Q1 2023 Xcel Brands Inc Earnings Call
Speaker 2: prior authorization of Excel brands and as a reminder this conference call is being recorded. I would now like to turn the call over to Andrew Berger of SM Berger and Company. Thank you. Andrew you may now begin.
Speaker 3: Good evening everyone and thank you for joining us and welcome to the Xcel Brands first quarter 2023 earnings call. We greatly appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert DeLauren, and Chief Financial Officer, Jim Herron.
Speaker 3: and Executive Vice President of Business Development and Treasury, Seth Burrows.
Speaker 3: By now, everyone should have access to the earnings release for the first quarter ended March 31, 2023, which went out today, and in addition, the company filed with the Securities and Exchange Commission its quarterly report on Form 10Q earlier today as well. The release and the quarterly report will be available on the company's website at www.cpe.us.
Speaker 3: actual results to differ materially from certain expectations discussed here today.
Speaker 3: These risk factors are explained in detail in the company's most recent annual report filed with the SEC. Excel 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 environment means...
Speaker 3: that what is said on this call could change materially at any time. Finally, please note that on today's call, management will refer to certain non-GAAP financial measures, including non-GAAP net income, non-GAAP diluted earnings per share, and adjusted EBITDA. Our management uses these non-GAAP metrics as measures of operating performance to assist in comparing performance and performance to the performance of the
Speaker 3: from period to period on a consistent basis, and to identify business trends relating to the company's results of operations. Our 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.
Speaker 3: and thus they provide supplemental information to assist investors in evaluating the company's financial results.
Speaker 3: 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 company's earnings release or Part 1, Item 2 of the Form 10Q for reconciliation of non-GAAP measures.
Speaker 3: And now I'm pleased to introduce Robert DeLoren, Chairman and Chief Executive Officer. Bob, please go ahead.
Speaker 4: Thank you, Andrew. Good evening, everyone, and thank you for joining us. I would like to start today's call with a discussion of our strategic transformation efforts. After that, our CFO , Jim Herron, will discuss our first quarter financial results in more detail. In the first quarter of 2023, we began a restructure.
Speaker 4: of our business operation shifting from a wholesale licensing hybrid model to a high touch licensing and live stream DTC business model. With the ultimate goal transforming our company into a modern asset light and highly profitable live stream media and consumer products company.
Speaker 4: We expect the transition of our operating businesses to be substantially complete by the end of the second quarter of 2023. In summary, as a result of all of our restructuring efforts going forward we expect to save approximately $13 million in operating expenses.
Speaker 4: on an annualized basis, including approximately 6 million of reduced payroll costs and 7 million in lower operating costs. These cost savings started to be realized in the first quarter of 2023 and are expected to be substantially realized by the end of the second quarter of 2023. Our current financial forecast indicates that we will return to profitability.
Speaker 4: these new arrangements powered by extraordinary live stream and social commerce technology will provide our company a competitive advantage and with significant cost savings going forward and allow us to reduce and better manage our exposure to operating risk.
Speaker 4: while providing our customers with exceptional quality at attractive prices. Also, we believe our live stream technology will enable us to fully engage with and entertain our customers in ways that were not possible in the past.
Speaker 4: For our Judas Ripka brand, we have entered into a new licensing agreement to move the interactive television operations to JTV. This new arrangement and agreement with JTV has an initial five-year term with guaranteed minimum royalties. When the brand launches on JTV in the second quarter of 2016, we will be able to move the interactive television operations to JTV.
Speaker 4: It will be a brand with significant on-air presence for the network in the first year and beyond. We believe this presents a fantastic and exciting opportunity to grow the brand on TV and online with our new partner going forward. At the same time, we signed an additional license agreement with JTB for them to take over.
Speaker 4: jewelry inventory. Moving now to apparel in connection with the launch of our C-Wonder brand on HSN, we finalized and signed a license agreement with one jeanswear group for them to take over the wholesale production operations related to the C-Wonder brand.
Speaker 4: and other brands in our HSN show pipeline. This license has an initial term of three years with wealthy and minimum sales requirements.
Speaker 4: For the Halston brand, we recently signed a Strategic Master License Agreement with a soon to be announced industry leading global wholesale apparel and accessories company under which they will take over and assume all of the existing licensing contracts for the brand together with apparel wholesale operations and distribution in department store.
Speaker 4: from this agreement in Q2 of this year and expect to realize even greater revenues in 2024 when this license launches new products under the Halston brand in spring 2024. Our partnership with this licensee, given their extensive production and distribution capabilities.
Speaker 4: provides us with a tremendous opportunity to grow the brand and take Holston to the next level. With respect to our Longaberger brand, we are in the process of launching our latest version of live stream technology that we believe will revolutionize social commerce. We expect this business to turn the corner to profitability soon. Regarding our interactive television business.
Speaker 4: The Isaac Mizrahi and logo by Rory Goldstein brands are performing well on QVC with sales in the first quarter of 2023 exceeding sales in the fourth quarter of 2022. Sea Wonder launched on HSN at the end of March and the launch show exceeded planned by 130%. Now I'd like to turn the call.
Speaker 4: Over to Jim to discuss our results and financial highlights for the first quarter
Speaker 5: Thanks, Bob, and good evening, everyone. I will briefly discuss our financial results for the quarter ended March 31, 2023.
Speaker 5: Total revenue for the first quarter of 2023 was $6.1 million, representing a decrease of approximately $2.7 million from the prior year quarter, but an increase of approximately $2 million from the fourth quarter of 2022.
Speaker 5: The year-over-year revenue decline from the prior year quarter compared with the current quarter was driven by a $3.7 million decrease in licensing revenue, primarily attributable to the sale of a majority interest in the Isaac Missouri brand in May 2022.
Speaker 5: and was partially offset by an increase of approximately $1 million in net sales, largely due to the sale of our C1, their apparel inventory, to HSN as part of the restructuring and transformation of our business operating model.
Speaker 5: On a sequential quarter basis, the increase in revenues from the prior year quarter to the current quarter was mainly driven by the sale of our C1 to apparel and along with increased royalties from the Lori Goldstein brands on QVC.
Speaker 5: Gross profit margin from product sales decreased from approximately 40% in the first quarter of 2022 to approximately 30% in the current quarter.
Speaker 5: In conjunction with the exiting the wholesale operation portion of our business and transitioning the production, sourcing, logistics, and inventory management for our brands to best-in-class partners included liquidating inventory, which was primarily attributable to a lower gross margin percentages.
Speaker 5: Our operating costs and expenses were $8.8 million for the current quarter, down by $1.3 million from $10.1 million in the prior year quarter.
Speaker 5: This decrease was primarily attributable to lower salaries and other operating costs related to the Isaac Mizrari brand and reductions in staffing levels during the current quarter related to the restructuring and transformation of our business operating model.
Speaker 5: Operating costs and expenses also declined on a sequential quarter basis from $10.2 million in the fourth quarter of 2022 to $8.8 million in the first quarter of 2023.
Speaker 5: This decline was primarily related to our restructuring and transformation initiatives, including a combination of lower marketing and advertising expenses and administrative costs.
Speaker 5: We expect that our operating costs and expenses will continue to decrease during the second quarter of 2023 and by the start of the third quarter reach a run rate of under $4 million per quarter.
Speaker 5: which is exclusive of depreciation and amortization.
Speaker 5: Below operating income, we recognize a $0.5 million equity method loss in the first quarter of 2023 in accordance with the distribution provisions governing the business venture with the Isaac Missouri brand.
Speaker 5: which was exclusively 0.5 million of amortization of intangibles.
Speaker 5: And however, we did not have significant amount of interest in finance expenses in the current quarter as we fully repaid all of our outstanding debt in the second quarter of 2022. And this compares favorably with the first quarter of 2022 in which we did not have any equity method loss. But we did not have any equity method loss in the current quarter as we fully repaid all of our outstanding debt in the second quarter of 2022.
Speaker 5: but did recognize $0.7 million of interest in finance expense.
Speaker 5: For the current and prior year quarter, there was a zero tax benefit due to a tax valuation allowance recorded in each period.
Speaker 5: Overall, we have a net loss excluding non-controlling interest for the first quarter of 2023 of approximately $5.6 million or minus $0.29 per share compared with a net loss of $3.5 million or minus $0.18 per share in the prior year quarter.
Speaker 5: This represents an improvement, however, from the fourth quarter of 2022, net loss of $6 million or minus $0.30 per share.
Speaker 5: On a non-GAAT basis, we had a net loss for the current quarter of $3.6 million, or minus $0.18 per share, compared with a net loss of $1.9 million, or minus $0.10 per share in the first quarter of 2022.
Speaker 5: Adjusting EBITDA was negative 3.2 million for the current quarter compared with negative 0.9 million in the prior year quarter.
Speaker 5: This represents an improvement, though, from the fourth quarter of 2022, Justice Ibedar, of negative 5.99.
Speaker 5: For the balance of 2023, we expect our adjusted EBITDA to continue to improve throughout the year and as Bob mentioned earlier, we currently project that as a result of the Restructure Plan, we will achieve positive EBITDA in the back end of 2023.
Speaker 5: And again as a reminder non-GAAP net income non-GAAP diluted EPS and adjusted EBITDA are non-GAAP unordered terms.
Speaker 5: Our earnings press release in Form 10Q present a reconciliation of these items with the most directly comparable GAAP measures.
Speaker 5: Now turning to our balance sheet, as of March 31, 2023, the company had unrestricted cash of approximately $1.6 million and positive net working capital of $5 million, excluding the current portion of our lease obligations.
Speaker 5: The new Strategic Master License Agreement with our new license for the Holson brand, which was executed in May 2023, included a certain upfront cash payment.
Speaker 5: Under our current financial projections, we believe this coupled with our expense cuts and working capital position provides the company with adequate liquidity going forward.
Speaker 4: And with that, I would like to turn the call back over to Bob. Bob? Thank you, Jim, ladies and gentlemen. This concludes our prepared remarks. Operator?
Speaker 2: Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, please press star 1 on your telephone keypad. If you wish to withdraw your question, simply press star 1 again. And your first question comes from the line of Howard Brose with Wellington Shields. Please go ahead.
Speaker 6: Thank you. Robert, I first of all want to congratulate you on the significant changes and the vast opportunities that you are presenting to us.
Speaker 6: I have just a few questions. Clearly the cash payments advance.
Speaker 6: Will that be disclosed other than in the subsequent 10Q?
Speaker 4: It will be and a follow-up AK.
Speaker 4: will be in a follow-up AK, Howard. OK.
Speaker 6: Using Halston as an example, do you have any other significant opportunities in the works like Halston? Alston will be my preferred example of a film by Halston to help promote Hilary O'Byrne.
Speaker 4: So we have several new brands in our pipeline. We are in the process of launching something with Christie Brankley on HSN and other similar brands.
Speaker 4: celebrities on QVC, two on QVC, one more on HSN. Our Christian Siriano launch with our C Wonder Brand on HSN is off to a great start, Howard. We did 130% of the launch of the C Wonder Brand launch.
Speaker 4: better than plan on the first TS launch show. And all of Christian shows so far have been quite strong. So, you know, we look forward to these new businesses with both HSN and QVC and of course.
Speaker 4: Now with our own live stream platform, we will be selling product directly, live streaming with the celebrities that are working on our brand.
Speaker 4: And just to add to that, we expect a significant increase in the Halston business under our new license agreement. And we expect to announce who we have done this with in early June .
Speaker 6: So we're looking at live streaming.
Speaker 6: Do you have any competition right now in live streaming for these types of brands?
Speaker 4: Well, there's competition.
Speaker 4: that comes from interactive television. There's competition from a lot of retailers that have been trying live streaming. But I don't believe that there's any competitor out there that is working with a complete ecosystem from a technology perspective.
Speaker 6: towards the end of the year.
Speaker 6: you have a research report done by a lovely lady named Debra Fiatas.
Speaker 6: Crystal Equity Research and in her research model
Speaker 6: She talks about, and I'm talking about 2024. And I know you don't give guidance, but are you comfortable? That's the only word I want to use.
Speaker 6: with hard numbers for 2024. So... 25 and... go ahead.
Speaker 4: There are two analysts that cover Howard Sidoti and Debra. They're comfortable with the guidance that they've put out there. We expect that the company will return to profitability in Q4 of this year and then generate value in the industryaaSiii communityAm Ignite
Speaker 4: significant
Speaker 4: EBITDA compared to what we will be reporting for the entire year of 23, going into 24 and beyond.
Speaker 4: As you know, we've been able to eliminate $13 million of overhead. Our target was $10 million. We exceeded that by $3 million, and we believe there may be a little more that we can take out without disrupting the business.
Speaker 6: Again, best of luck and congratulations on the significant changes you've just created here. Thank you. Thank you.
Speaker 2: Your next question comes from the line of Anthony Libidzinski with CIDODI. Please go ahead.
Speaker 7: Good afternoon and thank you for taking the questions.
Speaker 7: Yes, so certainly a lot of changes here ahead. So, as far as the first quarter results, revenue did come in better than what we had expected, which was nice to see. Looks like most of the upset came from better than expected wholesale.
Speaker 7: I know you talked about selling a good chunk of inventory, the C-Wonder to HSN. How much of that $3.8 million in wholesale sales was actually attributable to the C-Wonder sales to HSN? Hey, I thought it was Jim.
Speaker 4: with HSN to... Just as a point of reference, Anthony...
Speaker 4: with HSN to... Just as a point of reference Anthony, Sea Wonder launched in late March.
Speaker 5: So what you're seeing is really just... Right, so there's two pieces of that. There's a royalty piece and then there's wholesale that will still continue to have wholesale sales into the second quarter and those products then will be sold on HSN will be sold on HSN.
Speaker 7: receiving royalties on the retail sales of that product. Got it, okay, thanks for that. And then so when I look at the balance sheet for inventory at the end of the first quarter was 3.1 million. So it was actually up sequentially from the fiscal year end. So.
Speaker 7: Now, so I guess, you know, first, so just looking at the first quarter ending inventory, what is that left? I mean, obviously, sold off a good chunk to HSN, but so what's left now in the inventory? And then how do we think about inventories by the end of the second quarter? And then by the end of the fiscal year, will there be much in terms of inventory?
Speaker 4: And we expect by the end of June , we won't have any apparel inventory.
Speaker 8: Okay.
Speaker 7: Gotcha. Okay. All right. Thanks. Thanks for that. And then so as far as the annualized cost savings, I know you talked about increasing that from 10 million to 13 million.
Speaker 7: Have you been able to I just wanted to get a better understanding where's the additional 3M dollars coming from and sounds like that might be a tad conservative. So just wanted to get a better.
Speaker 7: Have you been able to just wanted to get a better understanding where's the additional 3M dollars coming from and sounds like that might be a tad conservative. So just wanted to get a better. You know, explanation for that.
Speaker 4: So the cuts came 6 million from salaries and 7 million from operating overhead. And within the salaries, it's primarily people who were involved in the wholesale businesses and to some extent some of our e-comm businesses including...
Speaker 4: warehouse people, logistics, sourcing, team members, merchants, designers, and then in operating overhead, a lot of warehousing, shipping, inventory.
Speaker 4: marketing, so those expenses will no longer be part of our operating cost. And that's where most of the savings come from.
Speaker 7: Got it. As far as the Longaberger brand, in one of the prior filings you guys talked about possibly looking at the all too famous associates.
Speaker 7: divesting that? Is that still on the table or have you reconsidered that?
Speaker 4: We're exploring it with what we in an ideal world we'd like Longaberger to be part of our livestream marketplace and we're exploring either divesting it and
Speaker 4: bringing it into our marketplace or licensing it out to an operator where they can operate it and be part of our our marketplace. The plan for the marketplace is to be focused on fashion, home, and beauty.
Speaker 7: That understand okay well thank you best of luck and I'll pass it on to the next person
Speaker 2: Once again, ladies and gentlemen, if you have a question, it is star 1. And your next question comes from the line of...
Speaker 2: Deborah Fiacas with Crystal Equity Research. Please go ahead.
Speaker 9: Hi Deborah. Thank you. Good evening. Thank you for taking my questions. I appreciated the questions that were asked by the previous two participants, particularly in regard to the pretty significant increase in the savings that you expect. I just want to clarify.
Speaker 9: this jump from an estimated 10 million to 13 million is largely due to salaries. Maybe you could give us an idea of what your personnel force will look like, say at the end of June or at the end of October .
Speaker 4: or September , I should say. Sure. We, pre-transition, we were at about 95 people in our New York office. And, um,
Speaker 4: September , I should say. Sure. Pre-transition, we were at about 95 people in our New York office and six people in our office.
Speaker 4: Sure. We, pre-transition, we were at about 95 people in our New York office and six outside
Speaker 4: traveling salespeople and post June 30 we will be 40 people in New York. So a lot of the savings came from the cuts that we made that were all associated with supporting the wholesale businesses.
Speaker 4: And that's where we will be. And we don't see any disruption in the business. All but a few of those people are gone. There will be a few that will leave by the end of June . And part of the additional cost was the opportunity to get a new wholesome license.
Speaker 5: we were able to accelerate some of the costs associated with that business. So we were able to take advantage of that in 2020, sorry.
Speaker 9: Okay, excellent. Well, I understand a little better now. And then I wanted to move on, and you've already mentioned in your opening remarks a little bit in the Q&A your agreement regarding HULST. And it seems like 25 years is a long time in this day and age. What is it I know we'll all eventually know who this master license is.
Speaker 9: increase your sales volume so dramatically.
Speaker 9: If you could maybe give us a little bit of a hint as to...
Speaker 9: if you could maybe give us a little bit of a hint as to what you saw in them.
Speaker 4: If history is any indicator of what's likely to happen, they have a track record of building multi-billion dollar brand.
Speaker 9: Okay. So we'll see a good track record, and they have a history of making their payments and so forth, so we can trust them with this 25-year term.
Speaker 9: Yes, they are an industry titan. Okay, very good. Thank you. I do have one additional question. That's in regard to just the comments that you made related to your own efforts to reach your consumers, reach your customers. You mentioned social commerce technology.
Speaker 9: And you also mentioned your live stream technology that you are going to deploy for Longaberger. And I wondered if you could give us a little bit of color on what this technology is.
Speaker 9: you know, how does that set you apart from what the next brand owner is doing?
Speaker 4: Well, there's two things that are happening in the industry today. One, short form video content is winning.
Speaker 4: The retail model is shifting from the one-to-many model to the many-to-many model. Amazon announced two weeks ago that they are now shifting to the many-to-many model. And by that what I mean is the industry going forward will rely on
Speaker 4: converting everyday customers into paid influencers. And it will be a business driven by sales by many people as opposed to one entity that is pushing product.
Speaker 4: via either static images or short form video content. And there aren't a lot of tech platforms that one can provide the everyday shopper or an influencer with the technology that they need. Think of it as a shoppable version of TikTok.
Speaker 4: with appropriate reporting.
Speaker 4: the ability for brands to do the same thing in terms of converting whatever content they have into short form video content. Clearly, we believe, and it's not just us, it's others that are conducting research in this sector.
Speaker 4: that the future will be all about short-form video content and harnessing the power of shoppers and influencers to sell product. Okay, thank you. I might come back, but I'll let the next person ask questions.
Speaker 4: As always, stay fit, eat well, and be healthy.
Speaker 2: Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect and thank you for participating.