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Spicy
Pickle's Annual Numbers: Apples to Oranges |
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For
what it's worth, Spicy Pickle Franchising unveiled their Q4 and full-year
numbers a few days ago. We pose it like that just to  make
this point - the 'then and now' snapshot doesn't necessarily have
a lot of meaning.
Say what?
Don't get us
wrong...in the end it's always about results. Our
message is just how this franchise model - in its early growth stages
-
doesn't exactly lend itself to meaningful comparisons.
We'll look at
the numbers today, and even add in the context needed to give them some
meaning.
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Spicy
Pickle's Annual Numbers |
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Before assigning
any meaning to them, let's just summarize the key highlights from Spicy
Pickle's (OTCBB:
SPKL) recently-filed 10-K.
 For
the year-ending on December 31st 2007, Spicy Pickle generated $1.27 million
in revenue, versus $892K for 2006. The net loss came in at $3.6 million
(which was no surprise), compared to a loss of $1.8 million in 2006.
The details,
though,
tell the true story.
Expenses went
up fairly evenly across the board, save one...'investor relations'
was an all new category. Spicy Pickle spent about $731K in investor relations
- a good expense in the grand scheme of things.
And, the company
had bakery and company-owned-restaurant sales in 2006 that they didn't
have in 2007....a $360K hit on the sales total.
If the total
loss seems intimidating, don't let it. This is all pretty typical for a
young company that only recently went public. In fact, the most
recent fund-raising effort largely negates our big worries. They've
now got $5.4 million in cash, compared to $1.2 million in cash at the end
of 2006. This should be plenty of money for them to go the distance
between now and the point in time when they can start creating a positive
net cash flow.
By the way,
the reason we're hesitant to make a 'then and now' comparison...they
had 36 stores up and running as of the end of 2007, but only about half
that number at the end of 2006. They could reasonably double the number
again in 2008. Overhead and fixed costs, however, should roughly stay the
same.
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Spicy
Pickle's Quarterly Numbers |
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Another reason
a 'then and now' comparison is tough to come up with is rooted in
when
the company books franchise fees (not royalties) as revenue. They
don't count them until that store is actually open ...either a $17K
or $35K bump. That's a one time event though, and could overstate things
if assumed it was recurring revenue.
 On
the other hand, once a store is open - even if in the middle
of the quarter - it does produce recurring revenue. If
the restaurant wasn't operating as of the first day of the quarter, recurring
revenue may be understated for the time period.
Both are good
to have, but for last quarter, the company is booking a big chunk of change
from franchise fees rather than royalties - thanks to rapid expansion.
As more units are added, the bulk of sales will migrate over to the royalty
side of the business.
Just for a little
perspective on how fast Spicy Pickle is growing quarter by quarter...
As of the end
of March 2007, there were 19 operational restaurants. By the end of June
there were 24. They started October with 30 stores up and running, and
ended December with 36 operational restaurants.
Remember, the
average store contributes about $50K in revenue each year, and it's
high-margin revenue. The build-up of recurring revenue centers is more
important than the top line between then and now. With that in mind...
If you're looking
to compare Spicy Pickle to other companies on the basis of its sales totals,
you may not find a very helpful comparison. Even compared to similar organizations
(restaurants), the company's top line will never look quite high enough...that's
just the nature of a franchise model.
The key here
for investors is the bottom line. Those royalties are usually very
high margin contributions. Once fixed costs are met, most everything
else in the way of cash flow is very profitable. So again, earnings are
the key.
 The
company isn't there yet though, so even that's tough to do right
now. Give it sometime ...perhaps by the end of the year, or even sooner,
for a positive cash flow. It takes a little conjecture, but that's what
we've been doing since September.
As for the stock
in the meantime, SPKL has fared about as well as the rest of the market.
The bulls seem
to have drawn their short-term line in the sand at 80 cents; the
stock has made lows for four of the last ten trading days there. That's
not to say the final low and rebound point will be 80 cents - just
a notification that we've seen an interesting amount of support around
that mark.
Many traders
would look at this chart and actually say the 71 cent mark is a likely
low point. Why? There's a lingering gap there way back from
September 24th. Charts have a way of cleaning up untidiness, and from the
current trading level it wouldn't take much more to clean up this last
little bit.
Of course, the
move may well also be a buy-trigger for those same traders.
Regardless,
while properly timing any entry for an investment is the equivalent to
winning a battle, winning the war will eventually depend on the
company's success and longevity. The progress (i.e. store openings, which
intrinsically means cash flow) of Spicy Pickle is still the key.
To that end,
they've got 36 stores open now, and 92 more on the way within the foreseeable
future.
The end of the
quarter - which was today - is a great time for us to update our
economic charts and sector rankings. Look for that edition later on this
week. .
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Updated: 3:10 pm PST (23:10 GMT), November 20, 2008
