On value, investing, and everything in between

Three Bagger Opportunity?

Mar 01, 2023

Franchise Group (FRG) is our latest pick. Below is a snippet from one of our write-ups for the Value Investor Members. We put this company on the active recommendation list, early March.

Disclaimer: this analysis is for informational purposes only and is not investment advice. See for detail. 

What does the company do? 

Franchise Group (FRG) operates and owns franchise and franchisable businesses with a goal of maximizing cash flows. The company tries to acquire businesses with high cash flow generation that can be scaled by adding franchises, dealers, and company-owned units. 

As of their latest 10-K (FY 2022) The company currently owns The Vitamin Shoppe, Pet Supplies Plus, Badcock Home Furniture, American Freight, Buddy’s Home Furnishings, and Sylvan Learning.   3029 total locations - 1310 franchised, 1401 company run, 318 dealer locations.  

Franchisees will bear the operating costs of running the store and pay a monthly license fee, along with fees for franchise renewal, franchise opening fees, and franchise transfer fees.  


Does the business have a competitive advantage? Brand? Network Effects? Switching Cost? Low Cost? Intangible Assets?

Weak-moderate moat - brand moat.  The moat here is that the unit economics for each franchise is very profitable which attracts franchisors to the business.  This allows the company to grow revenue in a capital light manner (the franchisee will bear the cost for opening and operating the new store)


How durable is the competitive advantage?  What are the risks to the current (legacy) competitive advantage?

There are several business risks associated with the company.  The franchises may fall out of favor with franchisees if the unit economics no longer make much sense.

The American Freight business had a down year in 2022 due to 2021 pulling forward demand and an excess of inventory purchased.  This will impact 2023 for the first half (according to management).  If they continue to purchase improperly this may have a negative impact on the bottom line (2022 American Freight had roughly $3.7M to EBITDA due to the glut of supply.  In 2021 American Freight generated $108.8M in EBITDA )

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