Shares of Franchise Group (FRG 1.17%), an operator of franchised businesses including Liberty Tax and Vitamin Shoppe, fell after the company said it was increasing the size of a secondary stock offering it announced yesterday.
As of 3:03 p.m. EDT, the stock was down 13.1%.
In a press release this morning, Franchise Group, which was formerly known as Liberty Tax, said it was hiking the size of the offering from 3.5 million to 4.2 million shares and pricing it at $23.25 a share. Underwriters have the option to purchase an additional 630,000 shares within the next 30 days, and management said it would use the proceeds for working capital and general corporate purposes. The stock fell to below $22 a share on the news, less than the offering price.
Franchise Group's market cap slipped to less than $800 million this afternoon, meaning shareholders will be diluted by about 12% from the offering. Secondary offerings often elicit this kind of reaction as shareholders dislike the dilution, but the macroeconomic news may also be playing a role in the stock's decline today.
Coronavirus cases continued to grow in the U.S., dampening hopes for a quick recovery as states like Florida and Texas took steps back from reopening, such as closing all bars statewide. That news is particularly troubling for a company like Franchise Group that operates mostly brick-and-mortar storefronts, as another wave of infections means that consumers will avoid physical retail. News that GNC was filing for bankruptcy may have also put pressure on the Vitamin Shoppe, a GNC rival, as that brand has also struggled.
In its earnings report last week, Franchise Group actually raised its guidance, although it acknowledged challenges from COVID-19, and the company is now targeting adjusted earnings per share of at least $2.60. Based on its current price, the stock looks cheap, but another wave of infections could make the guidance obsolete.