NOBLE ROMAN’S REPORTS THIRD QUARTER, PROFITABLE AGAIN, COMPS ALMOST FLAT
Noble Roman’s (NROM) reported their third quarter results, which were once again profitable in spite of the pandemic. More important than the exact operating results is that (1) Same store sales for the original four Noble Roman’s Craft Pizza and Pubs (NRCPPs) have steadily recovered and were negative by only 2% in October. (2) The two most recently opened NRCPPs look like they will generate sales and store level margins almost 50% higher than the first four locations. Brownsburg and Greenwood, IN have changed the NROM equation. Average store level EBITDA margins among the current six locations can now be expected to approximate 18%, generating a 40% cash on cash return on investment, among the best in the restaurant space. (3) The balance sheet is the strongest in many years (4) The corporate cash flow has been positive all year, in spite of the pandemic, and can be utilized in the next several years for growth rather than debt service.
The corporate EBITDA which has been in the area of $3M in recent years, with much of it necessarily servicing debt, could expand over the next eighteen months to something on the order of $5M, most of which can fund growth. Though the NRCPP concept is still small among publicly traded restaurant companies, with only six (soon to be seven) company units and three franchised locations, the Brand has legs, in the Midwest at the very least, which leaves a very long runway for growth from this modest base in Indianapolis. The 650 unit non-traditional franchised locations, while currently inhibited by the pandemic, provide another long term growth opportunity. The Enterprise Value currently is in the range of $16-$17M, obviously a very modest valuation considering the cash flow considerations as described below.
THE THIRD QUARTER
Noble Roman’s, Inc. (NROM) reported their third quarter, ending 9/30, results on Tuesday. The quarter was profitable, as same store sales for their flagship Noble Roman’s Craft Pizza Pubs chain improved steadily through the quarter. The non-traditional fleet of over 600 franchised C-stores, convenience stores, etc., is recovering more slowly but the franchising division was solidly profitable as well. Overall corporate results for the quarter showed Operating Income of $411k. After deducting $328k of interest, $105k of which was non-cash, pretax income was $83k. GAAP EBITDA for the quarter, adding back $98k of D&A to operating income, was $509k.
The now six unit Company operated Noble Roman’s Craft Pizza & Pub (plus 3 franchised locations, including Kokomo which opened yesterday) showed a modest negative comp for Q3 of 6%, sharply improved from a negative 28.1% in Q2. October, importantly was down only 2%. Store level EBITDA of the 5 NRCPPs in Q3, improved to 13.2%, up from 11.8% in 2019, with the addition of Brownsburg that opened 3/25. The Company noted that, after adding back 1% cost of sales from pandemic related commodity shortages, about 2% from additional pandemic related operating expenses, and 1% from non-cash lease expense. the Adjusted store level EBITDA was about 17%. It was pointed out that Brownsburg is projected to do about $1.7M of annual volume and contribute $383k (22.5%) EBITDA at the store level, generating a 59% cash on cash return on the approximate cash cost of $650k. Management pointed out on the conference call that the 3 points of pandemic related expenses applies to these numbers as well, so the post-pandemic margin could be even higher.
The non-traditional franchising venue is recovering more slowly, with revenues of $1,252k vs, $1,681k, down 25.6%. The margin contribution from this segment was 62.5%, down from 69.7%. The uncertainty regarding the duration of the pandemic make it unclear how quickly the results from this division will recover.
The sixth company operated NRCPP location opened to record weekly sales in Greenwood on 10/12. Management indicated, on the conference call, the possibility that sales and margins could exceed those of Brownsburg. Though Greenwood is only open one month, so it is early to draw conclusions, Greenwood sales after one month are exceeding those of Brownsburg at the same point. The third franchised location, in Kokomo, IN opened two days ago. The seventh company location opens just after Thanksgiving in McCordsville, IN. The Company refrained from making projections relative to future openings, but reflected on the comfortable balance sheet ($1.6M in cash) and the consistently positive cash flow, concluding that they are continuously screening location prospects and an eighth location could open in Q1’21.
STORE LEVEL ECONOMICS
The most important consideration in terms of investment prospects for any restaurant chain is the return on investment at the unit level, which depends on the “operating profit”, or “store level EBITDA” compared to the investment per unit. That outlook, while more than adequate prior to the recent openings, has been enhanced substantially by Brownsburg and Greenwood. The four original NRCPPs, the first of which opened in January 2017, produced an average of $1.2M of sales in calendar 2019, with an average operating profit of 12%. A case can be made that there were some non-recurring factors, amounting to at least two points, that affected those results, including the operating learning curve from introducing a brand new concept, shockingly high Common Area Charges at two locations, third party delivery charges, and some degree of cannibalization of sales from the highest volume original Westfield location. A 14% Adjusted Return generates $168k of average annual operating profit, or a very acceptable 26% cash on cash return on the $650k of average investment per store. However, the fifth and sixth location look like they will do something like $1.7M of sales, with a normalized operating margin above 26%. That would bring the average annual volume to $1.37M with an average store level EBITDA margin of $261k, which is 18% of sales generating a 40% cash on cash return. This is obviously a huge improvement in the outlook in the wake of the two most recent openings. Future openings can, of course add or detract from the 18% on $1.37M but it seems like a reasonable bet that McCordsville and others will at least match the new average.
CONFERENCE CALL COMMENTS
Scott and Paul Mobley, CEO and CFO respectively, commented further that labor is a continuing challenge, especially with the masking requirement but the Company has managed to adequately cope. Relative to the non-traditional venue, 20 new locations have opened this year, in spite of pandemic related hesitancy of potential franchisees, matching the 20 lower volume locations that have closed. The dine-in portion of sales at the two newest NRCPP locations is about 40%, and it varies more widely at the first four locations. Partitioning and other physical adjustments have allowed for almost 100% of pre-pandemic seating, but customer attitudes still affect the sales mix. Third party delivery, which hurt margins in 2019 and early 2020 and which the Company has never promoted, has trailed off to minimal levels. The proprietary Pizza Valet curbside pickup service has been embraced by both customers and staff (who like the tips). In terms of the number of potential NRCPPs in the vicinity of Indianapolis, Scott Mobley referred to the twenty Buffalo Wild Wings as just a starting point, so the geographical pipeline close to home is substantial.
BALANCE SHEET AND CASH FLOW CONSIDERATIONS
The balance sheet showed $1.645M of cash at 9/30, up from $1.577 at 6/30, with Greenwood (now open) and McCordsville (to open by December 1st) almost fully funded. Corporate EBITDA was over $500k in the third quarter, obviously still affected by the Pandemic, obviously with no contribution from the new Greenwood location. Nine month reported EBITDA was $2.3M, which included the forgivable $715k PPP loan, but that loan replaced lost sales and profits so the normalized EBITDA would likely still be in the same range. It seems reasonable that 2021, in a more normalized environment, with Brownsburg (opened in March’20), Greenwood (opened in October ’20) and McCordsville (about to open) could generate something at or above $4M of corporate EBITDA. As opposed to last several years, when debt service absorbed a large part of corporate cash flow, aside for the possibility of principal payments out of excess cash flow, as defined, there are no principal payments due on the $8M of current long term debt until 2023. Management has not committed to a further schedule of company NRCPP openings, primarily because of pandemic related uncertainties, but they have demonstrated an ability to open stores within 90 days of a lease signing, are continuously evaluating locations, and it would be surprising if two or three new company operated locations don’t happen in 2021. It is not hard to picture therefore a $5M run rate of corporate EBITDA within 18 months from today.
CONCLUSION: provided above