Next up is Jeff Geygan with Rocky Mountain Chocolate Factory.
Thank you. Hey, good afternoon, everybody. Thank you for attending today. My name's Jeff Geygan. I'm Interim CEO of Rocky Mountain Chocolate Factory. I probably need to have you take a quick look at this, the safe harbor. Rocky Mountain was formed in Durango, Colorado in 1981. By 1985 it went public. The company experienced a couple of years of really rapid growth. At some point, we got up to 338 stores. It's probably, you know, a decade and a half ago, you know, things went wrong. The company ended up being challenged. They weren't growing stores. We had a couple activist contests, cost in round numbers, $4 million-$5 million, burned through some cash.
At some point, I was one of the activists that came in under Global Value Investment Corp. We bought some stock, asked for board representation, helped them fight off a couple of bad guys, in our opinion, and sat on the board for a few years until our second CEO in two years resigned, and the board looked at me and said, "Here, you fix this." That was two years ago, May 14th. Immediately upon accepting that assignment, I moved out to Durango, Colorado, spent 1 year out there to really understand the business, what was fundamentally broken, what had to be fixed. About one year later, I moved back to Charleston, South Carolina, which is where I hail from, under the presumption that there was a certain amount of this that was an operational fix.
We had to figure out what was going on in production with IT. We had put a new ERP system in place. We were rolling out POS systems across the country. My job at that point was to drive top line. We needed to initially start by let's get the business model fixed, and then the second leg of the trip was let's grow it. Really, when we first showed up, I made the first hire, and I came in in May. My first major hire was Carrie Cass, sitting in the front row here as CFO. This was a really a Jim Collins Good to Great type of story. We had to get the wrong guys off, the right guys on. We had to reset the culture. We had to understand the business we were in.
As much as people say, "Oh, Rocky Mountain Chocolate, you guys make great chocolates," which we do. I said, "We're actually a franchisor, so we have to be a really good franchisor." We've got a system of franchisees around the country. We have 140 domestic stores, three international. The three international stores are in the Republic of the Philippines. Of the 140 domestic stores, as of recently, we own four of them. My attitude pretty early on was, look, if we're gonna be a good franchisor, we really know how to run the model. We've got to be able to run a store. We have to do it effectively.
Little by little, when Carrie and I first showed up, we owned two stores, one in Durango, which we'd owned for 45 years, one in Corpus Christi, which we'd owned for about three years. Last August, we ended up buying a store in Camarillo, California, which isn't too far from here. We paid round numbers about one and a half times earnings, which is a pretty good deal. Just recently, on May 1, we bought a store down in Nashville, Tennessee, which is a strategic location for us. We were able to buy these stores at pretty reasonable multiples, which I assume will be accretive to earnings over time.
More importantly, the idea was that we as a franchisor have to know how to run a store, and it also became a testing ground for us. I can say, instead of saying to the franchisee, "Here. Here, try this. It'll work for you," it's like, "No, try this. We tried it in our four stores, and it does work. It does in fact work. We're going to come out and help you know, bring either a new innovative product or a new innovative idea into the store." Part of the challenge for us as a management team is the company had been going through, you know, easily 10 years of decline. And the average unit volume as of last year's Franchise Disclosure Document reporting was about $613,000, which isn't great frankly.
Of the 136 franchise stores, we have 97 franchisees on average, about 1.39 stores per franchisee, which isn't great either because there's a cost of going out and servicing all the franchisees. Never mind saying, "Let us help you develop a business plan that really is a solution for how do you drive more revenue? How do you increase profitability in your store?" Our attitude was we'd like to get the economics of the business right to start with and then to scale it, so we start to build more stores.
With that in mind, after the first year of going to Durango and trying to work through some of the issues around HR and IT and customer service and production, logistics, and so on, the next goal was now we have to start to build the stores. Instead of bringing on franchisees, which the company had done onesie-twosie, it's a guy that gets an SBA loan. He's got 80% leverage, owns one store. Not necessarily a particularly sophisticated financial operator, but what we wanted to do is attract guys that could own a half dozen or a dozen stores, because I wanted to have fewer new people that could really run a store at scale so that it was, you know, there's less cost to service that guy, but also better profitability.
My attitude is, if your you know, capital markets, if your store's not generating 15% net income margin or really, you know, pre-tax margin, what's the point here? The model has to generate that or more. Bear in mind, all the franchisees are paying us a royalty, in most cases about 5%. They had to hit 20%, before our royalty in order to get down to 15%, which is a good number. By and by, we went out, and we took some of our existing franchisees.
Of the 97, we assumed there are, you know, half dozen, maybe 18 guys that we could go to and say, "Hey, if we could give you the right economic model, would you sign up for a handful of these?" We did that with until recently, we had 34 stores in four different area development agreements. Recently, we added a fifth area development agreement, which is really saying to one guy, "Would you open up five, six, seven stores in a geographic area?" Today we have 40 of those stores that are due to open in the next to be started within either the next three or the next four years, and this includes in markets like Chicago, Miami.
Up in the mountains, we recently opened a agreement for six stores. That's geographic markets, really just around ski resorts. We're in Folsom, California. We're in Asbury Park, New Jersey. The goal here is really to take it from the 140 stores, cull that group a little bit where we have stores that probably never should have been opened, overlay that with we're adding new stores all the time. Our attitude is, if we're helping a franchisee pick a location, which we have the right to do, our view is we gotta pick locations that can generate at least $1 million in sales. To that point, we recently opened Well, not quite recently, but last June, we opened our first store under a new remodel.
If you've seen our new stores, it really looks nice. This is down in Charleston, South Carolina. That store currently is annualizing at about $600,000. It's a new store in a brand-new market. We give a store, three years to get to, scale. The second store we opened is up in Chicago. If anyone here is from Chicago, it's on State Street at Madison. That store opened in December. It's annualizing about $1.1 million today. We have another store that's opening in the next week and a half in, Tinton Falls, New Jersey, think Asbury Park, not too far from the current location we have in Long Branch. That store looks beautiful. We have a fourth store that's going to open in Folsom, California, where we already have a store in Folsom.
We have a second store in Sacramento. Again, in our opinion, these stores will all annualize at about $1 million or so. Last, currently under construction is down at Houston International Airport, IAH, in the new United B Terminal. The concept here was, let's get the business right, let's get the economics right, let's start to scale it, which we're doing right now. Let's see. I probably need to go next slide here. Oh, yes. Of course, we have all the people that we need to bring in here. I came in, as I mentioned, in 2024, May. Carrie came in in August. Part of this for us was really shifting the culture of the company, getting people that really understand franchising, that understand production, that understand retail.
We've had a little bit of a turnover in terms of getting the right people in the right seats on the bus here. I think we've got that mix right now. There's no shortage of opportunity across America. Carrie and I flew in yesterday. We've got 26 stores in the Los Angeles area. We visited three of them. As we drove from store to store to store, I thought, "Oh, man, there's so much opportunity here to open additional stores." In addition, not long ago, I was down in Las Vegas. We have three stores.
Driving around Vegas, it's like, "Oh, my gosh, you could easily see putting 10, 15 stores here." There are a lot of metro areas like that where we look at it and we say, "The fact that we only have a couple means I'm already sending a truck there." Logistically, and that's part of the challenge, if I send a truck down to the market, if I'm delivering to one store or 10 stores, there's not that much of a delta in terms I've got capital tied up in a truck, I got the cost of a driver and fuel. If I'm putting 15,000 versus 40,000 pounds on the truck, the delta in delivery is not that much.
The challenge for us is to find the right markets, then get concentration with financially sophisticated operators, guys that are really well-capitalized, they understand business, they're entrepreneurial, they want to open a lot of stores with us, just continue to grow. Historically, I mentioned we started in Durango, Colorado. We're primarily west of the Mississippi. As I mentioned moments ago, we have an area development agreement down in Miami. We have an operator down there that'll open up nine stores. We recently opened a store in Charleston, South Carolina. That operator said he wants to put 6 stores in the area. We're not in Atlanta. We're not in D.C. We're not in Philly. We're not in New York. We're not in Boston.
Although the guy up on Long Branch, New Jersey, that could easily run up to Bergen County, then across the river into Manhattan and out onto the island. There's an enormous amount of opportunity for us to expand, which then makes the economics of delivery that much better. Really, at the beginning and end of the day, as I've said to franchisees from the day I showed up, it was, "We have to help you drive traffic into your stores and improve profitability," which is what we're working on now. To that end, when Carrie and I first showed up, we really said that what are the four pillars of growth and success here? Has to be data and analytics. We need better information.
We put in a new ERP system that we're still getting benefits out of. We rolled out a POS system, so think point-of-sale cash register across the system. We have 125 of our 140 stores, and we're getting data flow that is unlike whatever we've had in the past. The 15 that aren't are really precluded from putting that in, but every store in the future will have the same POS system, which gives us an enormous amount of additional information, which allows us to make better strategic decisions on a forward basis. If anyone's followed the cocoa market, you would be aware that for years and years, cocoa traded between round numbers $1,500-$3,000 a metric ton until it didn't, and it went from $3,000- $12,000.
That's about the time we showed up. The company had not been particularly aggressive in making adjustments to price in order to account for that. Regrettably, there were a number of SKUs that we were selling right out of the chute where we were losing money. The challenge for us was in a hyperinflationary environment, we were saying to our franchisees, where they're already suffering, is we need to raise prices. We couldn't do the price hike all at once. We could have, but I would've had a complete riot on my hands. We said, "Why don't we do this in stages?" Over the last 12 months, we raised prices a number of times trying to get to some level that was satisfactory.
I can say, this quarter that we just ended, we're at a level that is satisfying to us in terms of gross profit margin on products that we sell. It's the highest margin we've had in the last 24 months, and our gross margin is double what it was 24 months ago. In terms of do we have an economic model that works, the margins are right. Now it's just a function of scaling, which is why I go back to the 24 or the 40-store area development agreements. That doesn't mean we wouldn't open a store for another guy if they're in an area, they want to open another store. Sure, we would do that.
In terms of us going out and looking for new franchisees, we're looking for financially sophisticated, well-capitalized, entrepreneurial guys that want to open half dozen or more. We think we have a pretty compelling model here. Actually, it's relatively labor light. You can run a million-dollar store with three, four guys. If you think about that in terms of last time you walked into a McDonald's or a store like that, and you say, "Wow, you got a lot of labor running around here." Forget about having people show up and all the HR issues. There's just a cost to bringing labor in today. As you know, I think we're paying, you know, generally you're paying $15, $20 an hour for labor, so it's quite expensive. Really long-term strategic plan is really based upon data and analytics.
We need better information, which we're working on. It's revenue growth, which we're working on, with production efficiencies, which we're working on. Lastly is financial stability. When Carrie and I showed up, it was obvious that first of all, we're going to need a new bank. We had a money center bank. This wasn't the right deal for them. Within six months we'd refinanced our debt. We actually had one of our directors who stepped up with a $6 million loan. We did a subsequent debt issuance, pari passu debt for $1.8 million. We did two equity raises. As part of the second equity raise, we paid off $1.2 of the second raise. Currently we stand with $6.6 million, 12% term loan interest only, matures September 30, 2027.
We have a little bit of time on that, and we're risk-averse people here. I don't like having debt on our balance sheet. At some point we'll try and work that off. In the short run, we needed more working capital. We did issue equity two times. Once August 5, 2024, the day Carrie showed up. I didn't disclose we're in advance that we were raising equity, but she came all the same. We issued 1.25 million shares and a little bit better than a year later, this last December 18, we issued 1.5 million shares. Both times I'll mention we issued it above the share price.
The first tranche was at $1.75, the second was $1.80, the round numbers of stock was trading at $1.50 at the time. Bear in mind, I've been on Wall Street for 40 years. I'm an activist investor. I'm the quintessential CEO that cares about equity. The board looks at me and says, "You know, when can we make you permanent?" I said, "Well, I'm happy to be permanent, but it would cost more because the agreement that I signed to start with is really pretty light in terms of its compensation." What I live for, what drives me every day, is creating equity value for our shareholders. That's it. The company that I formed in 2007, Global Value Investment Corp, owns 20% of the stock.
To say that I show up at work every day motivated to drive equity price would be an understatement. Carrie and I are working seven days a week around the clock to make sure we get this right, and we're not gonna rest until we do. What that means is that sometimes we're gonna make mistakes. Sometimes we're gonna hire guys that don't work out, and it's slow to hire, quick to fire. We've had some turnover. I bring guys in. You know, it's everyone's always long on delivery. I don't know how many of you have to hire people, but boy, you hire people and they tell you they're gonna do everything, and they show up, and they do nothing. We've been pretty quick to turn over people. It's worked well. Everyone's motivated.
Actually, I don't know if you've ever been to Durango, Colorado. It's in the southwest part of Durango. It's three and a half hours from the nearest interstate. There's 17,000-18,000 people in town. The four counties around collective population, 60,000. It's a little tricky to hire people there. Some of the guys we hire, we hire from afar. If we have to be very careful about the people we bring in because the, you know, back to Jim Collins, it's culture here. We gotta get the right guys who understand what we're trying to do with the business, the biggest cultural shift is we have equity owners. These are the guys that own the company.
We're responsible for them. Whether you're a director or an executive, the guys that own the company are sitting in this audience, and we take that really seriously. It's like, if we're not performing, you should fire us. I said to the board, "If the day that I don't think I can do this, and I'm an equity holder, you should fire me, and you don't have to. I'll give you my resignation. We'll find someone who can do this." In the short run, though, we think we've got a good business plan going here right now. Yes. I've mentioned a couple of times we have 40 stores. This is a picture of the Chicago store. It's a fantastic location. The guy front and center here is Tyson Minnick. He owns three stores now.
He's agreed to open up 10 stores in Chicago over the next four years. And again, this store is annualizing right now at $1.1 million. My sense is it's probably a $1.5 million-$2 million store. The economics on these stores, again, this store should throw off 15%-20% on a pre-tax basis. Stores, round numbers, cost about $600,000 to develop. If you know, it's simple math. You generate $1 million, throws off $150,000, you spend $600,000 to build it, you're getting a 25% cash on cash. Put a little bit of leverage on that, your return on equity looks pretty good.
I think that's a fairly compelling offering, and what we're looking to do is go to a Chicago, a New York, a Vegas, an L.A., and just get guys that really wanna open a lot of these stores. In the meantime, it's our view that if we go into a market like L.A., and we can pick up a couple stores from existing franchisees that are, you know, maybe they're just a little long in the game, it's time for them to hang up their cleats and leave the field.
We'll be the buyer of last resort. We can go into that market, and our view is if we can buy them at one and a half, two times, we can bundle a group of four or five stores together, improve the profitability on it because you know, now we own it, now we operate it, then we can bundle those up and sell them at some point at 4.5x. Maybe that might be a little generous, but definitely north of 4. That becomes a pretty good deal for us. In the meantime, we're testing our skills. We're figuring out how do we operate these businesses at scale? Sorry, I'm running through a lot of stuff. The deck is rich in content here.
I should talk a little bit about cocoa because the price went up a lot, it was challenging for us. About 47% of our raw material cost is cocoa. Think chocolate. We went to the market, we did a natural hedge, tried to protect ourselves, and we're the quintessential buyer, you know, in the futures market because we're the guy that needs to take delivery. I actually want price certainty. I don't care about the variability.
I just need price certainty so I can produce the product at a known amount, I can sell it to my franchisees, and the deal I made with the franchisees is, "I'm gonna have to raise prices on you, but I need to get to a target margin." Think, in the scheme of things, packaged product is the highest margin, followed by bulk product, which shows up in the candy case, followed by supplies, think a cup that has our logo on it, followed by ingredients, which is our lowest margin. What I said is I'm working towards a target margin. If we can reduce cost, which I expect we will over time, either through volume running through the plant or more efficient in buying, or we get some economies of scale, I will pass that savings on to you, and we will.
What I said to the franchisees, "Don't you dare lower your prices 'cause the consuming public is going to get tolerant to the price. You should capture that margin. You should save some money. 3% of your annual sales you should bank under the long-term CapEx because I'm going to come back to you every five to seven years and say, 'You're going to need to spend $100,000 -$150,000 to refresh your store.'" I've heard from a lot of guys, "Well, where am I getting that money?" I said, "Well, haven't you been saving?" They're like, "No, I've got that. You see that Corvette out there, that trip to Cancun?
I spent all that money." We have to really get the financially sophisticated franchisee who understands you're running a business, your business has equity or intrinsic value at the end of the day, and if you're smart about this, at the end of your either 10 or 15 or 20-year franchise agreement, you can turn around and flip that story and you can have equity of value. That's a novel concept to most of our franchisees, but that's absolutely the way to look at this. Guys, I could go on for a lot longer. We're at five minutes and 19 seconds, and I want to leave time for Q&A, so I'm gonna pause there and take questions. Yes, sir?
Yeah. Have you thought about using a kind of grocery outlet model where you, like, partner with management?
The question is, have we thought about using a grocery outlet model?
Where you partner with managers. You give them, like, half. You retain ownership, they get, like, half the underlying operating profit.
We—
You can build the ownership performance in the game.
Yeah. You mean with the franchisee?
It wouldn't be a franchisee.
Just another operator. We should talk about that later. I haven't explored it completely. We've thought about a couple different economic models that could make sense, but ultimately, we're looking for Our ideal operator is a guy that owns four or five different brands already, and he's building a portfolio of franchise concepts, and they don't have anything that fits this category, and they own 50, 60 of these, and they want to add 10 or 12 Rocky Mountains in markets where they already are, where they've got the infrastructure. That's the perfect guy for us. We got a guy down in Las Vegas we're talking to right now. That's his situation. Got a guy up in San Francisco we're talking to right now. That's his situation.
There I don't think there's a shortage of potential guys out there, guys and gals who could be good operators for us. But I think culturally, the company historically was, like, looking for a ones and two mom and pop kind of guy, which meant we had a lot of franchisees. Became very, very difficult to manage all them, and we didn't get the well-capitalized guy, the guy that could say, "Hey, look, I love the concept. No problem spending $600,000. I'm going to leverage it, you know, 50%, so I need $300 cash. I'm going to go open up another half dozen stores, and then I get real economies to scale with this." Well, we don't have enough of those. That's the guy we're looking for. Good question. Other questions? Yes, sir.
You mentioned you put in a new ERP system.
I'm curious, like, what drove that decision and maybe what have been some of the benefits of it?
Yeah, great question. We put a new ERP. What drove the decision and what's gone wrong? That's what you wanted to know, right? Yeah. We did, we had a system called Macola. It was, when Carrie and I showed up, it was probably 20+ years. It'd been put in place in the nineties, so it was probably older than 20 years, and it really wasn't doing what we needed. The decision had been made for us in advance of showing up. It's a Microsoft product, and anyone who's talked to a company that's put an ERP system in place, it doesn't go as smoothly as the consultants promised. We're still working through it, but every day, the data, we get better and better data coming out of that.
In fact, the data is so rich that I was walking around the plant recently, I said, "Let's throw a TV, a TV screen up in the production area, in the kitchen area, in the break room, in the warehouse, and I'm gonna start to stream data that we're looking at as executives onto the TV screens in the local area." I said to the guys, "Look, if you can help me save money, I'll share that with you." They're like, "Really?" No one ever asked how much I'd share, I said, "Yes, we'll share that with you." They said, "So how are we gonna measure this?" I said, "Well, you see these TV screens that I put up here? We're not gonna beam Netflix in here.
We're gonna actually start showing you the same data that we're looking at, and then put it in dollars and cents. Here's what the errors yesterday cost us. Here's how much money we left on the table." This is a novel idea. I go down there a couple of days later, and I see the guys look at the TV, and I said, "What do you think?" They're saying, "When's Netflix coming?" I said, "Ha ha ha. What do you think?" They said, "Well, we don't really know what it means." That was this huge eye-opener for me. I'm like, "Really?" I spent like seven, eight minutes talking to the guys, and these are the numbers, and this is what it means.
I walk away, and I come back 15 minutes later, and from afar, I see them all huddled around looking at it, and they're saying, "Oh, this is really cool information." That was just in the warehouse. I thought, "Oh, that's interesting. Why don't I take what's in the warehouse and put it over in production and what's in production and put it in the kitchen?" Everybody was seeing the data into really developing a culture. The guys in the warehouse now know what's going on in production, which knows what's going on in kitchen and logistics, and now I'm teaching our guys about the business holistically.
The thing is, I'm a man of my word, I said, "If you save money, let's say we're blowing $100,000, you can bring that down to $50,000, we save $50,000, I'll give you $10,000." The guys don't show up at the Christmas party and say, "Where's my bonus?" I said, "Your bonus just got flushed down the drain here because you made these mistakes. I'll share that with you." I've got one minute? Thanks. This is important. It's a cultural thing where we're teaching the guys about the business. What matters? How do we drive profitability here? If you do that, I'm glad to share. You know, I'm the quintessential capitalist. You help me save, make money, I'll share some of that with you.
I don't have to get an earful at the Christmas party when guys are saying, "Where's my bonus?" Believe me, I'd like to give them all a big bonus. I'm loathe to give guys pay raises 'cause I'm stuck with that forever. If I say, "I'll pay you whatever, and you perform, I'll definitely share that with you," but you gotta perform. Of course, every quarter I'm gonna cinch it up a little bit. It's worked pretty well. Anyway, got 24 seconds. Thank you all for attending. We could go on for hours here, you can reach out to us. Call us up at Rocky Mountain. We're up in Durango, Colorado. If you happen to see one of our stores, definitely stop in and try it out.