Archive for July, 2016
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.