Have you heard of Franchise Group Inc.? Franchise Group Inc. is a franchising platform for market-leading and emerging brands. They operate through well-known brands including the Vitamin Shoppe, Pet Supplies Plus, Badcock Home Furniture & More, American Freight, Buddy’s Home Furnishings, and Sylvan Learning.
Franchise Group is continuously looking to grow its portfolio through acquisition or organic brand development. They typically target businesses that can be scaled by adding franchise and company-owned units or that can be restructured to enhance their performance under the Franchise Group umbrella.
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Franchise Group Inc. Grows Organically And Through Acquisitions
The Franchise Group originally operated under the name Liberty Tax (which they no longer own). The company changed its name to Franchise Group Inc. on September 19, 2019. Franchise Group completed the acquisition of its current subsidiaries in 2019 and 2020.
Although operating under the name Franchise Group for only three years, on a combined basis, as of December 25, 2021, the Franchise Group is operating in 2,948 locations consisting of 1,221 franchised locations, 1,410 company-run locations, and 317 dealer locations.
As each company is managed by its respective team, they share a services platform that drives them the best practices.
Overall, the Franchise Group increased its locations from 3,654 in 2019 to 3,770 in 2020. However, the Franchise Group has a net decrease of 822 in the number of stores since 2021 due to the selling of Liberty Tax, which has a total of 2,441 locations, in 2021. The gap is filled through the acquisition of Pet Supplies Plus, Badcock, and Sylvan.
| Company Owned | Dealer Owned | Franchised | Total | Distribution Centers | |
|---|---|---|---|---|---|
| Vitamin Shoppe | 711 | – | – | 711 | 2 |
| Pet Supplies Plus | 228 | – | 374 | 602 | 3 |
| Badcock | 66 | 317 | – | 383 | 3 |
| American Freight | 362 | – | 5 | 367 | 9 |
| Buddy’s | 37 | – | 276 | 313 | – |
| Sylvan | 6 | – | 566 | 572 | – |
| Total Franchise Group | 1,410 | 317 | 1,221 | 2,948 | 17 |
Table 1. Breakout of Company-owned Stores, Dealer-owned Stores, Franchised Stores, & Distribution Centers by Segment in 2021
| Liberty Tax | Buddy’s | American Freight | Vitamin Shoppe | Total | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Company-Owned |
Franchised | Total | Company-Owned | Franchised | Total | Company-Owned | Franchised | Total | Company-Owned | Franchise Group |
| 194 | 2,247 | 2,441 | 45 | 247 | 292 | 312 | 6 | 318 | 719 | 3,770 |
Table 2. Breakout of Company-owned Stores, Dealer-owned Stores, Franchised Stores, & Distribution Centers by Segment in 2020
By comparing Table 1 and Table 2, except for Liberty Tax, all of the other segments (Buddy’s, American Freight, and Vitamin Shoppe) have increased operating locations in 2021. More importantly, Buddy’s, which heavily relies on franchising, has newly opened 29 franchised stores. The Franchise Group has acquired Sylvan and Pet Supplies Plus which mainly operates through franchising, which provides vast opportunities for franchisees to join their platform. Additionally, Pet Supplies Plus closed no locations in 2020 despite the COVID-19 pandemic!
Pet Supplies Plus Franchise Unit Count (Past 5 Years)
| Year | Start of Year | Units Opened | Units Closed | Total End of Year |
|---|---|---|---|---|
| 2016 | 154 | 35 | 2 | 187 |
| 2017 | 187 | 32 | 3 | 212 |
| 2018 | 212 | 28 | 6 | 234 |
| 2018 | 234 | 31 | 4 | 261 |
| 2020 | 261 | 41 | 0 | 302 |
The Franchise Group continues to look at acquisition targets outside of franchising including Kohl’s. The Franchise Group is seeking to pay $59 per share to acquire Kohl’s department store retail chain. Although this deal is yet to be determined, franchisees should be aware of the future growth opportunities provided by the Franchise Group.
Franchise Group Inc (Nasdaq: FGR) Stock
The Franchise Group has been publicly traded on Nasdaq since its Initial Public Offering (IPO) on July 23, 2018. The Franchise Group priced its IPO at $10.40, and it is currently $40.43 (as of April 19, 2022). Currently, it has a total market capitalization of $1.629 billion. However, it is highly volatile with a beta of 1.76. In terms of shareholders, the Franchise Group has a dividend yield of 6.51%.
Franchise Group Inc.’s Preliminary Financials
Note: as the Liberty Tax business was sold to NextPoint in 2021, its relevant data are reported as discontinued operations and it is excluded from the results of operations.
| Fiscal Years Ended | Change | |||
|---|---|---|---|---|
| (In Thousands) | 12/25/2021 | 12/26/2020 | $ | % |
| Total Revenues | 3,255,204 | 2,029,727 | 1,255,477 | 60% |
| Total Operating Expenses | 3,028,853 | 1,977,216 | 1,051,637 | 53% |
| Income (loss) From Operations | 226,351 | 52,511 | 173,840 | 331% |
| Net Income (loss) from continuing operations | 191,966 | 20,645 | 171,321 | 830% |
| Net Income (loss) from discontinued operations, net of tax | 171,822 | 4,419 | 167,403 | 3,788% |
| Net Income (loss) attributable to Franchise Group, Inc. | 363,788 | 25,064 | 338,724 | 1351% |
The total Franchise Group Inc. revenue increased by $1.2 billion, or 60%, mainly due to the acquisition of Pet Supplies Plus on March 10, 2021, consisting of $917.4 million. The Badcock Acquisition on November 22, 2021, increased revenue by $102.1 million, while the Sylvan Acquisition on September 27, 2021, increased revenue by $9.7 million. Accordingly, the operating expenses increased by $1.1 billion due to the expansion of the portfolio.
| Fiscal Years Ended | Change | |||
|---|---|---|---|---|
| (In Thousands) | 12/25/2021 | 12/26/2020 | ||
| Product | 3,012,471 | 1,899,662 | 1,112,809 | 59% |
| Service and Other | 209,103 | 65,798 | 143,305 | 218% |
| Rental | 33,630 | 64,267 | (30,637) | (48)% |
| Total Revenue | 3,322,204 | 2,029,727 | 1,255,477 | 60% |
The total revenues for the Franchise Group consist of three segments: product, service and other, and rental. Specifically, the Franchise Group leases the vast majority of its Company-owned stores and Distribution Centers. There is a $30.6 million decrease in rental revenue due to the refranchising of 47 Buddy’s Company-owned stores and an additional 8 stores.
Franchise Group Inc Subsidiaries Expand Into 2021 & Beyond
To evaluate the operation of a business, it is important to examine the comparable stores’ performances between 2021 and 2020. Since Pet Supplies Plus, Sylvan, and Badcock are acquired in 2021, we could look at the performance of the Vitamin Shoppe, American Freight, and Buddy’s. Particularly, Buddy’s, which heavily operates through franchising among the three, provides us insights on the performance of franchisees and whether the Franchise Group has managed them effectively.
Vitamin Shoppe Franchise Profit & Performance
For the Vitamin Shoppe, the total revenues increased by $136.8 million. The increase is primarily driven by the strong customer traffic, especially during the COVID-19 pandemic when the demand for health and wellness products increased. With the revenues increasing by 13%, the operating expenses only increased by 4%.
American Freight Franchise Profit & Performance
The revenues for the American Freight increased by $92.5 million due to new store openings and the acquisition of the FFO Home. Coming behind the new stores opening is the increase in operating income of 8%, including occupancy costs and advertising expenses during the pandemic.
Buddy’s Home Furnishings Franchise Profit & Performance
On the other hand, the total revenues for Buddy’s decreased by $32.9 million, mostly due to the refranchising of 47 Company-owned stores and an additional 8 stores. Additionally, the loss in revenues is partly offset by the decrease in operating expenses of $29.2 million. Overall, it is too early to determine if franchising through the Franchise Group is optimal for franchisees. Since it is a new company that is expanding rapidly, it is common to restructure its business at this stage. Along with high revenues, it is one of the risks the franchisees should take when joining a relatively new company.
Franchise Group Inc.’s Income Statement Takeaway
FRANCHISE GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years Ended December 25, 2021, December 26, 2020, Transition Period Ended December 28, 2019, December29, 20188 (Unaudited), and Year Ended April 30, 2019
| Twelve Months Ended 12/25/2021 | Twelve Months Ended 12/26/2020 | Transition Period From 1228/2019 | Period From 5/1/2018 – 12/29/2018 | Twelve Months Ended 4/30/2019 | |
|---|---|---|---|---|---|
| Revenues: | |||||
| Product | 3,012,471 | 1,899,662 | 96,139 | – | – |
| Service and Other | 209,103 | 65,798 | 14,751 | – | – |
| Rental | 33,630 | 64,267 | 23,636 | – | – |
| Total Revenues | 3,255 | 2,029,727 | 134,526 | – | – |
| Operating Expenses: | |||||
| Cost of Revenue: | |||||
| Product | 1,892,741 | 1,136,054 | 71,820 | – | – |
| Service and Other | 16,506 | 2,149 | 768 | – | – |
| Rental | 11,552 | 21,905 | 8,661 | – | – |
| Total Cost of Revenues | 1,920,799 | 1,160,108 | 81,249 | – | – |
| Selling, General, and Administrative Expenses | 1,108,054 | 817,108 | 96,298 | – | – |
| Total Operating Expenses | 3,028,853 | 1,977,216 | 177,547 | – | – |
| Income (loss) from Operations | 226,351 | 52,511 | (43,021) | – | – |
| Other Income (Expense): | |||||
| Bargain Purchase Gain | 132,559 | – | – | – | – |
| Other | (67,368) | (5,294) | – | – | – |
| Interest Expense, net | (133,114) | (96,774) | (6,998) | – | – |
| Income (loss) from Continuing Operations Before Income Taxes | 158,428 | (49,557) | (50,019) | – | – |
| Income Tax Expense (Benefit) | (33,538) | (60,501) | (8,577) | – | – |
| Income (loss) from Continuing Operations | 191,966 | 10,944 | (41,422) | – | – |
| Income (loss) from Discontinued Operations, net of tax | 171,822 | 16,210 | (63,024) | (43,053) | (2,156) |
| Net Income (loss) | 363,788 | 27,154 | (104,466) | (43,053) | (2,156) |
| Less: Net (Income) Loss Attributable to Non-Controlling Interest | – | (2,090) | 36,039 | – | – |
| Net Income (loss) Attributable to Non-Controlling Interest | 363,788 | 25,064 | (68,427) | (43,053) | (2,156) |
| Amounts Attributable to Franchise Group, Inc.: | |||||
| Net Income (loss) from Continuing Operations | 191,966 | 20,645 | (22,614) | – | – |
| Net Income (loss) from Discontinued Operations | 171,822 | 4,419 | (45,813) | (43,053) | (2,156) |
| Net Income (loss) Attributable to Franchise Group, Inc. | 363,788 | 25,064 | (68,427) | (43,053) | (2,156) |
| Basic Earnings (loss) Per Share | |||||
| Continuing Operations | 4.56 | 0.57 | (1.35) | – | – |
| Discontinued Operations | 4.27 | 0.13 | (2.76) | (3.17) | (0.16) |
| Total Basic Earnings (loss) Per Share | 8.83 | 0.70 | (4.11) | (3.17) | (0.16) |
| Diluted Earnings (loss) Per Share: | |||||
| Continuing Operations | 4.48 | 0.57 | (1.36) | – | – |
| Discontinued Operations | 4.19 | 0.13 | (2.75) | (3.17) | (0.16) |
| Total Diluted Earnings (loss) Per Share | 8.67 | 0.70 | (4.11) | (3.17) | (0.16) |
| Weighted-Average Shares Outstanding: | |||||
| Basic | 40,199,681 | 34,531,362 | 16,699,065 | 13,602,774 | 13,800,884 |
| Diluted | 40,964,182 | 34,971,935 | 16,669,065 | 13,602,774 | 13,800,884 |
Table 5. Franchise Group, Inc. Consolidated Statements of Operations
By examining the total revenues the Franchise Group as a company earns across three years, we can see that the revenue is growing rapidly, even under the impact of the COVID-19 pandemic. Although the company has an increase in operating expenses, especially selling, general, and administrative expenses, due to expansion, the Franchise Group is able to control the cost and generate positive net income. Over the past year, the net income increased by 1351% to $343 million!
Franchise Group Inc.’s Cash Flows Statement Takeaway
FRANCHISE GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Tears Ended December 25, 2021, December 26,2020, Transition Period Ended December 28, 2018 (Unaudited) and Year Ended April 30, 2019
| Twelve Months Ended 12/25/2021 | Twelve Months Ended 12/26/2020 | Transition Period From 5/11/2019 – 12/28/2019 | Period From 5/1/2018 – 12/29/2018 | Twelve Months Ended 4/30/2019 | |
|---|---|---|---|---|---|
| Operating Activities: | |||||
| Net Income (loss) | 363,788 | 27,154 | (104,466) | (43,053) | (2,156) |
| Adjustments to Reconcile Net Income (loss) to Net Cash Provided By (used in) Operating Activities: | |||||
| Provision for Doubtful Accounts | 8,878 | 5,930 | 4,751 | 5,150 | 8,738 |
| Depreciation, Amortization, and Impaiment Charges | 72,765 | 62,543 | 32,401 | 8,429 | 14,084 |
| Amortization of Deferred Financing Charges | 56,054 | 30,635 | 319 | 169 | 38 |
| Stock-based Compensation Expense | 13,696 | 9,484 | 3,102 | 604 | 999 |
| (Gain) Loss on Bargain Purchases and Sales of Company Stores | (137,747) | (4,133) | (1,106) | (155) | 694 |
| Deferred Tax (Income) Expense | 709 | 1,092 | (9,275) | (200) | 586 |
| Prepayment Penalty for Early Debt Extinguishment | 36,726 | – | – | – | – |
| Gain on Divestiture of Liberty Tax | (188,092) | – | – | – | – |
| Change in Fair Value of Investment | 31,773 | – | – | – | – |
| Other, net | 1,749 | 85 | 900 | 5,244 | 5,833 |
| Change In | |||||
| Accounts, Notes, and Interest Receivable | (18,543) | (19,811) | (226) | 9,726 | 3,035 |
| Income Taxes Receivable | (20,191) | (8,059) | (2,012) | (23,546) | (6,886) |
| Other Assets | 12,939 | (5,573) | 27,038 | 1,470 | (3,656) |
| Accounts Payable and Accrued Expenses | (12,215) | 23,927 | (4,414) | (12,510) | (338) |
| Inventory | (121,393) | 97,681 | 10,134 | – | – |
| Deferred Revenue | 5,073 | 20,537 | 1,369 | (3,102) | (3,842) |
| Net Cash Provided by (used in) Operating Activities) | 105,939 | 241,492 | (41,485) | (51,774) | 17,129 |
| Investing Activities: | |||||
| Issuance of Operating Loans to Franchisees | (17,749) | (34,136) | (22,483) | (28,940) | (68,283) |
| Payments Received on Operating Loans to Franchisees | 23,103 | 50,291 | 827 | 2,048 | 67,556 |
| Purchases of Company-Owned Stores | (1,087) | (6,587) | (3,491) | (139) | (229) |
| Proceeds from Sale of Company-Owned Stores | 12,866 | 36,349 | 279 | 1,207 | 1,229 |
| Acquisition of Business, net of Cash and Restricted Cash Acquired | (1,063,811) | (353,423) | (317,251) | – | – |
| Divestiture of Business, net of Cash and Restricted Cash Sold | 179,471 | – | – | – | – |
| Capital Expenditures | (46,958) | (34,931) | (1,136) | (2,391) | (2,939) |
| Proceeds from Sale of Property, Plant, and Equipment | 6 | 1,224 | – | – | – |
| Net Cash (used in) Investing Activities | (914,159) | (341,213) | (343,255) | (28,215) | (2,666) |
| Financing Activities: | |||||
| Proceeds from the Exercise of Stock Options | 665 | 520 | 2,202 | – | 153 |
| Repurchase of Common Stock and Tax Impact of Stock Compensation | – | – | – | – | (88) |
| Dividends Paid | (67,234) | (29,350) | – | (2,244) | (2,244) |
| Non-Controlling Interest Distribution | – | (4,716) | – | – | – |
| Repayment of Other Long-Term Obligations | (1,176,581) | (505,486) | (13,054) | (4,235) | (7,502) |
| Borrowings Under Revolving Credit Facility | 26,724 | 184,665 | 129,260 | 75,946 | 123,615 |
| Repayment Under Revolving Credit Facility | (84,874) | (235,614) | (25,403) | (3,692) | (123,615) |
| Issuance of Common Stock | – | 198,004 | 96,143 | – | – |
| Issuance of Preferred Stock | 79,542 | 29,482 | – | – | – |
| Tender Offer | – | – | (47,071)</229> | – | – |
| Payment for Debt Issue Costs | (65,926) | (16,865) | (15,071) | – | – |
| Prepayment Penalty for Early Debt Extinguisment | (36,726) | – | – | – | – |
| Issuance of Debt | 2,275,000 | 586,000 | 280,000 | – | – |
| Cash Paid for Taxes on Exercises/Vesting of Stock-Based Compensation | (856) | (487) | (110) | (83) | (83) |
| Net Cash Provided by (used in) Financing Activities | 949,734 | 206,153 | 406,738 | 65,692 | (9,764) |
| Effect of Exchange Rate Changes on Cash, net | 36 | (76) | 165 | (244) | (238) |
| Net Increase in Cash and Cash Equialents and Restricted Cash | 141,580 | 106,356 | 22,163 | (14,541) | 4,461 |
| Cash, Cash Equivalents ad Restricted Cash at Beginning of Year | 151,502 | 45,146 | 22,983 | 18,522 | 18,522 |
| Cash, Cash Equivalents ad Restricted Cash at Endof Year | 293,082 | 151,502 | 45,146 | 3,981 | 22,983 |
Table 6. Franchise Group, Inc. Consolidated Statements of Cash Flows
The final piece of analysis takes a look at the cash flows statement, where the amount of cash is an important indicator of a company’s financial health. As the company can manipulate its profits, the amount of cash available shows the company’s ability to pay back its debt to investors and invest in future projects. This is an essential indicator for the Franchise Group, as it is growing through acquisition which requires appropriate funding, either through cash flows or borrowings.
According to the cash flows statement, the Franchise Group has a $106,356 thousand increase in cash, cash equivalents, and restricted cash. At the end of the fiscal year, their total cash and cash equivalents amounted to approximately $293,082 thousand.
In 2021, the net cash provided by operating activities decreased by $135.5 million, primarily due to a $219.1 million increase in cash for inventory caused by new store openings. This is partially offset by a $127.5 million increase in cash net income due to the sale of Liberty Tax to NextPoint. The Franchise Group deploys a large amount of cash in investing activities, with a net cash increase of $572.9 million, driven by an increase in cash used for acquisitions.
Franchise Group Inc.’s Risk Factors
COVID-19 Global Pandemic:
Like other businesses, the Franchise Group encounters challenges and uncertainties, even with efforts to address the adverse impacts of the pandemic. Due to increasing practices of social distance, there are changes in the behaviors of both customers and employees that are uncertain to the business. For example, the financial condition of the customers can be adversely impacted, resulting in a decrease in the demand for products; the ability of franchisees and employees to operate at store locations can also be negatively affected.
Effective Management:
The significant changes to the Franchise Group’s initiatives and strategies through acquisitions make it susceptible to potential difficulties in managing effectively, resulting in failure to generate the same level of profits as in prior years.
To remain competitive in the industries, the Franchise Group needs to manage increased responsibilities for adding new customers, franchisees, and dealers and continuously finding new opportunities in the existing market. Additionally, as a company that manages a portfolio of retail and franchised brands, the Franchise Group could be negatively impacted if they try to restructure the business by selling one of the business segments. This includes numerous risks, such as the acceptance of a less than favorable sales price and the adverse reactions by customers and suppliers that can potentially degrade their reputation and impede their future growth.
Operation in Highly Competitive Industries:
The Franchise Group operates in highly competitive industries such as retail, consumer services, tutoring, and rent-to-own industries, as it has a diverse portfolio of brands. The Franchise Group needs to compete against similar operators with well-established brands and smaller retailers. In addition, some of the competitors can be more effective and efficient in introducing new products and services. If they fail to meet the supply and demand or fail to provide customers with attractive experiences, their business can result in a loss of revenue and a decrease in profits. For example, with the widespread use of the internet, the Franchise Group faces the challenges of growing the e-commerce sector to continuously operate in a profitable manner.
Highly Dependence on Franchisees and Dealers:
Due to the special structure of the company, it is essential for the Franchise Group to maintain a benign relationship with the franchisees and dealers. Since the Franchise Group does not have direct control over the operation of the franchises and dealers and the franchises and dealers may not operate in a manner consistent with the philosophy of the company, there are risks the growth and financials can be adversely affected. Meanwhile, disputes with franchisees or dealers can result in financial damages, reputation degradation, and loss of prospective franchising opportunities.
Conclusion
Overall, the Franchise Group, Inc is a very profitable company that operates both company-owned locations, franchises, and dealerships. As a relatively new company that is rapidly growing, the Franchise Group has promising financials, with net income increased by over 1000%. During the COVID-19 pandemic, the Franchise Group completes several acquisitions that generate encouraging revenues, and the sale of Liberty Tax that helps with cash flows. Although the costs of operation grow due to new store openings and acquisitions, its strong revenues negate the loss.
However, it is still unclear whether the Franchise Group is a profitable company for franchisees to join. At an early stage of a growing company, the constant restructuring of the business model can result in financial loss for both the company and franchisees. Although an expanding company usually comes with high revenues, we should expect correspondent risks.
