Rocky Mountain Chocolate Factory. CEO Fired,WTF??? Robert, We Hardly Knew Ye.

CEO was fired on Friday, January 26th, within hours after we had a zoom call with him.

Huck enjoying the snow.

On Friday, January 26th from 2:30-3:30 we had a conference call with CEO Robert Sarlis and the CFO Allen Arroyo. We had some follow up questions to our previous call with Allen.

We actually came away from the call extremely impressed with Mr. Sarlis and his views on how to fix the business. His candor and focus on what needed to be done was refreshing. We are stunned that he was fired (he was hired May of 2022) and have no idea why or what to expect going forward. The new interim CEO Starlette Johnson, had served on the Board since March 2022. She is or has served on numerous Boards of companies in the retail/restaurant industry, but most of her experience that is listed was serving on Boards of companies that were acquired (either before or after). She does not seem to have the operations experience Mr. Sarlis did, so she may in fact end up being just an interim CEO.

Starlette Johnson Bio:

Starlette B. Johnson, age 61, has served as a member of the Board since March 2022. Ms. Johnson has served as a consultant to the hospitality and entertainment industries, through SBJ Advisory Group, LLC, working with both public and private companies since 2012. In October 2020, she joined the board of Tastemaker Acquisition Corporation (NASDAQ: TMKR), a special purpose acquisition company focusing on the restaurant, hospitality, and related tech and services sectors, and serves as Chair of the Audit Committee. Ms. Johnson also has served on the board of Jack’s Family Restaurants since October of 2019 after the acquisition of the company by AEA Partners and currently serves on the Audit and Marketing Committees. From March 2021 through May 2023, Ms. Johnson joined the board of ARKO Corp. (NASDAQ: ARKO), the sixth largest convenience store chain in the United States in March 2021 and served as Chair of the Nominating/Governance Committee and as a member of the Audit and Compensation Committees. From September 2012 through February 2023, she served as a member of the Audit Committee, as Chair of the Nominating/Governance Committee and as Chair of the Compensation Committee for Chuy’s Inc. (NASDAQ: CHUY), a full-service casual Mexican chain. Ms. Johnson served as Chair of the Board for privately-held SusieCakes, a classic desserts bakery based in Southern California from December 2014 through December 2020. She also served as a member of the Board and Chair of the Audit Committee of Bojangles’ Famous Chicken ‘n Biscuits (NASDAQ: BOJA) from March 2016 until the completion of its go-private transaction in January 2019. From January 2019 through October 2020, Ms. Johnson served as a board member and as Interim President of the Lucky Strike Entertainment Group after its acquisition by Wellspring Capital Management, reporting directly to its board of directors. Ms. Johnson received an MBA from Duke University, and a Bachelor of Science degree in Finance from Virginia Tech.

Some takeaways from our call.

• Transfering packaging to Utah, while negative to margins in the near-term (400-500bps) does mean there is more space now available to reconfigure the plant to improve efficiency.

  • We still think that moving packaging will permanently lower peak margins.

  • The $6M+ in capital expenditures do have an ROI component to them and is not just deferred maintenance (like paint).

• Labor is always going to be hard to find in Durango.

  • The population in the town is only 19K.

  • The population in the county is only 55K.

  • The company has to compete for employees against a ski resort, a college, the city government and the railroad.

    • The company pays around $16 an hour as a starting wage.

    • Factory runs shifts four days a week with 10 hour shifts.

  • Mr. Sarlis did mention that Native Americans make up a significant percentage of the labor force and the company has even looked into housing to help recruit more Native Americans to the workforce.

• Mr. Sarlis was bringing much needed attention and focus on helping the bottom franchisees improve their business or close down. Since the company has a large number of single unit operators, it has been hard to maintain quality consistently across the store base. We felt Mr. Sarlis was approaching the problem in a way that was needed to be done.

  • The acquisition of the Corpus Christi store was an example of that. The company has no plans to own the store long-term, but will use it as a model for how future stores should operate.

• The company used to supply all 157 stores with shipments directly from Durango, which was very expensive. Using cross-docking and other strategies to supply stores should improve margins.

• The company has tremendous green space to grow the franchise business.

  • There is little store concentration outside of California (12 stores in Sacramento, 23 stores in LA), Colorado (23 stores in Denver), Illinois (11 stores in Chicago) and Texas (4 stores in Dallas, 7 stores in Houston and 5 stores in San Antonio).

  • We think the addition of Kara Conklin from Focus Brands is a good hire because several of the brands at Focus (Auntie Anne’s, Carvel, Cinnabon and Jamba Juice) are similar to RMCF. We are sure her Rolodex is being mined already. These are multi-unit operators that need to be recruited for the company to be successful.

    

Summary:

We cannot recall ever having a meeting with a member of a management team that was terminated within hours of our meeting. If Mr. Sarlis knew this was one of his last meetings, he should go to Vegas and play in the World Series of Poker!!! We have no idea if the surprise underperformance in Q4 or the recent covenant violation contributed to a change in the Board’s view of his competency. We have stated that we believed that the management team in place was capable of turning around the company and the turnaround plan was reasonable, but the timeline was much longer than many were hoping for. We will be interested to see what is said on the next conference call.

Perhaps Buffett is right:

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Warren Buffett