Q3 2026 Earnings Call: Contradictions Emerge on Cocoa Margins, Capital Allocation, and Franchising Timelines

Date of Call: Jan 14, 2026

Financials Results

• Revenue: $7.5M, down 5% YOY from $7.9M
• EPS: negative $0.02 per share, improved from negative $0.11 per share prior year
• Gross Margin: 21.4% gross manufacturing margin, compared to 10% prior year and negative 0.6% previous quarter

Business Commentary:

Margin Improvement and Strategic Focus:

• Rocky Mountain Chocolate Factory reported a 21.4% gross manufacturing margin for Q3 2026, compared to 10% in the same quarter of the prior year and a negative 0.6% for the previous quarter.
• This improvement was driven by the company's "margin first" transformation strategy, including exiting low-margin revenue streams, implementing price adjustments, and achieving labor efficiencies.

Franchise Development and Growth:

• The company currently has 2 new stores under construction and 34 stores under recently negotiated area development agreements.
• This momentum is attributed to the company's refreshed brand direction and targeted digital marketing efforts, attracting well-capitalized and operationally sophisticated operators.

Cost Reduction and Efficiency:

• Total costs and expenses improved to $7.5 million, down from $8.6 million in the same quarter last year.
• Savings were realized across nearly all areas of operations due to the elimination of temporary labor, improved production scheduling, and SKU rationalization.

Equity Financing and Debt Reduction:

• The company completed a $2.7 million equity capital raise, allowing it to pay down $1.2 million of debt.
• The strengthened balance sheet provides greater flexibility for investing in operations, franchise development, and technology initiatives.

Cocoa Price Impact and Future Outlook:

• The company locked in chocolate prices at favorable rates, with cocoa prices recently decreasing to $5,000 per metric ton for a portion of their annual consumption.
• The reduction in cocoa prices is expected to provide a margin tailwind, contributing to future profitability.

Sentiment Analysis:

Overall Tone: Positive

• Management describes Q3 as 'an important inflection point' with 'meaningful improvement in gross profit and margin.' They state actions are 'foundational to restoring long-term sustainable growth and shareholder value creation' and express being 'more resilient' with a 'clear path' to margin expansion.

Q&A:

• Question from Doug Garber (Westport Alpha): Can you talk about the 34 new stores, the agreement there and the pace of deployment and what else you have in the pipeline for other areas and what you're targeting for store growth in the future?
  Response: 34 area development agreements are with 4 franchisees; rollout is measured but accelerating, with stores required within 3-4 years and completed within 4-5 years. More agreements are in the queue.

• Question from Doug Garber (Westport Alpha): How have you lined up the financing for these stores? Do the existing owners have liquidity or debt facilities or equity lined up to execute this plan?
  Response: Partners are well-capitalized and financially sophisticated, minimizing the need for significant debt.

• Question from Doug Garber (Westport Alpha): On the profitability, I'm trying to understand the cocoa price impact as that has come down and how much more of a margin tailwind that will be as the prices normalize... how much more margin expansion do you expect?
  Response: Cocoa/chocolate price declines are expected to provide a margin tailwind, with recent purchases locked in at favorable prices. The company does not quantify the impact.

• Question from Doug Garber (Westport Alpha): On the balance sheet, you've added equity now twice. Where are we in that journey of recapping the balance sheet...? And where are you trying to take that in the future?
  Response: Next capital allocation leg will focus on reducing debt and investing in the company using free cash flow, not additional equity issuance.

• Question from Peter Sidoti (Sidoti & Company, Inc.): When do you expect the accelerated franchising effort to begin showing up on the top line?
  Response: New stores take ~3 years to mature; revenue from new stores is not expected to be dramatic in 2026 but will show up later. Focus also includes increasing same-store sales and penetrating specialty markets with appropriate margins.

• Question from Peter Sidoti (Sidoti & Company, Inc.): What's the biggest obstacles you now feel that you're facing when looking at growing the business?
  Response: Primary obstacle is execution - executing profitably, growing the top line primarily through the franchise system, and realizing remaining cost savings.

Contradiction Point 1

Cocoa Price Impact on Margins

Different statements on the expected margin tailwind from declining cocoa prices.

What impact will declining cocoa prices have on profitability and margins, and what margin tailwind is expected as prices normalize? - Doug Garber (Westport Alpha)

2026Q3: As cocoa/chocolate prices decline, a margin tailwind is expected, though the exact impact has not been quantified. - [Jeffrey Geygan](CEO)

How are you assessing potential margin benefits, timing, hedging strategies, and supplier cost impacts as cocoa prices decline from record highs? - Sean Mansouri (Elevate Ir)

2026Q2: Cocoa prices have dropped... This should lead to meaningful margin improvement over time as chocolate is a 40% raw material cost component. - [Jeffrey Geygan](CEO) & [Carrie Cass](CFO)

Contradiction Point 2

Capital Allocation Strategy

Contradiction on the use of equity financing for recapitalization.

What is your current progress in recapitalizing the balance sheet, and what are your future plans for it? - Doug Garber (Westport Alpha)

2026Q3: The next leg of the capital allocation plan is expected to focus on reducing debt and investing in the company, primarily using free cash flow rather than additional equity issuance. - [Jeffrey Geygan](CEO)

How long will the cash burn continue, and will equity financing be needed? - Peter Sidoti (Sidoti & Company, Inc.)

2026Q2: The company does not expect to continue cash burning over the next 12 months. Any capital raise would be at the Board of Directors' discretion. - [Jeffrey Geygan](CEO)

Contradiction Point 3

Financing Responsibility for New Stores

Contradiction on whether the company or franchisees handle financing for new stores.

How are the existing owners lining up financing for the stores—through liquidity, debt facilities, or equity? - Doug Garber (Westport Alpha)

2026Q3: Financing is handled by the franchisees... minimizing the need for significant debt. - [Jeffrey Geygan](CEO)

How do you determine quarterly price adjustments and prevent pricing fatigue with franchisees and consumers? - Sean Mansouri (External Investor Relations Adviser)

2025Q4: The company will provide adequate notice to franchisees... any cost reductions or increases (e.g., cocoa prices) will be passed on to maintain a target margin. - [Carrie Cass](CFO)

Contradiction Point 4

Timeline for Franchising Impact on Revenue

Contradiction on when new franchise store revenue will significantly contribute to the top line.

When will the accelerated franchising effort start impacting revenue? - Peter Sidoti (Sidoti & Company, Inc.)

2026Q3: New store revenue growth is expected to be minimal in 2026 but should show more impact in the following year. - [Jeffrey Geygan](CEO)

What is your current status in the rebranding process and the response to the new store's brand refresh? - Sean Mansouri (External Investor Relations Adviser)

2025Q4: Feedback on the new brand elements has been fantastic... The company is proceeding with permitting for a flagship location... - [Jeffrey Geygan](CEO)

Contradiction Point 5

Primary Business Obstacle

Shift in stated primary obstacle from operational execution to franchise system growth.

What's the main challenge in growing the business? - Peter Sidoti (Sidoti & Company, Inc.)

2026Q3: The primary obstacle is executing profitably, which involves improving operational efficiency and growing the top line primarily through the franchise system. - [Jeffrey Geygan](CEO)

How are you building the franchise acquisition strategy and improving overall processes to support both new and existing franchisees? - Doug Garber (Westport Alpha)

2026Q1: The strategy prioritizes **expanding with existing franchisees** who meet high criteria... To support current franchisees, the company employs **five business consultants** for semiannual on-site visits... - [Jeffrey Geygan](CEO)