Franchise (TAX) 7 Aug 222022 Q2 Earnings call transcript

Ladies and gentlemen, thank you for standing by. And welcome to Franchise Group’s Fiscal 2022 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 would now like to hand the conference over to your host, Andrew Kaminski, Executive Vice President and Chief Administrative Officer of Franchise Group. you. Thank

Eric Good on you Kahn, the President CEO; Gisenda. conference joining Franchise and CFO. and I'm Group's call. call and afternoon, you, for thank our Group's Thank Franchise Seeton, with Brian

results based Before forward-looking getting that discussed the expressed are management's or Franchise within no guarantees obligation this of the on on and made are Private statements by federal them. to statements materially Securities place as may this could laws. statements forward-looking the Group Act forward-looking assumes undue meaning Investors the certain other on reliance of except differ Actual law, of and of contain XXXX forward-looking date matters expectations from in call the are I'd future or these revise started, statements. cautioned by update as forward-looking of like are to mention of not call These those statements. to Litigation The securities current Reform provisions and not implied required performance.

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I'd the over Brian. Now Brian? to like turn to call

Thanks, our Andrew, afternoon and for to joining and listeners, good you thank us.

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for share rate. and profitability revenue in approximately the pet, I'll business, adjusted then FRG $X.XX businesses turning that diversification providing dividend to I’ll performance before to to on lowering $XXX from full a pressures our to financial and moving the over So general happy The be XXXX, a for share education allowed share. the questions. at $X.XX to provide Group expectations $X.X financial year provide second in per and non-GAAP $XXX share from call Eric furnishings Franchise are to to outlook declare to but quarter we're $X.XX quarterly billion; leading annual $X.XX profit growth approximately our earnings scale while within services million was from a your to per billion million; update lower Inflationary details. approximately financial our FRG a answer health EBITDA another in wellness home

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the to steady billion emphatically expected contributor FRG’s than the loss EBITDA to less state. to is be revenue Freight growth, be to American than comes base long roughly term in the current Freight generate inflation $XXX material is expected additionally nearly approximately generate million through approximately flow EBITDA American with store would what this economic over $ a XX% American at expected of result over the that year We planned, impact come Freight million will totals less revenue in in Although $XXX basis to alone. understand The generate FRG to will EBITDA is were excess on X and how of impact Freight as million year American frequently the diligence and of understand suboptimal candidates or asked this perform we downside vendors. at of points the acquisition to XXX want all a will potential franchisees just perform that math we when revenue want vendors cost $XXX freight. a environment, lenders, shareholders, of likely downside

enhance costs costs. cumulative in business environment freight climate to and this as costs, credibility cash and ordering more peaked. new the part, quarter that first furnishing we in flow our costs built stakeholders inventory make the than think and primary FRG that and shared is than the and demonstrating product not our whole valuable now freight but more home We're profitability between of break. at in opportunity whole have an excellent to today all parts. are provide a FRG’s will bend lower by ultimately incoming I lower is after difference that should FRG with to The one product the reliable

headed this we correcting self likely expect direction. this than mechanism supply and trends others since believe Some and that we normal, are favor, but it right changing transactions trend eye as and ultimately correcting demand products in transactions the limit much we're cost prices the capital to for cost trip and imbalance an fuel. our gas as system. also are in buy sell need year human of the in this a on more manifests of are make We've keeping will in our prices with the older and continue. through these velocity deter Markets their both the to from to to store. phenomena Despite our are sizes the itself take inventory seen favor, larger the rest attempt getting customers in energy lower higher transaction car surge fewer marginal customer to than incremental reductions the an material to generally We're

our within forces market would increase, we're a be prices reduce profitability. typical wrong it back relief range and continue expect and We for our our normal customers. to to for to worse provide and fuel prices ultimately gas If same-store customers

spend and acquisitions to further our the current we to scale drive as and diligencing to brands. FRG. and tackle management and team, unit cash within and But we we significant incremental diversify earnings a drive recognize franchise block share continuing material time flow execution per As tremendous opportunity growth

within our not across current to capital completely within is Franchising and More our activity any importantly, brands require FRG. continues or M&A unit control growth accelerate does market cooperation.

financial last partners. and easy last of months is and great opening risk economy a have For Real new up several We're and stores starting zero of times. Estate is opened Very XXXX, of most the territories lenders next closed want last questions headquarter and always of over the improving couple Badcock people support XX But real construction Eric credit to the hand franchisees an to partners the very anyway and publicly earlier on lucky cost our answer market group and the week, with quarter, Street of financial our for to the the Oak XX the close details. the when to on estate after labor to over about FRG support humming. easier be will the provides lender stepped Badcock to in of the I materials all rate have believe couple any I I've thank learned When compared sale. it time months. first the years, leases is six and see years. the all down before But their just shut again when new locations. this support of stressful completely of I'll happy sale over, get free

with ask also and suboptimal their sheets We term us revolver. role And really our chose his going most nimblest, take of that up a partners we will provide their and and advantage balance appreciate our larger assembled conditions Q&A. positioned together and to are details works the well that our in come and our are opportunities in Their give support team. plays then and creative despite it you. smartest could to patience current we've revolver our of to appreciate and we can for their to turn I and trust well upsized group appreciate their the lenders Everybody Eric, environment. lenders to our recently everybody pay way market we help wrap FRG loan I'll the off uniquely financial share us efforts behalf. on Thank you is of management the

Brian. you, Thank

I the call. to this making that items many be references forma Before will operations, we results to remind would address I of like throughout you pro

acquisition. refer financial adjusted Group. acquisition have businesses by prior due a their releases to reasonable. not These accounting and press allow comparable Our of to the to discuss for results the Franchise Comparison evaluate policies items calendar performance to extent and to timing us and is to when of to companies the filings forma fiscal available with the been historical will our pro align may acquired results period acquired the

second quick the XX.X% stores bringing with second franchisee comps had XX franchise declining In seven of the home start Buddy’s awarded comp stores locations I backlog furnishings system-wide comps quarter the second quarter. down a will corporate recap quarter results, three with opened same-store by Buddy’s businesses. Badcock Moving X.X% and for locations. a and to X.X% X.X%. sales negative our new declining to of new

and into of the and debt. well of closed $XX.X revenue continued PSP XX expect comps million. quarter Wash quarter proceeds on and total eight the to bringing million traffic There quarter. quarter, Shoppe to Direct-to-consumer concept and be $XX backlog new business we comps franchises in in for we down going the quarter, we month. in in and stores FTD into a the we pay due will has We were new off of quarter sales accounted franchise been in in the to in and the momentum one of in balance total second to XX in $XXX.X quarter date the X.X% X.X% new backlog comps Plus of The of was fiscal its perform results for interest second overall reported demand been comps capitalize brand building locations. quarter. Vitamin or FRG’s $XX EPS later approximately six generated sold sold per as and stores. billion, Earlier of the and when included retail quarter and for grew Adjusted second per increases for six from fully well growth XX.X% accelerate In million approved. reduce second X.X% financial the of backlog to same release in previously in filings. Wag believe net products. customer used new basis sale the Badcock months for sports Wash quarter location eight financing. summer quarter business acquisitions XX.X% XXXX, N' at to XX results quarter. Pet Supplies build net million used acquisition distribution & $X.X share. integrated locations. position on units. has XX our was proceeds and the agreements bringing announced will More outstanding the non-GAAP the Freight the EBITDA X.X% the $XXX continuing be of a the headquarters delivered On the franchises bringing Badcock area quarter, in the XX Badcock’s detailed for Franchise second the the slower operations acquisition. respectively, fully our included and was new this Sylvan and During centers to was $X.XX first grew for sold quarter Franchising is second the with strong to this the store N' press net franchisee almost and up the Group second closed income financial XXX to PSP store Sylvan Badcock its openings opened on all consolidated the continues wide in franchisee seven for be bringing all and week, the for segments XXXX, we comps in it’s million sale and X.X%, it American The to $X.XX continued sales continues the to heads at the were nutrition quarter, share. total the stores Wag acquisition development are of this increased backlog from with results PSP store of second interest diluted system. system

are and EBITDA the the process have consumer results from We EPS. partners finance in-house business and non-GAAP at of party still from non-core finance third of to in transitioning adjusted excluded the Badcock

will believe While we count to originating liabilities We to having approximately of Once $X.X the reported statement receivable be income pro securitized no billion despite accounts in third the in a million. reflect for we accounted $XX term on we balance parties. approximately debt with and and most the be and continues that the sheet. balance cash outstanding longer lending, and loans securitization the assets forma receivables debt quarter for been of consumer as ended will receivables sheet our customer sale sold discontinue related

the and the $XXX had our During approximately of quarter, million $XXX of remaining. we ABL availabilities million revolver increased to size

our based is balance $XX have interest [over] you. sheet with of In open questions. of continue our conjunction our recent in meet future. is please and to expected we support line and foreseeable Operator, for all expense the rate, increased business obligations the of liquidity we sufficient to businesses performance, cost our Thank believe accordingly for with and the interest and all incremental annually. to cash our All an debt dollars million increase

Instruction] of Thank will the [Operator this first line conduct question Our CJS you. comes from time, we question-and-answer session. Securities. a Solow from At Larry

Thanks, Great, good questions. taking afternoon. guys. Thanks for the

that, business. on you on know this clearly American high general is at just outlook specifically furniture else level I specifically really the the Freight? the Is that there is is guide the deduction here significant? question all it means, and coming out your don't or lion’s I driver Is guidance. biggest businesses to of anything like that's in First share but

that say I'd inflation. American greatest from Well, had impact - the Yeah. the balance Freight has

it's pluses I of is think a businesses, outside rest overall. just The There's to noise. but really minuses the Freight. other American really and in relative guidance, amounts minor noise

And you've year-to-date bit I it. run But close contributions year that like million even I’m taking I or out business. obviously and - piece But Badcocks’s that EBITDA million, taken out is little to the $XX the EBITDA like on that. saw more trying then excess stimulus little get to from my and a the hands done something think $XX because from - XX you know thought I better just of the lending a you've rate that, number lending last government had was you because this

offset were a little American was to obviously my better get Badcock little bit two to worse. an first trying of just I'm the the hands which of So - quarters were on numbers actually a because a than bit actually bit, little better kind Freight,

number annualized look look quarter? of like in should thoughts artificial any on an this sort there one-time could anything there EBITDA like? what or Is or So

says a of home Yeah, expected the now, said good combined, bit first it's what on in have EBITDA be little businesses is but well, half furnishings we it point. I a a overall year, that in Badcock of by as the name. noise. the would why outperformed That's versus as Badcock business performance to an rest the its

Yeah.

average pretty cost what to at are significantly deep seeing and same Badcock unit it's as below value, well. Freight. and And Freight, that American prices same of inflationary extent of Badcock is not pressures, lot a American quite selling their their the

our We year obviously the a set Badcock is seeing for projections well. more Freight American as cushion giving of it. So

relative you all So understand it's of comes businesses pressure. bridge projections as impact far furnishing to as important seeing that the whole our as FRG But Freight. that for American same inflationary a really financial home are that from the the

like - seems Right. But it

about for thinking what though correct. for directionally magnitude is The you're Badcock

you're your Right. sensitive are on to now overall now expenses customers are the lower, like relative me not not freight furniture both fact it’s it more goods a price that's I'm prices seems priced to normal more but basically the are because And importantly, attracting normally American cheaper being It's Freight, wrong, just price the that of significantly correct much recession, type higher. who your out. usually of if

So more? that hurt consumers get

Totally correct almost up last years the for Freight, compared a that where their from but you freight the product to you give onto of couple they costs good their are really don't lot of of were. if reasons, freight loaded look, look costs pre-COVID, really are XXX% in information, American terms at much costs

Right.

order more up is XX%. Badcock magnitude of

That’s a there. difference big

is that going increasing. would you the - customer, large difference see there at is very recession, lower a everybody, the up, jobless you typically what American would the see correct yes, a in also and So, income you're rate is unemployment Freight,

the you customer wallet again not increases is So who back We're up. our the customer for low is happening higher a lower been squeezed. seeing have not that problem compounding increasing reason income we're our may guidance. now doing we've what's is becomes seeing trade prices And you your the the the that's not we've half year, customer really unemployment customer What then We're very been we're income - getting now. as their which the replaced, having vendors. income lose go and for of price we're from down, their part our as of

to I'll customers wait. As having no, that income we more increase low just prices we're to consumer, say, continue more and

just you'll of to It is that home And to the taking by the back got into more an furnishings going continue pricing, for going opportunity customers lose business stores us get value that XXXX has spread who being end because from of you more buy XXX So up increase could we've word from stores. to you to you're customers. mouth.

about American think best have be. The Freight get it that you is those up you could because isn't form then stores impact. Well, Freight and to the hear bigger Freight know deal great end don't sudden, you of a [mainly] American are to go word a deals, then a performer that great Freight mouth of a and you they I because offering for buddy, a from American of American having the all not advertising store. if

that costs to increases some eat prices, We not just significantly. going in inventory down and coming we going see cases, we're we're very So now. cost the in to have the embedded increase

We and XX% to have decreasing one prices, in of our vendors, product categories. larger costs major better XX%

our see we'll So we purchasing to as as reducing that are as can and where prices dramatically vendors shift their we go. much those that as

On losing customer, job. or not the hand, other the he higher their income is she

that to up. trade we in use a see the see need we bit FICO applications or don't score applications. party the and we scores actually are a of applications in they So third rent-to-own quite a down. this provider the and more XXX virtual Again, And are

So XX%. that down applications, you applications. on gets just what And fine. average applications XXX, the score, the below bigger it shows decrease over scores we're are in applications the seeing customer that the The forget completed, actually FICO is lower

worse So and very for life. anything because that to going absolutely and to a not customer do - make that you're us we want customer customer it it's clear we're seeing it that to be customer for to

X%, switching I of just Shoppe, those maybe the Supplies, Vitamin some price, all appreciate just bit a aided Are mentioned at you decent You they're gears I get those on X%, by you growth. now right? color. both think Can Pet numbers, like same-store price companies. imagine, or little briefly, less Right that on I

are what sort at growth what just So figure that of or trying volume out Vitamin? that to

end pricing pricing. PSP, dramatic pet you're units and PSP in either not is as year-to-date, sides digits in sales. home at traffic leading dramatic. It's or same-store is Vitamin sales, to are wellness it inflation is Shoppe, positive PSPs on not nearly talking supplies at at health But lower as furnishings. up Units, that both down The but but Vitamin got down higher and single both up. as - Shoppe

discretionary supplies PSP grown industry you we some has I because less food have get seen mean food pet there the people has heard and And the pet kind some dog the usually is and less bones - guys same-store, buying of stuff. Have of that but more like - also? that you historically but like

Absolutely, absolutely.

Okay, right, Okay, great.

those encouraging to a you've see - that comment. saw Shoppe XX% up just for both I quick I see that's - added Just to know to last see up, to to that nice it, XX% think at starting right? businesses lastly, good I just because that to basically year, and pick were in good Vitamin backlog thanks. start zero, close Or like so franchise zero,

you it. you. Yeah, got Thank

moment. one and you, Thank

next question line Michael comes Our of the Baker. from

hear you Can thanks. Okay, me guys?

Yeah.

so I guess Great. ask didn't I I'll start Kohl's. about All if you be right, first, off. I'd remiss

out so what You any some it cash just it buy that, of the game. fact that fair you fit releases could some without flow its have incremental might In equity. you buy ways, of regarding think press and your the I put generation criteria of because sort

out? Franchise a hand, why be model. I that. And is work the didn't good and happened? It other want doesn't franchise You to you were you it Kohl's so feel explain process? it can - to, what know thought like guess, seems thinking if then even you what fit, the a in what involved On like Group, ultimately

I questions. help good couple yeah, you. And think comments, I’ll a good, can Yeah, make

right. You're

the have couple concept. to First the we explore. a as of to didn't out without us structure so was we Franchise transaction the little us going and in franchisable business. proposed risk ultimately that what of and we to Kohl’s cash a just much much forward. Franchise releases, don't all, it that to offhand. fit net goalposts potential to a Ultimately, having FRG. we that of approached opportunity any was franchisable it net do, not investment for might that brings where that transaction out engage ignore. really investment made But struggled, we one cash as sense the make the as If It first of a the with business was were good sense view the structure too didn't Group to times Group have - we flow But because couple least put started FRG, didn't risk transaction, at did kind it weren't it that of know what and moved as then we a out saying we having of to that we also have far outlining from of ultimately, I by bit walk cash move just any from But away actually

flow if have I risk, of it would had we structure a where at would the Yeah, And years. think be obviously, of we, all the did go that and Franchise Group diversification to proceeded, franchisable had, off then, quickly, transaction accelerate would have ultimately, our cash businesses. not been paid free of to we not all use with risk, a growth minimum, very our months, cash the forward. goal

but I we transaction the through process, culminated. from not to benefit ultimately we are a see a likely that going of lot think

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presumably lot dry So now you of powder. a have

next businesses think should how financing? hard Group? Is to it because worse now? we for it it's And the about better pipeline Is are struggling? Franchise how the So maybe acquisition because steps is get

above well, of Yeah, is correct. all the

smaller. I our the plenty sea, the in and to opportunities us that bigger, in of there's think mentioned them some some lenders, fish explore, opportunity, script. I plenty for environment, Look, of the plenty of

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be I the far of will we're up, zone under certainly leverage for think even as back opportunity If right as to prepared levered. I it advantage within that comes think sure. take comfort our we

extremely we're to those were for up environment transaction, extent that going need going going we're opportunities. will an the of yeah, because threshold the opportunity is look, think accepting chaotic. cost we next threshold more to is de-lever high, before, of capital cost in You're it's we for the meaningfully lever in times markets get - to to The But, to up, absolutely these capital on continue calls create to need doing that correct in goes I our quite that be you're that. engage and many generally, capital of to has as cost to return cost high well. as what this that's And, after can anything if else we've that before discussed that there's really capital

and think be I while So tuck-ins verticals that look we're to going about to we on other is. And smaller next transaction what certainly larger at it, can very add mindful at we're a basis.

you down, part is recession I to this bit not if good don't that long you more, recession resistant talk Presumably could case but why could just American On still that won’t you next a thought American if start it that the this bit? about is maybe flow idea your delve a just of recession just but Freight, call year little when guidance, the Makes model, inflation but perhaps it's expectations, that this business. through And the will, like for a - turning proof, you could if year, to be not from out it Freight, for the about guess I little the a sense, talk thanks sorry, was term P&L? switching process for that. could, one one sounds gears. does If I now a if coming that into

the We going I think inflation. In middle customers, a deviation higher seeing. term of this an and it's is we're type you're that not And sure that lower and Freight income believe where not just problem inflation And rates correct. the is But This recession, what And impacts yeah. really a is that recession impact - I'm unfortunately, up Sure, recession. recession. see this to standard do resistant. income income, really unemployment American not an like is right is, would be. is go actual this you're

well. I fashioned see good American very think old you'll in Freight recession, a perform

And refranchising and is we not, to those the or own we really year today, that unit someday that to we company-owned deep we of where is it flow deep from think, it's customer The my be any the fantastic from It's makes we just most by there a ultimately will eager part as cash contributing end of two now, years, stores been storm in main product. franchisees, business. so it's real of limited of a the being is our hit right whether There's afford products, only our finding the can recession. whether be best it's Freight economics open most mind value be and And And course. can't not that eyes, a very is, that as Freight ton quite still with all customer’s even is another years, open. good now. the plan own American likely fashioned years, the as ultimately it five XX able brands company old to value are demand valuable we're that three And business I free years business in American but brand of up open estate that we every have, stores. stores we get owned have, the

mattress compared the of be performance and COVID is business to you I be think just still right three would So standard - EBITDA the business have as at would it's pre-COVID that believed is. levels, It over it said, withstanding, but we're told it furniture deviations XX% generating in least generating. if that I units don't how I of seeing That's now. chaotic levels peak, we down seeing I good a myself would pre-COVID and that is. not

Understood. the Thanks color. for

Sure.

Thank for one you. next And moment question. our

question Zaffino next OPCO. Our comes from Ian at

the Supply. Thank Pet guess you. I from comp that or Zaffino the was down, one I same-store attributable It's A you was discretionary was a And first decelerated. the were seems to down, also in couple - basis? here. But guess traffic can weaker. what Vitamin Shoppe, Ian slowdown me It you that sales you then of the same-store like tell seeing guess, on why Oppenheimer. traffic explained also questions What also there? Thanks. was I

Yes. Thanks. board. the think And really that it's Ian. I Thanks, across

Pet such I what, spent there But been talking such home the because - board, seeing all furnishings inflation Plus. the inflation had - and cost up the trips of limit and of the that to consumer our would a include we time dramatic a the to a food energy number businesses, the the lot for Although they're include has tank average greater across of you any still would Shoppe, fill about know Vitamin impact. and is the Supplies store, trying know, business you're seeing that to

Shoppe, as well. think down, I revenue that's higher seeing Vitamin comps. positive the we're we're units but are are ticket transaction that's and up, the even average still leading are prices PSP, the fewer seeing traffic same actually to people the why at thing, tickets down units trips though what's down store, to making per their

across get the into that are it's summer, that we So vacations this I board. summer. taking they take think didn't as Look, customers last Sylvan, just even

up is utilization is so lower. clearly still And but comp so utilization down,

basis really it's they're a customers across per think are have the paying monthly board. we Buddy’s, I used on than to paying. its So dynamic, same more store that fewer

scenes there's of the underneath well the And covers business cash, activity. still the generates going business actual with the under is lot we’re so customer the plenty doing a on but

here? where some point? Okay, of perfect. capital, at buyback like return it’s that then as consideration more off, of this as meaningful And finally Or stock is price to up, well the any high. coming downside is advantage share Thanks. also, We'll anything see a take far

a something We few We into Yeah, Board have a authorized do quiet we we've is to open buyback it the years. when we did million not the we just much over authorized, window our window. next intend that had didn't and $XXX open Certainly, window, still two got transaction so XXbX-X. period. an acquire. open how want an Kohl’s We strategic at ago, of we an the and be not have say don't meetings we then - to about because

open a more haven't buying but, before. businesses have against not speak tool our the to an in - that's we've other of toolbox So weigh, we existing we to we the had ability yet businesses will window that now of had look, buying

now, businesses is it do, I very have we're better good that thing. We we anybody about which than a knows and excited don't our think

be So I be. we'll as think opportunistic can we

very Okay, you much. thank

Sure.

back would I remarks. you. closing Thank turn Brian now it for to to like

Great. Well, thank you operator, please end very And much for joining us today. the call.

Thank does today's the This conference. program. you for your in participation conclude

disconnect. now may You