Rocky Mountain Chocolate Factory Signals Margin-First Turnaround

Rocky Mountain Chocolate Factory ((RMCF)) has held its Q3 earnings call. Read on for the main highlights of the call.

Rocky Mountain Chocolate Factory Earnings Call Highlights Margin-First Turnaround

Management struck an optimistic but disciplined tone on Rocky Mountain Chocolate Factory’s latest earnings call, framing the quarter as a clear inflection point in a margin-first turnaround. While sales dipped as the company deliberately exited low-margin business, profitability metrics improved sharply: gross profit doubled, manufacturing margins rebounded, EBITDA turned positive, and costs moved lower. Coupled with fresh equity capital, technology investments, and growing franchise interest, executives argued that the structural recovery underway outweighs near-term revenue pressure and operational growing pains.

Gross Profit Doubles as Manufacturing Margin Rebounds

A central highlight was the dramatic improvement in profitability despite slightly lower revenue. Total product and retail gross profit climbed to $1.4 million in fiscal Q3 2026, up 100% from $0.7 million a year earlier. Manufacturing margin was the standout: it improved to 21.4%, compared with 10% in the prior-year quarter and a negative 0.6% in the immediately preceding quarter. Management attributed the turnaround to pricing actions, a more profitable product mix, and better labor efficiency on the factory floor. This sharp margin recovery is the backbone of the company’s “margin-first” strategy and signals that the worst of the manufacturing drag may be behind it.

EBITDA Turns Positive as Net Loss Narrows Sharply

Profitability metrics showed meaningful improvement at the bottom line. EBITDA swung to a positive $400,000 in Q3 2026, versus a negative $400,000 a year ago—an $800,000 turnaround. Net loss narrowed to just $200,000, or a loss of $0.02 per share, from an $800,000 loss, or $0.11 per share, in the same quarter last year. While the company is not yet consistently profitable, the combination of higher gross margins and lower operating expenses has substantially reduced cash burn. Management positioned this as evidence that the turnaround is progressing in line with plan, even as some operational inefficiencies and transition costs remain.

Cost Structure Overhaul Supports Margin-First Strategy

Rocky Mountain Chocolate Factory continued to reshape its cost base to support sustainable profitability. Total costs and expenses fell to $7.5 million from $8.6 million year over year, a reduction of about 12.8%. Management credited aggressive SKU rationalization—cutting hundreds of low-contributing items—alongside removal of temporary labor, large reductions in overtime, and better production scheduling. The company has also added a second production shift, helping improve throughput without relying on expensive overtime. Importantly, leaders believe there is still $500,000 to $1 million of additional savings to be captured from the current structure, suggesting further margin upside even without strong near-term revenue growth.

Balance Sheet Bolstered by Fresh Equity Capital

The company has strengthened its financial footing with a post-quarter $2.7 million equity raise. Of that, $1.2 million was used to pay down debt, while $1.5 million remains as working capital. Management emphasized that the improved balance sheet gives Rocky Mountain more flexibility to invest in operations, franchise development, and technology enhancements. For investors, the move reduces leverage risk and provides runway for the margin-focused turnaround, though it also modestly dilutes existing shareholders.

Franchise Development Gathers Momentum, but on a Long Horizon

Franchise development was a clear bright spot, signaling renewed confidence in the brand among operators. The company reported 34 stores under area development agreements and two new stores currently under construction, with growing interest from multi-unit, well-capitalized franchisees. Management stressed a focus on partner quality over pure store count, and noted that build-outs are expected to occur over a 4–5 year window, with initial stores typically opening within the first year of signing. While this pipeline supports a healthier, more scalable franchise system over time, leadership cautioned that the financial impact on the top line will unfold gradually rather than in an immediate surge of revenue.

Technology and Digital Investments Modernize the Brand

Rocky Mountain is investing heavily in technology and digital capabilities to drive sales and improve data visibility. All domestic locations now have unique store websites, and DoorDash white-labeled storefronts are live on a zero-commission model for franchisees, offering a more economical way to reach delivery customers. Roughly 120 stores are live on a new POS system, giving management and owners better insight into sales trends and operations. The company is also customizing its ERP system and developing a loyalty program, with rollout plans in progress. These digital upgrades are intended to lift average unit volumes (AUVs), support more targeted marketing, and strengthen the brand’s omni-channel presence.

Input Cost Tailwinds Emerging from Cocoa Hedging

Management sees a more favorable backdrop for key input costs, notably chocolate. The company expects margin tailwinds from the elimination of roughly a 10% cocoa tariff and a pullback in cocoa futures prices. Rocky Mountain has locked in nearly 20% of its anticipated annual chocolate consumption at what it views as attractive prices. While the company declined to disclose the exact percentage of raw materials that cocoa represents—limiting modeling precision—executives argued that these actions should help protect and expand margins as chocolate costs normalize.

Store-Level Performance Shows Strength in Key Locations

On-the-ground performance in select stores is encouraging. A remodeled company-owned store in Corpus Christi has delivered consistent growth, with several days exceeding $4,000 in sales. Management highlighted $2,800 in daily sales as a benchmark for a $1 million AUV location, suggesting that this store is tracking well above that threshold. New locations in Chicago and Charleston are also performing at or above expectations, with favorable daily sales trends. These examples support management’s thesis that remodels, better locations, and a refreshed store model can materially lift unit economics.

Intentional Revenue Decline Reflects Exit from Low-Margin Channels

Despite the profitability gains, total revenue slipped about 5.1% year over year, falling to $7.5 million from $7.9 million. Management was explicit that this decline is largely intentional, driven by exiting low- or negative-margin special and wholesale revenue streams. By pruning business that doesn’t meet return thresholds, the company is prioritizing profitability and brand health over near-term volume. While this weighs on reported sales today, executives argue it should yield a more profitable and resilient revenue base going forward.

Near-Term Profit Still Pressured by Transition Costs

The quarter’s results underscore that the turnaround is not complete. Rocky Mountain still posted a modest net loss of $200,000, and management expects continued near-term pressure as it transitions away from low-margin channels and works through production changes. Inefficiencies in production, startup costs for new processes, and some lingering operational friction are all weighing on results. Leadership framed these as temporary issues that should ease as the new manufacturing setup stabilizes and further cost savings are realized.

Operational Inefficiencies and Logistics Costs Remain a Drag

Ongoing operational inefficiencies and elevated input and freight costs remain headwinds. The company called out higher material and logistics expenses and production transition challenges that partially offset this quarter’s improvements in gross profit. While these pressures are not unique to Rocky Mountain, the company is still in the process of optimizing its supply chain and production flows. Management sees room to further streamline operations and capture additional margin, but investors should expect some volatility in quarterly results as these changes are implemented.

Franchise Growth Will Be Slow to Show in the Top Line

Even with strong interest from franchisees, the company is clear that new units will not deliver a rapid top-line inflection. Stores under area development agreements typically open within 3–4 years and are fully built out within 4–5 years. As a result, management does not expect significant revenue contribution from these units in 2026. Instead, the near-term focus remains on improving existing store performance, upgrading technology, and enhancing unit economics, with more meaningful franchise-driven growth expected over a multi-year horizon.

Selective Store Closures Support Brand Health but Pressure Revenue

Rocky Mountain is willing to shrink to grow stronger. The company is allowing underperforming locations to close where they no longer fit the refreshed brand or financial standards. While this strategy can reduce store counts and near-term revenue, management believes it is critical to protecting the brand image and improving average unit performance across the system. For investors, this means the company’s reported revenues may understate underlying health as weaker units exit and remaining stores become more productive.

Limited Disclosure on Raw Material Mix Adds Modeling Uncertainty

One point of tension for more detail-oriented investors is the lack of granular disclosure around input costs. Management declined to provide a specific breakdown of how much of its raw material basket is chocolate or cocoa, despite highlighting cocoa hedging and improved input-cost outlook. This leaves some uncertainty for those trying to model sensitivity to commodity moves, especially in a period of volatile cocoa prices. Nonetheless, the company maintains that its hedging strategy and tariff relief will be net positives for margins.

Guidance and Outlook: Margin-First Path to Profitability

Looking ahead, Rocky Mountain is guiding investors to focus on a “margin-first” journey to sustainable profitability rather than headline revenue growth. The company reiterated Q3 FY2026 results—$7.5 million in revenue, $1.4 million in total product and retail gross profit, a 21.4% gross manufacturing margin, $7.5 million in total costs, a $200,000 net loss, and $400,000 of positive EBITDA—as evidence that the strategy is working. Operationally, management targets maintaining a network of over 250 franchised and licensed locations, with two stores under construction and 34 under area development agreements slated to build out over 4–5 years. They highlighted a lease-to-open timeline of roughly six months, store-level benchmarks of $2,800 in daily sales for a $1 million AUV, ongoing SKU rationalization with another $500,000–$1 million in expected savings, and expanding deployment of the new POS and digital tools across the system. Remodels are slated to ramp after March 1, with most completed by October 2026 and nearly all within 24 months. With roughly 20% of annual chocolate needs hedged at favorable prices and a recent $2.7 million equity raise boosting liquidity, management expects continued margin expansion, rising AUVs, and a return to positive cash flow over the coming quarters, even as reported sales grow only modestly near term.

In sum, Rocky Mountain Chocolate Factory’s latest earnings call painted the picture of a company trading short-term revenue growth for a healthier, more profitable future. Margins are recovering, costs are coming down, and well-capitalized franchisees are lining up, even as operational inefficiencies, logistics costs, and deliberate channel exits keep a lid on near-term sales and profit. For investors, the story is increasingly about execution on cost savings, store remodels, and franchise build-outs—and whether the early signs of improved unit economics can compound into a durable, cash-generating specialty retail platform.