Q3 2022 Xcel Brands Inc Earnings Call

November 15, 2022

[music].

Okay.

Good day, and welcome to X L brands third quarter earnings Conference call. 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 I would now like to turn the call over to Andrew Berger.

<unk> of S M Burger and company.

Thank you Andrew you May now begin.

Good morning, everyone and thank you for joining us and welcome to the X L brands third quarter 2022 earnings call. We greatly appreciate your participation and interest.

With us on the call today are chairman and Chief Executive Officer, Robert to Lauren Chief Financial Officer, Jim Haran, and executive Vice President of business development and Treasury So for us right.

By now everyone should have had access to the earnings release for the third quarter. Andrew ended September 32022, which went out last evening and in addition, the company filed with the Securities and Exchange Commission.

Quarterly report on Form 10-Q yesterday November 14th.

The release and the quarterly report are 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.

The dynamic nature of the current macroeconomic and geopolitical environment means what is said on today's call could change materially at any time.

Finally, please note that on today's call management will refer to certain non-GAAP financial measures, including 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.

Just a basis, that's why identified business trends relating to the company's results of operations.

Our management believes these financial performance measurements are also useful because these measures.

Just 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 earnings to the company's earnings release or to 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, Bob. Please go ahead.

Thank you Andrew and good morning, everyone and thank you for joining us I'd like to start today's call with some brief opening remarks, followed by some operating highlights and insights after that.

So Jim Erin will discuss our financial results in more detail as we reported last quarter. We completed the sale of a 70% interest in our Isaac Mizrahi brand and entered into a newly formed business Fancher with W. HP Global we have made a lot of progress with the integration of debenture.

W. Hp's operations and expect to make some announcements soon related to our progress with respect to new business development that said the transaction Hasnt impacted our revenues and earnings for the third quarter and will continue to have an impact for the remainder of 2022. In addition near term.

Retail headwinds caused by a challenging retail and business environment have further impacted revenues and earnings during the year.

Scott on our last quarterly earnings call.

We will carefully manage our business by controlling expenses. Despite near term headwinds we are pursuing initiatives that we expect to positively impact revenues and EBITDA going into 2023.

These initiatives include our recent announcement of the appointment of Ken Downing is the creative director and Livestream spokesperson Halston, Ken shows are doing well on HSN and he's having a very positive impact on all creative aspects of the brand.

Extremely excited by how Canada is setting the stage for the go forward for Halston under his creative direction.

I'm also excited by the September 2022 appointment of Christian Siriano as the creative director of our C. Wonder brand and we are on track for the brand to debut on HSN with Christian as the on air.

Starting in the spring of 2023, we are seeing significant interest from potential licensees for the new C. Wonder by Christian Siriano brand across multiple categories. We are excited to be working with Christian and his significant social media following of nearly 5 million followers. During the current quarter. We also.

Launched to Opex, our multi branded optical business on HSN and QVC. This business is conducted through a joint venture whereby we leverage inventory and systems of our partner without any material working capital investments.

Overall, we expect these new developments to help create growth in our existing brands and expand our relationship with QVC and HSN. Furthermore, we continue to work on several other new initiatives with new talent and celebrities and hope to be able to announce them. Shortly our goal is to build a livestream shopping.

Destination for interactive television and our proprietary livestream platforms with over 10 million followers through the combined social media reach as our new creative talent celebrities brands and product launches. We have also continued to see success in our longer Burger business, especially from <unk>.

Our livestream shopping perspective.

As we regularly sell our products and our lives.

We have successfully positioned XL brands as a leader in live streaming social commerce and this hasnt been at least partially responsible for our ability to attract top talent from.

Our new brands and initiatives with QVC, and HSN and our livestream platforms.

And as Ryan transaction is having a short term impact on our financial results, we expect in new businesses.

Scott and the new projects and opportunities that are currently either planned or being considered to more than offset the lost revenue and earnings in the coming year from a financial perspective, we continue to maintain a strong debt free balance sheet, and we believe having strong liquidity levels and greater access to capital is critically important in todays call.

Complex challenging business environment, we expect to enhance our capital levels in the coming quarters with the new commercial bank working capital line also Jim and I together with our operating teams are working hard on a plan for operating efficiency goals for 2023 to watch that recent increased cost in operating the <unk>.

Business, especially as it relates to logistics warehouse and duty cost, we expect that our new warehouse operation in Mexico, coupled with other operating efficiencies that we plan to implement by year end can reduce operating costs.

Over two and a half million OLED.

Over an annualized period in closing we are excited about the growth opportunities for our existing brands, including Halston and C. Wonder with respect to announcements for the brands as well as new business opportunities in our pipeline, we continue to explore new opportunities, including acquisition opportunities and strategic.

Partnerships, we have and will continue to be discipline in our operating costs and we are optimistic that the company will return to profitability in 2023, now I'd like to turn the call over to Jim to discuss our results and financial highlights for the third quarter.

Thanks, Bob and good morning, everyone.

I will briefly discuss our financial results for the quarter and nine months ended September 32022.

Total revenue for the third quarter was $4 5 million, representing a decrease of approximately $6 8 million from the prior year quarter.

The current nine months total revenue decreased approximately $8 1 million from the prior year period to $17 2 million. These.

These revenue declines were driven by declines in both net licensing revenues and net sales.

Net licensing revenue for the current quarter was approximately $2 2 million, representing a decrease of approximately $4 7 million was 68% as compared with the prior year quarter.

This decrease in license fee revenue was primarily attributable to the May 31 2022 sales.

The majority interest in the Isaac Mizrahi brand.

Licensing revenue for the current nine months decreased by approximately $8 1 million to $21 7 million or 27% as compared with the prior year period.

This decrease in licensing revenue was primarily attributable to the sale of the Isaac Mizrahi brand, partially offset by licensing revenue generated from the Lori Goldstein brand during the entire nine months in 2022.

Sales decreased by approximately $2 1 million in the current quarter and $4 million for the nine months ended September 32022, which is 47% and 32% lower respectively as compared with the prior year comparable periods.

These decreases were primarily attributable to declines in wholesale apparel revenue, which early in the year were driven by a combination of discounts on seasonal inventory and canceled orders who was by temporary closing of oversea factories and more recently are being driven by reduced a pause orders from retailers.

Due to industry wide excess inventory levels.

Yeah.

Gross profit margin from product sales increased slightly from 35% in the third quarter of 2021% to 37% in the current quarter.

For the nine month period gross margin from product sales declined from 39% in the prior year to 32% in the current year.

This decline for the nine month period was primarily due to selling off a seasoned apparel inventory early in the year and inventory write downs related to cancel a SaaS orders.

Our operating costs and expenses were $8 7 million for the current quarter down $1 million from the $9 7 million in the prior year quarter.

This decrease was primarily primarily attributable to costs associated with the Isaac Mizrahi brand.

On a year to date basis operating costs with $30 2 million up $2 6 million from 27 6 million in the prior year nine months.

This increase was mainly driven by the combination of cash and noncash expenses related to the Lori Goldstein brand.

Which we owned for the entire months of the current year transaction expenses incurred in connection with the Isaac Mizrahi brand Seo and investments in our new initiatives.

Yeah.

These increases were partially offset by costs associated with the Isaac Mizrahi brand.

Although we like many other companies have experienced cost increases from our service providers and vendors due to the current inflationary economic environment, most notably in the area of shipping warehousing and logistics of course, we are generally managed to control our overall expenses and continue to pursue ways to cut operating costs.

And the other income category, we recognized a $3 million equity method loss in both the current quarter and year to date periods in accordance with the distribution provisions governing the business venture for the Isaac Mizrahi brand.

The recorded loss includes $1 7 million of amortization of intangibles.

Also in this category are the current nine months includes the $26 million gain from the second quarter partial sale of <unk>.

Jewelry brand.

Interest and finance expenses for the current quarter were essentially zero compared with a $5 million in the third quarter of 2021.

This decrease was due to the full repayment of all of our outstanding debt in the second quarter of 2022.

Overall, we had a net loss excluding noncontrolling interest for the third quarter of 2022 of approximately $4 million or minus <unk> 21 per share compared with a net loss of $1 1 billion were minus success per share in the prior year quarter.

On a non-GAAP basis, we had a net loss for the current quarter of $3 3 million or minus <unk> 17 per share compared with essentially breakeven net income in the third quarter of 2021.

Adjusted EBITDA was negative $2 9 million for the current quarter compared with $1 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 are 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.

Turning now to our balance sheet.

As of September 30 of 2022, the company had unrestricted cash of approximately $8 4 million and positive net working capital of $13 $7 million. Excluding the current portion of lease obligations and contingent obligations payable in shares of stock.

Although the sale of the Arctic, Missouri business had an impact on our revenues and earnings for the last two quarters and we will continue to have an impact for the remainder of 2022.

New initiatives as Bob alluded to earlier will begin contributing to earnings shortly.

In addition to these initiatives the company has plans in the works that will reduce operating costs in several areas maintaining operating efficiency and quality.

The combination of new revenue sources and operating costs is expected to turn the company back to profitability in the second half of 2023 and beyond.

And with that I would like to turn the call back over to Bob Bob.

Thank you Jim This concludes our prepared remarks operator.

At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

Okay.

Your first question comes from the line of Anthony Lupinski with Sidoti <unk> Company.

Yeah.

Good morning, gentlemen.

Thank you for taking the questions. So first just some questions about the third quarter. So just curious.

As far as the <unk> performance. So were there any notable changes to the business as the quarter progressed or was it fairly consistent month to month.

I would I would say Anthony.

Bob.

That quarter was.

Exactly as we thought it would turn out.

Sure.

Were they worse.

<unk> sales in our wholesale business, which we did anticipate coming into.

The current inventory situation that exists with most retailers but for.

For the most part of the quarter.

Shaped up exactly the way we thought it would.

When we when we sold the Isaac.

Brand towards the 70% interest in Isaac we anticipated losses until we brought on line.

Five or six new initiatives that we have in the pipeline three of which of course, we have announced.

And.

The first launch.

The new initiatives will be will queue optics has already launched on both networks.

And C wonder launches.

In March.

23.

And then that will be followed by the whole new Halston, Ken Downing line cap has been very busy.

And working with the creative teams involved with holliston.

<unk> had some very successful shows at HSN.

Yes.

We expect that we'll be making more announcements.

Over the next 90 to 120 days that will tail off the roster.

We were planning to bring into the business in 2023.

Got it okay. Thanks for that Bob and then.

As far as the gross margin percentage.

Good to see that being up versus last year, and certainly up versus the second quarter. So what would you attribute that to.

I would say the sourcing team did a very good job here and we did manage inventory very very tight.

So.

I think that that's a good piece of it going forward into 'twenty, three and we will bring the warehouse in Mexico online thats going to help significantly.

With cost.

Turning now to logistics.

Perspective, as well as a duty perspective.

We're excited.

To get that.

Warehouse up and running.

Okay.

Okay, and what's the timing of the Mexico warehouse opening.

We are testing now shipments.

This month we.

We are fully integrated into the warehouse, we are moving goods.

Our PPO in Los Angeles to.

Mexico by year end, we should be fully operational there.

Got it okay. That's good to hear and then.

So so right now you're sort of midway through the fourth quarter.

Could you share with us just kind of broadly speaking what are you seeing so far from a demand perspective for apparel jewelry.

Trends.

And then any sort of Ed Thomas also on Lager Burger, what Youre seeing there.

Yes.

I'll answer the apparel question first.

Most retailers R. R.

Backed up with inventory I think.

Many retailers and a lot of those salaries because of the supply chain problems that we've all been experiencing since the beginning of October it got a little ahead of inventory because it was difficult to buy it in 2020 one.

And now most retailers are over inventoried and we're starting to see that in headlines as recent as today in the Wall Street Journal.

Retailers are are discounting significantly.

To move that inventory I do believe.

That it will take.

A good part of Q1 and Q2 for all of that inventory to flush itself out.

And for everyone to get back to normal operating levels.

With inventory so we expect that wholesale demand there'll be a little soft in the department store channels in Q1 and Q2 and.

And then.

We will see that return.

More normal levels.

In Q3, and Q4, our interactive television business is less sensitive to that.

There are there are buy commitments in place with HSN on the new programs that we're launching.

And we're on track.

With that business.

Got it Okay, and then that business a year ago was certainly hurt the severely by the QVC warehouse fire. So I guess you have.

Easier comparison right.

Yes.

I don't think most people fully understand the implications of that fire.

The impact.

GBC and cure rate in general.

They didn't really have the capacity and there are other warehouses, it's not so easy to just switch to the three pls doesn't happen.

Overnight.

And I do think QVC did an amazing job of navigating through a very difficult situation.

Got it okay, well, thanks, and best of luck for the holiday season.

Thank you Anthony.

Your next question comes from the line of Debra <unk> with Crystal equity research.

Good morning, and thank you for taking my questions I was hoping to return to the gross margin discussion just one additional follow up.

Would we perhaps see an impact in the December quarter from your Mexico operations, and the benefits thereof, or would it perhaps really not be visible until.

The first quarter in 2023.

So you won't you won't see it Deborah.

<unk> first quarter.

When we brought those goods into the U S.

Two the L. A.

PL, we pay to EV.

We're moving goods down to Mexico, now really just we're on task.

And just be sure by January everything is running efficiently.

And then go forward next year.

Goodwill arriving port in L. A.

We'll be truck from L. A bonded to Mexico.

Direct to consumer.

The duty savings.

Thank you and then another question I. Appreciate you, perhaps don't want to provide you know dollar figures or a number of figures, but I was hoping you might provide a little bit more color on the the launch of the optical products.

At least perhaps tell us whether or not it's tracking your expectations and your plans in the early days of the introduction.

So I would say on both networks.

They were software launches.

And there were a lot of back end pieces to it that that had to be deep.

<unk>.

To speak.

And.

It's operating efficiently heading into the new year.

<unk> QVC will began in HSN will begin to market.

We're aggressively.

Graham.

Program really brings to QVC and HSN and eyewear brands that they previously.

Did not offer their customer base.

We are very.

Domestic debt over the coming years this will develop into a.

Strong business for us.

Thank you and then I also wanted to ask about the two newest additions to your to your roster of personalities and designers Ken.

<unk> already got into the <unk>.

Just just jumped right in where we see the same thing with Christian Siriano or will we have to wait until spring of $2 23, before we see him.

On the air.

So christian's first show is scheduled for.

March 2023.

Sure.

Are we expected to land in the warehouse early January .

First Joey will be.

Yes.

Towards the end of March.

And is it possible that we may do some type.

Marketing before absolutely I think Christian will become very visible at the face.

And the creative director of C Wonder.

When we start the new year.

Very good and then just last question has to do with it.

Q3 2022 Xcel Brands Inc Earnings Call

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