Dive Brief:
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Franchise Group, whose banners include Pet Supplies Plus, The Vitamin Shoppe and Buddy’s Home Furnishings, on Sunday said it is undergoing restructuring within a Chapter 11 bankruptcy filing. Franchised locations are not part of the process.
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The company will wind down its American Freight banner, “which has struggled due to sustained inflation and macroeconomic challenges facing the large durable goods sector,” per a company press release. Store closing sales at locations nationwide and online begin Tuesday.
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A restructuring support agreement with holders of some 80% of its first lien debt will convert that debt into 100% equity in the reorganized business, the company said. Lenders have committed $250 million in debtor-in-possession financing, subject to approval by the U.S. Bankruptcy Court for the District of Delaware.
Dive Insight:
Franchise Group President and CEO Andrew Laurence in a statement said this bankruptcy is “a pivotal step forward” that will allow the company to fortify its strongest performers — Pet Supplies Plus, The Vitamin Shoppe and Buddy’s Home Furnishings.
“Each of these businesses has a demonstrated value proposition and provides great products and services to customers, which they will continue to do seamlessly during this process,” he said. “Strengthening FRG’s balance sheet will allow us to enhance our support for these businesses as they advance their growth trajectories.”
In 2022, Franchise Group was mulling a $9 billion takeover of Kohl’s, though the department store ultimately rejected a later, lower offer. But trouble has been on the horizon for Franchise Group since then: Its last earnings report as a public company, for the first half of 2023, featured revenue declines and about a $160 million net loss. In its annual report, Franchise Group also listed its “substantial indebtedness” as a risk to its business.
The company went private about 18 months ago in a $2.6 billion deal led by then-CEO Brian Kahn and a group that included other members of company leadership and financial partners, and shortly after “was suddenly rocked by the allegations that [he] was involved in the demise” of hedge fund Prophecy Asset Management. Kahn faced fraud allegations from the Securities and Exchange Commission and the Justice Department, per court filings Monday.
Laurence, who is a partner at Vintage Capital Management, took over as CEO in January. All the while, the company had been looking to shore up its finances, even after selling off its W.S. Badcock and Sylvan Learning businesses, both acquired in 2021, per bankruptcy court filings. “At the same time, however, Franchise Group’s other operating businesses, and primarily American Freight, continued to encounter headwinds driven by the macro-economic and other factors,” including rising interest rates. The allegations against Kahn also undermined the company’s “ability to sell or otherwise monetize any of its other businesses, which in turn meant that Franchise Group could not deleverage its balance sheet and reduce the related liquidity and cash flow burdens associated with its high debt levels.”
The company told the bankruptcy court that it holds about $2 billion in debt, consisting of about $248.7 million outstanding under its senior secured asset-based revolving credit facility; about $1.1 billion under a first lien secured term loan credit facility; about $125 million under a second lien secured term loan credit facility; and about $514.7 million under a junior term loan credit facility.
Before filing under Chapter 11, Franchise Group paid $5.75 million in retention bonuses to certain insider employees and $2.16 million to certain noninsider employees, per court documents.
