Franchise Group, parent of retailers including Vitamin Shoppe and Pet Supplies Plus, is following in the footsteps of other U.S. store operators this year by filing for bankruptcy protection and planning to shut down one of its struggling chains, American Freight.
Delaware, Ohio-based Franchise Group this weekend started voluntary Chapter 11 proceedings in the U.S. Bankruptcy Court for the District of Delaware in order to implement an agreed-upon restructuring plan. The company's franchised locations aren't part of the proceedings. Franchise Group said it has a commitment for $250 million of debtor-in-possession, or DIP, financing from lenders to support its operations.
Discount furniture retailer American Freight, based in Delaware, Ohio, will be a casualty of the bankruptcy process. It will be winding down its business and starting store-closing sales Tuesday. It has 357 locations across the country, with 344 company-owned stores and 13 franchise-operated locations, with roughly 3,000 employees, according to court documents.
"The debtors concluded that American Freight’s limited amount of profitable store locations could not support the rightsizing of its business through a plan of reorganization," David Orlofsky, Franchise Group's chief restructuring officer, said in a 61-page affidavit.
Franchise Group's portfolio also includes: Secaucus, New Jersey-based Vitamin Shoppe, with roughly 680 company-operated stores and 20 franchised locations across the United States and Canada; Livonia, Michigan-based Pet Supplies Plus and its Wag N' Wash franchise, with a total of about 240 locations; and Orlando, Florida-based Buddy’s Home Furnishings, which has 34 company-operated stores and over 300 franchised locations.
Shutterings soar
Franchise Group's Chapter 11 filing, which reported nearly $2 billion in debt, and the American Freight shutdown will be adding to the growing pile of retail bankruptcies and store closings in 2024. Texas-based restaurant chain TGI Fridays filed for Chapter 11 on Saturday. As of late last week, U.S. retailers had announced 6,481 store closures for this year, according to Coresight Research, already eclipsing the 5,553 closures it tracked for the whole of calendar 2023 and higher than any full-year total since 2020.
In its bankruptcy filing, Franchise Group cited the same kinds of financial problems from macroeconomic trends that other retail owners have had, particularly furniture sellers: a spike in sales during the pandemic, followed by a slowdown in nondiscretionary spending when stimulus money ran out and inflation soared.
"Today's announcement to de-lever our balance sheet is a pivotal step forward in enabling our market-leading businesses Pet Supplies Plus, The Vitamin Shoppe, and Buddy's Home Furnishings to realize their full potential," Andrew Laurence, Franchise Group's president and CEO, said in a statement Sunday. "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. Strengthening [Franchise Group's] balance sheet will allow us to enhance our support for these businesses as they advance their growth trajectories."
Unique problems
But Franchise Group also faces challenges that other ailing retailers don't, including the fallout of its founder and former CEO Brian Kahn from a federal probe involving his dealings with the firm that had taken the holding company private in August last year, Los Angeles-based B. Riley Financial. Kahn has denied any wrongdoing, but Franchise Group said the news of the investigation hindered its efforts to get back on track, scaring away possible partners.
In February, Franchise Group’s "operating businesses, and primarily American Freight, continued to encounter headwinds driven by the macro-economic and other factors," Orlofsky said.
Those, "together with the allegations against Mr. Kahn, adversely impacted Franchise Group’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 level," according to Orlofsky.
And in court documents, he also expressed concern that it may be left on the hook for rent owed by a chain it merged, furniture retailer W.S. Badcock doing business as Badcock Home Furniture & More, with Conn's HomePlus about a year ago. Conn's and Badcock filed for bankruptcy earlier this year, with plans to close dozens of stores.
CoStar News reached out to Franchise Group for additional comment but did not immediately hear back.
Franchise Group, which made an unsuccessful bid for the Kohl's department-store chain in 2022, remains the guarantor for Badcock's leases following the merger of it and Conn's, according to Orlofsky.
"The rejection of one or more of the Badcock lease agreements in Conn’s Chapter 11 cases could potentially result in the landlords under such agreements asserting claims against Franchise Group pursuant to the lease guaranty agreements," he said.
Financial details
As part of the Chapter 11 process, Franchise Group said it plans a marketing process, via court-approved bidding procedures, to "ensure that the company is maximizing value and best positioning its operating businesses for long-term success."
The company has entered into a restructuring support agreement with the holders of roughly 80% of its first-lien debt. That agreement calls for the proposed equitization of the first-lien debt into 100% of the equity in the reorganized enterprise, which would substantially reduce the Franchise Group's debt and enhance liquidity, according to the company.
As part of the restructuring plan, the first-lien lender group has committed $250 million in DIP financing which, subject to court approval and together with cash on hand, will provide Franchise Group with the liquidity to maintain operations across its businesses and fulfill go-forward commitments to employees, customers, vendors, franchise partners and other stakeholders, according to the company.
For the record
Willkie Farr & Gallagher and Young Conaway Stargatt & Taylor are serving as legal counsel, AlixPartners is serving as financial adviser and chief restructuring officer, and Ducera Partners is serving as investment banker to Franchise Group. Paul Hastings is serving as legal counsel and Lazard is serving as investment banker to the first-lien ad hoc group.