10-Q: BAB, Inc. Q2 2026 Earnings Show Revenue Dip, Profit Growth

BAB, Inc. reported a slight decrease in total revenue for Q2 2026 compared to the prior year, but saw an increase in net income and earnings per share.

Summary

• For the three months ended May 31, 2026, BAB, Inc. reported a net income of $186,882, an increase from $154,292 in the same period of 2025.
• Total revenue for the quarter was $803,689, a slight decrease of 0.5% from $808,486 in the prior year's quarter.
• Royalty fee revenue increased by 1.6% to $520,020, while franchise fee revenue saw a significant jump of 75.0% to $7,117.
• Licensing fees and other income increased by 4.5% to $69,111, driven by gift card breakage revenue, though offset by decreases in sign shop and settlement revenue.
• Marketing fund revenues decreased by 8.8% to $207,441, but this was matched by a corresponding decrease in marketing fund expenses, resulting in no impact on net income.
• Total operating expenses decreased by 8.6% to $556,262, primarily due to lower payroll and marketing fund expenses.
• For the six months ended May 31, 2026, net income was $306,051, up from $270,559 in the same period of 2025.
• Total revenue for the six-month period decreased by 2.5% to $1,527,352.
• Royalty fee revenue for the six months increased by 1.8% to $985,908.
• Licensing fee and other income decreased by 13.6% to $120,872.
• Operating expenses for the six months decreased by 7.5% to $1,127,179.
• Basic and diluted earnings per share remained at $0.04 for the six-month period, consistent with the prior year.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this filing as moderately positive, with solid net income growth and effective cost control despite a slight dip in overall revenue, indicating a stable and resilient business model.

Positives

• Net income increased by 21.1% to $186,882 for the three months ended May 31, 2026, compared to the same period in 2025.
• Net income for the six months ended May 31, 2026, increased by 12.8% to $306,051 compared to the prior year.
• Royalty fee revenue showed consistent growth, increasing by 1.6% for the quarter and 1.8% for the six-month period.
• Franchise fee revenue saw a substantial increase of 75.0% for the quarter and 17% for the six-month period.
• Licensing fees and other income increased by 4.5% for the quarter, driven by gift card breakage revenue.
• Total operating expenses decreased by 8.6% for the quarter and 7.5% for the six-month period, indicating cost control.
• Working capital increased to $1,974,000 at May 31, 2026, from $1,733,000 at May 31, 2025.
• Unrestricted cash increased to $2,215,397 at May 31, 2026, from $2,048,454 at May 31, 2025.
• Cash provided by operating activities increased significantly to $464,139 for the six months ended May 31, 2026, from $285,714 in the prior year.

Negatives

• Total revenue for the three months ended May 31, 2026, decreased by 0.5% to $803,689 compared to the prior year.
• Total revenue for the six months ended May 31, 2026, decreased by 2.5% to $1,527,352 compared to the prior year.
• Marketing fund revenues decreased by 8.8% for both the three-month and six-month periods.
• Licensing fee and other income decreased by 13.6% for the six-month period.
• The number of operating units decreased slightly, with 63 franchisee-owned and licensed stores open at May 31, 2026, compared to 65 at May 31, 2025.

Risks

• The company's ability to attract new franchisees.
• The continued success of current franchisees.
• The effects of competition on franchisees and consumer acceptance of products in new and existing markets.
• Fluctuation in development and operating costs.
• Brand awareness.
• Availability and terms of capital.
• Adverse publicity.
• Acceptance of new product offerings.
• Availability of locations and terms of sites for store development.
• Food, labor, and employee benefit costs.
• Changes in government regulation (including increases in the minimum wage).
• Regional economic and weather conditions.
• The hiring, training, and retention of skilled corporate and restaurant management.
• The integration and assimilation of acquired concepts.

Future Outlook

The company's future outlook is not explicitly detailed with forward-looking financial guidance. However, the company continues to declare quarterly cash distributions/dividends and will analyze its ability to pay them on a quarterly basis.

Management Comments

• Management believes that the disclosures are adequate to make the information presented not misleading.
• Management considers its relations with its employees to be good.
• Management continues to review expenses and control costs in a time of rising costs.
• Management does not believe that there are any recently issued and effective or not yet effective accounting pronouncements as of May 31, 2026 that would have or are expected to have any significant effect on the Company's financial position, cash flows or income statement.
• Management has evaluated the effectiveness of disclosure controls and procedures and concluded they are effective.
• Management has disclosed to auditors and the audit committee all significant deficiencies and material weaknesses in internal control over financial reporting and any fraud involving management or employees with a significant role in internal control.

Industry Context

StockSavvy.ai notes that BAB, Inc.'s performance in Q2 2026, with a slight revenue dip but profit growth, reflects a common trend in the fragmented quick-service restaurant and franchise sector where operational efficiency and cost management are crucial for profitability amidst fluctuating consumer demand and rising costs.

Comparison to Industry Standards

• The company's effective tax rate of 28.1% is within the typical range for U.S. corporations, though specific industry benchmarks for franchise businesses can vary.
• The increase in royalty fee revenue, despite a slight overall revenue decline, suggests a resilient core business model, which is a positive indicator compared to businesses heavily reliant on initial franchise fees.
• The decrease in operating expenses, particularly payroll and marketing, indicates a focus on efficiency, a strategy often employed by mature franchise systems to maintain or improve margins.
• The company's cash distribution policy, while discretionary, aligns with practices of established franchise companies that aim to return value to shareholders when financially prudent.

Corporate Governance

Legal Proceedings

• The company may be subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Management does not believe the outcome of any such proceedings will have a material effect on its financial position. No pending or threatened proceedings or claims are known to the company.

Related Party Transactions

• The company has a minority interest in Athletes HQ Systems, Inc. (AHQ), which was issued as compensation for consulting services and recorded at $2,250, representing a 15% ownership interest. This investment is considered immaterial and has not been subsequently adjusted to fair market value.

Stakeholder Impact

• Shareholders: Continued declaration of cash distributions/dividends indicates a commitment to returning value, though the amount and frequency are discretionary.
• Employees: Management considers employee relations to be good, with no collective bargaining agreements in place.
• Franchisees: The company continues to support franchisees through royalty fee structures and marketing fund services. A slight decrease in operating units may indicate challenges for some franchisees.
• Vendors/Suppliers: The company receives fees and rebates from vendors on product purchases by franchisees, indicating a symbiotic relationship.

Next Steps

• The company will continue to analyze its ability to pay cash distributions/dividends on a quarterly basis.
• The company will adopt ASU 2023-09 for income tax disclosures for the fiscal year ending November 30, 2026.
• The company will adopt ASU 2025-05 for measurement of credit losses for accounts receivable and contract assets for the fiscal year ending November 30, 2027.

Key Dates

Recommendation

BAB, Inc. demonstrates resilience with growing net income and EPS despite a slight revenue decline, supported by strong cost management and consistent royalty fee growth. However, the lack of significant growth drivers and a slight decrease in operating units suggest a steady but not rapidly expanding business. Therefore, a 'hold' recommendation is appropriate, pending signs of renewed top-line growth or expansion.

Keywords

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