Rocky Mountain Chocolate Factory, Inc. :RMCF-US: Earnings Analysis: Q1, 2018 By the Numbers : July 10, 2017

Rocky Mountain Chocolate Factory, Inc. reports financial results for the quarter ended May 31, 2017.

Highlights

  • Summary numbers: Revenues of USD 9.35 million, Net Earnings of USD 0.81 million.
  • Gross margins narrowed from 33.46% to 32.62% compared to the same period last year, operating (EBITDA) margins now 17.27% from 16.72%.
  • Change in operating cash flow of 53.49% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-05-31 2017-02-28 2016-11-30 2016-08-31 2016-05-31
Relevant Numbers (Quarterly)
Revenues (mil) 9.35 10.36 9.96 8.6 9.38
Revenue Growth (%YOY) -0.32 -5.89 1.51 -7.25 -9.53
Earnings (mil) 0.81 0.73 1.01 0.97 0.73
Earnings Growth (%YOY) 11.18 -70.02 129.54 25.01 -4.08
Net Margin (%) 8.71 7.06 10.16 11.33 7.81
EPS 0.14 0.12 0.17 0.16 0.12
Return on Equity (%) 4.29 3.85 5.34 5.23 3.95
Return on Assets (%) 10.67 9.55 13.49 12.98 9.42

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, RMCF-US‘s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if RMCF-US‘s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by -9.81% and earnings by 11.16% compared to the previous period.

Earnings Growth Analysis

The company’s gross margins showed no year-on-year improvement. In spite of this, the company’s earnings rose, influenced primarily by the improvement in operating margins (EBITDA margins) from 16.72% to 17.27%. For comparison, gross margins were 26.78% and EBITDA margins were 14.46% in the last period.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

RMCF-US‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 69.52 days, compared to last year’s level of 68.35 days.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

RMCF-US‘s year-on-year change in operating cash flow of 53.49% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 13.25% to 13.84% and (2) one-time items. The company’s pretax margins are now 13.54% compared to 12.23% for the same period last year.

EBIT Margin History
PreTax Margin History

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Company Profile

Rocky Mountain Chocolate Factory, Inc. engages in the manufacture of chocolate candies and confectionery products. It includes clusters, caramels, creams, mints, and truffles. The company was founded in 1982 and is headquartered in Durango, CO.

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