Lifetime Brands, Inc. (LCUT) Q2 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Lifetime Brands' Second Quarter 2022 Earnings Conference Call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speakers' remark 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 thanks for joining Lifetime Brands second quarter 2022 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 protection from 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. Such statements are based upon information available to the Company as of the date hereof and are subject to change for future developments. Except as required by law, the Company does not undertake any obligation to update such statements. 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. 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. Our performance in the second quarter was strong compared to pre-pandemic levels but we continue to feel the impact of the macroeconomic challenges that companies across industries continue to face. Inflation and supply chain constructions have created inventory buildup at major retailers. Combined with weaker end market demand across many channels, these factors have created a slowdown in purchases from consumers as well as our retail customers this quarter, notably in off-price retailers. Despite this environment, we were pleased to record results that exceeded pre-pandemic levels, which is a testament to the progress the team has made, executing on our strategic objectives. These results demonstrate that Lifetime continues to effectively manage our business, notwithstanding macroeconomic and other external impacts. We delivered $151.3 million in net sales and $7 million in adjusted EBITDA compared to [$188.6 million] in net sales and $18.2 million in adjusted EBITDA for the 2021 period. However, compared to the 2009 quarter, which is a relevant benchmark prior to the significant impact of COVID-19, our growth in net sales and adjusted EBITDA is 6.2% and 6.3%, respectively. We believe that we have positioned Lifetime well to navigate these headwinds and have taken a number of mitigating actions, including implementing pricing adjustments where possible and reducing our SG&A over the course of 2022. Our business model has proven resilient through all market cycles, and we are confident we are on the right path. Starting with our core U.S. business. Our distribution remains solid, and we continue to consolidate the market share gains we have made over the last several years. That said, inflationary pressures have dampened the end market demand with many retailers pushing back their scheduled deliveries due to supply chain disruptions and over inventory positions that occurred as a result. Because of the recent supply chain challenges, retailers have received late shipments across many categories and have missed seasonal windows, resulting in a shift in focus to selling down inventory on hand versus selling in with new product orders. Ultimately, while some decrease in consumer demand related to inflation is likely to persist, we expect orders from our retailers to return to more consistent levels in the latter half of the year once they are able to sell down, built up inventory. We have already seen public comments from a number of major [indiscernible] suggesting they expect a more normalized second half of the year. For the quarter and year-to-date periods, respectively, e-commerce sales represented 18.7% and 18.9%. This was an increase from prior year, which was 16.1% for the second quarter and 18.4% for the year-to-date period. Strong performance in Amazon and growth in our burgeoning DTC channel, contributed to the increase. Drop-ship sales through omnichannel retailers declined approximately 17% for the year-to-date period as this channel showed reduced demand driven by the inventory and related issues that I've already discussed. We continue to gain traction on our various growth initiatives, including Year & Day which has now successfully relaunched and is seeing [indiscernible] every quarter. Turning now to our international business. While we continue to gain market share in Europe, our performance in our European business was significantly impacted by several factors. The ongoing uncertainty caused by the war in Ukraine, in addition to even more severe inflation and supply chain pressures than those we face in the U.S. have dampened the end market demand across Europe, the corresponding decline in shipments for our EU-based operations across all channels. We continue to see a long-term opportunity to expand our business in the international markets, and we will continue to pursue our growth initiatives with this objective in mind. Our new distribution center in the Netherlands is now fully operational and performing in line with our expectations. We are already in discussions with several customers about expanding our business in Continental Europe later in 2022 and beyond as a result of this new capability. In Asia, we have also seen a fall off in growth as a result of supply chain and inflationary challenges. But our Asian business continues to be profitable, and we continue to see a significant opportunity with consumers in Asian markets going forward. It's worth noting that the challenges in our international business are no longer operational in nature as in the past, prior to our reorganization of the business and are primarily a result of macroeconomic factors. We continue to feel good about the progress we have made on our European and Asian expansion, further as a result of the successful execution of the international turnaround strategy. We believe our full year 2022 will continue to show incremental financial progress, notwithstanding the current economic environment. In commercial food service, Mikasa Hospitality continues to gain traction. We are confident with the new leadership that we added earlier this year. We are well positioned to pursue our strategic objectives in this important growth initiative. While we have seen a rebound in the commercial food service sector this year, we are cautious about the impact of recessionary environment would have on this industry which could delay our progress in the short term but may accelerate our long-term penetration due to our strong financial penetration or position compared with most of our competitors in this space. Our other growth initiatives to expand into [other] product categories also remain on track and are showing results. While the demand environment remains somewhat challenged, we are starting an easing in the global supply chain and shipping disruptions of the past couple of years. Our ocean freight costs are down noticeably compared to prior year, and more importantly, availability has greatly increased. As I mentioned briefly earlier, we have already taken actions to mitigate the inflationary and supply chain impacts we are experiencing. We have discussed our successful strategy of gaining competitive advantage by investing in higher inventory levels the past couple of years, which has resulted in market share gains for Lifetime. With the shifting demand picture in the second quarter, we have adjusted our strategy and are now focused on reducing our inventory levels gradually over time while still ensuring we are adequately stocked to be a reliable partner to our customers and maintain our strong relationships with retailers. In addition, we have implemented plans to reduce our SG&A across the globe as we -- and we previously implemented price increases in line with broader economic inflation. We believe the actions we have taken will enable us to maintain robust earnings in this challenging environment but we will continue to be nimble and flexible in responding to the market as we navigate ongoing macro challenges. In addition, considering lessons we have learned from the pandemic, as well as macroeconomic and geopolitical factors. We have made a concerted effort to reduce our reliance on China-based manufacturing and build alternative sourcing options into our global footprint. This initiative is long term in nature, and we are actively working on opportunities in Mexico, Eastern Europe and multiple Asian countries. This is an important long-term effort to reduce our risk and enhance our operational flexibility, address unexpected supply chain challenges in the future. Turning now to our financial guidance. In light of the current environment and our results in the second quarter, we are revising our outlook for the full year 2022. While we had anticipated softening of demand and accelerated inflationary cost pressures in the outlook we issued in May, we did not anticipate the abrupt short-term change in order trends across most channels in the quarter, due to the dynamics discussed earlier, which have delayed many shipments in the first half of the year. While we continue to view these impacts as short term and expect a degree of normalization in the second half of the year, we now expect our adjusted EBITDA to be in the range of $73 million to $79 million and our net sales to be in the range of $800 million to $850 million for the full year. Looking ahead, we will continue to be proactive in managing through this environment, and we are focused on maintaining a healthy balance sheet and strong cash flows to maximize our operating flexibility. On last quarter's call, we spoke about our commitment to the goals we announced in our five-year plan. While we believe that the goals of the plan can still be achieved due to the current economic and geopolitical conditions and potential impact on global growth. We are not, at this time, providing an update, while near-term visibility in our results limit. We remain committed to being transparent on our long-term objectives and as more certainty emerges, we look forward to sharing our strategic path forward as we have consistently shared with our stakeholders in the past. Overall, our business model has proved resilient through all market cycles, and our strong balance sheet and cash generation remain significant competitive advantage for Lifetime despite fluctuations in consumer behavior. We continue to execute well on all of our growth drivers, and we believe that our leading brands, strategic growth initiatives and financial flexibility will continue to drive significant long-term shareholder value. With that, I'll now turn the call over to Larry.

Thanks, Rob. As we reported this morning, the net loss for the second quarter of 2022 was $3.5 million or $0.16 per diluted share versus net income of $5.8 million or $0.26 per diluted share in the second quarter of 2021. Adjusted loss was $2.9 million for the second quarter, a $0.22 or $0.14 per diluted share compared to adjusted income of $6.1 million or $0.28 per diluted share in '21. Loss from operations was $500,000 for the second quarter of 22% as compared to income from operations of $11 million in 2021. Adjusted EBITDA was $79.9 million for the trailing 12-month period ended June 30, 2022. Adjusted net income, adjusted income from operations and adjusted EBITDA are non-GAAP financial measures and are reconciled to our GAAP financial measures in the earnings release. Following comments are for the second quarter of 2022 and '21 unless stated otherwise. Consolidated sales declined 18.9% from 2021. [Rob], the impact of very high inflation and unprecedented supply chain disruptions resulted in significant excess inventory levels of retail have adversely affected our business in the current quarter. These results look especially weak when we compare to a very strong 2021. However, when compared to the last pre-pandemic second quarter of 2019, they were up 6.2%. The U.S. and International segment sales declined in the current quarter. The decreases were for the reason following a very strong performance in 2021. When compared to the last prepandemic second quarter of 2019, the U.S. segment sales were up 11.5%. A portion of this increase came from higher selling prices and the acquisition. Gross margin increased to 36.5% from 35.4%. For the U.S. segment, gross sales, gross margin percentage rose to 37.1% from $35. This is driven by product mix, a tariff reduction on certain products and lower containment costs as capacity has improved, and we will have non-vessel-operating carriers. International gross margin was 30.5% compared to 32.3% last year. The decrease primarily reflects the impact of fixed overhead costs on lower sales volume. Our distribution expense as a percent of net sales increased to 11.5% from 10.1%. For the U.S. segment, distribution expenses as a percentage of goods shipped from its warehouses, excluding nonrecurring expenses of 11.3% -- increased to 11.3% from 9.4%. The increased rate was attributable to lower shipment volume and higher labor rates, partially offset by lower warehouse equipment and supply expenses. Additionally, the rate was adversely affected by higher inventory levels which reduced labor efficiency. For international, distribution expense as a percentage of goods shipped from its warehouses were 22.1% in '22 versus 17.5% last year. This increase was primarily attributable to lower shipment volumes, higher labor costs and increase in business occupancy tax expense for the U.K. warehouses. This increase was partially offset by lower freight cost as we now ship goods for distribution in Continental Europe through our [indiscernible] in the Netherlands. Selling, general and administrative expenses were $38.3 million for '22 versus $36.2 million in 2021. For the U.S., these expenses were $29.1 million in '22 versus $26.4 million in 2021. The increase was predominantly due to the acquisition of S'well, including integration expenses. And SG&A Expenses for International of $4.3 million in '22 and $4.2 million last year. Foreign currency transaction losses were offset by lower intangible asset amortization. Unallocated corporate expenses were $4.9 million in '22 versus $5.7 million in 2021. The decrease was driven by lower incentive compensation expense, partially offset by an increase in professional fees. Our tax rate for the quarter was 2.5%. The rate was lower than the statutory rate of 21% primarily due to foreign losses with no benefit tax recognize that such benefit is offset [valuation on]. And comparatively to the 2021 quarter, the income tax rate was 25.3%, which was higher than the federal sector rate. Primarily due to state and local tax expense, borrowing loss of out benefit, net of a benefit related to share-based equity compensation. And looking at our debt and liquidity at June 30, 2022, net debt was $259.1 million. Net debt-to-EBITDA leverage ratio based on pro forma adjusted EBITDA was 3.1x and liquidity, which includes $7.2 million of cash plus availability under our credit facilities was [$131 million]. The Company's balance sheet liquidity remains strong, notwithstanding the funding of S'well acquisition and higher inventory levels. And regarding our asset-based loan agreement, which expires in March of 2023, I'm pleased to report that we have signed commitments from all lenders to extend the agreement to August 2027 in terms we believe are competitive for the financing market. JP Morgan Chase will continue as the administrative Asia. The definitive agreement is subject to completion to the definitive amendment is subject to completion of the agreement documentation. This concludes our prepared comments. Operator, please open the line for questions.

[Operator Instructions] Our first question -- our first question comes from Linda Bolton.

Yes. Hello. Good morning. How are you doing?

Doing well and yourself?

Good. So [Technical Difficulty]

Linda?

Can you hear me?

Just got you back, but we lost you.

Okay. Let me start again. So last quarter, Rob, you had spoken about a few issues that dampened sales last quarter, but were expected to help sales this quarter. One of them was the Amazon distribution center log [dams] or something like that was corrected. And also the planogram were shifted into this quarter. Did those things occur? Or were those not things that actually helped this quarter?

So taking those separately, Amazon did clear out some of the issues and that benefited our business. So we saw a pickup in Amazon noticeably. And that contributed to, as I mentioned, the meaningful growth as e-commerce sales as a percentage of total sales. In terms of -- in general with all retailers and this impact at planogram resets, as has gotten a lot of attention, I'm sure you're aware, is the retail, the brick-and-mortar retailers as well as the e-commerce retailers, we're tremendously over inventory. And therefore, there's been a delay in shipments in pushing back across pretty much all channels, including the major ones with the planogram resets anywhere from 90 to 120 days. So we did not see a pickup related to that. They were really -- even if it's not our goods, the retailers, as you know, are really focused on selling out the over-inventory positions, and we're bringing in new goods.

So if you were to estimate -- I know it's hard to estimate, but how much like -- what do you think your retail inventory is -- how much is it up year-over-year currently?

You're talking about the inventory of our goods in retailers?

Yes.

It differs channel with -- a lot of the big guys have started reducing inventory levels, and they've -- and you've heard the big public -- the omnichannel mass guys have announced, they're expecting pickups in the second half of the year, and we're actually seeing some of that more in August as we look at that order book than July. So we are seeing that. If you look at the off-price segment, which has been a robust segment for us, we do very well. We basically ship them [indiscernible] thing. And they were just very over-inventoried, particularly with apparel. The delays in shipping issues resulted in a lot, not just them. Other retailers experienced this, but -- and it's a good example in off-price. They had a lot of apparel, particularly winter apparel and they kind of missed the season, right? So there's been a lot of discounting that some retailers as you may be aware have even started looking to sell inventory through liquidators rather than just flowing them out through sales, just retailer by retailer base. So we are seeing no pickup of order flow. We remain cautious and there's hard visibility to really see, but there has been a decline at retail of inventory levels. And again, what we don't know is other people's inventory. And one of the problems we face is when they're over inventory, even if it's not our inventory, there's no room to order in goods. We've seen a little bit of that in Amazon. We have out-indexed our category by threefold over the last quarter so quite noticeably. And we've seen a pickup as they are replenishing, but not as much as the sell-through, and it's because it's still inventory level that's being worked through.

Okay. And we have started to look at the IRI data a little bit. It's for the tracked channel, POS, for your company. And even though it doesn't tell the full picture, those numbers do look like they really slowed down to pretty big year-over-year declines in POS, so that has to do with consumer behavior and buying and all that. But what do you think you're seeing in those trends? And do you kind of see the trend kind of worsening here near term? Or are you seeing things maybe start to improve a little on the POS front?

Yes. So by the way, I'm glad for our dialogue, IRI and NPD merge because we've described a lot of NPD data. Now they're the same, right? So you're getting to see what we see, so that's nice. So if you look at the sell-through there has been a softening of demand. The biggest impact of us has been more the inventory levels that people haven't been buying and not necessarily sell-through. So it has been softening. The question is if we go into a recession, well that will continue. There's no question that inflation has impacted people buying an [exit] price to price and gas is more expensive. People are spending less discretionary. We've seen that more in Europe, which we believe is already in a recession, and there has been a bigger impact from consumer demand in Amazon. As I mentioned, we're doing quite well in Amazon in the States, but not in Europe because the consumer demand is not there. So without completely answering your question, the visibility is poor I think it will be over the six months, a function of will the economy decline which will have a dampening on consumer demand. But we've seen some dampen that the biggest impact on us in this quarter has been more supply chain on [funding] with the retailers.

Okay. And then can you just say I didn't see -- did you say how much the S'well acquisition contributed to revenue in the quarter?

Yes. By the way, we factored all of what we think is going to happen in our guidance, right? So I'll defer to Larry. We've fully integrated S'well now into our business as part of our built business unit. We're very optimistic. It's going to be a very good acquisition for us, probably exceed what we've been talking about it. But there's always hear when you acquire things. So we have to work through some major over-inventory situations in channels that were stocked prior to our acquisition of the business. But Larry?

Yes, sure. So in the second quarter as well [added about] $3.5 million revenue year-to-date, it's just under about $4.5 million.

There's a lot though, that we didn't include in our estimates that we are now aware of including. We'll be able to drive a lot of the cost side of the goods. And we've integrated in more effectively than we thought than what we -- not that we thought I should say, but what we planned and talked about.

Okay. And then finally, we've been hearing from one of my companies, a cosmetic company that sources out of China that maybe some tariffs will expire in September. And if they're not renewed, they will expire, and you'll get those benefits. Are you thinking that, that could happen that you could get some tariff relief here in the foreseeable future?

Yes. We've gotten some this year. We are very closely following and involved with this [indiscernible]. Good is there's a lot of hundreds of categories, right, that fall into that. We're not counting on that, though, to provide a pickup for us on margin. And we're -- we view that if there's a benefit, we'd be neutral, but there's potential upside there.

Okay. I'll leave it there. Thank you very much.

Thank you. Operator, are there other questions? Operator? Andrew, you still on? Can you hear us?

Yes, I'm here.

There seems to be a technical difficulty. We've lost the operator.

I'm sorry, my line was muted. Our next question comes from Anthony Lebiedzinski.

Hey Anthony.

Anthony, are you there?

Sorry, my line was muted. Can you hear me now?

Yes, Anthony. Hi.

Okay. So first, I definitely appreciate the color on the geographic breakdown. As far as just over looking at the product categories, is the weakness that you're seeing? Is that kind of across the board? Or are there any particular product categories that stand out?

Pretty much across the board. It would be biggest in our tools category only because that's our biggest category, right? But again, [indiscernible] is much more driven by people -- retailers not buying because they have too much inventory. So that makes it fairly uniform across all categories.

Got you. And then actually, just a follow-up on Linda's question about the tariff release. So you said you've got some relief this year. Is there any way you can quantify that? I just wanted to know as far as how meaningful that was?

Yes. Larry mentioned in his comments, there was some pickup. It's not what's driving our numbers, but we get some benefit.

I mean it's the fact that [indiscernible] called it out, but I don't have the specifics and so...

It's not driving the numbers.

Got it. Okay. I was just wondering if there was anything meaningful to call out as far as the impact of that. So overall, looking at your comments, Rob, as far as your SG&A reduction that you planned, how should we think about that as we look to update our models here for the back half of the year?

So Anthony, Yes. As you know, we manage actively our business. So we took a look at the business with these changes we saw in 2022. And already implemented globally expense reductions. Those will impact the second half of the year, right? So we really implemented them in our what we would call a six plus six plan, right? So six actual in the forecast. So that's why you really don't see any benefit in the first six months. But they have been implemented. It is across the globe. In general, we took out 5% of our SG&A. Now bear in mind, as you model, we've grown tremendously, right? We've doubled the profitability of this business over the last three years. And we've been looking to make sure we were investing in growth as opposed to just pocketing everything that we've achieved, right? So we've been vocal that we've been investing millions of dollars that we would be making now much more money over the last couple of years in new initiatives such as Year & Day, Mikasa Hospitality, new product adjacencies and the like. So we -- if you look at the year-over-year, that includes more investment, right, in a vacuum. But now that will be by 5%, right? Because we took our run rate and cut it by 5%. Run rate as for the first six months, not [indiscernible] for year 2021, understand?

Right. Right. Got it. Thanks for the additional colors, Rob. So as you work to reduce your inventories, should we expect anything in terms of the discounting of that as you look to get that inventory sold? Or do you think you'll be able to sell it -- as full price or close to full price?

Yes, it's a great question. So for -- as you know, for the last couple of years, we've been conservatively investing in inventory, and it's been a highly successful strategy. Well, it's not a highly successful strategy at this moment in the environment that we're facing, right? So we want to monetize that, and we can't. No, we are not discounting. It's all a inventory, right? We can sell it. And it's not like we're company that we've got to really monetize that and get the cash out of discount because we don't need you, right? We've got tremendous liquidity. We're very strong financially. So we will -- we are not discounting. We have not discounted. Now if you look at where your discount today, you're doing the off-price channel, the off-price channel [debt], it will pick up. It's starting to pick up, and it's a great channel for us and they're great relationships. But we're not going to go in any channel, including that channel, which we had an opportunity to do in this quarter and discount deeply, but we decided not to monetize and do some sales, lower margin, and that's why you see our margins have maintained very strong. We do not intend to discount this such as the region on a different situation, right? You see them discounting and their operating margins are going way down as they've guided people to. That's because they've got the inventory they've got to dump it and the only way to do sales reductions, right? So we don't need to hold on to the inventory. We are cognizant of -- we have extra spend if we're overflowing in inventories, and we've got a higher external warehouses. And with the quarter being soft, we didn't really reduce inventory because we weren't purchasing anymore, but we had -- we weren't really down too much. But you will see progress on that initiative in the second half of the year.

Got it. Okay. And then you also mentioned in your prepared remarks with the new facility that you have in the Netherlands, that you'll be able to expand more into Continental Europe. I certainly recognize that now is certainly a tough period there in Europe. But just if you could just kind of expand on that as far as the potential opportunity. I assume it would be probably next year, but if you could just give us some more color, that would be great on that.

Yes. We will pick up some this year. We are picking up, Anthony. The benefit of that facility is we can ship anywhere in the continent in 24 hours, 48 at worst-case scenario, right? So we have availability on the continent that is not disrupted. So -- and we could do it on -- really, we talk about it being cost neutral, it could even be better than that. So we are picking up distribution in conjunction with our direct selling strategy and this capability, more of it will be forward-looking, but we just have a better value proposition to offer people cheaper, faster and better. So we picked up [Carrefour], actually, we picked up a lot of business in [Donal], which is in the U.K. So that's not Netherlands space. But we are expanding e-commerce throughout the continent [sell] it is because we can drop-ship as well from this facility. So it's a good capability. We have picked up market share, but the business is down because the impacts have more than offset that. The macro in.

Got it. All right. Understood. Thank you very much and best of luck.

Thanks, Anthony.

And that was our final question.

Great. Thank you, operator. And thank you, everyone, for joining us as [OEs] on this call. Larry and I are available for anyone who wants to reach out for further discussions or questions, and we look forward to speaking to everyone in our third quarter's call in a few months. Thank you.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.