Q2 2021 Xcel Brands Inc Earnings Call

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Thank you for standing by this is the conference operator.

Welcome to XL brands second quarter earnings Conference call.

After the presentation there'll be an opportunity to ask questions.

And the question queue you May Press Star then one when your telephone keypad.

Do you need assistance during the conference call you may signal, an operator by pressing star in there.

Please be advised that reproduction of this call in whole or in part is not permitted without prior written authorization of X L brands and as a reminder, this conference call is being recorded.

Like to turn the conference call over to Andrew Berger of SM Berger and core.

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 the call today are chairman and Chief Executive Officer, Robert The Lauren 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 30th 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 the quarterly report will be available on the company's website at Www Dot XL brands Dot 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.

<unk> 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.

There remains significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of these circumstances means what he 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 these non-GAAP metrics as measures of operating performance to assist in comparing performance from period to period on a consistent basis, it's all identified business trends.

Relating to the company's results of operations.

Management believes these financial performance measurements are also useful because they measure 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 in the company's earnings release or part one item two of the Form 10-Q for a reconciliation of non-GAAP measures and now I'm pleased to introduce Robert to Lauren Chairman and Chief Executive Officer. 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 exciting operating highlights and insights into 2021 after that our CFO, Jim Haran will discuss our financial risk.

In more detail the second quarter of 2021 was a quarter of growth and expansion for our business.

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 <unk>.

Our wholesale jewelry business, the opening of our Judith Ripka flagship jewelry store and the strong growth in our e-commerce businesses.

And an organic sources, notably the April for 2021 acquisition of the logo Lori Goldstein brand.

I'm pleased with my mountain, we have belt 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 and increased product costs logistics and warehousing.

Cost 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 of distribution.

Our interactive television business led by our Isaac Mizrahi live and logo Lori Goldstein businesses is doing exceptionally well Isaac Mizrahi live as it is exceeding plan by 5% and it's up almost 10% from the prior year.

Our currently acquired or I should say, our recently acquired Lori Goldstein business was <unk>.

Every program to Prime time, shortly after our acquisition and has added significant growth to our interactive television business. As a result, our interactive television revenues are up 36% in Q2 compared with the prior year quarter, and we continue to grow certain of our brands on HSN and international interactive.

T V channels, including the shopping channel in Canada, and T V S N and Australia, which are included in our wholesale sales result, interactive TV continues to be a core business for X L 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 that were up almost 150% compared to the prior year quarter and they're up over 220% year to date compared with the same period in the prior year.

New memberships are up 33% and Longaberger and active stylus startup of 167% for the first six months in June we conducted our first U to threats go live streaming event, which.

We were pleased with our results and we plan on conducting the second live streaming event in September for our Judith Ripka brand since our February Premier show, we have average one live streaming event per month for a longer Burger, which has been a valuable resource contributing significantly to the sales and <unk>.

You'd grow the business in fact.

This past Monday night, we held our most successful show to date and achieved over 100000 in sales or $3000 per minute.

These are outstanding numbers, given the current growth rate and our longer Burger stylist community. We believe that our shows can generate $1 million or 15000 per minute by the end of 2022 and this new channel of distribution, we are not waiting for the future to greet is we are in fact, reaching out to agree to 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're not going to take inventory positions without committed sales are clear demand forecasting for our drop ship programs. Accordingly, we have re forecasted this business in line with our inventory risk tolerance for 2020. One we will use this time to further our.

Goal of making the best possible apparel products. Our units were up at the 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 drop ship programs with retailers such as Saks.

Well and we plan to open more premium retail drop ship accounts by year end with those program showing 500% growth for the first half of 'twenty.

2021, finally, we are planning a livestream event with our C Wonder brand in connection with the launch of our new spring 'twenty two line at Walmart, We believe that live streaming will provide a significant important boost to the business. We ended the first half of 2021 and C wonder up 33%.

And apparel, 47% in footwear, and 19% in handbags, and 33% in luggage and doubts and believe we have now settled at retail price points that work for the Walmart customer we continue to see improvements on 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 Jeremy to discuss our financial results for the quarter.

Thanks, Bob and good evening everyone.

I will briefly discuss financial results for the quarter and six months ended June 32021. Please.

Please note that our financial results are described more fully in our quarterly report on Form 10-Q, which we plan to file with the SEC.

The 16th.

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 wholesalers continue to rebound and recover from the initial outbreak of COVID-19, and also by licensing revenues generated by the April one 2021 acquisition of Lori Goldstein Brian.

Net sales increased by approximately $4 million in the current quarter to $4.5 million. This increase was primarily attributable to higher wholesale apparel sales as retail shelves was severely negatively impacted in the prior year quarter. During the initial outbreak of the COVID-19 pandemic.

Jewelry wholesale also contributed significantly to the year over year increase in sales while e-commerce shelves of Longaberger brand of products and Judith Ripka brand jewelry also grew substantially from the prior year quarter.

From a trend perspective, this was our fourth consecutive quarter of product sales growth with our 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.

Increase in license revenue was primarily attributable to the recent acquisition of the Lori Goldstein brand as well as the continued strong performance by the article was very bright.

These increases were partially offset by decline in licensing revenue attributable to our transitioning of the H Halston brand to wholesale supply model.

Our operating expenses were $9.4 million for the current quarter up from $5.4 million in a prior year quarter, primarily driven by increases in payroll and marketing costs to help fuel growth in 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 year 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 nonessential costs, while the current quarter reflects post COVID-19 normalized expense levels.

Additionally, the second quarter of 2020 included the benefit of government assistance received through the Paycheck protection program under the cares Act for which we recognized 1.6 million as a reduction to prior year core expenses.

Interest and finance expense for the quarter was $1.4 million compared with <unk> 3 million for the prior year quarter.

This increase was attributable to the April 14th 2021 refinancing of our term debt, including a point $8 million loss on extinguishment of our old term debt.

Subsequent higher interest expense due to higher principal balance and higher interest rate on the new term loan agreement.

Nevertheless, excluding noncontrolling interests was approximately $1.6 million for the current quarter or minus eight cents per basic and diluted share compared with a net loss of $1.3 million or negative seven cents per basic and diluted share for the prior year quarter.

After adjusting for certain cash and noncash items non-GAAP net loss for the current quarter was approximately <unk> 1 million or minus one cents per share compared with non-GAAP net income of approximately $1.2 million or six cents per share in the prior year quarter.

Adjusted EBITDA for the current quarter was point 9 billion compared with $1.7 million for the prior year quarter the.

The increase in certain operating costs mentioned above along with the prior year quarter impact of government assistance received through the Paycheck protection program were the primary drivers of the year over year change in EBITDA.

As a reminder, non-GAAP net income non-GAAP diluted EPS and adjusted EBITDA, a non-GAAP unaudited terms.

Our earnings press release, and Form 10-Q present, a reconciliation of these items with the most directly comparable GAAP measures.

Now moving to our six month results.

And the first six months of 2021 total revenue increased approximately $4 million or 27% over the prior year six month period to $18.6 million, primarily driven by net product sales.

Net product sales for the current six months grew approximately $3.6 million to $8 million, mainly due to the combination of higher jewelry wholesale and higher sales of lager Burger branded products through E Commerce, social commerce and live streaming.

The rebound and recovery in wholesale it's also contributed significantly to the year over year increase in net product sales.

Gross margin from net sales remain constant at approximately 40% for both the current and the prior year six months.

Net licensing revenue for the current six months increased by approximately <unk> 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 Liberty go see brand and continued strong performance of the Isaac Mizrahi brand.

Operating expenses for the six months ended June 32021 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 and 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's 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 with $1.7 million compared with <unk> 6 million for the prior year comparable period.

Increase was attributable to the previously mentioned refinancing of our term loan debt.

Net loss, excluding Noncontrolling interests was approximately $4.1 million for the current six months or -21 cents per basic and diluted share compared with a net loss of $2.1 million or -11 cents per basic and diluted share for the prior year six months.

After adjusting for certain cash and noncash items non-GAAP net loss for the current six months was approximately $1.6 million or minus nine cents per share compared with non-GAAP net income of approximately $1.4 million or seven cents per share in the prior year six months.

Adjusted EBITDA for the current six months was essentially breakeven compared with $2.5 million for the prior year six months the increase in certain operating costs mentioned above along with the prior year impact of government assistance with the primary drivers of the year over year change in EBITDA.

Turning now to our cash and our liquidity as of June 32021, the company had unrestricted cash cash equivalents of approximately $4.8 million compared with cash of 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 our revolving loan facility.

And offset by cash paid for the acquisition of the Lori Goldstein, Brent cash used in operations and inventory build to meet expected increases in wholesale and direct to consumer businesses.

Our working capital excluding the current portion of operating lease obligations increased from seven 9 million at 'twenty 'twenty year end to $8.7 million at June 30, 2021.

And finally, our total debt at June 32021 was $25.9 million, including $24.4 million of term debt and $1.5 million under our revolver.

And I think 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.

We will now begin the question answer session.

To join the question queue. You May Press Star then one on your telephone keypad, you'll hear a COVID-19 acknowledging earthquake.

If youre using a speakerphone please pick up your handset before pressing any keys.

Your question. Please press Star then two.

We will pause for a moment as callers join the queue.

The first question comes from Jim Devlin from Jefferies.

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.

Change in the Halston business model, what are what's the significance of it and the the outlook.

Sure.

So the.

We transitioned halston from a license model and interactive to a wholesale model and consolidated our design teams that were offering the same products now and department stores or as we are with interactive TV worldwide.

And we move the brand from Q V C. H S N. A as you know QVC acquired HSN.

Is that fairly recent acquisition, there and we see a lot of opportunity at HSN with with the brand and with apparel as a category. It's not as apparel is not Ah is.

As core to the business as it is a key V C.

So the primary.

The impact was where we had G. M ours are 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 work.

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 sales with with establishing now that's a wholesale business not only in interactive television and.

Various department stores.

Around the country and I would say by the end of this year and we'd probably it will cross over that and that's up from there.

Okay.

And my second question is.

I inferred to your comments about C. Wonder on Walmart is being a positive weather. So my question is is it somewhat positive as it outstandingly positive. We're someplace in between can you give us some color on that.

Sure I would I would say that it's somewhere in between them.

Sales across all of those categories are up as you know we've been experimenting with different price points with Walmart and this this fall season, we adjusted the retails to now match, where Walmart is with similar brands on the <unk>.

Retail floor to help to accelerate the sell throughs.

And we are in discussions with Walmart now about a livestream event.

For spring with a new spring product.

Where we're all excited.

Walmart with the spring collection, and we do think that we can be very helpful.

<unk> to Walmart and their live streaming efforts and I think that are that will help accelerate things there if it all goes as planned.

Okay. Thank you.

The next question comes from how it barrels from Wellington Shields. Please go ahead.

Yes, Hello, I'm, calling on behalf of Howard where else would you be able to give us some update on the acquisition.

Are you, referring to Lori Goldstein or Longaberger.

Oh.

Okay. So I'll do Lori Goldstein first it's it's going very well.

For us the <unk>.

Transaction first and foremost we'll be accretive this year.

And.

We were able to get the brand position back into prime time, almost the day after closing.

And are working with our current manufacturing partners.

Laurie golf and 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 that could be nearly double the volume.

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 and we are.

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 our nano influencers that we referred to a stylist.

It's growing dramatically.

And the margin the maintained margins in that business are quite strong about a third are maybe a little more today are the products of drop ship vendors for us. So it's somewhat working capital light and the products that we do hold a turning fast so.

Date on a longer burn very dramatic growth there.

Okay. Thank you very much.

Yeah.

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

Thank you operator.

Yeah.

Ladies and gentlemen.

As always thank you for your time. This evening, we greatly appreciate your continued interest and support in X L brands.

And.

As I always conclude stay fit eat well and be healthy.

Uh huh.

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

Okay.

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