Xcel Brands, Inc. (XELB) Q2 2021 Earnings Report, Transcript and Summary

Thank you for standing-by, this is conference operator. Welcome to the Xcel Brands Second Quarter 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 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 and well. 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 second quarter ended June 31, 2021 which went out a short while ago. And in addition, the company expects to file with the Securities and Exchange Commission its quarterly report on Form 10-Q by August 16. The release and 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 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, the ongoing COVID-19 pandemic continues to have a significant impact on the company's business, financial condition, cash flow and results of operations. There remains significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of these circumstances mean what is set on today's 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 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 on the company's earnings release or to Part 1, Item 2 of the Form 10-Q for a reconciliation of non-GAAP measures. And now, I am pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob, please go ahead.

Thank you, Andrew. Good evening, everyone and thank you for joining us. I hope all of you and your families are staying safe and healthy. I will start today's call with some brief opening remarks followed by some operating highlights and insights into 2021. After that, our CFO, Jim Haran, will discuss our financial results in more detail. The second quarter of 2021 was a quarter of growth and expansion for our business. As we grew our top line revenues by over 100% from second quarter of 2020 and nearly 40% from the first quarter of 2021. This growth came from a combination of organic sources including the continued rebound in our wholesale apparel sales, dramatic growth in our wholesale jewelry business, the opening of our Judith Ripka Flagship Jewelry store and the strong growth in our e-commerce businesses and inorganic sources notably the April 1 2021 acquisition of the Logo Lori Goldstein brand, I am pleased with the momentum we have built and as we move towards the second half of 2021, we are eager to capitalize on that momentum and accelerate the expansion of our business. We expect continued strong growth in Q3 and Q4 of this year. And that our future quarterly revenues will eclipse pre pandemic levels. That said, we are planning a slower recovery in our wholesale apparel business which is driven by our conservative approach to inventory management given the current global trends in increased product costs, logistics and warehousing costs increases, delivery delays and the related margin decrease in certain apparel products. Now, I'd like to turn to briefly discuss our business by channel distribution. Our interactive television business led by our Isaac Mizrahi, live and Logo Lori Goldstein businesses is doing exceptionally well. Isaac Mizrahi lives is exceeding plan by 5% and is up almost 10% from the prior year. Our currently acquired or I should say our recently acquired Lori Goldstein business was reprogrammed to primetime shortly after our acquisition and has added significant growth to our interactive TV business. As a result, our interactive TV revenues are up 36% in Q2 compared with the prior year quarter, and we continue to grow certain of our brand on HSN and international interactive TV channels, including the shopping channel in Canada and TV SN in Australia, which are included in our wholesale sales results. Interactive television continues to be a core business for Xcel brands, and we're excited to see our businesses in this channel continue to do incredibly well. Turning now to our direct to consumer e-commerce and live streaming businesses. Our Judith Ripka Longaberger combined ecommerce sales are up almost 150% compared to the prior year quarter and are up over 220% year-to-date, compared with the same period in the prior year. New memberships are up 33% in Longaberger and active stylists are up 167% for the first six months. In June, we conducted our first due to thrift go live streaming event which we were pleased with the results and we plan on conducting the second live streaming event in September for our Judith Ripka brand. Since our February premiere show, we have averaged one live streaming event per month for Longaberger, which has been a valuable resource contributing significantly to the sales and continued growth of the business. In fact, this past Monday night, we held our most successful show to date and achieved over 100,000 in sales or $3,000 per minute. These are outstanding numbers. Given the current growth rate in our Longaberger stylist community, we believe that our shows can generate 1 million or 15,000 per minute by the end of 2022. In this new channel distribution, we are not waiting for the future to greet us. We are in fact reaching out to greet it. Now turning to our wholesale businesses, our apparel wholesale business continues to improve since the outbreak of COVID last March. Although we continue to take a cautious approach as it relates to our inventory management for the near term. We are not going to take inventory positions without committed sales or clear demand forecasting for our dropship programs. accordingly. We have re forecasted this business in line with our inventory risk tolerance for 2021. We will use this time to further our goal of making the best possible apparel products. Our Judith Ripka wholesale business is up dramatically at over 156% from last year, we opened over 47 new independent jewelry doors and are on plan to be at over 75 doors by year end. Our dropship programs with retailers such as Saks are doing well and we plan to open more premium retail dropship accounts by year end, with those programs showing 500% growth for the first half of 2021. Finally, we are planning a live stream event with our C. Wonder branding in action with the launch of our new spring 22 line at Walmart. We believe that live streaming will provide a significant important boost to this business. We ended the first half of 2021 and C. Wonder up 33% in apparel 47% in footwear and 19% in handbags, and 33% in luggage and belts and believe we have now settled at retail price points that work for the Walmart customer. We continue to see improvements and the unprecedented impacts of the COVID-19 crisis and I'm excited by the opportunities we are pursuing to create value in the coming quarters and years. We are encouraged by the growth in all of our channels of distribution and we are very optimistic about our continued success. Now, I would like to turn the call over to Jim to discuss our financial results for the quarter.

Thanks, Bob. And Good evening, everyone. I will briefly discuss financial results for the quarter in six months ended June 30, 2021. Please note that our financial results are described more fully and a quarterly report on Form-10Q which we plan to file with the SEC by August 16. Total revenue for the second quarter of 2021 was $10.8 million, representing an increase of approximately $5.7 million or over 100% from the second quarter of 2020. This increase in revenue was primarily driven by wholesales continued to rebound and recover from the initial outbreak of COVID-19 and also by licensing revenues generated by the April 1 2021 acquisition of the Lori Goldstein brand. Net sales increased by approximately $4 million in the current quarter to $4.5 million. This increase was primarily attributable to higher wholesale power sales, as retail sales were severely negatively impacted in the prior year quarter during the initial outbreak of the COVID-19 pandemic. Jewelry wholesales also contributes significantly to the year-over-year increase in sales while e-commerce sales of Longaberger branded products and Judith Ripka brand jewelry also grew substantially from the prior year quarter. From a trend perspective, this was a fourth consecutive quarter of product sales growth, with a net product sales increasing by approximately 30% as compared with the first quarter of 2021. Net licensing revenue increased by approximately $1.7 million in the current quarter to $6.2 million. This increase in licensing revenue was primarily attributable to the recent acquisition of the Lori Goldstein brand, as well as the continued strong performance by Isaac [0:11:49] brand. These increases were partially offset by a decline in licensing revenue attributable to transitioning of the [0:11:58] wholesale brand to a wholesale supply model. Our operating expenses were $9.4 million for the current quarter, up from $5.4 million in the prior quarter, primarily driven by increases in payroll and marketing costs, to help fuel growth and our wholesale and direct to consumer businesses, as well as expenses related to the Lori Goldstein brand. It is important to note that the prior quarter operating expenses reflected the impact of cost reduction actions that were taken by management in response to the COVID-19 pandemic, including temporary reductions of employee compensation and cutting non-essential costs, while the current quarter reflect post COVID normalized expense levels. Additionally, the second quarter of 2020, including the benefit of government assistance, received through the paycheck protection program under the CARES Act, which we recognize $1.6 million as a reduction to prior quarter expenses. Interest in finance expense for the quarter was $1.4 million compared with $0.3 million for the prior year quarter. This increase was attributable to the April 14 2021 refinancing of a term debt including $0.8 million loss on extinguishment of long term debt. Subsequent higher interest expense due to higher principal balance and high interest rate on that new term loan agreement. Net loss excluding non-controlling interest was approximately $1.6 million for the current quarter or minus $0.08 per basic and diluted share, compared with a net loss of $1.3 million or negative $0.07 per basic and diluted share for the prior year quarter. After adjusting for certain cash and non-cash items, non-GAAP net loss for the current quarter was approximately $0.1 million or minus $0.01 per share, compared with non GAAP net income of approximately $1.2 million or $0.06 per share in the prior year quarter. Adjusted EBIDTA for the current quarter was $0.9 million, compared with $1.7 million for the prior year quarter. The increase in certain operating costs mentioned above, along with the prior quarter impact of government assistance received through the paycheck protection program were the primary drivers the year-over-year change in EBIDTA. As a reminder, non GAAP net income, non GAAP diluted EPS and adjusted EBIDTA or non GAAP on all of the terms. Our earnings press release and Form-1oQ present a reconciliation of these items with the most directly comparable GAAP measures. Moving to our six month results. In the first six months of 2021 total revenue increased approximately $4 million or 27% over the prior six month period to $18.6 million primarily driven by net product sales. Net product sales to the current six months grew approximately $3.6 million to $8 million, mainly due to the combination of higher jewelry home sales and higher sales of Longaberger brand new product through e-commerce, social commerce and live streaming. The rebound and recovery in wholesale also contributed significantly to the year-over-year increase in net product sales. Gross Margin for net sales remain constant at approximately 40% for both the current and the prior six months. Net licensing revenue for the current six months increased by approximately $0.4 million to $10.5 million. Similar to the quarterly results this increase for the six month period was driven by the recent acquisition of the Lori Goldstein brand and continued strong performance of the Isaac Mizrahi brand. Operating expenses for the six months ended June 30 2021 increased approximately $4.3 million from the prior period to $17.9 million. This increase was mainly driven by a combination of the highest salary costs, marketing expenses, expenses related to the Lori Goldstein brand, shipping warehousing costs and consulting fees and partially offset by lower bad debt expense. As with the quarterly results, it's important to keep in mind that the prior year six month operating expenses reflect the impact of cost reduction actions in response to COVID-19 pandemic and a $1.6 million benefits received through the paycheck Protection Program. Interest and finance expense for the current six months was $1.7 million compared with $0.6 million for the prior year comparable period. This increase was attributable to the previously mentioned refinancing of our term loan debt. Net loss excluding non-controlling interest was approximately $4.1 million for the current six months or minus $0.21 per basic and diluted share, compared with a net loss of $2.1 million or $0.11 per basic and diluted share for the prior year six months. After adjusting for certain cash and non-cash items, non- GAAP net loss for the current system were approximately $1.6 million or minus $0.09 per share, compared with non GAAP net income of approximately $1.4 million or $0.07 per share in the prior year six months. Adjusted EBIDTA for the current six months was essentially breakeven compared with $2.5 million for the prior six months. The increase in certain operating costs mentioned above along with the prior impact of government assistance with the primary drivers of the year-over-year change in EBIDTA. Turning now to our cash and our liquidity. As of June 30 2021, the company had unrestricted cash and cash equivalents of approximately $4.8 million, compared with cash flow approximately $5 million at December 31 2020. This change is the result of $7.76 million of cash generated from financing activities, including the refinancing of our term loan debt as well as a $1.5 million draw on a revolving loan facility and offset by cash pays for the acquisition of the Lori Goldstein brand. Cash using operations and inventory built to meet expected increases in wholesale and direct to consumer businesses. Our working capital, excluding the current portion of operating lease obligations increased from $7.9 million at 2020 year end to $8.7 million at June 30 2021. And finally, our total debt at June 30 2021 was $25.9 million, including $24.4 million of term debt and $1.5 million under our revolver. And our net debt, net of cash was approximately $21.1 million. And with that, I would like to turn the call back over to Bob. Bob?

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

[Operator Instructions] The first question comes from Jim Dowling from Jefferies Capital. Please go ahead.

Hey, Bob, I have two questions for you. The first one is could you go into some more detail on the change in the Halston business model? What's the significance of it and the outlook?

Sure. How are you Jim? So the transition Halston from a licensed model and interactive to a wholesale model and consolidated our design teams. We're offering the same products now and department stores or as we are with interactive television worldwide, and we moved the brand from QVC to HSN. As you know, QVC acquired HSN as a fairly recent acquisition there and we see a lot of opportunity at HSN with the brand. And with apparel as a category, it's not as apparel is not as core to the business as it is at QVC. So the primary impact was where we had GMRs that we were coming off of with the business at QVC. It's now transitioned to a margin business much more profitable for us, after we get it ramped to that that crossover point where the margin dollars are exceeding where the minimum royalties were.

What's the timing on that?

We expect that, you know, if it wasn't for COVID, we would have already crossed over, that really took the wind out of our sails with establishing that as a wholesale business, not only an interactive TV, but in various department stores around the country. I would say by the end of this year, we probably will cross over that and adapt from there.

Okay. My second question is, I infer your comments about C. Wonder and Walmart as being positive weather. So my question is, is it somewhat positive? Is it outstandingly positive? Or someplace in between? Can you give us some color on that?

Sure, I would. I would say that it's somewhere in between, you know, unit sales across all those categories are up. As you know, we've been experimenting with different price points with Walmart. And this fall season, we adjusted the retails to now match where Walmart is with similar brands on the retail floor to help to accelerate this sell through [ph]. And we are in discussions with Walmart now about a live stream event for spring with a new spring product where we're all excited, and Walmart with the spring collection. And we do think that we can be very helpful to Walmart and their live streaming efforts. And I think that that will help accelerate things there if it all goes as planned.

Thank you.

The next question comes from Howard Brous with Wellington Shield. Please go ahead.

Yes, hello. I'm calling on behalf of Howard Brous, would you be able to give us an update on the acquisition?

Are you referring to Lori Goldstein or Longaberger?

Lori [ph].

Okay. So I'll do Lori Goldstein first, it's going very well. For us the transaction first and foremost, will be accretive this year. And we were able to get the brand position back into primetime almost the day after closing. And working with the current manufacturing partner that produces the Lori Goldstein apparel that is a royalty model for us as a third party that does the manufacturing. And the goal here now is to get that business back on track back to where it was. And certainly all the trends since the acquisition are that we are headed there and that could be nearly double the volume that where we acquired it. So lots of upside there for us, Longaberger is going exceedingly well for us. It is a social commerce model. It is powered by live streaming. We acquired it. Last year out of bankruptcy we ended the year last year on a run rate of about $1 million we think by the end of this year, it'll be on a run rate of $6 million to $7 million. Recruiting which drives the business or nano influencers that we refer to a stylist is growing dramatically. And to maintain margins in that business are quite strong about a third, maybe a little more today, the products of dropship by vendors for us. So it's somewhat working capital light and the products that we do hold it turning fast. So that's the update on a lot of our very dramatic growth there.

Okay. Thank you very much.

There are no further questions at this time. I'd like to turn the call back over to Mr. D'Loren for any closing remarks.

Thank you, operator. Ladies and gentlemen, as always, thank you for your time this evening. We greatly appreciate your continued interest in support in Xcel brands. And as I always conclude, stay fit, eat well and be healthy.

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