NOBLE ROMAN’S, INC.- UPDATE FROM PRESENTATION AT 7/15 ANNUAL MEETING

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NOBLE ROMAN’S, INC.- UPDATE FROM PRESENTATION AT ANNUAL MEETING ON 7/15/22

There were no meaningful fundamental developments at Noble Roman’s annual meeting that took place last Friday, 7/15/22. However, CEO Scott Mobley’s presentation provided an update regarding progress over the last two years, and reviewed ongoing challenges and opportunities. The full slide presentation can be found on the Noble Roman’s website, and we provide some of the highlights below. Our previous articles regarding Noble Roman’s can be accessed through the SEARCH function on the Home Page of this website.

CONCLUSION:

Second quarter results, to be reported in early August, will obviously be instructive. It seems that, based on the presentation at last week’s Annual Meeting, the worst of the COVID and supply chain effects is in the rear-view mirror. Our expectation, therefore,  is that sales in Q2 are likely to be noticeably higher than Q1, both on a seasonal basis and also less affected by COVID variants. Operating margins at the Craft Pizza and Pubs (CPPs) should also be sequentially improved, better labor efficiency and higher sales, and commodity prices no worse than in Q1.

Non-traditional franchising results in Q2 should improve sequentially, at least modestly, with seasonally higher sales, new units signed and/or opened, and the continued recovery from COVID. Most importantly, the “total addressable market” is huge, many tens of thousands of prospects, the franchise offering has been improved, signings and openings are taking place, and a newly hired experienced sales associate could be an important addition. This division, over the long term, could be materially larger than it is today.

The new smaller CPP prototype, if successful, could provide new momentum for this division. The company has demonstrated an ability to open new locations in as little as 90 days from signing of a lease, and lease negotiations are currently taking place, so we should have feedback in this regard within perhaps six months.

NOBLE ROMAN’S CRAFT PIZZA AND PUB (CPP)

Recall that there are currently nine company operated “CPPs”, plus three franchised locations, all within an hour or so of Indianapolis. The CPP is distinctive from fast casual pizza competitors in that its menu is broader (with sandwiches, pasta, salads, desserts), three different size pies are served, there are several styles of crusts, beer and wine is offered, the dining room has more service, and the décor is modern with TV entertainment. The latest developments include: a salad bar added during June and July, which in the last week of June increased sales before 4pm by 16.8%. Potentially very important: a new 2,400 square foot prototype has been designed, allowing for 20 tables seating 89, retaining the pizza valet service entrance and the visible dough making area, with two large ovens replacing three smaller units, continued offering of domestic and imported craft beers but without the bar area. The new CPP version will save about $270k of initial hard costs (versus the previous $650-$700k), with presumably lower ongoing occupancy expense. Negotiations are in progress for the first company operated location, which could facilitate franchising by being much less costly to build and more profitable to operate.

THE NON-TRADITIONAL VENUE

Recall that there are over 600 non-traditional locations selling Noble Roman’s pizza and other products, generating over $4M in annual royalties with operating profit well over 50%. This business, mostly convenience stores and gas stations, was seriously impacted over the last two years by Covid, has been steadily recovering most recently. In addition to pizza, baked sandwiches, pasta, burgers/cheeseburger pizzas, breakfast and take-N-Bake products have been available. Honey Crisp Chicken was introduced as an “Add-On Concept” but was de-emphasized during the Covid due to supply shortages. The Total Addressable Market (TAM) In the convenience store/gas station grouping is about 150,000 units. Foodservice sales within convenience stores (industry wide) have been growing steadily right through the Covid, accounting for 22.5% of inside sales and 33.5% of gross profit, so non-traditional potential franchisees are increasingly interested in improving their food offerings. While many non-traditional franchisees are small business entities, and were obviously affected by the stay-at-home economy in 2020 and 2021, it is noteworthy that, since the onset of COVID (from 3/20 to 7/22), NROM has signed 85 franchise agreements and 61 new units have opened. In calendar 2022 through 7/15 there have been 21 signings and 17 openings. The typical non-traditional installation costs about $24,500 for equipment and signage and a $7,500 initial franchise fee. A newly instituted franchise agreement calls for a minimum weekly royalty, and expands the economic viability of lower volume locations. Lastly, a new sales associate, with operational and sales experience in the non-traditional sphere has been hired as of July 5, 2022.

 EMERGING FROM COVID

Scott Mobley reiterated how difficult the two years ending 3/22 have been, indicating that staffing and supply chain issues have noticeably eased in the last few months. Inflation, however, remains a key issue, and good real estate is in short supply due to minimal new strip center development over the last two years. The average salary for general & assistant managers is up 18.2% since October, 2019, to $51,444, but adjustments at four company locations, reducing salaried managers from three to two, has been a partial offset. Average hourly wage in the same period has increased by 8% to $11.70/hr. As a measure of the improvement in labor productivity, Sales Per Non-Management Labor Hour (SPNMLH) has increased from $52.89 in January, 2020 to an impressive $75.59, up 43%,  in July, 2022.

COST OF GOODS

The CRB Commodity Index, after rising almost 50% from January through June, 2022, has retreated about 15% from its high in the last several weeks. Wheat, Beef, Chicken, and Tomato Paste, after substantial increases, are still at or near their recent highs. Cheddar Cheese Block price, after rising throughout ’21 to $2.00, rose further to a peak around $2.35 by April-May, has now retreated to about $2.15. Offsetting some of the higher cost of goods and in an effort to cut down on waste, operational simplifications have been put in place. Some slower moving menu items have been removed from the menu and the variety of cheese cup sizes has been reduced. To reduce power usage, only 2 of 3 ovens are used during lunch and slower weekdays. Negotiations have taken place with linen, pest control and produce suppliers, as well as their credit card processor. Relief relative to the operating costs of goods and services is “on the way”, the magnitude of which is “TBD”.

CONTINUED UNCERTAINTIES

The presentation made reference to ongoing uncertainties such as the general economy, the price of gasoline which inhibits local travel, the general rate of inflation, resurgence of COVID variants, and customer resistance to necessary menu price increases.

RECENT PERFORMANCE METRICS

Over the last year, from June to June, the average ticket is up 8.7%, the percent of sales that is Dine-In is 56.4% vs. 49.4%, 3rd party delivery sales is 13.8% vs. 17.7%, and YTD catering is $98,996 vs. $71,735. Consumers are clearly more comfortable dining out, and entertaining groups at home, rather than picking up or getting delivery.

CONCLUSION: Provided above