I wasn’t aware it was happening at the same time SPKL issued yesterday’s press release, but September quarterly numbers were announced, and the market didn’t seem to care that their top line is a small number and their bottom line showed losses as predicted. The stock is up 11.5% today as I write this, continuing the rebound phase that started at the end of last week.
Here’s the short look at the top and bottom line. SPKL delivered $261k in revs in the quarter, and lost $1.3 million or $.03 per share. Sounds like an awfully small company. You have to drill a little deeper to understand the value.
Three new stores opened during the quarter, and the company booked $60k in revs from franchise fees. The remaining $200k is the 7% royalty stream the company derives from franchise stores.
Here’ what this means- the stores underlying the $200k in royalties delivered about $3 million in revenues- That’s about $12 million in annual revs. Three new stores opened during the quarter, so the company didn’t experience a full 3 months of revenue stream for those.
One other issue to understand: In Q3 of 2006 SPKL had one small company owned store in Denver. That store has since closed and is being relocated. The new version has a fantastic location, will act as a nationwide training store, and contain the bakery and commisary. That new store is slated to open in mid December. All the revenues from that store will go to the top line, and the company is currently looking at other sites for company owned stores.
In short, if all 40 stores manage to get opened by year’s end, the revenues being delivered by those stores will be between $26 million and $30 million annually. At 8%, the company books about $2 million in annual revs- not including franchise fees and the top line from their company owned store. Then, you can start looking out to ’08 when SPKL moves past the 40 store threshold, and starts moving towards 100 stores.
You will see some top line increase in Q4 of ’07, and a huge top line increase in Q1 ’08. This is very predictable due to the nature of the business. In the interim, with the stock up nicely today, I would say the market gets the value in this case.
Comments and questions are welcome.
What I like is that SPKL monitors their royalties right off the point of sale terminals in each store which ensures accurate payment. I imagine that this is usual in the industry or am I mistaken? In any case, thanks for the synopsis on the top and bottom line. Looks like the price reflects the next six months?
Editor: I totally agree with your assessment that the next six month of growth is already priced into the stock. Stocks usually trade on the market’s perception of where a company will be in six months. However, in the case of SPKL, the perception could change for the better if growth accelerates. On the royalties- here’s how it works at SPKL- all the registers are tied into a central server, and the parent company keeps track. Every Monday each franchisee receives an email recapping the previous week’s revs. On Wednesday, the parent company automatically debits the bank accounts of the franchisees. Zero receivables from franchisees. Remember, the CEO has been to this rodeo before. Pretty slick if you ask me.
What would be a good point to add now. As usual did not have money in place to add at 1.10. Have 225 at 0.85 and looking to add. I am a long term investor and like to do cost averaging.
Editor: There could be two more opportunities to get into this stock- 1. If they arrange a financing at some sort of discount to the market, the stock might drop temporarily, and 2. If the overall market simply falls apart. However, in light of what is likely to happen at the corporate level from here forward, I don’t believe the stock will offer a lot of opportunities from any kind of negative news at the corporate level. At any rate, at least you own some at $.85- so there you go.
Do you envision another pullback at $2?
Editor: A pullback to $2 would be fine considering the stock is trading at $1.50- I’m guessing you meant $1. Anything could happen. There are two opportunities for $1- if the market overall keeps tanking as it has done in the last month, or if the company raises money at some sort of discount to the market, and the stock sells off. BTW- this would be normal- lots of companies do private placements below the market- the investors get a discount because they are not getting free trading shares. If you think it might pull back because the company is going to disappoint, I don’t see it happening. Things are just going too well.
What do you have to say to those who stauchly insist breakeven for this company is north of 75 stores? I did the math myself and came out with, and granted there is some leeway, 45 or so stores to cover the “nut”. thx.
Editor: I haven’t written about his myself, but here’s my personal assessment- 45 stores, along with 20 new franchise sales does it. Don’t forget, even though they don’t book franchise fees as revenues until the stores actually open, they get to use the money as cash flow. If you believe it is 75 you are not taking into account cash flow from franchise sales.
Do you see another major pullback at $2.00?
Editor: I don’t understand the question- are you asking if I believe it is going to $2, and then pulling back? Or do you have the number wrong and are asking if it could go to $1?, or are you asking if I believe it is going to go back to $2. No matter what the question, I believe the stock could be vulnerable to a pullback if 1. The overall market continues getting hammered, or 2. The market reacts negatively if the company announces a financing. This is only over the next several months. Over the longer term I see the stock much higher than $2.
What is the deal with the breakfast menu? Ever tried what they are beta testing? How are they doing the test? Yummy.
Editor: It’s being tested in the Sacramento store. I don’t have hard numbers to share- just anecdotally I have heard it raised the numbers quite nicely.
looks like you sold off a considerable amount, why are you selling now?
Editor: I have sold a considerable amount in dollars, but not in my total position in the stock. You will note that I told everyone the stock was a sell when it was up around $2, because it was overvalued. I told everyone to sell, and I was selling as well. Furthermore, if you watched the video, you know I first invested in this company back in 2005, and had put a total of nearly $300k of my own personal capital at risk, so it was a huge investment for me. Since the stock has pulled back, I have stopped selling, and still own nearly 2/3 of my total position. Basically, I was just following the advice I gave you. Also, when we disclose the amount we have sold, it is cumulative for myself and my partners. One of my partners has sold a little in the last two weeks. I am not selling down here. I can’t say where it will be in the next two months, but the way the company is going I have a lot of confidence for much higher levels over the next couple of years.
SPKL: Did the company do an IPO? and if so How did they raise the capital, BD, self, Internal funds, self Private Palcement. How many shareholders do they have now and after this IPO? The CFO in the video seems to know the capital markets well…
Editor: There are 12.2 million shares in the public markets. The original financing that was in the registration statement was 8 million shares at $.25- raised in the spring of ’06. The company sold and additional 4.2 million shares at $.40 in a self underwritten IPO in the spring of ’07. There have been a few random 144 filings from even early shareholders, for a total of probably 13 million in the public float of the 44 million I&O. Prior to ’06, there were a mere handful of very early shareholders who still own the stock at a very low price who were personal contacts of the CEO.
You’ve reported that the company says its breakeven point will be 40 stores. Do you think the stock pps will hold about where it is until then (or very close to then)? As someone who has only a modest amount of money to invest bi-weekly, I must admit that I don’t mind the pps staying low for a while. It gives me a chance to accumulate.
Editor: Cash flow breakeven is probably about 40 stores with perhaps 20 franchises sold. In addition, the new corporate store will add quite a bit of gross profit. Looks very good for 2008. Can’t say if the PPS will hold up- this market is brutal. Easy call for a year or two. Very tough for a month or two. If you are going to buy a little every two weeks, you should average out.
I believe the filings say that the new company store will operate at a loss, at least for a year or so. Do you think it will be profitable?
Editor: Depends on whether you are talking about a franchise, or a company owned store. In the case of a franchise, the parent company just gets its royalty. Whether the store is profitable is the business of the franchisee. In the case of a company owned store, there is no belief it will operate at a loss at all. We are expecting the individual unit to be profitable right out of the gates.
What do you feel is a reasonable, feasible corporate store count, all things considered. 20? 25? Thanks in advance.
Editor: When the company gets to 100 stores, I would like to see about 20 of them be corporate. That would be a good mix.
Thanks for the reply, much appreciated. But are referring to company stores in general, or the soon-to-open training store in Denver? I was asking about the latter, the 10q states that it will operate at a loss due to it’s function as a training site.
Editor: The store may operate at a loss to pay for the space, but the money comes back at the corporate level in the form of franchisee fees. They pay $35,000 up front for the first store to the parent company, which is when they do their training. Plus- I don’t believe the company owned store will lose money- they will have the bakery and commissary they operate out of the space- it should do very well. They just have to be very conservative in their SEC filings.
Thanks for the great info. How big is the company store? What is the expected overhead and projected revenue (based on other store in the area, I suppose)? Will it be profitable within a month? A year? thx.
Editor: Will have to get that information for you. I don’t have that 411 at my immediate disposal or programmed onto my highly defective mental hard drive.
Thanks for the great info. Right now I am down on on SPKL, but I believe it begin to turn around in 2008. My question is, when do you think Spicy Pickle will begin to look at company owned stores as many critics of this stock criticize this company because it only has 1 company owned store. Also what do you think is the key thing this company NEEDS to do for this to start to taking off?
Editor: The company is taking steps to start the process of developing a number of company owned stores. In my view, the perfect mix would be to have 20 – 25 company owned stores when we get to 100 stores opened. Then you would have a very profitable company. The key thing that needs to happen is a capital raising event. The company is exploring its options, but is being very careful to put together a financing that would be detrimental to the current shareholders. They take on debt to do it.
re ericdabbs comment… I think you meant “not” detrimental to the current shareholders, correct? Not clear on one other thing, when you said “they take on debt to do it”, did you mean debt in lieu of a private share offering? Thanks.
Editor: Yes, if the company engages in a capital raise, it would be through a non-toxic private placement of equity vs any sort of debt.
Are they going to get listed on the Nasdaq if they meet the requirements or would they prefer to remain otc?
Editor: It’s a bit of a rhetorical question. All BB stocks would rather be NASDAQ as the reporting requirements are the same, so why not? There are some reporting issues which make it cheaper to be on the Pink Sheets, but no benefit on the BB. Therefore, the answer is yes. The company is probably not big enough to move in that direction in 2008- but it is a realistic possibility out in ’09 as the company grows and turns profitable. I fully expect it to turn profitable in ’08 as the critical mass of recurring revenues is hit by the number of stores that get open. It is inevitable with the franchises they have already sold. The next moves will be towards larger new franchise deals and company owned stores.
Here is a piece your readers may like and I recommend for the company website should you have a chance to let them know:
http://www.ceocfointerviews.com/interviews/SPKL-SpicyPickle3.htm
Thanks so much for your continued efforts.
Editor: Thanks for the contribution. You get the “spirit” of the BLOG- it’s an opportunity to share ideas and stuff you find. I also welcome the negative point of view as well.
It is quiet, awfully quiet AND, the stock is slipping down on tiny volume. Now, I’ll be a buyer. Any thoughts on the Pickle’s silence? thx
Editor: That condition should change a bit soon.
This stock has been slowly slipping away really fast!!! What do you think needs to happen before this starts to turn around? What is the projected price of this stock before everyone stops selling? It looks like this stock is doomed to be around the $1.10 range.
Editor: I hope you read the developments over the weekend. It should turn around right now. If it doesn’t, it’s 100% market driven. Company is doing great.
What’s your opinion of the private financing – good or toxic for shareholders?
Editor: I wrote extensively on it over the weekend. If you are not receiving the publication, you need to figure out why by “White Listing” in your email software. There are instructions on the right hand menu bar at the home page.
I read the blog over the weekend and Im glad that they Spicy Pickle is getting more financing. It was on a recent slump. What I liked most about the article is that they are trying to acquire more company owned stores as opposed to just franchises and also the section where they talked about how they can build stores first and then later decide if they want to make it a franchise or company owned store. That was one thing that really bugged me about this company because company owned stores would get more revenue as opposed to just royalty fees that get right now from franchises.
My question that I have now is…are they going to post Q4 earnings? If so when do you think they will post that?time
Editor: Of course they will post Q4 orders. However, like most small companies, they will probably take nearly the whole time alloted to complete the 10K- it’s a huge filing every year. The CFO of this company has thirty years of experience. I would look for those numbers in the second half of March. Q4 numbers won’t be any big deal- it will be Q1 numbers of ’08 that will show huge increases. With their big corporate store opening this week, and all the new stores making a full contribution in Q1, you will see some very big percentage increases. You won’t see it in Q4 as their old company owned store, which has been closed up, was operating in Q4 ’07- therefore, the comparisons won’t show you much.
where do you see this peaking in the near future?
Editor: Probably due for a little pullback now. It’s entitled to after the current meteoric run up in the stock against the backdrop of a tough market.
Regarding the preferreds and the 60 day hold: what short term risk do you perceive, if any, from preferred shareholders giving up their dividend opportunity and cashing in their preferred stock? Thx.
Editor: There isn’t any short term risk- it will be a maximum of 6 months under the new SEC 144 regs before their shares are free trading- could be a little less if a registration becomes effective before hand. These investors are betting that the company will make enough progress over the coming 6 months to have the liquidity to make money.
I loved the video presentation with spkl. Is this something you plan on doing more of this year?
Editor: I have plans to do a lot more video.
i did not see any news on it, but i was just wondering if they were able to open the other stores before the end of the year. i am hoping for big things out of this co.
Editor: When you say the end of the year, I assume you mean 2008. Then, the answer would be yes- I expect them to open a lot of stores in ’08. They have a total of about 70 more to find locations for.
I just ate at the Ashburn, VA, store, which was the perfect size for keeping the overhead low and the profits high. Josh, the owner, said the catering menu is really picking up steam. The place was half full at 3pm when I arrived in the pouring rain. I had the Italian Panini, The Gobbler and the She Crab soup. I ate the pickles too. Each pickle tasted different and delicious. Best sandwiches I have ever had. I have had Jersey Mike’s, Subway, Quiznos, Blimpie and many mom & pop subs. That Italian Panini and that Gobbler are both in classes of their own and have no peer comparisons at those others I just mentioned. Simply perfect sandwiches with loads of flavor.
Best wishes for you and your readers in ’08.
Lewis
Editor: Thanks for the contribution. Great stuff. Just as I have been saying. The food is simply great.
Do you have an opinion for traders on the short term? Specifically, I have been espousing the liklihood that the gap of 1.11-1.24 gets filled, which would aslo serve as a 1.10 re-test. Like the stars aligning:) Anyway, any thoughts? thx.
Editor: I don’t believe in trying to suggest there are good short term trades in this market. Short term trades require volume, and people are generally very scared right now. I can tell you there is plenty more good news to come. Things will probably improve as we move into February. That having been said, I believe there is a fair amount of risk in being out of the stock as growth should be robust.
what the hell did people stop eatting?
Editor: Probably. Stock was due to move a little one way or the other. In lieu of this nasty meltdown, not surprised to see it give a little ground. However, clearly there are buyers who believe in the growth over the next two years.