Diversified franchise business operator
Franchise Group (NYSE: FRG) shares rallied with the benchmark
S&P 500 index (NYSEARCA: SPY) after bottoming out in March 2020. The Company operates over 4,100 locations in the U.S. and Canada which include Liberty Tax Service (original company), Buddy’s Home Furnishings, Sears Outlet, American Freight and The Vitamin Shoppe stores. Based on the mix of businesses, Franchise Group has been a beneficiary of pandemic-prompted stay-at-home mandates as shares peaked just over pre-COVID levels contracting into the acceleration of economic restarts. However, a closer look at its businesses indicate the selling may be a pullback for risk-tolerant investors to step on the train at bargain opportunistic pullback levels.
Q2 FY 2020 Earnings Release
On Aug. 5, 2020, Franchise Group released its second-quarter fiscal 2020 results for the quarter ending June 2020. The Company reported an earnings-per-share (EPS) loss of (-$0.30) excluding non-recurring items versus consensus analyst estimates for a profit of $0.24, missing estimates by (-$0.54). Revenues were flat year-over-year (YoY) at $512.6 million. The Company paid down $70 million of debt in the quarter and completed it acquisition of American Freight in Feb. 2020. End of quarter cash balance of $105.5 million doesn’t include the $106 million in proceeds from the June 27th offering of 1.2million shares of 7.50% Series A preferred stock with conversion at $25 per share. The Company lifted its full-year fiscal 2020 adjust EBITDA to over $2.70 non-GAP EPS from its previous $2.60 estimate. The $2.70 non-GAAP EPS includes $0.30 per share pro forma dilution from the offering.
Segment Breakdown
Franchise Group operates four segments of which three benefit from the stay-at-home restrictions and COVID-19 effects. American Freight, formerly known as Sears Outlet, which sells deep discount appliances, mattresses and furniture throughout 300 stores in 40 states saw revenues of $234.5 million. The Vitamin Shoppe saw $237.7 million top line revenues from its 400 stores. Liberty Tax saw $15 million. Buddy’s Home Furnishings is a rent-to-own business that remained open throughout the pandemic as an essential business. Buddy’s saw $25.4 million in revenues, up 9% YoY with a $1.5 million net profit.
Q2 2020 Conference Call Takeaways
According to Franchise Group President and CEO, Brian Kahn, noted how the demand in home furnishings benefit from the shift in consumer spending from travel and entertainment to home improvement and refurnishing. The government stimulus checks were “like a second tax refund” for consumers, which the Company saw direct impact to their home products top line. Recessionary times also favor deep value furnishings and appliances which plays into its core products and services.
Pent-Up Demand Driving Restart Narrative
American Freight had up to 150 stores temporarily closed due to COVID effects but still managed to grow sales 7% YoY for Q2. With stores reopened, the month of July is seeing 21% YoY sales growth. The Vitamin Shoppe had up to 90 store closings and reduced operating hours due to mall locations. However, the Company was able to tactically adjust supply chains to meet the significant demand for its immunity, health and wellness products in Q2. As the reopening trend accelerates, pent up demand is evident as the month of July grew sales 11.6% YoY. Liberty Tax saw (-3%) drop in Federal tax returns for the quarter. The Company plans to leverage, optimize and synergize segment strengths and services where applicable moving forward. For example, Franchise Group plans to launch Liberty Tax kiosks within American Freight and Buddy’s stores in 2021.
A Dual-Narrative Winner
While the market ran up Franchise Group shares as a pandemic benefactor from the demand in home furnishings and goods, it hasn’t considered the upside for its brick-and-mortar stores benefiting from economic restarts enabling them to come back online. It also targets the most hurt lower-income demographic that is experiencing the recessionary times now. The restart is just as painful as the pandemic restrictions as household incomes continue to struggle without another stimulus plan. This Company is a dual-narrative play that is enabling prudent investors to shop for bargain opportunistic pullback entries.
FRG Opportunistic Pullback Levels
Using the rifle charts on the monthly and weekly time frames provides a broader view of the landscape for FRG stock. The monthly rifle chart has a pup and stochastic mini pup with a rising 5-period moving average (MA) near the $22.33 Fibonacci (fib) level. The monthly upper Bollinger Bands (BBs) sit near the $30.98 fib. The weekly rifle charts triggered a market structure low (MSL) buy above $11.12 and completed a full oscillation as it peaked at the $28.41 fib. The weekly rifle chart is now in a make or break situation where the stochastic is falling back under the overbought 80-band causing the weekly 5-period MA to slope down. This downward weekly stochastic oscillation can provideopportunistic pullback levels are at the $19.97 fib, $17.60 monthly 15-period MA and overlapping fib, $16.78 fib and $14.67 overlapping fib. Granted these are deep pullbacks, but the volume on this stock is also relatively thin so bargain entry prices will be the best defensive measure.
