Xcel Brands, Inc. (XELB) Q1 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Xcel Brands First Quarter Fiscal Year 2020 Financial Results 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 Stan Berger. Please go ahead.

Thank you, operator. 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 and uncertain 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, Business Development and Treasury, Seth Burroughs. By now, everyone should have received access to the earnings release for the first quarter ended March 31, 2020, which went out earlier this morning. And in addition, the company plans to file with the Securities and Exchange Commission its quarterly report on Form 10-Q by May 20, 2020. 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 most recent annual report filed with the SEC. 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. In addition, at this time, the company's -- COVID-19 pandemic is having a significant impact on the company's business financial condition, cash flow and results of operations. There is significant uncertainty about the duration and extent of the impact of the virus. The dynamic nature of these circumstances mean what is said on this call could change 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. 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 team 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 measures of financial performance calculated and presented in accordance with GAAP. You may refer to the attachment to the company's earnings release or Part 1, Item 2 of the Form 10-Q for a reconsolidation of non-GAAP measures. Now, I am pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob, please go ahead.

Thank you, Stan. Good evening, everyone, and thank you for joining us. As Stan stated, I hope all of you and your families are staying safe and healthy. I will give an overview of our first quarter 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 give an update about the impact from the events of the COVID-19 pandemic. As I stated on our prior call, this is an unprecedented event that comes with a great deal of uncertainty. Now, the most challenging part of all of this is assessing how will the customer or the consumer emerge from this when it is over? It is nearly impossible for any of us to forecast this. Our business was affected by COVID-19 in Q1 and will more severely be impacted in Q2 and Q3 of 2020, primarily in our wholesale business. We expect that Q4 will be impacted but it’s too early to fully assess the impact at this time. As previously reported, we have experienced canceled orders and in certain cases, goods are not being received by our retail accounts, because they 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 and other similar 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 separately. We continue to monitor the financial viability of some of our wholesale customers and have taken reserves, where we have identified risk. Thankfully, a vast majority of our wholesale accounts are retailers who at this time continue to be financially stable. With respect to our expenses and in order to manage our cash, we have taken appropriate action to reduce all costs, including reducing employee compensation across the board, furloughing certain employees, further management of inventory, and cutting all non-essential costs and other measures to conserve cash, including working with our suppliers, licensees and retail partners to better time cash flows to ensure that we will not only weather the storm, but emerge from it stronger. The measures have resulted in significant cost reductions and cash preservation. Finally, we are successfully working through the various government assistance programs that have been rolled out over the past six weeks. Our Xcel team members continue to show their dedication to Xcel and our strong consumer brand. They continue to work remotely and are operating the business effectively. I am grateful for the way 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 the 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 financial performance for the first quarter of 2020. Although, our total revenues for the quarter were down 7.5% throughout the year due to the impact of COVID-19, we are pleased to report that we achieved over 50% revenue growth in our apparel and jewelry wholesale and e-commerce businesses. At the same time, the gross margins in our wholesale and e-commerce businesses grew from 25% in the first quarter of 2019 to 38% in the current quarter. As previously stated, this illustrates how vital it was to transition and transform our operating model last year from a pure licensing business to a vertical licensing wholesale and direct-to-consumer business model. This transformation of our operating model as well as our proprietary technologies, design, production and supply chain platform provides us with distinct and significant competitive advantages. We can and will use these advantages to provide us with maximum flexibility to continue to adapt to the changing conditions in the current environment. Now let's take a closer look at our operations by distribution channel. Our interactive television business performed well in Q1 achieving our first quarter plan. Looking ahead to the balance of the year, April sales showed some softness in the latter half of the month as QVC pivoted airtime to home and food products and adjusted to remote broadcasting. May sales to-date have shown recovery and appear to be back on track with plan. We have been able to leverage video conferencing technology and social media live streams to drive sales for our brands on QVC that has the business looking like it's back on track. Given the current environment, it is extremely difficult to forecast and predict how the latter half of the year will unfold, but we will continue to remain flexible and adapt to the changing conditions as appropriate. We are actively working with QVC to develop more products for the fourth quarter that are working well in the current environment, including loungewear, sleepwear and facemasks. We are all in uncharted waters here. But the flexibility of our business model enables us to react faster and provide new solutions as retailers continue to adjust to the current environment. In our licensing business, we continue to develop and manage our portfolio of over 60 licenses across our brands. We expect our licensees to experience canceled orders and reduced sales from the impact of the COVID-19 pandemic. We continue to work through this with our licensees. And as previously mentioned, we have retained Blank Rome to advise us on all the various CARES Act relief programs and have created a newsletter to keep our licensees informed of best practices as it relates to these programs. The outlook for licensing revenues for the balance of 2020 is uncertain. We have been and will continue to monitor business openings as our country slowly gets back from the stay at home policies enacted by each state and are leaning into retailers who have stayed open throughout this pandemic, where possible. As previously announced, we launched apparel at Walmart under our C. Wonder brand in February through our wholesale division. The line was launched at price points that Walmart hopes will establish a new higher quality and value proposition for its customers. Based on the line’s initial performance, Walmart plans to expand the brand into complementary categories in the fall. As such, our team has worked with best-in-class licensees in categories such as handbags, small leather goods, fashion jewelry, and sleepwear, to design and develop products that Walmart has confirmed will continue to be launched this fall. We're also working with our licensees to develop lines of hand sanitizers and facemasks, both of which should also launch this fall. These are all examples of how our flexible business model gives us an advantage, especially in times of extreme change like we are all living through today. Finally, and as previously reported, we are currently working on a capsule collection with [Creole], 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 2020, especially with the execution of our products. We experienced canceled orders with our March deliveries that resulted in lost sales. Despite these canceled orders we were up 50% in top-line sales over last year with a gross margin increase of 13%. We had great momentum in our wholesale business before the COVID-19 pandemic hit us all. As I previously stated, based on our plan and ours strong order book, we were showing sales growth in excess of 40% for 2020. We expect sales to be down in Q2 and Q3, and are cautiously optimistic about Q4. Q4 results will be dependent upon how the consumer behaves as stores open and return to normal or at least the new normal. As previously discussed, while our wholesale business will be impacted in 2020, we believe we are well positioned to resume that level of growth 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 Judith Ripka brand identity. 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. As previously reported, we have received significant positive response from these collections from both consumers and industry insiders. We continue to see strong growth in our e-commerce business in 2020. Finally, we launched our new peer-to-peer digital platform for our Longaberger brand and recruited over 3,000 sales associates in the first two weeks of operations. This is extremely exciting and shows very significant sales potential. We hope to be able to leverage the peer-to-peer model across our jewelry and other businesses and we'll report on our progress throughout the year as we continue to roll this social selling platform out. 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 have also created a highly flexible model that can supply our retail partners through either a wholesale and direct-to-retail model and with our integrated technology platform can do so faster than many in our industry. Our people, our brands, our flexibility and our strong balance sheet are our strengths. We're doing everything possible to come through the COVID-19 event so that we emerge from it stronger. Now, I'd like to turn the call over to Jim to review our financial results for the quarter. Jim?

Thanks, Bob. And good evening, everyone. I will briefly discuss financial results for the quarter ended March 31, 2020. And please take 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 May 20th. Total revenue for the first quarter of 2020 was $9.5 million, a net decrease of approximately $0.8 million or 8% in the prior quarter, primarily driven by lower licensing revenues, partially offset by growth in our wholesale apparel business. The decline in licensing revenues was primarily related to lower guaranteed minimum royalties compared with last year. Our strategy continues to be to transition certain licensing programs to a wholesale model. And Q1 wholesalers were negatively impacted by COVID-19 contributing to the decrease in our total revenue for the first quarter. Current quarter gross profit margins decreased from 82% in the prior year quarter to 75% in the current quarter, reflecting the transition of portions of our business from a licensing model to a wholesale model. However, gross profit margins from product sales increased from 25% in the prior year quarter to 38% in the current quarter as a result of achieving greater efficiencies and economies of scale as our wholesale business continues to grow. Our operating expenses were $8.2 million up from $7.8 million in the prior year quarter. The current quarter now reflects higher depreciation and amortization expense, primarily resulting from the accounting change for our Judith Ripka trademarks from an indefinite life asset to a finite life asset effective January 1st. This non-cash increase in expense was largely offset by decreases in both cash and stock-based compensation costs as compared with the prior year quarter. Further contributing to an increase in Q1 operating expenses was a $200,000 bad debt expense triggered by reserves for account receivable collectability for account debtors that had been hit hard by the impact of COVID-19. Interest and finance expense was $0.29 million compared with $0.48 million to the prior quarter. The prior year amount notably included a loss on extinguishment of debt resulting from the February 2019 term loan amendment. Absent this prior year loss, our interest and finance was essentially flat year-over-year. GAAP net loss was approximately $0.8 million for the first quarter of 2020 or minus $0.04 per basic and diluted share compared with a GAAP net income of $0.1 million or $0.01 per basic and diluted share to the prior year quarter. After adjusting for certain cash and non-cash items, non-GAAP net income for the current quarter was approximately $0.1 million and non-GAAP earnings per share was zero per diluted share, compared with approximately $1.5 million or $0.08 per diluted share for the prior year quarter. Adjusted EBITDA for the current quarter was approximately $0.6 million compared with approximately $2 million in the prior year quarter. 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 quarterly report on Form 10-Q present a reconciliation of these items with the most directly comparable GAAP measures. Now, let's turn to our cash position. As of March 31, 2020, the company had unrestricted cash and cash equivalents of approximately $4.2 million compared with cash of approximately $4.6 million at December 31, 2019. This $0.4 million net decrease in unrestricted cash was primarily attributable to investments in CapEx, including our ERP system, which is nearly complete and partially offset by cash flow from operations. There were no debt service payments required in the current quarter due to the recent amendment of our term loan facility in April. Looking at our debt obligations, as of March 31 2020, total liabilities were approximately $42.1 million, representing a decrease of approximately $2.6 million since the fiscal year began. The total liabilities at the end of March include $18.8 million of term debt, $0.9 million of contingent obligations, $11.1 million of operating lease obligations, and $6.9 million of net deferred tax liability. Of these amounts, the repayment of the contingent obligation is generally required to be paid in shares of the company stock. As of March 31, 2020, total term liabilities were $9.3 million inclusive of approximately $3.4 million of the current portion of long-term debt and $1.8 million of the current portion of operating lease obligations. Our working capital at March 31, 2020 excluding the current portion of lease obligations was approximately $8 million, compared with $9.5 million at December 31, 2019. At March 31, 2020, our total bank debt net of cash was $14.6 million to approximately 2.5 times adjusted EBITDA for the trailing 12 months. Finally, as Bob mentioned, we continue to take appropriate actions to reduce our costs and conserve cash in the light of the current economic environment resulting from the COVID-19 pandemic. We're also taking action to provide additional liquidity and flexibility. As previously reported, last month, we restructured and refinanced our senior term debt to allow for reduced principal payments and cover relief throughout the end of this year. And also in late April, we applied for and received an unsecured low interest loan of $1.8 million through the Payroll Protection Program under the CARES Act. And based on how we plan to use the proceeds, we anticipate that most, if not all of this loan, will be forgiven pursuant to the regulations under the CARES Act. And with that, I would like to turn the call back over to Bob. Bob?

Thank you, Jim. This concludes our prepared remarks. Operator?

We will now begin the question-and-answer session. [Operator Instructions]. There are no questions in queue. This concludes the question-and-answer session. I would like to turn the conference back over to Bob D'Loren for any closing remarks.

Thank you, operator, and ladies and gentlemen, thank you all for your time this evening. We greatly appreciate your continued interest and support in Xcel Brands. The impact of the COVID-19 pandemic on the retail industry has been devastating. We believe the challenges will continue for the next several years as perhaps retail and wholesale consolidation and store closures continue and/or accelerate. Notwithstanding these challenges, we continue to believe that Xcel’s infrastructure and omni-channel distribution 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 period of enormous disruption. 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.