Rocky Mountain Chocolate Factory, Inc. (RMCF) Earnings

Management highlights

### Fourth Quarter Performance Accountability - Interim CEO Jeff Gagan took accountability for Q4 results that missed internal expectations, noting the primary issue was a misaligned packaged product assortment strategy that over-emphasized large-format boxes and large candy pieces that did not match guest preferences. - Additional one-time/temporary headwinds included deliberate exit from a negative-margin specialty seasonal customer relationship (reducing Q4 revenue by ~$1.5 million), temporary e-commerce transition disruptions, costs for disposing of outdated packaging, and elevated professional service fees. ### Operational Fixes and Margin Improvement - Post-year-end consumer research with over 1,000 participants confirmed demand for greater assortment variety, more small-format pieces, and a broader mix of core products. A full reconfigured packaged assortment will launch in stores by Labor Day, using flexible cup-style packaging that reduces production and packaging costs, lowers price points, and improves competitive positioning. - Years of price adjustments, skew rationalization, and production operational changes have driven the highest gross margin product mix in over two years, with gross margin now near the company's long-term target. This allows management to shift focus to revenue growth. - Negotiated new corporate shipping rates have materially improved the e-commerce cost structure, which was previously pressured by high shipping costs relative to order value. ### Store and Franchise Development - Newly redesigned and remodeled stores show strong performance: the Chicago State Street location has $1.1 million in annualized sales with remaining upside; the new Charleston, SC location runs at a $600,000 annualized run rate, in line with expectations for a new brand market; remodeled locations like Corpus Christi, TX have delivered 10-15% post-remodel sales increases. - RMCF recently acquired the Nashville, TN franchise location to use as a company-controlled testing ground for new merchandising and guest engagement initiatives. Company-owned stores currently represent 3% of the domestic store base, with a target long-term share of 5-10% to build operational expertise that improves franchisee training and support. - Current committed franchise development totals 40 new locations over the next 3-5 years, including a 9-location ADA for Miami, a new 6-location vertical ADA for high-end Rocky Mountain resort locations, and a signed letter of intent for an additional Chicago franchise location. 31 of the 40 committed locations are with existing franchisees, and management prioritizes multi-unit operators that can develop regional networks of stores. - Target expansion markets include major East Coast cities that currently have no RMCF presence, including Boston, New York City, Philadelphia, Washington D.C., and Atlanta. ### System-Wide Operational Improvements - Rollout of an upgraded POS platform is complete, providing granular analytics on basket size, transaction counts, and items per transaction that give actionable insights for both corporate and franchise teams to improve merchandising and coaching. - The third-party delivery initiative has delivered strong results: average basket sizes are twice in-store transaction values, with half of orders being in-store pickup, positioning the channel as an incremental guest acquisition tool. Economics remain attractive with commissions capped at or below 20%, and a commission-free white-label online ordering platform is available to all stores via localized branded store websites. - A new guest loyalty and mobile app is scheduled to launch in late summer. A limited-time promotional collaboration with the children's series *Miraculous* centered on caramel apples will run from September 15 to October 31 to drive brand engagement. - Management is standardizing merchandising and assortment across the franchise system, with a target of dedicating 60% of store selling space to core RMCF signature products to deliver a consistent guest experience regardless of location.

Guidance

- Management reaffirmed that its long-term business transformation strategy remains on track, despite the miss in Q4 results, and underlying structural improvements to the business have left it much stronger than before the transformation began. - No explicit full-year financial guidance was provided, but management set three clear core priorities for the new fiscal year: 1) execute precise changes to the packaged product and e-commerce segments, 2) build on already achieved margin improvements, 3) convert progress in retail performance, franchise development, digital engagement, and cost discipline into consistent positive financial results. - Management did not disclose a specific target date for achieving positive cash flow, but stated that reaching positive cash flow as soon as possible is the company's top goal. - New location development is expected to continue over the next 3-5 years, with 40 committed locations already queued for development.

Segment performance

For the fiscal fourth quarter 2026: - Total company revenue: $6.8 million, down from $8.9 million year-over-year (YoY). - Product sales segment: $5.1 million, down from $7.1 million YoY. Packaged product sales came in $1.5 million below internal expectations, with a disproportionate impact on the e-commerce segment which is primarily composed of packaged products. Packaged products are the company's highest margin offering, followed by bulk candy, supplies, and ingredients (lowest margin). - Franchise and royalty fees segment: $1.6 million, down from $1.8 million YoY. - Total product and retail gross profit: negative $0.9 million, compared to negative $0.8 million YoY. - Total costs and expenses: $9.8 million, down from $11.6 million YoY, driven by efficiencies from relocating consumer packaging operations back to the Durango production facility. - Net loss: $3.4 million (negative $0.38 per share), compared to a net loss of $2.9 million (negative $0.37 per share) YoY.

Risks & headwinds

- Poor alignment of product strategy with consumer preferences resulted in material revenue and profit misses in the fourth quarter, highlighting execution risk as the company implements its transformation. - High shipping costs have historically been a persistent pressure point for e-commerce profitability, though management has taken steps to mitigate this risk. - Dependence on qualified multi-unit franchise developers limits the pace of new store expansion, as management prioritizes working with capable, well-capitalized operators over rapid unqualified growth. - Transformation progress is not linear, and near-term quarterly results may not reflect the underlying improvement of the business, creating volatility in near-term performance.

Analyst Q&A

• Q: How did management arrive at the original misaligned packaged product assortment, and what process is being used to develop the revised assortment? /

  A: The original assortment was based on existing store-level sales data that showed large truffles were popular for in-case purchases, so the team built boxed assortments around these large items. Post-miss, management conducted new extensive consumer research with over 1,000 participants including customers, prospects, and franchisees to identify what guests actually want in packaged products, which will guide the revised assortment. Management found guests want large truffles for in-store purchase but not for pre-packaged boxes. The revised assortment will include more small-format options and a broader mix of core product types. /

• Q: What is the annualized revenue impact of exiting the negative-margin specialty customer, and was this business seasonal? /

  A: The vast majority of this customer's sales occurred in the fourth quarter, as the majority of RMCF's specialty market business is seasonal, with peak volumes around the Christmas and Valentine's Day holidays. There is no material ongoing annual revenue impact from this exit outside of future fourth quarters. /

• Q: How far along is the company's turnaround, when will it start aggressively marketing new franchises, and what limits faster franchise growth today? /

  A: Management says the turnaround is already far enough along that it is already actively marketing and selling new franchises, with 40 committed locations already in the pipeline, equal to 30% of the current total store base. The primary limit to faster growth is the availability of qualified, well-capitalized multi-unit developers that can open and operate regional networks of stores. Management is working to reduce store construction costs to improve franchisee ROI, which will help attract more qualified operators. /

• Q: What metrics does management use to evaluate the effectiveness of store remodels? /

  A: The primary metric measured is same-store sales growth, followed by product mix, profitability, average basket size, and average transaction value. Management also collects qualitative feedback from customer review platforms like Google and Yelp, and consistently finds that guests respond very positively to the updated store designs.