Xcel Brands, Inc

Good day and welcome to the Excel Brands First 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 Excel Brands. And as a reminder, this conference is being recorded. I would now like to turn the call over to Andrew Berger of SM Berger & Company. Thank you. Andrew, you may begin.

Good evening, everyone, and thank you for joining us. We appreciate your participation and interest and hope that everyone is safe and well. With us on today's call are Chairman and Chief Executive Officer Robert DeLoren, Chief Financial Officer Jim Herron, and Executive Vice President of Business Development and Treasury Seth Burrows. By now, everyone should have had access to the earnings release for the first quarter ended March 31st, 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 10Q by May 17th. The release and quarterly report will be available on the company's website at www.xlbrands.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. Excel does not undertake any obligation to publicly update or revise any forward-looking statement, 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 remains significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of these circumstances mean 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, 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 and to identify business trends relating to the company's results of operations. Our management believes these financial performance measurements are also useful because these measure 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 on the company's earnings release or to Part 1, Item 2 of the Form 10-Q for reconciliation of non-GAAP measures. And now, I'm pleased to introduce Robert DeLoren, Chairman and Chief Executive Officer. Bob, 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 operating highlights and insights into 2021. After that, our CFO, Jim Herron, will discuss our financial results in more detail. With the extraordinary events of 2020 now nearly behind us, our team has been hard at work during the first quarter of 2021. in not just rebuilding and recovering but also expanding and growing the business as i mentioned in our last earnings call we expected our q1 wholesale businesses to be soft with momentum picking up in q2 and a return to normalized growth in q3 and q4 this year as we entered As we enter Q2, we are beginning to see the green shoots of a recovery across all channels of distribution, including our wholesale business. In order to accelerate the growth of our business, we recently entered into two significant transactions, which we believe will expand our opportunities to create significant value in 2021 and beyond. First, we acquired the Lori Goldstein brand on April 1st. I am pleased to announce that in less than 60 days, we have successfully integrated the business into our existing licensing platform and the initial results from the brand's performance in April and early May have been strong. We expect Lori Goldstein will contribute to earnings in Q2 of this year and for the remainder of the year. We believe our interactive TV business has fully recovered from the COVID pandemic. Our Isaac Mizrahi Live business is doing exceptionally well and has exceeded plan every month this year with April sales at 122% of sales plan and up significantly over last year. Our recently acquired Lori Goldstein business was reprogrammed to prime time shortly after our acquisition and generated 110% of sales plan for April and is off to a great start. Our Judith Ripka Fine Jewelry business on QVC and HSN generated sales of 122% and 142% of sales planned for April on QVC and HSN respectively. As we continue to grow our Halston and Isaac Mizrahi brands on HSN and in international interactive TV channels, including the shopping channel in Canada and TVSN in Australia, which are included in our wholesale sales results. Interactive television continues to be a core capability of XL Brands, and we're excited to see our businesses in these channels continue to do incredibly well coming out of the COVID-19 pandemic. Also, we refinanced our debt facility on April 14, which provided us with additional liquidity of over $10 million and reduced loan amortization by $6 million over the term of the loan. In addition, This gives us an available acquisition line of credit of up to $75 million, subject to lender approval for any opportunistic transactions that may exist in the current retail environment. I believe that the worst of the impact of the COVID pandemic is behind us, and we are now getting the business back on track to drive growth in 2021 and beyond. Now, I'd like to briefly discuss our business by channels of distribution. As I stated, our interactive TV business is doing extremely well. We also believe that our experience in interactive television positions us with a significant advantage to grow live stream shopping across all channels of distribution. Turning now to our direct-to-consumer e-commerce and live streaming businesses, Our Judith Ripka e-commerce business was up 45% from Mother's Day holiday compared to the same period last year and is up 25% for the year. Our Longaberger e-commerce and live streaming business is demonstrating strong monthly growth of approximately 29% per month in its first year of operations with an anticipated run rate of sales exceeding 10 million by year end. This compared to a 2.5 million run rate at year end 2020. I am pleased to report that in June we will conduct our first Judith Ripka live streaming event simultaneously with the opening of our Westchester store and plans continue to grow our direct consumer businesses with the addition of live streaming across all brands. Now turning to our wholesale businesses while we have taken a cautious approach with the wholesale apparel business heading into 2021 The business continues to improve since the outbreak of COVID last March. April sales have been strong, and we expect that business to show significant growth in Q2 as compared to Q1, and with continued growth accelerating in Q3 and Q4. Our Judith Ripka wholesale business is up dramatically at over 300% from last year. We opened over 33 independent jewelry doors and are on plan to be at over 75 doors by year-end. Our dropship programs with retailers such as Sachs are doing well, and we plan to open more premium retail dropship accounts by year-end. As mentioned in our previous earnings call, our sales goal for our wholesale and direct-to-consumer segments is over $35 million for 2021. We are well positioned for growth as we emerge from the unprecedented impacts of the COVID-19 crisis. and I am excited by the opportunities we are pursuing to create value in the coming quarters and years. As you can see, April and May are showing the green shoots of a return to growth across all channels of distribution, and I look forward to reporting our progress throughout the year. Now, I'd like to turn the call over to Jim to discuss our financial results for the quarter. Jim?

Thanks, Bob, and good evening, everyone. I will briefly discuss financial results for the quarter ended March 31, 2021. Please note that our financial results are described more fully in our quarterly report on Form 10Q, which was filed this evening. Total revenues for the quarter was $7.8 million, a net decrease of approximately $1.7 million, or 18%, from the prior year quarter, primarily driven by our transition of Halston to a wholesale model for our interactive television channel distribution. As Bob mentioned, we expect to see the rebound from this for the remainder of the year as our wholesale business Net product sales were down approximately 0.4 million year-over-year. Appliance and wholesale apparel sales, primarily as a result of the economic impacts of the ongoing COVID-19 pandemic, which did not impact us until Q2 of 2020, were partially offset by growth in our interactive television wholesale sales of Judith Ripka products, as well as significant growth in e-commerce sales of Longaberger branded products. From a trend perspective, this was our third consecutive quarter of product sales growth, with our net product sales increasing by approximately 35% as compared with the fourth quarter of 2020. Despite the year-over-year revenue declines, gross profit margin from product sales increased from 38% in the prior year quarter to 48% in the current quarter. Our decision to move away from certain licensing arrangements to wholesale and direct-to-consumer model gives us greater control of a product and the long-term benefit that we expect from increased revenues through volume and margin growth. Our operating expenses were $8.5 million for the current quarter, up 3.6% from $8.2 million in the prior year quarter, primarily driven by increases in payroll and marketing costs as we position ourselves for growth in 2021. Net loss excluding non-controlling interest was approximately 2.5 million for the current quarter or minus 13 cents per basic and diluted share compared with a net loss of 0.8 million or negative 4 cents per basic and diluted share for the prior year quarter. After adjusting for certain cash and non-cash items, non-GAAP net loss for the current quarter was approximately 1.5 million or minus 8 cents per share compared with non-GAAP net earnings of approximately 0.2 million or one cent per share in the prior year quarter. Adjusted EBITDA for the current quarter was negative 0.9 million compared with positive 0.7 million for the prior year quarter. The decrease in top line revenue of 1.7 million was the primary contributing factor in the decrease in adjusted EBITDA. As a reminder, non-GAAP net income, non-GAAP diluted EPS, and adjusted EBITDA of non-GAAP unordered terms. Our earnings press release and our Form 10Q presents a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our cash and liquidity. As of March 31st, 2021, the company had unrestricted cash and cash equivalents of approximately $3 million compared with cash of approximately $5 million at December 31st, 2020. As Bob previously mentioned, we acquired the logo Laurie Goldstein brand on April 1st of this year and refinanced our term debt shortly thereafter. This increased our term debt balance from $16.8 million as of March 31st to approximately $25 million following the refinancing and coupled with the $4 million revolving credit facility, provides the company with over $10 million of increased liquidity following the refinancing. As a result, our cash balance as of the end of April was approximately $10 million, and our term debt net of cash was approximately 15. In addition, our average scheduled loan amortization was reduced by an average of 1.5 million per year. As Bob mentioned, we also entered into a $75 million acquisition facility with BHI and First Eagle, subject to their credit approval, which provides us with additional capacity for acquisitions. It's important to note that we do not pay any unused line or other fees for such funds until they are drawn. We believe that the company has a strong balance sheet and the financial capacity to continue to grow our business both organically and through future acquisitions. And with that, I would like to turn the call back over to Bob.

Thank you, Jim. Ladies and gentlemen, this concludes our prepared remarks. Operator?

Thank you. And we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Once again, that is star then 1 to ask a question, and we will pause momentarily to assemble the roster.

And again, that is farther than one to ask a question.

And our first question today will come from Jim Darling with Jefferies Capital. Please go ahead.

Hey, Bob, could you update us if there's anything to say on what's going on with Walmart and C Wonder?

Sure. We are continuing with the online business with MGM, and we added several new categories coming into this spring season. The footwear and accessories businesses are doing particularly well. Our handbag business is doing well there. And we are working on concepts now to present to Walmart for spring of 22 for in-store sales. And we won't know until the buyers come in and do their review. But we're excited about the potential of actually getting in-store.

Is this a possible game-changer?

I would say it will be a strong business if we get into Walmart in-store. But I would say there are other things that are also game changers here, Jen. Longaberger is one of the most exciting things we're working on, not to diminish the importance of Sea Wonder. at Walmart, of course, but it's good to have 2020 behind us with some of the things that are happening, particularly with Longaberger and the possibilities with Sea Wonder.

Thank you. Thank you. And our next question will come from Howard Bross with Wellington Shield. Please go ahead.

Gentlemen, I'm glad everybody is well and the families are well. Bob, are you getting any sleep because of your little one or not?

I've been blessed. This baby is very unusual. She goes to sleep at 7 p.m. and wakes up at 7 a.m. every day. I don't know if the baby is truly a gift. Or my wife's doing a brilliant job. It's probably a combination of both, but thank you.

Yeah, things are pretty good. I'm sure it's a combination of both. Let me focus on Longaberger for a moment. You had mentioned that by the end of last year, you were doing $2.5 million worth of revenue. Your expectations are $10 million by the end of this year. Can one assume that that gives you profitability?

Yes, and just to be clear, Howard, we're talking about run rate because the sales growth is so dramatic on a weekly basis. We're looking at run rate as we go forward, and it's a fascinating business as we recruit members, which is a key metric for us to look at as the business grows. The growth in stylists, each stylist that we recruit on board increases sales by $6,000 per year. So we're running about 4,000 members now, 2,000 stylists, and the goal is to have onboarded by year end between another 3,000 to 5,000, which would put us at a very strong run rate going into It's a very exciting business.

As you're adding members and stylists, are you adding SKUs? Yes.

So we started with about 200 SKUs. Today we're close to 2,000. If you're not familiar with this, about a third of our business is marketplace. So we've built a marketplace for artisans around America that are making goods here in the U.S. And that is part of the buying function as well as an onboarding function to bring more companies and artisans into the marketplace. And then about another third of our products are consumables like home fragrance and food products. And then a third are what we call value-driven products, products that we're sourcing. And, of course, our core baskets, which we are still making in Dresden, Ohio. So SKU growth, we expect that currently we're at about 2,000. The goal is to get to about 3,000 by year-end and continue to grow from there.

So looking at Longaberger, you just described 2020 and 2021. How do I look at this thing over the next couple of years? Because if you go back to Longaberger going 15, 20 years ago, this was a billion-dollar business. So how can I look at it two to three years down the road?

I think the way, you know, you have to look at it is the way we do in terms of how we set the goals for the business. At 10,000 stylists, we should be on a $60 million run rate of revenue. And then it's just math from there. At 20,000, you're at $120 million and so on. So that's how we look at it. We just recruited a very senior person from the direct selling business to come and head up sales. and recruiting, and he's building a national team, and that's going to drive the recruiting. So it's really a bit of a flywheel. The more you add to the base of stylists, the more your sales grow. So it's really onboarding new people, artisans onto the marketplace to increase the product offering and recruiting stylists. And that drives the business, Howard. It's the best of digital live streaming and direct selling. That's what we did with the company to reposition it coming out of bankruptcy.

So live streaming represents how much of the potential revenue on a percentage basis, looking for 2022 or even 2023 or 4, just on your general thoughts, not asking for a projection.

Sure. So it should be about 25% of our Longaberger sales. We're currently conducting live shows every first Monday of the month. The shows are doing exceptionally well. We are currently selling more per minute than most interactive television networks around the world, except for QVC US. And as that customer base grows, we think we could actually be at those QVC US numbers, say 7,000 to 10,000 per minute when we're live streaming. So that's the goal. And the customer base grows as we grow the stylist base. because the way we set up the live streaming is we centralize the live streaming. We do it from here. We have the production room. Our stylists, they just need to invite their customers to the live stream event and then do the follow-up after the live stream event, and they get paid their marketing fees for just making the invites.

Let me then turn to Lori Goldstein for the 2021 2022 timeframe. What can I look at in terms of potential revenue coming off of a bad 2019? turnaround in 2021? How do I look at Lori Goldstein?

So one of the key things for us was to get Lori back into prime time, which we were able to do almost immediately after closing. There's a big difference in selling in prime time, as you well know, as opposed to selling in less prime hours. And now it's... doing product reviews to correct some of the mistakes that were made in product in 2019, which we think we have resolved. Certainly the sell-throughs on new product are working very well. The goal is to get the Lori Goldstein business back to where it was, which would be almost double where it was when we closed on it.

You're talking about a couple of hundred million dollars then?

Yes.

In revenue? Yes.

Well, in sales of Lurie Goldstein product and then, of course, for us, we're recording licensing royalties. So in an ideal world, the goal would be to double the royalties from where we acquired them.

All right. Let me address. Two other items, if I may, please. It isn't often I look at a company that is selling at 40% of book value. Book value is a little bit better than $4.50 a share, and it's selling for 40% of book value. Any thoughts as to possibly why that situation exists?

It's a hard question to answer, Howard. I think part of it is liquidity in the market, although trading volume has been good, not from the institutional community, but more from the retail community. I would say that in some In some regards, it's hard for people to understand the value of intangible, and that's a big factor in valuing Excel.

I understand that. You've taken down and you've paid almost two-thirds of a million dollars, if I remember reading the queue, which just came out, for a $75 million acquisition line. What type of multiple of EBITDA are you looking at? Four times as an example for acquisition purposes?

So to date, we've acquired a new company and or brand almost every 18 months since we started the business in 2011. We've not paid more than three. There's 3.5 times royalties. and generally speaking, less than five times EBITDA. So I would say that is correct. That's the target.

So although I know you can't comment about the target, but if I looked at spending $50 million at four times EBITDA, with the interest rate that you're being charged called 7% and adding $1 million to depreciation and amortization, you're still talking about close to 40 cents pre-tax. if you made an acquisition for $50 million at four times EBITDA. Does my numbers sound right?

Your numbers do sound right. Generally speaking, that is the way it would work. That would be highly accretive to the shareholders. And depending on expense cuts, it could be more. If we're investing in the brand, it could be somewhat less. But generally speaking, that's the way it works.

Bob, I wish all of you the best, and thank you for your time.

Thank you, Howard.

Thanks, Howard. And there are no further questions at this time. I'd like to turn the call back over to Mr. DeLorn for any closing remarks.

Ladies and gentlemen, thank you for your time this evening. We greatly appreciate your continued interest and support in XL Brands. As always, stay fit, eat well, and be healthy.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.