Spicy Pickle Franchising- An Intimate Look in a New Way

September 22, 2007
Volume VIII, Issue 64
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Spicy 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. Simply CLICK HERE, or go to the following URL:

Coming To Your Neighborhood Soon

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.

Feeding The Growth

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.

How 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 account.

There is one other revenue source. SPKL 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 unquestioned.


Here are the challenges, aside from the normal risks associated with any microcap stock. There are two company specific ones.

  • 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.
Where 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? If 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 beginning.

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 $1 in short order with upside from there? You be the judge. Go try the food. Go to 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 strategies.


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The Newsletter is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward  maximizing the upside potential for investors while minimizing the downside risk, whenever possible.  Moreover, as detailed below, this publication accepts compensation from certain of the companies which it features.  Likewise, this newsletter is owned by MarketByte, LLC.  To the degrees enumerated herein,  this newsletter should not be regarded as an independent publication.

Go Here to view our compensation on every company we have ever covered, or visit the following web address: for our full profiles and for Trading Alerts. Larry Isen, the editor and publisher of the OTC Journal, through various entities he controls, has purchased 1,200,441 shares of Spicy Pickle at an average cost of $.2125 per share. These purchases were made in Spicy Pickle private offerings. The aforementioned purchases were made between August of 2005 and August of 2006. In addition, Larry Isen has received 785,000 shares of Spicy Pickle common stock for consulting services. In addition, MarketByte LLC, an entity controlled by Larry Isen, has received a fee of $30,000 cash, and 300,000 newly issued restricted shares for coverage of Spicy Pickle. TGR Group LLC, the publisher of the Small Cap Network, has received $30,000 and 300,000 newly issued restricted shares for coverage of Spicy Pickle. Mr. Isen is an affiliate of TGR Group. In addition, two other individuals affiliated with TGR Group have purchased a total of 300,000 shares at $.25 per share. Current positions of the aforementioned can be found at and in the Spicy Pickle information section.

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