Franchise Group Files for Bankruptcy but Plans to Keep Retail Brands Open

Franchise Group, a company known for its retail brands, has filed for Chapter 11 bankruptcy protection. Despite the filing, the company plans to keep most of its retail brands, including Vitamin Shoppe, operating. Franchise Group has reached an agreement with about 80% of its senior secured lenders. This agreement allows the conversion of debt into ownership stakes, enabling continued business operations.

• Franchise Group, which owns brands like Vitamin Shoppe and Pet Supplies Plus, has filed for Chapter 11 bankruptcy protection but plans to keep most of its brands operational.
• The company has arranged with major lenders to convert debt into equity, supporting business continuity, although some stores, such as American Freight, will close.
• B. Riley Financial, which took Franchise Group private last year, faces financial setbacks due to a decrease in consumer spending and controversy surrounding founder Brian Kahn, currently under SEC investigation.
• B. Riley has responded to the financial strain by selling key assets and marking down investments, though it remains the most shorted stock in the market as investor skepticism mounts.

The company’s portfolio includes chains like Pet Supplies Plus and Buddy’s Home Furnishings. However, American Freight, a discount furniture and appliance seller, will close. This retailer has several outlets in California, including Torrance, West Covina, and Palmdale. Franchise Group reported assets and liabilities each ranging between $1 billion to $10 billion. The bankruptcy filing does not affect franchise-owned stores.

The Westwood-based B. Riley Financial took Franchise Group private last year in a $2.8 billion management-led buyout. The deal faced challenges due to slowing sales and a scandal involving its founder, Brian Kahn, and Prophecy Asset Management. This hedge fund allegedly defrauded investors of $294 million. Kahn denies any wrongdoing. Bryant Riley, B. Riley’s founder and co-CEO, has also denied knowledge of any wrongdoing. However, the SEC is investigating the firm’s dealings with Kahn.

Bryant Riley expressed his dismay over the outcome in a letter to employees. He noted the unforeseen downturn in consumer spending and the scandal’s impact. Despite the challenges, he stated that B. Riley remains in a better position than perceived. The company has announced a markdown of its investment in Franchise Group by up to $370 million. It also expects to record a loss of up to $475 million in its second-quarter earnings.

B. Riley’s financial struggles have led to significant asset sales to reduce debt. The company sold a majority stake in its Great American appraisal and liquidation business for $203 million. It also sold interests in several apparel brands and the former mall retailer Brookstone for $236 million. Furthermore, part of its wealth management business went to Stifel Financial Corp. for up to $35 million in cash.

The Franchise Group buyout turned B. Riley into the most highly shorted stock in the market. Investors bet on the company’s stock price dropping. Marc Cohodes, a leading short-seller, emphasized the bankruptcy filing as evidence of a poor deal for investors.

As B. Riley navigates through these financial difficulties, the focus remains on restructuring and reducing debt. The company’s efforts to manage its financial obligations will be crucial for its future stability.