Lifetime Brands, Inc. (LCUT) Q3 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Lifetime Brands Third Quarter 2020 Earnings Conference Call. At this time, I would like to inform all participants that their lines will be on a listen-only mode. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] I would now like to introduce your host for today's conference, Andrew Squire. Mr. Squire, you may begin.

Thank you. Good morning and thank you for joining Lifetime Brands third quarter 2020 earnings call. With us today from management are Rob Kay, Chief Executive Officer; and Larry Winoker, Chief Financial Officer. Before we begin the call, I'd like to remind you that our remarks this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the safe harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and factors that could influence our results are highlighted in today's press release and others are contained in our filings with the Securities and Exchange Commission. Our remarks this morning and in today's press release also contain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Included in such release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. With that introduction, I'd like to turn the call over to Rob Kay. Please go ahead, Rob.

Thank you. Good morning, everyone, and thank you for joining us today to discuss Lifetime Brands third quarter 2020 financial results. We are pleased with our strong performance in the third quarter, which marks another quarter of sales and earnings growth as we continue to make progress executing on our Lifetime 2.0 strategic plan. Our results this quarter reflects continued strong demand for our products in many of our product categories and our ability to efficiently execute our transformative initiatives, which have given us important competitive advantages, including increasing our drop-ship capabilities and building out digital marketing and sales tools. These initiatives, combined with effectively managing our supply chain, has positioned us well and allowed us to meet increased demand and gain market share. I would like to take this opportunity to emphasize the progress we have made in our U.S. business, which is the core of Lifetime's operations. U.S. business continues to show strength, and we are pleased to deliver our fifth consecutive quarter of year-over-year growth, contributing to a 3.2% increase in net sales. This increase was driven by our household products, led by our kitchenware products category, which continues to experience high consumer demand and gain market share across most of the channels that we sell into. In addition, sales in our U.S. business also increased this quarter as brick-and-mortar stores continue to reopen across the country. Strong consumer demand has been a key driver of our sales growth, with point of sales growth for the third quarter that shows Lifetime POS sales increased, meaningfully. According to the NPD Group retail tracking service data, kitchenware grew 59%; kitchen measurement was up 76%; bath measurement up 34%; and cutlery up 24% compared to the three-month period a year ago. Slightly offsetting this growth was a decline in our foodservice business, which experienced reduced demand due to the COVID impacts on that industry. Further, as I'll discuss below, while our consumer demand has been strong, we have had some delay in shipping retailers to replenish stock during the third quarter and we'll see these shipments in the current quarter. Lifetime has a very balanced product portfolio, and we have demonstrated that we can be flexible and allocate our resources to take advantage of market opportunities as they arise. This can be seen throughout 2020 as we have been successful reaching consumers through e-commerce, omnichannel and brick-and-mortar retailers as they have resumed operations. The investments we have made in brand equity, supply chain, distribution particularly across drop ship capabilities and liquidity, have allowed us to capture demand and gain market share in a challenging economic environment. Throughout the quarter, we saw a solid performance across most channels that we, in turn, optimize through a comprehensive channel management strategy. This allowed us to better serve our customers and capture additional market share. As consumers increasingly shop online, we continue to see an increase in pure-play e-commerce sales, which represented 16.4% of the quarter's net sales, an increase of 59.2% compared to Q3 of fiscal year 2019. While our absolute sales into this channel have grown, the third quarter saw a percent decline in pure-play e-commerce sales compared to the second quarter, as our sales through other channels grew at a higher rate. One area of meaningful growth, in addition to pure-play e-commerce has been the omnichannel retailers. Our ability to provide drop shipments in this channel has been used to gain market share and capture the strong demand being experienced by these retailers. Accordingly, drop shipments increased approximately 115% compared to the comparable quarter last year and approximately 117% for the year-to-date period versus the prior year. Factoring in our drop shipments, total e-commerce revenues for the quarter grew nearly 60% for the quarter and approximately 66% for the year-to-date period. While the pandemic has had a negative impact on certain of our sales channels, such as department store and foodservice, our ability to capture revenues in our other channels has more than offset these impacts and allowed us to continue to grow our core U.S.-based business. Of note, we continue to invest in channels such as foodservice, which we believe will provide meaningful growth in the future. Turning to our international business. Consistent with expectations, our operations in Europe have stabilized and further, end markets have continued to recover as stores reopen. We have also capitalized on our warehouse investment, which has meaningfully increased our drop ship capability in Europe. Importantly, during the quarter, we have begun to see the benefit of the improvements related to the operational issues in Europe, which we have now addressed, and the elimination of excess costs, which significantly improved the financial performance of the business. The results of our actions are evident in the reduction of our distribution costs in our European operations from over 24% of net sales during the first quarter to approximately 15.5% by the end of the third quarter. This number will continue to improve as we implement new processes and systems that are in use in our U.S. operations that will further create efficiency and operational cost savings in our U.K. operation. In the third quarter, we delivered 14.4% revenue growth in our international business over the prior year and its turnaround plan we have outlined remains on track. That said, we are closely monitoring increasing government restrictions in Europe and potential fallout from Brexit and are prepared to take action to mitigate these challenges should they arrive. Looking ahead, we will continue to invest in growth initiatives that we believe will benefit Lifetime in the long term. Specifically, we are focused on enhancing our digital and e-commerce capabilities, building out our commercial foodservice business and expanding our international business. Despite the challenges created by the global pandemic, we have continued to invest in and make progress on these important growth initiatives. We recently launched four of our brands through Alibaba's Tmall, directly to the Chinese consumer and we have recently launched the popular KitchenAid brand internationally. In addition, we continue to invest in our brands that resonate with the end consumer and have demonstrated their strong performance in the current environment. Turning to our foodservice business. As restaurants, hotels and other foodservice operations remain closed or only partially open, we continue to see reduced sales activity in our existing foodservice business. Regardless of the current environment, we remain committed to our hospitality business and we continue to believe it is a meaningful channel for long-term growth. Despite delayed growth caused by the ongoing impact of COVID-19, we are confident in the potential of Mikasa Hospitality for the front of the house foodservice market. In fact, during the third quarter, we began to realize sales in Mikasa Hospitality and we expect the brand will continue to gain traction going forward. I'll now turn to our balance sheet, which Larry will also touch on. Given the increased demand in our products which exceeded expectations, our balance sheet flexibility allowed us to keep our supply chain up and running in order to maintain adequate inventory levels. As a result, we have increased investments in inventory to supply the increased demand as we have effectively utilized our available liquidity as a competitive advantage. While this will have a short-term impact on our net debt position, we still managed to maintain our leverage ratio flat with our prior quarter and significantly reduced from prior year. That said, these key investments have led by time to increase its market share and deliver strong results and we are pleased to have the balance sheet to support these initiatives. As a result of our disciplined focus on cost management, we have become a much leaner organization and we remain committed to maintaining a solid liquidity position and continuing to deleverage our balance sheet. Importantly, our cost effectiveness program has contributed to our growth in the bottom line as we have continued to grow the top line. As a result, our EBITDA increased $3.4 million to $72.7 million for the 12 months ended September 2020. This represents an increase of approximately 5% from the second quarter and a nearly 20% increase from Q1. Before I turn the call over to Larry, I'd like to touch on some of the headwinds we faced in the third quarter. The current labor environment for warehouse workers and a tight transportation market have created challenges that will likely continue to exist in the near term. We have active labor management programs, which allow us to mitigate labor cost increases. Further, while we experienced some shortage of trucking availability in the U.S., which has impacted our ability to ship to certain customers, this has only resulted in delayed shipments of orders. This has not resulted in any orders being canceled, and we do not anticipate any cancellation. Trucking availability is an issue companies across all industries are currently facing, and we are working with our customers and partners to improve the flow of deliveries. For Lifetime, these challenges have slightly dampened the delayed revenues for the period, which I have described grew at a meaningful rate despite these headwinds. While we have not provided annual guidance for 2020 due to the ongoing uncertainty caused by the pandemic, our strong results in the past several quarters show the strength of our business and demonstrates our ability to successfully execute the Lifetime 2.0 strategic plan. With the confidence provided by our performance, on November 3, 2020, our Board of Directors determined to continue our quarterly dividends of $0.0425 per share, payable on February 12, 2021, to shareholders of record on January 29, 2021. As we navigate the COVID-19 pandemic, including monitoring the recent uptick in cases globally and reintroduction of restrictions in certain countries, we are pleased that demand for our products remains strong, and our Lifetime2.0 strategy is continuing to gain momentum. While COVID-19 has been a catalyst for increased consumer demand for our products, we expect a new generation of home shops will continue to have a positive effect on our revenues even when the pandemic is long gone. We are proud of our third quarter results, and we remain confident in our ability to continue delivering profitable growth. I'll now turn it over to Larry to go through our financial results.

Thanks, Rob. As we reported this morning, the net morning, the net income for the third quarter of 2020 was $13.9 million or $0.65 per diluted share as compared to a net loss of $13.5 million or $0.66 per diluted share in the third quarter of 2019. Adjusted net income was $13.9 million for the 2020 quarter or $0.65 per diluted share as compared to an adjusted net loss of $3 million or $0.15 per diluted share in 2019. A table which reconciles this non-GAAP measure to reported results was included in this morning's release. Income from operations was $21.5 million for the third quarter of 2020 as compared to $6.9 million in the 2019 period. Excluding a noncash charge for goodwill impairment in 2019, income from operations would have been $16.7 million. Adjusted EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $72.7 million for the trailing 12-month period ended September 30, 2020. This is a $3.4 million increase over the $69.3 million for the trailing 12 months ended June 30 2020. Net sales in the 2020 quarter were $224.8 million compared to $250.5 million for the 2019 quarter. The U.S. segment sales were up $6.3 million to $201.5 million, the increase was driven by strong demand for Kitchenware food preparation products and flatware as consumers continue preparing and consuming more meals at home. The increase in demand also reflected reopening of stores in the quarter and continued year-over-year growth in e-commerce, including drop shipments to omnichannel retailers. This increase was partially offset by lower sales for tableware products as the third quarter of 2019 period had a large warehouse club program and the 2020 quarter experienced weakness in the department store channel, as Rob noted. Sales in the warehouse channel, club channel were up on a year-to-date basis in 2020, but the current quarter's volume was off due to timing of various programs. Sales into the foodservice channel, back-to-school lunch box volume, were also off as the pandemic impacted consumer activities. International segment sales were up $2.9 million to $23.2 million on a reported basis, but $2.1 million in constant U.S. dollars. This segment income came from growth in e-commerce and export volume. In addition, the U.K. brick-and-mortar business stabilized following store reopenings. Gross margin for the 2020 quarter was $35.1 million versus 35.1% as compared to 33.8% in the 2019 quarter. For the U.S. segment, gross margin was 35.6% in the 2020 quarter versus 34.3% in 2019. The increase was due to changes in product and customer mix. Our international gross margin improved to 30.2% in 2020 quarter versus from 29.1% in 2019. The current quarter included a charge for slow-moving inventory that had a 1.5 point negative impact on gross margin percentage. The 2019 quarter was affected by the new distribution facilities, operational issues and lower margin clearance sales. Distribution expense for 2020 was 8.4% of net sales versus 8.6% in 2019. For the U.S. segment distribution expenses as a percentage of sales shipped from its warehouses was 8.4% and 8.8% for the 2020 and 2019 quarters respectively. This improvement reflects the continued realization of labor management efficiency and the leverage benefit of fixed cost on higher sales volume. For international, distribution expense as a percentage of sales shipped from its warehouses were 13.6% and 19.1% for the 2020 and 2019 quarters respectively. The improvement was primarily attributed to the improved efficiency in order fulfillment, labor efficiencies and lower third-party storage expenses. Selling, general and administrative expenses were $38.3 million for the third quarter of 2020 versus $37.4 million in the 2019 period. U.S. segment expenses were $27.3 million in the 2020 quarter versus $28.7 million in 2019. And as a percentage of net sales, SG&A expenses declined to 13.5% in 2020 from 14.7% in 2019. The improvement was primarily attributable to lower marketing and selling expenses resulting from the cost reduction actions we implemented. This was partially offset by higher employee incentive compensation. SG&A expenses for the international segment were $4.8 million in the 2020 quarter compared to $4.2 million in 2019. SG&A reflected higher sales commissions and leasehold amortization expense related to new facility, offset by lower expenses from cost reduction initiatives. In addition, certain expenses previously classified in distribution are now included in SG&A. Unallocated corporate expenses was $6.3 million in the 2020 quarter versus $4.5 million in 2019. The increase was primarily attributable to higher employee incentive compensation and legal expenses, partially offset by lower professional fees. Interest expense was $4.1 million in 2020 quarter versus $5.5 million 2019 due to lower debt outstanding as well as lower interest rates. Looking at taxes for the 2020 quarter, the income tax rate was 21.2%. This reflects the federal statutory tax rate with state and local taxes, offset by various other items that were immaterial. Finally, looking at liquidity. As of September 30, 2020, our liquidity, which includes $42.7 million of cash plus availability under our credit facilities, was $164.3 million. This is a significant increase from year-end 2019 as well as from the comparable period of September 30, 2019. It was achieved through improved operating results including cost reduction actions and the timing of vendor payments. With regard to the timing of vendor payments, as noted last quarter, we temporarily revised terms with our vendors, including obtaining rent relief, to further May 2020 dividend payment through December and deferred certain tax payments as permitted by applicable governments. While we intend to maintain a strong liquidity position, as Rob discussed, for commercial reasons, during the fourth quarter, we may relax on payment terms and increase inventory levels to meet expected higher demand. If this were to occur, our fourth quarter historical decline in net debt may not occur. I emphasize that this would be a deliberate management decision for competitive reasons and would be a short-term action. Finally, at September 30, 2020, our net was $245.6 million and debt to EBITDA leverage ratio was 3.4 times. This concludes our prepared comments. Operator, please open the line for questions.

[Operator Instructions] And our first question comes from the line of Linda Bolton-Weiser with D.A. Davidson.

Hi. Congratulations on a good quarter. Do you think you could quantify the sales shift that you mentioned from the third quarter to the fourth quarter?

Hi, Linda. I hope you're well. So the trucking challenges in the U.S. resulted in some significant sales orders that we couldn't fulfill in September and just rolled over into October because customer pickup, they just couldn't pick up, these are large customers, and couldn't pick up, and there have been delays. It still continues, so things are kind of moving. Can I – it's – we left in September nearly $20 million that we couldn't ship.

Okay. And you expect that shift in the fourth quarter essentially, right?

Yes. So, without a doubt, that $20 million shift, right, so there's nothing in terms of lost business. We just – in our – we have a tremendous amount of inbound, interesting enough, because of our investment in inventory and because of the big demand and getting back in stock. We're, as of October, just past now, was a peak for the company historically of inbound and outbound, right, because we're having so much coming in and so much going out, quality problem, I guess. So we've been managing it highly effectively. We're getting the stuff out that rolled over from September. We need to continue to work the situation to make sure that things aren't going to roll over from December to January. But we are extremely confident, and we haven't lost any business as a result of these trucking issues that exist in the United States, just these month-to-month spend.

Okay. And congratulations on getting your leverage ratio down to this level, mostly, I think you said it was 3.4x. Can you talk about what your targeted leverage ratio is and what you expect to do with cash flow kind of going forward?

Yes, so we've always said that when our leverage ratio was in the 5x that we were targeting at 3x leverage to be – to maintain something below that. Look, we're generating a lot of cash. We continue to generate a lot of cash. So we're just going to use that to pay down debt. We have no borrowing on a line, have not for a while now this year. So we're kind of close to that. We have been looking at some M&A opportunities that we've been passing on because we've been maintaining a high level of discipline. That even though they would've been accretive, they wouldn't offer us a growth opportunity, that is something we'd potentially do. And in this environment, we're not looking to buy back stock, but we have that ability. So at this point in time, we'll just continue to pay down debt until there is a good return opportunity that comes available to us.

Okay. And then you mentioned in a couple of points in your introductory remarks that you're gaining market share. Who do you think you're gaining market share from? Is it some of the larger players or is it just really small players in the fragmented industries that you're in? Or who do you think you're gaining share from?

Yes, so, I mean, we compete against a lot of people, and our average competitor is much smaller than us in the markets that we compete in. What we've seen is that – we've always believed that when we've kind of put Lifetime 2.0 together, that size matters and that critical mass is important, particularly in the consolidating industry, and that really accelerated this year, so more from smaller folks. But there is a kitchen tools area, there is a very large company that we pride in that we've been gaining meaningful market share from in mass and grocery, and it's just that we have a bigger balance sheet and more meaningful brands, we believe. And if you look at online, our brands really resonate. So our brands have resonated, and our agents have been skyrocketing to the top. And again, our challenge has been keeping in stock, so it's that combination, and that's against all.

Okay, thank you very much.

By the way, before you log off, one thing I failed to mention, I mentioned in my comments, drop ship, but the bigger players have the capability to drop ship and then invest in that. It's a huge competitive advantage over a lot of the other players in the industry, and that's helped us gain market share. Sorry about that, operator.

And our next question comes from Anthony Lebiedzinski with Sidoti.

Yes, good morning and thank you for taking the questions here. So, I understand as far as the delay in shipments, so that's just below into Q4, but otherwise, I mean, is it safe to say that you guys feel good about your prospects for Q4 of just stripping out as far as these issues with the shipment delays?

Yes.

Okay. Good. And as far as the gross margin, so they had a nice improvement year-over-year. How should we think about your ability to continue to improve that going forward?

That’s a good question, Anthony. So there's a lot of things that are driving margin, and let me answer that between our international business and U.S. business separately. But as part of, as we discussed and we went a little bit more detail on our Investor Day in November of 2019 that we've instituted a different way of running the business, and there's a different new product development focus. And we're less sales oriented, obviously, sales are important, but we're driving our product development, looking at overall profitability, competitiveness and the like. And we focused on margin improvement as a result of that. We've had a little J-curve impact in the U.S. on the fact in 2019, we paid [indiscernible] and getting that in terms of the ability to recoup that sort of delays a little bit, so we thought a little benefit of that. But a lot of it is product mix. Channel mix has something to do with it as well as the channel has changed a lot year-over-year, so those have been factors. In the U.K., we've transformed that business, and we've looked at a lot of things. We've gotten out of a tremendous amount of business that we sold, that questionable contribution margin level on gross margin. So we're adding – we're selling more of our own branded products, which are higher margin. We're emphasizing different capabilities and products, so that has had an impact. But again, channel mix definitely has an impact over there as well, so those have been the driving factors.

Got it, okay. And then I think, Rob, you also mentioned that you're looking to put in some of the processes that you have in place in the U.S. into the U.K. Can you give us a little – some more details and maybe some examples of what you're looking to do there?

Yes, sure. So, the nature of the business has changed a lot, so we're doing more shipments, more drop shipments, more piece pack. And those shipments are much more labor-intensive, so more cost. And in the U.S., which is a bigger, more developed infrastructure in terms of the warehouse, we had put in processes and proprietary software. We developed something called Perfect Pick, which allows the system to do a lot of work and stages things effectively. So there's much more manual-less manual labor and time, so time is money, and also efficiency in a warehouse operation. So we've been working on implementing that in our new Birmingham warehouse. We're working at the kinks, so we're about to go live on that, we'll go live in Q4. And that will increase our efficiency or throughput, but also drive down labor costs in the warehouse meaningfully. And again, if you look at the labor cost as a percentage of revenues in the U.K., in the first quarter, we were up at 11-plus percent, we're now we're 4-plus percent and that will still drive down, and we're just getting those efficiencies and continuing to run them through, so that'll improve a lot on a year-over-year basis next year.

Got it. Okay. All right, I think that's all I had. Thanks and best of luck.

Thanks so much Anthony.

[Operator Instructions] And there are no further questions at this time. Are there any closing remarks?

Thank you operator. Thank you, everyone, for joining us today. We appreciate your time. We appreciate your continued support of Lifetime Brands, and we look forward to speaking to everyone on our next conference call at the end of our fiscal year. Have a great day.

And this does conclude today's conference call. Thanks for your participation. You may now disconnect.