Franchise Group, Inc. (TAX)·Q2 2023 Earnings Summary

Executive Summary

• Q2 FY2023 results were weak on profitability with revenue $1.04B, operating income $22.5M, net loss $(50.8)M (diluted EPS $(1.50)), and Adjusted EBITDA $53.9M; Non-GAAP EPS was a loss of $(0.22) .
• American Freight and Badcock remained headwinds (AF revenue down 10% YoY; continued losses), while Pet Supplies Plus grew nearly 10% YoY; operating expense mix and lower non-operating gains vs last year weighed on results .
• The company did not hold an earnings call due to the proposed management-led go-private transaction; guidance remained withdrawn post Q1; focus turned to merger and capital structure actions (preferred redemption contingent on merger) .
• Near-term stock catalyst centered on the $30 per share cash consideration for the go-private, which later closed on Aug 21, 2023; preferred stock redeemed at $25 plus accrued dividends (Aug 22) .

What Went Well and What Went Wrong

• What Went Well

  • Pet Supplies Plus delivered 9.9% YoY revenue growth to $332.8M; segment still profitable despite cost inflation and wholesale growth mix; segment income $17.6M .
  • Vitamin Shoppe held revenue largely flat YoY at $304.7M with positive segment income of $28.7M, aided by store traffic and average transaction value strength vs prior year on a YTD basis .
  • Liquidity remained adequate with $106.3M cash; management affirmed covenant compliance and expects continued compliance over the next 12 months .

• What Went Wrong

  • American Freight revenue fell 10.2% YoY to $203.4M with segment operating loss $(21.9)M, reflecting inflation-driven demand softness and higher merchandise costs from prior-year orders; AF goodwill was impaired $75M in Q1 and the unit remained pressured .
  • Badcock revenue declined 26.2% YoY to $172.2M with segment income down 90.7% YoY, driven by lower product sales and a sharp decline in service revenue tied to amortization of receivable discounts and lower interest income as the financing book declined .
  • Non-operating tailwinds that benefited the prior-year quarter (e.g., sale-leaseback gains) did not recur; other income also deteriorated in part due to losses on an equity investment (NextPoint) .

Financial Results

Consolidated performance (oldest → newest):

Segment snapshot – Q2 2023:

Selected KPIs and balance sheet items (as of/for Q2 2023):

• Cash and cash equivalents: $106.3M
• Long-term obligations (excl. current): $1,526.6M
• Cash from operations (YTD six months): $38.1M

Guidance Changes

Earnings Call Themes & Trends

Q2 had no earnings call due to the proposed merger; themes reflect filings commentary.

Management Commentary

• “In light of the Proposed Merger, the Company is not scheduling a conference call to discuss its quarterly financial results.”
• On Q4 execution and 2023 expectations (context for trajectory): “Our financial performance in the fourth quarter was in line with the outlook we provided in November… We finished the year with 259 new territories sold and a backlog… of 482 locations. We expect organic growth in 2023 to drive increased EBITDA and cash flow.” — Brian Kahn, CEO
• On the merger (Q1 announcement): “We are excited to have this opportunity to continue our business strategy… while also delivering certain value to our public stockholders despite a challenging business environment.” — Brian Kahn, CEO ; Special Committee Chair emphasized a “significant premium” and a robust process .

Q&A Highlights

• No Q2 earnings call or Q&A session due to the pending merger .
• Filings clarifications:
  • American Freight: goodwill impairment in Q1 due to underperformance and macro; continued operating loss in Q2 with demand softness and higher merchandise costs .
  • Debt covenants: Company was in compliance as of July 1, 2023 and expects compliance for the next twelve months .
  • Controls: Previously identified cash flow classification material weakness; remediation actions in place, not yet fully seasoned .

Estimates Context

• Wall Street consensus from S&P Global was unavailable for TAX/FRG in our S&P mapping for Q2 2023; we could not benchmark revenue or EPS against Street expectations (S&P Global mapping not found; no data retrieved). Values retrieved from S&P Global.

Key Takeaways for Investors

• The operating narrative is bifurcated: Pet Supplies Plus and Vitamin Shoppe provide relative stability; American Freight and Badcock continue to drag consolidated margins and earnings .
• Profitability deteriorated YoY on loss of one-time non-operating gains, demand softness in big-ticket categories, and cost mix; Adjusted EBITDA nearly halved vs Q2’22 (to $53.9M from $103.4M) .
• With guidance withdrawn since Q1 and no Q2 call, near-term fundamental catalysts were limited; the go‑private transaction at $30/share and preferred redemption dominated the equity case and trading dynamics through close .
• Liquidity/covenants appear manageable in the near term (cash $106M; compliant with covenants), but leverage remains elevated; investors should monitor post-merger capital structure changes (rate step-ups on second lien, sidecar facility) .
• Structural actions at Badcock (wind-down of in-house financing economics) and demand trends at American Freight are key to any medium-term margin repair; absent improvement, consolidated results will remain constrained .
• Pet Supplies Plus unit growth and franchise pipeline continue to be bright spots supporting top-line resilience, even as wholesale mix pressures near-term margins .
• No Q2 conference call and limited qualitative updates heighten the importance of 10-Q disclosures for assessing run-rate earnings power and risk factors during the transition to private ownership .