Business Context and Reporting Period
Rave Restaurant Group, Inc. is a franchisor and licensor of Pizza Inn and Pie Five restaurants and Pizza Inn Express kiosks. The company had no company-owned restaurants as of September 24, 2023. This unaudited Form 10-Q covers the 13-week fiscal first quarter ended September 24, 2023, compared with the 13-week quarter ended September 25, 2022.
At quarter-end, the system comprised 111 domestic franchised or licensed units and 22 international Pizza Inn units, for 133 total units. The company’s common stock trades on Nasdaq under the symbol RAVE.
Key Financial Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $3.089 million | $3.005 million | Up 2.8% |
| Income before taxes | $518 thousand | $399 thousand | Up 29.8% |
| Net income | $386 thousand | $307 thousand | Up 25.7% |
| Basic diluted EPS | $0.03 | $0.02 | Up $0.01 |
| Cash provided by operating activities | $628 thousand | $1.135 million | Down $507 thousand |
| Adjusted EBITDA | $588 thousand | $542 thousand | Up $46 thousand |
- Net income margin was approximately 12.5%, compared with 10.2% in the prior-year quarter. Pre-tax margin was approximately 16.8%, compared with 13.3%.
- Adjusted EBITDA margin was approximately 19.0%, compared with 18.0%.
- Revenue consisted primarily of franchise royalties of $1.225 million, supplier and distributor incentives of $1.100 million, advertising fund contributions of $422 thousand, supplier convention funds of $187 thousand, and franchise license fees of $101 thousand.
- Pizza Inn franchise revenue increased 5.5% to $2.604 million. Pie Five franchise revenue declined 10.2% to $438 thousand.
- Cash and cash equivalents increased to $5.944 million from $5.328 million at June 25, 2023. Current assets were $7.591 million and current liabilities were $2.423 million.
- The filing reports no interest-bearing debt outstanding at quarter-end. Operating lease liabilities totaled $1.294 million, including $446 thousand current and $848 thousand long-term.
- Cash used in investing activities was $12 thousand, primarily reflecting $22 thousand of property and equipment purchases and $5 thousand of intangible asset purchases. There was no financing cash flow during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased $84 thousand, primarily from higher franchise royalties, supplier and distributor incentives, and franchise license fees. The increase also reflected higher default and closed-store revenue.
- General and administrative expense decreased 1.8% to $1.319 million, while franchise expense decreased 2.5% to $1.172 million.
- Bad debt expense increased to $25 thousand from $4 thousand, primarily due to international receivables. The allowance for bad debts was $12 thousand at quarter-end, compared with $58 thousand at June 25, 2023.
- Income tax expense increased to $132 thousand from $92 thousand as pre-tax income increased.
- Operating cash flow declined to $628 thousand from $1.135 million, primarily because of lower collections related to the employee retention credit. The prior-year period also included $1.384 million of treasury-stock repurchases and $30 thousand of short-term loan repayments; no such financing outflows occurred in the current quarter.
- Pizza Inn domestic retail sales increased 8.6% to $26.030 million, and comparable-store retail sales increased 6.8% to $24.596 million. Domestic Pizza Inn units declined by 12 during the quarter, ending at 111.
- Pie Five total domestic retail sales declined 9.1% to $4.767 million because average units open declined from 31 to 27. Pie Five comparable-store retail sales increased 1.2% to $4.717 million, while ending domestic units declined by one to 26.
- International Pizza Inn units declined by 12 following termination of the Saudi Arabia master licensee.
Guidance, Outlook, Risks and Unusual Items
- Management believes cash on hand and operating cash flow will be sufficient to fund operations for the next 12 months and beyond.
- Management expects Pizza Inn units to increase modestly in future periods but expects Pie Five units to decrease modestly.
- Adjusted EBITDA increased partly because of the treatment of franchisee default and closed-store revenue, which reduced the reconciliation by $64 thousand in the current quarter. Adjusted EBITDA also excludes $79 thousand of stock-based compensation expense.
- The company recorded $108 thousand of deferred income tax expense and maintains a $5.234 million net deferred tax asset. Realizability is subject to future taxable income and other factors.
- The company is exposed to franchisee credit risk, including international receivables, and to claims involving employment matters, franchise disputes, lawsuits, taxes, food-product contracts and other ordinary-course matters. Management states that pending matters are insured or are not expected to have a material adverse effect.
- Operating lease commitments totaled $1.376 million before $82 thousand of imputed interest. The company also guarantees certain franchised-store leases and could become responsible if franchisees abandon those leases.
- Management notes that COVID-19-related effects have diminished, but future outbreaks or perceived outbreaks could adversely affect restaurant traffic, brand reputation, franchisee sales, royalties and liquidity.
- The filing contains no formal quantitative revenue or earnings guidance. Disclosure controls and procedures were deemed effective at September 24, 2023.
Important Facts for Investors to Verify
- Verify the sustainability of higher Pizza Inn sales and royalties despite the 12-unit domestic reduction and the termination of the Saudi Arabia master licensee.
- Assess whether Pie Five’s unit contraction continues and whether modestly higher comparable-store sales can offset the smaller store base.
- Reconcile operating cash flow with earnings, including the reduced employee retention credit collections and changes in receivables and deferred revenues.
- Monitor international franchisee receivables, bad debt expense and the adequacy of the allowance for doubtful accounts.
- Review the realizability of the $5.234 million deferred tax asset and the company’s future taxable income assumptions.
- Evaluate lease guarantees, operating lease commitments and other disclosed legal and contractual contingencies.
- Note that 1,997,974 shares remained available for repurchase under the company’s stock purchase plan; no shares were repurchased during the quarter or after quarter-end through the filing date.