Rave Restaurant Group, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 28, 2015; both fiscal 2015 and fiscal 2014 contained 52 weeks. The supplied filing is an annual report for fiscal 2015, rather than a standalone 2014 fourth-quarter filing.
Business Context
Rave operates and franchises Pizza Inn pizza buffet, delivery/carry-out and express restaurants, domestic fast-casual Pie Five restaurants, and the Norco food and supply distribution business. At June 28, 2015, the system included 26 company-owned restaurants, 30 franchised Pie Five units, and 248 franchised Pizza Inn restaurants, including 71 international units.
Company-owned restaurants consisted of 24 Pie Five units and two Pizza Inn buffet units. Management’s strategy emphasized accelerating Pie Five expansion through company-owned development and franchising, while continuing selected domestic and international Pizza Inn development.
Financial Performance and Key Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Total revenue | $48.2 million | $42.2 million | +14.2% |
| Food and supply sales | $30.8 million | $28.8 million | +6.9% |
| Franchise revenue | $4.5 million | $3.4 million | +31.9% |
| Company-owned restaurant sales | $12.9 million | $10.0 million | +29.1% |
| Loss from continuing operations | $1.7 million | $1.5 million | Loss increased |
| Net loss | $1.8 million | $1.6 million | Loss increased $0.2 million |
| Basic loss per share | $0.19 | $0.18 | Loss increased |
| Adjusted EBITDA | $0.6 million | $(0.3) million | Improved $0.9 million |
| Cash flow from operations | $2.0 million | $(0.1) million | Improved $2.1 million |
| Capital expenditures | $6.7 million | $2.1 million | Substantially higher |
Revenue growth was driven by higher franchisee retail sales, increased Pie Five royalties and development fees, and 11 additional company-owned Pie Five units. Cost of sales rose 13.7% to $41.3 million, while franchise expenses and general and administrative expenses also increased to support Pie Five growth.
The filing does not provide a consolidated gross margin or operating margin percentage. Based on reported revenue and net loss, the approximate net margin was negative 3.8% in fiscal 2015 versus negative 3.7% in fiscal 2014.
Brand and Operating Trends
- Pie Five: System-wide retail sales increased 131.2% to $25.3 million. Average weekly sales increased 19.6% to $14,907, and comparable-store retail sales increased 11.2%. Domestic units increased from 20 to 54, including 25 new franchised units and 11 new company-owned units, partly offset by two closures.
- Pizza Inn: Domestic retail sales increased 0.8% to $93.0 million, supported by a 4.1% increase in comparable-store sales. Domestic units declined from 182 to 179, while international units remained at 71.
- Company-owned Pie Five operations: Restaurant operating cash flow increased 75.0% to $1.8 million, although the company-owned restaurant segment remained loss-making before taxes.
- Segment performance: Franchising and food distribution generated $1.5 million of income before taxes, compared with $0.8 million in fiscal 2014. Company-owned restaurants generated a $1.4 million pretax loss, compared with a $1.2 million loss in the prior year.
Cash, Debt and Liquidity
- Cash and cash equivalents were $6.0 million at June 28, 2015, compared with $2.8 million at June 29, 2014.
- Total assets increased to $24.0 million from $16.0 million, primarily reflecting investment in company-owned Pie Five restaurants.
- The company had no bank debt at year-end. Its prior revolving and term loan facilities expired or were paid in full during fiscal 2014 and the first quarter of fiscal 2015.
- Fiscal 2015 financing cash flow was $7.9 million, including $8.3 million of stock-sale proceeds, $0.4 million from stock-option exercises, and $0.8 million of bank-debt repayments.
- The company spent $6.7 million on investing activities, primarily for new company-owned Pie Five units.
- Management stated that cash on hand, operating cash flow and potential proceeds from the 2014 at-the-market offering should provide sufficient liquidity for fiscal 2016. The filing does not provide a quantified fiscal 2016 cash-flow forecast.
Material Changes and Unusual Items
- Pre-opening expenses increased to $0.7 million from $0.2 million because of the accelerated Pie Five opening schedule.
- The company recognized a $0.3 million non-cash impairment charge related to one company-owned Pizza Inn buffet unit.
- Discontinued operations generated a $0.2 million after-tax loss, relating to two Texas Pizza Inn locations.
- Effective in the third quarter, responsibility for system-wide inventory shifted from Norco to third-party distributors. Reported inventory declined to $0.2 million from $1.7 million.
- The company raised $8.3 million through stock sales in fiscal 2015. Through June 28, 2015, it had sold 767,463 shares under the 2014 ATM offering for net proceeds of $7.1 million.
- The company had $2.6 million of net deferred tax assets and concluded that realization was more likely than not; future taxable income assumptions are significant to this conclusion.
Outlook, Risks and Contingencies
Management planned continued development of franchised and company-owned Pie Five units in fiscal 2016, with development agreements covering up to 375 additional Pie Five units as of August 25, 2015. Pizza Inn expansion was also planned, including potential international development in the Middle East.
- Execution risk from rapid Pie Five expansion, including site selection, construction, staffing, training, franchisee qualification and operating oversight.
- Intense competition from national and regional pizza chains, fast-casual pizza concepts, local operators and alternative food products.
- Restaurant-level profitability risk, as company-owned operations remained loss-making despite higher sales and operating cash flow.
- Dependence on franchisee financial health, royalty collections and franchise development milestones.
- Exposure to food, labor, occupancy and other operating-cost inflation. The company does not hedge commodity prices.
- Lease commitments totaled approximately $15.6 million in future minimum payments, net of subleases, as of June 28, 2015. The company was pursuing sublease or termination alternatives for two closed Texas buffet locations.
- Pending ordinary-course claims and legal actions were considered either insured or unlikely to have a material adverse effect, but the filing does not quantify potential exposure.
- Cash balances exceeded FDIC insurance limits at various times, creating concentration-of-credit risk.
Investor Verification Checklist
- Verify whether Pie Five development agreements convert into actual openings and whether new units achieve sustainable store-level profitability.
- Reconcile reported positive operating cash flow and Adjusted EBITDA with recurring net losses and substantial company-owned restaurant investment.
- Monitor cash usage, remaining capacity under the ATM offering, potential equity dilution and future financing needs.
- Assess the realizability of the $2.6 million deferred tax asset against future taxable income.
- Review lease obligations, closed-store liabilities and potential costs of subleasing or terminating closed restaurant locations.
- Track Pizza Inn domestic unit closures and comparable-store sales, particularly as the company reallocates resources toward Pie Five.
- Review related-party advisory fees paid or accrued to NCMS, an entity indirectly controlled by the company’s chairman.