RAVE Update –
Rave Restaurant Group reported earnings last week that fell short of expectations on the top and bottom lines. While we were expecting Q4 to be very challenging, we were surprised at the degree to which same store sales declined (-12%) and even more surprised at the size of the decline in average weekly sales (-14.5%). While the same store sales figures are entirely based on corporate locations, the average weekly sales figures include franchise locations and we expected the sales results from non corporate locations to have more of a positive impact that they did. While the figures released did not allow for that level of granularity, we believe that those AWS figures were most heavily impacted by the sub-par corporate locations, some of which were closed during the period. While RAVE management held up a slight same store sales increase at Pizza Inn as a positive, the overall tone of the report was quite gloomy given management’s outlook on the current quarter where they indicated that Pie Five “… continued to experience difficult sales trends” and “Many of the newer restaurants that enter the comparable store base continue to experience a decline in sales from their initial year, particularly in the case of those stores that opened with very high sales volumes. The Pizza Inn system’s sales trends have been flat in the current quarter.”
In summary, Q4 was very disappointing and management did not give shareholders much reason for optimism based on current quarter-to-date trends or really much of anything. While we believe that the Pie Five concept and the product offered there are very good and among the best in the space, RAVE stock continues to languish due to poor execution and what appears to be a leadership vacuum. While this is obviously reflected in the trading of RAVE shares as they have continued to hit new multi-year lows in the trading sessions since the release, we remain bullish on the long term outlook for Pie Five and RAVE based on the strength of the concept as proven by multiple successful franchisees whose revenues dwarf those produced by corporate owned locations. We also believe that the rising tide of strong valuations in the fast casual build your own pizza space will eventually cause RAVE’s valuation to be pushed higher as Blaze, MOD, Pieology and others continue to bring the concept mainstream and extend valuations that are already multiples of the relative valuation for RAVE’s Pie Five. Additionally, we believe that the valuation for RAVE has fallen so low that it may start to attract attention from non strategic buyers in addition to restaurant industry players looking to take down two demonstrably good concepts that appear to be valued substantially below their industry peers.
JRJR Update –
We continue to get queries from Groove participants about JRJR Networks. We believe investors should avoid JRJR for a number of reasons, the most obvious being that the 4th quarter of 2016 just started and the most recent financial data that JRJR has filed with the SEC covers only until the end of the 4th quarter of 2015. There is no good way to gauge where the company currently stands with regards to the fundamentals that determine whether the company’s stock is trading at a level that represents an attractive valuation and management has continued to issue stock at implied prices that suggest they see a much lower valuation than the market currently does. While the company did release some preliminary numbers for its quarter ended March 31, 2016, they still haven’t filed the 10Q for that period that was due by May 16 and the company is now just two weeks from the NYSE Mkt imposed deadline for filing that is necessary to keep their shares listed. If JRJR does not meet that deadline and moves to the OTCBB or Pink Sheets, we believe the stock would fall substantially from current levels. While we would like to believe that the company would go to great lengths to avoid that result, we also note that the company recently issued over 100,000 shares of stock to the holders of its 9.756% debentures to get a default waiver that would allow them until December 31, 2016 to file.
Additionally, we note that the company recently filed an 8k to warn investors not to rely on any of its quarterly filings in 2015 and that the Company’s internal control over financial reporting and its disclosure controls and procedures were not effective as of December 31, 2015 and all quarterly periods of that year. This calls into question JRJR’s financials going back to the beginning of last year, which could lead to lawsuits from investors who bought shares in reliance on those filings. Given the continued lack of transparency, the historical results that suggest the company will likely need to raise capital in the very near future and management’s demonstrable indifference towards the negative impact of dilution for current investors, we recommend that investors avoid JRJR if you do not own it and that Groove participants who still own the stock take advantage of the current $1.15 – $1.25 trading range to take their money off the table.
Remark Media Update –
We continue to be intrigued by the developments at Remark Media, though we are still unsure exactly how to value this company as it evolves into a very different animal than what we were originally hunting. The recent closing of the China Branding Group acquisition goes further down the path of growth in a direction that seems very different from the previous transformative acquisition (Vegas.com). As the company continues to pour resources into content and the development of the Kan Kan platform, the opportunity for growth appears to be enormous, almost to the degree that it is hard to fully grasp in the context of its being addressed by a company the size of Remark. While the dilution and material change to the company’s capital structure that has accompanied these acquisitions requires us to take pause in recommending that investors buy the shares, we do believe that Groove investors who still own “house money” shares may want to hold and watch to see how this develops.
Inuvo Update –
Great article on Inuvo out last week that has brought some positive attention. Much of the focus was on the transformative potential of Searchlinks. We agree wholeheartedly with this thesis generally and while the very low valuation makes it tempting, we are not yet seeing the traction from Searchlinks that we believe to be necessary to see the stock continue to rally significantly absent some additional catalyst.
Rave Restaurant Group (Nasdaq: RAVE) stock has been moving higher on increased trading volume over the last few sessions and there appears to be whispers about a much improved quarterly report to be released over the next few weeks. Irrespective of whisper numbers moving higher and such, we have seen first hand many things that lead us to believe that the current quarter (Q1 2017 July – September) is going to be even better and most likely substantially better than the four that came before it. Members of the Groove community have visited many Pie Five locations in many states over the last few weeks. We have been surveying restaurant managers on how things are going generally, but most importantly we have tried to gauge the impact of Pie Five’s July price increases on customer traffic and spending. A few key takeaways from these visits –
1) The price increase that went into effect over the first few weeks of this quarter does not seem to have had a negative effect on traffic. We had conversations with managers in key markets just before and after the price increase and all have indicated that they have seen little to no impact from a traffic standpoint and only a few comments from repeat customers.
2) The company is seeing significantly higher volumes in the locations that have opened over the last few months. The range of numbers we are hearing lead us to believe there will be a significant improvement in systemwide AUVs in the current quarter.
3) Competitors (Blaze Pizza, Pieology, Uncle Maddios) entering Pie Five markets are not necessarily a bad thing according to the managers we spoke with who are in markets where this has occured. It appears that they are helping to build a mainstream acceptance of the fast casual build your own pizza concept, all remain more expensive than Pie Five (even after the price increase) and none can move the process from order to pizza in customer’s hand as quickly as Pie Five.
4) New Pizza Inn Buffet opening – new opening for a domestic franchisee Pizza Inn buffet concept last month. It has been awhile since we have seen growth from the Pizza Inn chain and the opening of new restaurants is an encouraging sign.
The bottom line – it appears that Rave’s Pie Five is growing rapidly – not just in new stores (two opened the last two weeks and four more opening over the next month) but also in revenues being generated at existing stores. Pizza Inn is showing signs of growth again. With similarly sized competitors (Mod Pizza) being valued recently at $120m+ in the private equity markets and many indicators suggesting that Pie Five is growing faster than many were expecting, could it be that investors are finally starting to realize that Pie Five is worth 2-3x the current market cap alone and the 200+ store Pizza Inn chain has significant value as well? Or could it be the short sellers are starting to take notice and cover? As of the most recent short interest report, there were over 500,000 shares sold short and the stock had the highest “days to cover” ratio in Rave Restaurant group history, with 18 trading days of 100% buy to cover transactions needed to cover that short position. Suffice it to say that there may be more competition to get a share of the thin float that is traded in RAVE Restaurant Group shares over the coming weeks with increased chatter of strong Q4 results, the potential for a rock star CEO hire and more investors starting to take notice of the Pie Five story and valuation disconnect.
As many of you are likely aware, the author of our Rave Restaurant Group research as well as several other investors who hold significant positions in RAVE stock have made efforts over the last two months to begin a dialogue with management and key members of the board about opportunities to enhance shareholder value. During this time many of us have also been adding to our positions in RAVE stock with the author now controlling just under 5% of the float and several other participants in this community who now own stakes between 1-3% of RAVE’s public float. If you own RAVE shares, could you drop me a quick line at email@example.com to let me know how many shares you own and also if you would like to participate in a private message forum we are creating specifically for the RAVE situation.
We are going to set up a forum specifically for RAVE investors where all who wish to participate can share real time information with the group. For instance, we have participants who have been visiting Pie Five and competitor (Blaze, MOD, Uncle Maddios and Pieology) locations in multiple markets around the country over the last few weeks in addition to speaking with franchisees. Suffice it to say that there are many very positive things that are happening with Pie Five (and some with Pizza Inn too) that are not part of the current investor conversation, possibly due in part to the leadership transition underway at RAVE. Regardless of the reasons, it is time for RAVE investors to use all the tools at our disposal to communicate about the next chapter for Rave Restaurant Group.
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.