Editor’s note: This column is part of our Best Stocks for 2015 contest. Rick Rouse’s pick for the contest is Rave Restaurant Group (RAVE).
Rave Restaurant Group (RAVE) reported earnings last week, and shares have fallen 10% since the Sept. 25 open.
At first glance, there seemed to be a little confusion regarding the company’s numbers, as some reports had RAVE losing 6 cents per shares, while other financial reports pegged the loss at 5 cents a share.
A few estimates had factored in a loss of 5 to 6 cents a share for the company, but there is very little coverage of the stock on Wall Street.
Revenues for the quarter were $3 million higher than forecasts after Rave posted quarterly revenue of $13.9 million. I always look at revenue numbers of a company more than an EPS miss or beat. On the surface, the company matched or beat expectations by a penny on the top line, with sales topping expectations by more than 30%.
For fiscal year 2015, Rave lost 19 cents per share, with 2 cents coming from discontinued operations. This matched the 2014 loss of 17 cents from continued operations, with discontinued operations accounting for another penny loss.
Some reports have the company’s loss at 18 cents for 2015 versus 17 cents last year. I went through the Rave’s 10-K report over the weekend to clarify the misconception.
RAVE Stock Isn’t Done Yet
Total revenues for 2015 from its two restaurant concepts, Pie Five Pizza and Pizza Inn, came in at $48.2 million versus $42.2 for fiscal year 2014. The losses totaled $1.84 million for the year, compared to $1.57 million in 2014.
The company continues to expand at a rapid pace, which explains the year-to-year losses. I still expect Rave to be profitable next summer, as its cash flow should start to cover the one-time costs of opening new restaurants.
The company owns 24 Pie Five restaurants and two Pizza Inn units. It has franchised an additional 30 units that are already opened for a total of 54 Pie Five stores now operating. There are 177 domestic franchised Pizza Inn restaurants, bringing the total number of stores under Rave’s umbrella to 233.
Although the Pizza Inn franchises are showing improvement, they are still a turnaround project. For the quarter, Pizza Inn grew sales 0.2% — a tiny fraction of the full-year 4.1% increase.
The real story behind the company’s growth will be Pie Five, which expects 500 units over the next five years. I have said this number could approach 750 stores given the explosive multi-unit deals they continue to sign. Pie Five stores had same-store sales growth of 6.7% for the recently ended quarter and more than 11% for the year.
The technical picture is still bearish on RAVE, with possible risk to $8 over the near-term. I would be shocked if shares test $7, but the possibility is there if the small caps go into correction mode.
I wouldn’t back the truck up if you don’t already own the stock, but I would start warming it up. At current levels, there is another $1 or $2 of downside risk, but another $8 to $10 of upside reward during the next six to 12 months.
Short-term support at $8.75 to $9 held on Friday following a test to $8.88. There is risk to $8.50 or $8 on a close below $8.75, and resistance is at the $9.50 to $10 level.
It’s not going to be smooth sailing from now until the end of the year, but RAVE stock remains in solid position.
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