Noble Roman’s Last Gasp Effort to save its Franchise

I have previously criticized Noble Roman’s (OTC BB: NROM) for over-aggressively expanding and for management blaming its franchisees when those franchises failed. Noble Roman’s has now taken over six struggling Indianapolis-area stores from a franchisee in a bid to prove that its franchisees can operate profitably. This reeks of desperation, and it is also a repudiation of the company’s recent strategy of owning no stores. Also, Noble Roman’s did not file a form 8-k to announce the move, something that appears to be required giving the materiality of the takeover for Noble Roman’s shareholders. See Cory Schouten’s excellent article at the Indianapolis Business Journal for more details.

Noble Roman’s has also announced that it has retained an investment bank to seek ‘strategic options’ including selling itself. The one problem with this strategy is that Noble Roman’s is likely not worth its current market cap of $29 million. I do not believe there is any chance of the company finding a buyer willing to pay more than $1 per share. The company’s profit fell 31% from Q4 2006 to Q4 2007 and I believe it likely that few of the area developers will actually build out new stores. As no new franchises or area developers are added, profits will continue to fall; new franchise and area developer fees have recently comprised a large portion of Noble Roman’s revenues. If we use the Q4 numbers and annualize them, we see Noble Roman’s trading at a lofty 20x its expected 2008 profit. Why would anyone want to purchase a struggling restaurant chain at such a price when much more established restaurants are trading at prices such as Brinker’s [[eat]] 12x this year’s expected earnings?

From the 10k:

  Quarter Ended
                             ---------------------------------------------
           2007              December 31  September 30  June 30   March 31
           ----              -----------  ------------  -------   --------
                                  (in thousands, except per share data)
 Total revenue                 $ 2,673      $ 2,959     $ 3,080    $ 2,855
 Operating income                  738        1,198       1,233      1,239
 Income before income taxes        591        1,035       1,066      1,065
 Net income                        389          693         704        703
 Net income per common share
     Basic                         .02          .04         .04        .04
     Diluted                       .02          .03         .04        .04

                                       32
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                                            Quarter Ended
                             ---------------------------------------------
           2006              December 31  September 30  June 30   March 31
           ----              -----------  ------------  -------   --------
                                  (in thousands, except per share data)
 Total revenue                 $ 2,503      $ 2,372     $ 2,316    $ 2,296
 Operating income                1,047          933         858        810
 Income before income taxes        861          738         660        613
 Net income                        567          487         436        405
 Net income per common share
      Basic                        .04          .03         .03        .02
      Diluted                      .03          .03         .03        .02

Disclosure: I have no position in any company mentioned. I have a disclosure policy. After publication of this article I remembered that I bought (went long) and sold NROM four days prior to this article, losing a tiny bit of money and violating my disclosure policy by publishing this. I regret this error.

0 thoughts on “Noble Roman’s Last Gasp Effort to save its Franchise”

  1. what kind of stock writer are you???… you sell the stock than say “oops” and that you’re short the stock…
    if I didn’t know any better, they’re might be some lawyers sending you some interesting mail sooner than later

  2. Well, the only problem with that is that I was not short, I was long. And it was a day trade (on which I actually lost money, even though the stock ended up 20% that day). So for three days before this article I had no position in NROM. And I still don’t have any position in it. While I violated my own policy, I certainly did not violate any laws.

  3. Michael,
    Thank you for the column, I was happy to read it and it says a lot for many of the people that have had a less than positive encounter with Noble Roman’s. It seems as though the heat in NROM’s kitchen is turning up.

  4. Patrick & Sandy:

    I’m not a stock market expert but I do have 20 yrs in franchising. Michael makes some pretty astute observations about Noble Roman’s. Most financial writers don’t have a clue as to the internal dynamics of a troubled franchise chain. I’ll give him a tip of the hat for that.

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