NOBLE ROMANS, INC. (NROM) – UPDATED WRITEUP
It’s a fresh start in our new world for Noble Romans, Inc. (NROM), a fifty year old well established Midwest brand. Their flagship Noble Romans Craft Pizza and Pubs survived the pandemic relatively well and an $8M financing in early February significantly improved their balance sheet. Though NROM is one of the smallest publicly held restaurant companies, with an enterprise value of under $20 million, we continue to follow their progress because the stock seems to represent good value statistically and there continues to be substantial potential for growth.
2019 RESULTS Noble Romans, Inc. (NROM) reported calendar 2019 results last week. We have written a number of articles describing NROM, which can be accessed through SEARCH and under Corporate Descriptions. In order of current importance: Indianapolis based NROM Romans operates five Noble Roman’s Craft Pizza & Pubs (NRCPP) in their home market, is actively looking for several additional locations, franchises two NRCPP units in Indiana with a third under development, franchise/licenses about 640 non-traditional locations (c-stores, entertainment centers, hospitals, etc.) all over the US and have licensed 2,402 grocery stores to sell Noble Roman’s products made fresh in their deli departments.
The largest source of revenues, $6.2M in 2019, comes from royalties and fees, including $1.136M from the grocery store venue. The least important segment currently is the grocery venue, declining in recent years ($1.423M in ’18) as a strong economy limited labor availability to assemble pizzas in the deli departments. Though that could improve in the post-pandemic world, Noble Roman’s has focused on franchising, both the NRCPPs and non-traditional venues. The four NRCPPs generated $4.8M in 2019. Details of these operations, as well as the 50 year history of the brand are described in our previous reports. As shown in the table below, there were a number of fourth quarter non-cash adjustments, so the full year operating results, combined with the balance sheet improvement, from ’19 to February’20, are most relevant to the prospects.
The table above is excerpted from the ’19 10-K. The Franchising division generated revenues of $6.2M in ’19, down from $6.4M, as grocery fees declined, partially offset by an increase in non-traditional and NRCPPs fees. The margin contribution was $4.071M vs. $3.794M, up 7.3% YTY, and the margin improved sharply to 66.0% from 59.0%, as operating expenses were reduced. The 4 NRCPPs that were operating in ’19 generated $4.8M of revenues, exactly flat with ’18. Food and Packaging Cost was 24.1% vs 24.6%. Labor was 30.0% vs. 31.4%. Though those Prime Costs were well controlled, Facility Costs (including common area charges, and a $134,544 non-cash accounting required rent adjustment, ASU 2016-02 accounting for leases) jumped to 17.2% from 13.6% and Other Operating Expenses (including marketing, delivery charges, and insurance, the latter two of which are expected to be lower in ‘20) jumped to 16.7% from 11.6%. Store level margin contribution therefore declined to 12.0% from 18.8%. Adding back the $134,544 non-cash rent charge, the margin contribution was a more respectable 14.8%. The Company also operates one non-traditional location, down from three a year earlier. That small venue generated $48k of operating cash flow, up from $12k in ’18. General & Administrative Expenses were $1.74M in ’19, up 4.2% from $1.67M in ’18, preparing for growth which was delayed until the new financing took place in February, 2020.
The 12/31/19 balance sheet, although important, and improving through ’19, was dramatically restructured in early February 2020. Immediately after the restructuring in early February, the company had current assets of approximately $4.4M and current liabilities of $1.1M, or net working capital of $3.3M, for a current ratio of 4-to-1. At 12/31/18 and 12/31/19, the company reported net A/R from franchisees of $4.4M and $4.0M, respectively, each of which were net of valuation allowances of $4.3M and $5.6M, respectively. These A/R adjustments in large part go back to 2014-2015, arising from contract breaches of approximately 80 non-traditional franchisees. The receivables include NROM legal costs, as spelled out in the franchise agreements.
Immediately after the balance sheet restructuring in early February, the company had two pieces of long-term debt. The largest is an $8M note due in 2025 which has no required principal payments due until 2/28/23 at which time monthly principal payments begin in the amount of $33,333 and continue until maturity. The new note bears interest of LIBOR plus 7.75%, plus 3% payment in kind to be added to the principal. There are also principal payments due based on consolidated excess cash flow as defined. As management said on the conference call: “We know full well that this is expensive financing. However, it was the best we had available…we made the decision in early 2020..to start growing and carry out our business plan….we closed just in time…so fortunately we had the liquidity to both withstand the Covid-19 changes and continue growing our business at the same time.” Also, while warrants were attached to the new financing, retirement of warrants attached to the previously outstanding convertible notes result in a net reduction of about 2.9M shares, from about 28M to 25M. Cash provided by the exercise of the new warrants would also generate an incremental $1.6M from the new warrants, which could be used for additional growth.
The other long-term debt is $625k of subordinated convertible (at $0.50/share) unsecured notes which mature 1/31/23. With no required principal payments on either piece of debt until 2023, the annual amount of cash to service its debt is approximately $800k, versus about $1.5M previously.
Additionally, on April 25th, the Company borrowed $715k under the PPP, which the Company anticipates will be forgiven in accordance with provisions of the CARES Act.”
THE NEW WORLD FOR NOBLE ROMAN’S, ALONG WITH EVERYBODY ELSE
Management was working on the new financing package prior to the pandemic, as well as constructing their fifth NRCPP location. The first of the two successful NRCPP franchisees was also moving forward with an additional location, in Kokomo , IN, which is currently under development. The result of the above described financing is that previous debt is repaid and the Company has the funds to open four new NRCPPs in the near future, one of which has already opened. While the financing is expensive, as management says, the lack of principal payments, which the Company was making with the previous financing, provides substantial additional free cash flow for the next several years.
The pandemic has obviously produced major adjustments. Since sales at the NRCPPs were not disastrous, store level managers were maintained at full salary and most crew members were retained. The NRCPP units were previously doing about 20% of their sales off-premise. The Company had fortunately introduced a “Pizza Valet” curbside pickup approach about a year ago, as well as working with, though not promoting, third party delivery services. That emphasis served them well and sales, according the conference call, have been running down YTY a relatively modest 30%. Other changes made in the last year included a modified dough formula that travels better and a new carry out box that holds temperature more effectively. Dining rooms have reopened at 50% of capacity as of 5/11, two weeks ago today and it is anybody’s guess how fast and how far dining room activity rebuilds.
The fifth Company operated NRCPP opened on March 25th in Brownsburg, IND, a small city just outside of Indianapolis , and did an extraordinary $50000+ in its first week. It goes without saying that the reception of the Brownsburg community, in the heart of the Coronavirus pandemic, speaks volumes about the value, and the potential for growth, of the Noble Romans brand. As President, Scott Mobley, described it on the conference call: “in my thirty years of industry experience I have never seen anything like it….during the first two days of opening, the entire lot, maybe 200 parking spaces were occupied at one time, with a line of cars 20 deep along the street to enter the parking lot….. we ended up having to make numerous system adjustments on the fly as well as instituting controls on the order rate”. He indicated later in the call that Brownsburg is still doing an impressive $36,000/week.
Relative to non-traditional locations, specifics were not given about sales levels, other than indicating that they vary widely between convenience stores, entertainment facilities, hospitals, etc. Scott Mobley did indicate that a new product extension is planned for the non-traditional venue that will target existing franchisees as well as new ones. It is an entirely new sales opportunity, has been tested, and several franchisees have already shown interest. Scott Mobley indicated that this development could be significant, indicating his comment was just a teaser in terms of potential benefits.
Another significant development is the creation of new somewhat smaller version of the NRCPP, 3,600 sq.ft., down from about 4,200 sq.ft. This new version incorporates what has been learned about off-premise service, improving the carry out option for both the Company and the customer, at the same time maintaining the seating capacity and ambience of the full service experience.
CONCLUSION: Provided at the beginning of this article