RAVE Restaurant Group, Inc. (RAVE) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to the RAVE Restaurant Group, Inc. Fourth Quarter and Fiscal Year 2017 Financial Results Conference Call . All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tim Mullany, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, everyone and thank you for joining RAVE Restaurant Group’s fourth quarter and fiscal year 2017 earnings conference call. Everyone should have access to our fourth quarter and fiscal year 2017 earnings release that was released this morning. The press release can be found at www.raverg.com in the Investor Relations section. Before we begin, I would like to remind everyone that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Please note that during today’s conference call we will discuss certain non-GAAP financial measures which we believe to be useful evaluating our performance. Any such discussion of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliation of comparable GAAP measures is available in our corrected earnings release. With that, I’d like to turn the call over to Scott Crane, Chief Executive Officer.

Good afternoon. Thanks for joining us, everyone. I am very pleased to discuss our full year financial and operating results with the fourth quarter financial results. I am still very optimistic about RAVE’s strategic direction. Our leadership team has been efficiently in addressing sales declines and has made significant progress in improving profitability and our cash position. To that end, we recently completed a $5 million rights offering that strengthens our shareholder equity and increases our Company’s liquidity. As expected, annual adjusted EBITDA decreased by $2.6 million over the prior year, negative $2.7 million. We had net loss of $12.5 million, which is $3.6 million greater than the prior year, primarily due to impairment charges and lease termination expenses. In the future, we believe that difficult decisions that were taken in fiscal 2017 will translate into a foundation for success in coming quarters. For the year, Pizza Inn comparable store sales increased 0.1% from the prior year while domestic retail sales decreased by 0.2%. We’ve know seen a full year positive same-store sales for the Pizza Inn system and we are seeing consumer activity that suggests we are on the right path. We also have seen a double-digit increase in international and an interest in new unit growth. The Pizza Inn leadership team has worked hand-in-hand with franchise leadership and created national plan to keep building momentum behind improved performance. Results suggest improved sales will begin translating to both facility upgrades and new store development for franchisees. Pizza Inn will soon celebrate sixth anniversary next year and is resonating with consumers across the country and internationally. In fact, the Pizza Inn system is starting to grow again. Pizza Inn opened eight new restaurants during the year, ending in fiscal year at 221 total Pizza Inn restaurants. And I believe we are seeing I think we have a runway of 18 to 20 to shoot this next year, which is very impressive. Pie Five saw system-wide total retail sales increase 7.5%, although comparable store retail sales decreased 16% from the prior year. Pie Five has been challenged by the rapidly changing consumer base that is affecting much of the restaurant industry and especially the fast casual segment. The decline in comparable store sales in the quarter was a result of declines in both company owned and franchise store base. We continue to be focused on improving the traffic trends at existing restaurants while continuing to support the ongoing growth of the system. Last quarter was significant for both RAVE brands. We are pleased that with Pizza Inn’s fourth quarter results, Pizza Inn domestic comparable sales increased 0.2% from the same periods of the prior year. Much of this increase could be attributed to the operational changes made by the system to increase efficiency and consistency. Historically, Pizza Inn has been America’s home town pizza place. We have claimed that as our marketing mantra and are starting to utilize that slogan in all new marketing and advertisings. Pizza Inn will soon be announcing new initiatives including all day buffet that came directly from consumer research and demand. Pizza Inn has reenergized our core base and we look forward to more announcements in the future. Pie Five has experienced some sales declines and we’ve taken some meaningful actions to clean up the balance sheets and impact of the underperforming markets that should translate in the long-term improvements. Our Company’s overall profitability was affected by these challenges and strategic actions. Our leadership has outlined additional areas where we see growth potential for both concepts and we’re building momentum behind these initiatives. After considerable consumer research, we have identified key initiatives that have taken the potential to increase the store sales and traffic trends. We still believe in the strength of our concept and Pie Five’s smaller store base gives us competitive advantage to significantly improving our relationship performance within the sector. We’ve been encouraged by the continued interest in franchise development, new restaurant expansion and consumer support for new initiatives. Just last month, we introduced a new Pie Five prototype in Plano. The next generation design also offers wine by the bottle and glass along with craft beer on tap. Our new restaurant prototype provides new opportunities for our brand to expand our menu, service and consumer use. We’re evaluating additional options to make it easier, more convenient for consumers to get a great personalized pizza. We’ve introduced in-house delivery capabilities and will begin rolling out the system across the country. All location will offer in-house delivery by the end of 2018. Also, we’ve introduced chicken wings in three locations. We have offering of five different flavors that are served bone in and boneless. This is a direct correlation that consumer research has suggested consumers would visit us more often if we offered additional menu options. In the fourth quarter of 2017, Pie Five added five new franchise restaurants, we closed seven Company-owned locations in underperforming markets bringing the fiscal year-end unit count of 84 Pie Five restaurants in 19 states. So, far in the current fiscal quarter, we have signed two new franchise development agreements in DFW and Pakistan for up to 57 additional Pie Five restaurants. Our new Pie Five international partners have already built a very successful global and domestic restaurant organization. We’re also actively pursuing other international deals. The pace of development of the Pie Five systems continues and we anticipate and extraordinary pace of franchise store openings in the next six months, based on the opening schedule. I’ll just turn it back over to Tim.

Thanks, Scott. Total revenues for the fiscal year 2017 and a comparable prior year were $57.1 million and $60.0 million respectively, a decrease of 4.7% year-over-year. Pie Five ended the fiscal year with 84 Pie Five restaurants in 19 space, as Scott mentioned. So far, the current fiscal quarter, the Company has opened one restaurant where franchisees have opened two new restaurants and the Company signed two new franchise development agreements, as mentioned in the DFW and Pakistan for up to 57 additional restaurants. At fiscal year-end, the company had franchisee restaurant development commitments for up to an additional 174 Pie Five restaurants. Pizza Inn opened eight new restaurants during the year while closing nine domestically and none internationally, ending the fiscal year at 221 total Pizza Inn Company-owned and franchise-owned restaurants worldwide. During the fiscal year, our cash used in operating activities was $5.5 million versus cash provided in prior year of $1.9 million, also driven by change in impairments, loss on sale of assets and changes in our accrued expenses. For the year, we had $573,000 in capital expenditures compared to $8.1 million from the prior year, resulting from the refocus efforts on improving unit economics of existing stores. Regarding cash flow from financing activities, we had $4.7 million of cash provided in the current year compared to $866,000 from the prior year. The financing activities in the fiscal year were provided by net proceeds from issuance of convertible notes of $2.9 million, proceeds from the exercise of stock options for $806,000 and a short-term loan of $1 million. The $866,000 in cash provided in fiscal year 2016 was from proceeds from the sale of stock of $764,000 and proceeds from the exercise of stock options of $102,000. For the fourth quarter, total revenues decreased by $2.2 million to $13.3 million, driven by the reduction of Company-owned stores from an average 16 fewer Company-owned restaurants opened compared to the same period of the prior year. As of the end of the quarter, we had 84 total domestic Pie Five units and 161 domestic Pizza Inn units with 60 international units. Pie Five comparable restaurant sales decreased 16.2% with an average of 49 restaurants in the comp base or 58% of total brand restaurant count. Pizza Inn domestic comparable restaurant sales increased 0.2% with 143 restaurants in the comp base or 89% of the total brand restaurant count. The sales trends that we experienced at Pie Five and Pizza Inn in the fourth quarter generally have continued so far in the current quarter. Pie Five total domestic retail sales for the fourth quarter decreased to 9.5%, primarily driven by the closer of the underperforming Company-owned restaurants, partially offset however by 10.6% total retail sales increase in the franchise system. Franchise retail sales improved by $1.1 million or 10.6% from the same period of prior year versus Company-owned unit retail sales declining 48.9% or $2.5 million over the same period. In the fourth quarter, Pizza Inn domestic franchise retail sales decreased by 0.3%. The number of franchise buffet locations remained constant during the fourth quarter at 93 units while the final number of Delco and Express franchised units increased by 3. Food and supply sales increased as percentage of overall total revenue by 12.2% to 70.1% while franchise revenue increased by 1.1% to 10.5% compared to the same period of prior year. The remaining Company restaurant sales revenue of 19.4% was 13.2% below the same period of the prior year. Restaurant operating cash flow from Company-owned Pie Five increased by $343,000 to $394,000. As a percentage of restaurant sales, this is a change from 1% to 15.2%. Fourth quarter net loss for the Company decreased $1.2 million to $1.1 million or $0.10 per diluted share compared to net loss of $2.3 million or $0.22 per diluted share in the prior year period. In addition to the impact of restaurant operating cash flow already discussed, the other primary driver for the change in net loss was a reduction in the impairment charges, non-operating store costs and discontinued operation costs of $1.7 million. Adjusted EBITDA decreased slightly in the fourth quarter to negative $479,000 compared to $475,000 in the prior year so effectively flat. At quarter-end, we had a cash balance of $451,000. During the fourth fiscal quarter, our cash used in operating activities was $2.5 million versus cash used in the prior year of a $197,000. Cash used by operating activities in the fourth quarter is primarily driven by changes in impairment and loss of sale of assets and then changes in accrued expenses. In the fourth quarter, we had capital expenditures of $315,000 compared to $485,000 in the same quarter of the prior year. From a total year, we had $573,000 in capital expenditures compared to $8.1 million from a prior year, resulting from a refocused efforts on improving unit economics of existing stores and also a refocus on our franchise units as opposed to Company store expansion. As a reminder, we disclosed a great deal of brand-specific financial and operating performance in our quarterly earnings release tables and our SEC filings. This information includes brand-specific comp and non-comp restaurant average unit volumes and income statement line item details and various explanations. Our Form 10-K was filed with the SEC earlier today. In closing, with the fourth quarter of 2017 remaining challenging, we have developed initiatives that address these sales trends and put the Company on the right platform for continued growth. We are focused on providing additional value in addition to our customers while improving traffic at all locations. With that, we’ll open it up for any questions.

[Operator Instructions]. Our first question comes from the line of John Gilliam with Point Clear Strategic Capital. Please go ahead.

Thank you for taking my call. Good afternoon, gentlemen.

Good afternoon.

Could you provide a little bit more color on the new prototype in Plano? Could you give an idea of what the numbers there are showing since the new prototype, new menu offerings were launched?

Yes. So, this is Scott. I’ll let Tim talk to the specifics to the extent we can. So, I would still try to give arms around that part. But we’re running, I would tell you about 7, 8% in mix in wings sales; we’re running fivish to 6% in larger format, Pizza for Two, if you will, 14-inch pie sales; 3 to 4% in craft beer sales. So, my goal was to operationalize some of these things against in the consumer work that said we love you but we want more -- more often, I would say, opening the top of the funnel and you got the day where we’re having our Pie Five’s actual annual conference today where if we can get 10 to 15 or 20 points of incremental revenue through these new initiative which is what we are working on and I think can happen, we are seeing, I guess I would tell you that coming out of there with the menu mix.

So, while we can’t give out singular store level sales data, what I would say is that as we open a store, our intent really wasn’t to gauge just total sales volume for this one particular unit, but what it was intended to do was allow us to test out for some new sales platforms, as Scott mentioned. And also in addition to new operational processes just change the overall composition of our sales at a store level, which is the first time we have actually done a fairly radical restructuring of sales composition. So in addition to our traditional pizza platform, which we have in all of our restaurants, the store did roll out the wings platform, which as Scott mentioned, got a fairly significant amount of overall sales incidence at the store. We also did a unique craft beer bar at this location which we don’t have at any of the other locations, to cash that out. And what I mentioned, new operational processes. We’re also doing things here for example that we don’t do at other locations like an order first process. So this one has to register immediately at the line, so the order is taken before the pizza is made as opposed to after, like all the other locations, number one. And then, number two, we’re also testing out a number runner. So in all of our other locations when a pizza comes out of the oven, it’s the customer is effectively waiting there to take it to their table, where it’s here like in many other fast casual concepts, we’re giving them a number, they go sit down and then somebody runs the pizza out to their table when they’ve done. So, there’s quite a few new things that are happening at this location. It’s still early for us to make a determination on what’s successful and what’s not. We don’t expect them all to be winners, so to speak. But we are very enthused from the early data that we are getting.

Excellent. And do I understand correctly, with the Plano location, with the new prototype, was this a new store opening or is this one we converted or added these things to that had already been open?

This was a new store opening but this was a resellers executed, probably about a year before Scott even joined the location. So, it was still being run through our heritage sort of real estate model, so to speak. So, in the last few years from when we signed that lease we have obviously updated massage, [ph] what we are looking for in our real estate metrics going forward. So I would say this is probably not the type of location that we would sign in future locations. It’s not that one. It’s not fitting of our forward-looking thinking.

With that concept, yes. We are trying to put the kitchen with new walk in, you can see the whole kitchen versus you walk down from I would say a vertical standpoint; you walk in but that just takes time to get through the system and get a few more, I would say linear feet on the horizontal versus the vertical. So that’s what it’s getting in.

Okay, great, good. Thank you. You guys mentioned the delivery will be offered for all the locations by the end of 2018. Was that end of calendar year or fiscal year 2018?

Calendar year.

Calendar year, okay.

Yes, we just announced it to all the franchisees today, actually this being our conference, so we’re still working through do that. We have got our two largest markets on it. So, I would say we are delivering now in 25 units roughly out of 85, showing -- clearly, consumer want Pie Five, they’d use us more often if we could add to the, like I said, the top of the funnel. So, we’re adding that but we’re hoping by the end of calendar year 2018.

Okay, great. Could you give an idea of what the -- where do we stand with regard to shareholders’ equity following the closing of that the recent offering?

Yes. So, we closed -- so, we can’t -- we haven’t released any financials obviously since this 10-K this morning. But I would say that the capital raise puts us in a cash position and definitely positive with our current plans. So, from a pure liquidity point of view, we wouldn’t need to, for example, do another capital raise. So, I think this -- completing this round was something that just strengthened our overall cash position. But, it’s not something that we foresee a need to do any additional raises for, from a liquidity point of view.

[Operator Instructions] At this time, I’m showing no further questions. So, this will conclude our question-and-answer session as well as today’s conference. We thank you for attending the presentation and you may now disconnect your lines.