Q1 2022 Franchise Group Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to franchise groups fiscal 2022 first quarter conference call at.
At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session. During the question and answer session. If you wish to ask a question. Please press zero then one on your Touchtone phone.
I'd now like to hand, the conference over to your host Andrew Kaminski Executive Vice President and Chief administrative officer and franchise group.
Thank you Richard Good afternoon, and thank you for joining our conference call on the call to Brian Kahn franchise groups, President and CEO and Eric <unk> franchise groups.
So before getting started I'd like to mention that certain matters discussed in this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
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 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 25, 2021, and other filings we make with the SEC.
The financial measures discussed today include non-GAAP measures that we believe investors focus on and comparing our results between periods and among our peer companies.
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.
non-GAAP financial information should not be considered in isolation from as a substitute for or superior to GAAP financial information will be included because management believes it provides 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 Bryan Bryan.
Thanks, Andrew.
Good afternoon, and thank you all for joining us I will provide a general update before turning the call over to Eric to provide financial details. We'll then be happy to answer questions.
First of all Im extremely proud of franchise group's overall performance in the first quarter.
Our financial performance persevered, despite consumer headwinds driven by spike in interest rates and energy costs as well as the other obstacles like supply chain constraints and general cost pressures on wages and products to persist for some time now.
<unk> diversification across various discretionary and non discretionary products and services continued to serve us well our diversification as a matter of capital allocation decisions that we can control over time, but the real heroes within FRG, our a plus management teams, who live in the trenches and who seem to.
Compete with each other to see who can be the most nimble and adapt most rapidly to changing environments in order to produce the most reliable cash flows grow.
I can't stress enough how important our management team's art FRG, we have some of the best partners in the world running our brands and their collective success, that's allowing us to gain momentum with all of our stakeholders as we continue to diversify and scale FRG through strategic internal and external investment opportunities within FRG our homes.
Furnishings business.
As seen wider variability of financial performance in our other businesses as cost pressures have been higher there to the tune of over 25% and that's driven higher prices to our customers unit sales have been lower fairly consistent for over a year now partly due to the high demand during COVID-19 and partly due to price increases.
<unk>.
Ultimately price out the marginal customer each step of the way.
Demand for health and wellness, Pat and educational services and products have seen far less variability within FRG. These businesses also happened to be the least discretionary and have the least amount of cost pressure in pricing variability.
It said across all the franchise group.
We estimate our freight and logistics costs are running in excess of $100 million more than they will in the steady state.
As these cost excesses subside FRG and our franchisees and dealers tend to be significant beneficiaries and while we don't expect any immediate gratification. We do believe that recent consumer headwinds are likely to catalyze a quicker return equilibrium sooner than we thought on our last conference call.
Moving to the first quarter results I'll start with a quick recap of our home furnishing businesses in the first quarter system wide bodies had negative same store comp.
Negative one 6% with franchisee comps declining two 2% corporate stores growing one 6%.
But he has opened 10 new franchise stores in the first quarter, ending with 323 stores operating under the body's banner.
But he's also awarded 12, new area development agreements in the quarter, increasing its backlog to 102 franchise locations.
Comped down negative four 5% for the first quarter. We are in the process of transitioning away from bad cuts in house credit program in favor of adding.
Several new and enhanced payment options from our trusted third party partners, we have excluded the traditional profitability of the credit business from our non-GAAP results.
During the quarter, we entered into a series of real estate transactions at Babcock, we've closed one generating gross cash proceeds of $94 million and we've signed a definitive purchase and sale agreements for bad Cox distribution centers corporate headquarters and other real estate for a combined more than $170 million of additional <unk>.
Cash proceeds.
The majority of the Babcock real estate transactions are expected to be closed in the current quarter and combined with the $400 million of consumer receivables sold in December all of these transactions will bring our gross proceeds from the sale of noncore assets at Babcock to over $660 million since we closed on the purchase of bad cockpit.
$580 million last November .
American freight comped down six 4% for the quarter.
Hey, freight opened two net new company owned stores in the quarter, bringing total store count to 369 units. We continue to be very optimistic about the growth prospects for a free franchising, we expect that franchisee demand will continue to increase when the API ecosystem normalizes.
In its first full quarter with FRG has still been performed well and delivered positive comps of over 16% still been opened three new locations and sold three new franchises. We continue to work with the Sylvan team on accelerating franchise growth and are starting to see traction in that process.
Yesterday in Baltimore Sylvan concluded its first in person franchise convention in three years.
You can feel the excitement among the Sylvan management team and its franchisees. It's a wonderful combination when you can offer franchisees a chance to provide a service to their communities. While also generating a profit for the privilege Sylvan operates 563 physical centers today and over 700 total locations and we expect that count to grow substantially over time.
Pet supplies plus generated systemwide same store sales comps for the first quarter of positive eight 5% franchisee comps grew over 10% in the quarter, while corporate stores grew five 7% for the quarter PSP continues to accelerate its growth and brand building with 19, new store openings and the sale of 21, new Frac.
<unk> area development agreements in the first quarter, bringing total backlog at PSP to 216 locations PSP acquisition of wagon washes off to a successful start and it's been well received by customers and franchisees.
We believe the wagon watch will be an attractive opportunity for franchisees to add smaller more focused stores within their geographies and that the second concept will complement existing PSP footprints and provide franchisees new market opportunities or both.
Vitamin Shoppe comps were positive six 1% for the first quarter.
Due to continued increases in store traffic and growing customer interest in this health and wellness products and services.
Direct to consumer revenue accounted for over 25% of the business in the quarter franchising continues to build momentum and vitamin shoppe as well with 12 stores now in backlog and we see growing interest from franchisees candidates.
Evidenced through discovery day attendees.
Before I turn the call over to Eric I, just want to reiterate how impressed I am by our management team. They collectively are great stewards of our capital.
They are the driving forces behind franchise groups opportunities to invest internally and externally as we continue to diversify and scale our business and once again I'd like to thank all of our dedicated associates for their tenacity.
And for their support of each other their support of our franchisees and dealers 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 will be making many references to pro forma items throughout this call.
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 to 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.
For the first quarter of 2022 total reported revenue for franchise group was $1 1 billion and income.
From continuing operations was $12 $3 million or 25.
Diluted share adjusted EBITDA was $112 $3 million and non-GAAP EPS was $1 29 per share.
<unk> overall financial results include the financial results of all acquisitions from the date of acquisition in the first quarter. All six business segments were fully included in our results and are detailed in our press release and filings.
As Brian mentioned, we are in the final stages of transitioning customer financing at Babcock from in House to third Party partners.
Since this business is being transitioned and does noncore for FRG, we excluded the results of the finance business for adjusted EBITDA and non-GAAP EPS.
We ended the quarter with approximately $1 3 billion in outstanding term debt.
Outstanding term debt balance does not include repayments from the net proceeds of $94 million sale of the backup Corporation, a real estate portfolio, which closed on March 31 2022.
We anticipate the two pending Babcock real estate sales close by the end of our second quarter and will allow us to repay at least the $175 million balance a backpack acquisition financing.
As well as add approximately $20 million of cash to the balance sheet.
At the end of the quarter, we added approximately $63 million of availability on our ABL revolver and cash of approximately $149 6 million.
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 reaffirming our previously announced financial outlook for fiscal year 2020 to have revenue of approximately $4 $4 $5 billion adjusted EBITDA of approximately $450 million and non-GAAP EPS of approximately $5 per share.
Due to the success of the sale of bad Cock real estate, we believe net debt will be below $1 $1 billion by the end of fiscal year 2022.
The company is using approximately 41 million weighted average shares outstanding our outlook does not include any assumptions for additional acquisitions divestitures 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.
Thank you.
We will now begin the question and answer session. If you have a question. Please press star zero one on your Touchtone phone, if you wish to be removed from the queue. Please press zero two if youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press star zero one on you touched on.
Tom.
We are standing by for questions.
And our first question on line comes from Mr. Mike Baker from D. A Davidson. Please go ahead.
Thanks, guys a couple of questions.
One can you sort.
So to put the first quarter in context to your own expectations. Your numbers were ahead of consensus.
But how does that compare since you don't give quarterly guidance just wondering how it compared to.
How you expected the first quarter to come in and then related to that as you think about the full year you have reiterated your guidance.
Pretty much to a T, but the environment today is a lot different than it was three months ago. So.
Are you more confident less confident or there are different drivers within that no change in the guidance and what's changed so just wondering how youre thinking about the business today versus three months ago. Thanks.
Sure.
Thanks, Mike.
So.
I'd say within the business, we obviously have several businesses and some of the businesses were marginally.
Stronger than we might have thought three months ago, some would be marginally weaker but all in all.
We are where we are and we're very happy to be where we are.
As far as what's changed over the last.
Couple of months.
I think that where we're paying attention to everything that's going on I definitely think that we've seen energy prices gas prices Spike that's traditionally.
Ben.
Cash out of pocket for many of our consumers that they have no choice, but to spend and that takes away discretionary income for them to use in some of our stores, but all in all it's been it's been fine traffic has continued to be about what we thought that it would.
I would say that the.
The main differences.
Today versus where we were three months ago would be I didn't really see what the catalyst would be that would.
Snap things back more into equilibrium and now I think I feel better that we can see the light at the end of the tunnel because the consumer generally is challenged.
Is that demand is lower it actually solved the supply chain issues to one extend it solves ultimately the pricing issues that we're seeing we're seeing container costs down in some places over 50% from the peak already and although that takes time to flow through the P&L.
I think that that debt.
Very different trend than we've seen over the last couple of years. So I think as long as we can continue to hold down the board doing exactly what we're doing we feel great.
And on the other side I think we're going to.
It would be a huge beneficiary of just something going back to normal.
Yeah interesting perspective, thanks, if I could ask.
One more just as it relates to the balance sheet and getting to below $1 1 billion and net debt by year end.
I assume that includes.
Within that debt calculation of the current installments, I, which I think is around $488 million right now and it certainly it does your net debt today is about $1 6 billion. So you got to pay down another $500 million. So things are selling and you'll get $268 million. So I guess where is the other roughly $2 50.
I'm going to come from is that for you and I'll I'll, let Eric coming over the top if I say something he doesn't like but that at current installment.
We still got the securitization from what we what we sold.
B Riley all of those receivables.
Its an accounting issue it's not.
I hate to say this is not actual debt, but it's not actual debt. We don't we don't actually owe that money, but we werent able to qualify for.
And accounting sales so until we stopped doing certain things operationally that has to appear on our balance sheet.
I'm sure I mucked, it up pretty well, but.
That's not actual debt that we owe anybody.
That makes sense.
Well, it's a follow up about that okay. So thats not included in that calculation, but I guess a.
Question would be what one does when does that come off the balance sheet. If at all because I assume if you just do a screen of pulp Bloomberg that that's going to show up as it might show up is that I guess I don't know, but it could yes.
Is actually driven by how we run the Babcock operations and when we stop doing certain things and it's going to just disappear.
Don't really want to get into what those things are because its business, it's not actually financial.
It's not.
Financially driven it's just an operating.
Variable how about that.
Fair enough, but is it something that is coming on in the foreseeable future or is that just going to be there. When you say you got to do something.
They don't currently.
Planning to do that.
It'll go away relatively quickly.
Thank you.
Appreciate that thank you.
No problem. It's a good question frankly, we didn't think it would be there in the first place. So it's a very good question.
Okay.
And thank you. Our next question on line comes from Susan Anderson from B Riley. Please go ahead.
Hi, good evening, thanks for taking my questions.
I was wondering if maybe you could talk a little bit about the speculation thats been out there that potentially could be a purchase earnings calls maybe if you could comment on that at all whether or not that's an asset that you would be interested in.
Sure. Thanks, Susan.
So I'm not going to comment on any particular company.
That would include kohls.
But im happy to talk to you about FRG and.
Tell you.
I can't tell you what we're going to do in the future, but I can tell you I think a lot about our philosophy when it comes M&A.
And things that we look at from time to time so.
First with our.
We've got a lot of conviction in the brands that we operate now and so we.
Very strongly believe that these brands that we operate will give us significant organic growth over time and also generate enough free cash flow to support a healthy and growing dividend and.
Also additional free cash flow that we can reinvest.
Both internally and externally and M&A and we don't have any interest in putting.
At at risk for any transaction.
Yeah just period.
We're not going to mortgage the farm to do any one transaction.
<unk>.
Look when we when we look at we look at everything that's available and some things makes sense something don't make sense.
Transactions of size.
Certainly would need to be significantly accretive to <unk> earnings per share and cash flow per share.
And I think you can also imagine as wonderful as our lenders are we do have capacity constraints regarding capital in large transactions wood.
Would certainly have to be just over the top positive for <unk> in my personal opinion.
Opinion to tie us up.
Money doesn't grow on trees, and I think we've talked about many times on these calls out we analyze the opportunity cost.
Things, we may not be able to do.
Because of the transactions that we do undertake that tie up our balance sheet.
Time to time.
And look I think management for US is always a key that you heard.
Let me talk about management, a little bit ago of the businesses we have.
We have really investable management teams the franchise group and whether we do.
Whether we do very small transactions are very large transactions.
Management is always going to be.
A key to what we are.
Looking forward. So I think that's just.
Some some background more I think on funding cost in the FRG in and what we look for maybe without.
Directly answer your question, but hopefully that's helpful.
Yeah, that's really helpful.
I guess just to follow up on that though.
Ever makes sense and maybe.
As Kevin calls, but just any other large purchased where you potentially.
Difficult to finance, if you would ever issue equity to make that purchase and then also maybe if you could just talk about.
Now if you feel like you are in a position where.
Most of that term loan pay down.
We look for other new acquisitions.
And if youre seeing increased opportunities out there too thanks.
Yeah, so in <unk>.
<unk> order.
Absolutely we do believe that.
It could be a really good time for us assuming the capital markets are cooperative to be transacting, we have reduced our leverage we're going to reduce it further shortly.
And there are definitely some wonderful assets out there.
Wonderful management teams that we would love to partner with given given the opportunity.
As far as issuing equity generally.
We are.
It is highly unlikely.
That.
We would.
Issue equity.
Anywhere near the current FRG valuation for M&A purposes.
I think it would be.
Very difficult to.
Find something that makes sense I think there are other ways to structure transactions that hopefully would not require us to do that if there was a large transaction, but that is not something that we have an appetite to do.
Okay, great and if I get them.
No.
Yes, Yes, I think you did yeah. That's really helpful. Thanks, and then if I could just add or ask a one more question. Just you kind of talked about it a little bit, but just on the consumer trends that youre seeing it sounds like for like.
I can frame there is maybe some slowing.
Do you feel like it's partly because of the pull forward of it then partly maybe cause inflation and just can see Mike is pulling back.
Is that the case and then I guess just given your unique you over so many different product categories are you seeing it doesn't sound like you're seeing similar trends and more.
Staple like products like pet supplies, plus and vitamin Shoppe, but just wanted to see if there's any other consumer trends that you could call out that have kind of changed from last quarter.
Sure.
Well I think.
Last quarter on the last conference call, we talked about what was going on in the home furnishing segment.
And.
And I think I said, then that we have seen units down significantly for well over a year now it's probably.
Year and a half.
And so.
So.
What.
We see is higher pricing.
One higher cost to higher pricing, but then three.
A large decrease in the actual units that are moving and we've seen that for quite some time. So so the revenue seems relatively stable, but there is there's not as much activity as.
You would normally see.
So that's not changed I would say that as far as the business itself today on this call versus where we were three months ago on the last call.
It hasn't actually gotten worse in my view, it's just not getting any better.
You do have higher costs that are rolling in.
<unk> just rolled through the P&L, but now is.
The cost pressures do subside and I really do think that they will.
<unk>.
To some extent, it's not getting worse.
It's just going to take several months to roll through the P&L as well.
So it's again, it's not.
There is no real change, it's just what we've been living with and it has not gotten worse.
On the education side of the pet side.
Health and wellness.
The business is not seeing quite as much inflationary pressures, although their management teams all feel.
Feel like they're fighting on a daily basis against inflationary pressures.
My view, it's all relative to some of the other businesses that have been dealing with far greater inflationary pressures for some time.
Look I think that.
Even though we don't do any business.
Over in Ukraine, and Russia, I do think that that period of time.
When when war broke out spooked spooked people I think that marginal customer may have just done nothing but all in all it is.
It worked out okay for us.
Thank you.
Next question on line comes from Mr. Ian Zaffino from Oppenheimer. Please go ahead.
Hey, Good afternoon, guys. This is Isaac Sars in the season.
That's on a strong start to the year so far.
I guess my two questions. The first one relates to what was asked previously just on pet supplies plus and.
With vitamin Shoppe, its obviously, you've seen Sean pumps in the first quarter and it's been trending that way for the last few quarters I guess.
I guess as you look out through the year I know you don't give specific guidance for the segments.
Just curious if you if you think the strong comps can hold up throughout the year as you look at the health of the consumer.
Yes.
Yes.
We don't we don't forecast comps by brand, but obviously I appreciate the question anyway.
I would.
I think I can say.
That our plan certainly does not include robust comps in those businesses. So.
We would not expect the same level of comp activity across the board maybe thats.
Safeway or answering a direct question.
Yeah, Okay got it I appreciate it.
Alright, I guess correct me, if I'm wrong, but I've.
No in the past you've said.
I guess you guys believe you can achieve some synergies between American trade bodies and in Bangkok.
I guess, if you could provide sort of a general outline of those kind of synergies and sort of the timeline around that it would be helpful to frame.
Sure.
Would you expect that to be this year or a little more longer term.
Yeah sure no problem.
And I do think that.
And you're right. We do expect it will be to achieve benefits of having a larger scale in the home furnishing segment.
Have not fat.
<unk> factored in any.
Synergies during this year to our thinking I think thats more longer term and I think a lot of it has to do with vendor relationships.
Whether or not we're able to successfully get the vendors to look at.
The American freight.
Babcock buddies and anything else that we made.
Add to the home furnishing segment over time, as just franchise group in that relationship and whether or not we're able to drive better pricing a very small benefit in pricing has a very large impact on overall profitability and I think as we become more meaningful to our vendor.
And they are looking at us on a macro level rather than just a micro level I think that there is significant.
<unk> ability to add to the system.
I'd say that that's certainly the largest candidate we don't expect to be running for example, Buddy Bob Cock and American freight out of one office and it's not about that it's not about head count or corporate cost savings.
Our more operationally driven.
Another example would be the way that we provide payment options to customers having.
Providing additional volume.
Similar vendors can have advantages as well across the system. So.
Again, all operational and not really just corp.
Corporate structural.
Okay got it makes sense.
And then just circling back quickly to sort of the M&A discussion before.
I mean, given that that leverage will come down to the end of the year.
And obviously, what the EBITDA growth.
The year.
I guess are there certain areas of the business that you'd be more open to doing M&A.
Just maybe your general comments around that.
Sure so.
Look I think that we.
We have a goal to diversify which would mean.
Adding business lines that we arent currently and if we think that they make sense and they are a good fit for franchise group over the long term and then we also are interested in investing.
In the businesses that we have and yes wagon wash is a great example, very small acquisition, but provides a whole second concept too.
PSP and that's wonderful.
Bad Cock.
Added scale to the home furnishing segment.
Wonderful transaction for us so we're not against adding exposure to the businesses that we feel comfortable with.
Overall, but look most of our time is spent.
Looking at new avenues, new verticals that we can build around over the long term as well so.
It's every two.
Two we've always said that if we can find there are a lot of businesses we've loved one.
And we can price.
Businesses that we would like to own but that doesn't mean that the counterparty is going to be interested in selling them for the valuation that we think makes sense for franchise group, but we're not going anywhere hope hopefully.
And sometimes people change their minds and we're here.
It's certainly.
I think we we've gradually moved from.
People, saying.
Who the heck are you too okay.
Seen what you've done in.
You are a viable partner and let's figure out if there's a way to make a transaction.
The momentum that we'd like to sustain.
Okay awesome, well, thanks very much.
Of course.
Thank you once again for any question that zero then one on your Touchtone phone.
It looks like we have a follow up from Mr. Baker. Please go ahead.
Yeah real quick I hate to be short term focused but again so much is going on in the economy.
In the last few months it seems like.
Comment on any trends throughout the quarter and then into the beginning of the second quarter in other words.
How is March and April versus January and February .
Just as an indication of what might be going on in the economy.
<unk>.
Yes so.
I don't.
Realistically.
The monthly variation.
Again.
Depends which business, which business you are comparing it to.
I think that.
The way I would.
Have you understand what we're seeing Holistically is that when you combine all of those variations the things that are better the things that are not as good as what we would've expected when you blend it all together.
We're right where we.
Thought we would be.
Yeah.
Thank you we have no further questions at this time I'd like to turn it over to our presenters for closing remarks.
Great.
You all for joining us this afternoon and operator, you can please conclude the call.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect speakers. Please standby for your debris.
Yeah.
Okay.
Yes.
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Mmm.
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Ladies and gentlemen, thank you for standing by and welcome to franchise groups fiscal 2022 first quarter conference call.
At this time all participants are in a listen only boat after the speaker presentation. There won't be a question and answer session. During the question and answer session. If you wish to ask a question. Please press zero then one on your Touchtone phone.
I would not like to handle conference over to your host Andrew Kamensky, Executive Vice President and Chief administrative Officer franchise group.
Thank you Richard Good afternoon, and thank you for joining our conference call them on the cough, Brian calm franchise groups, President and CEO and Eric seating franchise groups CFO before getting started I'd like to mention that certain matters discussed in this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
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 or implied by the forward looking statements.
Forward looking statements are made as of the date of this call and accept 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 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 25th 2021, and other filings we make with the SEC.
The financial measures discussed today include non-GAAP measures that we believe investors focus on and comparing our results between periods and among our peer companies.
Please see our earnings release in the news and events section of our website at franchises TRP Dot com for reconciliation of non-GAAP financial measures to GAAP measures.
Got financial information should not be considered in isolation from as a substitute for or superior to GAAP financial information will be included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and it's useful to investors for informational comparative purposes.
<unk> financial measures the company users have limitations I may differ from those used by other companies now.
Now I'd like to turn the call over to Bryan Bryan.
Alright, Thanks, Andrew and good afternoon, and thank you all for joining us all.
I'll provide a general update before turning the call over to Eric to provide financial details will then be happy to answer questions.
First of all I'm extremely proud of franchise groups overall performance in the first quarter.
Our financial performance persevered, despite consumer headwinds driven by spike in interest rates in energy costs.
As well as the other obstacles like supply chain constraints in general cost pressures on wages and products persisted for some time now.
Yeah, <unk> diversification across various discretionary and nondiscretionary products and services continue to serve as well or diversification as a matter of capital allocation decisions that we can control over time.
The real heroes within FRG, our management teams, who live in the trenches.
Seemed to compete with each other to see who can be the most nimble and adapt most rapidly changing environments in order to produce the most reliable cash flows for us.
Can't stress enough how important our management team guard FRG, we have some of the best partners in the world running our brands and it's their collective success with the law.
Allowing us to gain momentum with all of our stakeholders as we continue to diversify and scale FRG through strategic internal and external investment opportunities.
Within FRG, our homes furnishings business.
Has seen wider variability of financial performance and our other businesses is cost pressures have been higher there to the tune of over 25% and that's driven higher prices to our customers unit sales have been lowered fairly consistent for over a year now partly due to the high demand during COVID-19 and partly due to price increase.
Pieces.
Ultimately price out the marginal customer each step of the way demand for health and wellness hat and educational services and products have seen far less variability within FRG. These businesses also happen to be the least discretionary and have the least amount of cost pressure in pricing variability.
Said across all of franchise group, we estimate are braden logistics costs are running in excess of $100 million more than they will in the steady state.
These cost excesses subside FRG in our franchisees and dealers stand to be significant beneficiaries and while we don't expect any immediate gratification.
We do believe that recent consumer headwinds are likely to catalyze quicker return equilibrium sooner than we thought on our last conference call.
Moving to the first quarter results I'll start with a quick recap of our home furnishings businesses in the first quarter system wide Buddies had negative same store comp.
One, 6% with franchisee comps declining $2, 2% in corporate stores growing one 6%.
Buddies opened 10, new franchise stores in the first quarter, ending with 323 stores operating under the Buddies banner.
But he's also awarded 12, new area development agreements in the quarter, increasing its backlog to 102 franchise locations.
Calm down negative $4, 5% for the first quarter. We're in the process of transitioning away from bad Cox in-house credit program in favor of adding.
Several new and enhanced payment options from our trusted third party partners.
We have excluded the traditional profitability of the credit business from or non-GAAP results.
During the quarter, we entered into a series of real estate transactions and bad Cock. We've closed one generating gross cash proceeds of $94 million and we've signed definitive purchase or sale agreements for bad Cox distribution centres corporate headquarters and other real estate for a combined more than $170 million of additional <unk>.
Cash proceeds.
The majority of the bad Cop real estate transactions are expected to be closed in the current quarter and combined with the $400 million of consumer receivable sold in December all of these transactions will bear gross proceeds from the sale non-core assets bad cop to over $660 million.
Since we closed on the purchase of bad Cock for $580 million last November .
American freight calmed down $6, 4% for the quarter.
Hey for eight open to net new company owned stores in the quarter, bringing total store count to 369 units. We continue to be very optimistic about the growth prospects for a free franchising. We expect the franchisee demand will continue to increase when the apron ecosystem normalizes.
And his first full quarter with FRG, Sylvan performed well and delivered positive comps of over 16% Sylvan open three new locations and sold three new franchises. We continue to work with the Sylvan team and accelerating franchise growth and are starting to see traction in that process yesterday in Baltimore Sylvan concluded its first in person in franchise.
Convention in three years and you can feel the excitement among the Sylvan management team and its franchisees. It's a wonderful combination when you can offer franchisees a chance to provide a service to their communities. While also generating a profit for the privilege Sylvan operates 563 physical centers today and over 700 total location and we <unk>.
Spect that count to grow substantially over time.
Pet supplies plus generated system wide same store sales comps for the first quarter of positive 8.5% franchisee comps grew over 10% in the quarter, while corporate stores grew 5.7% for the quarter.
P continues to accelerated growth and brand building with 19, new store openings in the sale 21, new franchise area development agreements in the first quarter, bringing total backlog at PSP to 216 locations.
<unk> acquisition of wagon washes up to a successful start and it's been well received by customers and franchisees. We believe that wagon wash will be an attractive opportunity for franchisees Tad smaller more focused stores within their drug rupees and that this second concept will complement existing PSP footprints from provide franchisees new.
Market opportunities for both.
Vitamin shop comps were positive $6, 1% for the first quarter due to continued increases in store traffic and growing customer interest in his health and wellness products and services.
Direct to consumer revenue accounted for over 25% of the business in the quarter franchising continues to build momentum vitamin shop, as well with 12 stores now in backlog and we see growing interest from franchisee candidates.
Evidence through discovery day attendees.
Before I turn the call over to Eric I, just want to reiterate how impressed I am by our management team. They collectively are great stewards of our capital and they're the driving forces behind franchise groups opportunities to invest internally and externally as we continue to diversify and scalar business and once again I'd like to thank all of our dedicated associates for their <unk>.
City.
And for their support of each other their support of our franchisees and dealers and ultimately the successive franchise groups Eric.
Thank you Brian .
Four 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.
Press releases on 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 to our fiscal calendar in 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.
For the first quarter of 2022 total reported revenue for franchise group was $1.1 billion in income from continuing operations was $12.3 million or 25.
Fully diluted share.
Justin EBITDA was $112 $3 billion in non-GAAP , EPS plus $1.29 per share.
Frg's overall financial results include the financial results of all acquisitions from the date of acquisition in the first quarter. All six business segments were fully included in our results and are detailed in our press release and file.
As Brian mentioned, we are in the final stages of transitioning customer financing at bad Cockrum and house to third Party partners.
Since this business is being transitioned and as an encore for FRG, we excluded the results of the finance business, Rochester, EBITDA and non-GAAP EPS we.
We ended the quarter with approximately $1.3 billion in outstanding term debt.
Outstanding term balance does not include repayments from the net proceeds of the 94 million dollar sale of the backup Corporation real estate portfolio, which closed on March 31 2022.
We anticipate the two pending fat cock real estate sales close by the end of our second quarter and will allow us to repay at least the 175 million dollar balance of bad acquisition financing as well as at approximately $20 million of cash to the balance sheet.
At the end of the quarter, we added approximately $63 million of availability on our AVR revolver and cash of approximately $149.6 million.
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 reaffirming our previously announced financial outlook for fiscal year 2022 of revenue of approximately $445 billion adjusted EBITDA of approximately $450 million and non-GAAP EPS of approximately $5 per share.
The success of the sale of bad Cock real estate, we believe that will be below $1.1 billion by the end of fiscal year 2022.
The company is using approximately $41 million weighted average shares outstanding.
Outlook does not include any assumption for additional acquisition divestitures or refranchising activity.
I want to thank all of our shareholders lenders for their support the date.
Operator, please open the line for questions. Thank you.
Thank you.
We will now begin the question and answer session. If you have a question. Please press zero one on your Touchtone phone, if you wish to be removed from the queue. Please.
Zero, two if you're using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero one on your Touchtone pump and we're standing back to your question.
And our first question on mine comes from Mister Mike Baker B a Davidson. Please go ahead.
Thanks, guys.
Questions Ah one can you put a put the first quarter contacts to your own expectations. Your numbers were ahead of consensus.
But but how does that compare since you don't give quarterly guidance just wondering how it compared to.
How you expected the first quarter to come in and then related to that as you think about the full year you have reiterated your guidance pretty much to a T. But the environment today is a lot different than it was three months ago. So.
Are you more confident less confident are there different drivers are within that you don't know change in the guidance.
What's changed so just wondering how are you thinking about the business today versus three months ago.
Sure.
Mike.
So.
I think I would say within the business. We obviously have several businesses some of the businesses were marginally.
Stronger than we might have thought three months ago, some would be marginally weaker but all in all.
We are where we are and we're very happy to be where we are.
As far as what's changed over the last.
Couple of months.
I think that.
We're we're paying attention to everything that's going on I definitely think that we've seen energy prices gas prices Spike that's that's traditionally.
Ben.
Cash out of pocket for many of our consumers that they have no choice but to spend.
And that takes away discretionary income for them to use and some of our stores, but all in all it's been it's been fine traffic is continued to be about what we thought that it would.
I would say that the.
The main differences.
Day versus where we were three months ago would be I didn't really see what the catalyst would be that would.
Snapped things back more into equilibrium and now I think I feel better that we can see the light at the end of the tunnel because the consumer generally is challenged and is that demand is lower.
It actually solve the supply chain issues 221 extended solves ultimately the pricing issue that we're seeing we're seeing container costs down in some places over 50% from the peak already and and although that takes time to flow through the P&L.
I think that that that's a very.
Very different trend and we've seen over the last couple of years. So I think as long as we can continue to hold down the fort doing exactly what we're doing we feel great and on the other side I think we're going to.
It would be a huge beneficiary of just.
Something going back to normal.
Yeah, an interesting perspective, thanks, if I could ask one more just as it relates to the balance sheet and getting to below $1.1 billion and net debt by year and I assume that includes within that that calculation to current installments.
Which I think is around $488 million right now and it's certainly a does your net that today is about $1.6 billion. So you gotta pay down another $500 million, the things, you're selling and you'll get $268 million. So I guess, whereas the other you know roughly 250 million come from is out for Ya and I'll I'll, let Eric.
Coming over the top if I say something he he he doesn't like but that at current installment.
We still got the securitization from what we what we sold.
To be Riley all of those receivables.
An accounting issue it's not.
I hate to say this is not actual dead, but it's not actual that we don't we don't actually owe that money, but they're.
We weren't able to qualify for.
Counting sales so until we stopped doing certain things operationally that has to appear on our balance sheet, then I'm sure I must add up pretty well, but but that's not actual debt that we owe anybody.
It makes sense.
Well to follow up about that okay. So so that's not included in the calculation, but I guess a question would be what what does what does that come off the balance sheet. If at all because I assume if you just do a screened in porch Bloomberg that that's gonna show up as it might show up his dad, I guess I don't know, but it could.
Actually driven by how we run the backpack operations and when we stopped doing certain things and it's going to just disappear and I don't really want to get into what those things are because it's businesses not actually financial.
It is not.
Financially driven it's just an operating.
Variable how 'bout that fair.
Fair enough, but is it something that like it's coming off in the foreseeable future or is that just going to be there. When you say you gotta do something.
Currently.
Planning to do with.
It'll go away relatively quickly yes. Thank you I appreciate that thank you.
No problem. That's a good question frankly, we didn't think it would be there in the first place. So it's it's a very good question.
[laughter].
And thank you are next question of mine comes from Susan Anderson.
Riley. Please go ahead.
Hi, good evening, Thanks for taking my questions. Anthony maybe you could talk a little bit about the speculation that's been out there that potentially could be a purchase arrants calls maybe if you could comment on that at all whether or not that's an asphalt that you might be interested in.
Sure. Thanks, Susan.
So I'm not going to comment on any particular company and that would include Kohl's.
But I'm happy to talk to you about FRG in.
Tell you.
I can't tell you what we're going to do in the future, but I can tell you I think a lot about our philosophy when it comes M&A.
And things that we look at from time to time so.
First with art.
We've got a lot of conviction in the brands that we operate now and so we.
Very strongly believe that these brands that we operate will give us significant organic growth over time and also generate enough free cash flow to support a healthy and growing dividend and.
Also additional free cash flow that we can reinvest.
Both internally and externally and M&A and we don't have any interest in putting.
At risk for any transactions.
Period.
Not going to mortgage the farm to do any one transaction.
Look when we but we look at look at everything that's available and some things make sense some things don't make sense.
Any transaction of size.
Certainly would need to be significantly accretive bird.
G earnings per share in cash flow for sure.
And I think.
You can also imagine as wonderful as our lenders are we do have capacity constrained regarding capital in large transaction.
Would certainly have to be just over the top positive for FRG in my personal opinion.
Opinion to tie us up.
Money doesn't grow on trees, and and I think we've talked about many times on these calls out, but we we analyze the opportunity costs.
Of things, we may not be able to do.
Because of the transaction that we do undertake that tie up our balance sheet.
From time to time and look I think management for US is always a key in that you heard.
Let me talk about management, a little bit ago, the businesses we have.
We have really investable management teams that franchise group and whether we do.
Whether we do.
Very small transactions are very large transaction.
Management is always going to be.
A key to what we are.
Looking for it so I think that's just.
Some some background more I think on punished us an FRG in and what we look for may be without.
Directly answer your questions and hopefully that's helpful.
Yeah, that's very helpful. I guess just to follow up on that though.
Ever make sense and maybe.
Can you recall any other large perch as well.
Potentially it'd be difficult to finance, if he would ever issue equity to make that purchase and then also maybe if you could just talk about.
Now if you feel like you are in a position.
That term Lamb pay down can look for.
New acquisitions, and if you are seeing increased opportunities out there too.
Yeah. So.
Reversed order.
Lately, we do believe that.
To be a really good time for us assuming the capital markets or cooperative.
Be transacting, we have reduced our leverage we're going to reduce it further shortly and there are <unk>.
Definitely some wonderful assets out there.
My wonderful management teams that we would love to partner with given given the opportunity.
As far as issuing equity generally.
It is highly unlikely.
That.
We would.
Issue equity.
Anywhere near the current FRG valuation for M&A purposes, I, just I think it would be.
Very difficult to.
You'll find something that that makes sense I think there are other ways to structure transactions that hopefully would not require us to do that if if there was a large transaction, but but that is not something that we have an appetite to do.
Okay, great, but he ended up getting them all.
Yeah, Yeah, I think he did yeah. That's really helpful. Thanks, and then if I could just add one.
One more question I guess, you're kind of talked about it a little bit but this time they can see what you're trained that you're seeing it sounds like you know for like an.
And then you can trade there is maybe some swelling like you feel like it's probably like him to pull for them at the end, partly maybe cause inflation and just continue mind pulling back.
Is that the case and then I guess, just giving you a unique view over so many different product categories are you seeing it doesn't sound like you're seeing similar trends and the more stable.
Staple like products like pets apply plaza vitamin shop.
I wanted to see if.
Any other consumer trends that you could call out that have kind of change him last corner.
Sure and.
Last quarter on the last conference call, we talked about what was going on in the home furnishings segment.
And.
And I think I said, then that we've seen units down significantly for well over a year now it's probably you know.
A year and a half and.
So.
What what.
We see is higher pricing.
[noise] higher costs to hire pricing, but then three.
A large decrease in the actual units that are moving and we've seen that for quite some time. So so the revenue seems relatively stable, but there's there's not as much activity as you would normally see so that's not change that I would say that as far as the the business itself.
Today on this call versus where we were three months ago on the last call.
It hasn't actually gotten worse in my view, it's just not getting any better.
Yeah, you do have higher costs that are rolling in the.
They just rolled through the P&L, but now as the.
The cost pressures do subsided I really do think that they will.
To some extent, it's not getting worse.
That's just going to take several months to roll through the piano as well.
So again, it's not there's no real change, it's just what we've been living with and it has not gotten worse.
On the education side to side.
Health and wellness.
Businesses, not seen quite as much inflationary pressures, although their management teams all.
Feel like they are fighting on a daily basis against inflationary pressures, but.
From my view, it's all relative to some of the other businesses that have been dealing with far greater inflationary pressures for some time.
Look I think that.
Even though we don't do any business.
Over in Ukraine, and Russia, I do think that that period of time.
When war broke out spook to spook people I think that that marginal customer may have just done nothing but.
All in all it was.
Worked out okay for us.
Thank you alright.
Next question on mine comes from Mr. Ianthina Oppenheimer. Please go ahead.
Hey, Good afternoon got this is Isaac sauce offer ENB season, congrats on our shores start to the year. So far I guess my my two questions. The first one relates to like <unk>. So you just on pet supplies plus.
And with vitamin shop policy seems Sean pumps in the first quarter and it's been trying that way for the last few quarters I guess.
I guess as you look out for the year I know you don't give specific guidance for the segments.
But just curious if you if.
If you think of the strong comps can hold up throughout the year as you look at the health I guess.
Yeah. So we.
We don't we don't forecast comps by brand, but obviously appreciate the question anyway.
I would.
I think I can say.
That.
Our plan does certainly does not include robust comps and those businesses. So.
We we would not expect the same level of comp activity across the board maybe that's.
Safeway of answering a direct question.
Yeah, Okay I got it I appreciate it.
Ah, Yes, correct me, if I'm wrong, but I I've known to pass you said.
I guess you guys believe you can achieve some some synergies between American trade buddies and and bad Cock.
I guess, if you could provide sort of a general outline of those kind of synergies and sort of the timeline around that it would be helpful to frame either you should expect that to be this year or a little more longer term.
Yeah sure no problem and I do think that.
You're right, we do expect that will be to achieve benefits of having a larger scale in the home furnishings segment, we have not fact.
Factored in any.
Synergies during this year to our thinking I think that's more longer term and I think a lot of it has to do with vendor relationships and.
Whether or not we were able to successfully get the vendors to look at.
The American freight.
Bad Cop buddies and anything else that we may.
Add to the home furnishings segment overtime as just franchise group in that relationship and whether or not we're able to drive better pricing, a very small benefit and pricing has a very large impact on overall profitability.
And I think as we become more meaningful to our vendors and they are looking at us on a macro level rather than just a micro level I think that there is significant.
Profitability to add to the system. So.
That's certainly the largest candidate we don't expect to be.
Running for example, Buddy Ballcock, an American freight out of one office in it.
It's not about that it's not about you know head count or corporate cost savings, it's it's far more operationally driven.
Another example would be the way that we provide payment options to customers having.
Providing additional volume.
To similar vendors can have advantages as well across the system. So.
Again, all operational and not really just.
Corporate structural.
Okay got it makes sense and then just sort of looking back quickly to sort of M&A discussion before I mean, given that that leverage will obviously come down to the end of the year.
And and obviously, what the EBITDA growth.
The year I guess are there certain areas of the business that you'd be moved into an M&A and just maybe your general Thomas Rhonda.
[laughter] sure so.
Look I think that we.
We have a goal to diversify which would mean.
Adding business lines that we aren't currently and if we think that they make sense and they are a good fit for franchise group over the long term and then we also are interested in investing.
In the businesses that we have and yes wagon wash is a great example, very small acquisition, but but provide the whole second concept to PSP and and that's wonderful.
Add cock.
Added scale to the home furnishings segment and wonderful transaction for us So we're not against adding exposure to businesses that we feel comfortable with.
Overall, but but look most of our time is spent.
Looking at new avenues, new verticals that we can build around over the long term as well so that's it.
It takes two we've always said that we can find a lot of businesses, we logged on and we can price <unk>.
Businesses that we would like to own but that doesn't mean that the counterparty is going to be interested in selling them for the valuation that we think makes sense for franchise group, but we're not going anywhere hope hopefully and sometimes people change their minds and we're here and.
It's certainly.
Yeah, I think we.
We've gradually moved from.
People, saying.
Who the heck are you too okay.
What you've done and.
You are a viable partner and.
Figure out if there's a way to make the transaction. Then then that's that's the momentum that we'd like to sustain.
Okay awesome well, thank you very much.
Of course.
Thank you once again for any question that's zero been one on your Touchtone phone.
Okay. It looks like we have a follow up on Mister Baker. Please go ahead.
Yeah real quick I hate to be short term focus, but you know I've got some so much is going on in the economy.
And the last few months seems like care to comment on any trends throughout the quarter and then into the beginning of the second quarter. In other words, you know how it is March and April versus January and February .
Just just a is an indication of what might be going on in the economy.
Yeah. So.
I don't.
Realistically your comment on the monthly variations.
Yeah again.
Depends which business, which business you're comparing it to.
I think that.
The the way I would.
Have you understand what we're seeing Holistically is that when you combine all of those variations the things that are better the things that are not as good as what we would have expected when you blend it all together.
We're right where we.
Thought we would be.
Thank you we have no further questions at this time I'd like to turn it over to our presenters for closing remarks.
Great well. Thank you all for joining us this afternoon and operator you can please conclude the call.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.