FRG (2020 - Q2)

Ladies and gentlemen, thank you for standing by, and welcome to the Franchise Group's Second Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the conference over to your host, Andrew Kaminsky, Executive Vice President and Chief Administrative Officer of Franchise Group. Andrew K

Thank you, Hilda. Good morning 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 by 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 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-KT for the fiscal year end, December 28, 2019 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 and the news and events section of our website at franchisegrp.com for 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 that 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. Good morning and thank you for joining us today. I will briefly walk you through the highlights of the second quarter and current trends in our markets and businesses before turning the call over to Eric to discuss our second quarter results. And then we will be happy to answer questions. Despite the pandemic Franchise Group's overall financial performance has remained strong. Since we closed on our most recent acquisition of American Freight February, our cash flow has allowed us to retire over $70 million of debt and pay over $17 million of dividends and distributions to our shareholders. Thanks to the strong financial performance of our current brands our shareholders have further supported us and our pursuit of additional businesses through a recent underwritten public equity raise of approximately $106 million through an upside following offering of common stock. I'm confident that we will deploy our growth capital in a manner that is accretive to Franchise Group's overall earnings per share, as well as our available dividend per share. COVID-19 has turned the efficient market hypothesis upside down, I expect we will see more dislocation in our markets over the next couple of years than there has been at any time in my career. We have evaluated numerous M&A opportunities over the past few months and hope to be able to add additional brands to our portfolio in the near future. Earlier this week, we hired Todd Evans as our new Chief Franchising Officer. Todd brings a wealth of experience in building franchise operations and sales organizations, especially in the markets that we operate. I've known Todd for 20 years and I'm excited to finally be able to work with him on a daily basis. Todd's role will allow us to build or enhance the franchise teams at each operating business, bring best practices to our franchising operations, and most importantly, accelerate the franchise growth across all businesses. Operationally, demand for home furnishings offered by American Freight and Buddies has benefited from a shift in consumer spending. We see consumers in our demographic reallocating their discretionary spending from travel and entertainment to home improvement related spending, including refurnishing and durable merchandise upgrades. This trend combined with generous government subsidies that have acted like a second tax refund for our customer demographic has created a strong demand for our products and services. Additionally, recessionary economic times are typically good environments for our deep value products and flexible payment options. And we are seeing an influx of new customers. Let me turn to a brief synopsis of our individual businesses. When we combined A Freight with the former outlet business in mid February, we underwrote a business combination that included $42 million of annualized synergies. A Freight management has done an excellent job of integrating these businesses, and now expects to see the original synergy plan through 2021. Not only has the A Freight team excelled operationally, but they've been fantastic sales people, as we've said multiple times, A Freight had up to 150 locations closed at various times due to COVID-19 yet delivered over 7% actual revenue growth compared to the second quarter of 2019. The strong demand trends have continued through fiscal July with comparable store sales up approximately 21% compared to fiscal July 2019. Rent or owned stores like Buddy's are typically resilient across economic cycles. Buddy's remained open during the pandemic as an essential business and continue to execute according to plan. As the economy reopened with the equivalent of a second tax refund from the government, Buddy's comped positive 9% in the second quarter and accelerated further in the fiscal month of July. In addition to benefiting from the same market trends as A Freight, we believe management's focus on professionally serving its customers and communities, has made them a trusted destination for furniture, mattresses, appliances and electronics. The Vitamin Shoppe had numerous challenges overcoming the second quarter, including 90 store closures, reduced operating hours due to COVID-19 and civil unrest. Management adjusted its operating model to maximize performance by making adjustments to the supply chain to accommodate significant growth in immunity support health and wellness products and its online businesses during the quarter as the business returned to normal operating hours, comparable sales for fiscal July grew approximately 11.6% compared to fiscal 2019. Year-to-date, we've retired or purchased for our own accounts $38.4 million of the Vitamin Shoppe’s $70 million term loan. As we stated, we expect to further reduce the term loan to no more than $28 million by year end. As everyone knows from their personal tax filing, this was a unique tax season. The extended deadline created challenges for the Liberty team and our franchisees, but our Liberty leadership team persevered to drive a stronger finish to the tax season than we expected when we last spoke to you in June. As we disclosed last week, Liberty Tax completed approximately 1.15 million federal tax returns in the United States through the July 15th, extended filing deadline, compared to $1.3 million returns for the 2019 tax season. US store count was down 320 units to 2501 storefronts, and on a same store basis federal tax returns prepared were down approximately 3% for the 2020 tax season. The pilot plan to roll out Liberty Tax kiosks within our American Freight and Buddy's stores for the 2021 tax season is in motion. We expect to have at least 20 locations up and running by September 1st, and are hoping to add more in early fall. We've made progress on our all season products, and are looking forward to bringing value added products and services to our franchisees and customers in the near future. Overall, the Franchise Group of Companies have continued to do resilient, and our management teams are finding ways to improve their financial prospects despite the distractions caused by the virus. Before turning the call over the Eric, I would once again like to thank all of our associates for their hard work and dedication to our company. They truly are what makes us successful. Eric?

Thank you, Brian. Before I address the results of operations, I would like to remind you that we will 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 recently changed 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 recent timing of the acquisition. For example, our recent 10-KT filing reflects our new fiscal year ends December retail year, but only includes the results of Buddy's, Sears Outlet and the Vitamin Shoppe from their respective acquisition dates through December 28, 2019. The 10-Q that we filed last night contains the actual results for all businesses for the entire second quarter. Discussing our pro forma results or comparable results to prior periods. We will include American Freight’s results as if we owned it since the beginning of the fiscal year. For the quarter, first for the second quarter of 2020 total reported revenue for Franchise Group was 512.6 million compared to our July 27th preliminary release of 505 million to 515 million. GAAP net loss attributed to the Franchise Group was 21.7 million or $0.62 per share, compared to our preliminary release of net loss of $27 million to $24 million or $0.76 to $0.70 per share. Pro forma adjusted EBITDA was 62.7 million compared to our preliminary release of 55 million to 65 million. Non-GAAP EPS was $0.53 per share, compared to our guidance of $0.34 to $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 additional shares issued in the offering had a dilutive impact of approximately $0.30 per share for the full year of 2020, which is taken into account in our revised guidance. The GAAP net loss for the quarter was primarily driven by interest expense, which includes deferred financing costs, and one-time items associated with purchase price accounting and acquisition costs. We have four reportable segments, American Freight, the Vitamin Shoppe, Liberty Tax and Buddy's. For the three month period ended June 27, 2020, American Freight had revenue and pro forma adjusted EBITDA of 234.4 million and 40.4 million, respectively. The Vitamin Shoppe had revenue and pro forma adjusted EBITDA of 237.7 million and 16.3 million respectively. Buddy's had revenue and pro forma adjusted EBITDA of 25.4 million and 7 million, respectively. Liberty Tax had revenue and negative pro forma adjusted EBITDA of 15.1 million $538,000 respectively. Liberty Tax typically has a majority of its revenue and EBITDA in the first quarter due to the timing of the tax season. But due to the extended deadline this year had more revenue and EBITDA in the second quarter than it is expected to in future second quarters. Turning to our balance sheet and cash flow. For the quarter we have free cash flow of $23.2 million defined as operating cash flow less capital expenditures. CapEx for the quarter was $10 million. The end of the quarter cash balance of $105.5 million does not include $106 million of net proceeds from the follow on offering, since it closed after June 27th. It also does not include the initial tax refund of $29 million received in July and anticipated additional $24 million of receipts as a result of the IRS rule change relating to net operating loss carry back from the CARES Act. Our pro forma cash balance at the end of the quarter including these items is approximately $264 million. At the end of the quarter we had outstanding debt of $740.6 million net of deferred financing costs. As previously disclosed during the second quarter, we amended the Vitamin Shoppe term loan to allow us to prepay debt used to acquire the company. We are still on track, as Brian mentioned, to eliminate approximately $42 million of the $70 million initial term loan used to acquire Vitamin Shoppe by the end of 2020. By early next week, we expect Liberty Tax to assign a new $60 million direct lending facility to support its franchisees during the off season. Liberty's prior facility was fully repaid prior to its expiration on April 30th. This new facility will allow Liberty franchisees to borrow directly from the lender with Liberty acting as a loan servicer. Liberty will earn servicing fees on the loans, the facility will be off balance sheet and Liberty is not the direct borrower. Liberty will incur a one-time arrangement fee of $2.5 million, which can be earned back based on the achievement of certain performance criteria by borrowing franchisees. 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. I will now turn the call back to Brian to discuss our guidance for the remainder of the year.

Thanks, Eric. For fiscal 2020, we believe we will exceed our previous guidance of $240 million of pro forma adjusted EBITDA and $2.60 of non-GAAP earnings per share. And now expect pro forma adjusted EBITDA to exceed $255 million and non-GAAP earnings per share of over $2.70 including $0.30 of pro forma dilution from our recent follow-on offering. This guidance excludes any assumptions for acquisitions, divestitures, or refranchising activity. I want to thank all of our shareholders and lenders for their support today. Operator, please open the line for questions. Thank you.

Thank you. [Operator Instructions] We ask that you please limit yourself to one question and one follow-up. [Operator Instructions] We have a question from Scott Buck from B. Riley.

Hi, good morning, guys. I was curious if you have a sense of what the incremental impact was from the stimulus programs during the second quarter? And then I assume if we get another round of stimulus here announced in the next couple of days, you see a similar impact for the third quarter?

It's Brian. Scott, the stimulus plan, we had American Freight comps well over 20% sometimes over 40% during the quarter. We absolutely believe that stimulus helped that. In July, we did continue to comp over 20% as stimulus was winding down. We don't have any additional stimulus expectations built into our numbers for the back half of the year. And that's just not something that we're really qualified to analyze. Obviously, if there is additional stimulus, we do think that it will continue to help, but unclear still as to how much.

Sure, appreciate that. Second, if you could give a little bit more color on the acquisition environment. Obviously, there's been a number of retail bankruptcies. If you could give us a sense of what you guys are looking for and what, how large of a transaction you would consider?

Well, as you see, we seem to find at least one bankruptcy on average per day in retail space. So the M&A environment is certainly robust. We're very active participants. Many businesses we're looking at don't ultimately fit with what we're trying to do. We need the business to be either already franchised or franchisable, size wise. There's no, there's, it's really more based on the opportunity and the value that we can get out of the business. We would consider very small acquisitions that we think we can grow. And we would consider much larger acquisitions, if the value is right. We think that we can get the support from our vendors in the event of a larger acquisition. So it's really case by case basis.

And last one, I lied. I know, it's early, but have you seen any impact in the Vitamin Shoppe business from the GNC bankruptcy?

You would expect when a competitor ends up in bankruptcy and they are publicly announced that they're liquidating stores, you would expect to see pressure on market share. If that is happening, then we're certainly not seeing it because Vitamin Shoppes performing very well and currently comping positively that's not really what we would have expected during a competitor liquidating stores. But they'll get through that process. And I think they're expecting to emerge later this year in some form or fashion with a reduced store base in the United States. And it'll be interesting to see when that supply wears off what Vitamin Shoppe looks like then.

Thank you, at this moment, I would like to turn the call back to Mr. Kahn for further remarks.

Again, thank you all for joining us this morning. Operator, please conclude the call.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may now disconnect.