with a strong foundation in place and a new level of discipline across the business. Thank you for your attention. I'll now turn it over to our CFO, Carrie Cass, to walk you through our fiscal Q4 and full year financial results. Carrie?

Carrie E. Cass, CFO

Thank you, Jeff. Please note that unless otherwise stated, all comparisons are on a year-over-year basis. Total revenue for the quarter was $8.9 million compared to $7.3 million in the same period last year. Product sales were $7.1 million compared to $5.6 million last year, and franchise and royalty fees were essentially flat at $1.8 million. Total product and retail gross profit was a negative $0.8 million compared to $0.1 million. The decrease was primarily attributed to higher raw material costs. Total costs and expenses were $11.6 million compared to $8.8 million. The increase was due primarily to marketing and administrative investments associated with the brand refresh and prototype store rollout. Net loss from continuing operations was $2.9 million or a negative $0.37 per share compared to $1.6 million or a negative $0.25 per share. Turning to the balance sheet. We ended our fiscal year with a cash balance of $0.7 million compared to $2.1 million at the end of fiscal '24. We also ended our fiscal year with total inventories of $4.6 million compared to $4.4 million last year. As of February 28, '25, we had $6 million in debt outstanding related to our term loan and no balance on our line of credit. This compares to $1.25 million drawn on our revolving line and no other debt outstanding at the end of fiscal '24. Now turning to our full year '25 results. Revenue was $29.6 million compared to $28 million for the full year of '24. Total product and retail gross profit was $0.1 million compared to $1.4 million. The decrease was primarily due to a sharp increase in the cost of cocoa and other inflationary pressures as well as higher overhead costs and reduced production volume. Total costs and expenses increased to $35.5 million compared to $32.9 million. The increase was primarily driven by inflationary cost pressures, including higher raw material costs and general operating cost increases. Net loss from continuing operations was $6.1 million or a negative $0.86 per share compared to a net loss from continuing operations of $4.9 million or negative $0.77 per share. This concludes our prepared remarks. We'll now open it up to Q&A.

Operator, Operator

Thank you. Ladies and gentlemen, before we begin the live Q&A, the company would like to address questions that have been received via email over the past week. I will now turn the call over to Sean Mansouri, RMCF External Investor Relations Adviser.

Sean Mansouri, External Investor Relations Adviser

Thank you, operator. Jeff, Carrie, to kick things off, you mentioned quarterly price adjustments going forward. What's your process for determining those changes and how do you avoid pricing fatigue with franchisees or consumers?

Jeffrey Richart Geygan, Interim CEO

Thanks, Sean. Carrie, I'll take this one. The March 1 reset wasn't a one-time event. It's part of an ongoing discipline in which we want to make sure our cost and pricing are aligned. I anticipate that we'll do this on a quarterly basis or more frequently as needed. With full transparency, if we're able to reduce costs, I think cocoa prices going up and down, we'll pass that on to our customers. What we need to do is maintain a target margin and with our franchisees, we've tried to give them adequate notice in terms of when we're changing. So I'm not concerned about inconsistencies or fatigue.

Sean Mansouri, External Investor Relations Adviser

Understood. And where do you stand in the entire rebranding process? And what has the response been so far, especially now that you have a new store with the brand refresh rolled out?

Jeffrey Richart Geygan, Interim CEO

Thank you. The feedback has been excellent. If you get a chance to visit the Charleston store, we plan to upload some live pictures to our website soon. It's in pristine condition and our customers, along with the owner operator, have responded positively. All our franchisees who have visited the store are impressed. Additionally, we are currently working on obtaining permits for our 1 State Street location in Chicago, which is a great opportunity and will be an outstanding store. We also have new consumer packaging that looks elegant and appealing. We aim to begin shipping this packaging to stores in mid to late July, ensuring all locations receive it by early August, and we anticipate it will be very successful. As for the latter part of your question, we are also updating our signage and initiating store remodels. Some of the signage updates are happening now, while the remodels will commence later this year, allowing us to achieve a consistent look and feel across all our stores.

Sean Mansouri, External Investor Relations Adviser

Next one, what's your strategy for new unit growth going forward? Will growth come from new franchisees, existing operators or company-owned stores?

Jeffrey Richart Geygan, Interim CEO

Yes, likely fewer company-owned stores. That’s not our goal. However, we currently have several excellent franchisees who, after observing our vision and direction, especially with the opening of the Charleston store, have become more engaged. Many of our existing franchisees, who run successful businesses, are reaching out to us to explore the possibility of strategically opening new stores. We have previously mentioned to investors that there are markets where we’d like to increase our presence and density, such as Boston, New York, Atlanta, and Miami, where we currently have very little presence. This will necessitate either working with existing franchisees or engaging new ones. As I mentioned earlier, the ideal next generation of franchisee should be well-capitalized, financially sophisticated, and entrepreneurial, preferably individuals with experience in franchising who are currently multi-unit or multi-brand operators. We believe the best path forward is to partner with fewer franchisees who operate more stores. Therefore, if we are planning to open 50 new stores, I would prefer to have five operators managing ten stores each rather than fifty operators each managing one store for all the clear reasons.

Sean Mansouri, External Investor Relations Adviser

Yes. And last one for the inbound Q&A via email. Your filings were delayed this year. Can you provide context on what happened and why it's taken so long to report earnings?

Jeffrey Richart Geygan, Interim CEO

Yes, of course, I'll turn that over to Carrie.

Carrie E. Cass, CFO

Yes. There were a few things that occurred, of course, at the time, but mostly it was due to the ERP installation. We had to do some additional testing. The auditors needed to do additional testing to make sure that the data we were getting out of the new system was consistent and correct. And so the delays really revolved around that, but there were also a number of initiatives happening at the same time. And while delays are never ideal, they don't reflect any issues or problems. We're really focusing on execution and the transformation that we're making here and looking forward.

Operator, Operator

This concludes today's conference call. You may now disconnect your phone lines and have a wonderful day. Thank you for your participation.