RAVE Reports Decent Quarter But Stock Taken Down By Short Sellers
Rave Restaurant Group reported first quarter earnings that were surprisingly good given the market action in the days and weeks leading up to its release. Despite the kind of market action (down 40% in the few weeks prior to report) that typically presages a reporting disaster, Rave reported in line with our expectations (but one cent below the lone analyst covering RAVE) generating a loss of five cents per share on revenue of $14.5 million (in line with both projections). Highlights included top line growth of 28% over the prior year despite sluggish results from the 240+ store Pizza Inn chain, Pie Five revenue growth of 163% over the same quarter last year, a good same store sales gain at Pie Five despite a very difficult year over year comparison and a record 14 new Pie Five restaurants were opened during the quarter.
We were pleasantly surprised to see the Pie Five chain’s same store sales increase 1.5% over the prior year, which we viewed as very positive considering the high hurdle set for that metric this year due to the prior year’s 17% same store sales growth in Q1 and significant noise in this year’s number that many seem to be overlooking. Management’s commentary in the release mentioning “slightly negative” same store sales comps for the current quarter to date also seems to have caused investors to take a negative view of Pie Five’s performance and seemingly miss what is driving that lower figure, as the current quarter is also going up against a very tough prior year comparison (16.9% same store sales gain last year). More importantly, we think that most have missed the fact that the same store sales base for Pie Five includes only those restaurants that have been open for 18 months, which is less than 1/3 of the Pie Five stores that are currently in operation. The vast majority of Pie Fives that have been open for 18 months are located in the Dallas – Fort Worth metroplex where several new Pie Fives were opened during the quarter. These new restaurants are very helpful to the total system sales figures, but they likely pulled sales away from the older stores in the area, cannibalization that would directly impact the same store sales number in a negative way because the shiny new restaurant’s sales are not included in the same store sales measure. Thus, we believe that investors who are reading the same store sales figure for Pie Five in the reported and current quarter as being indicative of a lessening of consumer’s affinity for Pie Five are not realizing what a small portion of the Pie Five chain that number represents and also missing the fact that the numbers were materially lower because of the cannibalization caused by new store openings in that area.
Rave Restaurant Group’s loss from continuing operations was $520,000 for the quarter, but we note that this included $400,000 of pre-opening expenses (POE) due to the opening of 14 new Pie Five restaurants during the period. Ex-POE Rave would have had a loss of only $120k for the period, despite the fact that the company experienced the highest quarterly new restaurant unit growth in its history and despite the fact that the company has been spending heavily (General & Administrative expenses up 40%+) to build out the infrastructure to properly support the rapidly growing Pie Five chain. We are pleased with management’s ability to deliver what we believe to be good results at its existing restaurants while also executing on its aggressive growth plan. Additionally, management’s discipline in raising capital for this expansion has been impressive as they have judiciously sold only enough stock as necessary to fund this growth, as evidenced by their sale of only 58,300 shares in the reported quarter at an average price ($13.36 per share) more than double the current trading price. We note that management did not continue to sell shares when the stock started falling below $12 and they clearly noted that existing cash on hand would be sufficient for operating and capex needs for the next 12 months, so we believe the possibility of additional dilution at current levels is practically zero.
As we have noted previously, the short interest in RAVE shares has been increasing significantly over the last few months. We have reviewed the trading in the days leading up to and following this quarterly report and it has been characterized by trades that shrewdly and efficiently push the price lower. As of this writing, the seemingly coordinated effort to push the shares lower had succeeded in pushing RAVE shares to a new 52 week low below $6, which values the entire enterprise in the $65 million range. We believe this represents less than half of what Pie Five would command in a private equity transaction with its current 75 restaurants open and we note that the Pizza Inn chain of 240+ restaurants still has significant value as well. At this price, we believe that even the shorts who have targeted RAVE will soon start to turn and go long, as the easy money to be made in such trading will be to the upside. We strongly recommend that investors who do not not already have a position in RAVE should do so now, even if you have to sell other stocks to do so, as the opportunity to buy in to the only publicly traded fast casual pizza stock at these levels will not last long.