NOBLE ROMAN’S (NROM) REPORTS MARCH QUARTER – SUPPORTED BY THE BEST BALANCE SHEET IN MANY YEARS, UNIT GROWTH (AND HIGHER PROFITS) TO RESUME SHORTLY
CONCLUSION:
Noble Roman’s (NROM) has dealt with the pandemic related challenges better than most, maintaining corporate liquidity, improving their balance sheet materially, and controlling operating expenses well. The prospect for increasingly profitable growth has been enhanced by the opening, in the heart of the pandemic, of three additional Noble Roman’s Craft Pizza and Pub locations. The seven current NRCPPs can now be expected to annualize at an indicated average of about $1.4M, with store level margins in the high teens generating a cash on cash return of 35% or more. Moreover, If the three latest openings, annualizing at about $1.6M, are any indication, future results could be materially better than that. At the same time, the 650 non-traditional locations, mostly in C-stores and entertainment facilities, generate annually over $4 million of royalties and can be expected to grow as well. The Company has reported an EBITDA of approximately $3M in recent years, but that has been reduced by high interest cost and legal expenses, both of which should be much lower in the future. Over the next twenty four months, it is not hard to project a corporate EBITDA run rate between $4M and $5M, from a combination of company NRCPPs, steady progress in the non-traditional segment, and franchised NRCPPs. As the Company results reflect the expected steady progress, with fewer non-operating adjustments, it seems likely that NROM will be revalued upward.
Relative to the expected stock performance, it should be noted that a substantial holder (Robert Stiller, founder of Green Mountain Coffee), who purchased over 3 million shares of stock something like 10 years ago, has been a seller recently of several hundred thousand shares (about 79,000 shares this month). While he has not directly spoken to the Company, his most recent filing indicates his ownership at 2.8M shares, about 12% of the outstanding shares. We expect that, if the fundamentals of Noble Roman’s develop as expected, the Stiller holdings, worth about $1.1M at the current price will be absorbed by new buyers. His apparent willingness to sell shares at this level could provide an opportunity to a value oriented small cap stock investor.
THE FIRST QUARTER REPORT
Noble Roman’s (NROM) reported their March, 2020 quarter last week. Results, as indicated with the ’20 yearend report and subsequent commentary, showed store level operations at the seven company operated Noble Roman’s Craft Pizza & Pub (NRCPP) locations largely recovered from the pandemic, and the 650 franchised non-traditional units steadily recovering (though mores slowly) as well.
We have written about Noble Roman’s previously, and readers can use the SEARCH function on our Home Page to access previous articles. Recall that all company operated NRCPPs are in the Indianapolis metro area. The first four were in Westfield (now open for four years), followed by Whitestown, Carmel and Fishers. The three newest NRCPP locations are in Brownsburg, McCordsville & Greenwood, opened during calendar 2020, in combination materially improving the previous average unit volumes. The non-traditional locations were not affected as much by the pandemic as the NRCPPs, percentagewise (perhaps 50% at worst versus 75% for the NRCPPs. However, discussed further below, this segment, while steadily recovering, was still down about 30% YTY in the March quarter. Recall also that NROM received $941k of PPP funds in the March quarter, which was obviously a material contribution to the Operating Profit of $1.2M.
Total Revenues in the 3/31/21 quarter were $3.3M, up from $2.7M YTY. The Operating Profit was $1.2M vs. $589k. The Operating Income was improved as a result of the four original NRCPPs almost recovering their pre-pandemic AUVs, the three new NRCPPs doing even better, and the reimbursement of $941k in PPP qualifying expenses, partially offset by the lower fees from non-traditional franchisees ($890k vs. $1,278k). It should be noted that the non-traditional royalties were up sequentially from the $840k in Q4’20.
The total $941k of PPP funds were allocated as follows: $371k toward NRCPP labor, $211k toward NRCPP occupancy and other expenses, $140k toward non-traditional expenses, $29k toward company operated non-traditional, and $190k toward corporate expenses.
The NRCPPs generated $2,108k of Revenues vs. $1,092 last year, and $880k of store level EBITDA vs. $121k. Adjusting for $371k of PPP funds applied toward labor and about $210k toward occupancy expenses, indicated store level EBITDA would have been $299k or 14.2% of sales. This compares against 11.1% store level EBITDA in Q1’20. The Company points out that both quarters are not “normalized” since expenses were incurred, not necessarily reimbursed, to cope with the pandemic. In any case, the higher volumes from the most recently opened locations should point to improving average store level EBITDA in quarters to come.
The franchising venue, consisting mostly of non-traditional stores, secondarily-grocery store fees, lastly- revenue from the three franchised NRCPPs (in Lafayette, Kokomo and Evansville, IN) reported $1054k of royalties and fees vs. $1,467k. The grocery segment was down $25k to $164k. The non-traditional portion was $890k vs. $1278k. The margin contribution was $714k vs. $977k, after crediting $140k of the PPP funds, so the pre-PPP margin was $574k.
There is one company operated non-traditional location, in a hospital, that generated $116k of revenues and $27k of EBITDA margin, after applying $29k of PPP funds.
Net income in Q1’21 vs. a year ago, both quarters obviously affected by the pandemic, with a profit of $827k vs. a loss in ’20 of $255k. This year was still negatively affected by the pandemic, offset by the PPP receipt. Last year was affected much less by the pandemic but included a non-cash write-off of unamortized loan cost of $658k. Importantly, even without the PPP receipt, and in spite of the continuing operational distortions related to the pandemic, Operating Income was a positive $220k and $165k of D&A provided positive EBITDA of $385k.
In terms of future expectations, as described below from the conference call, operating margins at both the NRCPPs and non-traditional franchising can be expected to improve, from normal seasonality, pandemic effects unwinding, and the inclusion of three very successful newly opened NRCPPs.
THE CONFERENCE CALL
Paul Mobley, Executive Chairman and CFO, reviewed the financials, and Scott Mobley discussed operational considerations. Aside from the financial details described above, Paul Mobley pointed out that the $941k PPP receipt in Q1 is expected to be forgiven, just as the $715k received in ’20. He indicated that normalized Operating Income was about $700k in the quarter, since there were pandemic related operational adjustments, partially offset by the $941k PPP receipt. He indicated that the uncertainties related to the pandemic have created hesitancy among potential new franchisees of both the NRCPPs and the non-traditional venue. In spite of that, the first NRCPP franchisee (in Lafayette and Kokomo) is looking for a third location and 12 new non-traditional franchisees have signed up so far this year. Mr. Mobley pointed out that the balance sheet current ratio is a healthy 3.8 to 1 compared to 2.6 to 1 at 12/31/20. The $1.9M of cash plus expected cash flow allows for the Company to plan three new NRCPPs in ’21, each costing about $750k, while still maintaining adequate liquidity.
During the Q&A, Paul Mobley described how the first quarter, while encouraging, had additional pandemic-related expenses that were not fully covered by the PPP receipt, so sales and operating margins in the quarters to come should be more normalized and “significantly improved”.
Scott Mobley described how the break down between dine-in and off premise sales is now about 50-50, versus 35% dine-in just 4-6 weeks ago, varying between locations. He also indicated that lunch ran about 22.5%, dinner 77.5% Pre-Covid. Lunch fell off to about 15% early in the pandemic, and has recovered only to about 17.5% so is expected to build further as customers return to the workplace. Online ordering was only 8.5% Pre-Covid, grew to 35% and now is running about 20% of sales. Importantly, delivery, which the Company does not promote, ran under 10% of sales pre-Covid, jumped to 22.5% of sales and is now running about 18%. The Company has recently been “working with a third party alternative” which will reduce NROM’s cost by about 50%, thereby saving something over two points of store operating expense from what it ran in Q1’21 (4.5% of sales, up from 3.2% in ‘20). Scott described with pride how, in spite of the unprecedented labor shortage, the Company has met the challenge with recruiting, training and motivation. The Company has kept the labor expense under control. Adding back the $371k credit of PPP funds to the $229k of reported salaries and wages would indicate a labor expense of $600k or 28.4% of sales, versus 29.1% a year ago.
Also during the Q&A, Scott Mobley described how the Company has engineered the NRCPPs to provide speed (2.5 minutes for the traditional crust, about 6 minutes for Sicilian) along with a high quality end product. The stock equipment from the manufacturer was fine tuned to mesh with the long successful dough recipe that was also modified accordingly. He also described some aspects of the raw ingredient quality: 100% real meats with no fillers, tomatoes processed in the field and never frozen, as well as the never frozen dough. In terms of the varied menu, including pasta, sandwiches and salads, each ingredient can play multiple roles on the menu, which provides velocity for the distributor, higher volume and pricing control with the manufacturer and simplifies handling procedures for employees.
CONCLUSION: Provided at the beginning of this article