Xcel Brands, Inc. (XELB) Q4 2018 Earnings Report, Transcript and Summary

Welcome to the Xcel Brands, Inc. Fiscal Year 2018 Fourth Quarter Investor Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator instructions]. I would now like to turn the conference over to Andrew Berger, Investor Relations. Please go ahead.

Good evening everyone and thank you for joining us. We appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert D’Loren; Chief Financial Officer, Jim Haran; and Executive Vice President of Business Development and Treasury, Seth Burroughs. By now, everyone should have had access to the earnings release for the fourth quarter and fiscal year ended December 31, 2018, which went out this afternoon, and in addition the company plans to file with the Securities and Exchange Commission its annual report on Form 10-K by April 1, 2019. The release and the annual report will be available on the company’s website at www.xcelbrands.com. This call is being webcast and a replay will be available on the company’s Investor Relations website. Before we begin, please keep in mind that this call will contain forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from certain expectations discussed here today. These risk factors are explained in detail in the company’s SEC filings. Xcel does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Finally, please note that on today’s call, management will refer to certain non-GAAP financial measures such as non-GAAP net income, non-GAAP diluted earnings per share, and adjusted EBITDA. Our management uses non-GAAP metrics as measures of operating performance to assist in comparing performance from period-to-period on a consistent basis and to identify business trends related to the company’s results of operations. Our management believes these financial performance measurements are also useful because these measures adjust for certain cost and other events that management believes are not representative of our core business operating results, and thus they provide supplemental information to assist investors in evaluating the company’s financial results. These non-GAAP measures should not be considered in isolation or as alternatives to net income, earnings per share, or any other measures of financial performance calculated and presented in accordance with GAAP. You may refer to the attachment in the company’s earnings release or Part 2, Item 7 of the Form 10-K for a reconciliation of non-GAAP measures. Now I am pleased to introduce Robert D’Loren, Chairman and Chief Executive Officer. Bob, please go ahead. Robert D’Loren: Thank you, Andrew. Good evening everyone and thank you for joining us. I’ll start this evening with an overview of our 2018 financial performance and then provide some operating highlights. After that, our CFO Jim Haran will discuss our financial results in more detail, and then we will conclude by opening the call for Q&A. Now, let's get started with financial performance. We achieved $35.5 million in revenues which was up 12% from last year and $8.4 million in adjusted EBITDA which was up 5% from last year. This was primarily due to continued strength in our QVC business, planned wholesale and e-commerce sales, growth in licensing royalties and operating expense management including a disciplined approach to investing in our wholesale apparel and jewelry business and infrastructure. In 2018, we launched our jewelry and apparel wholesale operations and experienced a first full year in our Judith Ripka Fine Jewelry e-commerce business, which launched in December of 2017. Our 2018 operating income increased by approximately 50% over last year excluding non-recurring charges for the exit of our previous office space and last year’s goodwill charge. We are nearing completion of our transition from a licensing company to a vertical consumer products and media and technology based operating Company. We believe our operating platform including our fast to market production and integrated technology capabilities provides us with significant competitive advantages. Our focus remains on expanding distribution of our brands through digital and TV media channels, and all other channels. This includes interactive TV, wholesale and direct-to-consumer sales of our products. We are encouraged by our current growth and continue to make strides in developing our platform. Now, taking a closer look at operations by distribution channel, our interactive television business is performing well, especially in our Isaac Mizrahi brand. We see room for improvement in growth in our H by Halston brand and have made additional commitments to design and product development to help catapult this brand forward. Also, we have reassigned a senior level merchandising executive within the organization to focus 100% on our Qurate business. We continue to work closely with Qurate to increase customer counts and productivity for our brands, and look for opportunities for expansion in this channel. In 2018, we launched Judith Ripka on HSN with excellent results. We are excited to now have Judith Ripka on both QVC and HSN. We believe there are significant opportunities for us within the Qurate Retail Group. Turning to our wholesale and direct-to-consumer businesses: In January of 2018, we launched our Judith Ripka Fine Jewelry wholesale operations. And in November of 2018, we launched our wholesale apparel business. Also, we recruited a highly experienced merchandising and operations executive to manage and develop our wholesale and direct-to-consumer businesses. As I mentioned, in December of 2017, we launched our Judith Ripka Fine Jewelry e-commerce business. In 2018, we invested in direct-to-consumer technologies, including CRM, data analytics and site optimization systems and recruited a highly experienced e-commerce marketing executive to drive this business. Our investments resulted in our e-commerce sales for Judith Ripka exceeding budget by 12% in 2018. More importantly, we are now on a run rate to increase sales on judithripka.com by over 500% in 2019 and plan to launch new apparel e-commerce site later this year. We believe the rationale for our wholesale and direct-to-consumer business is to better serve our customers, maintain better control over design and quality of our products, improve efficiencies within the supply chain and grow top-line and bottom-line results. Also, this gives us greater control over sales and distribution. Finally, in our specialty retail and brand collaboration business, we continue to increase the assortment of product we offer through this channel and collaborations and to gain momentum in specialty retailers nationwide. We remain committed to exploring new specialty retail opportunities, collaborations and partnerships as we seek opportunities with different specialty retail concepts and brand partners and expect to make announcement about new and exciting collaborations in ‘19. In fab, we announced this morning our Isaac Mizrahi collaboration with New Balance on [Judith Ripka]. Now, regarding our acquisition of the Halston Heritage and Halston Trademarks, this purchase consolidates ownership of the Halston Trademarks under Xcel. As a reminder, we previously acquired the H by Houston and H Houston trademarks in December of 2014. This recent acquisition gives us an opportunity to focus on the entirety of the Halston brand, its label and their design nuances while continuing to preserve this iconic American brand’s legacy. We expect that this transaction will be accreditive to our earnings after an initial startup period in the operations of our key apparel licensees for Halston and Halston Heritage labels. Finally, given our strong balance sheet position and the technology, design and production platform that we now have in place, we are open to exploring growth opportunities through additional opportunistic acquisitions going forward. In conclusion, through our all channel approach, we have positioned ourselves to establish our presence in all forms of distribution so that we can reach our customers everywhere they shop. To this extent, the expansion and diversification of our business model as a technology based operating company represents a logical and exciting path forward. Now, with this transition nearly complete and the time spent and investment funded, we believe more than ever that we will continue to create growth opportunities for the company. Finally, we believe our commitment to creating innovative solutions for today's retail challenges is the required cornerstone and the building blocks of generating long-term sustainable growth for our shareholders. Now I would like to turn the call over to Jim to review our financial results. Jim?

Thanks, Bob, and good evening, everybody. I will briefly discuss financial results for the quarter and year ended December 31, 2018. Please note that our financial results are described more fully in our annual report on Form 10-K which will be filed with the SEC by April 1st. Total revenue for fourth quarter of 2018 was $9.9 million, a net increase of $2.9 million or 42% over the prior quarter, primarily driven by sales from the company's Judith Ripka Fine Jewelry wholesale and e-commerce operations and wholesale, apparel operations. Current quarter net revenue increased $0.9 million to $7.9 million from $7 million in the prior year quarter, primarily attributed to net margin from wholesale and e-commerce sales. Our operating expenses were $7.9 million and $19 million in the current and prior year quarters respectively. Excluding a non-recurring facility exit of $0.8 million in the current quarter and a goodwill charge of $12.4 million in the prior year quarter, our operating expenses increased by $0.4 million to $7.1 million in the current quarter compared to $6.7 in the prior quarter. This increase was primarily attributable to $0.6 million of increase in salaries and other operating expenses, $0.1 million increase in amortization and depreciation and partially offset by $0.3 million decrease in stock-based compensation. The increase in salaries and other operating expenses relate to the launch of our wholesale apparel operations and marketing costs associated with our e-commerce business. Interest expense decreased by $0.1 million compared with the prior year quarter. The decrease in interest is attributable to lowering our term debt balance. GAAP net loss was approximately $0.3 million for the fourth quarter or negative $0.02 per basic and diluted share compared with a GAAP net loss of $10.2 million or negative $0.55 per basic and diluted share for the prior year quarter. The current quarter’s net loss includes a $0.8 million non-recurring facility exit charge related to the company's prior office and operating facility. The prior year’s net loss included goodwill charge of $12.4 million. After adjusting for certain cash and non-cash items, non-GAAP net income for the quarter ended December 31, 2018 was up 45% to approximately $0.95 million and non-GAAP earnings per share was up 25% to $0.05 per diluted share based on approximately 18.2 million weighted average shares outstanding, compared with $0.65 million or $0.04 per diluted share based on approximately 18.4 million weighted average shares outstanding in the prior year. Adjusted EBITDA for the fourth quarter of 2018 was up $0.3 million to approximately $1.7 million compared to approximately $1.4 million in the prior year quarter. Moving now to our year-end results. Total revenue for the year ended December 31, 2018, was $35.5 million, an increase of $3.8 million or 12% over the prior year. The increase in total revenue for the current year was primarily attributable to sales for the company's Judith Ripka Fine Jewelry wholesale and e-commerce, and wholesale apparel operations. Net revenue for the year ended December 31, 2018, increased $1.1 million to $32.8 million from $31.7 million in the prior year. This increase was primarily attributable to net margin from wholesale and e-commerce sales. Turning to interactive television revenues, we had a decrease of approximately $0.9 million associated with the termination and transition of the C. Wonder brand from QVC, which was offset by a strong performance of our Isaac Mizrahi brand. In 2018, we transitioned our department store business from a license model to a wholesale operation. Department store licensing revenue decreased in 2018 by $1.2 million, compared with the prior year. This decrease was partially offset by approximately a $1 million increase of brick and mortar licensing revenue led by our H Halston and C. Wonder brands. Turning to our year-end operating expenses. Excluding anon-recurring facility exit of $0.8 million in the current year and a goodwill charge of $12.4 million in the prior year, operating expenses decreased by $0.5 million to $28 million in 2018, compared with $28.5 million in the prior year. This decrease was primarily attributable to a $1.4 million decrease in stock-based compensation, which was partially offset by $0.7 million increase in salaries and other operating expenses and $0.2 million increase in amortization and depreciation. The $0.7 million increase in salaries and other operating expenses was related to the launch and operations of our wholesale and e-commerce businesses including marketing costs. Interest expense for 2018 decreased by approximately $0.3 million compared with the prior year as the result of lower term debt. GAAP net income was approximately $1.2 million for the current year or $0.06 per basic and diluted share, an increase of $11.2 million or $0.61 per basic and diluted share from the prior year's net loss. After adjusting for certain cash and non-cash items, non-GAAP net income for the year ended December 31, 2018, was up 12% to approximately $5.5 million and non-GAAP earnings per share was up 15% to $0.30 per diluted share based on approximately 18.3 million weighted average shares outstanding compared with $4.9 million or $0.26 per diluted share based on approximately 18.5 million weighted average shares outstanding in the prior year. Our adjusted EBITDA for the year ended December 31, 2018, was up $0.4 million to approximately $8.4 million compared to $8 million in the prior year. As a reminder, non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA are non-GAAP unaudited terms. Our earnings press release as well as our annual report on Form 10-K present a reconciliation to these items with the most directly comparable GAAP measures. Now turning to our cash position. As of December 31 2018, the company had unrestricted cash and cash equivalents of approximately $8.8 million compared with total cash of approximately $10.2 million at December 31, 2017. This $1.4 million net decrease in cash was primarily attributable to $1.5 million capital expenditures, including a non-recurring $1 million CapEx investment we made in our department store business. In 2018, we generated $6.6 million of cash from operating activities which was offset by $5.5 million in principal repayments on our term debt and a $1 million in shares repurchased for the vesting of restricted stock grants. The $6.6 million of cash provided by operating activities was primarily driven by net income of $1.1 million adjusted for non-cash expenses of approximately $5.7 million and partially offset $0.2 million decrease in cash from net changes in operating assets and liabilities. The non-cash expenses were primarily attributable to deferred income tax provision, stock-based compensation, and depreciation and amortization. Looking at our debt, at December 31, 2018, total liabilities were approximately $38.1 million which includes $16.9 million in term debt, $3 million in contingent obligations and $8.1 million of net deferred tax liability. Of these amounts, $2.9 million contingent obligations and $0.6 million of term debt are payable in stock or cash at the company's option. At December 31, 2018, total current liabilities were $16.1 million inclusive of approximately $5.3 million of the current portion of long-term debt and $3 million of contingent obligations payable in stock at our option. Our working capital at December 31, 2018 was approximately $10.6 million exclusive of contingent obligations payable at stock compared with $10.2 million at December 31, 2017. As of December 31, 2018, our term debt payable in cash was $16.8 million and we had $8.8 million of cash leaving our net term debt at $8 million. Our adjusted EBITDA to our net debt ratio was less than 1 times as we continue to be positioned with very low and manageable leverage. With that, I would like to turn the call back over to Bob. Bob? Robert D’Loren: Thank you, Jim. Ladies and gentlemen, this concludes our prepared remarks. Operator?

Yes. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Michael Kawamoto with DA Davidson. Please go ahead.

So we saw a pretty material pick-up in sales versus license revenues for the quarter, kind of activity at your department store business model. Do you expect to ramp that up fairly quickly or kind of the run rate for that piece of business right now, just given the visibility you have? A - Robert D’Loren: I think what you'll see Michael is we'll go at that run rate for Q1 and Q2 we expect increased activity in Q3 and Q4 this year. So similar kind of sales behavior to what you’ve seen in '18. We transitioned from license to wholesale business in November and had a little uptake there in the last quarter, because we picked up some sales. But we'll see -- now we're transitioning through spring and there would be pickup in fall just based upon preliminary selling that we're seeing. The team here has done a nice job, I think you already aware of the Halston brand and with the Isaac. We're getting good feedback from the buyers. So we expect to see a pick-up in Q3 and Q4.

And is a lot of that -- that pick-up in sales in 4Q that you talked about, is that like the private label business that you mentioned on the last call and a couple of other key accounts? A - Robert D’Loren : No. It's both, it’s branded and private label. And we have some of our private label brands that are doing very well, they're exceeding our expectations sell-through has been a fantastic with some of the private label brands that we are working on particularly with [offset]. So we're excited about what's happening there with the private label and I'm really optimistic about the whole line, it was really received well, and we look forward to making those deliveries.

Go ahead. Robert D’Loren : I was going to say, we expect our e-com is going to continue the momentum towards the end of the year?

That's a good segway into my second question on the Judith Ripka Fine Jewelry business. I think you said on a runway to grow over 500%. What do you think the key driver there, is it better styles, that's more on trend or just better awareness around the platform and more stability? What do you think the key drivers are there? A - Robert D’Loren : I think it's product driven. We did a little bit of experimenting with change in the direction of design. Judith Ripka is known for its state point of view and that jewelry is not trending roll like everything in fashion casual, is trending, we live in a much more casual society today and we make some adjustments to design and testing, landed on the design, quite frankly is selling faster than we can produce the product and with that we created five new collections that we're launching and we're seeing the results in real time with e-commerce. Regarding nature of e-commerce as we react our model and it’s going well for us, we see the growth coming from …

Good here and then just on the Halston acquisition you did. Can you talk about maybe what categories or channels that was brand and made you see the largest opportunities for growth going forward? Robert D’Loren : Halston is virtually at every tier of distribution. Halston Heritage is in premium retailers like Neiman Marcus, Saks, and Bloomingdale. H Halston is sold in better retailers like Lord & Taylor and Hudson’s Bay and of course H by Halston on QVC. The part of the transition out of our license agreement gives ourselves more control over design and I'm happy with what our internal teams have done with the product. Also it has eliminated an exclusivity that we had with HPC since that we have much broader distribution with the brand and we're hopeful that in ‘19 and the second half of the year we can begin to distribute the better selling product and more retailers beyond Lord & Taylor and Hudson’s Bay.

And then Michael from a licensing standpoint given that that brand was split, it’s a little bit challenging to find licensees that we didn’t control the entire brand. We are bringing the brand together. We have opened up new licensing opportunities across various categories as you have already signed or license or licenses, number of additional agencies were in discussion with. So, we have already signed four licenses , we have a number of additional licensees, so we are -- those on the core apparel business Halston and Halston Ancillary categories we see significant activity.

Got it, that is really helpful. And then just, last one from me. You are pretty much to do the first quarter at this point. Can you you know give us anything on maybe how the quarter shaped up or where it differed from your expectations as giving everything that you have gone right now? A - Robert D’Loren : We don’t typically provide guidance, again, we're very pleased with the lot of the developments in our core business and you know, we’re looking forward to closing the quarter by next announcement.

This concludes the question-and-answer session. I would now like to turn the conference back over to Robert D' Loren for any closing remarks. Robert D’Loren: Ladies and gentlemen, thank you all for your time this evening. We greatly appreciate your continued interest and support in Xcel Brands. As always, stay fit, eat well and be healthy.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.