Late last week RAVE Restaurant Group announced a transition from CEO Randy Gier to former CEO and top shareholder Clinton Coleman who will serve in an interim capacity. Several contributors to the Groove community had attempted to reach out to former RAVE CEO Randy Gier many times over the last two months to no avail and this announcement only confirms the handwriting that has been on the wall for months now. While Mr. Gier obviously brought some positive things to RAVE from a marketing standpoint, his inability to communicate with existing and prospective shareholders made him unable to serve effectively in the capacity of Chief Executive Officer for a publicly traded company. Additionally, his ability to execute the company’s long term growth strategy was increasingly being called into question as he slipped further and further off the grid. Mr. Gier owned very little stock in RAVE and many shareholders found the combination of these factors increasingly difficult to stomach. The bottom line is that the removal of Mr. Gier is a very positive development for long term shareholders, as the company will now be run day to day by individuals who have a vested interest (they control over 30% of outstanding shares) in seeing the company AND its stock perform well.
We have been expecting RAVE’s 4th Quarter to continue the negative sales trends of the prior quarter and nothing has changed in that regard. However, we do believe that Q1 (started July 1) is showing positive trends based on several new initiatives that began in the first two weeks of the quarter. We note that discussions with managers of several franchisee owned and corporate Pie Five locations suggest that sales are trending positively over these first few weeks of July. While this is somewhat anecdotal and obviously covers only a fraction of the reporting period, we are encouraged because the current stock price appears to price in a continuation of the prior quarter’s negative sales trends and a continuation of the leadership woes that have been dogging Rave. With the combination of Thursday’s announcement of the leadership transition and the positive sales indicators, we believe that RAVE’s operations may have started turning a corner while the stock remains mired near multi year lows. Additionally, now that the owners of 30%+ of RAVE’s shares outstanding are calling the shots day to day, they may prove to be unwilling to hold through a leadership transition with the acquisition activity in the space starting to pick up and much higher valuations being offered for similarly situated companies. It would not be surprising to see RAVE taking bids from the many ready and able buyers who would likely be willing to pay a substantial premium to the current market cap to take down Pie Five and Pizza Inn in one fell swoop, especially given that comparable private market transactions have been valuing Pie Five comparables at more than double the current RAVE valuation.
JRJR filed the long awaited 10k for 2015 this week and we have now had a chance to review the actual numbers. We note that much of our enthusiasm for the JRJR trade was based on three beliefs –
- that there was significant latent value in the gourmet foods division (YIAH) that might soon be realized
- that a major turnaround was occurring at Longaberger
- that Agel was at an inflexion point due to the release of the new Caspi skin care line.
The gourmet foods division (YIAH) was growing like wildfire through the end of Q3 and we believed that division alone could be worth the majority of the then existing market cap if the company could continue to grow anywhere close to the pace they had maintained each quarter since acquiring it. This division had been growing at a blistering pace that matched the growth of several high profile gourmet food delivery companies that were receiving eye-popping valuations in the private funding markets and we had reason to believe that YIAH might continue that growth as it was just starting to enter the US market. We did not hear much discussion of what happened with YIAH during Q4 on the conference call and of course, the conference call was held several days before the financials were released so there was not an opportunity to inquire, but the company apparently hit a bump in the road as the growth did not continue into Q4 at all. It appears that YIAH actually contracted significantly from a revenue standpoint in Q4, falling from Q3 revenue of $6.5m down to revenue of $3.9m.
There had been talk of a major turnaround occurring at Longaberger that started towards the end of Q2. Q4 is traditionally very strong for retailers and purveyors of wares like the Longaberger product portfolio and the constant flow of positive talk from Longaberger leadership gave us reason to believe that things were going very well. While there may be some positive trends occurring there that are not ascertainable from the reported revenue and profit figures, it appears that Longaberger revenues were down substantially over the prior year’s results. Given that the quarterly revenue contribution for Kleeneze and Betterware was likely in the $20 million range (plus or minus a million – these numbers are not broken down in the reported numbers but we can glean an approximation based on the revenue run rate when each was acquired during 2015), we can then back into a Longaberger revenue figure to get a number that is more of an apples to apples comparison with Longabergers’ prior year performance. Using this approach it appears that Longaberger’s revenue came in substantially lower than the prior year’s Q4.
With Agel, much of our enthusiasm was derived from comments by management on the Q3 conference call that led us to believe that Caspi was going to be a major game changer for Agel. We thought that the Q4 launch of Caspi plus the momentum of the heralded Bio product released late in Q3 would lead to a strong boost in Q4 sales for Agel. While there was an improvement in Q4 revenue vs Q3, it appears that revenues for Q4 2015 ended up being approximately 11% lower than what they were in Q4 2014.
Thus, the three key items we were looking to for improvement in JRJR’s Q4 report did not materialize – they did not show the continued growth (YIAH) or the improvement (Longaberger and Agel) that we were hoping to see. In our experience, long delays and missed filing deadlines seldom occur when things are going well generally and we found this to hold true for JRJR in Q4. Given that we again find ourselves in the position of waiting to view financials from a deadline that passed many weeks ago (this time for Q1), we continue to view JRJR shares as a very high risk and we think those who went against our earlier recommendations to cut their risk in JRJR should proceed with much caution here.
There are rumors circulating that RAVE may be in discussions to sell the company or at least a stake in its Pie Five subsidiary to a private equity firm or one of several privately held chains that have expressed an interest over the last few weeks. We have heard from multiple sources of recent meetings of top level RAVE execs in Atlanta regarding partnerships in that market and the gist of the rumor is that the talks emerged from those meetings. We have made multiple attempts through email, phone, twitter, etc. to reach the CEO, CFO or an IR rep over the past two weeks with no reply whatsoever. The silence is deafening with the market cap of the company ($39m) very close to a competitor’s most recent equity raise (MOD Pizza raised $34m two months ago) and one of its other largest competitors (Pieology) clearly stating that they intend to acquire other players in the space after last week’s acquisition of competitor Project Pie. Rave’s sub $40 million market cap is surprisingly low for a firm that has no debt and is still growing fast enough to be closing in on the opening of its 100th Pie Five over the next few weeks. To take down one of the top players in the fast casual pizza space for under $80m sounds like a steal and the 200 unit+ Pizza Inn chain may be in the mix as well since the scuttlebutt is that it is the parent company RAVE getting acquired in the $75m range.
RAVE at its current valuation would be a juicy target for Pieology, Blaze or MOD Pizza. Additionally, we would not be surprised to see significant interest from Private Equity firms whether the rumored suitors (Roark, Sentinel) are involved or not. We do find it an interesting coincidence that Roark was mentioned, as they own multiple chains, they acquired Wingstop in this same price range a few years back and then hired away Rave’s (then called Pizza Inn Holdings) CEO Charlie Morrison before taking Wingstop public last year. As for the three other fast casual chains mentioned above, those three have been battling it out in many of the same markets while Pie Five has been growing in other geographies, so its footprint has much less overlap. For instance, Pieology is opening its first Atlanta area restaurant this week, at ground zero for where these meetings with potential suitors have supposedly taken place.
We also think the timing for acquisition overtures makes sense. RAVE stock is down over 70% since this time last year, as the company closes in on its 100th Pie Five store over the next few weeks and the company is making some changes starting next week that could boost key metrics. Pie Five has always been the lowest cost build your own pizza option among the “big four” and that will not be changing, but the company will be instituting a price increase starting next week that will not just bring them closer to what their competitors charge, but likely will call more attention to their lowest cost status while boosting revenue. The company is also increasing the size of its basic offering to 11″ from 9″, which will put their size up there with the largest among the big three while maintaining the lowest cost.
Fast Casual Pizza – Base Prices of the Big Four
Blaze – $8.45 (any toppings)
MOD Pizza – $8.29 (any toppings)
Uncle Maddios – $7.99 (up to 3 toppings)
Pieology – $7.65 (any toppings)
Pie Five $6.99 (any toppings)
Pie Five purportedly moving up to $7.49 and slightly larger pizza over the next few days
The increased cost associated with this change for Pie Five will be negligible at just a few cents per pie and the rest of that price increase should do much to boost the top and bottom lines if sales remain near constant or improve. While some may posit that an increase in the price will cause some consumers to balk, we note that the #1 Pie Five franchise store in the entire chain by revenue production has been charging $7.99 per pie since it opened a little over a year ago vs. the standard $6.99, so it has been even higher than the $7.49 that will be charged by the others after the price increase. From a timing standpoint, we think potential acquirors might do well to make their moves before the company starts seeing improvements in the store level metrics or other catalysts emerge to move the stock price higher. Regardless whether the sale rumors turn out to be accurate, we believe that Pie Five is worth at least 2x the current market cap of RAVE restaurant group and Pizza Inn has considerable value that is being overlooked as well.
JRJR Networks filed an NT 10Q after the market closed yesterday, giving the required statutory notice of its intent to delay filing its financial statements for the first quarter of 2016. The filing indicated that the company did not expect to file in the next five days. Additionally, there was a filing yesterday that indicated JRJR director Senator Kay Bailey Hutchinson had rescinded the JRJR stock grant from February. In the context of the company’s continued delays in filing its 10k for 2015 and its failure to provide shareholders any explanation for this director filing for the stock grant to be rescinded, it is difficult to see either of these occurrences in a positive light
We have previously lamented JRJR’s failure to communicate with shareholders. May 16, 2016 was a very important day given it was the deadline for filing first quarter financials, it was the deadline for filing the company’s compliance plan that will allow them to retain an NYSE Mkt listing, it was a day where a long tenured director filed to rescind a 94,000 share stock grant given less than 3 months ago and it was a day where the company would have to issue an additional 50,000 shares to lender Dominion Capital for going another 10 days past the 10k filing deadline. Any one of these four occurrences would usually result in some explanation being offered and the four of them together would usually result in a company taking steps to explain to shareholders why things appear to be in such disarray. As of one hour after the market opened this morning that has not occurred.
“Egregious” is the word that comes to mind to describe JRJR’s shareholder communication practices. It is an understatement to say that they must improve if they hope to achieve the company’s long term goals and it is difficult to imagine any significant shareholder value being created here until there is demonstrable change. While many Groove participants have understandably reduced their JRJR holdings significantly or completely liquidated, we know there are some who continue to hold shares and we hope that the company will take steps to keep its NYSE Mkt listing and adopt better shareholder communication practices in the near future.
A community update following the release of Inuvo’s (NYSE Mkt: INUV) Q1 results and in anticipation of quarterly results coming soon for Remark Media (Nasdaq: MARK) and Rave Restaurant Group (Nasdaq: RAVE) –
Inuvo reported Non GAAP earnings last night that beat estimates by a penny, but weakness in its core business during March caused the company to came up short on the revenue side. Despite its 8th consecutive quarter of GAAP profitability, investors were less than enthused due to comments on the call that indicated that March weakness had carried over into April and management is now expecting a weaker second quarter to result. The positive comments on the call were largely focused on the Searchlinks roll-out and the potential for big game hunting type account wins, but it appears that investors are more focused on the reported partner revenue results that came up short. While management pointed out that most of the shortfall could be attributed to the company’s acquisition of several of the better performing partner sites and this essentially moved that revenue from the Partner Network to the Owned and Operated Network side, we believe that that investors were disappointed due to an expectation that Searchlinks revenue would have grown to make up for a much larger portion of that revenue shift by now. We suggest investors remain cautious on Inuvo with a wait and see approach as we expect that future Owned and Operated revenue growth will slow and continue to be mostly offset by the additional advertising spend required to produce it, Additionally, we have viewed Searchlinks as the key catalyst for growth and from a revenue production standpoint, it does not appear that Searchlinks has gained significant traction yet. Management comments on the call suggest that they do not expect this to occur in Q2 either which means investors may have to look all the way out to Q3 to see evidence that Searchlinks is the catalyst that will take the company to the next level.
Remark shares seem to have settled into a trading range between $4.50-$5 and the trading in the stock has fallen off precipitously. The company’s acquisition of the Vegas.com assets has transformed Remark into a completely different company that is heavily impacted by online travel bookings in a concentrated geographical area. While the company continues to develop its Kan Kan and Bikini.com initiatives and it gets meaningful revenue contribution from its tax and financial domain businesses in Q2 each year, it appears that there is currently very little if any synergy between these businesses. While the monetization of the Sharecare asset could provide an opportunity for upside, we believe that investors are largely taking a “wait and see” approach with Remark as many find the long term growth story with these disparate businesses to be increasingly difficult to understand.
Rave Restaurant Group
Rave Restaurant Group’s shares seem to have found support in the $5 range and settled into a trading range between $5 and $5.50. The departure of senior VP Chris Smith following the closing of several underperforming Pie Five locations seems to have dampened investor’s enthusiasm for the Pie Five growth story. Given these closings and the upcoming Q3 earnings report where additional closings and challenging same store sales figures will undoubtedly be part of the narrative, we do not expect to see significant upside in the very near term, though we remain cautiously optimistic on the long term picture.
We are increasingly concerned by JRJR Network’s lack of communication with shareholders.
In the absence of evidence to the contrary, we are required to read the tea leaves and infer what is going on from the bits of information that are available. BDO has been serving as JRJR’s accounting/auditing firm for about a year now. There was no prior indication that the company might have any accounting issues that would require a late filing. At literally the 11th hour, the company hired a new CFO and filed for an extension, on which they indicated that they expected to file within the 15 day extension period. That day came and went with no additional new releases or filings until the SEC deadline for disclosing the deficiency letter from the NYSE Mkt due to their failure to file within the 15 day extention period. It is difficult to see this as just an extreme disregard for shareholder communication, as it also gives the impression that there may be some surprises when the 10k is ultimately filed. In our experiences, surprises that cause delays of this kind (delays that are kept under wraps until the last possible minute) are not good surprises.
While our general bull thesis could remain intact, it is difficult to know if the turnarounds (Longaberger, Agel, etc.) are progressing, if the newly acquired UK companies are delivering improved margins and if the growth trajectory of YIAH has continued to impress. These things are not knowable because there have been no financials filed that would give official numbers for going on 8 months now. Worse yet, there have been no press releases giving any indication of anything (positive or negative) with these companies with the exception of the pro forma revenue figure released a few months back. The bottom line here is that the lack of shareholder communication raises the risk profile for JRJR Networks significantly. While the current price could turn out to be a tremendous bargain (and we hope it does), we do not currently have the information that would allow us to be certain of that.
Lots of interesting things happening at JRJR, but no press release yet about earnings call date or time, leading us to wonder if the company is going to file late given that the deadline is today. Given that this is the first K filed with a new auditor, it is not that surprising that the company would be filing at the last minute or even filing late, but it is disappointing that nothing has been communicated to shareholders about a time and date for the earnings conference call by March 30. The hiring of an experienced CFO is a very positive development and will hopefully lead to improvements in many processes that will ensure that reporting is more timely going forward. We hope that communication with shareholders will be improved as well.
Trying to read the tea leaves remains difficult, as we would typically see such a delay as negative, but on the other hand we note the 8k filing this morning that announced the significant stock option awards that were priced this week. If the company was about to report a very poor quarter or if they had material issues that might drag the full year audit out for an extended period, you would think that they would wait until later to price those options on the expectation that the stock price would fall and the options grant could be at a lower price.
Last week’s release of the reported short interest indicated a decline of nearly 45% and differing interpretations of the most recent naked short interest report (the first after the registrar, cusip, name change) have lead some to see the position as substantially covered and others to see noise in the figures indicating it could still be outstanding. While we were not privy to the details of that report, we would think that the recent price decline despite positive developments at JRJR would lead most shorts to cover their remaining exposure while they have the opportunity to do so at an attractive price. We note that some of the trading this morning appears to reflect short covering. Though it is not in great volume yet, the pattern used to walk the price down has been used in several trades to buy this morning, we have not seen that occur in many months and this is a very interesting development that bears watching. Regardless, JRJR shares are very cheap again and this presents a great opportunity for investors.