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Wiki Wiki Summary
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Risk Factors
ROCKY MOUNTAIN CHOCOLATE FACTORY INC Item 1A Risk Factors Ingredients Subject to the Price Fluctuations Several of the principal ingredients used in our products, including chocolate and nuts, are subject to significant price fluctuations
Although cocoa beans, the primary raw material used in the production of chocolate, are grown commercially in Africa, Brazil and several other countries around the world, cocoa beans are traded in the commodities market, and their supply and price are therefore subject to volatility
We believe our principal chocolate supplier purchases most of its beans at negotiated prices from African growers, often at a premium to commodity prices
Although the price of chocolate has been relatively stable in recent years, the supply and price of cocoa beans, and in turn of chocolate, are affected by many factors, including monetary fluctuations and economic, political and weather conditions in countries in which cocoa beans are grown
We purchase most of our nut meats from domestic suppliers who procure their products from growers around the world
Although we often enter into purchase contracts for these products, significant or prolonged increases in the prices of chocolate or of one or more types of nuts, or the unavailability of adequate supplies of chocolate or nuts of the quality sought by us, could have a material adverse effect on us and our results of operations
Suitable Sites for Franchised Stores at Reasonable Occupancy Costs Our expansion plans are critically dependent on our ability to obtain suitable sites at reasonable occupancy costs for our franchised stores and kiosks in the regional mall environment
There is no assurance that we will be able to obtain suitable locations for our franchised stores and kiosks in this environment at a cost that will allow such stores to be economically viable
Growth Dependent Upon Attracting and Retaining Qualified Franchisees Our continued growth and success is dependent in part upon our ability to attract, retain and contract with qualified franchisees and the ability of those franchisees to operate their stores successfully and to promote and develop the Rocky Mountain Chocolate Factory store concept and our reputation for an enjoyable in-store experience and product quality
Although we have established criteria to evaluate prospective franchisees and have been successful in attracting franchisees, there can be no assurance that franchisees will be able to operate successfully Rocky Mountain Chocolate Factory stores in their franchise areas in a manner consistent with our concepts and standards
Federal, State and Local Regulation We are subject to regulation by the Federal Trade Commission and must comply with certain state laws governing the offer, sale and termination of franchises and the refusal to renew franchises
Many state laws also regulate substantive aspects of the franchisor-franchisee relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees and regulating discrimination among franchisees in charges, royalties or fees
Franchise laws continue to develop and change, and changes in such laws could impose additional costs and burdens on franchisors
Our failure to obtain approvals to sell franchises and the adoption of new franchise laws, or changes in existing laws, could have a material adverse effect on us and our results of operations
Each of our Company-owned and franchised stores is subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located
Difficulties or failures in obtaining required licenses or approvals from such agencies could delay or prevent the opening of a new store
We and our franchisees are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements
Because a significant number of our employees are paid at rates related to the federal minimum wage, increases in the minimum wage would increase our labor costs
The failure to obtain required licenses or approvals, or an increase in the minimum wage rate, employee benefits costs (including costs associated with mandated health insurance coverage) or other costs associated with employees, could have a material adverse effect on us and our results of operations
13 _________________________________________________________________ Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies
A finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time, and could have a material adverse effect on us and our results of operations
Competition The retailing of confectionery products is highly competitive
We and our franchisees compete with numerous businesses that offer confectionery products
Many of these competitors have greater name recognition and financial, marketing and other resources than we do
In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees
Competitive market conditions could have a material adverse effect on us and our results of operations and our ability to expand successfully
Consumer Tastes and Trends The sale of our products is affected by changes in consumer tastes and eating habits, including views regarding consumption of chocolate
Numerous other factors that we cannot control, such as economic conditions, demographic trends, traffic patterns and weather conditions, influence the sale of our products
Changes in any of these factors could have a material adverse effect on us and our results of operations
Company Manufactured Products We believe that approximately 50prca of franchised stores’ revenues are generated by sales of products manufactured by and purchased from us, 40prca by sales of products made in the stores with ingredients purchased from us or approved suppliers and 10prca by sales of products purchased from approved suppliers for resale in the stores
Franchisees’ sales of products manufactured by us generate higher revenues to us than sales of store-made or other products
A significant decrease in the amount of products franchisees purchase from us, therefore, could adversely affect our total revenues and results of operations
Such a decrease could result from franchiseesdecisions to sell more store-made products or products purchased from third party suppliers
Inflation – Costs of Ingredients and Labor Inflationary factors such as increases in the costs of ingredients, energy and labor directly affect our operations
Most of our leases provide for cost-of-living adjustments and require us to pay taxes, insurance and maintenance expenses, all of which are subject to inflation
Additionally, our future lease costs for new facilities may reflect potentially escalating costs of real estate and construction
There is no assurance that we will be able to pass on our increased costs to our customers
Seasonality of Sales Our sales and earnings are seasonal, with significantly higher sales and earnings occurring during the Christmas and summer vacation seasons than at other times of the year, which causes fluctuations in our quarterly results of operations
In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sale of franchises
Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations