Vitamin Shoppe Owner Franchise Group Inc. Files For Chapter 11

Nov 05, 2024

The Vitamin Shoppe owner has enter Chapter 11. (Photo by John Greim/LightRocket via Getty Images)

Vitamin Shoppe owner Franchise Group Inc. has filed for Chapter 11 bankruptcy protection after racking up months of losses and with background troubles dogging its Los Angeles-based backer B. Riley Financial Inc.

The holding company, also known as FRG, owns a number of brands including Buddy’s Home Furnishings and Pet Supplies Plus, filed in Delaware, setting out in court documents almost $2 billion of debt.

The news followed persistent rumors that FRG was preparing to cede control to lenders after lengthy restructuring negotiations. FRG said in a statement that it had struck a deal with lenders that own the majority of its senior debt and under the proposal, lenders have agreed to swap out debt for 100% of the equity in the reorganized business.

Franchise Group acquired Vitamin Shoppe in 2019 and in 2023 FRG subsequently agreed to a $30 per share deal to go private valued at about $2.6 billion and led by FRG CEO Brian Kahn. Following the deal, Franchise Group’s management team, including Kahn, continued to lead the company, which operates more than 3,000 stores.

Investment and brokerage firm B. Riley had helped arrange the buyout but Kahn subsequently stepped down in January amid a criminal investigation into his alleged role in a securities fraud case related to the collapse of hedge fund Prophecy Asset Management.

While Kahn continues to deny any wrongdoing, and insists he was among those defrauded, problems at FRG compounded in the meantime as its brands struggled amid the cost of living squeeze. The group sold its Sylvan Learning business in February of this year in an attempt to deleverage its balance sheet, but other possible disposals were hindered by the allegations involving Kahn, FRG’s chief restructuring officer David Orlofsky said in a court filing.

“FRG’s bankruptcy is a confluence of events that ultimately derailed our original investment thesis,” B. Riley Co-founder and Chairman Bryant Riley said in an email to employees. “Unfortunately, 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.”

Pet Supplies Plus is among the brands to continue trading within Chapter 11. (Photo by: Lindsey ... [+] Nicholson/UCG/Universal Images Group via Getty Images)

For his part, starting in 2018, Kahn had used a series of acquisitions to create FRG with financial support from B. Riley and in last year’s buyout the latter took a 31% stake in FRG and also loaned Kahn about $200 million, using his stake as collateral.

Tokyo-based Nomura Holdings Inc. also provided a $500 million term loan to B. Riley and received shares in FRG along with other assets. B. Riley said that it expected to pay down this debt to $125 million by the end of November.

“Despite the negative headlines, we are in far better shape than folks give us credit for,” Riley said in his email, saying B. Riley will have the capital to return to growth.

FRG said Sunday in a company statement that the first lien lender group had agreed to provide the company with $250 million in Chapter 11 financing, which along with cash already on hand will provide the business “with ample liquidity to maintain operations across its businesses and fulfill go-forward commitments to employees, customers, vendors, franchise partners, and other stakeholders.”

Based in Secaucus, N.J., leading specialty health-and-wellness retailer The Vitamin Shoppe operates 700 company-operated retail stores under The Vitamin Shoppe and Super Supplements banners, as well as an online site. It recently announced a partnership with Uber Eats to provide delivery of online orders nationally from its store via the app.

As part of the restructuring, FRG said it has decided to shutter discount retailer American Freight and will commence store closure sales on Nov. 5.

B. Riley shares fell around 13% this morning after the company announced it will need to take an additional impairment of $120 million on its equity investment in the parent unit of FRG and a loan to Kahn. Its stock price is down nearly 80% in the year-to-date.