FDD Talk: Rocky Mountain Chocolate Factory Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Rocky Mountain Chocolate Factory franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Rocky Mountain Chocolate Factory franchise, based on Item 7 of the company’s 2020 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Rocky Mountain Chocolate Factory franchise, based on Items 5 and 6 of the company’s 2020 FDD

• Section IV – Number of franchised and company-owned Rocky Mountain Chocolate Factory outlets at the start of the year and the end of the year for 2017, 2018, and 2019, based on Item 20 of the company’s 2020 FDD

• Section V – Presentation and analysis of Rocky Mountain Chocolate Factory’s financial performance representations, based on Item 19 of the company’s 2020 FDD, including information on the:

• 2019 average, median, highest, lowest, and combined annual gross retail sales for the top 25%, middle 50%, lower 25%, and all 175 franchised Rocky Mountain Chocolate Factory stores that had been open for at least 12 months as of the end of Rocky Mountain’s most recent fiscal year, February 29, 2020

Section I – Background Information

18 Things You Need to Know About the Rocky Mountain Chocolate Factory Franchise

Joins Edible Arrangements for Groundbreaking Strategic Partnership

1.  In late December 2019, Rocky Mountain Chocolate Factory and Edible Arrangements announced that the companies had entered into a long-term strategic alliance whereby Rocky Mountain will become the exclusive provider of certain branded chocolate products to Edible, its affiliates, and its franchisees. The strategic alliance represents the culmination of Rocky Mountain’s exploration of its strategic alternatives, as announced on May 29, 2019.

2.  Rocky Mountain Chocolate Factory branded products are now available for purchase both on Edible’s website as well as through over 1,000 franchised Edible Arrangements locations nationwide. In addition, due to Edible’s significant e-commerce expertise and scale, Edible and Rocky Mountain have also executed a letter of intent for Edible to be responsible for all e-commerce sales from the Rocky Mountain corporate website and the broader Rocky Mountain e-commerce ecosystem.

3.  As part of the strategic alliance, Rocky Mountain will issue Edible warrants to purchase up to 960,677 shares of Rocky Mountain common stock at an exercise price of $8.76 per share. The warrants will vest annually over the five-year contractual period if Edible achieves various revenue thresholds on an annual or cumulative five-year basis. Such annual revenue thresholds for vesting reach a maximum of $46 million in the fifth year of the contract. The maximum shares of Rocky Mountain common stock underlying such warrants, if fully vested, represent a total of 16% of the current Rocky Mountain shares of common stock currently outstanding.

4.  In conjunction with the strategic alliance, Edible CEO and founder Tariq Farid, through his affiliate, will purchase $1 million of Rocky Mountain common stock and, effective January 2020, will join the company’s board of directors, bringing his significant expertise with franchising, gifting, and e-commerce.

5.  Bryan Merryman, CEO and chairman of the board of Rocky Mountain, said, “I believe this is truly a historic partnership for the company. As we have explored various strategic alternatives throughout this year, one of our main objectives was to drive incremental demand for our factory in Durango, Colorado. Currently, the factory operates below 50% capacity. With the strategic alliance with Edible, we have the opportunity to not only significantly increase factory sales of our existing Rocky Mountain products, but also realize meaningful operating efficiencies in our factory. In addition, given Edible’s world-class e-commerce expertise, we will be able to offer Rocky Mountain products to customers seamlessly nationwide. Finally, our franchisees will also be able to participate in the significant e-commerce opportunity by opting into shipping, delivery or pickup options for online customers.”

6.  Farid added, “Rocky Mountain is a perfect partner for Edible. The Rocky Mountain Chocolate Factory brand is extremely complimentary to the Edible brand and products and by offering customers both Edible and Rocky Mountain products together, I am convinced we will be one of the most attractive sources of gifts and treats available to customers today.”

7.  With the entry into this strategic alliance, the board of directors of Rocky Mountain has formally concluded its review of strategic alternatives for the company. North Point Advisors served as financial advisor for Rocky Mountain and Perkins Coie LLP served as legal advisor. Farids & Co. LLC served as the commercial advisor for Edible Brands and DLA Piper LLP (US) served as legal advisor to Edible Arrangements.

Provides Update on Strategic Alternatives Process and Board Composition

8.  In mid-November 2019, Rocky Mountain Chocolate Factory provided an update to shareholders on its previously announced strategic alternatives process as well as its board of directors composition. “The Board is fully focused on driving and maximizing shareholder value. We have conducted an exhaustive strategic review process, engaging with numerous potential acquirors and strategic partners,” said Bryan Merryman, chairman of the board. “The process has not yet yielded any actionable options for the Company. We remain open to all potential value-creating opportunities.”

9.  On May 29, 2019, Rocky Mountain Chocolate Factory announced that its board was conducting a process to explore and evaluate strategic alternatives to maximize shareholder value and position the company for long-term success. As part of this process, the company and its financial advisor, North Point Advisors, held discussions with numerous potential acquirors and strategic partners. However, given some of the recent headwinds faced by Rocky Mountain Chocolate, none of those discussions resulted in alternatives that the board believed would be in the best interest of shareholders (at the time).

10.  By way of background, in early March, Rocky Mountain Chocolate Factory received an unsolicited offer to acquire the company for a premium to the then-current market price. Based upon discussions with the potential acquiror and after consultation with their financial and legal advisors, the board considered the offer to be credible and worth exploring to maximize value to shareholders. However, after a thorough due diligence process, the potential acquiror advised the board that it was no longer interested in pursuing an acquisition of the company.

11.  Based on the board’s prior analysis of the headwinds facing the company, the board determined that North Point Advisors should continue to evaluate Rocky Mountain Chocolate’s strategic alternatives and engage in a broad process to identify an acquiror or strategic partner that would benefit all shareholders. The board had been actively engaged throughout this rigorous process and continued to evaluate an additional range of business changes and alternatives to improve Rocky Mountain Chocolate Factory’s results and maximize shareholder value.

12.  The board recognized that new directors with fresh, different, and diverse perspectives would benefit the company and its shareholders. As such, the board invited the two potential directors proposed by AB Value Partners, LP, Andrew Berger and Mary Kennedy Thompson, for interviews with the entire board. Following those interviews, the board extended an offer to Ms. Thompson to join the board due to her background and extensive franchising expertise. This offer was not made as a means to settle a potential proxy contest with AB Value, but rather was made without any conditions attached.

13.  The board did not believe that Mr. Berger would add expertise or perspective that would benefit the company’s shareholders and accordingly did not make him an offer to join the board, although the board remains open to a continued dialogue with Mr. Berger and his view of the company.

14.  The board intended to hire a search firm to identify other potential new and diverse director candidates who can add value and bring additional perspective to the board. There was no specific timetable for this evaluation to be completed.

Company History

15.  Rocky Mountain Chocolate Factory was founded in 1981 by Frank Crail after he moved to Durango, Colorado from Newport Beach, California to raise his family in a small town. According to a later confession from Crail, he actually wanted to open a See’s Candies store, but the company did not sell franchises. This is why Crail wanted Rocky Mountain Chocolate Factory to be a franchise from the start. So, in 1982, Crail opened the first two franchises in Colorado Springs, Colorado and Park City, Utah. To keep up with demand at all three stores, an offsite factory was built later in 1982.

16.  Over the next few years, Rocky Mountain Chocolate Factory continued to grow and in 1985, the company went public and is now traded on the NASDAQ exchange under the symbol “RMCF”. Rocky Mountain Chocolate Factory’s growth continued into the 1990s and in 1996, Whitman’s Candies made an offer of $16 million to buy the company. The offer was rejected by Rocky Mountain’s management.

17.  Today, Rocky Mountain Chocolate Factory is still based out of Durango and there are locations all across the United States as well as internationally.

Entrepreneur’s Franchise 500

18.  Rocky Mountain Chocolate Factory did not rank on Entrepreneur’s 2021 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Rocky Mountain Chocolate Factory franchise costs, based on Item 7 of the company’s 2020 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Rocky Mountain Chocolate Factory’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2020 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2017

• Outlets at the Start of the Year:  189
• Outlets at the End of the Year:  183
• Net Change:  -6

2018

• Outlets at the Start of the Year:  183
• Outlets at the End of the Year:  183
• Net Change:  0

2019

• Outlets at the Start of the Year:  183
• Outlets at the End of the Year:  176
• Net Change:  -7

Company-Owned

2017

• Outlets at the Start of the Year:  4
• Outlets at the End of the Year:  5
• Net Change:  +1

2018

• Outlets at the Start of the Year:  5
• Outlets at the End of the Year:  2
• Net Change:  -3

2019

• Outlets at the Start of the Year:  2
• Outlets at the End of the Year:  2
• Net Change:  0

Section V – Financial Performance Representations (Item 19, 2020 FDD) and Analysis

• The information provided below is based on reports of Gross Retail Sales (as defined in the Franchise Agreement) provided by the 175 franchised Rocky Mountain Chocolate Factory Stores that had been open for at least 12 months as of the end of Rocky Mountain’s most recent fiscal year, February 29, 2020. This information is for the 12 months prior to that date.

• The Gross Retail Sales for Stores that Rocky Mountain owns are not included in this information, but Rocky Mountain has included information on any satellite or temporary Stores operated by franchisees.

• Differences in Gross Retail Sales may be attributable to differences in the mix of Factory Candy, Store Candy, or other non-edible items offered for sale at each Store, which is subject, in part, to the franchisee’s discretion.

• Other factors that may affect the results among Stores include geographic and demographic characteristics, the type of mall or other location, length of time the Store has been open, and the managerial or entrepreneurial abilities of the franchisee and its managers.

• The information below was prepared from royalty reports provided by each individual franchisee. A franchisee pays Rocky Mountain a royalty based on sales.

• Rocky Mountain knows of no instance, and has no reason to believe, that any franchisee would overstate its level of sales receipts in its royalty report; however, these results have not been audited and Rocky Mountain has not independently verified these results.

Fiscal Year 2019 Gross Sales for All Franchised Stores Open for at Least 12 Months

Top 25%