Business Context and Reporting Period
Rave Restaurant Group, Inc. franchises and licenses Pizza Inn, Pie Five, Pizza Inn Express kiosks, and Pie Five ghost kitchens. The company facilitates food, equipment, and supply distribution through third-party distributors. This Form 10-Q covers the 13-week quarter and 26-week year-to-date periods ended December 24, 2023, compared with December 25, 2022. The filing is unaudited. Rave is a smaller reporting company and non-accelerated filer.
At December 24, 2023, the system included 112 domestic and 18 international Pizza Inn units and 24 domestic Pie Five units, plus one net increase in Pie Five ghost kitchens during the six-month period.
Financial Performance and Liquidity
| Metric | Three months ended Dec. 24, 2023 | Three months ended Dec. 25, 2022 | Six months ended Dec. 24, 2023 | Six months ended Dec. 25, 2022 |
|---|---|---|---|---|
| Revenue | $2.792 million | $2.866 million | $5.881 million | $5.871 million |
| Income before taxes | $540 thousand | $488 thousand | $1.058 million | $887 thousand |
| Net income | $553 thousand | $348 thousand | $939 thousand | $655 thousand |
| Basic EPS | $0.04 | $0.02 | $0.07 | $0.04 |
| Adjusted EBITDA | $582 thousand | $615 thousand | $1.170 million | $1.157 million |
| Cash provided by operating activities | Not provided | Not provided | $305 thousand | $792 thousand |
Net profit margin was approximately 19.8% for the quarter and 16.0% year to date, compared with approximately 12.1% and 11.2%, respectively, in the prior comparable periods. Adjusted EBITDA margin was approximately 20.8% for the quarter and 19.9% year to date, compared with 21.4% and 19.7%, respectively.
- Quarterly revenue declined 2.6%, while year-to-date revenue increased 0.2%.
- Quarterly income before taxes increased 10.7%; year-to-date income before taxes increased 19.3%.
- General and administrative expense declined 7.7% for the quarter and 4.9% year to date. Franchise expense declined 2.7% and 2.6%, respectively.
- The quarter included a $13 thousand income tax benefit versus $140 thousand of tax expense in the prior year. Year-to-date tax expense was $119 thousand versus $232 thousand.
- There was no interest expense in the quarter or year to date, compared with $1 thousand year to date in the prior period.
At December 24, 2023, cash and cash equivalents were $5.306 million, compared with $5.328 million at June 25, 2023. Current assets were $7.106 million and current liabilities were $1.697 million, implying substantial short-term liquidity. Total liabilities were $3.059 million and shareholders’ equity was $11.101 million. The company reported no short-term or long-term borrowings; liabilities primarily consisted of operating lease liabilities and deferred revenues. Operating lease liabilities totaled $1.172 million, including $432 thousand current.
Year-to-date investing cash flow used $16 thousand, primarily for property and equipment and intangible assets. Financing cash flow used $311 thousand for taxes paid on vested restricted stock units. No treasury stock was repurchased in the current period, compared with $4.979 million of repurchases in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Pizza Inn domestic retail sales increased 8.1% for the quarter and 8.3% year to date, supported by higher Buffet Unit counts and comparable-store sales. Comparable domestic retail sales increased to $24.403 million for the quarter and $48.999 million year to date.
- Pie Five domestic retail sales declined 11.4% for the quarter and approximately 10.2% year to date, primarily because average units open decreased from 31 to 25 for the quarter and from 31 to 26 year to date. Pie Five comparable-store sales were relatively stable or modestly higher.
- Domestic Pizza Inn units increased by one during the quarter but decreased by 11 year to date; international Pizza Inn units decreased by four and 16, respectively. Pie Five domestic units decreased by two during the quarter and three year to date.
- Quarterly revenue pressure reflected lower supplier and distributor incentives and a lower store count, partly offset by higher comparable retail sales. Year-to-date revenue was supported by higher franchise royalties and default and closed-store revenue but offset by lower deferred marketing revenue.
- Adjusted EBITDA was broadly stable year to date, increasing to $1.170 million from $1.157 million, although quarterly Adjusted EBITDA declined to $582 thousand from $615 thousand.
- Operating cash generation fell to $305 thousand from $792 thousand, primarily because the prior-year period benefited from collections related to the employee retention credit.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal numerical revenue, earnings, or unit-development guidance. Management expects cash on hand and cash generated from operations to fund operations for the next 12 months and beyond. The company expects Pizza Inn units to increase modestly in future periods and Pie Five units to decrease modestly.
- Management states that pending claims and contingencies involving employment matters, franchise disputes, lawsuits, taxes, food-product contracts, and other ordinary-course matters are either insured or not expected to have a material adverse effect.
- The company’s lease guarantees for certain franchised locations could require it to assume lease obligations if a franchisee abandons a location and fails to meet its obligations.
- Future results remain exposed to franchisee financial condition, store closures, unit counts, comparable-store sales, supplier incentive volumes, distributor relationships, and the ability to collect franchise receivables.
- The company continues to evaluate the realizability of its deferred tax assets. Actual results could differ from management’s estimates.
- Although the adverse effects of COVID-19 have diminished, a new outbreak or perceived outbreak could negatively affect restaurant traffic, brand perception, results, and liquidity.
- The company adopted the expected-credit-loss accounting standard on June 26, 2023, with no material reported impact.
- Unusual period items included the $13 thousand quarterly tax benefit, $82 thousand of year-to-date stock-based compensation, $35 thousand of year-to-date bad debt expense, and $18 thousand of quarterly and $82 thousand of year-to-date franchisee default and closed-store revenue included in the Adjusted EBITDA reconciliation.
Important Facts for Investors to Verify
- Verify the sustainability of profitability and operating cash flow, particularly given year-to-date operating cash flow of only $305 thousand against $939 thousand of net income.
- Assess whether Pizza Inn domestic comparable-store growth can offset ongoing international and non-Buffet unit reductions.
- Monitor Pie Five unit closures, ghost-kitchen development, and the company’s expectation that Pie Five units will continue to decline modestly.
- Review the composition and collectability of accounts receivable, including the $35 thousand year-to-date bad debt expense and $23 thousand allowance at period end.
- Evaluate lease obligations and potential exposure under guarantees of franchised-store leases.
- Reconcile the company’s non-GAAP Adjusted EBITDA to GAAP earnings and consider the effect of tax benefits, default and closed-store revenue, and stock-based compensation.
- Confirm the company’s liquidity assessment and the absence of conventional debt, while considering operating lease commitments of $1.242 million before $70 thousand of imputed interest.