Q2 2022 Xcel Brands Inc Earnings Call
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Welcome to XL brands second quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please be advised that reproduction of this call in whole or in part is not prohibited without prior written authorization of XL brands and as a rule.
Mind you. This conference call is being recorded I would now like to turn the call over to Andrew Berger of SM Berger and Kyle. Thank you Andrew you May now begin.
Good morning, everyone and thank you for joining us and welcome to the X L brands second quarter 2022 earnings call. 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 to Lauren Chief Financial Officer, Jim hearing and executive Vice President of business development and Treasury Seth.
For us right.
By now everyone should have had access to the earnings release for the second quarter ended June 30th 2022, which went out a short while ago and in addition, the company will file with the Securities and Exchange Commission. Its quarterly report on Form 10-Q today.
The release and the quarterly report will be available on the company's website at Www Dot XL brands Dot com.
During the second quarter, the company announced that it closed on the sale of a 70% interest is Isaac Mizrahi brand.
The company filed a form 8-K report relating to the transaction and it too is 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.
L brands 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 that 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 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 for periods of period on a consistent basis and to identify business trends relating to the company.
Results of operations.
Our management believes these financial performance measures 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 Companys earnings release, So part one item two of the Form 10-Q for a reconciliation of non-GAAP measures.
And now I'm pleased to introduce Robert Ward, Chairman and Chief Executive Officer. Please go ahead.
Thank you Andrew Good morning, everyone and thank you for joining US I will start today's call with a review of the transformation of our business through the sale of a 70% interest in the Isaac Mizrahi brand and joint venture agreement with W. H P global our operating role going forward.
A word and our plans to use the proceeds from the sale I will then cover some operating highlights for the second quarter and then our CFO , Jim Haran will discuss our financial results for the second quarter in more detail.
I'm pleased to share with you that on May 26, we successfully completed the sale of a 70% interest in our Isaac Mizrahi brand and entered into a newly formed joint venture agreement with W. H P Global private equity backed brand management and licensing company the transaction resulted in.
$46.2 million of cash proceeds at closing, which combined with our 30% retained interest in the venture and a $2 million earn out valued the Isaac Mizrahi brand at $68 million. This is significantly higher than the value of the brand when we acquired it in 2011.
By retaining ownership and the brand we remain committed to participating in the future growth of this iconic brand under our agreement with W. H P. We will continue to oversee and manage the Isaac Mizrahi business on Q V. C and we have entered into a license agreement with debenture to continue to develop our women's apparel business under the <unk>.
MS Wright brand in the United States and Canada.
In this connection.
We have been working with W. H P to develop a new strategic plan to grow the women's apparel business, which we hope to be able to announce soon we are excited to partner with W. H P. For the next phase of growth for the Isaac Mizrahi brand, including a launch of a direct to consumer website as well as international.
10 of these debt leverage W. H P. Its global footprint and expertise.
Overall, we believe this was a transformational transaction for XL and that it allowed us to realize substantial value from the growth created by us and the Isaac Mizrahi brand while at the same time retaining a material interest in its future growth as I stated on our Q1 earnings call. We have worked hard.
Over the past 12 years to position XL as a design production and livestream media platform focused on driving growth and creating long term value for consumer brands. We have also developed an innovative proprietary live streaming platform based upon re imagining shopping entertainment and social media is one thing and have become a leader.
In this rapidly emerging marketplace. We are pleased both with the success, we have been able to achieve under our brands on direct response, TV as well as our ability to materially increase the long term value of our brands as evidenced by the second quarter, Isaac Mizrahi transaction from a financial perspective.
Transaction significantly enhanced our balance sheet concurrent with this transaction, we repaid 100% of our outstanding debt under our loan agreement with first Eagle and significantly increased our cash and working capital positions.
For the first time since we started the company in 2011, we are now a debt free company, which provides us with significant flexibility to pursue opportunities that accelerate growth as I discussed when we announced the transaction selling a majority of the Isaac Mizrahi brand will impact our revenues and earnings for the remainder of 2012.
To this combined with recent headwinds caused by continued supply chain issues high inflation order cancellations as retailers manage inventory and added cost for new initiatives that I will discuss more fully has resulted in the 2022 year not shaping up as we had it in there.
Really expect it I should note that the challenges in the retail environment came suddenly in the market remains extremely fluid that said, having strong liquidity levels and greater access to capital is critically important in todays business environment, we expect to enhance our capital levels in the coming quarters with new commercial bank.
Working capital line and have maintained our relationship with first Eagle for future acquisition financing.
We will move quickly, but prudently put this capital to work and are exploring several strategic investments that we believe will continue to enhance our competitive position and provide earnings growth, while maintaining a strong balance sheet and the current economic environment. We believe there will be attractive acquisition opportunities as our <unk>.
Street deals with the slowdown we've seen at retail in the past and approaching quarters. We are also working on multiple new projects within our existing businesses. The first of which we recently announced with the appointment of Ken Downing as creative director and Livestream spokesperson for Halston, we have several new <unk>.
Launches planned for Halston, and spring twenty-three, including a distribution arrangement in the U K. We also recently launched a multi branded optical business on HSN, which will be followed with a launch on Q V. C. Soon all through a joint venture whereby XL has been able to leverage inventory and systems in the manufacturing.
During partner without any material capital investments. We are extremely excited by these new developments, which will help create growth in our existing brands and expand our relationship with QVC and HSN and expect more announcements. Soon also we executed a distribution agreement for our C Wonder brand in the U K.
Finally, we recently executed an agreement with a warehouse facility in Mexico that will give us a significant competitive advantage and improve margins through section $3 21, a tariff savings and established a new domestic distribution center in Ohio to better serve our longer broker customers.
A high level perspective, while the Isaac Mizrahi transaction had a short term impact on revenues and earnings we expect to quickly replace these based upon the pipeline of new projects and new opportunities that are currently either planned or being considered we are very pleased with the transaction as a step towards strengthening our balance.
Sheena and positioning X L as a leading platform for brands, primarily driven by livestream shopping.
In closing, we believe our financial flexibility strong liquidity rich asset values and access to capital will drive our current businesses and fun new opportunity. This is even more important as companies in our industry are dealing with continued margin pressure and order cancellations due to logistics, where I'm at <unk>.
<unk> cost and.
And macro and geopolitical concerns as a result, we believe that the growth investments. We are pursuing combined with our strong balance sheet will position us well to grow our business through economic headwinds that have been suddenly thrust upon us as of today's call. Our wholly owned brands include Halston.
Lori Goldstein, Judith Ripka N C wonder and we share ownership and Longaberger now and Isaac Mizrahi I continue to believe that our asset values far exceed our stock price and market cap the Isaac Mizrahi transaction supports this hypothesis.
We have proven our platform success at creating long term value in our brands have developed a reputation in the industry as a leading platform for brands driven by livestream shopping and we will continue to build our existing brands enter into partnerships and acquire new brands and businesses with the goal of enhancing shareholder value for our stakeholders.
The platform. We have created is supported by the strongest pipeline of new opportunities in our history and I am excited by the direction. We are headed now I'd like to turn the call over to Jim to discuss the Isaac Mizrahi transaction in more detail at our results for the second quarter Jim.
Thanks, Bob and good morning, everyone.
I'll briefly discuss our financial results for the quarter and six months ended June 32022.
Total revenue for the second quarter of 2022 was $8 5 million, representing a decrease of approximately $2 3 million or 21% from the prior year quarter.
For the current six months total revenue decreased approximately $1 4 million from the prior year period to $17 2 million.
Wholesale apparel revenues were down on a year to year basis compared with the prior year and was partially offset by higher licensing revenues for the current six month period.
Net wholesale and direct to consumer sales decreased by approximately $1 2 million in the current quarter and $2 million for the six months ended June 32022.
It was approximately 27% and 24% lower respectively as compared with the prior year comparable period.
These decreases were primarily attributable to declines in wholesale apparel revenue during the first half of the year, mainly driven by the temporary closing of overseas factories and cancellation of orders from our retail customers based on industry headwinds.
Net licensing revenues for the current quarter of approximately $5 2 million, representing a decrease of approximately $1 million or 17% as compared with the prior year quarter.
This decrease in licensing revenue was primarily attributable to the May 31, 2020 to sell the majority interest in the Isaac Mizrahi brand.
Licensing revenue for the current six months increased by approximately <unk> 6 million to $11 2 million or 6% as compared with the prior period, primarily attributable to our ownership of the Lori Goldstein brand during the entire six months in 2022, and partially offset by the cell of origin brand in the current year.
Gross profit margin from products. It has declined approximately 33% in the second quarter of 2021 to approximately 22% in the current quarter and from 39% in the prior year six month period to 30% in the current six months.
These declines were primarily due to the selling off of seasoned apparel inventory and inventory write downs relating to cancel sales orders as well as increased logistics and global supply chain costs.
Relocating our product distribute into Mexico that Bob mentioned in his opening remarks, we will have a positive impact on our cost of goods going forward.
Our operating expenses were $11 3 million for the current quarter up $1 9 million from $9 4 million in the prior year quarter approximately half of this increase was attributable to expenses related to the sale of the Isaac Mizrahi brand there are onetime costs and would not be expected to continue.
Although we experienced various cost increases for multiple service providers and vendors due to the current inflationary economic environment, most notably in the area of shipping warehousing and logistics costs, we have managed to control overall expenses.
Separately, we have incurred costs associated with several new initiatives, we are working on including design and product development and warehouses subclass.
The investment in these new initiatives as part of the company's plan to replace the revenue from the Missouri brand and again, we continue to pursue ways to cut operating costs.
And the other income category, we recognized a $20.6 million gain in the current quarter and six months period related to the previously mentioned partial sale of the Isaac Mizrahi brand.
Interest and finance expense for the current quarter was $2 8 million compared with $1 4 million in the prior year quarter.
On a year to date basis interest and finance expense was $3 5 million for the current year period versus $1 7 million in the prior year period.
This trend on a quarter and year to date basis is primarily driven by the fact that in the current year, we recognized a higher loss on extinguishment of debt as a result of the May 2022 repayments of all of our outstanding term loan debt, which included a $1 4 million early repayment premium.
The fact that we have fully paid off all of our standing term loan debt and thus no longer have any interest and principal payments due will benefit both our cash flow as well as our income statement and subsequent quarters.
Overall, our net income excluding noncontrolling interest for the second quarter of 2022 was approximately $9 5 million or <unk> 48 cents per share compared with a net loss of $1 6 million or minus eight cents per share in the second quarter of 2021.
On a non-GAAP basis, we had a net loss for the current quarter $3 6 million or minus <unk> 18 per share compared with <unk> 1 million or minus one cents per share in the second quarter of 2021.
Adjusted EBITDA was negative $2 8 million for the current quarter compared with <unk> 9 million in the prior year quarter. The decrease in EBITDA was primarily attributable to lower revenues previously mentioned.
As a reminder, non-GAAP net income non-GAAP diluted EPS and adjusted EBITDA, a non-GAAP on or the terms our earnings press release, and our Form 10-Q present, a reconciliation of these items with the most directly comparable GAAP measures.
Turning now to our balance sheet as of June 32022, the company had unrestricted cash cash equivalents of approximately $11 million and positive net working capital of $17 million. Excluding the current portion of lease obligations and contingent obligations payable in shares of stock.
It should be noted that our cash balances as low level at the end of each quarter. Our current cash balance is approximately $15 million compared with $11 million at June 32022.
And as discussed we have fully paid off our outstanding term loan debt, which will eliminate approximately $4 5 million in annual debt service payments.
That I would like to call I would like to turn the call back over to Bob Bob.
Jim This concludes our prepared remarks operator.
Yeah.
Ask a question. Please press star one on your telephone keypad.
Tom will indicate your line is in the question you May Press Star two if he would like.
All of your questions.
And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question is from Anthony.
Lee Prusinski with Sidoti and company. Please proceed.
Good morning, and thank you for taking the questions.
So I know you guys talked about the.
The strong pipeline of new products can you give us perhaps any any additional color on those and as far as the other projects that you announced as far as Halston and C.
C Wonder.
If you could just help us to think about.
How should we think about it.
What was the impact on your revenue.
Earnings going forward some of these new projects.
It sounds good how are you Anthony.
So.
Okay.
To launch for spring of 'twenty, three that will be also a distributed to premium retailers here in the U S. A bloomingdale's Saks Nordstrom Nieman.
That level of distribution and of course, we will continue to build the.
Boston business and the better tiers of distribution like Macy's and some of the off price retailers. There are also a three <unk>.
Additional new initiatives that are in the pipeline with HSN and with QBC, which one of which we hope to be announcing in the next few weeks and that will be a significant increase in business for our C. Wonder brand. So that's that's a must.
Juruti of the pipeline transactions and no significant capital being deployed for any of these other than <unk>.
Startup cost for product developed and additional <unk>.
Staff to to.
Oversee these businesses before the launch as well as some freelance employees that we brought in I have to get them get the all the product that we are working on.
Developed and launched on time.
Got it thanks for that.
Just a follow up is there any way to quantify these start up costs.
Some of these freelance workers as far as the magnitude of that.
So any color on that.
Sure and generally they are one time cost and to launch a brand for a new season.
Including startup costs for product development and freelance.
Employees that we need in terms of extra hands to take on the additional workload.
It's about 300000 per initiative.
And of course, all of that hits the P&L, we can't capitalize that but those are those are onetime costs. We are also incurring some additional costs setting up warehouse operations in Mexico, and the new three PL that we set up in Ohio for how long.
Their book of business. The Longaberger business has outgrown the three P. L. A that were in they just cannot process orders fast enough. If we run a big event.
And we moved into a state of the art <unk>, there and most of those costs are technology related.
For the setup cost.
Got it Okay, and then to follow up on that as far as the new Mexico facility.
Facility what is the time it gets to when you expect to complete that by.
Mexico will be operational by year end.
It'll be shipping one of the new launches from that facility in late December .
And and and then take it forward from there.
The duty savings.
Is anywhere from 17% to 36% on apparel, depending upon the material and the and the goods. So it's a very significant.
Advantage for us and if you're not familiar with section 321, a of the trade rules are.
There is a the concept of a de minimis amount to qualify for the duty savings and so long as the shipment to direct to the consumer is under $800. It is duty free so.
It is it is a program that many companies, particularly direct to consumer companies are taking advantage of and four hour HSN.
And a T V C business, given that 100% of their orders are direct to consumer.
It's a way that we can be much more competitive retail prices and margins both for QVC HSN and for XL.
Got it thanks for that additional color and then.
So as you look at your current brand portfolio.
Do you think you have the most opportunity to expand.
I think.
Halston.
It has a significant upside for us just given its current distribution.
We believe that the new distribution.
Program that we've started in the UK will be a meaningful business for us immediate distribution is going to be three and 300 independent boutiques and better department stores there.
And our discussion to do something similar in Mexico with distribution in Liverpool and above so we see significant upside with Halston also now with cat and being on board. We think we have an authentic voice there that can drive business at.
HSN and also with the duty free.
Status coming out of the warehouse.
Thank al retails will be will be in line perfectly to drive business.
At HSN also the C. Wonder program has tremendous upside we will be reporting over the next few weeks. What this program will be it's a significant piece of business for us over the next three years and we are very very excited about about this.
Got it okay and the last question for me. So as you look to these new projects what is your willingness to perhaps.
Go back into that position or should we assume that for now you want to maintain a desk to the balance sheet.
We would we would.
Prefer to have a debt free balance sheet as it relates to any term debt.
We we will.
Or I should say, we are in the process of securing a working capital line. It is given.
The planned increase in the amount of inventory that.
That we will be carrying for these various QVC and HSN programs as well as the launch of Halston and premium.
Much more efficient for us to have a line of credit secured by a R and inventory.
Got it okay that makes a lot of sense, okay, well. Thank you very much and best of luck.
Okay.
Our next question is from Debra <unk> with Crystal equity Research. Please proceed.
Thank you and thank you for taking my questions. The first one is more or less a housekeeping question.
And related to the your sale of Mizrahi brand of course, you've retained a significant portion of that 30% of it and it's obvious how that looks on the balance sheet, but I wonder and maybe this is a question for Jim how would we expect that 30% interest to be reflected in your in your.
Our income statement in your P&L.
It's gonna be recorded under the equity method. So it would be a separate line item, we will record the income.
As reported to us from the JV, we have essentially be broken into two pieces I don't want to talk to them, but it's gonna be there'll be sort of a core cash operating component that.
That in conjunction with the.
The distributions for two members and noncash expense of the amortizing part of the intangibles.
Acquired which we didn't project.
Okay.
There's definitely a gotcha.
Okay, very good and when can shareholders expect to see that.
It was it was it was a break even this quarter, we only had the brain for a month.
A month, so we didn't really record anything.
You'll start to see that or the P&L starting in the third quarter.
Okay excellent. Thank you and then of course in regard to the new license that you have for them is rocky brand, where you're going to create a women's apparel.
Are there limitations on that on that license is it sports only or can we see a broad array of of women's apparel.
So I'll take that.
It will be.
Very broad offering that's all.
All classifications.
Classifications under apparel, and we expect to be making an announcement about that.
That launch.
Very soon.
Okay are you expecting a just sort of keys into what was asked by the previous Ah.
Person regarding the C. Wonder brand are you expecting that to take place the C wonder.
Our activity to take place at a faster pace than maybe we would see the new.
New Mizrahi.
<unk>.
Items.
Yes.
The C wonder product development.
It has been in place over the last three months. It is a spring 'twenty three launch Isaac would be.
For fall.
23.
In 'twenty three.
Okay.
Okay and this is a more of a global question you mentioned in your opening remarks, Bob about unexpected inflation. It's in the headlines every day, but last Friday at the University of Michigan gave out some preliminary numbers related to consumer sentiment and of course. This is just a survey of economists.
But they indicated that consumer sentiment had spiked up.
255.1, which is a big number off of a low that was set in June and I just wondered how can how can shareholders makes sense out of these big headlines fees.
These would be how what you're experiencing at XL brands.
What what do you see in terms of the pace of your orders in and maybe the order size average order sizes or ticket averages. If that's the way you look at it.
So this year was challenging for us because of supply chain issues, we are in and our apparel business. Most of our goods are sourced out of China.
And as you know there were shutdowns at many of the provinces in China that caused 45 to 60 day delays in deliveries and a well we tried to hold as many of those orders as we could as retailers began to pull back on.
Inventory levels are where they could cancel orders they did and that has had a very significant impact on the wholesale business for us this year and of course, we're managing through.
The various different stages of goods, where we could cancel orders that were at factories, we did but in certain cases, there are manufacturing inputs grades good trends buttons that were ordered.
We will do our very best to repurpose.
That was good.
And where we could cancel orders and negotiate.
Fairly with our factories, we did and that's been the biggest challenge and then of course, well container cost and logistics costs are are improving and they are still.
Significantly more than they were pre COVID-19.
And blend.
We saw it two and a half years ago. The de Minimis change from 200 to 800 under section 321, a we started doing research and diligence on identifying a warehouse there because this is.
This is a significant advantage, where you're shipping direct to consumer.
Right.
Appreciate you, bringing that up just now because that actually has to do with my next question. It seems like you're bringing consumers quite a bit of value by making that adjustment in your your upstream.
Distribution.
Chain.
What.
What other means are.
Used to bring value to the consumers or to attract them and I just wondered if you could maybe give us a little color on your pricing strategies.
Do you feel like at this juncture you have to engage in sales to keep customers.
Coming to you and loyal to you if you could just give us a little bit of color in regards to your policies on pricing.
So.
<unk> is important regardless of tier of distribution and people like to believe that they.
Purchase something at a fair price.
And.
There is some art and engineering to them building a product whatever it is at a price point that is going to work with the consumer, particularly at each tier of distribution and we do believe that Tomorrow's winners.
<unk> may not necessarily be branded companies the way apparel companies emerged I'm say 2030 years ago with brands like Calvin and Tommy.
Today, it's it's going to be platform companies that have fast production have duty free capability have.
The ability to reach consumers directly.
And build audience and followers or I should say highly engaged followers and we believe that the best way to do that is through live streaming.
The consumer is a board with a static images and we feel that we are very well positioned.
To be one of one of the leading platform companies doing what we do.
Alright, Thank you I'll get back in the queue in favor of the next questioner.
I think you'd ever.
We have no more questions at this time I would like to turn the conference back over to Mr. Gila ran for closing remarks.
Thank you operator, ladies and gentlemen, and thank you all for your time. This morning, we greatly appreciate your continued interest and support in X L brands as always stay fit eat well and be healthy.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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