Q1 2021 Franchise Group Inc Earnings Call
Price 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'd now like to hand, the conference over to your host Andrew Kaminski 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 a call with Brian Kahn franchise group, President and CEO and Eric <unk> franchise group 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 1095, 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.
Really from those expects expressed in or implied in the forward looking statements 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 groups 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 <unk>.
<unk> 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 website at franchise at <unk> Dot 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.
The company uses have limitations and may differ from those used by other companies now I'd like to turn the call over to Bryan Bryan.
Thanks, Andrew.
And good afternoon to our listeners and thank you for joining US I will briefly discuss the highlights of franchise groups 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 your questions.
In the first quarter 2021 franchise group continued to execute operationally will 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.
Next point acquisition Corp.
We closed on the acquisition of <unk> 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 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 document and held multiple discovery days for potential franchisees across all of our brands and.
Net buddies and existing franchisee has recently signed a definitive purchase agreement at our ninth store conversion of an independent dealer.
Conversions of independents like this are particularly attractive for the franchise or and the franchisee because they're typically acquiring mature stores at add immediate revenue and incremental cash flow instead of a gradual ramp over a one to two year period that a de novo store would experience.
The rent to own industry remains highly fragmented outside of rent a center in 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 seven New American freight locations and added 10 more stores to pet supplies existing 186 door backlog since closing the acquisition on March 10.
Pet supplies plus has been a great addition franchise group.
Chris Roland and his team have already been able to accelerate their growth plans by selectively purchasing 41 pet valu stores.
These locations were cherry picked because they had favorable lease terms and targeted markets and became fully fixture with grooming and pet wash stations essentially.
Essentially all day needed to do is change the signage net inventory to get these locations opened and the team is already Refranchising 17 of these 41 locations with more refranchising to come.
As of today PSP has 565 locations, including 324 franchise stores Pst'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, we're generating minimal service rep.
During the latter part of March of 2020 due to COVID-19 restrictions.
American freight management team successfully converted the acquired 31 S. F O home location to the American Grey banner during the first quarter.
Not only are these locations have been rebranded but we have on boarded them to all of our platforms and they're running smoothly.
As of today American freight operates 356 locations, including six franchise stores.
Total revenue in American freight managed to grow two 9% overall in the first quarter compared to the pro forma first quarter of 2020 is that pro forma includes the revenue generated by American freight stores before we actually closed the acquisition in mid February.
By supply constraints in furniture, mattresses, and appliances American freight management has been able to source enough product to continue opening new stores and steadily ramp the former <unk> stores on the appliance side last year's disruption in manufacturing of new appliances has trickled down the supply chain.
Hum.
Has become a.
Dropped significantly.
Significantly limits, our availability of ads as merchandise for the last few quarters, our ads as 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-19 binge buying and a delayed start to the tax season and nominal comps they were down 10% American freight still group EBITDA, 13% compared to the same period last year and went to apply a normalized an American freight and its franchisees would be big beneficiaries.
But he's home furnishings is experiencing similar supply constraints, primarily in upholstery case goods and mattress categories operationally similar to American freight Buddies management is finding ways to overcome the supply constraints due to the recurring nature of buddies revenue stream from inventory out on lease, but he was able to comp positive eight five per cent.
For same store sales in Q1, but he's continues to operate very well and their primary focus is squarely on increasing the current store count of 295 with the potential to have over 2000 franchise locations in the United States Vitamin Shoppe had same store sales comps of positive eight 5% consisting.
The five 8% in store from 22, 3% direct to consumer and less than 1% of the sales comp was due to COVID-19 related store count comparisons.
Trends in favor of health and wellness has continued and vitamin Shoppe is clearly a beneficiary.
And for Liberty tax from the announced merger with next point is still anticipated to close late 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 three turns of net lever.
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.
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 and supporting each other and our franchisees and ultimately the success of franchise growth.
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 from the acquired businesses prior to their acquisition by franchise group.
These items have been adjusted to align with our fiscal calendar and accounting policy is 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 and 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 reported adjusted EBITDA in the same format as 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 per franchise group was $621 3 million GAAP net loss from continuing operations was $28 3 million or <unk> 76 per share.
Adjusted EBITDA was $79 2 million and non-GAAP EPS was <unk> 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 four reportable segments American freight the vitamin Shoppe pet supplies plus and bodies.
And now reported 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 $45 million respectively.
But he said revenue and adjusted EBITDA of $16 8 million and $5 2 million respectively.
And PSB has revenue and adjusted EBITDA of $51 3 million and $4 8 million, respectively from our ownership period.
For the fourth quarter.
That's five plus had revenue and adjusted EBITDA of approximately $254 4 million and approximately $22 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 from one time rebranding costs associated with American freights conversion.
<unk> home locations.
And approximately $100000 associated with Psp's conversion of pet valu locations during our ownership period.
We ended the quarter with approximately $1 3 billion in term debt.
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 next point.
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.
So at least $3 35.
While maintaining our prior guidance of revenue of three to $3 1 billion.
In calculating EPS, we were using approximately 40 million weighted average shares outstanding.
Our guidance does not include any assumptions for governance stim.
Stimulus payments additional acquisitions divestitures other than liberty or Refranchising activity.
I want to thank all of our share holders and lenders for their support to date.
Operator, please open the line for questions. Thank you.
And thank you ladies and gentlemen, if you have a question at this time. Please press Star then the one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key we ask that you. Please limit yourself to one question and one follow up.
And we have our first question from Larry Solow with CJS Securities. Please go ahead Sir.
Hi, good afternoon, its actually lead you go to for Larry.
Yeah.
Just 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 yeah, I guess better compete with the Amazons and the choice of the world in each of those end markets.
Yeah, well I think that's actually what what's happened and it would pet supplies. Specifically that's that is how that is their ecommerce strategy today. They use the local neighborhood stores effectively is.
The distribution centers to the local area for people, placing orders.
So we don't actually shipped directly from the distribution centers themselves. So.
So get delivery or buy online pickup in store and that really is right now the way ecommerce works with.
Vitamin Shoppe its.
Very different they.
They have two large distribution centers that do fulfill.
Through Fedex and deliver directly from the distribution centers, but.
Now with buy online pick up in store.
That becomes a.
Essentially the same thing where you can use the 700 plus locations.
As you.
Very competitive distribution sources for the customers locally they can get the product faster and in many cases and in 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 youre 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 are answering.
Answering those questions backwards I think we would stretch to about four two turns of EBITDA for the right deal.
We'd need to have a very concrete plan for very quickly getting back below.
Our our return 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.
You were always.
We're always looking at companies that 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.
I'm currently in the franchise group portfolio of businesses that we have been involved with for many years. So just because the transaction happened at a certain day does it mean that it was just a process that was started it's not it's not a typical.
Here a banker.
You're involved in a process.
Do you like it or don't you and see if he can make a transaction work so.
Our jobs are to go find.
Branded businesses that we think would be a good part of the franchise group for the long term and those could be very small and those could be large I would certainly characterize PSP is a larger transaction for us. So it was Americas right. So so as vitamin shoppe.
And we're always working on them whether or not.
We're about to transact is.
Totally different question.
Does that makes sense.
And thank you we have our next question from Ian Zaffino with Oppenheimer. Please go ahead.
Hi, great.
Got it guys. Thank you very much from a color on the supply chain and inventory can you also maybe touch upon labor.
Labor and you know your ability to maybe pass that through and then other.
<unk> pressures that you're.
You're facing an opportunity to be able to pass that off through thanks.
Sure. So there's nothing particularly new with it as it relates to labor or supply chain and 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-19 use when manufacturing shutdown in.
You know it takes time to get it going again and then.
You add all the demand that depleting the inventory it just 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 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. Its just the other way around right now.
Yeah as it relates to labor.
It's I guess similar you've got.
Got it.
You know a lot of people, who would prefer not to work that don't have to work that typically would have to work. So that the labor force has overall been reduced and and you're competing with other companies.
For labor and your.
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.
Not seeing a lot of people.
Miss work because of.
Getting the virus anymore, that's that's a positive.
But I think the labor market is tight and.
No we're not seeing any.
Material.
The increases in labor rates and you know.
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 could actually help you on the top line.
<unk>.
But he's an American freight but.
But as far as you know as a follow up question, what I wanted to ask skins.
She had pet supply 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 shop, So and I know you mentioned that you're not going to talk about synergies, but can you maybe walk us through maybe some of the things you've learned over our pet supply.
How you might share that knowledge over at vitamin Shoppe. Thanks.
Sure and I don't think its share.
Just what we learned at one business they 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, there are pros and I think that we have several businesses that.
We couldn't take what we've learned from pet supplies plus and.
You'll get a real advantage that not only helps.
And it not only helps the e-commerce strategies or the overall distribution, but 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 it distribution system for the benefit of everybody. We may find that we can apply that elsewhere and in our future transaction becomes far more attractive because of it.
So it's definitely a good example, but I wouldn't 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.
Wow, Alright, GAAP debt, that's pretty impressive. So thank you very much I'll, let someone else jump on here. Thanks.
Thank you. Our next question comes from Susan Anderson with B Riley.
Hi, good evening, thanks, Jonathan the quicker.
Wondering if maybe you could give a little bit more color on where you're at with the franchising locations at American free and vitamin Shoppe and your expectations for the rest of the year there.
Sure. So you know this quarter is really when we launched those franchise programs American freight has signed a seven store development agreement.
They're doing it.
Yeah.
Ton of interest.
It's all about getting the right deals under his interest in Refranchising stores, there's interest interest opening stores, there's interest in refranchising and signing development agreements.
I think that as the year goes on we will see.
The significant gains in the franchising efforts at American free and I know Youll quote me on that later, so you know franchise team needs to sell some territories.
And vitamin Shoppe. They just finished their F D D day.
They've launched they actually had a franchise meet the team day to day, a very impressive and you expect that you know I'd say they were 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 low.
Determine shop franchising of Refranchising as the year goes on.
Great and then.
If you could talk about the drivers and the EBITDA margin performance by segment I think it looks like buddies and vitamin Shoppe were up year over year in the quarter, but American freight is down a day and then how you think about this market margins in second quarter than it was from a year.
Sure.
Eric do you want to take that you want me to take that.
Yeah.
Yes, going going by business.
Starting with vitamin shop, I think if you look at their margin profile overall, we do expect them to be generally.
Around the same spot.
In second quarter than the back half of the year I think it would be a little bit softer just because normally you've got the.
Call it the new year's resolution aspect to acquire one within their business rather than the health and wellness, yes, generally asking a positive transition that may look if it continues through the year, we're not anticipating ambition additional stimulus.
You know, we're not thinking about anything related to <unk>.
American freight we expect to be relatively steady from the margin perspective.
Bodies, certainly benefit in first half of the year from the stimulus and 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 their strongest traditionally in Q1, and then PSP is pretty consistent over the full.
Full year from a margin profile.
Great. That's very helpful. Thanks, so much.
And thank you.
Again, if you have a question. Please press Star then one on your Touchtone phone, we have our next question from Mike Baker with D. A Davidson.
Okay. Thanks, guys. A couple of couple of boring modeling question. If I can just confirm your results how would you characterize your results in each of these segments relative to your plan because I think there's some.
Some difficulty in moving some confusion or my new share around.
Bottling, the quarter's and the consensus so if you could just characterize the results by segment versus your internal plans. Please.
Yeah, Mike I think we noticed that the.
It's a bit scattered we 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 franchise and group where if.
We want everybody else to understand that as well so we're trying not to get bogged down in what the.
The quarterly number that said, we will be able to help you.
You know with with where how you should be thinking about the businesses understand that.
Removal of Liberty has created some confusion because we havent sold liberty yet everybody's used to the seasonality with Liberty, but liberty is not there so the revenue.
It.
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 just to complicate, especially.
You know it with where we are.
Coming out of COVID-19, the comparisons year over year it's.
No it's just a.
It's not it's not a normal year, but but overall.
Things are going very well.
Right right no I appreciate that but I guess, what I'm about to two follow ups, one I guess, what I'm asking more for reported that just happened. So this is not yet forecasting guidance just how would you characterize those results versus your internal plan.
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 ads as appliance.
Business.
Per cent down in revenues is that right that 10% down and how much 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've been in American freight for the quarter.
Yeah.
Good day.
It's hard to know and I can I can give you.
Some facts, but but you know I'm, drawing the conclusion or what they would've been otherwise I don't know it yet 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 <unk>.
Revenue in the quarter so just.
And look this is supply chain as tight not just with us as appliances, but it turns out as appliances is a great category for us. It's a category that we want to be and 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 you know call it.
Plus or minus $250 million of revenue from American freight and it gives it to $2 58.
Eight.
And it was $2 51 last year.
The the attribution of that revenue you know dish last year, 30% of our revenue $75 million came from houses appliances.
This year $45 million came from mazda's appliances, So we were $30 million less revenue.
Because of inventory and it's.
It's not just a little bit we went from <unk>.
Inventory of <unk>.
$46 million of ads as appliances. This time last year to 19 million now so we're turning 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 will get that benefit and again instead.
At a much higher relative margin than new in the box appliances, So we'll get that benefit down the road as well.
Yeah.
Personally I will miss it I appreciate that I've gotten a lot of airtime, but I'm going to flow more quickly if I could if you could talk about your 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 of the Liberty tax me when you pay down some more debt what should we think about for interest expense from here.
Well look it's really.
I think of interest on a daily basis. Unfortunately, and then of course, we've got the $1 3 billion.
Now a little north of 6% and we're we've got the negative arb because we've got the 182 cash proceeds that will pay down a portion of that 1.3. So interest will go down once we close on Liberty tax.
As of today that's that.
Do that daily rate and that's what we're that's what we're paying now.
We're paying it.
Starting when we close the transaction, which was march 10th but.
Our pro forma numbers for whatever reason you can.
<unk> talked to the GAAP world, but the 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.
Okay.
I got it I appreciate the time thank you.
Sure.
And thank you if you have a question. Please press Star then one on your Touchtone keypad.
And I see no further questions in queue I would now like to turn the call over to Brian <unk> 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.
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