Q3 2020 Xcel Brands Inc Earnings Call
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Welcome to the <unk> Gulf brand 2020, Q3 financial results Conference call.
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Good evening, everyone. Thank you for joining us we appreciate your participation and interest.
I hope that all of you our safe these challenging and uncertain times with us on the call today are chairman and Chief Executive Officer, Robert to Lauren Chief Financial Officer, Jim Harris, and Executive Vice President of business development and Treasury Seth Burroughs.
By now everyone should have access to the earnings release for the third quarter ended September Thirtyth two.
Yes, 20, which went out a short while ago and in addition, the company plans to file with the Securities and Exchange Commission. Its quarterly report on form 10-Q by November 13 2020.
The release quarterly report will be available on the company's website at Www X L brands Dot com.
This call is being webcast.
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 office.
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.
XL 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 financed.
No condition cash flow and results of operations. There is significant uncertainty about the duration and extent of the impact of the buyers.
Dynamic nature of these circumstances means that what is that today on this call could change materially at any time fine.
Finally, please note that on todays call management will refer to.
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, it's identified business trends relating to the company's results of operations our manner.
Management believes these financial performance measurements are also useful because these measure 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.
In isolation or as a alternatives to net income earnings per share or any other financial measure of financial performance calculated and presented in accordance with GAAP you may refer to the attachment on the company's earnings release or part one item two of the form 10-Q for a reconciliation of non-GAAP measures.
Now I'm pleased to introduce Robert de Lauro, Chairman and Chief Executive Officer, Bob. Please go ahead.
Thank you Andrew and 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 an hour.
Our third quarter financial performance and then provide some operating highlights after that our CFO, Jim Haran will discuss our financial results in more detail.
It has been only eight months since the COVID-19 pandemic first hit the U.S. yet in that short time, we have seen an extraordinary amount of.
Our business economic and social change and retail technology development. The disruptive forces that have been affecting the retail industry over the past few years have been greatly accelerated by the pandemic. However, we had X L brands believed that our strategy, which is based upon an agile.
Operating model Omni channel distribution integrated technology platform, and social media and live streaming marketing and sales capabilities will enable us to achieve success in this current environment and the post covert world. While we are taking appropriate actions to safeguard our our.
Assets resources and employees, we are continuing to execute on and invest in our strategy to move forward to emerge from the current crisis, even stronger than before over the past five months, our interactive TV business with QVC has been back on track and QVC business model.
Model has proven that it is not only sustainable but it's right for the moment given recent trends in live streaming as a vehicle to sell products. We believe that we are positioned well for this live streaming trend given our track record of success in generating over $3 billion in retail sales of products Viola.
Streaming on QVC over the past 10 years, and we are actively focused on leveraging live streaming technologies across other lines of business.
Our Q3 financial results have been impacted by Coke 19, both in top line revenue and bottom line results primarily caused by.
Decrease revenues and XL wholesale business and our licensees wholesale businesses as previously mentioned our interactive TV business.
And our direct to consumer Judith Ripka ecommerce and longer Burger peer to peer social commerce businesses are performing well, we expect to accelerate.
A lot of growth in these direct to consumer businesses by launching live streaming capability in 21, and 2021 finally I am extremely excited by the potential of these businesses now I would like to review our operations by channel of distribution.
Our interactive TV businesses.
Great way back on track after two months of soft sales in April and May. This was primarily driven by outstanding performance in our Isaac Mizrahi live brand and the successful development of more products that are working well in the current environment, including loungewear, sleepwear face masks and food and beverage.
Jason.
Lastly, we launched our age Hilton brand on HSN, the shopping channel in Canada, Tvs and in Australia, and on QVC, UK and Italy.
On a wholesale basis.
In our QVC in our non QVC licensing business, we continue to develop and manage our.
The portfolio of over 70 licensees across our brands as previously reported we expected our non TVC licensees to experience canceled orders and reduced sales in their wholesale businesses from the impact of COVID-19, Accordingly, we experienced a 62 and 39.
Our planned decrease in non QVC not licensing income in Q3 and for the nine months ended September 32022, respectively. However, we are up 19% from the second quarter showing that the beginning of a recovery for many of our licensees is in progress.
We have successfully.
For signed over 10, new licenses during the third quarter and various categories and continue to work to identify categories at retail channels at present opportunities.
In the current environment.
As I stated last quarter based on our plan and our strong order book, we were showing.
Sales growth in our wholesale business in excess of 40% for 2020.
Some sales orders resumed during the third quarter.
Hotels were up significantly from second quarter wholesale sales heading into the fourth quarter continue to improve but it will be dependent.
Upon the success of our retail partners in navigating through the pandemic.
Well, our wholesale business was impacted in 2020, we believe we are positioned to resume similar growth levels. In 2021 that were shown before we were hit by the pandemic.
Like apparel.
Our wholesale department store jewelry Bill.
Business was impacted by the pandemic as previously mentioned, we shifted our sales efforts to the independent retailer or indeed channel with great results to date, we expect continued strong growth in this channel of distribution and 2021 and beyond.
In our direct to consumer businesses, our Judas Rep.
Commerce business was up 17% over last year, we launched several new collections through the pandemic and are working on some exciting new collaborations for this holiday season and have supported it with an aggressive marketing campaign.
Also earlier this year, we launched our new peer to peer digital platform for our longer Burger brand.
And are seeing great early momentum in both sales associates or stylists recruiting as well as product sales our product Assortments include home furnishings accessories food and basket. We have recruited over 3500 members to the platform with new stylists joining each week. This is extremely.
And citing and shows very significant sales potential, particularly in economies like this one where people are seeking ways to make additional income we are testing new categories and brands in these peer to peer model and expect to launch live streaming capability that capability in these businesses in 2021.
In conclusion, and as I have stated before through our true 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've also created a highly flexible model that can supply our retail partners through either a wholesale.
Or vertical retail fee based working capital light model and with our integrated technology platform can do this with great speed and flexibility finally, I'm extremely excited by the potential of our Judith Ripka jewelry business and longer Burger peer to peer social commerce platform, especially given recent trends in my.
Streaming driven commerce, and our deep knowledge and expertise in this form of retail sales. These businesses not only diversify our product offering to jewelry home and wellness categories, but give us the potential to harness the power of social commerce through live stream.
Our people our brands.
Our flexibility and our strong balance sheet, our our strengths we are doing everything possible to come through this COVID-19 event. So that we emerge from it stronger now I would like to turn the call over to Jim to review, our financial results for the quarter and the first nine months Jim.
Thanks, Bob and good evening everyone.
I will briefly discuss financial results for the quarter and nine months ended September 32020. Please note that our financial results are described more fully in our quarterly report on form 10-Q, which we expect to be filed with the FCC by November 13th.
Total revenue for the third quarter of 2020.
Were 7.4 million a net decrease of approximately 3.5 million, what 32% from the prior year quarter.
This decrease was most pronounced in wholesales, which we were down approximately 2.3 million year over year due to canceled and reduced wholesale orders related to COVID-19.
Licensing revenue declined the price.
Only $1.2 million from the prior year quarter due to a combination of the economic impact of COVID-19 on our licensees and also by a reduction guaranteed minimum revenues from one of our existing licensing arrangements upon renewal effective January onest of this year.
Despite these revenue declines our overall.
Our gross profit margin was 83% in the current quarter up from 73% in the prior year quarter gross profit margin from product sales increased from 35% in the prior year quarter to 41% in the current quarter, which results in roughly equal margin contribution on less sales.
Our operating.
Answers were 6.5 million for the current quarter, representing a $1.1 million decreased from $7.6 million in the prior year quarter. This decrease is primarily due to cost reduction actions taken in response to the COVID-19, pandemic, including temporary reductions of employee compensation and cutting nonessential costs and.
Excludes 0.1 7 million payroll protection program relief.
Partially offsetting the decrease in operating expenses were <unk> 0.3, 6 million a bad debt reserves related to the bankruptcy of several retail customers.
Net loss was approximately half a million dollars for the current quarter or negative two cents per basic.
Diluted share compared with a net loss of 8.1 million or negative one cents per basic and diluted share for the prior year quarter.
After adjusting for certain cash and non cash items non-GAAP net income for the current quarter was approximately $2.8 million and non-GAAP earnings per share was four cents per diluted share compared.
With approximately $1.2 million or six cents per diluted share in the prior year quarter.
Adjusted EBITDA for the current quarter was approximately $1.4 million compared with $1.8 million for the prior year quarter.
As a reminder, non-GAAP net income non-GAAP diluted EPS, and adjusted EBITDA and non-GAAP on.
And what are the 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.
Moving to our nine month results in the first nine months of 2020 total revenue decreased approximately $8.4 million or 28%.
Over the prior year of which $5.7 million was attributable to our licensing business now.
Net product sales for the current nine months were down $2.7 million or 29% for the same period in the prior year as previously mentioned impacts of the COVID-19 pandemic were partially offset by volume growth experienced in.
In our power wholesale business during the first quarter of 2020.
Despite these revenue declines our overall gross profit margin was 82% in the current nine months up from 78% in the prior year gross profit margin from product sales. During the current nine months was 40% as compared to 29% in the prior year.
Yeah.
Operating expenses decreased by approximately 2.3 million from 22.4 million in the prior year nine months to $20.1 million in the current nine months. The two main drivers of this this decrease in operating expenses are the aforementioned cost reduction actions taken by management and responses.
Pandemic and government assistance received through the Paycheck protection program under the Kazakh, which we recognized $1.8 million as a reduction to current period operating expenses.
Partially offsetting the decrease in operating expenses were approximately $1 million and bad debt reserves related to the bankruptcy of several retail.
Customers.
And also offsetting these cost reductions were increase and some of the non cash expenses, including depreciation and amortization expense.
Interest and finance expense for the current nine months was point $9 million compared with $1.2 million in the prior year nine months. This decrease is primarily attributable.
Welcome to the fact that the prior year period includes point 2 million loss on extinguishment of debt as a result of the February 11, 2019 term loan amendment.
Net loss was approximately 2.6 million for the current nine months for minus 13 cents per basic and diluted share compared.
Coupled with net income of $1.9 million or 10 cents per diluted share for the prior year nine months.
The income for the prior year nine months, notably included $2.9 million of other income related to a gain on the reduction of contingent obligations from the acquisition of the C. Wonder brand.
After adjusting for certain cash and non cash.
Items non-GAAP net income for the current nine months was approximately $2.1 million and non-GAAP earnings per share was 11 cents per diluted share compared with approximately $3.8 million or 20 cents per diluted share in the prior year and nine months.
Adjusted EBITDA was approximately 3.9 million.
For the current nine months, which is approximately 30% lower than adjusted EBITDA of approximately $5.6 million for the same period in 2019.
Now turning to our cash position as of September 32020, the company had unrestricted cash and cash equivalents of approximately $4.8 million compared with cash.
Approximately $4.6 million at December 30, Onest 2019.
This net increase during the first nine months was primarily attributable to cash provided by operating results, which reflect the combination of collections from our standing debtors cash conversion in cost control measures implemented by management and government assist.
Cash is received through the Paycheck protection program.
The increase in cash provided by other activities was partially offset by continued investments in technology and continued principal payments against our term debt.
And now looking at our term debt at September 32020, our total bank debt was $17.5 million and term debt net of.
Cash was approximately $12.7 million or approximately 2.3 times adjusted EBITDA for the trailing 12 months.
Our working capital at September 32020, excluding the current portion of lease obligations was approximately $8.7 million compared with $9.5 million at December 30.
One 2019.
And lastly, we are also taking action to provide additional liquidity and flexibility, we restructured finance our senior term debt earlier, this year, and which allowed for us to reduce principal payments and covenant relief.
Also earlier this year, we received 1.8 million to the Paycheck protection program.
Under the cares act and based on the requirements and conditions under the cats and the Paycheck protection program flexibility at we expect that the entire amount alone will be forgiven and accordingly have tree of the proceeds of the loan similar to a grant.
With that I would like to turn the call back over to Bob Bob. Thank you Jim This concludes.
Our prepared remarks operator.
Thank you we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Robert Larson with Penn Capital. Please go ahead.
Hey, guys, how you doing congrats hi, Robert.
Congratulations on making it through the.
Other end appears that.
The the diversification really worked this time.
Thank you Ben.
Ben.
It's been a tough time in the industry as you know.
Yes.
On something more positive could you comment regarding.
In the outlook for wall.
Walmart.
How's the how's the brand doing their C. wonder.
Last call you mentioned that they like the product and they were asking for more SK using categories and if you online testing continues to do well is there a shock that you get.
Any kind of exposure to the stores in 2021. Thank you.
So.
We are experiencing very high.
Summer engagement on their E Commerce platform, which is really interesting when you think about the four brands that are currently test.
Testing.
Higher price points, and and and higher.
Product.
How are you.
Benefit for their customers, but.
We in spring when we launched there was an impact.
From co bid.
Fall to date has been much much better we're seeing much more.
Engagement, we have some items that are doing very well, we launched 10 new categories under licenses.
So we're seeing some.
Some strong.
Sell through is with some of the bags at the price points that were marketing and we are currently now looking at.
What the business would look like as we roll forward into a.
Perhaps spring or fall.
The next phase.
This which would be 250 doors.
That would look like in terms of order minimums, where we can bring the MSRP is it in line with what's already on Wal Mart floors and.
Based on where we are so far.
We're feeling positive.
That.
Can we can adjust those MSR pays with greater volumes on the production.
To succeed on the floor, so thats, who we are and as we go forward I will keep everyone a price.
And our next call.
Excellent so it sounds like there's progress being made there on the second issue.
The longer.
Long a burger deal.
I guess, you could say XL now's, a basket case, but.
But.
That business at one point I think in.
In the year 2000 did a billion dollars in revenues I know there was a bit of a collection size going on for that but as you look out for the next 234 years do you have any idea that if you. If you guys execute well with this strategy in this business in this format what type of revenues.
Yes, you could achieve visit something to get back to five or 10% of the all time peak in $50 million to $100 million or was that such an outlier that every other year was only that level and and that would be asking a little too much.
So a lot of neuberger historically.
So more than baskets, they had a fairly strong tabletop business of food business. They had a very significant jewelry business and Dave longer burgers vision for the company.
As that long number.
One point in time would sell.
Everything for the home in fact, Dave would say.
Someday were going to give the baskets away for free and sell our customers everything for their home.
Our strategy was to continue Daves vision.
Over the last month or so we're seeing that.
Our.
Sales shift when we launched it was baskets first and that's really all we brought to market because that's what we had but today. We're at about 850 skews on the site last month, 40% of our sales were.
Things, except basket and we anticipate.
That the business will be.
About 1500 skews by the end of Q1, perhaps 2000 by the end of Q2.
We will have just about everything that someone would want for their for their home.
We'll be launching a wind subscription business very shortly.
And.
That the.
The mathematics in that business or a bit geometric today, we have over his 3500 members 1100 of them are now trained sellers and like most direct sales business.
As an 80 20 rule about 20% of your sellers do 80% of your volume, we anticipate that we'll be out about.
10 10.
10000 members.
By the end of Q2.
Maybe even sooner and if you.
Think of historically this this company their sales associates did about $6000.
In annual sales.
If you if you're running 10000.
Stylist out there and they're each doing $6000 you can you can run the math.
Yourself in terms of where this could go. This is this is Jim Harris just to put a little color on the third quarter, we launched our younger girls E. Com in the first quarter. This year, we did a 155% of sales in Q3 than we did in the first six months. So we're very very pleased at the progress of.
Finally, we turn to ourselves.
I would I would expect.
You hope for seven figures are revenues next year, and that's going to be in under one.
The line item in the income statement the wholesale business.
It will it will appear in our wholesale sale.
But its really directed.
Consumer.
Got it and no Ken and I and one other thing I will add though the ROE assets and that digital business is an access of Fivex is just.
We couldn't be happier.
Yes have you been able to create any marketing.
Cutting buzz via social networking with it now that you've tried to resurrected or is it sort of still that the middle America stodgy business than it was when it went bankrupt.
We've generated over 500 million.
Media impressions.
Since we started marketing.
That sounds good all right that's.
That's it for me I'll go back in the queue.
Okay. Thanks.
Thanks Robert.
Again, if youd like to ask a question. Please press Star then one at this time.
Okay.
Going no further questions. This concludes our question and answer session I would like to turn the conference back over to Bob to warn for any closing remarks.
Thank you operator, and ladies and gentlemen, thank you all for your time. This evening, we greatly greatly appreciate your continued interest and support in X L brands, we wish all of you.
He harmony and happiness in the fast approaching holiday season, and as always stay fit it well and be healthy.
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