As a follow-up, the following link has the legal filings posted for one of the stores.
http://groups.google.com/group/rmcf-lawsuits
Tuesday, July 29, 2008
Monday, May 19, 2008
Thinking of Buying Rocky Mountain Chocolate Factory (RMCF) stock? Read this first.
Rocky Mountain Chocolate Factory (RMCF) is a product-based international franchisor. Their revenues and profitability are “derived principally from its franchised system of retail stores that feature chocolate and other confectionery products”. The Company also sells its candy in selected locations “outside its system of retail stores to build brand awareness”. RMCF touts itself as having continual revenue growth and no debt - an investors dream. Or is it a nightmare?
Over the past several years, RMCF has aggressively developed its franchise system such that the franchised store openings outpaced the franchised store closings. From August 2005 through November 2007, approximately 100 new stores opened while approximately 71 stores closed during the same period. The net result is what investors see, an overall positive growth number of around 29 stores during this period, or approximately 15 stores per year. An estimated 5% to 10 % of the retail stores are failing to the point where they close. In reality, a larger number of stores are likely to be operating in the red, and are soon to fail. Reality bites the hard, bitter nut in the sweet chocolate coating! The year 2008 may be the first where store closures outpace store openings.
From RMCFs First Quarter 2008 10K Report (10K Report): “Same store pounds purchased from the factory by franchised stores declined approximately 9% in the first quarter, second quarter and third quarter; 12% in the fourth quarter and 9% overall in fiscal 2008.” In fact, the same store sales have been steadily declining since 2005, in 2008 posting negative numbers. “Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depend on many factors, including new store openings, competition, the receptivity of the Company’s franchise system to the Company’s product introductions and promotional programs.”
As RMCFs states its principal source of revenues are derived from the franchised system, it seemed only fair to obtain information from these store owners directly. Specifically, several California store owners were asked for information about its franchisor. Based on information from some of the franchisees, the decline in purchases of factory candy from RMCF may be the result of RMCFs “mistreatment” of its own best customers: its franchisees. In the opening paragraph of this evaluation was the statement “the Company also sells its candy in selected locations outside its system of retail stores to build brand awareness.” This comment is directly from RMCFs 10K Report. However, franchisees indicate this policy of “brand awareness” includes the offering of factory candy for sale through discount stores such as Costco, QVC, and Shop.com often at prices that lower than the franchised store can offer it. RMCFs direct competition with its own franchisees at discount stores that are not required to pay RMCF a royalty is a disturbing, and likely unsustainable business practice. RMCF is often selling this candy to these discount stores at prices lower than franchisees pay within it own system. Based on its 10K, RMCF has no plans on any national advertising for realistic brand awareness despite its collection of 1% of gross sales from its franchisees that believe it should be used for this purpose.
RMCF holds a national convention for its franchisees. According to several franchisees, most store owners will not attend the RMCF national convention scheduled to be held this year in Durango out of protest. An outside convention, put together by franchisees, took place in Arizona earlier this year. Many franchisees now have discussions on a Google Group after there comments were censored on RMCF’s private intranet board.
More than 70 of RMCF’s 320 national retail stores are located in California. There are more franchised stores in California than any other state in the US. That is roughly 22 percent of RMCFs “principal source of revenue”. The top ranked stores within the RMCF system are located in California. California likely represents around 22 percent of its factory revenue and most likely an even higher percentage of royalty, marketing, and franchise payments than any other sector of its business including sales to discount stores. Why is California so important for your decision to invest in RMCF stock? The answer: California Law. There are possibly more laws governing franchising in California than in any of the other states in the US. Many of these laws protect franchisees.
In a search for legal proceedings against RMCF, at least two new legal cases in California should be cause for alarm for investors. Previous and at least one existing franchisee have filed actions against RMCF and several other parties in California Federal court. Upon download and review of these complaints, there are serious allegations of fraud and numerous other violations of California’s “mountain” of law governing franchising. The complaints together include alleged damages exceeding 2 million dollars, not including punitive damages if awarded. Goodbye dividends? Maybe. The outcome of these claims as of this analysis is unknown, however the complaint alleged are systemic, meaning the entire California franchise system could be affected. There is a potential for the outcome to affect other states as well. Without being a lawyer, I cannot provide a legal interpretation to these claims, but urge investors to read and consider them. Within RMCFs 10K Report is the following statement “However, the laws applicable to franchise operations and relationships continue to develop, and the Company is unable to predict the effect on its intended operations of additional requirements or restrictions that may be enacted or of court decisions that may be adverse to franchisers.” It seems to me, RMCF knows this can be a problem, but hey, it’s in the 10K Report – you were warned!
RMCFs 10K reports “The Company is not currently involved in any material legal proceedings other than ordinary routine litigation incidental to its business.”
Over the past several years, RMCF has aggressively developed its franchise system such that the franchised store openings outpaced the franchised store closings. From August 2005 through November 2007, approximately 100 new stores opened while approximately 71 stores closed during the same period. The net result is what investors see, an overall positive growth number of around 29 stores during this period, or approximately 15 stores per year. An estimated 5% to 10 % of the retail stores are failing to the point where they close. In reality, a larger number of stores are likely to be operating in the red, and are soon to fail. Reality bites the hard, bitter nut in the sweet chocolate coating! The year 2008 may be the first where store closures outpace store openings.
From RMCFs First Quarter 2008 10K Report (10K Report): “Same store pounds purchased from the factory by franchised stores declined approximately 9% in the first quarter, second quarter and third quarter; 12% in the fourth quarter and 9% overall in fiscal 2008.” In fact, the same store sales have been steadily declining since 2005, in 2008 posting negative numbers. “Efforts to reverse the decline in same store pounds purchased from the factory by franchised stores and to increase total factory sales depend on many factors, including new store openings, competition, the receptivity of the Company’s franchise system to the Company’s product introductions and promotional programs.”
As RMCFs states its principal source of revenues are derived from the franchised system, it seemed only fair to obtain information from these store owners directly. Specifically, several California store owners were asked for information about its franchisor. Based on information from some of the franchisees, the decline in purchases of factory candy from RMCF may be the result of RMCFs “mistreatment” of its own best customers: its franchisees. In the opening paragraph of this evaluation was the statement “the Company also sells its candy in selected locations outside its system of retail stores to build brand awareness.” This comment is directly from RMCFs 10K Report. However, franchisees indicate this policy of “brand awareness” includes the offering of factory candy for sale through discount stores such as Costco, QVC, and Shop.com often at prices that lower than the franchised store can offer it. RMCFs direct competition with its own franchisees at discount stores that are not required to pay RMCF a royalty is a disturbing, and likely unsustainable business practice. RMCF is often selling this candy to these discount stores at prices lower than franchisees pay within it own system. Based on its 10K, RMCF has no plans on any national advertising for realistic brand awareness despite its collection of 1% of gross sales from its franchisees that believe it should be used for this purpose.
RMCF holds a national convention for its franchisees. According to several franchisees, most store owners will not attend the RMCF national convention scheduled to be held this year in Durango out of protest. An outside convention, put together by franchisees, took place in Arizona earlier this year. Many franchisees now have discussions on a Google Group after there comments were censored on RMCF’s private intranet board.
More than 70 of RMCF’s 320 national retail stores are located in California. There are more franchised stores in California than any other state in the US. That is roughly 22 percent of RMCFs “principal source of revenue”. The top ranked stores within the RMCF system are located in California. California likely represents around 22 percent of its factory revenue and most likely an even higher percentage of royalty, marketing, and franchise payments than any other sector of its business including sales to discount stores. Why is California so important for your decision to invest in RMCF stock? The answer: California Law. There are possibly more laws governing franchising in California than in any of the other states in the US. Many of these laws protect franchisees.
In a search for legal proceedings against RMCF, at least two new legal cases in California should be cause for alarm for investors. Previous and at least one existing franchisee have filed actions against RMCF and several other parties in California Federal court. Upon download and review of these complaints, there are serious allegations of fraud and numerous other violations of California’s “mountain” of law governing franchising. The complaints together include alleged damages exceeding 2 million dollars, not including punitive damages if awarded. Goodbye dividends? Maybe. The outcome of these claims as of this analysis is unknown, however the complaint alleged are systemic, meaning the entire California franchise system could be affected. There is a potential for the outcome to affect other states as well. Without being a lawyer, I cannot provide a legal interpretation to these claims, but urge investors to read and consider them. Within RMCFs 10K Report is the following statement “However, the laws applicable to franchise operations and relationships continue to develop, and the Company is unable to predict the effect on its intended operations of additional requirements or restrictions that may be enacted or of court decisions that may be adverse to franchisers.” It seems to me, RMCF knows this can be a problem, but hey, it’s in the 10K Report – you were warned!
RMCFs 10K reports “The Company is not currently involved in any material legal proceedings other than ordinary routine litigation incidental to its business.”
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