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Pickle Franchising, Inc (OTC BB: SPKL): An Intimate Look
You might be hearing about Spicy
Pickle for the first time today, but I've been involved for two years,
and I believe the best is yet to come.
With the introduction of Spicy
Pickle, I am moving the OTC Journal into the next generation
microcap content. It's
Internet II- a more video rich and interactive
Internet. An internet where you can get much more comprehensive content
and immediate interactive feedback for your questions and concerns.
I've always hoped I could find an
idea the whole OTC Journal membership base could get behind. Spicy
Pickle, one of America's fastest growing fast casual restaurant chains,
could be that idea. I will know based on your participation, questions,
and comments. I hope the Spicy Pickle BLOG is the most lively and
active of all. By the end of the day today, there will be a BLOG,
and I welcome your comments and questions.
So, in the spirit of Internet II,
I offer you the opportunity to view a 15 minute video as a first step.
Yours truly will provide the introduction and conclusion. After you have
viewed the video, and gotten to know me more upfront and personal, you
should read the additional coverage below for a more detailed description
of the business model.
Put your feet up for 15 minutes,
relax and enjoy. I hope you will be compelled to read the rest of the presentation.
HERE, or go to the following URL:
||Coming To Your
In my opinion, if you see a sign
like this and walk in the store, you can get the best grilled pannini sandwich
around, and a variety of other foods as well. That's why these stores do
nearly twice the annual revenues out of the same size restaurants vs other
concepts- it's just that simple. Don't take my word for it- try it yourself
if you can.
In August of 2005 I wrote a check
for $35,000. It bought me about 1% of the company. At the time there were
about 8 of them open, and the possibility of another 12 or so opening in
the future. About 8 months later I starting writing more checks. At that
time- the spring of '06- there were 12 open and about 28 more to find locations
for- about 40 in total.
Today, there are 26 open, 14 more
currently under construction, and nearly 100 total franchises sold. Starting
in 2008 there are 50 plus more franchises to find locations for, and leases
are being worked on and signed now. That's extraordinary growth.
In short, the company has grown from
20 franchises to nearly 100 in 2 short years, and I believe the steepest
part of their growth curve could be out in the future.
From a couple of small, Denver based
sandwich shops in 2001, Spicy Pickle has expanded rapidly on a nationwide
basis. So, what's fueling their meteoric growth? Simple- the individual
store performance metrics.
While there are a few laggards in
the chain, Spicy Pickles are delivering $600,000 to $800,000 in
annual revenues. A couple of the more successful stores are approaching
the $1 million mark, which is very impressive for about 2,000 square feet.
People love the food, and they are coming back. The word is starting to
spread in the restaurant franchising community, and demand for multi store
territories is gaining momentum.
Spicy Pickle Makes Money
Spicy Pickle Franchising is
just what the name implies- a franchise company. This is a good time to
discuss the franchise business model from the parent company's point of
view. Here's how it works in the case of SPKL- the company charges
a fee of $35,000 to a franchisee for the service of getting their first
store open. Should the same franchisee open more stores, the franchisee
pays $17,500 for each additional store (1/2 price because the training
is no longer required). The management of Spicy Pickle becomes intimately
involved in the entire process- it's a complete package- real estate, training,
crews to open the stores and train employees.
Once the store opens, the franchisee
pays a 7% royalty of its sales to the parent company. 2% of the 7% is segregated
into a common advertising fund. The remaining 5% goes directly to SPKL
as royalty fees. The 7% is collected every Wednesday morning for the prior
week's sales using an electronic debit from the franchisee's checking account.
There are no receivables from royalties.
Here's the power of the business
model- the top line is not a huge number, but it keeps coming in forever.
It is not a one time sale with a cost of goods that has to be recreated
next month, it is a weekly fee SPKL collects forever. As same store
sales grow, and the number of stores grows, the revenues simply increase.
Like an annuity; it just keeps paying.
Once SPKL grows to enough
stores generating enough royalty revenue to cover its monthly overhead,
the company turns cash flow positive and probably never looks back.
Here are some hard numbers. Many
of the SPKL stores generate about $700,000 in annual revenues- some
less, some more. This means each store contributes about $35,000 to the
parent company every year- forever. That's about $3,000 per month per store.
By year's end there will be 40 stores open and operating- times $3,000
per month (x 40 stores)- $120,000 per month simply flowing into the bank
There is one other revenue source.
gets a roughly 2% rebate from its nationwide suppliers. Vendors
like Coca Cola and Deitz & Watts (same meat supplier
used by Whole Foods and many other private labels) also pay a rebate. That's
an additional $14,000 per store, or $1166 per store monthly.
Now, we're up to $4,166 per
store, per month in revenues, or about $166,000 per month
(based on 40 stores) in recurring revenues- once again- the key word- forever.
Here's a couple of other revenue
sources to throw in the mix. The $35,000 franchisee fee is collected
up front. SPKL can use the money as it sees fit, but doesn't book
the revenues until the store opens for business. Therefore, if 14 more
stores open before year's end, there's another $500,000 in revenues
over the remainder of this year.
There's one more component. SPKL
is opening a company owned store in downtown Denver which will serve as
a training facility. It will have a conference room off the kitchen, and
a large bakery. The bakery will serve all the 22 Denver area stores,
and be another revenue source for the parent company.
All in all, here's what it adds up
to- the company should generate recurring revenues of at least $200,000
monthly, which is almost exactly the cost of running the company with its
19 full time employees.
My estimate- once SPKL hits
the 40 store number with the downtown Denver training store being company
owned, the monthly overhead will be covered by the cash flow. As more stores
start to open in 2008, SPKL turns cash flow positive every month
from recurring revenues, and the company is off and running. These are
just rough estimates and the final outcome could vary, but the trend is
Here are the challenges, aside from
the normal risks associated with any microcap stock. There are two company
Top line- by year's end SPKL's
stores will be generating in excess of $25 million in revenues. However,
with the exception of one store, the revenues are not credited to the parent
company- they remain on the books of the franchisees. Between royalties,
franchisee fees, and revs from one company owned store, I estimate SPKL
will have an annual run rate of about $3.5 million by year's end.
Don't let the low number fool you- for most of the recurring revenues there
is no cost of goods- it's 100% gross profit.
Real estate- Finding locations
at reasonable prices with the Spicy Pickle demographic is the company's
biggest single challenge. Management is reluctant to put franchisees in
poor locations, and there is significant competition from other concepts
for prime commercial real estate. This challenge could slow the growth
rate, but management is hopeful another 40 locations could open in 2008.
to From Here?- the Valuation
I believe SPKL has an intrinsic
value of $1 today, with lots of upside ahead. Frozen in time, the
stock is worth $1 in my view. More evidence of dynamic growth should
take it higher.
Consider this argument. Suppose you
had an asset that delivered you $35,000 to $50,000 in annual revenues as
far out as you could see? What would that asset be worth? Where I live,
a $750,000 home might rent for about $3,000 per month. Of course, you would
have to buy the home, rent it, and manage it. If you were to buy a bond
that paid $35,000 to $50,000 per year forever, it could cost as little
as $500,000 or as much as $1 million depending on the risk.
So, I believe it is fair to conclude
each existing franchise is probably worth about $750,000 in intrinsic value,
or $30 million in total value for the 40 stores.
Now- here's step 2. There are nearly
60 more franchises sold that are slated for construction in 2008 and 2009
subject to finding the locations. What are they worth? Let's say each one
is worth 1/3 of the finished product- about $190,000 each times 60- equals
about $15 million in value.
$30 million added to $15 million
comes to 45 million in intrinsic value. There are 45 million shares
I&O- hence $1 per share. If you think this is a stretch,
considering the following. There are about 650 Chipoltle Mexican Grills,
and the company sports a market cap of $3.6 billion. If I've done the math
correctly, the market is valuing each store at about $5 million. This is
not a true apples to apples comparison as the CMG stores are all company
owned, the metaphor serves to consider how the market might value a hot
restaurant concept down the road.
To sum it up- 26 stores open, 14
more by year's end, and nearly 60 more to build out equates to a $1
stock in my view. That's a static view- frozen in time.
As they add more franchisees, the
value will likely go up, and hopefully the stock price. And, speaking of
the price, you might wonder about the supply/demand dynamic.
The public float consists of 8 million
shares that were sold at $.25 about 18 months ago. An additional 4.2 million
shares were issued at $.40 in the company's self underwritten IPO. There
is no debt, no convertible securities, no warrants, and only a few options
issued to employees. In short, this structure is as clean as it gets.
In my mind, here's the most interesting
aspect of SPKL. There will be 100 stores- that's a given. We're
headed there- it's just a question of time. Here's the big question- when
we get to 100 stores, will we be looking at 500 total stores down the road?
so, you're looking at a potential 1/2 billion market valuation somewhere
down the road. That's the kind of stock you tell your grandchildren
about years from now.
As you can see from the chart, this
stock was pretty quiet since it opened for trading in August. Of late it
has been gaining a little steam, and Friday was the first million share
plus day. As you can see, 1 million shares of volume took the stock up
$.12, which suggests the supply could be very thin. Friday was just the
Why should we believe the company
will continue to grow beyond 100 stores? Consider the history of CEO Marc
Geman. He bought PretzelMaker in 1994, a mall based soft pretzel concept.
At the time there were 4 stores, the the company was distressed. After
raising about $1.5 million to fund the expansion, Pretzelmaker hit the
260 store level in only 4 years. PretzelMaker was sold to Ms Fields Cookies
for just shy of $9 million in 1998, and shareholders walked away very happy.
Go try the food. Make up your own
mind. Is SPKL going to 500 stores some day? Are we going to see
in short order with upside from there? You be the judge. Go try the food.
Go to www.spicypickle.com to find
locations, or simply click
here to find one close to you.
For more information, check the BLOG.
It will be live Saturday afternoon with some additional thoughts on trading