Xcel Brands, Inc. (XELB) Q4 2021 Earnings Report, Transcript and Summary

Good morning. Welcome to Xcel Brands Fourth 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 call is being recorded. I would now like to turn the call over to Andrew Berger of SM Berger & Company. Thank you. Andrew, you may begin.

Good morning, everyone, and thank you for joining us. We appreciate your participation and interest and hope that you are all safe and well. 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 access to the earnings release for the fourth quarter ended December 31, 2021, which went out a short while ago. And in addition, the company will file with the Securities and Exchange Commission its annual report on Form 10-K by April 15, 2022. 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. The dynamic nature of the current macroeconomic and geopolitical environment means what is said 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 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 that 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 to the company's earnings release or Part II, Item 7 of the Form 10-K for a reconciliation of non-GAAP measures. And 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 will start today's call with some brief opening remarks followed by some operating highlights and insights into our business in 2022 and beyond. After that, our CFO, Jim Haran, will discuss our financial results for Q4 and the full year 2021 in more detail. We continue to show strong top line revenue growth year-over-year across virtually all of our businesses despite economic headwinds we encountered in the fourth quarter. We ended 2021 with approximately $38 million of top line revenues, which is $8.5 million or 29% above 2020, and we believe that our growth would have been even stronger if not for QVC warehouse fire in the fourth quarter that impacted our QVC apparel sales. The majority of 2021's sales growth came from our wholesale and direct-to-consumer businesses, which is on a full year basis -- which has on a full year basis generated more sales than before COVID-19. We believe our investments in people, technology, live streaming, design, product development and supply chain management are now greatly benefiting the company at a time when companies in our industry, including ours, are dealing with margin pressure due to cost increases in logistics and raw materials costs. We believe that these investments position us well to grow our business despite any economic headwinds that may come our way. Before I discuss our 2021 results, I'd like to address the significance of the current live streaming opportunity to better explain why we're excited by it and why we believe that we're uniquely positioned to leverage this new sales channel for growth in both our Longaberger platform as well as in other businesses that we are developing. The Longaberger business is at the forefront of technology and social commerce which we expect will drive the biggest shift in consumer buying behavior since the first e-commerce retailer began selling consumer goods. We have predicted for the past 11 years and were founded with a mission to lead the industry in the convergence of shopping, entertainment and social media. That mission has manifested itself through a shift in consumer buying behavior towards interactive video combined with e-commerce or live streaming. Over the past year and most recently at the Shoptalk industry conference, industry professionals have discussed the importance of live stream and its implications for retailing, especially as our ability to rely on retargeting and e-commerce marketing has been impacted by changes in technology and privacy regulations. Most agreed that video went from a nice-to-have feature for sales and marketing to an essential marketing strategy, given this convergence, especially in countries like China, where live streaming sales have grown from just $3 billion in 2017 to over $305 billion in 2021, with nearly 500 million people buying via live streaming last year according to widely published industry reports. This is all just getting started here in the U.S. outside of QVC, HSN and other linear interactive TV networks. In fact, over the past 6 months, many brand owners and retailers have started researching or searching for solutions for live streaming and major social media platforms and testing their own versions of shoppable video. Over $9 billion in capital was invested in live stream startups over the past 12 months according to widely distributed industry reports. The big tech companies will go for it all, including commerce, payment processing and entertainment and specialty live stream retailers will emerge and succeed. Xcel has deep expertise in how to make live stream video work and scale with a proven track record of over $3 billion in sales and 10,000 production hours through interactive TV, on television networks around the world and in our own live streaming platforms. Now imagine a specialized product classification platform focused on home products that is not a single live stream or shoppable video, but rather a destination where shoppers could explore scores of curated home products and live videos hosted by authentic artisans, home designers and influencers is always available to view 24/7, 365, all in a place where shoppers can communicate with live stream show-hosting guests, ask questions in real time through on-screen chat that is visible to all viewers. One that even allows shoppers who invited their friends and family to join them and communicate directly with each other in real time. And then when the impulse to buy happens, the customer simply clicks on one button to purchase without interrupting the video live stream show. Well, this type of platform would be extraordinary and the good news for our shareholders is that it not only exists with Longaberger, but is working and is highly scalable. Xcel as a pioneer and industry leader in live stream shopping has reimagined the online e-commerce shopping experience. And we can replicate this platform across other brands and various product classifications and categories in similar specialist platforms, for example, apparel. In fact, we can and expect that we will assist third-party retailers seeking to leverage our expertise and technology in their search for a live streaming solution. We believe that this will help us to better partner with these retailers in selling our products while serving as a live stream resource for them. We expect to make some announcements along these lines soon. Market research, including extensive industry data shows that consumers have grown bored with looking at static images and reading reviews when making purchase decisions. Driven by the pandemic, consumers have now developed a preference for online shopping over traditional retail and are drawn to things that are social, fun, entertaining and build communities. This is exactly why live streaming was an industry focus at this year's Shoptalk conference. Longaberger's new social shopping and live streaming platform is not only the future of retailing for business to consumer commerce, but also the next level business-to-business platform for artisans, designers and brands through Longaberger's home marketplace for unique home products, all supported by technology, live streaming and a growing community of over 5,000 members and nano-influencers and 250,000 customers that have come together in just 24 months. Longaberger's attribution technology allows vendors to leverage a powerful built-in affiliate marketing capability through our fast-growing base of nano-influencers, while creating an attractive income earning opportunity for these nano-influencers who get paid marketing fees for people that view the Longaberger burger live stream events and purchase products. We expect that this feature and unique home marketplace will drive many more nano-influencers to join Longaberger from all over the world, producing a flywheel effect in growing the Longaberger community of nano-influencers and customers and product sales. This platform is also built to address the growing gig economy. According to Oxygen, more than 1/3 of Americans have started a new side hustle during the pandemic, and we're excited with the potential of the Longaberger platform as well as other live stream platforms we're developing in other specialty categories and verticals. With Longaberger up 273% year-over-year, and our pilot live stream shows for Judith Ripka Jewelry performing well, we believe the future is now, and we plan to grow all of our businesses through this new and powerful sales channel. Now I'd like to briefly discuss our business by division and channel of distribution. Our core interactive TV business was on pace for a record year in 2021. Unfortunately, one of QVC's warehouses experienced a devastating fire in mid-December, which significantly impacted the programming of certain shows, including a large planned TSV show, which resulted in a substantial loss of Q4 revenue. Despite the loss of revenue caused by the fire, revenue from our Isaac Mizrahi brand was up 5% from the prior year and our total interactive TV business revenues were up 6% from last year. We continue to grow certain of our brands on HSN and with international interactive TV channels. We expect that interactive TV will present a significant opportunity for us in 2022 and beyond with both our existing brands as well as new opportunities that we hope to announce soon. Finally, we believe interactive TV is the grandfather of live streaming in the U.S. Interactive TV retailers are on the verge of a retail evolution with digital live streaming, and we are excited to be at ground zero in this new digital channel with Qurate as a retail partner. Turning now to our direct-to-consumer e-commerce and live streaming businesses. Our Judith Ripka and Longaberger e-commerce sales were up 24% and 273%, respectively, compared with the prior year. The number of Longaberger brands, stylists or nano-influencers that are the driving force of live streaming in this business was up 48% in 2021. We expect this growth rate to accelerate in 2022. Now turning to our wholesale businesses. First, let me start by saying that we believe that this business, if managed properly by controlling third-party retailer markdowns and promotions, door and product allocations management, et cetera, is necessary for us to be everywhere where our customers shop. Our apparel wholesale business was up over 25% for the full year compared with last year. We rightsized our margins heading into 2022 by adjusting retail pricing for inflation without sacrificing product quality. In fact, our apparel products are seeing strong sell-throughs across the board in 2022 and has led to increased distribution of our brands through new retail accounts going to fall '22, as well as a recent distribution deal we just signed in the U.K. Our plan for 2022 is to continue to introduce great styles that we believe will have significant sales growth and improved margins in our wholesale apparel business and continue to strategically grow our wholesale customer base and drop ship accounts. Looking more closely at our Judith Ripka wholesale jewelry business, the business was up dramatically in 2021 at over 330% as compared with the prior year. Our margin in this business remained strong, and we expect to more than double sales again in 2022. In summary, as we close out our 2022 1st quarter, our QVC business is poised for another great year and continued growth. We expect expansion in this business segment and channel, both through our existing brands as well as through our new opportunities, including live streaming that leverage our deep expertise with live streaming shopping and our relationships with both QVC and HSN. And we expect continued acceleration of expansion of our direct-to-consumer and wholesale businesses driven by great products and our ability to leverage our investments in infrastructure and systems with a return to profitability for the year. Overall, I believe, 2022 will be a transformative year for Xcel brand. We entered the year with a strong and compelling platform that is well positioned for both the current and emerging retail environment. As a result, we have the strongest pipeline of growth opportunities we've had in our history, and I am excited by the actions we are pursuing to create long-term value in the coming quarters and years. Now I'd like to turn the call over to Jim to discuss our financial results for the quarter and full year.

Thanks, Bob, and good morning, everyone. I will briefly discuss financial results for the quarter and fiscal year ended December 31, 2021. Please note that our financial results are described more fully in our annual report on Form 10-K. Total revenue for the fourth quarter of 2021 was $8.1 million, representing an increase of approximately $0.6 million or 8% from the prior year quarter. This increase in revenue was primarily driven by significant growth in our wholesale and direct-to-consumer businesses where net sales grew by $1 million, or 39%, partially offset by a small decline in our net licensing revenue, which was largely related to a warehouse fire at QVC. Prior to the warehouse fire, licensing revenue was on track to be up over 15% for the fourth quarter. For the full year, total revenue increased approximately $8.5 million to $37.9 million, or 29% over the prior year. The full year growth in revenue was primarily driven by significant improvements in our wholesale and direct-to-consumer businesses, including Judith Ripka, Longaberger and wholesale apparel which altogether accounted for $6.9 million of the total revenue increase and represented a 75% increase from prior year sales. The remaining $1.6 million of the year-over-year revenue growth was driven by licensing activity, including the April 2021 acquisition of the Lori Goldstein brand, which was partially offset by the transition of the H Halston brand to a wholesale supply model. Gross profit margin from sales declined from approximately 41% in fiscal year 2020 to approximately 34% in fiscal year 2021, primarily driven by the sell-off of aged inventory, increased freight costs, labor and raw material costs. This trend was more pronounced in the fourth quarter, and heading into 2022, we proactively adjusted our pricing to address the margin pressure caused by inflation and domestic and global economic trends. Our operating expenses were $12.2 million for the current quarter, down significantly from $20.4 million in the prior year quarter, primarily driven by asset impairment charges in the prior year quarter which were partially offset by a return to normalized payroll costs, costs associated with our newly acquired Lori Goldstein brand, retail store operations and higher shipping, warehousing and logistic costs. For the full year, operating expenses were $39.8 million, down from $40.4 million in 2020. In addition, the current year includes higher depreciation and amortization expense primarily related to the Lori Goldstein brand. The previously mentioned increase in certain categories of operating expenses include our continued investments in growing our wholesale and direct-to-consumer businesses, which we expect will begin to contribute strongly to our bottom line in 2022. It is also important to note that 2020 operating expenses reflect the impact of cost reduction actions that we took in response to the COVID-19 pandemic, including temporary reductions of employee compensation and also reflect the benefit of government assistance received through the Paycheck Protection Program. Our 2021 operating expenses do not include these items. Net loss excluding noncontrolling interest was approximately $6.9 million for the current quarter or minus $0.35 per share. And on a full year basis, net loss was approximately $12.2 million or minus $0.63 per share. Adjusted EBITDA for the current quarter was negative $3.5 million compared with a positive $0.2 million for the prior year quarter. Adjusted EBITDA for the years ended December 31, 2021, and 2020 was negative $2.5 million and positive $4.1 million, respectively. As discussed, while we saw positive growth across virtually all of our businesses, our fourth quarter loss was primarily due to the QVC warehouse fire in the fourth quarter and margin impact for the sell-off of certain apparel inventory, both of which impacted our fourth quarter EBITDA. We believe that a material portion of the fourth quarter 2020 [ earning ] impacts, such as the QVC warehouse fire and the margin impact from sell-off of certain inventory were nonrecurring and were temporary. Also, we believe that we have reacted appropriately to the impact of inflation on our margins. And finally, while the QVC warehouse fire continued to have some minor impact to our first quarter sales on interactive TV, we believe that we were past this, and will not expect to see any material impact from this for the rest of 2022. As a reminder, non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA are non-GAAP unaudited terms. Our earnings press release and Form 10-K present a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our balance sheet. As of December 31, 2021, the company had unrestricted cash and cash equivalents of approximately $4.5 million and positive net working capital of $7.9 million, excluding the current portion of our lease obligations. Our term debt loan at December 31, 2021, was $29 million and bank debt net of cash was approximately $24.5 million. Lastly, and in closing, we believe, based on our forecast for 2022, the company will return to profitability and that we're uniquely positioned for strong growth heading into this new social commerce cycle that we're all entering. 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] It seems there are no questions at this time. I'll turn the floor back over to Mr. D'Loren for closing comments.

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.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.