Franchise Group, Inc. Announces First Quarter Fiscal Year 2023 Financial Results


DELAWARE, Ohio, May 10, 2023 (GLOBE NEWSWIRE) -- Franchise Group, Inc. (NASDAQ: FRG) (“Franchise Group,” “FRG” or the “Company”) today announced the financial results for its fiscal first quarter ended April 1, 2023. For the first quarter of fiscal 2023, total reported revenue for Franchise Group was approximately $1.1 billion, net loss from operations was approximately $108.3 million or $3.16 per fully diluted share, Adjusted EBITDA was approximately $66.0 million and Non-GAAP EPS was $0.11 per share.   On April 1, 2023, total cash on hand was approximately $98.3 million and outstanding term debt was approximately $1.4 billion.

The Board of Directors approved a quarterly dividend of $0.46875 per share to the Company’s Series A Cumulative Perpetual Preferred stockholders. The cash dividend will be paid on or about July 17, 2023 to holders of record of the Company’s Series A preferred stock on the close of business on July 3, 2023.   FRG management was unable to recommend that the Board of Directors declare a regular quarterly common stock dividend this quarter due to restrictions in FRG’s credit agreements. FRG’s credit agreements permit dividends so long as the Company’s leverage ratio remains below a specified level, and the Company is currently in excess of this level.

The Company currently has six reportable segments: American Freight; The Vitamin Shoppe; Pet Supplies Plus; Buddy’s; Sylvan; and Badcock.

The following table summarizes Revenue, Adjusted EBITDA, and Net Income/(Loss) for each of these segments. Reconciliations of Adjusted EBITDA, Non-GAAP Net Income and Non-GAAP EPS to their respective most comparable GAAP measures, are included below under “Non-GAAP Financial Measures and Key Metrics.”

    
   For the Three Months Ended
   April 1, 2023
     Adjusted Net
   Revenue EBITDA Income/(Loss)
   (In thousands)
 American Freight $236,561 $(7,542) $(93,859)
 Vitamin Shoppe  321,702  35,120   11,892 
 Pet Supplies Plus  334,071  29,625   7,759 
 Buddy's  14,968  4,507   1,724 
 Sylvan Learning  10,232  3,338   (121)
 Badcock  187,287  4,306   (27,188)
 Corporate  -  (3,354)  (8,524)
 Total $1,104,821 $66,000  $(108,317)
        

Outlook
In light of today’s announcement and our first quarter results, Franchise Group is withdrawing its previous financial outlook for 2023.

Conference Call Information
In light of today’s announcement, Franchise Group will conduct a conference call later this morning at 8:30 A.M. ET to discuss its business and financial results for the fiscal 2023 first quarter. A real-time webcast of the conference call will be available on the Events page of Franchise Group’s website at www.franchisegrp.com. Dial in access is also accessible through the link on the website. Please register 5-10 minutes prior to the scheduled start time.

About Franchise Group, Inc.
Franchise Group is an owner and operator of franchised and franchisable businesses that continually looks to grow its portfolio of brands while utilizing its operating and capital allocation philosophy to generate strong cash flow for its shareholders. Franchise Group’s business lines include Pet Supplies Plus, American Freight, The Vitamin Shoppe, Badcock Home Furniture & more, Buddy’s Home Furnishings, Sylvan Learning and Wag N Wash. On a combined basis, Franchise Group currently operates over 3,000 locations predominantly located in the U.S. that are either Company-run or operated pursuant to franchising and dealer agreements.

 
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
     
(In thousands, except share count and per share data) April 1, 2023 December 31, 2022
Assets (Unaudited) (Unaudited)
Current assets:    
Cash and cash equivalents $98,266  $80,783
Current receivables, net of allowance for credit losses of $(3,038) and $(4,106), respectively  151,723   170,162
Current securitized receivables, net of allowance for credit losses of $(71,148) and $(57,095), respectively  290,367   292,913
Inventories, net  759,891   736,841
Current assets held for sale  7,633   8,528
Other current assets  29,610   27,272
Total current assets  1,337,490   1,316,499
Property, plant, and equipment, net  234,705   223,718
Non-current receivables, net of allowance for credit losses of $(1,064) and $(892), respectively  11,202   11,735
Non-current securitized receivables, net of allowance for credit losses of $(9,418) and $(7,705), respectively  38,437   39,527
Goodwill  663,466   737,402
Intangible assets, net  114,000   116,799
Tradenames  222,703   222,703
Operating lease right-of-use assets  910,269   890,949
Investment in equity securities  9,758   11,587
Other non-current assets  65,232   59,493
Total assets $3,607,262  $3,630,412
Liabilities and Stockholders’ Equity    
Current liabilities:    
Current installments of long-term obligations, net $11,771  $6,935
Current installments of debt secured by accounts receivable, net  412,862   340,021
Current operating lease liabilities  179,246   179,519
Accounts payable and accrued expenses  415,665   376,895
Other current liabilities  40,983   40,541
Total current liabilities  1,060,527   943,911
Long-term obligations, excluding current installments  1,394,320   1,374,479
Non-current installments of debt secured by accounts receivable, net  68,163   107,448
Non-current operating lease liabilities  741,174   720,474
Other non-current liabilities  65,431   62,720
Total liabilities  3,329,615   3,209,032
     
Stockholders’ equity:    
Common stock, $0.01 par value per share, 180,000,000 shares authorized, 35,148,564 and 34,925,733 shares issued and outstanding at April 1, 2023 and December 31, 2022, respectively  351   349
Preferred stock, $0.01 par value per share, 20,000,000 shares authorized and 4,541,125 issued and outstanding at April 1, 2023 and December 31, 2022  45   45
Additional paid-in capital  310,160   311,069
Retained earnings  (32,909)  109,917
Total equity  277,647   421,380
Total liabilities and equity $3,607,262  $3,630,412
     


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
     
     
  Three Months Ended
(In thousands, except share count and per share data) April 1, 2023 March 26, 2022
  (Unaudited) (Unaudited)
Revenues:    
Product $976,808  $979,164 
Service and other  120,567   148,282 
Rental  7,446   8,024 
Total revenues  1,104,821   1,135,470 
Operating expenses:    
Cost of revenue:    
Product  656,904   616,585 
Service and other  9,579   8,663 
Rental  2,626   2,861 
Total cost of revenue  669,109   628,109 
Selling, general, and administrative expenses  387,241   376,995 
Goodwill impairment  75,000   - 
Total operating expenses  1,131,350   1,005,104 
Income from operations  (26,529)  130,366 
Other expense:    
Bargain purchase gain  -   (67)
Other  (1,834)  (21,977)
Interest expense, net  (87,129)  (92,327)
Income (loss) before income taxes  (115,492)  15,995 
Income tax expense (benefit)  (7,175)  3,678 
Income (loss) attributable to Franchise Group, Inc. $(108,317) $12,317 
     
Net income (loss) per share:    
Basic $(3.16) $0.25 
Diluted  (3.16)  0.25 
     
Weighted-average shares outstanding:    
Basic  35,002,174   40,307,412 
Diluted  35,002,174   41,107,793 

 

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
     
     
  Three Months Ended
(In thousands) April 1, 2023 March 26, 2022
  (Unaudited) (Unaudited)
Operating Activities    
Net income (loss) $(108,317) $12,317 
Adjustments to reconcile net income to net cash provided by operating activities:    
Provision for credit losses for accounts receivable  20,327   15,103 
Depreciation, amortization, and impairment charges  21,851   22,033 
Goodwill impairment  75,000   - 
Amortization of deferred financing costs  2,830   6,379 
Securitized financing costs  27,000   29,801 
Stock-based compensation expense  2,719   5,447 
Change in fair value of investment  1,830   23,723 
Gain on bargain purchases and sales of Company-owned stores  -   (2,206)
Other non-cash items  (42)  (2,227)
Changes in other assets and liabilities  (23,511)  (101,227)
Net cash provided by operating activities  19,687   9,143 
Investing Activities    
Purchases of property, plant, and equipment  (14,219)  (9,752)
Proceeds from sale of property, plant, and equipment  1,166   2,554 
Acquisition of business, net of cash and restricted cash acquired  (3,682)  (3,930)
Net cash (used in) investing activities  (16,735)  (11,128)
Financing Activities    
Dividends paid  (25,698)  (27,315)
Issuance of long-term debt and other obligations  415,000   67,000 
Repayment of long-term debt and other obligations  (387,585)  (182,096)
Proceeds from secured debt obligations  132,151   57,358 
Repayment of secured debt obligations  (97,210)  (55,096)
Principal payments of finance lease obligations  (1,207)  (768)
Payment for debt issue costs  (17,393)  - 
Cash paid for exercises/vesting of stock-based compensation, net  (3,626)  (215)
Net cash provided by (used in) financing activities  14,432   (141,132)
Net increase (decrease) in cash equivalents and restricted cash  17,384   (143,117)
Cash, cash equivalents and restricted cash at beginning of period  81,250   292,714 
Cash, cash equivalents and restricted cash at end of period $98,634  $149,597 
Supplemental Cash Flow Disclosure    
Cash paid for taxes, net of refunds $1,562  $274 
Cash paid for interest  30,841   21,424 
Cash paid for interest on secured debt  23,757   16,830 
Accrued capital expenditures  2,229   3,177 
Capital expenditures funded by finance lease liabilities  12,741   - 
         

Non-GAAP Financial Measures and Key Metrics

Adjusted EBITDA, Non-GAAP Net Income and Non-GAAP EPS are financial measures that are not prepared in accordance with GAAP. Management believes the presentation of these measures is useful to investors as supplemental measures in evaluating the aggregate performance of the Company’s operating businesses and in comparing its results from period to period because they exclude items that the Company does not believe are reflective of its core or ongoing operating results. These measures are used by management to evaluate the Company’s performance and make resource allocation decisions each period. These metrics are also used in the determination of executive management's compensation. Adjusted EBITDA, Non-GAAP Net Income and Non-GAAP EPS should not be considered in isolation or as a substitute for net income or other income statement information prepared in accordance with GAAP and our presentation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies.

Management defines and calculates Adjusted EBITDA as net income (loss) from continuing operations before interest, income taxes, depreciation and amortization adjusted for certain non-core or non-operational items related to executive severance and related costs, stock-based compensation, shareholder litigation costs, corporate governance costs, accrued judgments and settlements, net of estimated revenue, store closures, rebranding costs, acquisition costs, inventory fair value step up amortization and prepayment penalty on early debt repayment. Adjusted EBITDA is a financial measure that is not prepared in accordance with GAAP.

Management defines and calculates Non-GAAP Net Income and Non-GAAP EPS as net income (loss) and net income (loss) per diluted share from continuing operations adjusted for non-core or non-operational items related to executive severance and related costs, stock-based compensation, non-cash executive compensation expense, shareholder litigation costs, prepayment penalties on early debt repayment, non-cash amortization of debt issuance costs, store closures, the Badcock segment’s in-house financing operations, rebranding costs, acquisition costs, inventory fair value step up amortization, and amortization of acquired intangible assets. Although amortization of acquired intangible assets is excluded from these non-GAAP measures, it is important for investors to understand that such intangible assets support revenue generation. Management excludes amortization of intangible assets because these are non-cash amounts for which the amount and frequency are significantly impacted by the timing and size of our acquisitions, which vary from period to periods and across companies. The tax effect on the related non-GAAP adjustments was calculated based on an estimated annual non-GAAP effective tax rate of 25.8%.

Reconciliation of Adjusted EBITDA
Below is the reconciliation of Net Income/(Loss) from continuing operations to Adjusted EBITDA for the three months ended April 1, 2023.

                 
  For the Three Months Ended April 1, 2023
($ In thousands) Buddy's Pet Supplies
Plus
 American
Freight
 Vitamin
Shoppe
 Sylvan Badcock Corporate Total
Net income (loss) $1,724 $7,759  $(93,859) $11,892 $(121) $(27,188) $(8,524) $(108,317)
Add back:                
Interest expense  1,417  8,286   13,592   11,172  1,227   51,374   61   87,129 
Income tax expense (benefit)  599  3,321   (6,363)  4,131  42   (9,444)  539   (7,175)
Depreciation and amortization charges  767  7,704   3,265   6,694  2,107   1,077   10   21,624 
Total Adjustments  2,783  19,311   10,494   21,997  3,376   43,007   610   101,578 
EBITDA  4,507  27,070   (83,365)  33,889  3,255   15,819   (7,914)  (6,739)
Adjustments to EBITDA                
Executive severance and related costs  -  (6)  390   1,185  -   -   -   1,569 
Litigation costs and settlements  -  -   40   46  7   -   -   94 
Stock-based and long term executive compensation  -  1,688   (34)  -  76   -   2,719   4,450 
Corporate compliance costs  -  -   -   -  -   -   (4)  (4)
Store closures  -  -   18   -  -   -   -   18 
Securitized accounts receivable interest income  -  -   -   -  -   (30,584)  -   (30,584)
Securitized accounts receivable allowance for credit losses  -  -   -   -  -   21,995   -   21,995 
W.S. Badcock financing operations  -  -   -   -  -   (3,122)  -   (3,121)
Right-of-use asset and long-term asset impairment  -  135   409   -  -   -   -   544 
Goodwill impairment  -  -   75,000   -  -   -   -   75,000 
Integration costs  -  637   -   -  -   -   12   649 
Divestiture costs  -  -   -   -  -   198   -   198 
Acquisition costs  -  101   -   -  -   -   -   101 
Loss on investment in equity securities  -  -   -   -  -   -   1,830   1,830 
Acquisition bargain purchase gain  -  -   -   -  -   -   -   - 
Total Adjustments to EBITDA  -  2,555   75,823   1,231  83   (11,513)  4,557   72,739 
Adjusted EBITDA $ 4,507 $ 29,625  $ (7,542) $ 35,120 $ 3,338  $ 4,306  $ (3,357) $ 66,000 
                 

Reconciliation of Non-GAAP Net Income and EPS

Below is the reconciliation of Net Income/(Loss) from continuing operations to Non-GAAP Net Income and Net Income/(Loss) from continuing operations per diluted share to Non-GAAP EPS for the three months ended April 1, 2023.

 
  For the Three Months Ended
($ In thousands except share count and per share data) April 1, 2023
     
Net income (loss) / Net income (loss) per diluted share $(108,317) $(3.09)
Less: Preferred dividend declared  (2,128)  (0.06)
Adjusted Net Income available to Common Stockholder  (110,446)  (3.16)
Add back:    
Executive severance and related costs  1,569   0.04 
Litigation costs and settlements  94   - 
Stock-based and long term executive compensation  4,450   0.13 
Corporate compliance costs  (4)  - 
Store closures  18   - 
Securitized accounts receivable interest income  (30,584)  (0.87)
Securitized accounts receivable allowance for credit losses  21,995   0.63 
W.S. Badcock financing operations  (3,121)  (0.09)
Right-of-use asset and long-term asset impairment  544   0.02 
Goodwill impairment  75,000   2.14 
Integration costs  649   0.02 
Divestiture costs  198   0.01 
Acquisition costs  101   - 
Loss on investment in equity securities  1,830   0.05 
Acquisition bargain purchase gain  -   - 
Adjustments to EBITDA  72,739   2.08 
Non-cash amortization of debt issuance costs  2,830   0.08 
Amortization of acquisition-related intangibles  4,367   0.12 
Securitized receivables interest expense  48,125   1.38 
Tax impact  (13,678)  (0.39)
Impact of diluted share count assuming non-GAAP net income  -   - 
Total Adjustments to Net income (loss)  114,383   3.27 
Non-GAAP Net Income / Non-GAAP diluted EPS $ 3,937  $ 0.11 
Basic weighted average shares    35,002,174 
Non-GAAP diluted weighted average shares outstanding    35,002,174 
     

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, projections, predictions, expectations, or beliefs about future events or results and are not statements of historical fact. Such statements may include statements regarding the Company’s results of operation and financial condition. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning or other statements concerning opinions or judgment of the Company or its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of the Company or matters pertaining to the proposed merger will not differ materially from any projected future results, performance, achievements or other matters expressed or implied by such forward-looking statements. Actual future results, performance, achievements or other matters may differ materially from historical results or those anticipated depending on a variety of factors, many of which are beyond the control of the Company. The Company refers you to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s Form 10-K for the fiscal year ended December 31, 2022, and comparable sections of the Company’s Quarterly Reports on Form 10-Q and other filings, which have been filed with the SEC and are available on the SEC’s website at www.sec.gov. All of the forward-looking statements made in this press release are expressly qualified by the cautionary statements contained or referred to herein. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its business or operations. Readers are cautioned not to rely on the forward-looking statements contained in this press release. Forward-looking statements speak only as of the date they are made and the Company does not undertake any obligation to update, revise or clarify these forward-looking statements, whether as a result of new information, future events or otherwise.

Investor Relations & Media Contact:
Andrew F. Kaminsky
EVP & Chief Administrative Officer
Franchise Group, Inc.
akaminsky@franchisegrp.com
(914) 939-5161