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FG

Franchise Group, Inc. (TAX)·Q3 2022 Earnings Summary

Executive Summary

  • Q3 2022 revenue was $1.051B, Non-GAAP EPS $0.59, and Adjusted EBITDA $73.1M; GAAP results included a net loss of $121.2M ($-3.09 diluted EPS) driven by a $70M goodwill impairment at American Freight and elevated interest expense, marking a sharp sequential decline versus Q2’s $0.94 diluted EPS .
  • Management formed a new Home Furnishings Division (American Freight, Buddy’s, W.S. Badcock) led by former At Home COO Peter Corsa to drive operational synergies, while repurchasing ~2.2M shares (~5% of shares) for $77.9M; shares outstanding fell to ~38.2M, signaling capital-return focus .
  • FY2022 guidance was cut: Adjusted EBITDA to ~$350M (from $390M) and Non-GAAP EPS to ~$3.25 (from $4.00), while revenue held at ~$4.3B; management assumes an effective tax rate of ~27% and ~40.5M weighted average shares for EPS calculations .
  • The company disclosed a restatement of cash flow classifications for Q1/Q2 2022 and a material weakness in internal controls, which is being remediated—an added governance overhang and potential catalyst for investor caution .

What Went Well and What Went Wrong

What Went Well

  • Strategic realignment: FRG created a Home Furnishings Division (American Freight, Buddy’s, Badcock) under seasoned operator Peter Corsa to accelerate best practices and synergy capture. “Peter is perfectly aligned with FRG’s cash flow mentality… ramping a value retailer’s unit count, revenue, and EBITDA more than 5-fold” .
  • Capital allocation: Repurchased ~2.2M shares (~5% of outstanding) for $77.9M, reducing shares to ~38.2M, reflecting conviction in long-term value .
  • Resilient diversified segments: Vitamin Shoppe and Pet Supplies Plus delivered positive EBITDA and net income contributions in Q3, countering home furnishings weakness .

What Went Wrong

  • Impairment and earnings pressure: Recorded a $70M goodwill impairment at American Freight; GAAP net loss from continuing operations was $121.2M and diluted EPS was -$3.09, with interest expense of $61.2M weighing heavily on results .
  • Guidance cut: FY2022 Adjusted EBITDA reduced to ~$350M from $390M and Non-GAAP EPS to ~$3.25 from $4.00; reflects persistent margin headwinds and slower recovery in home furnishings .
  • Controls and cash flow restatement: Identified misclassification of Badcock secured-borrowing interest in Q1/Q2 cash flow statements and a material weakness in internal control over financial reporting, adding governance risk .

Financial Results

Consolidated P&L and EPS versus prior quarters

MetricQ1 2022Q2 2022Q3 2022
Revenue ($USD Millions)$1,135.5 $1,095.0 $1,051.5
Gross Profit ($USD Millions)$507.4 (Rev−CoR) $482.7 (Rev−CoR) $435.0 (Rev−CoR)
Gross Profit Margin %44.7% (507.4/1,135.5) 44.1% (482.7/1,095.0) 41.4% (435.0/1,051.5)
EBIT ($USD Millions)$130.4 $77.1 $(26.0)
EBIT Margin %11.5% (130.4/1,135.5) 7.0% (77.1/1,095.0) -2.5% (-26.0/1,051.5)
Net Income (Loss) from Continuing Ops ($USD Millions)$12.3 $41.0 $(121.2)
Net Income Margin %1.1% (12.3/1,135.5) 3.7% (41.0/1,095.0) -11.5% (-121.2/1,051.5)
Diluted EPS – Continuing Ops ($)$0.25 $0.94 $(3.09)
Non-GAAP EPS ($)$1.29 $1.19 $0.59
Adjusted EBITDA ($USD Millions)$112.3 $103.4 $73.1

Year-over-Year (YoY)

MetricQ1 2021Q2 2021Q3 2021
Revenue ($USD Millions)$621.3 $862.8 $828.8
Diluted EPS – Continuing Ops ($)$(0.76) $0.74 $0.83

Segment Breakdown (Q3 2022)

SegmentRevenue ($USD Thousands)Adjusted EBITDA ($USD Thousands)Net Income/(Loss) ($USD Thousands)
American Freight$199,316 $(4,879) $(82,504)
Vitamin Shoppe$296,152 $32,489 $13,293
Pet Supplies Plus$323,026 $27,045 $10,257
Buddy’s$13,160 $2,631 $599
Sylvan Learning$9,544 $3,118 $28
Badcock$210,278 $15,342 $(11,028)
Corporate- $(2,671) $(51,808)
Total$1,051,476 $73,076 $(121,163)

KPIs and Balance Sheet Highlights

KPIQ1 2022Q2 2022Q3 2022
Cash & Cash Equivalents ($USD Thousands)$149,597 $95,038 $72,931
Term Debt Outstanding (Approx.)~$1.3B ~$1.1B ~$1.1B
Share Repurchases (Quarter)--~2.2M shares, $77.9M spend; shares outstanding ~38.2M
Effective Tax Rate Assumption (Guidance)~27% ~27% ~27%
Weighted Avg Shares (Guidance assumption)~41.0M ~41.0M ~40.5M
Dividends Paid (9M22)--$82.0M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2022~$4.45B (Q1) ~$4.3B (Q2/Q3) Lowered in Q2; Maintained in Q3
Adjusted EBITDAFY 2022~$450M (Q1) ~$390M (Q2) ; ~$350M (Q3) Lowered twice (Q2, Q3)
Non-GAAP EPSFY 2022~$5.00 (Q1) ~$4.00 (Q2) ; ~$3.25 (Q3) Lowered twice (Q2, Q3)
Effective Tax RateFY 2022~27% ~27% Maintained
Weighted Avg Shares (for EPS)FY 2022~41.0M ~41.0M (Q2) ; ~40.5M (Q3) Slightly reduced in Q3
Capital AllocationFY 2022-Share repurchases continued (2.2M shares; $77.9M Q3) Added buybacks detail

Earnings Call Themes & Trends

Note: A Q3 2022 earnings call transcript was not available via our document tools; themes below draw from press releases.

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
Home Furnishings strategyQ2: Inflation cresting; freight/product costs reversing; home furnishings performance expected to normalize next year . Q1: Diversification resilience .Creation of Home Furnishings Division under Peter Corsa; American Freight goodwill impairment .Intensified focus; leadership added; impairment signals near-term reset
Inflation/supply chainQ2: Signs inflation cresting and reversing; diversification offsets turbulence .Margin pressure persisted; interest expense elevated; non-GAAP adjustments sizable .Mixed: improvement expected, but Q3 showed continued pressure
Franchising growthQ1: “Franchising momentum continues” .Pet/Vitamin/Sylvan delivered positive EBITDA and income .Steady contribution from asset-light segments
Capital allocationQ1/Q2: Real estate monetization at Badcock; debt reduction plans .~2.2M shares repurchased; cash declined sequentially to ~$72.9M .Continued buybacks with tighter liquidity
Governance/controlsNo prior mention.Restatement of cash flow classification; material weakness identified, remediation underway .New risk factor; watch remediation progress

Management Commentary

  • “Please welcome Peter Corsa to FRG… we expect him to play an invaluable role in driving best practices and synergies throughout our Home Furnishings Division” — Brian Kahn, President & CEO .
  • “Core to FRG is an intentional model of operational and end market diversification… accelerating franchising and continued profitable growth in pet, health & wellness, and education services… countering reduced performance in our home furnishings businesses” — Brian Kahn (Q2) .
  • “I am proud of FRG’s overall performance in the first quarter… diversification… resilient and nimble management teams” — Brian Kahn (Q1) .

Q&A Highlights

  • A Q3 2022 earnings call transcript was not accessible via our document tools; therefore, specific Q&A themes and clarifications cannot be provided. We confirmed the call timing (Nov 3, 4:30 PM ET) from the release .

Estimates Context

  • S&P Global consensus estimates for Q3 2022 EPS and revenue were unavailable due to a missing CIQ mapping for TAX in the SPGI dataset, preventing retrieval. We attempted to fetch “Primary EPS Consensus Mean” and “Revenue Consensus Mean” for Q3 2022; mapping error persisted (SpgiEstimatesError).
  • Given the lack of accessible consensus, we cannot assess beats/misses versus Wall Street for Q3 2022 at this time.
MetricQ3 2022 ActualQ3 2022 S&P Global Consensus
Revenue ($USD Billions)$1.052 N/A
Diluted EPS – Continuing Ops ($)$(3.09) N/A
Non-GAAP EPS ($)$0.59 N/A
Adjusted EBITDA ($USD Millions)$73.1 N/A

Key Takeaways for Investors

  • Home Furnishings reset: The $70M goodwill impairment and division consolidation signal a near-term earnings reset at American Freight, with medium-term potential for operational gains under new leadership; investors should monitor margin trajectory and store productivity .
  • Diversification remains a buffer: Vitamin Shoppe, Pet Supplies Plus, and Sylvan continued positive EBITDA and net income, helping counter home furnishings cyclicality; this mix supports cash generation through cycles .
  • Guidance risk skew: Two sequential cuts to FY2022 Adjusted EBITDA and Non-GAAP EPS highlight execution/macro risk; watch holiday-season demand and Q4 margin recovery indications .
  • Capital allocation vs liquidity: Aggressive buybacks (2.2M shares) reduced share count but cash fell to ~$72.9M; with ~$1.1B term debt and high interest expense, balance sheet flexibility is a key variable for 2023 .
  • Governance remediation needed: The restatement and material weakness in ICFR are overhangs; prompt remediation and clear disclosure updates will be important to restore confidence .
  • Valuation catalysts: Execution within the Home Furnishings Division, stabilization of American Freight, and normalization of freight/product costs could drive multiple expansion; conversely, further guidance cuts or control issues may pressure the stock .
  • Trading setup: Near term, the narrative hinges on impairment/controls vs. synergy/leadership—expect volatility around Q4 results and any updates on divisional performance and remediation progress .