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Franchise Group Results Slide as Firm Looks for Ways to Cut Debt

Jill R. Shah

13 May 2024 at 6:03 pm·3-min read

(Bloomberg) -- Franchise Group Inc., the firm at the center of a controversy surrounding B. Riley Financial Inc.’s finances, posted steep drops in first-quarter results as it grapples with looming maturities on its debt load, according to people familiar with the matter.

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The owner of brands such as Vitamin Shoppe and American Freight told investors revenue showed a double-digit drop from a year earlier, according to the people. Adjusted earnings before interest, taxes, depreciation and amortization plunged to around $25 million from about $62 million, said the people, who asked not to be identified discussing the private figures.

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Franchise Group is planning to cut debt and exploring securitization within its Pet Supplies Plus business, the people said. The firm didn’t respond to a request for comment.

Concern among investors about the finances of Franchise Group and its founder, Brian Kahn, helped cut B. Riley’s stock price by more than half from last year’s high. Kahn stepped down in January down after questions arose about his role in managing money for an unrelated hedge fund, Prophecy Asset Management, before it collapsed in 2020 and triggered a US fraud investigation.

Kahn has said he didn’t do anything wrong, he hasn’t been charged by US authorities and has said he was among those who lost money when Prophecy collapsed.

B. Riley’s Impact

B. Riley has been targeted by short sellers for its relationship with Kahn, its financing of a management-led buyout of Franchise Group in 2023 and whether its value is accurately reflected in B. Riley’s own financial statements. The investment bank has said it had no knowledge or involvement with Kahn’s role at Prophecy.

B. Riley has an equity stake in Franchise Group and additional exposure through a $200 million loan it made to Brian Kahn’s Vintage Capital Management, with his own Franchise Group shares as collateral.

The investment bank is scheduled to report its own financial results on May 15 after the market closes. In a regulatory filing late Monday, B. Riley said it expects to show a net loss of about $51 million, citing non-cash items that included unrealized losses on investments and $59 million of fair value adjustments on loans, which it didn’t specify.

Franchise Group has about $1.1 billion of first-lien debt due 2026, according to data compiled by Bloomberg. Some lenders to Franchise Group are seeking legal advice from Gibson Dunn & Crutcher ahead of these maturities to protect the investment, Bloomberg previously reported. Some of the company’s senior loans are quoted at about 86 cents on the dollar with yields above 20%, which typically reflects concern among lenders that the debts might not be fully repaid.

The firm recently agreed to sell one of its brands, Sylvan Learning, to Unleashed Brands for $185 million. During a December conference call, B. Riley founder Bryant Riley said Vitamin Shoppe might also be a sale candidate.

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