Restaurant Finance Monitor
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Noble Roman’s is steadily earning at an annualized untaxed rate of about $.12/share, with about $15M of tax protected earnings. EBITDA is running at around $3.5M annually, the highest level over the last several years, though a variety of “clean-up” issues have eaten into that calculation.  With a total enterprise value not much more than $15M, this established mid-west brand holds growth potential both with new company operated Pub locations as well as from franchising the Pubs and non-traditional locations. Just as a bank financing several years ago “transformed” the prospects, and allowed the company to create the Pub concept and establish the present much improved situation, a larger financing currently being negotiated promises to take NROM to the next level. Absent that, slower but steady company operated growth, while servicing the current debt, should still be possible, and franchising would take the lead.


Noble Roman’s Q2 results was consistent with Q1 in terms of increased earnings and EBITDA. Progress in the franchising segment outweighed margin pressure within the Craft Pizza & Pub operation. Net Income, which is tax protected for about $15 million, was $580k, up 5.5% for the quarter and 1.21M, up 11.0% for six months. EBITDA was $877.1k for three months, up 9.2%, and $1.724 for six months, up 9.5%. Both numbers annualize to a $3.5M annual rate (almost exactly the same as calendar ’18), and could improve to a $4M rate with a strong seasonal period ahead. Franchising revenues was essentially flat for three month and six months, with growth elsewhere offsetting a continuing decline in the relatively small grocery store segment. The extreme weather in the winter and early spring affected sales and margins in the Craft Pizza & Pub company stores in the early part of the second quarter, though to a much lesser degree than in the first quarter.


The Noble Roman’s Craft Pizza & Pub remains the most promising portion of the current operations. The four existing company stores, as disclosed in the recent 10Q, generated approximately $900k of store level EBITDA margin in 2018. Considering that these locations cost about $2.4M to establish, that represents a 37.5% cash on cash return. Especially since only one of the restaurants was open more than eighteen months in Q2’19, this represents one of the most attractive returns within the fast casual restaurant industry. In Q2’19, however, the store level margin came down from 22.6% to 15.7%, much of it beyond the company control, and part of which could be recoverable over time. The good news is that prime costs were better in Q2, cost of sales 140 bp better to an impressively  low 20.9%. Salaries and wages also improved by 160 bp to 28.6%. Paper and Packaging was up 10 bp to 2.7%.  Facility costs increased by 310 bp, mostly from an unexpected increase in common area charges based on (supposedly) actual expenses in 2018 and the company has requested an audit of these numbers. While the company cannot predict the outcome of their “negotiation”, we think there could be at least some partial positive adjustment going forward and higher sales would obviously reduce this impact in any event. Other Operating Expenses increased 590 bp to 16.4%. Per the 10Q, 140 bp was an increase in insurance cost (which the company is currently renegotiating), 190 bp was advertising and 150 bp was delivery expense. The advertising expense, not a lot of dollars ($25,000) relative to $1.3M of sales, can obviously be leveraged as more company and/or franchised  locations are built within the trade area. The delivery expense burden will more likely come down than go up, in our view. From a macro standpoint, we believe that the third party delivery agents have seen their best days in terms of margin, and restaurant operators in general will carry less of a burden. Also, Noble Roman’s is doing their best to encourage use of their curbside pickup Pizza Valet service, which is increasingly being embraced by customers. Overall, we view it likely that store level margins can be improved over time, and higher sales would obviously be a big help. In the meantime, the four current operated locations at the current average annualized sales level of $1.33M, are generated an attractive cash on cash return. Relative to the franchising of the Pizza Pub, the first franchised operator, after a highly successful opening in Lafayette, IN., is exploring sites for a second location, and a second franchised operator, in Evansville, IN is expected to open late this fall.

The franchising segment, excluding grocery stores (which has been de-emphasized), reported revenues up 4.5% and 9.8% for three months and six months, respectively. Most impressively, the margin contribution from this segment increased by 850 bp to 66.4% and 960 bp to 67.6%, for three and six months, respectively. In the most recent quarter, salaries and wages came down 520 bp to 10.8%, trade show expense was reduced 80 bp to 6.5%, insurance by 50bp to 4.0%, travel and auto expense by 170 bp to 1.7%.The company noted in their quarterly release that in the period from 1/1 through 8/14, 21 new non-traditional locations have opened versus 17 a year earlier. Also: “the first two weeks’ sales of all non-traditional franchise openings in 2019 have averaged 32.8% higher than openings from previous years.”

The least important segment, in terms of revenue contribution, is the royalties and fees from grocery stores, which came down by $84k to $285k, and by $199k to $590k, for three and six months, respectively. As has been discussed previously, with the labor market tight, grocery stores have been challenged in terms of staffing deli departments, so have been reluctant to take on new products. Noble Roman’s has therefore decided to employ capital and personnel in the two other highly productive and more promising areas.


Cash improved by about $150k between 12/31 and 6/30, while paying off about $400k of bank debt and reducing accounts payable and accrued expenses by about $415k. Current Accounts Receivable went up by about $210k over six months to $1.78M but this is a seasonal factor and the amount is down by about $80k since June 30, 2018. Total Current Assets of $3.6M is 2.7x Current Liabilities. The question of the Company’s ability to repay the $1.9M remaining amount of convertible subordinated notes outstanding, which mature between November ’19 and February ’20 was raised on the Q2 conference call. $675,000 of those notes were voluntarily extended for three years. As the 10Q filing puts it: “the remaining Notes, in the amount of $1.225 million must either be converted into common stock, extended beyond the maturity of the senior debt or replaced with other like securities.” The Company has said that a new financing is being negotiated that would, if finalized, allow for repayment of all existing debt, including the convertible Notes, as well as provide funds for five additional Pizza Pubs. Should that financing not materialize, we view it as likely than any Convertible Notes remaining can be re-marketed for essentially the same terms, with an extended maturity date. It seems obvious to us that a 10% coupon, convertible at $0.50/share, with warrants attached (at $1.00) is a far better piece of paper today than when originally issued in 2017, and the general interest rate environment is even lower today than it was then.


CEO and President, Scott Mobley, presided over the Q2 conference call. After financial results were provide in summary form by Chairman and CFO, Paul Mobley, Scott provided an operating summary in which he summarized operating initiatives designed to improve both sales and margins at the company operated Pubs. New sub sandwiches, combo meals and side items are being introduced, using local area marketing tactics. Online ordering, essential these days, has just been rolled out. Though the Company is not advertising the delivery option, relying on their Pizza Valet curbside pickup offering, Grubhub is now joining DoorDash as a third party vendor. A new and improved website is being introduced. Split pricing on the various pizza crusts is being added. Since the Sicilian crust is viewed as a premium product, the price is being raised by a modest $0.25 on the personal size, $0.50 for medium, $1.00 for large. Relative to the non-traditional franchising opportunity, Scott talked about a record setting location on an Indian reservation in Arizona. While no promises are being made relative to building sales at the Pubs beyond the $1.33M annualized level (Per Q2), the company clearly thinks this is possible and is bending every effort to do so.

CONCLUSION: Provided at the beginning of this article

Roger Lipton

P.S. – For more information, consult our full writeup of NROM, accessible from the Home Page @ Corporate Description, Public and Private Companies