Notes to Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation
Unless otherwise stated, references to the “Company,” “we,“ “us,” and “our” in this Quarterly Report on Form 10-Q (this “Quarterly Report”) refer to Franchise Group, Inc. and its direct and indirect subsidiaries on a consolidated basis. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2022 that was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 (the “Form 10-K”).
In the opinion of management, all adjustments (including those of a normal recurring nature) necessary for a fair presentation of such condensed consolidated financial statements in accordance with GAAP have been recorded. The December 31, 2022 balance sheet information was derived from the audited financial statements as of that date.
Reclassifications
Certain prior year amounts within the footnotes have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which changes how companies measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard replaces the “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost (which generally will result in the earlier recognition of allowances for losses) and requires companies to record allowances for available-for-sale debt securities, rather than reduce the carrying amount. In addition, companies will have to disclose significantly more information, including information used to track credit quality by year of origination, for most financing receivables.
Effective January 1, 2023, the Company adopted ASU 2016-13 and applied a cumulative-effect adjustment to retained earnings. The Company has reviewed its entire portfolio of assets recognized on the balance sheet as of December 31, 2022 and identified customer receivables and securitized receivables as the materially impacted assets within the scope of ASC 326. Upon adoption of ASC 326 the Company recorded a net decrease to retained earnings of $10.0 million as of January 1, 2023. Prior period amounts were not adjusted and will continue to be reported under the previous accounting standards.
The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet as a result of the adoption of ASC 326 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Impact of Adoption of ASC 326 |
| (In thousands) | | Balance at
December 31, 2022 | | Adjustments due to ASC 326 | | Balance at
January 1, 2023 |
| Assets | | | | | | |
| Current receivables, net | | $ | 170,162 | | | $ | (654) | | | $ | 169,508 | |
| Current securitized receivables, net | | 292,913 | | | (11,619) | | | 281,294 | |
| Non-current securitized receivables, net | | 39,527 | | | (1,568) | | | 37,959 | |
| Deferred income taxes | | 38,528 | | | 3,863 | | | 42,391 | |
| Stockholders’ Equity | | | | | | |
| Retained earnings | | $ | 109,917 | | | $ | (9,978) | | | $ | 99,939 | |
(2) Acquisitions
The Company continually looks to diversify and grow its portfolio of brands through acquisitions. On February 28, 2023, the Company’s Pet Supplies Plus segment acquired 20 stores through bankruptcy proceedings of a third party for approximately $3.7 million. The components of the preliminary purchase price allocation are not presented herein due to the immateriality of the transaction to the Company overall. The Company’s Pet Supplies Plus segment subsequently franchised 12 of the 20 acquired stores.
(3) Accounts and Notes Receivable
Current and non-current receivables as of April 1, 2023 and December 31, 2022 are presented in the Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | April 1, 2023 | | December 31, 2022 |
| Trade accounts receivable | | $ | 30,916 | | | $ | 40,165 | |
| Customer accounts receivable | | 26,266 | | | 56,639 | |
| Franchisee accounts receivable | | 58,795 | | | 46,778 | |
| Notes receivable | | 2,211 | | | 2,361 | |
| Income tax receivable | | 36,573 | | | 28,325 | |
| Allowance for credit losses | | (3,038) | | | (4,106) | |
| Current receivables, net | | 151,723 | | | 170,162 | |
| Notes receivable, non-current | | 12,266 | | | 12,627 | |
| Allowance for credit losses, non-current | | (1,064) | | | (892) | |
| Non-current receivables, net | | 11,202 | | | 11,735 | |
| Total receivables | | $ | 162,925 | | | $ | 181,897 | |
Allowance for Credit Losses
The adequacy of the allowance for credit losses is assessed on a quarterly basis and adjusted as deemed necessary. Receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for credit losses. Expected credit losses for trade and franchisee accounts receivable are immaterial. Notes receivable are due from the Company’s franchisees and are collateralized by the underlying franchise. The debtors’ ability to repay the notes is dependent upon both the performance of the franchisee’s industry as a whole and the individual franchise areas.
Activity in the allowance for credit losses for trade, customer, and franchisee accounts receivable and notes receivable for the three months ended April 1, 2023 and March 26, 2022 were as follows: | | | | | | | | | | | | | | |
| | Three Months Ended |
| (In thousands) | | April 1, 2023 | | March 26, 2022 |
| Balance at beginning of period | | $ | 4,998 | | | $ | 6,192 | |
| Cumulative effect of adopted accounting standards | | 654 | | | — | |
| Provision for credit loss expense (benefit) | | (1,541) | | | (669) | |
| Write-offs, net of recoveries | | (9) | | | — | |
| Balance at end of period | | $ | 4,102 | | | $ | 5,523 | |
Past due amounts are primarily attributable to trade and franchisee accounts receivable that have been generated over the past year and are past due by 1-30 days. The delinquency distribution of accounts and notes receivable past due at April 1, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | April 1, 2023 |
| (In thousands) | | Past due | | Current | | Total receivables |
| Accounts receivable | | $ | 8,311 | | | $ | 107,666 | | | $ | 115,977 | |
| Notes receivable | | — | | | 14,417 | | | 14,417 | |
| Total accounts and notes receivable | | $ | 8,311 | | | $ | 122,083 | | | $ | 130,394 | |
(4) Securitized Accounts Receivable
In order to monetize its customer credit receivables portfolio, the Company's Badcock Home Furniture & more (“Badcock”) segment sells beneficial interests in customer revolving lines of credit pursuant to securitization transactions. The Company securitized an additional $133.4 million of its customer credit receivables portfolio during the three months ended April 1, 2023. For additional details regarding these securitizations, refer to “Note 5 – Securitized Accounts Receivable” in the Form 10-K.
When securitized receivables are delinquent for approximately one year, the estimated uncollectible amount from the customer is written off and the corresponding securitized accounts receivable is reduced. Financial instruments that could potentially subject the Company to concentrations of credit risk consist of accounts receivable with its customers. The Company manages such risk by managing the customer accounts receivable portfolio using delinquency as a key credit quality indicator. Management believes the allowance is adequate to cover the Company’s credit loss exposure. Due to their non-recourse nature, the Company will record a gain on extinguishment for any debt secured by uncollectible accounts receivable in the future when the debt meets the extinguishment requirements in accordance with ASC 470, “Debt”.
Activity in the allowance for credit losses on securitized accounts for the three months ended April 1, 2023 and March 26, 2022 was as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended |
| (In thousands) | | April 1, 2023 | | March 26, 2022 |
| Balance at beginning of period | | $ | 64,800 | | | $ | — | |
| Cumulative effect of adopted accounting standards | | 13,187 | | | — | |
| Provision for credit loss expense | | 21,995 | | | 15,792 | |
| Write-offs, net of recoveries | | (19,416) | | | (12,126) | |
| Balance at end of period | | $ | 80,566 | | | $ | 3,666 | |
Current amounts include receivables for customers who have made a payment in the past 30 days. Any customers who have not made a required payment within the last 30 days are considered past due. The following table presents the delinquency distribution of the carrying value of customer accounts receivable by year of origination as of April 1, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Delinquency Bucket | | 2023 | | 2022 | | 2021 | | Prior | | Total |
| (in thousands) | | | | | | | | | | |
| Current | | $ | 76,678 | | | $ | 167,866 | | | $ | 22,218 | | | $ | 5,649 | | | $ | 272,411 | |
| 1-30 | | 12,103 | | | 32,889 | | | 6,926 | | | 1,987 | | | 53,904 | |
| 31-60 | | 1,310 | | | 7,976 | | | 2,533 | | | 1,008 | | | 12,827 | |
| 61-90 | | — | | | 5,781 | | | 1,931 | | | 735 | | | 8,448 | |
| 91+ | | — | | | 41,224 | | | 28,222 | | | 11,532 | | | 80,977 | |
| Total | | $ | 90,091 | | | $ | 255,735 | | | $ | 61,830 | | | $ | 20,910 | | | $ | 428,567 | |
Servicing revenue, interest income and interest expense generated from securitized receivables for the three months ended April 1, 2023 and March 26, 2022 were as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | April 1, 2023 | | March 26, 2022 |
| Securitization servicing revenue | | $ | 3,245 | | | $ | 2,652 | |
Interest income from securitization1 | | 30,475 | | | 65,269 | |
| Interest expense, debt secured by accounts receivable | | (48,125) | | | (65,299) | |
1 Includes interest income from Badcock customer receivables (refer to “Note 3 – Accounts and Notes Receivable”) and securitized receivables.
(5) Goodwill and Intangible Assets
The Company performs impairment tests for goodwill as of the end of July of each fiscal year and between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair values of the Company’s reporting units below their carrying values. As a result of the Company’s American Freight segment’s underperformance compared to projections for the three months ended April 1, 2023, as well as current macroeconomic conditions, the Company updated its long-term forecasts. The Company performed an interim goodwill impairment quantitative assessment as of April 1, 2023, and based on the results of the analysis, the Company recorded a non-cash goodwill impairment charge of $75.0 million, which was recorded in “Goodwill impairment” in the accompanying Condensed Consolidated Statements of Operations. Other than the American Freight segment’s accumulated goodwill impairment of $70.0 million as of December 31, 2022, no other reporting units had accumulated goodwill impairment losses recorded.
The estimated fair value of the Company’s American Freight reporting unit was calculated using a weighted-average of values determined from an income approach and a market approach. The income approach involves estimating the fair value of each reporting unit by discounting its estimated future cash flows using a discount rate that would be consistent with a market participant’s assumption. The market approach bases the fair value measurement on information obtained from observed stock prices of public companies and recent merger and acquisition transaction data of comparable entities. In order to estimate the fair value of goodwill, management must make certain estimates and assumptions that affect the total fair value of the reporting unit including, among other things, an assessment of market conditions, projected cash flows, discount rates and growth rates. Management’s estimates of projected cash flows related to the reporting unit include, but are not limited to, future earnings of the reporting unit, assumptions about the use or disposition of assets included in the reporting unit, estimated remaining lives of those assets, and future expenditures necessary to maintain the assets’ existing service potential. The assumptions in the fair value measurement reflect the current market environment, industry-specific factors and company-specific factors.
Changes in the carrying amount of goodwill for the three months ended April 1, 2023 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Vitamin Shoppe | | Pet Supplies Plus | | | | American Freight | | Buddy’s | | Sylvan | | Total |
| Balance as of December 31, 2022 | | $ | 1,277 | | | $ | 336,791 | | | | | $ | 300,829 | | | $ | 79,099 | | | $ | 19,406 | | | $ | 737,402 | |
| Acquisitions | | — | | | 3,690 | | | | | — | | | — | | | — | | | 3,690 | |
| Goodwill impairment | | — | | | — | | | | | (75,000) | | | — | | | — | | | (75,000) | |
| Disposals and purchase accounting adjustments | | — | | | (2,626) | | | | | — | | | — | | | — | | | (2,626) | |
| Balance as of April 1, 2023 | | $ | 1,277 | | | $ | 337,855 | | | | | $ | 225,829 | | | $ | 79,099 | | | $ | 19,406 | | | $ | 663,466 | |
Components of intangible assets as of April 1, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | April 1, 2023 |
| (In thousands) | | Gross carrying amount | | Accumulated
amortization | | Net carrying amount |
| Indefinite lived tradenames | | $ | 222,703 | | | $ | — | | | $ | 222,703 | |
| | | | | | |
| Intangible assets: | | | | | | |
| Franchise and dealer agreements | | $ | 96,005 | | | $ | (16,218) | | | $ | 79,787 | |
| Customer contracts | | 42,528 | | | (9,807) | | | 32,721 | |
| Other intangible assets | | 2,374 | | | (882) | | | 1,492 | |
| Total intangible assets | | $ | 140,907 | | | $ | (26,907) | | | $ | 114,000 | |
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| (In thousands) | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
| Indefinite lived tradenames | | $ | 222,703 | | | $ | — | | | $ | 222,703 | |
| | | | | | |
| Intangible assets: | | | | | | |
| Franchise and dealer agreements | | $ | 96,005 | | | $ | (14,348) | | | $ | 81,657 | |
| Customer contracts | | 42,484 | | | (8,878) | | | 33,606 | |
| Other intangible assets | | 2,313 | | | (777) | | | 1,536 | |
| Total intangible assets | | $ | 140,802 | | | $ | (24,003) | | | $ | 116,799 | |
(6) Revenue
For details regarding the principal activities from which the Company generates its revenue, refer to “Note 1 – Description of Business and Summary of Significant Accounting Policies Presentation” in the Form 10-K. For more detailed information regarding reportable segments, refer to “Note 13 – Segments” in this Quarterly Report. The following represents the disaggregated revenue by reportable segments for the three months ended April 1, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | April 1, 2023 |
| (In thousands) | | Vitamin Shoppe | | Pet Supplies Plus | | Badcock | | American Freight | | Buddy’s | | Sylvan | | Consolidated |
| Retail sales | | $ | 320,597 | | | $ | 163,259 | | | $ | 132,256 | | | $ | 202,150 | | | $ | 724 | | | $ | 8 | | | $ | 818,994 | |
| Wholesale sales | | 782 | | | 151,982 | | | — | | | 5,050 | | | — | | | — | | | 157,814 | |
| Total product revenue | | 321,379 | | | 315,241 | | | 132,256 | | | 207,200 | | | 724 | | | 8 | | | 976,808 | |
Royalties and advertising fees | | 178 | | | 10,884 | | | — | | | 795 | | | 5,183 | | | 9,880 | | | 26,920 | |
| Financing revenue | | — | | | — | | | 498 | | | 9,927 | | | — | | | — | | | 10,425 | |
| Interest income | | — | | | 83 | | | 22,239 | | | 177 | | | — | | | — | | | 22,499 | |
| Interest income from amortization of original purchase discount | | — | | | — | | | 8,236 | | | — | | | — | | | — | | | 8,236 | |
| Warranty and damage revenue | | — | | | — | | | 12,305 | | | 10,588 | | | 1,563 | | | — | | | 24,456 | |
| Other revenues | | 145 | | | 7,863 | | | 11,753 | | | 7,874 | | | 52 | | | 344 | | | 28,031 | |
| Total service revenue | | 323 | | | 18,830 | | | 55,031 | | | 29,361 | | | 6,798 | | | 10,224 | | | 120,567 | |
| Rental revenue, net | | — | | | — | | | — | | | — | | | 7,446 | | | — | | | 7,446 | |
| Total rental revenue | | — | | | — | | | — | | | — | | | 7,446 | | | — | | | 7,446 | |
| Total revenue | | $ | 321,702 | | | $ | 334,071 | | | $ | 187,287 | | | $ | 236,561 | | | $ | 14,968 | | | $ | 10,232 | | | $ | 1,104,821 | |
The following represents the disaggregated revenue by reportable segments for the three months ended March 26, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 26, 2022 |
| (In thousands) | | Vitamin Shoppe | | Pet Supplies Plus | | Badcock | | American Freight | | Buddy’s | | Sylvan | | Consolidated |
| Retail sales | | $ | 310,430 | | | $ | 162,549 | | | $ | 166,642 | | | $ | 211,513 | | | $ | 1,070 | | | $ | 11 | | | $ | 852,215 | |
| Wholesale sales | | 175 | | | 123,232 | | | — | | | 3,542 | | | — | | | — | | | 126,949 | |
| Total product revenue | | 310,605 | | | 285,781 | | | 166,642 | | | 215,055 | | | 1,070 | | | 11 | | | 979,164 | |
| Royalties and advertising fees | | 134 | | | 9,062 | | | — | | | 548 | | | 4,824 | | | 9,509 | | | 24,077 | |
| Financing revenue | | — | | | — | | | — | | | 8,175 | | | — | | | — | | | 8,175 | |
| Interest income | | — | | | 73 | | | 27,663 | | | 195 | | | — | | | — | | | 27,931 | |
| Interest income from amortization of original purchase discount | | — | | | — | | | 37,606 | | | — | | | — | | | — | | | 37,606 | |
| Warranty and damage revenue | | — | | | — | | | 13,546 | | | 11,479 | | | 1,604 | | | — | | | 26,629 | |
| Other revenues | | 214 | | | 6,298 | | | 10,802 | | | 5,964 | | | 63 | | | 523 | | | 23,864 | |
| Total service revenue | | 348 | | | 15,433 | | | 89,617 | | | 26,361 | | | 6,491 | | | 10,032 | | | 148,282 | |
| Rental revenue, net | | — | | | — | | | — | | | — | | | 8,024 | | | — | | | 8,024 | |
| Total rental revenue | | — | | | — | | | — | | | — | | | 8,024 | | | — | | | 8,024 | |
| Total revenue | | $ | 310,953 | | | $ | 301,214 | | | $ | 256,259 | | | $ | 241,416 | | | $ | 15,585 | | | $ | 10,043 | | | $ | 1,135,470 | |
Contract Balances
The following table provides information about receivables and contract liabilities (deferred revenue) from contracts with customers as of April 1, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| (In thousands) | | April 1, 2023 | | December 31, 2022 |
| Accounts receivable | | $ | 115,977 | | | $ | 143,582 | |
| Notes receivable | | 14,477 | | | 14,988 | |
| | | | |
| Customer deposits | | $ | 21,663 | | | $ | 20,816 | |
| Gift cards and loyalty programs | | 9,496 | | | 9,565 | |
| Deferred franchise fee revenue | | 23,642 | | | 22,175 | |
| Other deferred revenue | | 9,955 | | | 10,688 | |
| Total deferred revenue | | $ | 64,756 | | | $ | 63,244 | |
Deferred revenue consists of (1) amounts received for merchandise of which customers have not yet taken possession, (2) gift card or store credits outstanding, and (3) loyalty reward program credits which are primarily recognized within one year following the revenue deferral. Deferred franchise fee revenue is recognized over the term of the agreement, which is between five and twenty years. The amount of revenue recognized in the period that was included in the contract liability balance at the beginning of the period is immaterial to the condensed consolidated financial statements.
(7) Long-Term Obligations
For details regarding the Company’s long-term debt obligations, refer to “Note 10 – Long-Term Obligations” in the Form 10-K.
Long-term obligations at April 1, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | April 1, 2023 | | December 31, 2022 |
| Term loans, net of debt issuance costs | | | | |
| First lien term loan, due March 10, 2026 | | $ | 1,064,470 | | | $ | 779,777 | |
| Second lien term loan, due September 10, 2026 | | 289,993 | | | 289,435 | |
| Total term loans, net of debt issuance costs | | 1,354,463 | | | 1,069,212 | |
| ABL Revolver | | 23,500 | | | 295,000 | |
| Other long-term obligations | | 5,061 | | | 6,147 | |
| Finance lease liabilities | | 23,067 | | | 11,055 | |
| Total long-term obligations | | 1,406,091 | | | 1,381,414 | |
| Less current installments | | 11,771 | | | 6,935 | |
| Total long-term obligations, net | | $ | 1,394,320 | | | $ | 1,374,479 | |
First Lien Credit Agreement
On February 2, 2023, the Company entered into the Third Amendment to the First Lien Credit Agreement, which amends the First Lien Credit Agreement dated as of March 10, 2021 to provide for an incremental term loan facility in the principal amount of $300.0 million and change the reference rate under the First Lien Credit Agreement from LIBOR to SOFR. The net proceeds were used to repay certain amounts outstanding under the Company’s ABL Credit Agreement.
Compliance with Debt Covenants
The Company's revolving credit and long-term debt agreements impose restrictive covenants on it, including requirements to meet certain ratios. As of April 1, 2023, the Company was in compliance with all covenants under these agreements and, based on a continuation of current operating results, the Company expects to be in compliance for the next twelve months.
(8) Income Taxes
Overview
For the three months ended April 1, 2023 and March 26, 2022, the Company had an effective tax rate of 6.2% and 23.0%, respectively. The changes in the effective tax rate compared to the prior year are due to a current year projected pre-tax loss compared to prior year pre-tax income and a current year non-cash goodwill impairment charge that is nondeductible for tax purposes.
Tax Receivable Agreement
On July 10, 2019, the Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) with the then-existing non-controlling interest holders (the “Buddy’s Members”) that provides for the payment by the Company to the Buddy’s Members of 40% of the cash savings, if any, in federal, state and local taxes that the Company realizes or is deemed to realize as a result of any increases in tax basis of the assets of Franchise Group New Holdco, LLC (“New Holdco”) resulting from future redemptions or exchanges of New Holdco units.
Payments will be made when such Tax Receivable Agreement related deductions actually reduce the Company’s income tax liability. No payments were made to the Buddy’s Members pursuant to the Tax Receivable Agreement during the three months ended April 1, 2023. Total amounts due under the Tax Receivable Agreement to the Buddy’s Members as of April 1, 2023 were $15.4 million, with $1.0 million in “Other current liabilities” and the remaining amount recorded in “Other non-current liabilities” in the accompanying Condensed Consolidated Balance Sheets. Pursuant to the Company’s election under Section 754 of the Internal Revenue Code (the “Code”), the Company has obtained an increase in its share of the tax basis in
the net assets of New Holdco when the New Holdco units were redeemed or exchanged by the non-controlling interest holders and other qualifying transactions. The Company has treated the redemptions and exchanges of New Holdco units by the non-controlling interest holders as direct purchases of New Holdco units for U.S. federal income tax purposes. This increase in tax basis will reduce the amounts that it would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
(9) Net Income (Loss) Per Share
Diluted net income (loss) per share is computed using the weighted-average number of common stock and, if dilutive, the potential common stock outstanding during the period. Potential common stock consists of the incremental common stock issuable upon the exercise of stock options and vesting of restricted stock units. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method.
The following table sets forth the calculations of basic and diluted net income (loss) per share: | | | | | | | | | | | | | | |
| | Three Months Ended |
| (In thousands, except for share and per share amounts) | | April 1, 2023 |
| March 26, 2022 |
| Net income (loss) attributable to Franchise Group | | $ | (108,317) | | | $ | 12,317 | |
| Less: Preferred dividend declared | | (2,128) | | | (2,128) | |
| | | | |
| | | | |
| Adjusted net income (loss) available to Common Stockholders | | $ | (110,445) | | | $ | 10,189 | |
| | | | |
| Weighted-average common stock outstanding | | 35,002,174 | | | 40,307,412 | |
| Net dilutive effect of stock options and restricted stock | | — | | | 800,381 | |
| Weighted-average diluted shares outstanding | | 35,002,174 | | | 41,107,793 | |
| | | | |
| Net income (loss) per share: | | | | |
| Basic net income per share | | $ | (3.16) | | | $ | 0.25 | |
| Diluted net income per share | | (3.16) | | | 0.25 | |
(10) Equity & Stock Compensation Plans
For a discussion of our stock-based compensation plans, refer to “Note 12 – Stock Compensation Plans” in the Form 10-K.
Restricted Stock Units
The Company has awarded service-based restricted stock units (the “RSUs”) to its non-employee directors, officers and certain employees. The Company recognizes expense based on the estimated fair value of the RSUs granted over the vesting period on a straight-line basis. The fair value of RSUs is determined using the Company’s closing stock price on the date of the grant. At April 1, 2023, unrecognized compensation costs related to the RSUs were $11.7 million. These costs are expected to be recognized through fiscal year 2024.
The following table summarizes the status of the RSUs as of and changes during the three months ended April 1, 2023:
| | | | | | | | | | | | | | |
| | Number of RSUs | | Weighted average fair value at grant date |
| Balance as of December 31, 2022 | | 273,302 | | | $ | 36.39 | |
| Granted | | 284,818 | | | 27.89 | |
| Vested | | (51,431) | | | 28.23 | |
| Canceled | | (500) | | | 42.41 | |
| Balance as of April 1, 2023 | | 506,189 | | | $ | 32.43 | |
Performance Restricted Stock Units
The Company has awarded performance restricted stock units (the “PRSUs”) to its officers and certain employees. The Company recognizes expense based on the estimated fair value of the PRSUs granted over the vesting period on a straight-line basis. The fair value of PRSUs is determined using the Company’s closing stock price on the date of the grant. At April 1, 2023, unrecognized compensation costs related to the PRSUs were $5.9 million. These costs are expected to be recognized through fiscal year 2025.
The following table summarizes the status of the PRSUs as of and changes during the three months ended April 1, 2023:
| | | | | | | | | | | | | | |
| | Number of PRSUs | | Weighted average fair value at grant date |
| Balance as of December 31, 2022 | | 364,857 | | | $ | 32.92 | |
| Granted | | 217,088 | | | 33.79 | |
Adjusted for performance results achieved(1) | | 154,904 | | | 24.84 | |
| Vested | | (282,256) | | | 24.82 | |
| Canceled | | (500) | | | 42.41 | |
| Balance as of April 1, 2023 | | 454,093 | | | $ | 35.60 | |
(1) Represents an adjustment for performance results achieved related to outstanding 2020 PRSU shares that reached 200% achievement in March 2023.
Market-Based Performance Restricted Stock Units
The Company has awarded market-based performance restricted stock units (the “MPRSUs”) to its officers and certain employees. The Company recognizes expense based on the estimated fair value of the MPRSUs granted over the vesting period on a straight-line basis. The fair value of MPRSUs is determined using a Monte Carlo simulation valuation model to calculate grant date fair value. Compensation expense is recognized over the requisite service period using the proportionate amount of the award’s fair value that has been earned through service to date. Under GAAP, compensation expense is not reversed if the award target is not achieved. At April 1, 2023, unrecognized compensation costs related to the MPRSUs were $8.0 million. These costs are expected to be recognized through fiscal year 2024.
The following table summarizes the status of the MPRSUs as of and changes during the three months ended April 1, 2023:
| | | | | | | | | | | | | | |
| | Number of MPRSUs | | Weighted average fair value at grant date |
| Balance as of December 31, 2022 | | 840,926 | | | $ | 21.77 | |
| Granted | | — | | | — | |
| Vested | | — | | | — | |
| Canceled | | (37,500) | | | 19.97 | |
| Balance as of April 1, 2023 | | 803,426 | | | $ | 21.86 | |
Stock Options
The Company has awarded stock options to its non-employee directors and officers. As of April 1, 2023, there were 239,564 stock options outstanding. During the three months ended April 1, 2023, there were no stock options granted, 15,000 stock options exercised, and no stock options forfeited. The weighted-average exercise price of stock options outstanding was $9.54 per share as of April 1, 2023. All outstanding stock options will expire in fiscal years 2023 and 2024.
At April 1, 2023, there were zero non-vested stock options outstanding and there was no remaining unrecognized compensation cost related to vested stock options.
The following table summarizes information about stock options outstanding and exercisable at April 1, 2023:
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding and Exercisable |
| Range of exercise prices | | Number | | Weighted average exercise price | | Weighted average remaining contractual life (in years) |
| | |
| $0.00 - $10.89 | | 185,000 | | | $ | 8.80 | | | 0.7 |
| $10.90 - $12.01 | | 54,564 | | | 11.97 | | | 0.7 |
| | 239,564 | | | $ | 9.54 | | | |
Stock Compensation Expense
The Company recorded $2.7 million and $5.4 million in stock-based compensation expense during the three months ended April 1, 2023 and March 26, 2022, respectively.
Long-Term Incentive Plans
The Company has long-term incentive plans at various operating companies which are recorded as liabilities. Upon vesting, the awards granted under these plans may be settled in cash or shares of the Company’s stock at the Company’s discretion. The total aggregate liability for these plans as of April 1, 2023 is $9.8 million, recorded in “Other non-current liabilities” on the Condensed Consolidated Balance Sheets. During the three months ended April 1, 2023, total expense recognized related to these plans was $1.8 million.
(11) Related Party Transactions
The Company considers any of its directors, executive officers or beneficial owners of more than 5% of its common stock, or any member of the immediate family of the foregoing persons, to be related parties.
Messrs. Kahn and Laurence
Brian Kahn and Vintage Capital Management, LLC and its affiliates (“Vintage”), in aggregate, held approximately 40.2% of the aggregate voting power of the Company through their ownership of common stock as of April 1, 2023. Brian Kahn and Andrew Laurence are principals of Vintage. Mr. Kahn is a member of the Board of Directors, President and Chief Executive Officer of the Company. Mr. Laurence is an Executive Vice President of the Company and served as a member of the Company’s Board of Directors until May 2021.
Buddy’s Franchises. Mr. Kahn’s brother-in-law owns eight Buddy’s franchises. All transactions between the Company’s Buddy’s segment and Mr. Kahn’s brother-in-law are conducted on a basis consistent with other franchisees.
Tax Receivable Agreement
Refer to “Note 8 – Income Taxes” for detail regarding the amounts due under the Tax Receivable Agreement to the Buddy’s Members.
(12) Commitments and Contingencies
In the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s business, financial condition, cash flows, or results of operations.
The Company is party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits concerning the fees charged to customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters, and contract disputes. Although the Company cannot provide assurance that it will ultimately prevail in each instance, it believes the amount, if any, it will be required to pay in the discharge of liabilities or settlements in these claims will not have a material adverse impact on its consolidated results of operations, financial position, or cash flows.
Guarantees
The Company remains secondarily liable under various real estate leases that were assigned to franchisees who acquired Pet Supplies Plus or Vitamin Shoppe stores from the Company. In the event of the failure of an acquirer to pay lease payments, the Company could be obligated to pay the remaining lease payments which extend through 2033 and in aggregate are $30.3 million and $30.2 million as of April 1, 2023 and December 31, 2022, respectively. In certain cases, the Company could attempt to recover from the franchisees’ personal assets should the Company be required to pay remaining lease obligations.
If the Company is required to make payments under any of these guarantees, the Company could seek to recover those amounts from the franchisees or in some cases their affiliates. The Company believes that payment under any of these guarantees is remote as of April 1, 2023.
(13) Segments
The Company’s operations are conducted in six reportable business segments: Vitamin Shoppe, Pet Supplies Plus, Badcock, American Freight, Buddy’s, and Sylvan. The Company defines its segments as those operations which results its chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources.
The Vitamin Shoppe segment is an omnichannel specialty retailer and wellness lifestyle company with the mission of providing customers with the most trusted products, guidance, and services to help them become their best selves, however they define it. The Vitamin Shoppe segment offers one of the largest varieties of products among vitamin, mineral and supplement retailers. The broad product offering enables the company to provide customers with a depth of selection of products that may not be readily available at other specialty retailers or mass merchants, such as discount stores, supermarkets, drug stores and wholesale clubs. The Vitamin Shoppe continues to focus on improving the customer experience through the roll-out of initiatives including increasing customer engagement and personalization, redesigning the omnichannel experience (including in stores as well as through the internet and mobile devices), growing private brands and improving the effectiveness of pricing and promotions. Vitamin Shoppe is headquartered in Secaucus, New Jersey.
The Pet Supplies Plus segment is a leading omnichannel retail chain and franchisor of pet supplies and services. Pet Supplies Plus has a diversified revenue model comprised of Company-owned store revenue, franchise royalties and revenue generated by the wholesale distribution of products to its franchisees. Pet Supplies Plus offers a curated selection of premium brands, proprietary private labels and specialty products with retail price parity with online players. Additionally, Pet Supplies Plus offers grooming, pet wash and other services in most of its locations. The Pet Supplies Plus segment operates under the “Pet Supplies Plus” brand and is headquartered in Livonia, Michigan.
The Badcock segment is a retailer of furniture, appliances, bedding, electronics, home office equipment, accessories and seasonal items in a showroom format. Additionally, Badcock offers multiple and flexible payment solutions and credit options through its consumer financing services. The Badcock segment operates under the “Badcock Home Furniture & More” brand and is headquartered in Mulberry, Florida.
The American Freight segment is a retail chain offering in-store and online access to furniture, mattresses, new and out-of-box home appliances and home accessories at discount prices. American Freight buys direct from manufacturers and sells direct in warehouse-style stores. By cutting out the middleman and keeping its overhead costs low, American Freight can offer quality products at low prices. American Freight provides customers with multiple payment options providing access to high-quality products and brand name appliances that may otherwise remain aspirational to some of its customers.
American Freight also serves as a liquidation channel for major appliance vendors. American Freight operates specialty distribution centers that test every out-of-box appliance before it is offered for sale to customers. Customers typically are covered by the original manufacturer’s warranty and are offered the opportunity to purchase a full suite of extended-service plans and services. The American Freight segment operates under the “American Freight” brand and is headquartered in Delaware, Ohio.
The Buddy’s segment is a specialty retailer of high quality, name brand consumer electronic, residential furniture, appliances and household accessories through rent-to-own agreements. The rental transaction allows customers the opportunity to benefit from the use of high-quality products under flexible rental purchase agreements without long-term obligations. The Buddy’s segment operates under the “Buddy’s” brand and is headquartered in Orlando, Florida.
The Sylvan segment is an established and growing franchisor of supplemental education for Pre-K-12 students and families. Sylvan addresses the full range of student needs with a broad variety of academic curriculums delivered in an omnichannel format. The Sylvan platform provides franchisees with the ability to provide a range of services, including on premises, virtually, at a satellite location, and in the home. Sylvan is headquartered in Hunt Valley, Maryland.
Refer to “Note 6 – Revenue” for total revenues by segment. Operating income (loss) by segment were as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended |
| (In thousands) | | April 1, 2023 | | March 26, 2022 |
| Income (loss) from operations: | | | | |
| Vitamin Shoppe | | $ | 27,194 | | | $ | 35,354 | |
| Pet Supplies Plus | | 19,367 | | | 17,021 | |
| Badcock | | 14,742 | | | 70,230 | |
| American Freight | | (86,630) | | | 11,213 | |
| Buddy’s | | 3,740 | | | 4,065 | |
| Sylvan | | 1,151 | | | 948 | |
| Total Segments | | (20,436) | | | 138,831 | |
| Corporate | | (6,093) | | | (8,465) | |
| Consolidated income (loss) from operations | | $ | (26,529) | | | $ | 130,366 | |
Total assets by segment were as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | April 1, 2023 | | December 31, 2022 |
| Total assets: | | | | |
| Vitamin Shoppe | | $ | 623,453 | | | $ | 625,543 | |
| Pet Supplies Plus | | 1,013,360 | | | 977,234 | |
| Badcock | | 748,927 | | | 789,727 | |
| American Freight | | 857,705 | | | 904,378 | |
| Buddy’s | | 134,692 | | | 135,192 | |
| Sylvan | | 86,856 | | | 90,361 | |
| Total Segments | | 3,464,993 | | | 3,522,435 | |
| Corporate | | 142,269 | | | 107,977 | |
| Consolidated total assets | | $ | 3,607,262 | | | $ | 3,630,412 | |
(14) Subsequent Events
On May 9, 2023, the Board declared quarterly dividends of $0.46875 per share of Series A Preferred Stock. The dividends will be paid in cash on or about July 17, 2023 to holders of record of the Company's Series A Preferred Stock on the close of business on July 3, 2023.
On May 10, 2023, the Company announced that it has entered into a definitive agreement and plan of merger (the “Merger Agreement”) pursuant to which members of the senior management team of the Company led by Brian Kahn, the Company’s Chief Executive Officer (collectively with affiliates and related parties of the senior management team, the “Management Group”), have agreed to acquire approximately 64% of the Company’s issued and outstanding common stock that the Management Group does not presently own or control. Under the terms of the proposed merger, the Company’s common stockholders, other than the Management Group (the “Public Stockholders”), will receive $30.00 in cash for each share of the Company’s common stock they hold.
The proposed merger is anticipated to close in the second half of 2023, subject to satisfaction or waiver of the closing conditions, including approval by regulatory authorities and the Company’s stockholders, including approval by a majority of the shares of common stock of the Company not owned or controlled by the Management Group. Upon completion of the proposed merger, the Company will become a private company and will no longer be publicly listed or traded on NASDAQ.
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