After yesterday’s close it was reported that MOD Pizza, one of the other largest players in the fast casual pizza space has raised another $42 million to continue expanding its rapidly growing base of stores. While MOD Pizza has grown to almost twice the size of the Pie Five chain, this funding round brings the total raised to approximately $150 million which means that MOD’s valuation may be approaching $200 million, but it is definitively between 8-10X the current Pie Five valuation. This announcement from MOD highlights an eye-popping valuation disparity that has emerged between the two companies with nearly identical concepts/products – MOD received enough cash yesterday to pay 2x the current price for all RAVE shares outstanding and still have $4 million in cash leftover because RAVE Restaurant Group’s stock market valuation was only $19 million as of the opening this morning ($1.92).
While MOD could clearly pay cash to acquire RAVE and more than double its store count in one fell swoop, we do not think that will occur. However, we do believe there are other players who are in the fast casual space who do have the appetite for such a deal and we believe that the ridiculous disconnect that has emerged between RAVE’s enterprise value (no debt so literally $19 million based on current market price) and the value that could be created for shareholders with a rapidly growing 100 unit fast casual pizza chain + a 225 unit pizza buffet chain in the hands of a larger chain or private equity group will increase the pressure on the RAVE Board of Directors to open up the bidding. The RAVE Board of Directors has taken steps to increase communication with shareholders by holding its first quarterly conference call last week, but the company’s largest individual shareholders have asked for more – specifically the formation of a committee and/or the hiring of a firm to solicit offers for Pie Five and Pizza Inn individually and/or for an acquisition of RAVE in its entirety. With its closest comparable now valued north of $150 million, it will be increasingly difficult for RAVE to remain independent unless the stock trades significantly higher.
Rave Restaurant Group reported a mixed picture Wednesday morning with revenue up 6.3% in line with our expectations for $15.5m, but a marginally larger bottom line loss than expected due to approximately $400k in costs related to two store closings. Year over year revenue gains were largely driven by a Pie Five system wide sale increase of 35.7% that resulted from its rapidly growing store base, which was slightly offset by a 1.6% decline in revenue reported by Pizza Inn. RAVE reported continuing challenges for Pie Five with the same store sales falling 14.7% as new stores experiencing lower sales trends entered the base, while Pizza Inn bucked a challenging trend among sit down restaurants with a slight increase in same store sales.
RAVE’s stock traded much lower following the report, continuing a trend that started the afternoon before earnings were released. RAVE’s stock declined 15% in Tuesday’s trading session and this was followed by another 20% decline at the open on Wednesday morning, but the shares recovered much of that fairly quickly and ended up down only 7% for the day. We were surprised by the 15% decline the day before earnings were released and astounded by the trading following the report, as the numbers and commentary released with the quarterly earnings did not appear to justify a sell off at all.
Following Wednesday’s trading session, RAVE management held the first investor conference call in the history of the company. Management communicated many details regarding the company’s operations that helped investors to understand the story behind the numbers and we believe this will go a long way in helping bring more investors into the stock as operational results improve. Key takeaways from the call –
1) Pie Five Store Openings Will Accelerate – only six new Pie Fives opened in the reported quarter, but there are 8 scheduled to open in the current quarter and the scheduled openings will result in an accelerated pace of openings in 2017. No new corp. owned store openings unless fill in locations in DFW market.
2) Capital Needs – questioned about this, management indicated that the company has no long term debt and they do not intend to take on debt. Also, in being pressed on shareholder concerns about dilution if there are additional stock sales, management made it clear that there will be significantly lower capital needs going forward as the corporate owned store opening expenses, the costs associated with lease termination and other store closing expenses will not be a factor the remainder of the year which should the company to operate with much lower capital needs than what we saw in the current quarter.
3) Pizza Inn – continues to perform well in a difficult market. New stores opening are producing at much higher volume than the older locations, closings have all been the lowest revenue producers and this revenue impact has largely been offset by the new store openings. CEO Coleman indicated that the company would not lose sight of the potential and value of the Pizza Inn chain and they would continue to focus on maximizing that value while they work to fix the issues with Pie Five.
4) Online Ordering for Pie Five – management believes that online ordering fits well with the Pie Five approach and that it will eventually drive increased sales due to the convenience factor. This was introduced during the quarter at most of the corp. locations, it went live with the first franchisee group in Kansas City last week and it will be rolled out in stages over the next 3-4 months systemwide. We see this as a very positive development given the increased sales they believe to be directly attributable to online ordering that has been mentioned by several high profile fast casual chains and purveyors of pizza over the last few months.
5) Price Increase – did not seem to have a negative impact on traffic as Pie Five is still priced as the value offering in the space and management does not expect to roll out additional price increases in the near future as they see a growing trend of value consciousness among consumers.
6) CEO Search – company is being “appropriately patient”.
Overall, we felt the tone of the conference call was very positive despite the challenging trends with Pie Five and the fast casual space in general. Investors were provided meaningful color on the company’s operations and strategy and the fact that they held the call is a most positive development for shareholders. We believe this is clearly indicative of RAVE’s BOD and management making a meaningful effort to become more transparent and communicative with shareholders – Bravo!
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 firstname.lastname@example.org 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.