Rave Restaurant Group, Inc. — Fiscal 2023 First Quarter Summary
Business Context and Reporting Period
Rave franchises Pizza Inn buffet, delivery/carry-out and express restaurants, Pizza Inn Express kiosks, and Pie Five fast-casual pizza restaurants. The unaudited Form 10-Q covers the 13 weeks ended September 25, 2022, compared with the 13 weeks ended September 26, 2021.
- At September 25, 2022, the system had 128 domestic Pizza Inn units, 33 international Pizza Inn units and 31 domestic Pie Five units, for 192 total units.
- The Company operated no Company-owned restaurants.
- Domestic franchised and licensed retail sales were $29.2 million, including $24.0 million for Pizza Inn and $5.2 million for Pie Five.
Financial Performance and Key Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $3.005 million | $2.553 million | 17.7% increase |
| Income before taxes | $399 thousand | $288 thousand | 38.5% increase |
| Net income | $307 thousand | $285 thousand | 7.7% increase |
| Basic and diluted EPS | $0.02 | $0.02 | Unchanged |
| Operating cash flow | $1.135 million | $(343) thousand | $1.478 million improvement |
| Adjusted EBITDA | $542 thousand | $431 thousand | 25.8% increase |
- Approximate margins were 13.3% for income before taxes, 10.2% for net income, 15.0% for EBITDA and 18.0% for adjusted EBITDA.
- Revenue growth was driven primarily by higher franchise royalties, supplier and distributor incentives, advertising fund contributions and supplier convention funds.
- Pizza Inn franchise revenue increased 21.4% to $2.469 million. Pie Five franchise revenue was $488 thousand, compared with $472 thousand.
- General and administrative expense increased 11.5% to $1.343 million, while franchise expense increased to $1.202 million from $986 thousand.
- Income tax expense increased to $92 thousand from $3 thousand, primarily due to current state taxes.
- Interest expense declined to $1 thousand from $24 thousand following repayment of the convertible notes.
Liquidity, Cash Flow and Capitalization
- Cash and cash equivalents were $7.421 million at September 25, 2022, compared with $7.723 million at June 26, 2022.
- Operating cash flow of $1.135 million was supported principally by collections of accounts receivable related to the employee retention credit.
- Investing activities used $23 thousand, including $39 thousand for definite-lived intangible assets and $14 thousand for property and equipment.
- Financing activities used $1.414 million, primarily for repurchase of 1,110,891 shares for $1.384 million.
- The Company had no convertible notes outstanding; the $3.0 million of 4% convertible notes matured and were paid in cash on February 15, 2022.
- Current liabilities were $3.035 million, and total liabilities were $5.105 million. Operating lease liabilities totaled $1.791 million, including $498 thousand current.
- Management stated that cash on hand and expected operating cash flow should be sufficient to fund operations for the next 12 months and beyond.
Material Changes Versus the Prior Comparable Period
- System-wide Pizza Inn domestic retail sales increased 17.9% to $23.979 million; comparable-store sales increased 12.5%.
- Pie Five system-wide retail sales increased 3.6% to $5.243 million, while comparable-store sales increased 7.6%; average units open declined from 33 to 31.
- Total units increased by two international Pizza Inn units, while domestic Pizza Inn and Pie Five unit counts were unchanged.
- Operating cash flow shifted from a $343 thousand use to $1.135 million of cash provided.
- Share repurchases reduced outstanding shares from 17.511 million at June 26, 2022 to 16.401 million at September 25, 2022.
- Adjusted EBITDA increased $111 thousand, reflecting higher earnings and increased stock-based compensation, partly offset by higher corporate and franchise expenses.
Guidance, Outlook, Risks and Unusual Items
- Management expects domestic and international Pizza Inn units to increase modestly and believes Pie Five units will eventually increase, but the filing provides no numerical revenue, earnings or unit-growth guidance.
- Management stated that the adverse effects of COVID-19 have diminished, but warned that renewed outbreaks, restrictions, customer reluctance to dine in and changes in off-premises dining could materially affect results and liquidity.
- The Company recorded $5 thousand of impairment and other lease charges related primarily to beverage equipment.
- The Company collected $0.6 million during the quarter from a previously recorded $0.7 million employee retention credit.
- A former chief executive officer obtained a $1.9 million judgment, including attorney fees, costs and prejudgment interest, in an employment-related lawsuit. The Company appealed the judgment to the Fifth Circuit Court of Appeals.
- Management believes other pending claims are insured or unlikely to have a material adverse effect, although actual outcomes could differ.
- The Company amended its stock repurchase plan to authorize up to 8.016 million shares; 4.244 million shares remained available for repurchase at quarter-end.
- Management reported that disclosure controls and procedures were effective as of September 25, 2022, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Verify the status and potential cash impact of the $1.9 million former-CEO judgment and appeal.
- Assess whether operating cash flow remains sustainable after excluding the employee retention credit-related collections.
- Monitor unit openings, closures and comparable-store sales for both Pizza Inn and Pie Five.
- Evaluate the effect of share repurchases on liquidity, share count and per-share results.
- Review deferred tax asset realizability and the unusually higher quarterly tax expense.
- Assess exposure to COVID-19 recurrence, franchisee financial health, lease guarantees and other ordinary-course contingencies.