Xcel Brands, Inc

Thank you for standing by. This is a conference operator. Welcome to Excel Brand's second quarter earnings conference call. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. 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 call is being recorded. I would now like to turn the conference call over to Andrew Berger of SM Berger & Co. Thank you. Andrew, you may now begin.

Good evening, everyone, and thank you for joining us. We appreciate your participation and interest and hope that all of you are safe and well. With us on the call today are Chairman and Chief Executive Officer Robert 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 second quarter ended June 30th, 2021, which went out a short while ago. And in addition, the company expects to file with the Securities and Exchange Commission its quarterly report on Form 10Q by August 16th. The release and the quarterly report will be available on the company's website at www.excelbrands.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 statements. whether as a result of new information, future events, or otherwise. In addition, the ongoing COVID-19 pandemic continues to have a significant impact on the company's business, financial condition, cash flow, and results of operations. There remains significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of these circumstances 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, 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 measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus they provide supplemental information to assist investors in evaluating the company's financial results. These non-GAAP measures should not be considered in isolation or as alternatives to net income, earnings per share, or any other measure of financial performance calculated and presented in accordance with GAAP. You may refer to the attachment in the company's earnings release or Part 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 exciting operating highlights and insights into 2021. After that, our CFO, Jim Herron, will discuss our financial results in more detail. The second quarter of 2021 was a quarter of growth and expansion for our business as we grew our top line revenues by over 100% from second quarter of 2020 and nearly 40% from the first quarter of 2021. This growth came from a combination of organic sources, including the continued rebound in our wholesale apparel sales, dramatic growth in our wholesale jewelry business, the opening of our Judith Ripka flagship jewelry store and the strong growth in our e-commerce businesses and inorganic sources, notably the April 1st, 2021 acquisition of the logo Lori Goldstein brand. I am pleased with the momentum we have built. And as we move towards the second half of 2021, we are eager to capitalize on that momentum and accelerate the expansion of our business. We expect continued strong growth in Q3 and Q4 of this year, and that our future quarterly revenues will eclipse pre-pandemic levels. That said, we are planning a slower recovery in our wholesale apparel business, which is driven by our conservative approach to inventory management, given the current global trends in increased product cost logistics and warehousing cost increases Delivery delays and the related margin decrease in certain apparel products. Now I'd like to turn to briefly discuss our business by channel of distribution. Our interactive television business led by our Isaac Mizrahi Live and Logo Lori Goldstein businesses is doing exceptionally well. Isaac Mizrahi Live is exceeding planned by 5% and is up almost 10% from the prior year. Our currently acquired, or I should say our recently acquired, Lori Goldstein business was reprogrammed to prime time shortly after our acquisition and has added significant growth to our interactive TV business. As a result, our interactive TV revenues are up 36% in Q2 compared with the prior year quarter. And we continue to grow certain of our 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 business for Xcel Brands, and we're excited to see our businesses in this channel continue to do incredibly well. Turning now to our direct-to-consumer e-commerce and live streaming businesses, Our Judith Ripka and Longaberger combined e-commerce sales are up almost 150% compared to the prior year quarter and are up over 220% year to date compared with the same period in the prior year. New memberships are up 33% in Longaberger and active stylists are up 167% for the first six months. In June, we conducted our first Judith Ripka live streaming event, which we were pleased with the results and we plan on conducting the second live streaming event in September for our Judith Ripka brand. Since our February premiere show, we have averaged one live streaming event per month for Longaberger, which has been a valuable resource contributing significantly to the sales and continued growth of the business. In fact, this past monday night we held our most successful show to date and achieved over 100 000 in sales or three thousand dollars per minute these are outstanding numbers given the current growth rate in our longer burger stylist community we believe that our shows can generate 1 million or 15 000 per minute by the end of 2022 in this new channel of distribution we are not waiting for the future to greet us we are in fact reaching out to greet it Now, turning to our wholesale businesses, our apparel wholesale business continues to improve since the outbreak of COVID last March, although we continue to take a cautious approach as it relates to our inventory management. For the near term, we are not going to take inventory positions without committed sales or clear demand forecasting for our dropship programs. Accordingly, we have reforecasted this business in line with our inventory risk tolerance for 2021. We will use this time to further our goal of making the best possible apparel products. Our Judith Ripka wholesale business is up dramatically at over 156% from last year. We opened over 47 new independent jewelry doors and are on plan to be at over 75 doors by year end. Our dropship programs with retailers such as Saks are doing well, and we plan to open more premium retail dropship accounts by year end, with those programs showing 500% growth for the first half of 2021. Finally, we are planning a live stream event with our Sea Wonder brand in connection with the launch of our new Spring 22 line at Walmart. We believe that live streaming will provide a significant, important boost to this business. We ended the first half of 2021 in Sea Wonder, up 33% in apparel, 47% in footwear, 19% in handbags, and 33% in luggage and belts, and believe we have now settled at retail price points that work for the Walmart customer. We continue to see improvements from the unprecedented impacts of the COVID-19 crisis, and I'm excited by the opportunities we are pursuing to create value in the coming quarters and years. We are encouraged by the growth in all of our channels of distribution, and we are very optimistic about our continued success. Now I would like to turn the call over to Jim to discuss our financial results for the quarter.

Thanks Bob and good evening everyone. I will briefly discuss financial results for the quarter and six months ended June 30, 2021. Please note that our financial results are described more fully in our quarterly report on Form 10Q, which we plan to file with the SEC by August 16th. Total revenue for the second quarter of 2021 was $10.8 million, representing an increase of approximately $5.7 million, or over 100% from the second quarter of 2020. This increase in revenue was primarily driven by wholesale continuing to rebound and recover from the initial outbreak of COVID-19, and also by licensing revenues generated by the April 1st, 2021 acquisition of the Lurie Goldstein brand. Net sales increased by approximately $4 million in the current quarter to $4.5 million. This increase was primarily attributable to higher wholesale apparel sales as retail sales were severely negatively impacted in the prior year quarter during the initial outbreak of the COVID-19 pandemic. Jewelry wholesales also contributed significantly to the year-over-year increase in sales, while e-commerce sales of Langeberger branded products and Jewelry brand jewelry also grew substantially from the prior year quarter. From a trend perspective, this was our fourth consecutive quarter of product sales growth, with our net product sales increasing by approximately 30% as compared with the first quarter of 2021. Net licensing revenue increased by approximately $1.7 million in the current quarter to $6.2 million. This increase in licensing revenue was primarily attributable to the recent acquisition of the Lurie Goldstein brand, as well as the continued strong performance by the Isaac Mizrahi brand. These increases were partially offset by a decline in licensing revenue attributable to our transitioning of the H. Halston brand to a wholesale supply model. Our operating expenses were $9.4 million for the current quarter, up from $5.4 million in the prior year quarter primarily driven by increases in payroll and marketing costs to help fuel growth in our wholesale and direct-to-consumer businesses, as well as expenses related to the Lori Goldstein brand. It is important to note that the prior year quarter operating expenses reflected the impact of cost reduction actions that were taken by management in response to the COVID-19 pandemic, including temporary reductions of employee compensation and cutting non-essential costs, while the current quarter reflects post-COVID normalized expense levels. Additionally, the second quarter of 2020 included the benefit of government assistance received through the Paycheck Protection Program under the CARES Act, for which we recognize $1.6 million as a reduction to prior year quarter expenses. Interest and finance expense for the quarter was $1.4 million compared with $0.3 million for the prior year quarter. This increase was attributable to the April 14, 2021 refinancing of our term debt, including a $0.8 million loss on the extinguishment of her old term debt. Subsequent higher interest expense due to higher principal balance and higher interest rate under the new term loan agreement. Net loss excluding non-controlling interest was approximately $1.6 million for the current quarter or minus $0.08 per basic and diluted share compared with a net loss of $1.3 million or negative $0.07 per basic and diluted share for the prior quarter. After adjusting for certain cash and non-cash items, non-GAAP net loss for the current quarter was approximately 0.1 million or minus one cent per share compared with non-GAAP net income of approximately 1.2 million or six cents per share in the prior year quarter. Adjusted EBITDA for the current quarter was 0.9 million compared with 1.7 million for the prior year quarter. The increase in certain operating costs mentioned above along with the prior year quarter impact of government assistance received through the Paycheck Protection Program with the primary drivers of the year-over-year change in EBITDA. As a reminder, non-GAAP net income, non-GAAP diluted EPS, and adjusted EBITDA on non-GAAP unaudited terms. Our earnings press release and Form 10-Q present a reconciliation of these items with the most directly comparable GAAP measures. Now moving to our six-month results. In the first six months of 2021, Total revenue increased approximately $4 million, or 27% over the prior year six-month period, to $18.6 million, primarily driven by net product sales. Net product sales for the current six months grew approximately $3.6 million to $8 million, mainly due to the combination of higher jewelry wholesales and higher sales of Langeberger brand new product through e-commerce, social commerce, and live streaming. The rebound and recovery in wholesale has also contributed significantly to the year-over-year increase in net product sales. Gross margin for net sales remained constant at approximately 40% for both the current and the prior year six months. Net licensing revenue for the current six months increased by approximately $0.4 million to $10.5 million. Similar to the quarterly results, this increase for the six-month period was driven by the recent acquisition of the Lurie Goldstein brand and continued strong performance of the Isaac Mizrari brand. Operating expenses for the six months ended June 30th, 2021, increased approximately 4.3 million from the prior period to 17.9 million. This increase was mainly driven by a combination of the highest salary costs, marketing expenses, expenses related to the Laurie Goldstein brand, shipping and warehousing costs, and consulting fees, and partially offset by lower bad debt expense. As with the quarterly results, it's important to keep in mind that the prior year six-month operating expenses reflect the impact of cost reduction actions in response to COVID-19 pandemic and a $1.6 million benefit received through the Paycheck Protection Program. Interest and finance expense for the current six months was $1.7 million compared with $0.6 million for the prior year comparable period. This increase was attributable to the previously mentioned refinancing of our term loan debt. Net loss excluding non-controlling interest was approximately $4.1 million for the current six months or minus $0.21 per basic and diluted share compared with a net loss of $2.1 million or minus $0.11 per basic and diluted share for the prior year six months. After adjusting for certain cash and non-cash items, non-GAAP net loss for the current six months was approximately $1.6 million or minus $0.09 per share compared with non-GAAP net income of approximately 1.4 million, or seven cents per share, in the prior year six months. Adjusted EBITDA for the current six months was essentially break even, compared with 2.5 million for the prior year six months. The increase in certain operating costs mentioned above, along with the prior year impact of government assistance, were the primary drivers of the year-over-year change in EBITDA. Turning now to our cash and our liquidity, As of June 30th, 2021, the company had unrestricted cash and cash equivalents of approximately $4.8 million compared with cash for approximately $5 million at December 31st, 2020. This change is the result of $7.76 million of cash generated from financial activities, including the refinancing of our term loan debt, as well as a $1.5 million draw on our revolving loan facility. An offset by cash paid for the acquisition of the Lori Goldstein brand, cash use and operations, and inventory bill to meet expected increases in wholesale and our direct-to-consumer businesses. Our working capital, excluding the current portion of operating lease obligations, increased from $7.9 million at 2020 year-end to $8.7 million at June 30, 2021. And finally, our total debt at June 30, 2021 was $25.9 million, including $24.4 million of term debt and $1.5 million under our revolver, And our bank net debt, net of cash was approximately $21.1 million. And with that, I would like to turn the call back over to Bob. Bob? Thank you, Jim.

This concludes our prepared remarks. Operator?

We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We'll pause for a moment as callers join the queue. The first question comes from Jim Dowling from Jeffries Capital. Please go ahead.

Hey, Bob, I have two questions for you. The first one is, could you go into some more detail on the change in the Halston business model? What's the significance of it and the outlook?

Sure. How are you, Jim? So we transitioned Halston from a licensed model in interactive to a wholesale model and consolidated our design team. So we're offering the same products now in department stores as we are with interactive television worldwide. And we moved the brand from QVC to HSN. As you know, QVC acquired HSN as a fairly recent acquisition there. And we see a lot of opportunity at HSN with the brand and with apparel as a category. Apparel is not as core to the business as it is at QVC. The primary impact was where we had GMRs that we were coming off of with the business at QVC. It's now transitioned to a margin business. Much more profitable for us after we get it ramped to that crossover point where the margin dollars are exceeding where the minimum royalties were.

What's the timing on that?

We expect that, you know, if it wasn't for COVID, we would have already crossed over. That really took the wind out of our sails with establishing that as a wholesale business, not only in interactive TV, but in various department stores around the country. I would say by the end of this year, we probably will cross over that, and it's up from there.

Okay. My second question is, I inferred your comments about Sea Wonder and Walmart as being positive. So my question is, is it somewhat positive? Is it outstandingly positive or someplace in between? Can you give us some color on that?

Sure. I would say that it's somewhere in between. Unit sales across all those categories are up. Um, as you know, we've been experimenting with different price points with Walmart and this, this fall season, we adjusted the retails to now match where Walmart is with similar brands on the retail floor, uh, to help to accelerate the sell throughs. And we are in discussions with Walmart now about a live stream event. for spring with a new spring product. We're all excited, us and Walmart, with the spring collection. And we do think that we can be very helpful to Walmart in their live streaming efforts. And I think that that will help accelerate things there if it all goes as planned.

Thank you. The next question comes from Howard Browse from Wellington Shields.

Please go ahead.

Yes, hello. I'm calling on behalf of Howard Browse. Would you be able to give us an update on the acquisition?

Are you referring to Laurie Goldstein or Langeberger? Both.

Okay. So, I'll do Laurie Goldstein first. It's going very well. for us the the transaction first and foremost will be a creative this year and we were able to get the brand position back into prime time almost the day after closing and working with the current manufacturing partner that produces the Lori Goldstein apparel that is a royalty model for us there's a third party that does the manufacturing And the goal here now is to get that business back on track, back to where it was. And certainly all the trends since the acquisition are that we are headed there and that could be nearly double the volume where we acquired it. So lots of upside there for us. Longaberger is going exceedingly well. For us, it is a social commerce model. It is powered by live streaming. We acquired it last year out of bankruptcy. We ended the year last year on a run rate of about 1 million. We think by the end of this year, it'll be on a run rate of 6 to 7 million. Recruiting, which drives the business, our nano-influencers that we refer to as stylists, is growing dramatically. And the margins, the maintained margins in that business are quite strong, about a third, maybe a little more today. The products are drop shipped by vendors for us. So it's somewhat working capital light and the products that we do hold are turning fast. So that's the update on Longaberger. Very dramatic growth there.

Okay. Thank you very much.

There are no further questions at this time. I'd like to turn the call back over to Mr. DeLoren for any closing remarks.

Thank you, Operator. Ladies and gentlemen, as always, thank you for your time this evening. We greatly appreciate your continued interest and support in Xcel Brands. And as I always conclude, stay fit, eat well, and be healthy.

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