Franchise Group Inc (FRG) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Franchise Group's Fiscal 2021 First Quarter Conference Call. (Operator Instructions) I would now like to hand the conference over to your host, Andrew Kaminsky, Executive Vice President and Chief Administrative Officer of Franchise Group.

Thank you. Good afternoon, and thank you for joining our conference call. I'm on the call with Brian Kahn, Franchise Group's President and CEO; and Eric Seeton, Franchise Group's CFO.

Before getting started, I'd like to mention that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied in the forward-looking statements.

The forward-looking statements are made as of the date of this call, and except as required by law. Franchise Group assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of these and other risks and uncertainties that could cause Franchise Group's actual results to differ materially from those indicated in the forward-looking statements, please see our Form 10-K for the fiscal year ended December 26, 2020, and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures that we believe investors focus on in comparing results between periods and among peer companies. Please see our earnings release in the News and Events section of our website at franchisegrp.com, for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from, as a substitute for, or superior to GAAP financial information, but included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies.

Now I'd like to turn the call over to Brian. Brian?

Thanks, Andrew, and good afternoon to our listeners, and thank you for joining us. I will briefly discuss the highlights of Franchise Group's first quarter, provide an update on recent corporate activities and discuss current trends in our markets and businesses before turning the call over to Eric to provide financial details. We'll then be happy to answer questions.

In the first quarter of 2021, Franchise Group continued to execute operationally while further enhancing and diversifying our franchise brands with the acquisition of Pet Supplies Plus, which established our entry into the pet industry. Additionally, we signed a definitive agreement to combine Liberty Tax with NextPoint Acquisition Corp.. We closed on the acquisition of FFO Home, and we closed a new credit facility that significantly reduced our weighted average cost of capital.

We believe that all of these corporate actions position Franchise Group to generate higher discretionary free cash flow, and our management team will continue to allocate that discretionary cash flow to the highest and best uses to increase Franchise Group's long-term shareholder value.

We reported to you on our last conference call that we plan to accelerate our franchising efforts this year. Year-to-date, our brands have combined to add 28 new franchise locations and awarded an additional 62 new area development agreements. We recently filed The Vitamin Shoppe franchise disclosure documents and held multiple discovery days for potential franchisees across all of our brands.

At Buddy's, an existing franchisee, has recently signed a definitive purchase agreement at a 9-store conversion of an independent dealer. Conversions of independents like this are particularly attractive for the franchisor and the franchisee because they're typically acquiring mature stores that add immediate revenue and incremental cash flow, instead of a gradual ramp over a 1- to 2-year period that a de novo store would experience.

The rent-to-own industry remains highly fragmented outside of Rent-A-Center and Aaron's, and we believe that there are many more conversion opportunities available for our franchisees. Our franchise teams also signed a development agreement for 7 new American Freight locations and added 10 more stores to Pet Supplies' existing 186 store backlog since closing the acquisition on March 10.

Pet Supplies Plus has been a great addition to Franchise Group. Chris Rowland and his team have already been able to accelerate their growth plans by selectively purchasing 41 pet value stores. These locations were cherry-picked because they had favorable lease terms in targeted markets and came fully fixtured with grooming and pet wash stations. Essentially, all they needed to do is change the signage in that inventory to get these locations opened, and the team has already refranchised 17 of these 41 locations with more refranchising to come.

As of today, PSP has 565 locations, including 324 franchise stores. PSP's first quarter same-store sales comp was positive 15.2%, with less than 1% of that comp coming from improved service revenue as many stores were generating minimal service revenue during the latter part of March of 2020 due to COVID restrictions.

American Freight management team successfully converted the acquired 31 FFO Home locations to the American Freight banner during the first quarter. Not only have these locations been rebranded, but we have onboarded them to all of our platforms and they're running smoothly. As of today, American Freight operates 356 locations, including 6 franchise stores.

Total revenue at American Freight managed to grow 2.9% overall in the first quarter compared to the pro forma first quarter of 2020, as that pro forma includes revenue generated by American Freight stores before we actually closed the acquisition in mid-February. Despite supply constraints of furniture, mattresses and appliances, American Freight management has been able to source enough product to continue opening new stores and steadily ramp the former FFO stores.

On the appliance side, last year's disruption in manufacturing of new appliances has trickled down as the supply chain has become disrupted and significantly limits our availability of as-is merchandise for the last few quarters. Our as-is total inventory levels are down almost 60% compared to this time last year, and revenue from this high-margin category is down 40% year-over-year.

Despite these supply constraints, year-over-year comparisons that include the start of last year's COVID binge buying and a delayed start to the tax season and nominal comps that were down 10%, American Freight still grew its EBITDA 13% compared to the same period last year. And when supply normalizes, American Freight and its franchisees will be big beneficiaries.

Buddy's home furnishings is experiencing similar supply constraints, primarily in upholstery, case goods and mattress categories. Operationally, similar to American Freight, Buddy's management is finding ways to overcome supply constraints. Due to the recurring nature of Buddy's revenue stream from inventory out on lease, Buddy's was able to comp positive 8.5% and for same-store sales in Q1. Buddy's continued to operate very well, and their primary focus is squarely on increasing the current store count of 295 with potential to have over 2,000 franchise locations in the United States.

Vitamin Shoppe had same-store sales comps of positive 8.5%, consisting of 5.8% in-store and 22.3% direct-to-consumer. And less than 1% of this sales comp was due to COVID-related store count comparisons. The trends in favor of health and wellness has continued and Vitamin Shoppe is clearly a beneficiary.

As for Liberty Tax, the announced merger with NextPoint is still anticipated to close later in the second quarter. As a reminder, this delevering transaction will still allow Franchise Group to maintain significant economic interest in the strategy of aggregating consumer finance products and services while bringing us under 3 turns of net leverage consistent with our long-term financial policy.

With our expectation of near-term delevering, we will continue to evaluate various M&A opportunities that will allow us to drive additional earnings growth and further diversify our cash flow across multiple sectors of the economy. These opportunities come in various forms, ranging from larger established companies like the PSP acquisition, to nascent brands with attractive unit economics that we believe we can grow significantly over time. We will continue to be creative and look at all avenues to find the right opportunities.

Before turning the call over to Eric, I'd once again like to thank all of our dedicated associates for their hard work in supporting each other and our franchisees and ultimately, the success of Franchise Group. Eric?

Thank you, Brian. Before I address the results of operations, I would like to remind you that we'll be making many references to pro forma items throughout this call. Our press releases and filings may refer to historical financial results for the acquired businesses prior to their acquisition by Franchise Group. These items have been adjusted to align with our fiscal calendar and accounting policies to the extent reasonable. Comparison to pro forma results will allow us to discuss and evaluate performance of the acquired companies when a comparable period is not available due to the timing of the acquisition.

As a reminder, in order to conform with SEC rules consistent with the concepts in Article 11 of Regulation S-X for the non GAAP reporting, Franchise Group will not be reporting synergies and other acquisition costs as part of pro forma adjusted EBITDA. The company will continue to report adjusted EBITDA in the same format it has in the past. At this time, we do not anticipate reporting any supplemental information for 2021.

The specific amounts included in each disclosure are fully discussed in detail in the non-GAAP financial measures and metrics section of our earnings release. For the first quarter of 2021, total reported revenue for Franchise Group was $621.3 million. GAAP net loss from continuing operations was $28.3 million or $0.76 per share. Adjusted EBITDA was $79.2 million and non-GAAP EPS was $0.90 per share.

The GAAP net loss for the quarter was primarily driven by interest expense, which included deferred financing costs and onetime items associated with purchase price accounting and our recent financing activity.

We currently have 4 reportable segments: American Freight, The Vitamin Shoppe, Pet Supplies Plus and Buddy's, and now report Liberty Tax as a discontinued operation. For the quarter ended March 27, 2021, American Freight had revenue and adjusted EBITDA of $258.5 million and $30.6 million, respectively. The Vitamin Shoppe had revenue and adjusted EBITDA of $294.7 million and $40.5 million, respectively. Buddy's had revenue and adjusted EBITDA of $16.8 million and $5.2 million, respectively. And PSP had revenue and adjusted EBITDA of $51.3 million and $4.8 million, respectively, for our ownership period.

For the full quarter, Pet Supplies Plus had revenue and adjusted EBITDA of approximately $254.4 million and approximately $20.2 million. For the quarter, consolidated cash flow from operating activities for FRG was $75.8 million and capital expenditures of $11.5 million, netting to free cash flow of $64.2 million, defined as operating cash flow less capital expenditures. Within these amounts, Liberty Tax had cash flow from operating activities of $15.8 million and capital expenditures of $2.7 million. Free cash flow attributed to FRG continuing operations was $60 million from operating activities, less $8.9 million of capital expenditures, netting to free cash flow of $51.1 million.

The net capital spend for ongoing operations included $1.7 million for onetime rebranding costs associated with American Freight's conversion of FFO Home locations; and approximately $100,000 associated with PSP's conversion of pet value locations during our ownership period.

We ended the quarter with approximately $1.3 billion in term debt, a fully undrawn $150 million ABL revolver and cash of $164.9 million. The term debt is expected to be reduced by approximately $180 million upon the closing of the Liberty Tax transaction with NextPoint. In conjunction with our balance sheet and business performance, we believe we have sufficient liquidity to continue to meet all of our obligations and support all of our businesses for the foreseeable future.

As of today, we are increasing our adjusted EBITDA guidance for 2021 from at least $310 million to at least $315 million; and our non-GAAP EPS guidance from at least $3.25 to at least $3.35, while maintaining our prior guidance of revenue of $3 billion to $3.1 billion. In calculating EPS, we are using approximately 40 million weighted average shares outstanding. Our guidance does not include any assumptions for government stimulus payments, additional acquisitions, divestitures other than Liberty or refranchising activity.

I want to thank all of our shareholders and lenders for their support to date. Operator, please open the line for questions. Thank you.

(Operator Instructions) And we have our first question from Larry Solow with CJS Securities.

It's actually Lee Jagoda for Larry. Just to start, can we talk a little bit about your e-commerce strategy, and I guess, specifically around Vitamin Shoppe and Pet Supplies? And within that, are there things that you can do with your physical stores that can, I guess, better compete with the Amazons and the Chewys of the world in each of those end markets?

Yes. Well, I think that's actually what's happened. And with Pet Supplies specifically, that is how -- that is their e-commerce strategy. To date, they use the local neighborhood stores effectively as distribution centers to the local area for people placing orders. So we don't actually ship directly from the distribution centers themselves.

So they'll get delivery or buy online, pickup in store. And that really is, right now, the way e-commerce works. With Vitamin Shoppe, it's very different. They have 2 large distribution centers that do fulfill through FedEx and deliver directly from the distribution centers. But now with buy online, pickup in store, that becomes essentially the same thing where you can use the 700-plus locations as very competitive distribution sources for the customers.

Locally they can get the product faster in many cases. And the product margin for Vitamin Shoppe is higher when fulfilled from the stores. So it works for everybody.

Great. And then just shifting gears to M&A. I know you mentioned you've got a pipeline of stuff that you're looking at. I know we just did the Pet Supplies acquisition. Is it too soon to think that you would be looking at additional platform type deals? And what's your appetite in terms of the leverage that you would be willing to go up to, even temporarily, for the right deal?

Sure. I think we -- answering this question backwards, I think we would stretch to about 4 turns of EBITDA for the right deal. We'd need to have a very concrete plan for very quickly getting back below our 3-turn threshold. We want to be in that 2 to 3 turns over the long term. And clearly, with Pet Supplies Plus, we did -- we didn't go all the way to 4 turns, but we will be back under 3 turns very quickly.

As far as working on larger deals or smaller deals, we we're always looking at companies. We're looking at businesses today that we may not get involved with for many years, but it's a process. Most of the businesses that we have currently in the Franchise Group portfolio of businesses that we have been involved in for many years. So just because the transaction happened at a certain date doesn't mean that it was just a process that was started. It's not a typical, "Hire a banker. Get involved in a process. Do you like it or don't you," and see if you can make a transaction work.

So our jobs are to go find brands, businesses that we think would be a good part of Franchise Group for the long term. And those could be very small, and those could be large. I would certainly characterize PSP as a larger transaction for us, so is American Freight, so is Vitamin Shoppe and we're always working on them. Whether or not we're about to transact is a totally different question. Yes. Does that make sense?

We have our next question from Ian Zaffino with Oppenheimer.

Thank you Very much for the color on the supply chain and inventory. Can you also maybe touch upon labor, your ability to maybe pass that through? And then other inflationary pressures that you're facing and your opportunity to be able to pass that all through?

Sure. So there's nothing particularly new as it relates to labor or supply chain. This has really been a common theme for us and for our businesses, and I think for others as well for the last many months because of COVID. It's when manufacturing shuts down and it takes time to get it going again. And then you add all the demand that's depleting the inventory, it just makes sense.

So that's -- really, we're getting used to dealing with it. You'd like to not have to deal with it because everybody is working harder. They're working longer hours to procure enough inventory just to fill the stores. So it's just not easy. And normally, it is very easy and vendors are begging you to take their product. It's just the other way around right now.

As it relates to labor, it's, I guess, similar. You've got a lot of people who would prefer not to work that don't have to work that typically would have to work. So the labor force has overall been reduced, and you're competing with other companies for labor. And you're -- so you've got really 2 competitive forces there. You've got other companies, and then you've got just whether or not the employee wants to work or not.

We're not seeing a lot of people miss work because of getting the virus anymore, that's a positive. But I think the labor market is tight, and we're not seeing any material increases in labor rates. And so it's not really been a problem for us at this point.

Okay. And I imagine a lot of these employees are kind of the same demographic that are enjoying the stimulus, which should actually help you on the top line on Buddy's and American Freight. But as far as -- as a follow-up question, what I wanted to ask is, seeing you have Pet Supplies now, they do a lot of their supply chain and delivery in-house. And I believe that you were looking to extend that maybe over to Vitamin Shoppe. So -- and I know you mentioned you're not going to talk about synergies.

But can you maybe walk us through maybe some of the things you've learned over at Pet Supplies and how you might share that knowledge over Vitamin Shoppe?

Sure. I don't think it's just what we learn at one business that can apply to any other particular business. But I'd say, certainly, from Pet Supplies, the way they run their distribution model, really, as a business instead of just as a service to the customers, I mean, they're pros. And I think that we have several businesses that we can take what we've learned from Pet Supplies Plus and get a real advantage that not only helps the -- it not only helps the e-commerce strategies or the overall distribution, but it helps the franchisees get product faster.

So in other businesses that we may own down the road, we may be able to apply the learnings of -- this is just one really good example of how to run a distribution system for the benefit of everybody. We may find that we can apply that elsewhere, and a future transaction becomes far more attractive because of it. So it's definitely a good example. But I wouldn't say that this is a Pet Supplies Plus and Vitamin Shoppe issue or relationship. I think it can be used in all of our businesses.

Our next question comes from Susan Anderson with B. Riley.

Nice job on the quarter. I was wondering if maybe you could give a little bit more color on where you're at with the franchising locations at American Freight and Vitamin Shoppe and your expectations for the rest of the year there.

Sure. So this quarter is really when we launched those franchise programs, American Freight has signed a 7-store development agreement. They're doing -- there's a ton of interest. It's all about getting the right deals on those interest in refranchising stores. There's interest in just opening stores. There's interest in refranchising, hand signing development agreements. I think that as the year goes on, we'll see significant gains in the franchising efforts at American Freight.

And I know you'll quote me on that later, so Franchise team needs to sell some territories. At Vitamin Shoppe, they just finished their FDD. They want to actually have a franchise meet-the-team day-to-day. Very impressive. And expect that -- I'd say they're a little bit behind schedule overall, but there's a lot of effort there by the management team, and they'll catch up very quickly. And certainly expect to have more to say about Vitamin Shoppe franchising or refranchising as the year goes on.

Great. And then maybe if you could talk about the drivers of the EBITDA margin performance by segment. I think it looks like Buddy's and Vitamin Shoppe were up year-over-year in the quarter, but American Freight was down a bit. And then how are you thinking about those margins in the second quarter and the rest of the year?

Sure. Eric, do you want to take that? Do you want me to take that?

Yes. Yes, going by business and starting with Vitamin Shoppe, I think if you look at their margin profile, overall, we do expect them to be generally around the same spot. In second quarter in the back half of the year, I think it'd be a little bit softer just because normally, you've got the, I'd call it, the New Year's resolution aspect to quarter 1 within their business within the health and wellness.

Again, we are seeing positive trends there that may lift if it continues through the year, as we're not anticipating additional stimulus and we're not making in anything related to COVID. American Freight, we expect to be relatively steady from the margin perspective. Buddy's, certainly benefited first half of the year from stimulus in the margin profile. If I look at that over the rest of the year, I expect them to be just a little bit lighter as they're strongest traditionally in Q1. And then PSP is pretty consistent over the full year from a margin profile.

(Operator Instructions) We have our next question from Mike Baker with D.A. Davidson.

Okay. A couple of boring modeling questions, if I can. So just to confirm, your results, how would you characterize your results in each of these segments relative to your plan? Because I think there's some difficulty, maybe some confusion or minutiae around modeling the quarters into consensus. So if you could just characterize the results by segment versus your internal plans, please?

Yes. Mike, I think we noticed that it's a bit scattered. We have not actually -- and we don't forecast externally the businesses by quarter. We are firm believers that we want -- we look at the business as a franchising group, where -- and we want everybody else to understand that as well. So we're trying not to get bogged down in what the quarterly numbers.

That said, we'll be able to help you with where -- with how you should be thinking about the businesses. I understand that the removal of Liberty has created some confusion because we haven't sold Liberty yet. Everybody is used to the seasonality with Liberty, but Liberty is not there. So the revenue isn't as lopsided to the first quarter as it typically would be.

So I think we can help, but we're not going to go into quarterly forecasts because it's just too complicated. Especially with where we are coming out of COVID, the comparisons year-over-year, it's just -- it's not a normal year. But overall, obviously, things are going very well.

Right. No, I appreciate that. But I guess what I'm -- so 2 follow-ups. One, I guess what I'm asking more is for the quarter that just happened. So this is not...

Yes.

Forecasting guidance, just how would you characterize those results versus your internal plan?

Okay. Oh that's -- yes. So look, we raised our guidance for the year because the first quarter exceeded our plan. We were not opining on the rest of the year. We exceeded the plan, raised our guidance. We'll see how this quarter plays out and readdress at the end of next quarter. That's a fair question.

Right. Okay. Understood. And then maybe to follow-up, and maybe you'd characterize this as not a fair question, but in terms of seasonality, is there anything we should think of in this-- relevant to the second quarter? How does that usually look if -- because we don't have the pro forma annual history of your concept. So it's hard for us to know...

No, no. That's fine. So first, first quarter is seasonally strongest, I think, for almost all of our businesses. So the -- remember, our businesses benefits quite a bit, not only the Liberty business previously, but the other businesses benefit quite a bit from the consumer getting their tax refunds and coming into our stores and buying products. That would be American Freight certainly and Buddy's. And as Eric mentioned, Vitamin Shoppe, first quarter seasonality is always strongest due to New Year's resolutions. PSP doesn't have that kind of seasonality.

But I understand your question. Does that make sense?

Yes. That will help us. So yes, I guess what I'm trying to get at is just to make sure expectations are properly set for the second quarter. Two other follow-ups, if I could or other questions. One, on the American Freight business. So I think you said -- did you say that the comps were down 10%? And, I think, a large part of that was 60% reduction in the as-is appliance business; 50% down in revenues. Is that right, that 10% down? And how much do you think was impacted by that supply chain issue? In other words, if you had been fully in stock, what do you think your comps could have been in American Freight for the quarter?

Yes. Well, it's hard to know. And I can give you some facts, but I'm drawing the conclusion of what they would have been otherwise, I don't know. Yes. So on a on an apples-to-apples comparison, those comps would have been down 10% for all of those reasons.

If you look at the actual revenue in the quarter. So just -- and look, this is -- the supply chain is tight, not just with as-is appliances. But it turns out, as-is appliances is a great category for us, a category that we want to be in. I think it's a category that we can dominate because other people just don't want to be in that business anyway, but it's a very high-margin category as well.

So if you look at, call it, plus or minus $250 million of revenue for American Freight, and I guess, $258.8 million, and it was $251 million last year, the attribution of that revenue this -- last year, 30% of our revenue, $75 million came from as-is appliances. This year, $45 million came from as-is appliances. So $30 million less revenue because of inventory. And it's -- it's not just a little bit. We went from inventory of $46 million of as-is appliances this time last year to $19 million now.

So we're returning inventory more rapidly, but there's just far less available. But as manufacturing has now come back online and that will trickle down back to us, we'll get that benefit. And again, it's at a much higher relative margin than new-in-the-box appliances, so we'll get that benefit down the road as well.

Yes, That perfectly illuminates it. I appreciate that. I've gotten a lot of air time, but I'm going to ask one more quickly, if I could. Can you talk about your -- the savings that you'll see on your interest expense line from the reduction in the rate you've gotten, as well as post the closing delivery tax when you pay down some more debt? What should we think about for interest expense for the year?

For the -- well, look, it's really -- I think of interest on a daily basis, unfortunately. And of course, we've got the $1.3 billion right now, a little north of 6%. And where we've got the negative R because we've got the $182 million of cash proceeds that'll pay down a portion of that $1.3 billion. So interest will go down once we close on Liberty Tax.

But as of today, that -- you could do that daily rate, and that's what we're paying. Now we're paying it starting when we closed the transaction, which was March 10. But our pro forma numbers, for whatever reason, I mean, I can talk to the GAAP world, but our pro forma numbers include the assumption that we had that interest even, I guess, before we had PSP. It's confusing, but it is what it is.

(Operator Instructions) And I see no further questions in queue. I would now like to turn the call over to Brian Kahn for any further remarks.

Great. Well, thank you all again for joining us this afternoon. And operator, you can please conclude the call.

Thank you, sir. And thank you, ladies and gentlemen. This concludes our conference call, and we thank you for your participation. You may now disconnect.