Franchise Group, Owner Of Vitamin Shoppe And Other Retail Chains, Files For Bankruptcy

The owner of retail chains The Vitamin Shoppe, Pet Supplies Plus and Buddy's Home Furnishings has filed for Chapter 11 bankruptcy to execute a debt restructuring deal to rescue the troubled operator.

The Franchise Group Inc. on Sunday entered a restructuring support agreement with holders of approximately 80% of its senior debt. Under the agreement, the company would complete a debt-to-equity swap, allowing its lenders to effectively become the new owners of the company, FRG announced.

The first-lien lender group has also committed $250M in debtor-in-possession financing, which, along with cash on hand, the company expects will allow it to stabilize and move forward.

Across its existing brands, FRG operated more than 3,000 stores as of last year, predominantly in the U.S., that are either company-run or pursuant to franchising and dealer agreements, according to regulatory filings. 

The restructuring wipes out B. Riley Financial’s investment in the company. The investment firm arranged a $2.8B buyout of the then-listed firm in August 2023, giving it a 31% stake in the company. 

“I feel personally sick about this result,” B. Riley Chairman and co-CEO Bryant Riley wrote in an email to employees Monday, which was included in a Securities and Exchange Commission filing. “There will likely be no equity recovery for all the constituents that participated, including the B. Riley shareholders, 69 employees, wealth clients and institutions that rolled their shares from the public entity and new institutional shareholders that participated.” 

Representatives for B. Riley didn't respond to Bisnow’s request for comment.

The bankruptcy results in a $120M impairment for B. Riley. It previously announced write-downs of up to $370M related to the FRG investment, Bloomberg reported.

As part of the restructuring strategy, FRG will wind down American Freight, a furniture and appliance firm that has more than 370 stores across 40 states, according to the brand’s website. Store closing sales will begin Tuesday.

American Freight has “struggled due to sustained inflation and macroeconomic challenges facing the large durable goods sector,” FRG said in its statement. 

The other brands are to “serve customers as usual,” the company said in its announcement. Its franchised locations won't be part of the proceedings.

Prior to the buyout, a July 1, 2023, quarterly report revealed that FRG is secondarily liable for various Pet Supplies Plus and Vitamin Shoppe franchisee real estate leases. In the event of franchisee failure, the company could be obligated to make lease payments, some of which extend through 2033. Those totaled $34.4M for Pet Supplies Plus and $30.2M for Vitamin Shoppe as of July 1, 2023, and Dec. 31, 2022, respectively. 

Shortly after Riley’s investment, ex-CEO Brian Kahn resigned from the company amid an investigation into securities fraud at collapsed investment management firm Prophecy Asset Management. Due to his role in the firm’s failure, he agreed to pay more than $200M to investors, including cash and shares in FRG, according to Bloomberg. In February, Kahn was accused of defaulting on parts of the settlement.

Riley's email to employees said FRG's issues were partly due to the scandal surrounding Kahn.

“The investment was devastated by the precipitous decline in consumer spending in the markets served by the FRG brands, and the fallout and uncertainty from the Prophecy scandal and the related federal investigation into Brian Kahn,” Riley wrote in his email. “These headwinds changed the economics of the investment and the timetable for executing on FRG’s strategy, including the potential monetization of assets, in a way that could not have been anticipated.”

In the months leading up to FRG’s downfall, B. Riley prepared by liquidating more than $500M of equity and debt assets. It has also orchestrated the sale of equity stakes in other parts of its portfolio, which produce approximately $400M in proceeds, according to Riley's email.

“We are positioning to be on the OFFENSIVE for the first time in too long,” Riley wrote.