Q2 2020 Franchise Group Inc Earnings Call

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Thank you for joining your conference will begin momentarily. We thank you for your patience and please stand by your conference will begin momentarily.

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Ladies and gentlemen, thank you for standing by and welcome to franchise groups second quarter Conference call.

At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.

I will now like to have the conference over to your host Andrew Kaminski Executive Vice President and Chief administrative officer of franchise Kirk.

Thank you all the good morning, and thank you for joining our conference call.

On the call with Brian Kong franchise groups, President and CEO, Eric seating franchise groups CFO.

For getting started I would like to me I would 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 or the federal Securities laws.

These forward looking statements are based on management's current expectations are not guarantees of future performance actual results could differ materially from those expressed or implied by the forward looking statements before 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 on these and other risks and uncertainties that could cause franchise groups actual results to differ materially from those indicated in the forward looking statements.

You see our form 10-K T for the fiscal year ended December 20, Eightth 2019, and other filings we make with the FCC.

The financial measures discussed today include non-GAAP measures that we believe investors focus on and comparing results between periods and among peer companies. Please see our earnings release in the news and events section of our web site at franchise GRP Dot com for a reconciliation of non-GAAP financial measures to GAAP measures non-GAAP financial information it should.

Not be considered in isolation from.

As a substitute for or superior to GAAP financial information, but included because management believes it provides a meaningful supplemental information regarding our operating results when assessing our business and it's useful to investors for informational comparative purposes. The non-GAAP financial measures. The company uses have limitations and may differ from those used by other companies.

Now I would like to turn the call over to Brian.

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Thanks, Andrew Good morning, Thank you for joining us today.

I will briefly walk you through the highlights of the second quarter and current trends in our markets in businesses before turning the call over to Eric ill discuss our second quarter results. Then we will be happy to answer your questions.

Despite the pandemic franchise groups overall financial performance has remained strong since we closed on our most recent acquisition of American freight in February our cash flow has allowed us to retire over $70 million of debt in pay over $17 million dividends in distributions to our shareholders. Thanks to the strong financial.

Performance of our current brands our shareholders have further supported us in our pursuit of additional businesses through a recent underwritten public equity raise approximately $106 million through an upsized follow on offering of common stock I'm confident that we will deploy our growth capital in a manner that is accretive to franchise groups overall.

Earnings per share as well as our available dividend per share Cobot 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 anytime in my career.

We've 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 and 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 them 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 the second tax refund for our customer demographic has created 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're seeing an influx of new customers.

Let me turn to a brief synopsis of our individual businesses.

When we combined eighth grade with the former outlet business in mid February we underwrote a business combination that included $42 million of annualized synergies.

Freight management has done an excellent job integrating these businesses and now expects to exceed the original synergy plan through 2021.

Not only has the athree team excelled operationally, but theyve been fantastic salespeople as we've said multiple times a freight head up to 150 locations closed at various times due to covert 19, yet delivered over 7% actual revenue growth compared to the second quarter of 2019. This.

Strong demand trends have continued through fiscal July with comparable store sales up approximately 21% compared to fiscal July 2019.

Rent to own stores like buddies are typically resilient across our economic cycles Buddies remained open during the pandemic as an essential business and continued to execute according to plan as the economy reopened with the equivalent of a second tax refund from the government.

Buddies 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 free we believe management's focus on professionally serving its customers and communities has made them a truck the destination for furniture mattresses appliances and electronics.

The vitamin Shoppe had numerous challenges to overcome in the second quarter, including 90 store closures reduced operating hours due to covert 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 per se.

Compared to fiscal 2019.

Year to date, we've retired or purchased for our own account $38.4 million of the vitamin shops 70 million dollar term loan.

As we stated we expect to further reduce the term loan to no more than $20 million by year end.

As everyone knows from their personal tax filing this was a unique tax season.

The extended deadline created challenges because of Liberty team and our franchisees, but our Liberty leadership team persevered to drive a stronger finished 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 deck season, U.S. store count was down 320 units to 20, 501 storefronts and on a same store basis federal tax returns prepared were down approximately 3%.

For the 2020 tax season.

The pilot plan to rollout Liberty tax kiosks within our American freight and Buddy 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.

They truly are what makes a 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-K T filing reflects our new fiscal yearend December retail year, but only includes the results of bodies Sears outlet and the vitamin shoppe from their respective acquisition 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 freights 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 27 preliminary release of 505 to 515 million.

GAAP net loss attributed to franchise group was 21.7 million were 62 cents per share.

Compared to our preliminary release of net loss of $27 million to $24 million or 76 cents to 70 cents per share.

Pro forma adjusted EBITDA was 62.7 million compared to our preliminary release of 55 to 65 million.

Non-GAAP EPS was 53 cents per share compared to our guidance of 34 cents to 53 cents 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.

And calculating non-GAAP EPS in 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 30 cents per share for the full year 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 onetime items associated with purchase price accounting and acquisition costs.

We have four reportable segments.

American freight the vitamin Shoppe Liberty tax and bodies.

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.

But he has 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 up 15.1 million and 538000, 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 quarter cash balance of 105.5 million.

It does not include $106 million of net proceeds from the follow on offering since it closed after June 27.

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 backs in the queue Cares Act.

Our pro forma cash balances ended 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, where it's still on track as Brian mentioned to eliminate approximately $42 million a 70 million initial term loan used to acquire the vitamin shoppe by the end of 2020.

By early next week, we expect Liberty tax to sign a new 60 million direct lending facility to support its franchisees during the off season.

Liberty's Pryor facility was fully paid prior to its exploration on April Thirtyth.

This new facility will allow liberty franchisees world directly from the lender with Liberty acting as a loan servicer.

Liberty will arent servicing fees on the loans the facility the off balance sheet and Liberty is not the direct borrower.

Liberty will incur a onetime arrangement fee of 2.5 million, which can be earnback 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 continuing to me all of our obligations and support all of our businesses for the foreseeable future.

I will now turn the call back to Bryant discuss our guidance for the remainder of the year.

Thanks, Eric for fiscal 2020, we believe we will exceed our previous guidance for $240 million or pro forma adjusted EBITDA in $2.60 non-GAAP earnings per share and now expect pro forma adjusted EBITDA to exceed 255 million.

Non-GAAP earnings per share of over $2 in 70 cents, including 30 cents a pro forma dilution from our recent follow on offering.

This guidance excludes any assumptions for acquisitions divestitures or refranchising activity.

Want to thank all of our shareholders and lenders for their support to date operator. Please open the line for questions. Thank you.

Thank you ladies and gentlemen, if you have a question at this time, please press the star and less than one key on your touched on telecom.

If your question has been answered all your wish dividend will be ourselves from the Q. Please press the pound Keith.

We asked thank you please limit yourself to one question and one follow up.

One moment level compile your questions.

We have a question from Scott, but 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 your announced in the next couple of days you'd see a similar impact for the third quarter.

Okay, It's Brian Scott.

Yes, the stimulus plan, we had American rate comps, a well over 20% at some times 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 you were 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 I appreciate that second a 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 incentive of what you guys are looking for and.

What a how large of a transaction you would consider that'd be helpful. Thank you.

Sure well, yeah as you see we seem to find so 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 were looking at don't ultimately fit with what we're trying to do or we need the business to be either already franchised or franchise the boat.

You know size wise.

Yes, there is no.

There, it's really more based on the opportunity and the value that we can get out of a business, we would consider a very small.

Acquisition that we think we can grow and we would consider you know much larger acquisitions. If the value is right. We think that we can get the support from our lenders.

In the event to go larger acquisition. So it's it's really you know case by case basis.

Great and then last one I highlight.

I know, it's early but have you seen any impact and 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 are liquidating stores, you would expect to see pressure on market share.

If if that is happening then we're certainly not seeing it because vitamin shops, performing very well and and currently comping positively that's not really what we would've expected during a competitor.

Liquidating stores.

But.

They will get through that process and I think they're expecting to emerge later this year in some form or fashion with the reduced store base in the United States and it'll be interesting to see when that supply a wears off what what vitamin shoppe looks like that.

All right appreciate the color guys. Thanks a lot.

Sure.

Thank you at this moment I will like to turn the call back to mature comp 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.

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