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This Discount Home Retailer Is Headed to the Retail Graveyard
Vicki M. Young
5 min read
Financial struggles dogging Franchise Group Inc. have led to to a pre-packaged Chapter 11 filing for bankruptcy court protection.
Franchise, an acquirer of franchised and franchisable businesses, has been hit by operational declines and losses due to the retail backdrop impacted by macroeconomic trends and inflationary pressures. Those factors added to its struggles connected with an overleveraged balance sheet and rising interest expenses.
Lost in the bankruptcy restructuring will be home furnishings retailer American Freight, which had been struggling due to macroeconomic challenges in the large durable goods sector, Franchise said on Sunday. Franchise plans to keep in operation its Pet Supplies Plus, The Vitamin Shoppe, and Buddy’s Home Furnishings banners.
Franchise said that it has entered into a restructuring support agreement with holders of about 80 percent of its first lien debt, with the debt holders owning 100 percent of the equity in the reorganized company. Franchise said the equitization would “substantially reduce the company’s debt” and enhance its liquidity for the benefit of its continuing operations. The first-lien lender group has also committed $250 million in debtor-in-possession financing. Franchise, which filed its Chapter 11 petition in a Delaware bankruptcy court, said it will pursue a so-called dual track whereby it moves towards confirmation of a restructuring plan while marketing for an auction to maximize value for creditors.
“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,” Franchise’s president and CEO Andrew Laurence said, adding that the strengthened balance sheet will give the company the ability to “support these businesses as they advance their growth trajectories.”
David Orlofsky, a managing director at AlixPartners who was hired to be Franchise’s chief restructuring officer, said in a court document that in addition to the financial struggles at Franchise, the company was “suddenly rocked by the allegations” that its then CEO Brian Kahn was involved in the demise of Prophecy Asset Management. While the fund is not connected to Franchise, both a suit by the Securities and Exchange Commission and a criminal indictment from the Department of Justice referred to Kahn as one of two unindicted alleged co-conspirators. An independent probe by Franchise concluded that the company had no involvement in—nor any knowledge of—Kahn’s alleged misconduct, according to Orlofsky.
Pulled into the widening SEC probe is whether investment banking firm B. Riley had fully disclosed the risks in some of its assets. B. Riley acquired Franchise last year as part of a management-led buyout, which included financing collateralized by interests in Franchise and connected to Kahn through an asset management firm he founded.
Following the take-private transaction, Franchise sold its subsidiary home goods retailer W.S. Badcock Corp. to Conn’s Inc., a home retail competitor, last December. Conn’s filed its own Chapter 11 petition in July to conduct an orderly wind-down of operations, which include both the Conn’s and W.S. Badcock nameplates. Franchise also sold its Sylvan Learnings business this part February. The chief restructuring officer said higher interest rates and inflation have slowed new store openings and franchise sales. “Consumer discretionary spending has decreased, especially with respect to lower-income consumers, who comprise the core customer bases for American Freight and Buddy’s,” he said in the court document.
Orlofsky said American Freight operates 344 company-owned stores, with employees totaling 3,000. At Buddy’s Home Furnishings, which will stay in operation, there are 34 company-operated stores and over 300 franchised locations and about 230 employees. The franchisee owner-operators are not part of the Franchise bankruptcy.
According to the chief restructuring officer, at the time of the Chapter 11 filing, Franchise owed $1.99 billion in prepetition debt and about $106 million owed to unsecured creditors. Across all brands, Franchise has 2,200 retail store locations including company-owned and franchised, and 11,900 total employees. The Chapter 11 petition said the company estimated its number of creditors at between 50,000 to 100,000.
Liquidations at American Freight will begin on Tuesday. The shut down of the home retailer is the latest to hit the beleagured home sector due to consumer spending challenges. The home sector has had the highest default risk across retail since 2021, according to data from S&P Global Market Intelligence. And while last year saw the mega filings of Bed Bath & Beyond and the second Chapter 11 filing—the so-called Chapter 22—of Tuesday Morning, this year’s filings also include flooring retail LL Flooring, closeout home retailer Big Lots, which filed its Chapter 11 to effect a sale to Nexus Capital Management, and home wholesaler True Value Co. LLC, also to effect a sale to its competitor Do It Best.
In better days, Franchise is also known for its attempt to acquire department store retailer Kohl’s Corp. in June 2022. Activist investors at the time were pushing Kohl’s to sell itself. But a $60-per-share bid for a $7.74 billion deal turned into a revised $53-a-share, $6.84 billion offer over fears of a U.S. recession and concerns in the financing world. That led to the retailer rejecting Franchise’s revised proposal.
