Xcel Brands, Inc. (XELB) Q1 2019 Earnings Report, Transcript and Summary

Thank you. Ladies and gentlemen welcome to Xcel Brands' First Quarter 2019 Earnings 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] Please be advised that reproduction of this call in whole or in part is not permitted without prior written authorization of Xcel Brands. And as a reminder this conference call is being recorded. I would now like to turn the conference over to Andrew Berger of SM Berger & Co. Thank you. Andrew you may now begin.

Good morning, everyone, and thank you for joining us. We appreciate your participation and interest. With us on today's call 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 first quarter ended March 31st, 2019 which went out earlier today. And in addition the company plans to file with the Securities and Exchange Commission its quarterly report on Form 10-Q tomorrow May 15th, 2019. The release and the quarterly 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 these 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 relating to the company's results of operations. Our management believes these financial performance measurements are also useful because these measures adjust for certain costs 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 measure of financial performance calculated and presented in accordance with GAAP. You may refer to the attachment in the company's earnings release or to Part 1 Item 7 of the Form 10-Q for a reconciliation of non-GAAP measures. Now, I'm pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob please go ahead.

Thank you, Andrew. Good morning everyone and thank you for joining us. I'll start with our financial and operating highlights and then provide some thoughts on the rest of the year. 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 highlights. We showed an 18% increase in revenue in Q1 2019 compared to Q1 2018. The drivers of this increase can be attributed to continued improvement in our apparel and jewelry wholesale businesses and our jewelry e-commerce business. We also finished the quarter over-planned in our adjusted EBITDA which was nearly equal to our prior year quarter adjusted EBITDA after add-backs from non-recurring charges of approximately $100,000. Overall, we are pleased with our results for the quarter. As previously reported, we are nearing completion of our transition from a licensing company to a vertical consumer products, media, and technology-based operating company. Our focus remains on expanding our brands in all channels of distribution. This includes interactive TV wholesale bricks and mortar and direct-to-consumer sales of our brands and products via e-commerce. We are encouraged by our current top line revenue growth and continue to make strides in developing our platform. Finally, we believe conditions are favorable for us to consider strategic acquisition opportunities. Now taking a closer look at operations by distribution channel, our interactive television business is performing well, especially in our Isaac Mizrahi brand. We have introduced new and exciting designs in our H by Halston brand. And while our Judith Ripka brand continues to be planned on QVC, we see some macro headwinds in the jewelry business in this channel. Finally, international is growing nicely, particularly in the U.K. and Italy. In our wholesale apparel business, we recruited a highly experienced merchandising and operations executive and broadened some senior level designers in Q4, 2018, in order to more fully develop and grow our wholesale and direct-to-consumer businesses. This new team is off to a good start and I am very pleased with the direction of our products and the team. Early indications from retail accounts are promising. Our Judith Ripka wholesale and e-commerce businesses also continued to show strong growth. We are launching five new collections in Q3 and Q4 of 2019, all of which fully leverage our integrated technologies platforms. The products were designed utilizing the latest 3D design technology, which then enabled us to pass and choose collections to launch through consumer insight testing. We have also begun experimenting with pre-sales to assess and forecast demand utilizing these images. This is all exciting and if successful, has ability to transform inventory management in the jewelry and apparel industries. Finally, in our specialty retail business, we recently announced the collaboration with New Balance on QVC. This was and continues to be a successful collaboration that exceeded our expectations. We plan to make some additional announcements for similar programs in the quarters ahead. In conclusion, through our all-channel approach, we have positioned ourselves to establish our presence in all forms of distributions so that we can reach our customers everywhere they shop. Now, with the operational transition of our business nearly complete and the planning, funding and implementation of our fast-to-market and integrated technologies platforms, we believe, more than ever, that we will continue to create opportunities for the company to drive growth, both organically as well as through the potential acquisition of less technologically advanced companies that may be suitable and strategic add-ons to our business. Now I'd like to turn the call over to Jim to review our financial results for the quarter. Jim?

Thanks, Bob, and good morning, everybody. I will briefly discuss financial results for the quarter ended March 31, 2019. Please note that our financial results are described more fully in our quarterly report on Form 10-Q, which will be filed with the SEC by tomorrow. Total revenue increased to $10.3 million, an increase of $1.5 million or 18% over the prior year quarter, primarily driven by sales from the apparel and jewelry wholesale and e-commerce operations. Net revenue, overall, decreased by $100,000 to $8.5 million from $8.6 million in the prior year quarter. Our increase in product sales gross margin and increase in licensing revenue was offset by decrease in design fees. Total operating expenses increased to $7.8 million, an increase of $0.4 million, primarily attributable to the amortization of our Halston brand trademark. Upon the acquisition of the Halston and Halston Heritage trademarks, during the quarter management determined that the Halston brand has a finite life, subject to amortization. Current quarter amortization expense for the Halston brand, based on an 18-year life, was $0.5 million. There was no Halston brand amortization expense in last year's quarter. Total interest and finance expense increased by $0.19 million from the prior year quarter, attributable to a loss on extinguishment of debt. The loss on extinguishment of debt was triggered by the refinancing of our bank term debt, as we restructured the debt to fund a portion of the Halston acquisition back in February. Net income was approximately $0.13 million for the first quarter or $0.01 per diluted share, compared with net income of $0.5 million, or $0.03 per diluted share for the prior year quarter. After adjusting for certain cash and non-cash items, non-GAAP net income for the first quarter was approximately $1.5 million and non-GAAP earnings per share was $0.08 per diluted share, compared with $1.7 million, or $0.09 per diluted share in the prior year quarter. Approximately 18.5 million and 18.7 million weighted average shares outstanding for the current and prior year quarter respectively. Adjusted EBITDA for the first quarter was $2 million compared to approximately $2.2 million in the prior year quarter. Our non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA are slightly down from 2018 which was attributable to the decrease in net revenues. Turning now to our cash position, as of March 31 2019 the company had unrestricted cash and cash equivalents of approximately $6.8 million compared with total cash of approximately $8.8 million at December 31, 2018. The $2 million net decrease was primarily attributable to $1.6 million of cash used in the acquisition of the Halston and Halston Heritage Trademarks. Looking at our debt, at March 31 total liabilities were approximately $51.4 million which includes $21.7 million term debt, $3.8 million of contingent obligations and $11 million of operating lease liability with $8.2 million of net deferred cash liability. In accordance with ASC 842 we have recorded an operating lease liability at March 31, 2019 of approximately $11 million and a related operating lease right-to-use asset of approximately $8 million. In addition we reduced the December 31, 2018 accrued rent balance of $2.9 million to 0. The contingent obligations all payable in stock or cash at the company's option, the earnout target period for the $2.9 million contingent obligation associated with the C. Wonder acquisition ends June 30, 2019. We expect no payment to be made on this contingent obligation in the second quarter. At March 31, 2019 total current liabilities were $14 million, inclusive of approximately $4 million of the current portion of long-term debt and $2.9 million of the contingent obligations payable in stock at our option. Our working capital exclusive to the contingent obligations was approximately $8.7 million compared with $10.7 million at December 31. Working capital decreased by $2 million in the first quarter, primarily attributable to the $1.6 million of cash used in the acquisition of the Halston and Halston Heritage Trademarks and a reclassification of current portion of accrued rent to the current portion of operating lease liabilities of $0.5 million. And with that I would like to turn the call back over to Bob. Bob?

Thank you, Jim. Ladies and gentlemen this concludes our prepared remarks. Operator?

[Operator Instructions] Our first question comes from Michael Kawamoto of D.A. Davidson.

Hey, guys. How’s it going?

Michael, how are you?

Doing well, congrats on a good quarter, just starting out on the wholesale apparel business, is it trending about how you would have thought? And then how should we think -- how should we be thinking about wholesale sales ramping as the year progresses? Will we maybe see an acceleration in growth in the back half of the year just kind of in line with what you saw in the last call?

Yes. Michael I think you can expect to see acceleration in Q3 and Q4. Q1 we had hoped for a little bit more on the topline. We were balancing inventories with our retail partners and pulled back a little bit on the goods. But overall we were happy with the adjusted EBITDA and of course the non-GAAP, EPS that we were able to generate in Q1.

Sounds good. And then pivoting to Judith Ripka, I think on the last call you said it was trending to be at 500% over last year on the e-com business. Is it still -- are you still on that runway? Or has anything changed there?

Yes, yes. We are. And it's interesting with Judith Ripka because the technology for jewelry are little further along than they are in apparel. With all of these new collections we were able to design the jewelry in 3D. We were able to take those 3D images, which looked further realistic put them through consumer insight testing. And then over this past weekend, we took those images, loaded them up onto our website and began to market presales with reservations for July deliveries to get a read on demand. And early indications look good. The testing was very strong. And we have four additional collections coming behind these new collections that we just launched. The beauty of all of this is we don't have to make a mold or bring in samples or incur any kind of risk on inventory until we get a real read on demand. And we expect by year-end we will be in the same place with apparel where we would be running with 3D images, running it through full consumer insight testing and getting a read based on e-com platforms that we plan to establish. So we would expect continued very strong growth along the lines of how we grew from last year to this year with Judith Ripka. The new collections are quite good and being received well by our customers.

Got it. And building on Judith Ripka, I think you said that you had some headwinds on the interactive TV segment. Can you just elaborate on what you're seeing there?

It's not headwinds with the brand per se. The brand is doing well. We have been exceeding plan each month. It's -- there are headwinds in that channel of distribution with jewelry. QVC has been allocating air time to other categories and taking it away from jewelry. That said we continue to be one of the largest jewelry brands on QVC. We are one of the only jewelry brands or the only jewelry brand on both networks QVC and HSN as well as QVC too. So we are happy relative to what's happening at the macro level with jewelry on QVC.

Got it. And then just last because it's top of everyone's mind. In your case have you worked with some manufacturers in China? What is your exposure there? And I know apparel hasn't been named yet on the tariff's list, but could you pivot your footprint if need be?

So we pivoted last year to Vietnam and we have about 60% of our production now in Vietnam. And we will continue to look for new places to manufacture our apparel. And we are monitoring this closely. I participate actively with the AAFA fairly close to all of this and it's a wait and see.

Got it. Thanks so much for your time, and good luck for the rest of the year.

Thanks, Michael.

[Operator Instructions] There are no further questions at this time. I would now like to turn the call back over to Mr. D'Loren for any closing remarks.

Ladies and gentlemen, thank you all for your time this morning. We greatly appreciate your continued interest and support in Xcel Brands. As always stay fit, eat well, and be healthy.

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