Zacks Initiates Coverage of Rocky Mountain With Underperform Recommendation

Core Viewpoint - Zacks Investment Research has initiated coverage of Rocky Mountain Chocolate Factory, Inc. (RMCF) with an "Underperform" recommendation due to concerns over financial performance and operational challenges [1] Financial Performance - Rocky Mountain's gross margins have decreased from 5.1% in Q1 fiscal 2024 to (5.8)% in Q1 fiscal 2025, primarily due to rising raw material and labor costs [2] - Cash reserves have fallen from $2.1 million at the end of February 2024 to $0.6 million by the end of May 2024, indicating a decline in liquidity [7] - The company's line of credit increased from $1.3 million to $2 million in Q1 fiscal 2025, reflecting a growing reliance on debt [7] - The stock has underperformed compared to industry peers and the broader market, trading at low valuation multiples, which suggests a lack of market confidence in the company's recovery [8] Operational Challenges - The company faces production and supply chain inefficiencies despite over $3 million in capital expenditures aimed at improving efficiency [5] - Heavy reliance on the franchise network and limited e-commerce revenues pose additional challenges [5] - The competitive landscape of the U.S. confectionery market and shifting consumer preferences towards health and wellness products further complicate growth prospects [5] Positive Aspects - Rocky Mountain benefits from a well-recognized brand and a loyal consumer base, along with a resilient franchise network [3] - Partnerships with specialty retailers like Costco and co-branding with Cold Stone Creamery are expected to enhance brand exposure and drive traffic to franchise stores [3] Company Overview - Rocky Mountain, headquartered in Durango, CO, operates as an international franchisor and confectionery producer, with 115 licensee-owned and 152 franchised stores across 36 states and the Philippines as of February 29, 2024 [4]