Xcel Brands, Inc. (XELB) Q2 2024 Earnings Report, Transcript and Summary

Thank you for standing by. I'd like to welcome everyone to the XELB's Q2 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Paul Kuntz. Please go ahead.

Good afternoon, everyone, and thank you for joining us. Welcome to the Xcel Brands second quarter of 2024 earnings call. We greatly appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert D'Loren; Chief Financial Officer, Jim Haran; and EVP of Business Development and Treasury, Seth Burroughs. By now, everyone should have had access to the earnings release for the quarter ended June 30, 2024, which went out last evening. And in addition, the company's filing with the Securities and Exchange Commission its quarterly report on Form 10-Q today. 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 on 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 environment means that 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, including non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA. Our management uses these non-GAAP measures 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 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, unless 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, 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 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, Paul. Good morning, everyone, and thank you for joining us today. I'd like to start today's call with a brief update on our performance for the second quarter and our outlook for the remainder of the year. After that, our CFO, Jim Haran, will discuss our financial results in more detail. Before I cover the second quarter highlights, I would like to cover the sale and divestiture of the Lori Goldstein brand for a variety of reasons. It was determined that it would be in the best interest of the company to sell the brand back to its namesake and allow us to focus on our growing brands and potential new opportunities. In doing so, we recognized a net gain of $3.8 million and reduced liabilities by $6 million. Turning to the second quarter. We made continued progress on executing our project fundamentals plan to transition fully to a core working capital licensing business, growing our top-line licensing revenues while also improving our bottom line results for the quarter and going forward. Our net licensing revenues grew 16% year-over-year and 29% for the first quarter, while looking at our bottom line, our non-GAAP earnings for the quarter improved by approximately 85% from last year, and our adjusted EBITDA approach breakeven during the second quarter. As we continue to gain traction and accelerate growth in future quarters, we expect our licensing revenues to continue to grow and our bottom line operating results to continue to improve. Based on all of our progress with project fundamentals, our strategic plan to get back to what made us successful in our core business over the years and the organic growth in our brands, we expect to grow strongly going forward. The C. Wonder brand is performing well on HSN with second quarter sales exceeding HSN's plan by 6%. The second half of 2024 is planned up from the first half with expectations of achieving in excess of a 60% year-over-year growth rate. We expect to see retail sales volumes continue to grow strongly beyond 2024 on HSN and at other retailers. We are on track to launch additional new categories of footwear and handbags in spring of 2025. Our new brand, Tower Hill by Christie Brinkley, launched on HSN during the second quarter, exceeding plan by 40%. Additional airtime has been scheduled for the remainder of the year with significant growth plan for 2025. Separately, the brand will introduce additional categories of products outside of HSN starting in spring of 2025. In addition, we have received strong interest from potential licensing partners to the brand across multiple categories, including footwear, bags, beauty and skin care. One last note on HSN. We expect to announce the launch of another celebrity designer brand on HSN before the end of this year and another food and kitchen products brand in Q1 of 2025. Looking at our Judith Ripka business, second quarter royalties increased from first quarter by 45%. This is the result of greater product assortments. We look forward to seeing strong sales momentum carry forward throughout 2024 and 2025. As previously discussed, G-III launched Halston apparel this fall. In addition, they expect to begin shipping footwear and bags later this year for spring 2025. We expect revenues from this license to begin to pick up later this year and grow strongly in 2025 and beyond. As previously mentioned, Orme soft launched its video and social commerce marketplace during the second quarter. For Xcel, Orme represents a natural extension of our expertise in video commerce over television. The Orme team is doing a great job building awareness for the app and onboarding premier brand. They are pleased with the results to date. We believe this marketplace has the potential to transform video and social commerce in the U.S., and it will achieve its goal to democratize the influencer and creator economy. We are very excited by the potential of Orme. And now I'd like to turn the call over to Jim to discuss our financial results. Jim?

Thanks, Bob, and good morning, everyone. I will now briefly discuss our financial results for the quarter of six months ended June 30, 2024. Total revenue for the second quarter of 2024 was $3 million, representing a decrease of approximately $3.8 million from the second quarter of 2023. This decline was driven by the decrease in net product sales to effectively zero due to an exit from both wholesale operating businesses as part of our project fundamentals plan that began in 2023. The only product sales during the current quarter were approximately $100,000 related to the final sale of some residual June inventory, which have now been fully liquidated. Possibly offsetting the year-over-year decrease in net product sales was an increase of approximately $0.4 million or approximately 16% in net licensing revenue mainly attributable to the combination of a Halston national license with G-III apparel, significantly increased revenues generated by the C. Wonder business on HSN and the launch of Tower Hill by Christie Brinkley in May 2024. On a year-to-date basis, revenue for the current six months decreased by approximately $7.7 million to $5.1 million, again, driven by net product sales to effectively zero following the discontinuance of our wholesale operations. The decrease in net product sales was partially offset by an increase of $0.4 million or 8% in net licensing revenue due to the combination of new licensing agreements and brand launches previously mentioned. Our direct operating costs and expenses was $3.1 million for the current quarter, down by $2.1 million or 40% from $5.2 million in the prior year quarter. On a year-to-date basis, the direct operating costs and expenses decreased from $12.1 million for the prior year quarter to $7.1 million for the current quarter, representing a decline of approximately $5 million or 42%. These decreases for both the quarterly and year-to-date comparative periods were attributable to the discontinuance of the wholesale business in the prior year, which included reductions in staffing levels as well as related reductions in other overhead costs. With the project fundamental initiatives substantially completed, going forward, we expect our average direct operating costs to be approximately $2.5 million per quarter. Aside from direct operating cost expenses, our operating results in 2024 notably included a $3.8 million gain on the divestiture of the Lori Goldstein brand as well as asset impairment charges of $1.2 billion and $3.5 million for the current quarter and currently six months, respectively. We sold the Lori Goldstein brand on June 30, 2024 in exchange for approximately $6.1 million of non-cash proceeds, including relief from certain earnout payments and release of contingent obligations of the contractual agreements with the buyer and recognized a net gain on the sale of $3.8 million and lowered our balance sheet liabilities by $6 million. The aforementioned impairment charges recognized in the first and second quarters of this year were all related to the exit from and sublease of our prior [indiscernible]. Overall, we had net income for the second quarter of 2024 of approximately $0.2 million or $0.01 per share compared with a net loss of $3.5 million or minus $0.18 per share in the prior year quarter. On a non-GAAP basis, we had a net loss for the current quarter of $0.3 million or minus $0.01 per share, which represents an 85% improvement from the non-GAAP net loss of $2.1 million or minus $0.10 per share in the second quarter of 2023. Finally, adjusted EBITDA was negative $40,000 or approaching breakeven for the current quarter representing a year-over-year improvement of approximately $1.3 million or over 95% from the negative $1.3 million of adjusted EBITDA in the prior year quarter. With a new cost structure in place and projected revenue growth, management anticipates achieving positive quarterly EBITDA in the back half of the year. Now that we have rightsized our cost structure, our non-GAAP measurements continue to improve in future periods as licensing revenues are projected to grow. On a year-to-date basis, we had a net loss, excluding non-controlling interest for the current six months of approximately $6.1 million or minus $0.28 per share compared with a net loss of $9.1 million or minus $0.46 per share in the prior year six months. On a non-GAAP basis, we had a net loss for the current six months of $2.1 million or minus $0.10 per share, which represents an approximately 60% improvement for the non-GAAP net loss of $5.6 million or minus $0.28 per share in the prior year six months. Adjusted EBITDA on a year-to-date basis was negative $1.6 million represented a year-over-year improvement of approximately 50% from the negative $3.3 million of adjusted EBITDA in the prior year comparable period. Once again, I would like to take this opportunity to remind everyone the non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA on non-GAAP [indiscernible]. Our earnings press release and Form 10-Q present a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our balance sheet and liquidity. As of June 30, 2024, the company had total cash and cash equivalents of approximately $1.7 million, of which $0.7 million was restricted. Our net working capital, excluding the current portion of lease obligations and deferred revenue was approximately $1.1 million, which we believe is adequate and appropriate under our current licensing plus working capital-light business model. Since executing our project fundamental plan, our cash usage has decreased significantly and is projected to continue to improve with the launch of Halston by G-III and continued growth in our other brands. And with that, I'd like to turn the call back over to Bob. Bob?

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

Thank you. [Operator Instructions] Your first question comes from the line of Michael Kupinski from NOBLE Capital. Your line is open.

A couple of things, can you give me a sense of how well the Christie Brinkley brand, Tower Hill is performing heading into Q3? And in Q3, are you anticipating that there will be some licensing revenue from Halston? And I just have a couple of other additional questions.

Sure. Tower Hill exceeded plan on the launch, Michael, by 40%. And we had contractual minimums there the actual forecast for the year is twice the minimum. And we anticipate going into '25, we'll double the business from where we are this year, and we are having great traction with Christie outside of HSN as well. There were a lot of significant retailers very interested in and what we're doing with Christie and Christie's potential, not only in apparel, but in home and other categories. We're excited about the prospects with Christie.

And then in terms of licensing revenue from Halston, are you anticipating licensing revenue in the third quarter from Halston for G-III?

Well, just as a reminder, there are minimum guaranteed royalties under that license. So we expect -- and depending upon -- whether or not they ship shoes and bags this year. They should to get in for spring. There's a potential of just coming up over those minimums and that we expect as G-III moves forward, increasing royalties from all activities with G-III, including all the third-party licenses that are currently in place for the brand.

And Bob, can you kind of give us a sense of what products are being rolled out on the Halston brand and the time line that you're anticipating at this point?

So it's apparel across multiple categories and classifications, which is typical of what G-III does. That's what we would expect would happen. And then they went to market with handbags and shoes during August, and we don't know the results of how that market went for that. We'll get that later in the quarter. But those are the core drivers of licensing and then there are multiple categories with third-party licensees including the Halston premium line that is distributed and best-positioned retailers that we think will be able to draft off of G-III's success.

And at this point, since we're halfway in the quarter, can you give us a sense of whether or not you believe that you will see year-over-year increases in licensing revenue in the third quarter?

Yes. We're on a steady ramp up with all the brands. And we entered into all of the licenses with these significant players like G-III and Jewelry TV and premier firms with One Jeanswear group, and launched the new brands on HSN, and we're just getting started with these businesses and the roll off to a great start.

And zero on the designer that you plan to announce in the fourth quarter, can you kind of give us a sense of -- will that be on HSN or would -- other retail partners and things like that, if you can give us a sense of that? And then I assume that there will be some costs associated with launching that brand. If you could kind of give us a sense of what you're anticipating at this point?

So that brand will launch just on HSN initially. And there wasn't very much start-up cost on that one because of the way we structured the deal. But that said, we've already -- product has been ordered, all the product development is done, it's launching and whatever cost we had have already been expensed. We do believe that the brand that we plan to launch for kitchen and food products in Q1 has tremendous potential, both on HSN and outside of HSN. that celebrity shift that we are doing this with has close to 5 million TikTok followers, she has a tremendous following.

Can you give us a sense of what the Isaac Mizrahi brand is doing at this point? and what your expectations are for that brand going forward?

So Isaac is on plan for what was forecasted for the year. That said, it's down from last year. And part of that relates to a reduction to zero in Isaac's remote shows coming out of COVID changed its position on remote shows and have mandated that all talent returned to studio. So we are working on bringing in another backup guests for Isaac to make up for that [ actual studio ] of time that we've lost because of the elimination of remote shows.

Got you. That's all I have. Thank you and congratulations on your turnaround view.

Thank you.

Thank you. Our next question comes from the line of Anthony Lebiedzinski from Sidoti. Your line is open.

Good morning.

Hi, Anthony.

Hi, good morning. Thanks for taking the questions and nice to see the improved performance. So now that you divested Lori Goldstein, how should we think about just overall the brand portfolio? Are you happy with where those brands are? I think you talked about all of them, except for Longaberger, but I guess in terms of just looking out like which brands are you most excited about, Bob, as far as growth opportunities going forward?

So I think C. Wonder has tremendous growth potential as Christie Brinkley. And we are focused there, we think, Isaac is a good opportunity assuming that we can get the right backup guests to help with some of the time we've lost to the remote shows. Longaberger is doing well. It is now an e-commerce-only business, we have onboarded it on to Orme, and we are now reengaging with all of the former Longaberger sellers so we're excited about the potential of Longaberger. We also think they're licensing opportunities for us with Longaberger. And we are continuing to look for new brands and new opportunities across our portfolio that we think can grow core business and add the kinds of brands that we're seeking today for the portfolio that will do well and traditional distribution linear TV distribution as well as distribution through streaming platforms, including, of course, Orme.

Got you. And then actually, as far as Orme, can you guys maybe just touch base as far as like what's been the number of downloads for the app? And are you actually seeing sales coming through that? Maybe if you could just give us some more details about what you've seen so far with Orme?

Sure. As you know, we are 30% owner of Orme. I can give you what the Orme team has reported to us. First, the thing that I think we all need to know about Orme and what it's doing is there has been very dramatic activity in this new market with the recent announcement of the alliance between TikTok and Amazon, the implications of social commerce have become very, very far reaching with this alliance. There are only three marketplaces for short-form video and social commerce and those are TikTok, Flip and Orme today. And the difference in Orme and perhaps TikTok and Flip is Orme is focused on better brands with higher average order values than both of those platforms. So that's the segment of the market that we're focused on. Orme began implementing its app distribution strategies on July 23. In less than three weeks, the team generated 20,000 downloads and we've been very selective on the platform about the kinds of brands that are going to be present on the Orme platform. So very, very high standards on selection value. There are 13 major brands on the site to date and they are continuing to ramp up the platform both from a user perspective and an onboarding brands.

Got you. Okay. Thanks for that color. That's definitely very helpful. And then just thinking about the profitability going forward here. So obviously, you're happy with the brands trajectory both C. Wonder and Christie Brinkley and Halston should be coming up in the fall as well. So -- and you've rightsized the cost structure there. So do you think you could be consistently earnings positive here going forward every quarter? Or is that just earnings or just EBITDA? If you could just kind of maybe help us out with that.

I think for the rest of the year, worst case will be breakeven, best case will be EBITDA positive heading into '25 with all brands, including Halston ramping up. That's how we see the balance of the year. We just don't have enough visibility into exactly what the Halston brand will do for the balance of the year.

Got you. Okay. So in terms of -- just to follow-up as far as Halston. So is the timing of that -- I know it's out of your hands, but as far as, what's the latest that you think you'll start to see, I guess, revenue coming from the Halston brand?

Well, there is revenue coming from it now. There were contractual minimums. We expect the ramp to really begin next year. It's a little delayed in terms of what we had initially anticipated. But we think it's on the right track. And we'll move forward nicely going into next year.

Got you. But you have some other well-performing brands that seem like they're offsetting some of that delay. Is that fair to say?

Yes. Exactly. Everything is up and moving nicely, particularly all the things we're doing on HSN.

Got you. All right. Well, thank you very much and best of luck.

Thank you, Anthony.

Thank you. Our next question comes from the line of Aaron Warwick from Breakout Investors. The line is open.

Hey guys, thanks for taking the call. Congratulations to getting the business on the right track. I just had a question on the compensation agreements for yourself, Bob, and Seth, that were recently modified where you're getting 40% of your base compensation in stock instead of cash. I just wanted to know some of the reasoning behind that. Is it more to do with preserving cash or thinking that your share price is quite undervalued given the prospects going forward? If you could comment on that.

First and foremost, we think the share price is undervalued, both from the perspective of relative value of our brands. We think that the value of the brands far exceeds the current market cap of the company. Also, if assuming that we stay on track with the growth in our royalty revenues, and we are trading well below what we believe our potential earnings are going forward into next year. And then lastly, it is, I think prudent, Seth and I are in a position where we can do something like this. And to the extent that we can preserve cash, we think that's a smart thing to do just given the state of world affairs.

Great. Okay. Thank you. One final thing, I guess, is Orme. What's the current expectation? You've mentioned the soft launch and there something about July 23rd, where we really started to roll it out a little bit more, what's kind of the plan for time line for the full commercialization and when they're really going to try to promote it to the masses?

So Orme is going to do its own capital raise. The technology is fully funded and built and launched and they are proving all of their business metrics, and we'll do their own raise. And I would expect that when they are funded they will then really drive the business to its full expectations, the potential.

Any sort of estimate on when they would plan to do that raise?

Their plan is to try to do it before year-end.

Okay. Good. Thank you. Appreciate your calm guys.

Thank you.

Thank you. Our next question comes from the line of Howard Brous from Wellington Shields. The line is open.

Thank you. Bob, congratulations on the turn.

Thank you, Howard.

Thank you. I thank everyone else who is responsible for I have a couple of questions. I want to pin you down if it's at all possible. You've got a couple of research reports that have recommended the company. I'd like you to comment on how comfortable you are on the numbers for next year? I'm not asking you to tell me that within a penny or two, but are you comfortable with those numbers? That's the first question.

So Howard, we're assuming everything continues to grow, what it has been growing across all of our businesses and G-III really begins the ramp that we believe is reasonable just given where they are. We're comfortable with those numbers, and certainly, I don't think today's stock price accurately reflects the potential of the company going into next year.

Because I've bluntly haven't found many companies that are selling at 3x free cash flow or 2x EBITDA, and that's basically what you're trading at. So I am saying that you got to be pretty comfortable with those numbers. What are the major brands are you going to launch on Orme?

So Orme had a robust pipeline. There's a strong business development team there. Of course, as you know, I have a tremendous amount of relationships in the branded space, both with retail brands and with wholesale brands. And I'm helping the company to make some of those contracts. And I would expect they're going to stay on the same type of ramp up. 13 new midsized companies are on the platform now within 60 days. I think they're going to continue at that pace. Initially, Orme is not seeking to be like Flip or TikTok, where there are lots of small vendors. This is really targeting more the aspirational luxury marketplace than some of the brands that you see on some of the other platforms. So I think you'll see continued onboarding of better brands and continued growth in the number of downloads and users on Orme.

Could you comment on the names today? Or is that something you can't currently?

The largest brand to date that's been onboarded is [indiscernible] and that was a great endorsement of Orme for the platform. And then there are others on the platform, not quite as large, but are positioned nicely in the marketplace like DL1961 and some similar brands. They've made great progress in onboarding some beauty brands and some home brands and an activewear brand so I'm very pleased with what the Orme team is doing, and we'll continue to help them in every way we can.

You have purchased, several months ago, 132,000 shares at $0.98, 146,000 in change at $0.65 and over the next year, you're taking about more than $0.5 million -- excuse me, more than that. You're purchasing some of the stocks $0.70 about another 500,000 shares. And that's a lot of stock. Can you comment?

Other than -- I'm making these investments, because I believe in what we're doing. What more can I say Howard, it's 800 million to nearly 1 million shares of stock in total.

That's all I have. Thank you.

Thank you, Howard.

Thank you. Our next question comes back from the line of Michael Kupinski of Noble Capital. The line is open.

Thank you. Just one quick follow-up, Bob, on the Christie Brinkley, brand you indicated that you're looking at other distribution channels outside of HSN, and I was wondering if you can talk a little bit of the products that you're thinking about in terms of those the products that you might offer outside of HSN. And then the distribution, are we looking at major big box retail stores or are you talking more digital distribution platforms. I was just wondering if you can add a little bit more color there?

So categories would be apparel, accessories, of course, fashion accessories, home, pet and beauty. We have all of those categories under the brand and the focus has been on major big box retailers.

And when would you expect to announce something like that? I mean, because that would be a fairly big announcement, I would think.

I would say that just given time lines on product development, we'd like to do something for spring of '25. We're working at light speed to try to get to market with a retailer by that date. But if, for whatever reason, we can't make it, then it would push to fall.

Got you. Okay. Good luck for that. It sounds great. That's all I have. Thank you.

Thank you. Seeing as there are no more questions in the queue, that concludes our question-and-answer session. I will now turn the call back over to the Xcel Brands team for closing remarks.

Thank you, ladies and gentlemen. Thank you 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 call. Thank you all for joining. You may now disconnect.