NOBLE ROMAN’S (NROM) REPORTS MARCH QUARTER – OMICRON REDUCES OPERATIONAL RESULT TO BREAKEVEN EBITDA – COMPANY EXITS PANDEMIC WITH NINE COMPANY (PLUS THREE FRANCHISED) “CRAFT PIZZA PUBS” AND OVER FIVE HUNDRED NON-TRADITIONAL FRANCHISED LOCATIONS
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CONCLUSION:
Noble Roman’s (NROM) has been predictably affected by ramifications of Covid-19 and its variants, as well as supply chain, labor and inflationary challenges. However, the Noble Roman’s Craft Pizza & Pub venue moves forward with nine company operated stores, operating profitably even in their seasonally weakest quarter and still influenced by the Covid. The non-traditional venue, even as it recovers, is generating over $1M per quarter in royalties and can be expected to grow from here.
The development of a new smaller prototype of the “Pub” has the potential to provide an additional growth venue for this fifty year old midwest brand. Noble Roman’s was generating approximately $3M EBITDA annually prior to the Covid. While a good portion of that EBITDA was consumed at that time by legal expenses related to long gone franchising activities, that burden has seemingly run its course. At the same time, over the last two years the “Pubs” have more than doubled in size (from five to nine company locations) and could grow very fast if the new smaller prototype is successful. Additionally, the non-traditional venue seems poised to grow again.
Scott Mobley’s summation is pertinent: “…the period from mid-November ’21 through late February ’22 required a constant emergency footing…daily pricing issues, ingredient shortages, personnel shortages, . Covid-19 isolations, distribution disruptions, shortages of equipment parts and service…The necessity of managing daily emergencies has subsided dramatically, and the operating environment during March and April, although still challenging, is very good by comparison.”
Overall, it seems likely that operating results, along with last vestiges of Omicron, have bottomed and the long term potential for earnings and cash flow growth should assert itself. With a total enterprise value of only about $15M, the possibility of record levels of EBITDA (which could exceed $5M in just few years), would provide a handsome return to investors at the current level.
NOBLE ROMAN’S REPORTS FIRST QUARTER RESULTS
Indianapolis based Noble Roman’s reported their March ’22 quarter, showing higher revenues versus ’21, due to two new “Craft Pizza Pubs”, with earnings and EBITDA subdued by the lingering effects (revenues and staffing) of Omicron and supply difficulties.
Total revenues in Q1’22 were $3.465M vs. $3.282M. Operating Income was $159k, down sharply from $1.161M (when $941k was received from the PPP program). There was a net loss of $137k, after interest of $342k and a $46k tax benefit, versus a profit of $827k in ’21 (as a result of the PPP). Adding back $112k of D&A, the first quarter of ’22 was virtually breakeven from an EBITDA standpoint (a loss of $25k).
NOBLE ROMAN’S CRAFT PIZZA AND PUBS
The Craft Pizza & Pub Division generated $2.283M of revenues, up from $2.108M, with nine locations operating versus seven in ’21. Cost of sales was similar at 20.8%. Salaries and wages was 31.7% of sales, higher than “normal”, due to staffing challenges, and especially higher than the 10.9% shown in ’21, when PPP was largely applied against this category. In a similar fashion, Facility Cost was 17.2% of sales versus only 5.4% shown in ’21. The total of Packaging, Delivery and “Other” Expenses was well controlled, 20.6% of sales versus 21.2% in ’21. The store level EBITDA margin contribution was 9.9% in ’22 versus a non-comparable 41.7% in ’21.
Based on commentary from both Paul and Scott Mobley, within the earnings release and on the conference call, there is reason to believe that store level margin from this division will improve noticeably in quarters to come. Per Paul Mobley: “the effect of labor shortages, supply chain disruptions, inflationary pressures and the Omicron effect have dissipated significantly starting in March (when labor expense ran 29.0% (versus 31.7% in Q1). Scott Mobley elaborated that “through aggressive recruiting, company owned Pub restaurants all have a full complement of management staff. We are much better staffed now than many and we have no severe staffing deficits in any company operated units….we are having to pay up for that labor, however, the good news is that our hourly labor productivity has increased more dramatically than the wage increase…..the average wage for hourly employees has increased by 5% in round numbers…..however…..sales per non-management labor hour has increased by approximately 35%. This and the menu price increase translate into a lower wage expense as a percentage of sales, a trend that began showing itself in March and has continued through April and now into May. Scott Mobley also pointed out that average salaries of managers is up about 7.5% since pre-Covid, partially offsetting the productivity gains of hourly staff.
Reinforcing the indication that sales have firmed in April and May, Scott Mobley described on the conference call that: “Organic sales of stores open well over a year or more, ‘organic’ defined as ‘total less catering and special events’, during the last six weeks are up 11% vs. last year…average check is up 5% so traffic and average check combined, is up about 6%.”.
Also supporting the likelihood of an improving store level margin was Scott Mobley’s breakdown of sales by venue during the last six weeks: Inside dining has been 49% vs 52% a year ago, carryout has been 34% vs. 33%, 3rd party delivery 17% vs 15%. Importantly, a recent new arrangement for third party delivery will incorporate a lower charge by the agent as well as a surcharge over the in-store price, which should make the 17% of sales from 3rd party delivery materially more profitable than it has been.
Based on the above indications, margins at the Craft Pizza and Pubs appear likely to move materially higher than was shown in Q1. The normal seasonal increase in sales, combined with the described improvement in labor costs, as well as 3rd party delivery profitability, seem likely to move margins at the Craft Pizza Pubs at least several percentage points higher than the 10% area of the first quarter.
NON-TRADITIONAL FRANCHISING
This portion of Noble Roman’s activities was virtually flat in the first quarter, at $1.03M vs. $1.05M in Q1’21. The EBITDA margin contribution of this segment was $573k vs. $715k in Q1’21. The flat year to year sales, in spite of new openings, is a result of closures likely affected by the ongoing Covid variants. The decline in profitability was also largely due to PPP funds in ’21 largely applied against Salaries and Wages, which was up $95k in ’22. Scott Mobley pointed out that the challenges of Omicron took certain NROM employees away from their normal efforts to support and build non-traditional results, but they have now returned to their traditional job descriptions. In the meantime, fourteen non-traditional locations have been signed in ’22 with fifteen opened and more to come. The non-traditional venue, with over six hundred locations operating before the Covid pandemic, has something less than that number operating today, but there continues to be substantial opportunity for growth. There are many thousands of convenience stores, gas stations, and entertainment centers that are prospects for Noble Roman’s products.
NEW CRAFT PIZZA & PUB PROTOTYPE
While NROM management continues to search for CRAFT PIZZA & PUB locations, they announced within the first quarter report the development of a new smaller prototype, which is contemplated to be 1,800 to 2,400 square feet in size. It would be suitable for smaller markets and potentially far more interesting to franchisees. It would have a more limited menu, therefore simpler to operate, and an initial investment far lower than the current 3,400 square foot version. As they search for the first site, management obviously feels that the opportunity is substantial and the risk is tolerable.
THE BALANCE SHEET
The current ratio was 2.5 to 1.0 on March 31, 2022, including cash of $808k, compared to 2.3 to 1.0 on 12/31/22. Current liquidity, along with cash flow generation from operations, should allow for development of at least two Noble Roman’s Craft Pizza Pubs. There is $8M of long term debt plus $597k of convertible debt. One of the corporate objectives is to refinance the $8M, at a lower interest rate and longer term, before principal repayments (at $33,333/month) begin on February 28, 2023., allowing for more rapid expansion of company operated Pub locations.
CONCLUSION: Provided at the beginning of this article
Roger Lipton