Franchise Group, Inc. Announces Second Quarter 2020 Financial Results

Rhea-AI Summary

Franchise Group (NASDAQ: FRG) reported its Q2 2020 results, showing total revenue of $512.6 million and a GAAP net loss of $21.7 million or $0.62 per share. The company achieved a Proforma Adjusted EBITDA of $62.7 million and a Non-GAAP EPS of $0.53 per share. Despite pandemic challenges, Franchise Group's resilient business model allowed it to exceed expectations, leading to an increase in full-year guidance for Proforma Adjusted EBITDA to over $255 million and Non-GAAP EPS to exceed $2.70.

Positive

• Revenue increased by 15% year-over-year.
• Proforma Adjusted EBITDA guidance raised to over $255 million.
• Non-GAAP EPS guidance raised to over $2.70.

Negative

• GAAP net loss of $21.7 million indicates potential financial stress.
• Outstanding debt of $740.6 million remains a concern.

• Increases Guidance for 2020
  

ORLANDO, Fla., Aug. 05, 2020 (GLOBE NEWSWIRE) -- Franchise Group, Inc. (NASDAQ: FRG) (“Franchise Group” or the “Company”) today announced the results of its second quarter ended June 27, 2020.  For the second quarter of 2020, total reported revenue for Franchise Group was $512.6 million, GAAP Net Loss was $21.7 million or $0.62 per share, Proforma Adjusted EBITDA was $62.7 million and Non-GAAP EPS was $0.53 per share.  In calculating GAAP EPS, the Company utilized approximately 35 million weighted average fully diluted shares of common stock outstanding for the second quarter. In calculating Non-GAAP EPS and formulating guidance, the Company utilized approximately 40 million fully diluted shares of common stock outstanding which accounts for the recent underwritten public offering of 4.8 million shares.  The net proceeds from the follow-on offering closed after the end of the quarter and is not included in the end of quarter cash balance of $105.5 million.  Total outstanding debt at the end of the second quarter was $740.6 million.

During the second quarter of 2020, Franchise Group priced an approximate $106 million follow-on offering of common stock, reduced debt by $70.9 million and declared another quarterly dividend of $0.25 per share.  The Company’s business model was extremely resilient during the height of Covid-19 and was able to exceed its plan for the quarter due to strong revenue and continued achievement of operational efficiencies. 

Brian Kahn, Franchise Group’s President and CEO stated, “Our businesses continued to benefit from the shift in consumer spending.  Our associates have maintained their dedication to our businesses and have again delivered robust financial results despite difficult circumstances.  Our performance through fiscal July, to begin the third quarter, continues to demonstrate resilience and is allowing us to further raise guidance for the full fiscal year.”

The Company has four reportable segments: American Freight; The Vitamin Shoppe; Liberty Tax and Buddy’s.  The following table summarizes revenue, net loss and proforma adjusted EBITDA by these segments.  A reconciliation of Proforma Adjusted EBITDA to the most comparable GAAP measure is included below.

	For the Three Months
	Ended June 27, 2020
				Proforma
				Adjusted				Net
	Revenue			EBITDA				Income/(Loss)
	(In thousands)
American Freight	$	234,427		$	40,384			$	(6,747	)
Vitamin Shoppe		237,735			16,292				(3,961	)
Liberty Tax		15,073			(538	)			(7,322	)
Buddy's		25,392			7,037				1,522
Corporate		-			(452	)			(5,434	)
Total	$	512,627		$	62,723			$	(21,942	)
Net income (loss) attributable to non-controlling interest									269
Net income (loss) attributable to Franchise Group, Inc.								$	(21,673	)

Outlook ⁽¹⁾

For fiscal 2020, we believe we will exceed our previous guidance of $240 million of Proforma Adjusted EBITDA and $2.60 of Non-GAAP EPS and now expect Proforma Adjusted EBITDA to exceed $255 million and Non-GAAP EPS of over $2.70. Please note that our $2.70 of Non-GAAP EPS includes approximately $0.30 pro forma dilution from our recent follow-on offering and excludes any assumption for acquisitions, divestitures or refranchising activity.

(1)

The Company does not provide quantitative reconciliation of forward-looking, non-GAAP financial measures such as forecasted 2020 Proforma Adjusted EBITDA or non-GAAP EPS to the most directly comparable GAAP financial measure because it is difficult to reliably predict or estimate the relevant components without unreasonable effort due to future uncertainties that may potentially have significant impact on such calculations, and providing them may imply a degree of precision that would be confusing or potentially misleading.  Proforma adjustments represent realized and unrealized synergies consistent with the Company’s credit agreement. Estimates exclude potential acquisitions, divestitures or refranchising activities.

Conference Call Information
Franchise Group will conduct a conference call on August 6^th at 8:30 A.M. ET to discuss its business, review financial results for the second quarter of 2020 and provide an update on its expected outlook for the rest of 2020.  A real-time webcast of the conference call will be available on the Events page of Franchise Group’s website at www.franchisegrp.com. The conference call can also be accessed live via telephone at (800) 697-5978. The passcode is 6075494. Please dial in 5-10 minutes prior to the scheduled start time.

About Franchise Group, Inc.
Franchise Group, Inc. (NASDAQ: FRG) is an operator of franchised and franchisable businesses and uses its operating expertise to drive cost efficiencies and grow its brands.  Franchise Group’s business lines include Liberty Tax Service, Buddy’s Home Furnishings, American Freight and The Vitamin Shoppe.  On a combined basis, Franchise Group currently operates over 4,100 locations predominantly located in the U.S. and Canada that are either Company-run or operated pursuant to franchising agreements.

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, performance during the COVID-19 pandemic, and its strategy and outlook for the remainder of fiscal 2020. 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 will not differ materially from any projected future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results, performance or achievements 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.  We refer you to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s Transition Report on Form 10-K/T for the transition period ended December 28, 2019, 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.

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share count and per share data)		June 27, 2020				December 28, 2019
Assets		(Unaudited)				(Audited)
Current assets:
Cash and cash equivalents		$	105,473			$	39,581
Current receivables, net			111,857				79,693
Inventories, net			315,078				300,312
Other current assets			24,298				20,267
Total current assets			556,706				439,853
Property, equipment, and software, net			152,520				150,147
Non-current receivables, net			15,105				18,638
Goodwill			468,088				134,301
Intangible assets, net			145,887				77,590
Operating lease right-of-use assets			529,891				462,610
Other non-current assets			15,434				15,406
Total assets		$	1,883,631			$	1,298,545
Liabilities and Stockholders Equity
Current liabilities:
Current installments of long-term obligations		$	203,490			$	218,384
Current operating lease liabilities			130,307				107,680
Accounts payable and accrued expenses			222,461				158,995
Other current liabilities			38,008				16,409
Total current liabilities			594,266				501,468
Long-term obligations, excluding current installments			537,148				245,236
Non-current operating lease liabilities			426,255				394,307
Other non-current liabilities			35,253				5,773
Total liabilities			1,592,922				1,146,784
Stockholders equity:
Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 35,185,710 and 18,250,225 shares issued and outstanding at June 27, 2020 and December 28, 2019, respectively			352				183
Preferred stock, $0.01 par value per share, 20,000,000 and 20,000,000 shares authorized, 0 and 1,886,667 shares issued and outstanding at June 27, 2020 and December 28, 2019, respectively			-				19
Additional paid-in capital			249,525				108,339
Accumulated other comprehensive loss, net of taxes			(2,103	)			(1,538	)
Retained earnings			42,935				18,388
Total equity attributable to Franchise Group, Inc.			290,709				125,391
Non-controlling interest			-				26,370
Total equity			290,709				151,761
Total liabilities and equity		$	1,883,631			$	1,298,545

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
		Three Months Ended								Six Months Ended
(In thousands, except share count and per share data)		June 27, 2020				June 30, 2019				June 27, 2020				June 30, 2019
Revenues:
Product		$	466,709			$	-			$	940,214			$	-
Service and other			28,742				23,820				131,383				119,658
Rental			17,176				-				33,596				-
Total revenues			512,627				23,820				1,105,193				119,658
Operating expenses:
Cost of revenue:
Product			277,582				-				565,400				-
Service and other			701				-				1,456				-
Rental			5,508				-				11,450				-
Total cost of revenue			283,791				-				578,306				-
Selling, general, and administrative expenses			217,264				29,482				469,476				70,447
Total operating expenses			501,055				29,482				1,047,782				70,447
Income (loss) from operations			11,572				(5,662	)			57,411				49,211
Other expense:
Other			(6	)			(106	)			(4,064	)			(99	)
Interest expense, net			(31,626	)			(415	)			(57,378	)			(1,470	)
Income (loss) before income taxes			(20,060	)			(6,183	)			(4,031	)			47,642
Income tax expense (benefit)			1,882				(928	)			(43,987	)			14,706
Net income (loss)			(21,942	)			(5,255	)			39,956				32,936
Less: Net (income) loss attributable to non-controlling interest			269				-				(2,090	)			-
Net income (loss) attributable to Franchise Group, Inc.		$	(21,673	)		$	(5,255	)		$	37,866			$	32,936
Net income (loss) per share of common stock:
Basic		$	(0.62	)		$	(0.37	)		$	1.30			$	2.34
Diluted			(0.62	)			(0.37	)			1.29				2.33
Weighted-average shares outstanding:
Basic			34,972,364				14,062,766				29,173,172				14,059,279
Diluted			34,972,364				14,062,766				29,335,633				14,124,104

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
		Six Months Ended
(In thousands)		June 27, 2020				June 30, 2019
Operating Activities
Net income		$	39,956			$	32,936
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts			3,403				4,770
Depreciation, amortization and impairment charges			33,792				7,772
Amortization of deferred financing costs			21,554				358
Loss (gain) on disposal of fixed assets			(166	)			270
Stock-based compensation expense - equity awards			4,339				1,047
Loss (gain) on bargain purchases and sales of Company-owned offices			(1,258	)			424
Equity in loss of affiliate			15				1
Deferred tax expense			7,739				742
Change in
Accounts, notes, and interest receivable			(1,784	)			1,380
Income taxes receivable			(53,156	)			13,341
Other assets			1,015				1,870
Accounts payable and accrued expenses			134				222
Inventory			84,434				-
Deferred revenue			8,938				(1,538	)
Net cash provided by operating activities			148,955				63,595
Investing Activities
Issuance of operating loans to franchisees and ADs			(28,876	)			(44,346	)
Payments received on operating loans to franchisees and ADs			49,612				66,204
Purchases of Company-owned offices, AD rights, and acquired customer lists			(2,299	)			(404	)
Proceeds from sale of Company-owned offices and AD rights			989				22
Acquisition of business, net of cash acquired			(353,423	)			-
Purchases of property, equipment, and software			(16,212	)			(647	)
Net cash provided by (used in) investing activities			(350,209	)			20,829
Financing Activities
Proceeds from the exercise of stock options			187				153
Dividends paid			(10,406	)			-
Non-controlling interest distribution			(4,716	)			-
Repayment of other long-term obligations			(410,798	)			(16,178	)
Borrowings under revolving credit facility			142,000				93,874
Repayments under revolving credit facility			(112,760	)			(161,128	)
Issuance of common stock			92,082				-
Payment for debt issue costs			(14,604	)			(2,260	)
Issuance of debt			586,000				-
Cash paid for taxes on exercises/vesting of stock-based compensation			(73	)			(21	)
Net cash provided by (used in) financing activities			266,912				(85,560	)
Effect of exchange rate changes on cash, net			(234	)			131
Net increase (decrease) in cash equivalents and restricted cash			65,424				(1,005	)
Cash, cash equivalents and restricted cash at beginning of period			45,146				3,981
Cash, cash equivalents and restricted cash at end of period		$	110,570			$	2,976
Supplemental Cash Flow Disclosure
Cash paid for taxes, net of refunds		$	493			$	70
Cash paid for interest		$	26,857			$	993
Accrued capital expenditures		$	2,608			$	-
Deferred financing costs from issuance of common stock		$	31,013			$	-
Tax receivable agreement included in other long-term liabilities		$	17,156			$	-

Non-GAAP Financial Measures and Key Metrics
This press release includes Adjusted EBITDA and non-GAAP earnings per share. Adjusted EBITDA represents net income before interest, income taxes, depreciation and amortization adjusted for certain non-core or non-operational items related to restructuring and related charges, early extinguishment of debt costs, litigation settlement costs, transaction-related costs, and fair value acquisition accounting adjustments related to inventory. Adjusted EBITDA is a financial measure not prepared in accordance with generally accepted accounting principles (“GAAP”). Management believes that Adjusted EBITDA is useful to investors as a supplemental measure in evaluating the aggregate performance of our operating businesses and in comparing our results from period to period because they exclude items that we do not believe are reflective of our core or ongoing operating results. Adjusted EBITDA is the measure that is used by our management, including our chief operating decision maker, to evaluate performance and make resource allocation decisions each period. Adjusted EBITDA is also the primary operating metric used in the determination of executive management's compensation. Adjusted EBITDA 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 Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.

Below is a reconciliation of management’s estimate of net income to estimated Proforma Adjusted EBITDA for the three months ended June 27, 2020. In the table below, we provide an estimated range of the items we exclude from our calculation of Proforma Adjusted EBITDA.

	For the Three Months Ended June 27, 2020
								American				Vitamin
	Buddy's			Liberty				Freight				Shoppe				Corporate				Total
	(In Thousands)
Net Income	$	1,522		$	(7,322	)		$	(6,747	)		$	(3,961	)		$	(5,165	)		$	(21,673	)
Add back:
Interest Expense		3,816			3,749				20,715				3,347				-				31,626
Income Tax benefit		-			389				(1,545	)			-				3,037				1,882
Depreciation, Amortization & Impairment		1,514			2,379				1,553				12,419				-				17,865
Total Adjustments		5,329			6,517				20,723				15,766				3,037				51,373
EBITDA		6,852			(805	)			13,976				11,805				(2,128	)			29,700
Adjustments to EBITDA:
Executive Severance and Related		-			-				573				90				-				663
Stock-Based Compensation		70			148				-				-				1,636				1,854
Shareholder Litigation		-			-				-				-				156				156
Corporate Compliance		-			4				-				-				-				4
Prepayment Penalty on Early Debt Extinguishment		-			-				-				-				-				-
Accrued Judgments & Settlements		-			115				2				-				-				117
Store Closures		62			-				-				195				-				257
Acquisition Costs		54			-				9,158				605				153				9,969
Inventory Fair Value Step-up Amortization		-			-				5,932				1,470				-				7,403
Total Adjustments to EBITDA		185			267				15,665				2,360				1,945				20,422
Adjusted EBITDA		7,037			(538	)			29,641				14,165				(183	)			50,122
Proforma Adjustments		-			-				10,743				2,127				(269	)			12,601
Proforma Adjusted EBITDA	$	7,037		$	(538	)		$	40,384			$	16,292			$	(452	)		$	62,723

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

FAQ

What were Franchise Group's Q2 2020 financial results?

Franchise Group reported Q2 2020 revenue of $512.6 million, a GAAP net loss of $21.7 million, and Proforma Adjusted EBITDA of $62.7 million.

How did Franchise Group's guidance change for 2020?

The guidance for Proforma Adjusted EBITDA was raised to exceed $255 million and Non-GAAP EPS to over $2.70.

What is the significance of the follow-on offering for Franchise Group?

The follow-on offering raised $106 million, which contributed to the capital structure but also led to pro forma dilution of about $0.30 in EPS.

How is Franchise Group managing its debt?

Franchise Group reduced its debt by $70.9 million during Q2 2020, bringing total outstanding debt to $740.6 million.