Franchise Group, Inc. Announces Second Quarter Fiscal Year 2023 Financial Results
Franchise Group, Inc. announces financial results for Q2 2023, with total reported revenue of $1.0 billion and net loss of $50.8 million. The Company has six reportable segments. The Series A Preferred Stock will be redeemed at $25.00 per share.
Positive
Franchise Group reports total revenue of $1.0 billion for Q2 2023
Adjusted EBITDA for Q2 2023 is approximately $53.9 million
Negative
Franchise Group experiences a net loss of $50.8 million for Q2 2023
08/08/2023 - 04:01 PM
DELAWARE, Ohio, Aug. 08, 2023 (GLOBE NEWSWIRE) -- Franchise Group, Inc. (NASDAQ: FRG) (“Franchise Group,” “FRG” or the “Company”) today announced the financial results for its fiscal second quarter ended July 1, 2023. For the second quarter of fiscal 2023, total reported revenue for Franchise Group was approximately $1.0 billion , net loss from operations was approximately $50.8 million or $1.50 per fully diluted share, Adjusted EBITDA was approximately $53.9 million and Non-GAAP EPS was a loss of $0.22 per share. On July 1, 2023, total cash on hand was approximately $106.3 million and outstanding term debt was approximately $1.4 billion .
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 For the Six Months Ended July 1, 2023 July 1, 2023 Adjusted Net Adjusted Net Revenue EBITDA Income/(Loss) Revenue EBITDA Income/(Loss) (In thousands) (In thousands) American Freight $ 203,427 $ (16,378 ) $ (27,362 ) $ 439,989 $ (23,919 ) $ (121,221 ) Vitamin Shoppe 304,727 35,316 12,388 626,429 70,435 24,280 Pet Supplies Plus 332,783 27,297 6,929 666,854 56,921 14,688 Buddy's 13,819 3,723 1,002 28,786 8,229 2,726 Sylvan 11,709 3,954 306 21,941 7,296 185 Badcock 172,221 1,537 (30,793 ) 359,508 5,843 (57,981 ) Corporate - (1,534 ) (13,266 ) - (4,892 ) (21,790 ) Total $ 1,038,686 $ 53,915 $ (50,796 ) $ 2,143,507 $ 119,914 $ (159,113 )
Redemption of Series A Preferred Stock As previously disclosed, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Freedom VCM, Inc., a Delaware corporation (“Parent”) and Freedom VCM Subco, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub shall merge with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Parent (the “Proposed Merger”). On July 19, 2023, in connection with the Proposed Merger, the Company issued a notice of redemption for all outstanding shares of the Series A Preferred Stock (the “Redemption”), which is contingent upon the successful completion of the Proposed Merger. The Series A Preferred Stock will be redeemed in cash at a redemption price equal to $25.00 per share plus any accrued and unpaid dividends from the last dividend payment date, if any, up to but not including the Redemption Date (the “Redemption Price”). The Redemption Price is expected to be paid on August 18, 2023 or such later date as the parties to the Merger Agreement may agree but in no event later than one business day following the effective time of the Proposed Merger (the “Redemption Date”).
In light of the Proposed Merger, the Company is not scheduling a conference call to discuss its quarterly financial results.
About Franchise Group, Inc.
FRANCHISE GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share count and per share data) July 1, 2023 December 31, 2022 Assets (Unaudited) (Unaudited) Current assets: Cash and cash equivalents $ 106,264 $ 80,783 Current receivables, net of allowance for credit losses of $(8,204) and $(4,106) , respectively 256,003 170,162 Current securitized receivables, net of allowance for credit losses of $(65,519) and $(57,095) , respectively 191,826 292,913 Inventories, net 746,753 736,841 Current assets held for sale 7,633 8,528 Other current assets 28,238 27,272 Total current assets 1,336,717 1,316,499 Property, plant, and equipment, net 238,922 223,718 Non-current receivables, net of allowance for credit losses of $(1,070) and $(892) , respectively 10,808 11,735 Non-current securitized receivables, net of allowance for credit losses of $(8,816) and $(7,705) , respectively 25,812 39,527 Goodwill 663,481 737,402 Intangible assets, net 111,432 116,799 Tradenames 222,703 222,703 Operating lease right-of-use assets 890,611 890,949 Investment in equity securities 5,977 11,587 Other non-current assets 65,398 59,493 Total assets $ 3,571,861 $ 3,630,412 Liabilities and Stockholders’ Equity Current liabilities: Current installments of long-term obligations, net $ 13,192 $ 6,935 Current installments of debt secured by accounts receivable, net 341,144 340,021 Current operating lease liabilities 179,250 179,519 Accounts payable and accrued expenses 407,543 376,895 Other current liabilities 34,827 40,541 Total current liabilities 975,956 943,911 Long-term obligations, excluding current installments 1,526,605 1,374,479 Non-current installments of debt secured by accounts receivable, net 44,423 107,448 Non-current operating lease liabilities 729,870 720,474 Other non-current liabilities 69,576 62,720 Total liabilities 3,346,430 3,209,032 Stockholders’ equity: Common stock, $0.01 par value per share, 180,000,000 shares authorized, 35,186,943 and 34,925,733 shares issued and outstanding at July 1, 2023 and December 31, 2022, respectively 352 349 Preferred stock, $0.01 par value per share, 20,000,000 shares authorized and 4,541,125 issued and outstanding at July 1, 2023 and December 31, 2022 45 45 Additional paid-in capital 310,654 311,069 Retained earnings (85,620 ) 109,917 Total equity 225,431 421,380 Total liabilities and equity $ 3,571,861 $ 3,630,412
FRANCHISE GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations Three Months Ended Six Months Ended (In thousands, except share count and per share data) July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues: Product $ 916,112 $ 952,009 $ 1,892,920 $ 1,931,173 Service and other 115,501 135,648 236,069 283,929 Rental 7,073 7,341 14,518 15,365 Total revenues 1,038,686 1,094,998 2,143,507 2,230,467 Operating expenses: Cost of revenue: Product 621,482 600,780 1,278,386 1,217,364 Service and other 8,634 8,732 18,213 17,395 Rental 2,507 2,741 5,133 5,603 Total cost of revenue 632,623 612,253 1,301,732 1,240,362 Selling, general, and administrative expenses 383,563 405,639 770,804 782,633 Goodwill impairment - - 75,000 - Total operating expenses 1,016,186 1,017,892 2,147,536 2,022,995 Income (loss) from operations 22,500 77,106 (4,029 ) 207,472 Other expense: Bargain purchase gain 6 3,581 6 3,514 Gain on sale-leaseback transactions, net - 49,854 - 49,854 Other, net (3,783 ) 12,853 (5,617 ) (9,122 ) Interest expense, net (83,364 ) (88,839 ) (170,493 ) (181,167 ) Income (loss) before income taxes (64,641 ) 54,555 (180,133 ) 70,551 Income tax expense (benefit) (13,845 ) 13,572 (21,020 ) 17,250 Income (loss) attributable to Franchise Group, Inc. $ (50,796 ) $ 40,983 $ (159,113 ) $ 53,301 Net income (loss) per share: Basic $ (1.50 ) $ 0.96 $ (4.66 ) $ 1.22 Diluted (1.50 ) 0.94 (4.66 ) 1.19 Weighted-average shares outstanding: Basic 35,177,146 40,356,299 35,089,660 40,331,855 Diluted 35,177,146 41,126,605 35,089,660 41,148,668
FRANCHISE GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended (In thousands) July 1, 2023 June 25, 2022 (Unaudited) (Unaudited) Operating Activities Net income (loss) $ (159,113 ) $ 53,301 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses for accounts receivable 45,743 56,840 Depreciation, amortization, and impairment charges 44,282 42,236 Goodwill impairment 75,000 - Amortization of deferred financing costs 5,788 12,032 Securitized financing costs 48,630 59,618 Stock-based compensation expense 2,829 10,853 Change in fair value of investment 5,611 10,855 Gain on bargain purchases and sales of Company-owned stores (42 ) (55,883 ) Other non-cash items 262 (2,182 ) Changes in other assets and liabilities (30,905 ) (238,903 ) Net cash provided by (used in) operating activities 38,085 (51,233 ) Investing Activities Purchases of property, plant, and equipment (28,760 ) (21,809 ) Proceeds from sale of property, plant, and equipment 3,379 240,558 Payments received on operating loans to franchisees (3,682 ) 1,000 Acquisition of business, net of cash and restricted cash acquired - (3,754 ) Net cash (used in) investing activities (29,063 ) 215,995 Financing Activities Dividends paid (49,806 ) (54,665 ) Issuance of long-term debt and other obligations 538,000 88,500 Repayment of long-term debt and other obligations (389,389 ) (358,172 ) Proceeds from secured debt obligations 133,398 130,556 Repayment of secured debt obligations (192,030 ) (166,653 ) Principal payments of finance lease obligations (3,180 ) (1,383 ) Payment for debt issue costs (17,393 ) (431 ) Cash paid for exercises/vesting of stock-based compensation, net (3,240 ) (190 ) Net cash provided by (used in) financing activities 16,360 (362,438 ) Net increase (decrease) in cash equivalents and restricted cash 25,382 (197,676 ) Cash, cash equivalents and restricted cash at beginning of period 81,250 292,714 Cash, cash equivalents and restricted cash at end of period $ 106,632 $ 95,038 Supplemental Cash Flow Disclosure Cash paid for taxes, net of refunds $ 4,048 $ 17,842 Cash paid for interest 67,075 42,013 Cash paid for interest on secured debt 43,414 48,506 Accrued capital expenditures 2,461 2,751 Capital expenditures funded by finance lease liabilities 14,147 -
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
For the Three Months Ended July 1, 2023 ($ In thousands) Buddy's Pet Supplies American Vitamin Sylvan Badcock Corporate Total Net income (loss) $ 1,002 $ 6,929 $ (27,362 ) $ 12,388 $ 306 $ (30,793 ) $ (13,266 ) $ (50,796 ) Add back: Interest expense 1,550 8,879 14,672 11,960 1,317 44,207 779 83,364 Income tax expense (benefit) 348 1,781 (9,200 ) 4,303 200 (10,555 ) (722 ) (13,845 ) Depreciation and amortization charges 823 6,746 3,940 6,665 2,015 1,057 19 21,265 Total Adjustments 2,721 17,406 9,412 22,928 3,532 34,709 76 90,784 EBITDA 3,723 24,335 (17,950 ) 35,316 3,838 3,916 (13,190 ) 39,988 Adjustments to EBITDA Executive severance and related costs - - (24 ) - - 48 - 24 Litigation costs and settlements - - 1,211 - 3 - - 1,214 Stock-based and long term executive compensation - 2,536 12 - 113 - 110 2,771 Corporate compliance costs - - - - - - - - Store closures - - 99 - - - - 99 Securitized accounts receivable interest income - - - - - (26,286 ) - (26,286 ) Securitized accounts receivable allowance for credit losses - - - - - 26,344 - 26,344 W.S. Badcock financing operations - - - - - (2,485 ) - (2,485 ) Right-of-use asset and long-term asset impairment - - 274 - - - - 274 Goodwill impairment - - - - - - - - Integration costs - 319 - - - - 12 331 Divestiture costs - - - - - - - - Acquisition costs - 107 - - - - 7,753 7,860 Loss on investment in equity securities - - - - - - 3,781 3,781 Acquisition bargain purchase gain - - - - - - - - Total Adjustments to EBITDA - 2,962 1,572 - 116 (2,379 ) 11,656 13,927 Adjusted EBITDA $ 3,723 $ 27,297 $ (16,378 ) $ 35,316 $ 3,954 $ 1,537 $ (1,534 ) $ 53,915
For the Six Months Ended July 1, 2023 ($ In thousands) Buddy's Pet Supplies American Vitamin Sylvan Badcock Corporate Total Net income (loss) $ 2,726 $ 14,688 $ (121,221 ) $ 24,280 $ 185 $ (57,981 ) $ (21,790 ) $ (159,113 ) Add back: Interest expense 2,966 17,165 28,264 23,132 2,548 95,581 837 170,493 Income tax expense (benefit) 947 5,102 (15,563 ) 8,433 241 (19,998 ) (182 ) (21,020 ) Depreciation and amortization charges 1,590 14,450 7,204 13,359 4,122 2,134 30 42,889 Total Adjustments 5,503 36,717 19,905 44,924 6,911 77,717 685 192,362 EBITDA 8,229 51,405 (101,316 ) 69,204 7,096 19,736 (21,105 ) 33,249 Adjustments to EBITDA Executive severance and related costs - (6 ) 366 1,185 - 48 - 1,593 Litigation costs and settlements - - 1,252 46 10 - - 1,308 Stock-based and long term executive compensation - 4,224 (22 ) - 190 - 2,829 7,221 Corporate compliance costs - - - - - - (4 ) (4 ) Store closures - - 117 - - - - 117 Securitized accounts receivable interest income - - - - - (56,871 ) - (56,871 ) Securitized accounts receivable allowance for credit losses - - - - - 48,339 - 48,339 W.S. Badcock financing operations - - - - - (5,607 ) - (5,607 ) Right-of-use asset and long-term asset impairment - 135 684 - - - - 819 Goodwill impairment - - 75,000 - - - - 75,000 Integration costs - 956 - - - - 24 980 Divestiture costs - - - - - 198 - 198 Acquisition costs - 207 - - - - 7,753 7,961 Loss on investment in equity securities - - - - - - 5,611 5,611 Acquisition bargain purchase gain - - - - - - - - Total Adjustments to EBITDA - 5,516 77,397 1,231 200 (13,893 ) 16,213 86,665 Adjusted EBITDA $ 8,229 $ 56,921 $ (23,919 ) $ 70,435 $ 7,296 $ 5,843 $ (4,892 ) $ 119,914
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 and six months ended July 1, 2023.
For the Three Months Ended For the Six Months Ended ($ In thousands except share count and per share data) July 1, 2023 July 1, 2023 Net income (loss) / Net income (loss) per diluted share $ (50,796 ) (1.44 ) $ (159,113 ) (4.53 ) Less: Preferred dividend declared (2,129 ) (0.06 ) (4,257 ) (0.12 ) Adjusted Net Income available to Common Stockholder (52,925 ) (1.50 ) (163,370 ) (4.66 ) Add back: Executive severance and related costs 24 - 1,593 0.05 Litigation costs and settlements 1,214 0.03 1,308 0.04 Stock-based and long term executive compensation 2,771 0.08 7,221 0.21 Corporate compliance costs - - (4 ) - Store closures 99 - 117 - Securitized accounts receivable interest income (26,286 ) (0.75 ) (56,871 ) (1.62 ) Securitized accounts receivable allowance for credit losses 26,344 0.75 48,339 1.38 W.S. Badcock financing operations (2,485 ) (0.07 ) (5,607 ) (0.16 ) Right-of-use asset and long-term asset impairment 274 0.01 819 0.02 Goodwill impairment - - 75,000 2.14 Integration costs 331 0.01 980 0.03 Divestiture costs - - 198 0.01 Acquisition costs 7,860 0.22 7,961 0.23 Loss on investment in equity securities 3,781 0.11 5,611 0.16 Acquisition bargain purchase gain - - - - Adjustments to EBITDA 13,927 0.39 8,664 0.25 Non-cash amortization of debt issuance costs 2,958 0.08 (29,456 ) (0.84 ) Amortization of acquisition-related intangibles 4,297 0.12 88,144 2.51 Securitized receivables interest expense 40,019 1.14 - - Tax impact (15,778 ) (0.45 ) 159,805 4.57 Impact of diluted share count assuming non-GAAP net income - - (3,566 ) (0.09 ) Total Adjustments to Net income (loss) 45,423 1.28 159,805 4.57 Non-GAAP Net Income / Non-GAAP diluted EPS $ (7,502 ) $ (0.22 ) $ (3,566 ) $ (0.09 ) Basic weighted average shares 35,177,146 35,089,660 Non-GAAP diluted weighted average shares outstanding 35,177,146 35,089,660
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, the proposed redemption of the Series A Preferred Stock and the Proposed Merger. 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.
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What is the total reported revenue for Franchise Group in Q2 2023?
The total reported revenue for Franchise Group in Q2 2023 is approximately $1.0 billion.
What is the net loss for Franchise Group in Q2 2023?
The net loss for Franchise Group in Q2 2023 is approximately $50.8 million.
What is the Adjusted EBITDA for Franchise Group in Q2 2023?
The Adjusted EBITDA for Franchise Group in Q2 2023 is approximately $53.9 million.
How many reportable segments does Franchise Group have?
Franchise Group has six reportable segments.
What is the redemption price for the Series A Preferred Stock?
The redemption price for the Series A Preferred Stock is $25.00 per share.
