FRG (2020 - Q4)

Ladies and gentlemen, thank you for standing by and welcome to Franchise Group's Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your host, Andy Laurence, Executive Vice President of Franchise Group. Andy Lau

Thank you, operator. Good afternoon and thank you for joining our conference call. I'm on the call with Brian Kahn, Franchise Group's President and CEO; and Eric Seeton, Franchise Group's CFO. Before getting started, I would like to mention that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could vary materially from those expressed in or implied by the forward-looking statements. The forward-looking statements are made as of the date of this call, and except as required by law, Franchise Group assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For more detailed discussion of these and other risks and uncertainties that could cause Franchise Group's actual results to differ materially from those indicated in the forward-looking statements, please see our Form 10-K for the fiscal year ended December 26, 2020, which was filed this afternoon and other filings we make with the SEC. The financial measures discussed today include non-GAAP measures that we believe investors focus on in comparing results between periods and among peer companies. Please see our earnings release in the News and Events section of our website at franchisegrp.com for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from, as a substitute for or superior to GAAP financial information but included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the company uses have limitations and may vary from those used by other companies. Now I would like to turn the call over to Brian. Brian?

Thanks, Andy, and good afternoon to our listeners. And thank you for joining us. I will briefly walk through a review of 2020, provide updates on our recent activities and discuss current trends in our markets and businesses. And then I'll turn the call over to Eric to provide financial details. We'll then be happy to answer questions. Overall Franchise Group’s management teams, associates, and franchisees overcame challenging obstacles in 2020, and adapted in a manner that has strengthened our brands and positioned them favorably for the future. In the fourth quarter of 2020, we continue to enhance our cash flow by driving revenue and cost synergies from an increasingly diverse set of operating brands. We acquired FFO Home, which added more than 30 new units to the American Freight brand without any incremental overhead. And we refranchised 47 Buddy’s locations in furtherance of our efforts to strategically refranchise corporate stores. Additionally, during and after the quarter we signed and have now closed the acquisition of Pet Supplies Plus and successfully syndicated and closed the related financing that materially improves our cost of capital. Furthermore, we signed a definitive agreement to combine Liberty with NextPoint Acquisition Corp., allowing for a fully valued de-levering transaction where Franchise Group will maintain its significant economic interest in the strategy of aggregating consumer finance products and services. These actions combined to positively impact our free cash flow generation and a portion of that enhanced free cash flow is being returned to shareholders through a 50% increase in our annual dividend rate to $1.50 per share in 2021, compared to $1 per share in 2020. So as of today, our current capital structure now includes $1.3 billion term loan, $182 million of which will be paid down with cash proceeds from Liberty's merger with NextPoint, which is anticipated to close in the second quarter. As we have previously stated, the Liberty and NextPoint, merger accelerates our strategy of evolving Liberty from a seasonal tax business into a year round diversified consumer financial products and services company. As for our ongoing brands, our operational priorities for 2021 include accelerating our franchising efforts for each of our brands and enhancing all of our brands e-commerce capabilities and productivity. Accelerating our franchising efforts means different things for some of our brands than others. For American Freight and The Vitamin Shoppe that means going to market aggressively for the first time with newly created franchise programs and infrastructure. For the more established Buddy's and Pet Supply franchise programs, our focus in 2021 will be on accelerating their growth and providing world-class support to both new and existing franchisees. We expect that as 2021 progresses, we will be able to report significant franchising and refranchising activity in our system. For full year 2021, we expect revenue growth at The Vitamin Shoppe, American Freight and Pet Supplies Plus. At Buddy's, we expect revenue to be lower due to the refranchising transaction in 2020. Like many other companies that experienced store closures, shelter-in-place orders, impacts of government stimulus programs and staggered reopening of its stores, our quarterly year-over-year comparisons will require context as the year progresses given that we had as many as 90 Vitamin Shoppe and 150 American Freight stores closed. Some beginning about this time last year, we intend to provide more insightful comparisons to augment our regular reporting this year. As a whole for 2021, we expect Franchise Group to achieve over 10% adjusted EBITDA growth, which will drive incremental non-GAAP earnings per share growth. Eric will provide more details on our expectations for specific periods shortly. But also as a reminder, our budget excludes refranchising activity that may or may not occur throughout the year. And we will update you on the financial impacts of these events as they occur. With the Pet Supplies acquisition closed and the pending Liberty definitive merger agreement signed, the way our management team looks at Franchise Group today. And the way our management team is compensated by the Franchise Group is on a pro forma basis. Assuming Liberty is excluded for the entirety of the year in Pet Supplies is included for a full 12-month period. Our goal has always been to maximize our discretionary cash flow. You've heard me say that term many times and then reallocate our cash flow to the highest and best uses. On a pro forma basis, we expect to benefit from over $200 million of annual discretionary cash flow based on a $330 million annual pro forma adjusted EBITDA, approximately $70 million of interest expense, pro forma for the debt repayment from the pending Liberty cash proceeds, approximately $15 million of system-wide maintenance CapEx. And for the sake of being conservative, approximately $40 million of cash taxes, assuming we are a full cash tax payer at the statutory rate of 25.8%. This year, however, based on tax attributes from the Pet Supplies acquisition, we don't expect ongoing operations to pay any federal cash income taxes, and only in an immaterial amount of state local cash taxes providing significantly higher short-term discretionary cash flow. Our current allocation of that discretionary cash flow has earmarked approximately $15 million for additional growth CapEx initiatives across all businesses, $10 million for debt amortization, $8.5 million for preferred dividends and $60 million for common dividends based on our recent dividend declaration rate. After all of those allocations, we expect to still have over $100 million of annual free cash flow to be used to further deliver our balance sheet, continue to diversify and scale Franchise Group and return additional capital to shareholders. As a reminder, after the Liberty merger closes, we expect our balance sheet to have less than $1 billion of net debt, quickly delivering Franchise Group back to under three turns of net leverage consistent with our long-term financial policy. We will also carry a significant balance sheet asset for our equity investment in NextPoint of the Liberty and LoanMe combined public company. For any reason, the Liberty transaction does not close our adjusted EBITDA, cash flow, earnings per share, debt levels, and the ratios would all be higher and we would provide those details at that time. But we look forward to the Liberty merger closing in the next few months. Lastly, for me, it's worth noting that our budget for 2021 also excludes any assumptions related to another round of government stimulus and includes our expectations of continued supply chain constraints, which have also led to elevated product and freight costs. That said, we're pleased with the resiliency of our brands, despite these challenges and look forward to an easing of supply constraints over time. Before turning the call over to Eric, I'd like to once again thank all of our dedicated associates for their hard work and supporting each other, our franchisees and ultimately the success of Franchise Group. Eric?

Thank you, Brian. Before I address the results of operations, I would like to remind you that we will be making references to pro forma items throughout this call. Our press releases and filings may refer to historical financial results for the acquired businesses prior to their acquisition by Franchise Group. These items have been adjusted to align with our fiscal calendar and accounting policies to the extent reasonable, comparison to pro forma results will allow us to discuss and evaluate performance of the acquired companies, when a comparable period is not available, due to the recent timing of the acquisition. The 10-K that we'll file today contains the actual results for all businesses for the entire year, except for the first 48 days of fiscal 2020 for American Freight. When discussing our pro forma results or comparable period results to prior periods will include American Freights results as if we owned it since the beginning of the year. In order to conform with SEC rules consistent with concepts in Article 11 of Regulation S-X for non-GAAP reporting, Franchise Group will not be reporting synergies and other acquisition costs as part of pro forma adjusted EBITDA. The company will continue to report adjusted EBITDA in the same format as it has in the past, and will provide supplemental information for Q4, that reflects cost synergies and other acquisition impacts. At this time, we do not anticipate reporting any supplemental information in 2021. The specific amounts included in each disclosure are fully discussed in detail in the non-GAAP financial measures and metrics. For the fourth quarter of 2020, total reported revenue for Franchise Group was $496.3 million, GAAP net loss attributed to Franchise Group was $4.2 million or $0.12 per share. And adjusted EBITDA was $28.8 million, in addition we had $5.2 million of supplemental information related to cost synergies and other acquisition impacts in Q4. The GAAP net loss for the quarter was primarily driven by interest expense, which includes deferred financing costs and one-time items associated with purchase price accounting. We have four reportable segments, American Freight; The Vitamin Shoppe; Liberty Tax and Buddy’s. For the quarter ended December 26, 2020 American Freight had revenue adjusted EBITDA and supplemental information of $214 million, $18.9 million and $2.9 million respectively. The Vitamin Shoppe had revenue adjusted EBITDA and supplemental information of $255.4 million, $15.7 million and $2.3 million respectively. Buddy’s had revenue and adjusted EBITDA of $22.1 million and $7.8 million respectively. As previously disclosed the refranchising of 47 Buddy’s corporate locations in November, 2020 is expected to have a net reduction in annual revenue and adjusted EBITDA of approximately $35 million and $6 million respectively. This impacted Buddy's revenue and adjusted EBITDA by approximately $3 million and $1 million respectively in the fourth quarter. Liberty Tax fourth quarter revenue and adjusted EBITDA was $4.8 million and a negative $12.4 million respectively. With the recent announcement of the combination of Liberty Tax and NextPoint Acquisition Corporation, Liberty Tax will be reported as a discontinued operation starting in Q1. For the first fiscal year 2020 Franchise Group had revenue of $2.15 billion in net income attributed to Franchise Group of $25.1 million or $0.70 per share, adjusted EBITDA of $227.6 million and supplemental information of $32.4 million. As just discussed Buddy's refranchising transaction reduced our annual adjusted EBITDA by approximately $1 million. Turning to our balance sheet and cash flow. For the quarter, we had free cash flow of $3.5 million defined as operating cash flow less capital expenditures. CapEx for the quarter was $8.2 million, in 2020, we generated $206.6 million of free cash flow received approximately $52 million in tax refunds related to NOL carrybacks allowed under the CARES Act and repaid $355.5 million of debt since the beginning of the year. CapEx for the year was $34.9 million. As Brian mentioned in conjunction with the closing of Pet Supplies Plus, we've put in place a new debt facility that has reduced our effective cost of debt from 11% to 6.2%. Our annualized cash interest expense on our new debt is expected to be approximately $80.5 million, which will further be reduced by just over $10 million after closing up the NextPoint transaction. In conjunction with our balance sheet and business performance, we believe we have sufficient liquidity to continue to meet all of our obligations and support all of our businesses for the foreseeable future. Turning to guidance, I want to reiterate that FRG management understands the importance of compliance issues noted in prior years. And we spent a significant amount of time with each of the operating companies in improving both accounting processes and internal controls over financial reporting to provide consistency across the businesses in our portfolio. At the end of 2020, those investments have paid off and we look to continue to implement this program with the inclusion of Pet Supplies Plus. Before taking questions, we would like to provide our current outlook for 2021, and providing our guidance, we want to highlight a few important changes and their impact. We are removing Liberty Tax from our guidance as it will be reported as a discontinued operation starting in Q1. But we will benefit from its cash flow for the 2021 tax season. Liberty Tax contributed approximately $122.8 million in revenue and $37 million in adjusted EBITDA in 2020. In compliance with Article 11 of Regulation S-X, our official guidance will include Pet Supplies Plus from the day of acquisition as opposed to the full year of fiscal 2021. On a pro forma basis Pet Supplies Plus had approximately $80 million in adjusted EBITDA in 2020, and then we expected to grow approximately 10% in 2021, but only $72 million of actual adjusted EBITDA is included in our guidance. As I previously mentioned, the net annualized impact of the Buddy’s refranchising transaction will reduce adjusted EBITDA by approximately $6 million annually, this takes into account the loss of four wall EBITDA, reduction in operating expenses and receipt of franchise royalties and fees. We also start reporting non-GAAP EPS, which will be calculated by adding the tax effected impact of the adjustments to EBITDA to GAAP net income and then dividing by the weighted average shares outstanding, and calculating non-GAAP EPS, we are currently using an effective tax rate of approximately 26%. We do not expect to pay any federal cash taxes in 2021, but expect to have an immaterial amount of state and local cash taxes. We will continue to report the financial impact of refranchising and franchising on a quarterly basis. With the impact of all these factors, in 2021, we are expecting to grow adjusted EBITDA by 10% to at least $310 million with a revenue to Franchise Group of $3 billion to $3.1 billion, generating GAAP net income of at least $40 million or $1 per share, and at least $3.25 of non-GAAP EPS. And calculating EPS, we're using 40 million weighted average shares outstanding, our guidance does not include any assumptions for additional acquisitions, divestitures, or refranchising activity. I do want to thank all of our shareholders and lenders for their support to-date. And operator, please open the line for questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from Mike Baker with D.A. Davidson.

Hey guys. Thanks. All right, one question, one follow-up, there's a lot to ask, but I guess I'll do this one. I guess I wanted to understand the organic growth stouts within your EBITDA outlook. On my math, if you take the 260 from 2020, including supplemental information, take out Liberty Tax, take out the Buddy’s – for the Buddy’s sales, got in $80 million for Pet Supplies Plus, but then take out a little bit for when you don't own them, et cetera. You'll get to a base of about 287 in EBITDA yet your guidance is 340. To me that looks like something about 18% organic EBITDA growth. Am I thinking about that, right? And if so, where did I – if you could just tell us, where you intend to generate that kind of EBITDA growth from?

Eric, do you want me to take that?

Yes, that's fine.

Yes. That's fine. So, yes, I don't think the math is exactly right. I think you started off right with the 260 and taking out Liberty, 37 and the Buddy's, 6. But I don't think we said anything about 340, although that's nice.

Sorry, I meant to say 310, sorry. I meant to say 310.

Yes. So for the 310, that's PSP is – so if you want to look at the 310 and PSP is in there for 72, right. So 217 and 72 is 289, and then organic growth from there.

So it’s about 8% organic growth, okay, fine. And so then if that's the case, where…

The 72 is part year as well, so it's not as simple as that. The businesses overall will grow combined by north of 10% all else being equal.

Okay. So we get into the numbers, I guess, specifically offline. But the bigger picture question is it seems like you plan on an organic EBITDA growth and so, if you could just discuss the trends there, and I guess the follow-up before you answer that. You can do the same math and I probably messed it up as well, but when you do that same kind of math on the top line, it looks like there is some implied organic growth in the 10% to maybe 15% range and you already sort of said that was the expectation for Pet Supplies Plus. So I guess, where are you seeing – which specific businesses are you seeing the implied organic growth on the top line and on the EBITDA line, and why?

Sure. So implied organic EBITDA, that’s a good one, and – so we are seeing implied organic EBITDA growth at Vitamin Shoppe, American Freight and Pet Supplies Plus, we would see implied EBITDA declines organically at Buddy’s, and all those net out to be still north of 10% overall.

Right, okay. So I guess the point I'm trying to make is you are seeing organic growth and maybe I'll ask it on the question, I'm sure someone else will ask it, but just in case, maybe a little bit more detail on what you were seeing in these businesses. We've given a lot – we've gotten a lot of high level information here, but if you could tell us, what did Vitamin Shoppe look like in the fourth quarter and into the early part of 2021? And what does American Freight, what are they competent at, et cetera, those – that type of detail I think would be helpful.

Yes. So Vitamin Shoppe comped north of 11% in Q4 American Freight grew north of 3%, Buddy’s grew north of 3%, so all three of those business and PSP comped positively as well. So the businesses are performing well, there are incremental margins associated with each of those businesses. We have unit growth at American Freight, a company-owned unit growth, which has an impact as well. So the businesses are healthy, supply chains certainly difficult, but the teams are managing through that. Some products are closer to par level – par levels than others. We're absolutely leaving revenue on the table from the supply chain. But we're comfortable with the outlook that we have now with the supply chain, the way that we see it unfolding.

Okay. I appreciate that color. I’ll turn over to somebody else.

Sure.

Thank you. Our next question comes from Susan Anderson with B. Riley.

Hi, good evening, nice to have in the quarter and managing through a tough year. I guess really quick on Liberty Tax, I think it – like you said it closes after April 15. So I guess the bulk of the tax season should be done. I guess just to clarify, are you keeping then the bulk of that cash from the tax season this year?

Yes, that's a good question. And so we continue to own and operate the business and the days fall where they may. So we do expect the transaction to close after the season has ended. So we will operate the business, get the cash flow from the tax season that we invested in last year to get to the season to wherever you lose money nine months out of the year, and you make money three months out of the year. So we've invested those losses into the back half of last year to get the tax season this year and to the extent that the transaction closes later and we will continue to fund that business and fund their weekly, monthly operating losses until the transaction closes. So hopefully that gives you a little more color.

Got it. Yes. And did you say what you're expecting from in terms of cash flow from the tax season this year? I think last year, obviously it was delayed, so I'm not sure if…

Sure. Well look in a normal tax season, and we do not believe at this point that the deadlines will be extended. I think we did $37 million of EBITDA last year, so called $35 million to $40 million EBITDA for that business, you generate in excess of that during the season, and then you invest some of that back into the remaining nine months. So just directionally you should expect that a tax season generates more than 100% of your cash flow for the year, if that helps.

Yes. That's helpful. Thanks. And then just as a follow-up, I guess I'm curious how you're thinking about if you're still, I guess, I think historically you said 25% payout of EBITDA and dividends. So now with PSP and obviously the refi debt, how are you thinking about that return to shareholders? And I guess if you're guiding the $310 million in EBITDA this year, that equals out to dividend about $193 million, would be higher also if PSP was there for a full 12 months, so just curious how you're thinking about that now going forward.

Sure. So we think about it frequently, right now, I think that we're comfortable with the dividend rate. But I don't want to do it, I don't want to be going up and down, I never want to go backwards. And we don't want to generally make policy changes in the middle of the year. I mean, we look at our budget, we see where we are. I don't think that we need to be right up at that 25% level yet. I do think that's where we aim to be down the road, but there are other factors and other uses of cash that maybe more valuable than an immediate increase in the dividend, but long-term we do expect to continue to grow the dividend, we want to create a track record that can be relied on for increasing dividends and never going backwards, and I think we're on a good path to proving that out.

Okay, great. If I could just add one more follow-up on the impact of the sub supply constraints, I guess, did you guys break out at all the impact to sales and I guess the cost associated with that? And I assume, I mean, I guess there was already supply constraints within appliances and so, but furniture, but now we have the port congestion too. So is that adding to the issue and when you expect that to catch up?

So the first part of your question, I got the last, but just asking the first part again, I missed that.

Yes. Or can you give some more color just on kind of what you guys feel like the impact of sales were? Because the lack of supply, I assume mainly American Freight, and then also if there was increased costs related to the port congestion that flowed through in fourth quarter and maybe first quarter.

Yes. So costs are higher, it's not just related to one thing. When you think about what happened last year, as everybody had to shelter in place, all the manufacturers shut down, whether they were domestic or international, just people weren't going to work. And that's really – that's what's driving the majority of it, the weather in Texas doesn't help, port delays don't help, but those are at the margin, I think that what you're seeing industry-wide is product cost increases because, supply is low and just simple economics supply and demand and the manufacturers are increasing prices, because they know that they can get it, that will – we pass that on, it's not impacting us. But over time you'll revert back to the mean and supplying and demand will play itself out, and that'll be a tailwind for us down the road. I really wouldn't look at any one thing though, there is no great fix where if the ports open up, everything is going to go back to normal, it’s just people are getting what they can get for their product, they're charging what they can charge for Freight. And if you're not willing to pay the toll, then that truck is going elsewhere. So for us, we just want to serve our customers as well as we can and make sure that we have product for them. And we've got some skews that are 100% stock and some that are 50%, it’s across the board. We would just – but I would certainly caution you to just think about any – to avoid thinking about any one fix that will solve this issue, I think it lasts probably longer than people think, but we'll make it through it, and obviously the performance is there. As far as how many dollars are left on the table, I don't even know the answer to that. It's not insignificant that's for sure, but the reality is, if you start looking backwards at what could have been, then you get the next year and then you think about, all right, well then how did that compare, and it's a slippery slope. So I think we really look at what our plan is for the year, the cadence is going to be awkward. You'll have very, very unusually large comps, when you're going against periods where stores were shut, and that doesn't really make a lot of sense, and then you'll have some businesses, when you get to the summer like American Freight that would have large negative comps because the reopening in the stimulus. But as it turns out for the whole year, it actually works out well, just like it did last year, where we had zero revenue for an extended period of time, loss of tons from being shut down and in the summer, you ended up getting a lot of revenue back and then there was significant strength throughout the balance of the year. So that when you actually look at the whole year, if you didn't know what happened within the year, it would have been about exactly what you expected. That was just blind luck. But now we're in a period where stores are open. We certainly do plan for them to remain open if they don't, then we'll certainly let you know what that impact is, but the cadence will just be strange on once a month-to-month basis. We'll help you understand what that means as a year goes on and how that impacts our plan. We could have negative comps in American Freight and for example, in June or July, but still be absolutely fine for the year.

Got it. Okay, great. That's really helpful. Thanks so much. Good luck this year.

Sure. Thanks.

Thank you. Our next question comes from Larry Solow with CJS Securities.

Good evening and thanks for taking the questions. And I’ll echo the congrats on more than a respectable year in certainly a tough environment. Brian, maybe just a global question, just in terms of – obviously, I assume your appetite for more deals remains. And obviously the interest environment is favorable. How do you balance that? I assume there's opportunities out there are certainly dislocations in the market should yield you some opportunities. How do you balance that with sort of your net debt-to-EBITDA looks like it's about three times on a pro forma basis. So it's not exceedingly high, but sort of that I think where you kind of want it to be, do you feel like your priorities may be more in the short-term to pay down some debt rather than acquisitions, or how do you sort of balance that?

Yes. So first of all, I think that, we can function with higher levels of debt and we can also function without acquisitions. I mean, we can grow the business and still accomplish a lot, it's nice to be able to continue to diversify. It's nice to be able to add scale to the business. We think that helps. We think the diversification of our cash flow streams helped in this last refinancing as well. But I think it's – right now, the most important thing for us is really just like we did for our equity holders, doing what we said we were going to do. I think we need to do that for our lenders and all of our stakeholders. And we've committed to getting back to within our financial targets of under three turns of net leverage when we lever up to do a transaction. And I think that it's important for us to actually do that and then prove it out, first and foremost. So there are always going to be great transactions. They may not always be right for us, we're always working on potential brands to bring into Franchise Group. That's our job, but we're going to be doing this a long time. There's no rush. And I think that, we'll get far more benefit down the road from doing what we say we're going to do. And then being able to remind people later that we did do that, over and over again, then just jumping on the next great deal, I mean, there are plenty of plenty of opportunities and they take time anyway. So I don't feel any anxiety to go add another one. But when you think about the flexibility of this capital structure now, we have the ability to add leverage to help us get a transaction done, generate cash, delever. We've got multiple ways of delevering as well. And clearly, this Liberty transaction is another example that people probably wouldn't have thought of before, but it's the right thing to do. And we still will have a large valuable asset in the equity of the combined business, sitting on our balance sheet. It doesn't impact our EBITDA or earnings per share. It's an equity investment, but it will be something that matters for us down the road, and we're happy to be doing it. But look, we can lever up, acquire assets, delever through refranchising, cash flow generation, debt paid down and then do it again. And I think that as long as we don't get – I don't think we'll go north of four turns for a transaction, but I also think that we'll be materially lower than we are today before we would look to do another material transaction.

Okay, good. And then just a specific question just on The Vitamin Shoppe, seems like the business that may have been most beneficial in the longer term from the pandemic. I know when you acquired it, I think you guys were sort of, I think, plan on comps being down and you were planning on closing some stores that were losing money and obviously, pandemic came with greater focus on health and healthcare that changed that a lot. As you look out over the three to five years, you probably saw some of these pressures from Amazon and the large online retailers, also maybe by your own online efforts. So do you see this business as more of a flattish to slight grow on the top line and your operational improvements continue to drive bottom line growth? Is that a good way to view it?

You're talking about over the long-term?

Yes. I'm talking three to five years sort of, as we….

Sure. Look, I think what happens three to five years from now, The Vitamin Shoppe will be determined by what we do, what the management team does today. And what they've been doing for the last couple of years, their ability to increase their private brand penetration, their ability, which they invest long before we got here, they started investing seriously in their direct-to-consumer channel, into e-commerce. It's something that the previous management team prior ownership overall, The Vitamin Shoppe, really – they were a little late to the party, but Sharon and her team has invested significantly since she came on board. And because they did that, they were ready for what happened last year, wouldn't have been nearly as successful of a year otherwise. So I think that what you really got was COVID speeding up the process and proving the value of the e-commerce and the direct-to-consumer channel. I think that from a franchisee's perspective, franchisees always going to ask you, what do I get for my royalty dollars? Why am I paying you? Well, there are two distribution centers and a heck of a direct-to-consumer business that's sitting there, ready for them to take advantage of, where they can get benefits from a retail transaction without ever actually having to see or deal with the customer. That's pretty valuable. And that was driven by previous investments and what the team is doing now. So now look, last year, I would have expected our focus to be more on private brands, but you ended up having a shock to the system with the pandemic and you're really just fighting for your life. And so what you're selling, whether it's your product or a third-party has mattered a lot less, but I do think that the focus on private brands and the success that the team will have increasing that penetration will create a stickier customer and lead the customer growth that leads to additional revenue growth down the road. Clearly e-com will grow faster than brick-and-mortar, but brick-and-mortar is growing now. It's not like today, we're talking about shrinking brick-and-mortar business that's being offset by e-com growth. Does that change three or five years from now? I think that'll be determined more by what happens within the business over the next year or two than anything else I can think of.

Okay. No. Great. I appreciate that color. If I could just slip one more in, just the Buddy's comp down – is that on the comp down for Buddy's year-over-year, is that excluding the franchise agreement or is that including that, in other words…

Yes, it's a double-down so it's – you're losing revenue because you're taking the stores out, the corporate stores out, the 47 that we refranchised. But the organic comp within Buddy's, I think that will be negative this year. I think that the rent-to-own industry was very unique in just how many parts of the pandemic touched it. And what I mean by that is, the rent-to-own industry is very used to get – their get customer gets a tax refund in February and they spend it, they buy out their agreements, you get a lot of revenue, it's lower margin revenue, but it's a lot of revenue because instead of paying you $40 a week, they're coming in and paying you $500 now have to buy out their agreement, or something larger than that. So just dollars are larger while last year, the government stimulus turned into a second tax refund. So you really got a double dose of that revenue which is – really it's one-time revenue then you need to go replace the customer, you buy a new product and you put the product back out on rent. And you go rent and collect, and the cycle continues. My view is that, that will also revert to the main, just so – I mean, that doesn't mean the business isn’t a great business. It will continue to grow over time. But I think that there was – when you're putting up last year, I think we had a quarter with like 15% comps and that business it's absolutely that was driven by the stimulus. And I don't – we don't budget for that to happen again this year. So yes, there appears to be another round of stimulus coming, but I don't – for our budgeting purposes, I don't want to have to think about, all right, we're going to get the same thing again with this stimulus. It's just – if we do great, but if not, we'll be fine. The business will keep generating cash. We're going to continue to help franchisees get stores open. It's more about what happens year-after-year-after-year than any one particular quarter.

Got it. Okay, great. Thanks again. Appreciate it.

Yes, no problem.

Thank you. And this concludes our Q&A session for today. I’d now like to turn the call back to Brian Kahn for any further remarks.

Great. Thanks, Carmen. And thank you all for joining us this afternoon. Carmen, you can conclude the call.

Thank you, ladies and gentlemen for participating in today's conference. You may now disconnect.