Franchise Group, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Franchise Group's Fiscal 2021 First 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 Kaminsky:]

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.

[Brian Kahn:]

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.

[Eric Seeton:]

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 one-time items associated with purchase price accounting and our recent financing activity. We currently have four reportable segments

[Operator:]

Thank you. And we have our first question from Larry Solow with CJS Securities. Please go ahead, sir.

[Lee Jagoda:]

Hi. Good afternoon. 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?

[Brian Kahn:]

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 two 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.

[Lee Jagoda:]

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?

[Brian Kahn:]

Sure. I think we – answering this question backwards, I think we would stretch to about four turns of EBITDA for the right deal. We'd need to have a very concrete plan for very quickly getting back below our three-turn threshold. We want to be in that two to three turns over the long term. And clearly with Pet Supplies Plus we did – we didn't go all the way to four turns but we will be back under three turns very quickly. As far as working on larger deals or smaller deals, 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?

[Operator:]

Thank you. We have our next question from Ian Zaffino with Oppenheimer. Please go ahead.

[Ian Zaffino:]

Hi, guys. 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? Thanks.

[Brian Kahn:]

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 two 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.

[Ian Zaffino:]

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? Thanks.

[Brian Kahn:]

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.

[Ian Zaffino:]

All right. That’s pretty impressive. So thank you very much for listening.

[Operator:]

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

[Susan Anderson:]

Hi. Good evening. 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?

[Brian Kahn:]

Sure. So, this quarter is really when we launched those franchise programs. American Freight has signed a seven-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.

[Susan Anderson:]

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?

[Brian Kahn:]

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

[Eric Seeton:]

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 one 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.

[Susan Anderson:]

Great. That’s very helpful. Thanks so much.

[Operator:]

Thank you. We have our next question from Mike Baker with D.A. Davidson.

[Mike Baker:]

Okay. Thanks, guys. 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?

[Brian Kahn:]

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.

[Mike Baker:]

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

[Brian Kahn:]

Yes.

[Mike Baker:]

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

[Brian Kahn:]

Okay. 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.

[Mike Baker:]

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…

[Brian Kahn:]

No, that's fine. 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?

[Mike Baker:]

Yeah. That will help us. So, yeah, 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?

[Brian Kahn:]

Yeah. 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 -- 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 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.

[Mike Baker:]

Yeah 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. Could 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?

[Brian Kahn:]

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.

[Mike Baker:]

Okay. I think it get it. Appreciate the time. Thank you.

[Brian Kahn:]

Sure.

[Operator:]

Thank you. And I see no further questions in queue. I would now like to turn the call over to Brian Kahn for any further remarks.

[Brian Kahn:]

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

[Operator:]

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.