Archive for November, 2016
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!