Xcel Brands, Inc. (XELB) Q4 2019 Earnings Report, Transcript and Summary

Welcome to the Xcel Brands Fourth Quarter and Annual 2019 Earnings Conference Call. [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 call over to Andrew Berger of SM Berger & Co. Thank you. Andrew, you may now begin.

Good evening, everyone, and thank you for joining us. We appreciate your participation and interest and hope that all of you are safe in these difficult times. 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, 2019, which went out after the market closed today. And in addition, the company plans to file with the Securities and Exchange Commission its annual report on Form 10-K. Please note that given the events associated with COVID-19, the company needed to extend the final date of its annual report on Form 10-K. 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 on 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. Also and significantly at this time the COVID-19 pandemic is now having a significant impact on the company's business financial condition, cash flow and results of operations. And there are significant uncertainty about the duration and expense of the impact of the virus. The dynamic nature of these circumstances means what is said on this call continues materially at any time. 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. 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. Management believes these financial performance measurements are also useful, because these measure adjust -- 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 to the company’s earnings release or to Part 2, Item 7 of the Form 10-K 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. Robert D’Loren: Thank you, Andrew. Good evening, everyone, and thank you for joining us. As Andrew stated, I hope all of you and your families are safe and healthy. We are all working from home these days. This is now the new norm. I’ll give an overview of our 2019 financial performance and then provide some operating highlights. After that our CFO, Jim Haran, will discuss our financial results in more detail. Before I discuss our financial results, I want to take a moment to talk about the events of the COVID-19 pandemic. It is an unprecedented event that comes with a great deal of uncertainty. What is happening throughout the world is not only a human tragedy, but may result in a significant global economic disaster. The most challenging part of all of this is the uncertainty of how long it will be and how will the consumer emerge from this when it's all over. It is nearly impossible to forecast this. It is too soon to tell what the overall economic impact will be on Xcel, though we believe it will impact our business in Q1 and Q2 2020 and perhaps the balance of the year. That said, the current challenge is with our spring delivery. We are experiencing cancelled orders and in certain cases goods are not being received by our retail accounts because they have closed their distribution centers. We are managing through this by moving certain core products forward to summer and early fall and if we have any unsold inventory, we will explore selling it into off price channels or perhaps even packing up some goods for spring 2021. We are very fortunate in that part of our design strategy and brand DNA across our brands is to platform year-round fabrics that are season agnostic. At this time, we do not anticipate that we will have significant inventory to liquidate. With respect to our expenses and in order to conserve our cash, we have taken appropriate action to reduce all costs, including reducing employee compensation across the board, furloughing certain employees for the management of inventory, and cutting all non-essential costs and other measures to conserve cash, including working with our suppliers and retail partners to better time cash flows to ensure that we will not only weather this storm, but emerge from it stronger. Our goal in all of this is to be completely transparent with our retail and supply chain partners and collaborate fairly with them to work through this together. Also, we are doing everything possible to minimize the impact of this event on our employees. Finally, we are working through the various government assistance programs that have been rolled out over the past month. Our Xcel team members are showing their dedication to Xcel and our strong consumer brands. They are working remotely and continue to operate the business in these uncertain times. I have been overwhelmed by how our teams have come together to address these events and I believe it speaks to the true strength of Xcel. Further, we believe that our transition from a pure licensing business to a vertical consumer products company is the optimal strategy to position Xcel for growth when business gets back to normal. Now I'd like to give an overview of our financial performance for 2019. We are pleased to report that we achieved $11.4 million in revenues for the fourth quarter, up 14% from Q4 2018. We ended the fiscal year with $41.7 million in total revenues, which was up approximately 18% from last year. This top line revenue growth is directly attributable to the investments we have made in our apparel and jewelry wholesale and e-commerce businesses and the completion this year of our transition from a pure licensing business to a licensing wholesale and direct to consumer or vertical business model. This business model change gives us more control over our products, higher margins and significant growth potential in multiple channels, including direct-to-consumer. Combining this new capability with our significant licensing revenue helped us to deliver strong top line growth in 2019. While our EBITDA was not what we had hoped for, primarily due to one-time scheduling conflicts with the availability of our QVC on air talent during December of 2019, as well as our C. Wonder brand launching at Wal-Mart in Spring 2020 rather than as planned for Fall 2019. Going forward, we believe our highly leverageable operating model, including our proprietary technologies, design, production and supply chain platform provides us with significant competitive advantages. Our focus remains on expanding distribution of our brands through interactive TV, digital media, wholesale and direct-to-consumer sales of our products with the goal of being everywhere our customer shop. At the same time, we will continue to look for a dynamic consumer lifestyle brand that are strategic and synergistic to add to our portfolio, such as the Halston Heritage acquisition we made in Q1 2019 and the Longaberger brand, which we acquired a 50% interest in during Q4 2019. Our Halston Heritage Premium Retail Distribution license business did well under our current licensee in 2019. We launched the Longaberger brand on QVC in November 2019 within weeks of our acquisition, as well as introducing it online in a peer-to-peer digital model. And based on preliminary results from both channels, we believe this addition to our brand portfolio begin to return a very strong ROI starting in 2020. In these difficult times, we are happy to be able to offer people across our country a way to generate extra income through our next generation peer-to-peer social selling platform. Also, these acquisitions diversify our distribution and category expertise. Now let's take a closer look at our operations by distribution channel. Our interactive television business performed well in 2019 with our brands effectively performing on plan at QVC for the year. We also executed a successful collaboration with New Balance on QVC during 2019. Looking ahead to 2020, our strongest brand in our interactive television business continues to be the Isaac Mizrahi brand. We have already started taking actions to grow the business with QVC in 2020, including launching new categories and increasing Isaac's appearances. At the same time, we are currently working towards transitioning our H by Halston business from a direct-to-retail license with QVC to a wholesale model in the latter half of 2020. More to come on this in future quarters. Of course, this all depends how the events of COVID-19 fully unfold. In our licensing business, we continue to grow and manage our portfolio of over 60 licensees across our brands. Most significantly we have been successful in developing a business in ancillary categories and have signed over 10 new categories for C. Wonder with distribution at Wal-Mart, most of which were slated to launch for Fall 2020, but maybe slightly delayed due to the recent events. Also, we have retained Blank Rome to advise us on all of the various COVID-19 release programs and have created a newsletter to keep our licensees informed of best practices as it relates to these programs. Additionally, in 2019, we developed and launch successful collaborations with Target for their 20-year retrospective, Sesame Street for their 50th anniversary and with New Balance at QVC. Also, we are currently working on a capsule collection with [Crayola] [ph] as well as a collaboration between Halston and Studio 54, both of which we hope to launch in 2021. In our wholesale apparel business, our design, merchandising and sourcing teams continue their strong performance in 2019, especially with the execution of our products. Based on our new collections and excellent sales team performance, we were able to place our brands in 12 new retail accounts, including Saks and Macy's in the United States and El Palacio in Mexico, and successfully launched our C. Wonder brand on walmart.com in February of 2020. In fact, we had great momentum in our wholesale business before the COVID-19 pandemic hit us all. Based on our plan and our strong order book, we were showing sales growth in excess of 40% in 2020. As discussed, while our wholesale business will be impacted in 2020, we believe we are well positioned to resume this level of growth going forward as retail stores reopen and sales normalize. In our wholesale and e-commerce jewelry business, we have been focused on new collections under our Judith Ripka brand in order to bring more contemporary and trend right styles to market, while maintaining the Judith Ripka brand identity. New collections are all designed in 3D and leverage consumer insight testing in order to determine the winning styles and inform merchandising and inventory purchasing decisions. We are extremely advanced in our integrated technology platform with fine jewelry and have successfully brought four new collections to market since we took back the license from our licensee with five more in the pipeline to be launched by June. We have received significant positive response from these collections from both consumers and industry insiders. Finally, we continue to see strong growth in our e-commerce business. We more than doubled our business in 2019 versus 2018. The business continues to show strong growth potential in 2020. In conclusion, through our omni-channel approach, we have positioned ourselves with a presence in all forms of distribution so that we can reach our customers everywhere they shop. We ended the year having completed the operational transition of our business to a vertical consumer products, media and technology based operating company with core expertise in women's, sportswear and dresses, fine jewelry and home product and maintained a strong balance sheet. Our people, our brands and our strong balance sheet are our strengths. We are doing everything possible to come through the COVID-19 events so that we emerge from it stronger. Now I'd like to turn the call over to Jim to review our financial results for 2019. Jim?

Thanks, Bob, and good evening, everyone. I will briefly discuss financial results for the quarter and year ended December 31, 2019. 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 14. Total revenue for the fourth quarter of 2019 was $11.4 million, a net increase of approximately $1.4 million or 40% over the prior year quarter, primarily driven by wholesale and e-commerce sales. Current quarter gross profit decreased approximately $0.3 million to $7.6 million from $7.9 million in the prior year quarter, primarily attributable to lower net licensing revenue. Operating expenses were $14.6 million and $7.1 million in the current and prior quarters, respectively. This increase is primarily attributable to a $6.2 million impairment charge related to the Ripka brand trademarks driven by the timing of the continued transition of this brand from a licensing model to a wholesale model and direct-to-consumer model. The current quarter also includes $1.3 million of transition expenses incurred for potential acquisition that we worked on, but did not close. Other recurring operating costs were generally flat, were down slightly from the prior year quarter. Total interest and finance expenses increased by $0.1 million from the prior year quarter attributable to the increase in our term debt from our February 2019 acquisition of the Halston and Halston Heritage trademarks. GAAP net loss was approximately $6.2 million for the fourth quarter, or negative $0.28 per basic and diluted share compared with a GAAP net loss of $0.3 million or negative $0.02 per basic and diluted share for the prior year quarter. And as previously mentioned, the current quarter's net loss includes $6.2 million non-cash impairment charge. After adjusting for certain cash and non-cash items, non-GAAP net income for the current quarter was approximately $0.9 million and non-GAAP earnings per share was $0.05 per diluted share compared with approximately $1.2 million or $0.07 per diluted share in the prior year quarter. Adjusted EBITDA for the current quarter decreased approximately $0.2 million or $1.5 million compared with approximately $1.7 million in the prior year quarter. Moving now to the full-year results. Total revenue for the year ended December 31, 2019, was $41.7 million, an increase of approximately $6.3 million or 18% over the prior year. As with the trend experienced for the quarter, the increase in total revenue for the current year was primarily driven by wholesale and e-commerce sales. Gross profit for the full-year decreased approximately $1.3 million to $31.5 million from $32.8 million in the prior year. This decrease was primarily attributable to lower net licensing revenue that was partially offset by wholesale margins. Our operating costs and expenses increased approximately $8.1 million [indiscernible] from the current year and approximately $28.8 million in the prior year. This increase was primarily attributable to the previously mentioned $6.2 million impairment charge for the Ripka brand trademarks and the $1.3 million of transaction expenses incurred for potential acquisitions that we worked on, but did not close. Interest expense for 2019 increased by approximately $0.5 million compared with the prior year due to the February 2019 term loan amendment, which resulted in both a $0.2 million loss and extinguishment of debt as well as higher principal balance and high interest rates and thus higher recurring interest expense. Our 2019 results also notably include the $2.9 million gain on the reduction of the contingent obligation related to the C. Wonder acquisition back in 2015. Our bottom line for the current year was a GAAP net loss of approximately $3.4 million or $0.18 per basic and diluted share compared with net income of $1.1 million or $0.06 per basic and diluted share in 2018. After adjusting for certain cash and non-cash items, non-GAAP net income for the current year was approximately $4.8 million and non-GAAP earnings per share was $0.25 per diluted share compared with $6.5 million or $0.36 per diluted share in the prior year. Adjusted EBITDA for the current year was $7.1 million, compared with $8.4 million in the prior year. As mentioned earlier by Bob, our year-end results and adjusted EBITDA were impacted by one-time scheduling conflicts with the availability of our QVC on air talent during December, as well as our C. Wonder brand launching at Wal-Mart in Spring 2020 rather than as planned for Fall 2019. And 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 of these items with the mostly directly comparable GAAP measures. Now, I'd like to turn to our cash position. As of December 31, 2019, the company had unrestricted cash of approximately $4.6 million compared with total cash of approximately $8.8 million at December 31, 2018. This $4.2 million decrease in unrestricted cash was primarily attributable to investments in technology, including our ERP and PLM systems of approximately $1 million; investment in new brands, including the Halston Heritage brand and Longaberger brand totaling $1.7 million; approximately $4.7 million of debt principal payments during the year, which these were offset by approximately $3.5 million of cash flow from operations. Looking at our debt. At December 31, 2019, total liabilities were approximately $44.7 million, which includes $18.8 million of term debt; $0.9 million of contingent obligations; $11.5 million operating lease obligations; and $7.4 million of net deferred tax liability. Of these amounts, the repayment of contingent obligation is generally required to be paid in shares of the company's stock. At December 31, 2019 total current liabilities were $9.8 million inclusive of approximately $2.3 million in the current portion of long-term debt and $1.8 million of the current portion of operating lease obligations. Our working capital at December 31, was approximately $9.5 million, excluding the current portion of lease obligations and any contingent liabilities payable on stock. These compared with $7.7 million at December 31, 2018. At December 31, 2019 our total bank debt net of cash was $14.2 million or 2x our adjusted EBITDA for the past year. And finally, as Bob mentioned, we are taking appropriate actions to reduce our cost, manage inventory, conserve cash in light of the current economic and market uncertainties brought about by the COVID-19 pandemic. In addition, we have just recently restructured and refinanced our senior term debt to allow for reduced principal payments, recovery release in 2020, which will provide us with additional flexibility to run our business effectively in this current environment. And with this, I would like to turn the call back over to Bob. Bob? Robert D’Loren: Thank you, Jim. This concludes our prepared remarks. Operator?

Our very first question comes from John Morris with Davidson. Please go ahead.

Thanks. Good afternoon, everybody. And hope everybody is safe and well. Just looking out ahead in over the valley of the COVID crisis here, no matter -- obviously, we don't know how long that's going to be, but if you’re looking at your long-term gross margin target, I’m trying to get a feel for where you would expect that to settle out in terms of your target, where you would see that coming out a year or two years? Thanks. Robert D’Loren: I'll take that one. John, it's Bob. How are you? Hope you’re …

Hey, Bob. Yes, good. Thank you. Robert D’Loren: … safe and healthy. So we don’t -- generally, our approach to margins is we tend to structure our purchase orders with a high IMU that we offer our retail partners. We don't see a lot of dilution as a result of doing that, of course, or going in. Wholesale margins are lower. But our strategy has been to offer our retail partners enough to cover what we think will result in final margins for them. How that plays out through the rest of the year, I think that remains to be seen. A lot of this will depend upon how long this goes on, how long will the retailers need to remain closed. As I did say on the call, we are experiencing some cancellations. But even with the canceled orders, we've been able to push a lot of the product forward to June, July, August with our partners. So we've been working nicely with the majority of our retail partners. So I think it's a little early to tell what the real margin compression will be through the year. I think it really depends upon what happens and how long this goes on.

Great. Bob, that's helpful. And then my follow-up is, Longaberger and prior to the disruptions, it sounds like you all were off on a good start with that acquisition. Just want to know -- just want to get a little bit of extra color from you on how that had ramped up relative to your expectations? What the high points been thus far prior to the disruption? Robert D’Loren: So Longaberger is an interesting opportunity for this moment in time because, as you know, it's a peer-to-peer model where salespeople sell products for us and all of them are independent contractors, if you will. Actually, they're members of the Longaberger family, that's what we call them. And in times like this, people are often looking for ways to earn additional income. And these kinds of businesses tend to do well in these kinds of cycles. The launch was very successful. It exceeded our expectations in terms of sales. We are about to launch within the next 30 days of the recruiting module for the former Longaberger sales associates to sign up. And through this module we can track them and what they're selling and pay commissions. And we feel very optimistic that we'll be able to recruit thousands of former 77,000 person sales force that they had onto the new platform. We continue to load new products every day. If you go to the site, you can see the kinds of things that we're offering the customers and the members there. It's primarily home products. We have offered a small selection of Judith Ripka jewelry to this family of Longaberger saleswomen and men. So we'll see how our other brands translate onto this platform over time. But so far, so good. We're very excited about this.

Great. Thank you.

Our next question comes from Walter Schenker with MAZ Partners. Please go ahead.

I was pleased to see along with many other companies, the Xcel brands is reducing compensation during this very trying period. Could you give us some sense just thinking about the cost structure? What type of percentage change there might be, if not for the broadly, at least the top few executives? Robert D’Loren: So we -- one, we reduced 2019 bonus income to senior executives that was payable at the end of March; and two, we made and across the board reduction of all employees, including our on-air guest. We will continue to look at this based upon where we're forecasting our cash flows. And the good news for us is 75% or approximately 75% of our overhead is variable and we will adjust as needed. But based on the cash flow analysis that we've been looking at, we've made the appropriate level of cuts across the board and treated everyone as fairly as we could.

Thank you. Robert D’Loren: Thank you.

[Operator Instructions] There are no further questions at this time. I will now turn the call back over to Mr. D’Loren for 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. The retail industry overall continues to be challenged and recently this business got harder due to the COVID-19 pandemic. We believe the challenges will continue for the next several years as perhaps retail consolidation and store closures continue and/or accelerate. Notwithstanding these challenges, we continue to believe that Xcel's infrastructure makes us an industry leading platform, both from an operational as well as a technological standpoint, and that we are uniquely positioned to capture significant market share during this enormous time of disruption. As always and most importantly now, stay fit, eat well and be healthy.

Ladies and gentlemen, that does conclude our conference call for today. You may disconnect your lines and thank you for participating.