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Groove Portfolio Focus Stock #3
RAVE Restaurant Group(Nasdaq: RAVE)
Price $8.18
Market Cap $70m

Rapidly Growing Fast Casual Pizza Concept Overlooked By Investors Due to Focus on Slow Growth Legacy Brand

We are adding Pizza Inn / Rave Restaurant Group (Nasdaq: RAVE) to the GrooveVC portfolio and recommend that community members consider adding it to their long term investment portfiolio after consulting with their financial advisors about the suitability of such an investment.

While there is obviously execution risk inherent in such a rapidly growing company, we believe that the current market cap significantly undervalues the rapidly growing Pie 5 division and the potential for a liquidity event that better allows for more rapid growth and allows investors to invest specifically in the growing Pie5 segment. We believe this could occur in the next 12-18 months and its likelihood will increasingly be reflected in PZZI's stock price. We believe the company's growth over the next 12 months combined with the growth of the space generally and the factors below will make this possible -

1) Revenue run rate by end of FY 2015 should be in $100m range driven by new company owned and franchised store openings and same store sales increases.

2) Pie 5 will likely be nearing 100 stores by end of cy 2015 if store count grows as fast in the second half of the CY as they are projected to grow in the first half.

3) Investor enthusiasm for fast casual concepts has been very high, leading to stratospheric trading valuations post offering.

4) Fast casual pizza is in its early stages and investors will see enormous growth over the next two years with hundreds of stores opening all over the US

5) The company and its franchisees are now in hyper growth mode, with new Pie5 openings at a pace in the range of one per week for the next six months. The impact of this on the company's revenue and bottom line should be huge, as it affects each of the three components of revenue -

A) Norco Food Sales - the new Pie5's are performing at a much higher sales level than the old Pizza Inns and somewhat higher than the existing Pie5's most of which operate as either single stores in a market or are in the uber competitive Dallas market. Some of these stores are averaging close to $3k in sales per day. The effect on Norco will be substantial, as that revenue item should grow dramatically over the next 3-4 years

B) Franchise Fees - this figure will be scaling rapidly because its two components are the fee that is paid when a new store opens and then a % of each new store's sales. With all these stores conservatively generating around $750k+ per year + new stores opening, the company would add $40 - $50k per year per store. This figure could double from the year ended June 30 vs the year ending June 30, 2015 and accelerate from there.

C) Company O&O Store Sales - Should scale higher rapidly due to the company's plan to aggressively open new stores in several new cities. At the conservative average of $750k revenue per year per store, the O&O revenue will scale higher quickly as the new stores start to open and the growth in 2015 should easily exceed 50% based on the scheduled roll out and the growth rate should accelerate going forward.

PZZI is in a sweet spot in terms of growth and this will increasingly be recognized by investors and reflected in its market cap. The company has zero debt and has recently raised the capital necessary to open new company owned locations by employing a unique " At the Market" stock offering approach. While the increased supply and dilution inherent in a stock sale has kept the price in check, we stiil believe the current market cap in the $70m range largely reflects a company that is still perceived to be an old slow-to-no growth Pizza chain due to its name (which will be changing soon to Rave Restaurant Group) reflecting the legacy brand and lack of Wall Street coverage or anyone to call attention to ths developing story. The fast casual pizza segment will experience astronomical growth over the next 3-4 years and we believe RAVE and Pie 5 stand to be one of the big winners in the space. GrooveVC investors would do well to start establishing a position before the RAVE story is discovered by the Street and before investors realize the value that could be created for RAVE shareholders in a Pie5 spin off.



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