Xcel Brands, Inc

Thank you for standing by. Welcome to Excel 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 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 & 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 third quarter as of September 30, 2021, which went out a short while ago. And in addition, the company filed with the Securities and Exchange Commission its quarterly report on Form 10-Q today. The release and 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 obligations 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 to 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. After that, our CFO, Jim Herron, will discuss our financial results in more detail. During the third quarter of 2021, we capitalized on the momentum that we built in the first half of the year and grew our total top line revenues by over 50% compared to the third quarter of 2020. Revenues from our licensing business were up 31% while net wholesale and direct to consumer sales increased over 100% for the quarter compared to Q3 2020. We expect sales in our wholesale and DTC businesses to continue to accelerate and believe that these sales will soon right-size to offset the expenses associated with these businesses as we continue to move forward. I am happy to say that we are now back on track to accelerate growth in top-line revenue. Also, I am both pleased by and thankful for the hard work of our team in achieving these results. As we look ahead to the remainder of the year, we expect continued acceleration and expansion of our business across all divisions and distribution channels. Now I'd like to briefly discuss our business by channel and distribution. Our interactive TV business is doing extremely well. Apparel and jewelry sales continue to be a bright spot for QVC. Isaac Mizrahi Live is exceeding plan by 7%. and Q3 licensing revenue from Isaac Mizrahi Live is up over 15% from the prior year. Our recently acquired Lloyd Goldstein business was reprogrammed to prime time shortly after our acquisition and has added significant growth to our interactive TV business. Our total interactive TV licensing revenues are up 27% in Q3 compared with the prior year quarter. and we continue to grow our Halston brand on HSN and in other international interactive TV channels, which are included in our wholesale sales results. Interactive television continues to be a core business for Excel Brands, and we're excited to see our businesses in this channel continue to do incredibly well as we continue to move out of the COVID-19 pandemic. On a separate note, Our non-interactive TV licensing business was up 77% this quarter compared to the prior year quarter, and we are excited by the growth in that business driven by new licenses and high awareness of our Halston brand aided by Netflix hit series about Halston released earlier this year. Turning now to our direct consumer e-commerce and live streaming businesses, our Judith Ripka and Longaberger Combined e-commerce sales were up approximately 150% compared to the prior year quarter and are up almost 200% year to date compared with the same period in the prior year. Longaberger active stylist membership is up 50% and we added over 250,000 email subscribers to our direct consumer businesses through Q3 of this year. In June, we conducted our first Judith Ripka live streaming event, which we were Very pleased with the results and we scheduled two additional live stream events for holiday 2021. We also conduct monthly live stream events for Longaberger, which has been a valuable resource contributing significantly to sales and the continued growth of the business. These events are adding strong growth to our e-commerce businesses. Business metrics for these events are outstanding with 3% conversion rate on invites. 20% conversion rates from viewers to sales, and sales at $3,500 per minute. Customer acquisition costs are extremely low for this business, and we believe our over $3 billion of live stream experience has helped drive our success and growth in live stream sales. Now, turning to our wholesale businesses, our apparel wholesale business continues to improve since the outbreak of COVID last March, David Wiltshire- wholesale apparel was up approximately 56% compared to the prior year quarter and is up over 32% year to date compared with the same period. David Wiltshire- In the prior year and is on par with pre pandemic performance, we expect continued growth and see wonder and Halston wholesale apparel businesses going into 2022. David Wiltshire- Our Judith rip the wholesale jewelry business is up dramatically at over 400% as compared with last year. We opened over 60 new independent jewelry doors and are on plan to be at over 70 doors by year end and with a plan to more than double our door count in 2022. Our drop ship programs with retailers such as Saks and Macy's continue to grow. Finally, we are planning additional live stream events for each of Judith Ripka Halston and C Wonder in spring of 22 to drive sales across all channels of distribution. We believe that live streaming will provide a significant and important boost for our businesses. Overall, I am 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 are on track for a great top line finish for the year. Now, I would like to turn the call over to Jim to discuss our financial results for the quarter and year to date.

Thanks, Bob, and good evening, everyone. I will briefly discuss financial results for the quarter and nine months ended September 30, 2021. Please note that our financial results are described more fully in our quarterly report on Form 10-Q. Total revenue for the third quarter of 2021 was $11.3 million, representing an increase of approximately $3.9 million, or 52%, from the prior year quarter. This increase in revenue was primarily driven by our wholesale and direct-to-consumer businesses, and also by growth in our QVC and non-QVC licensing revenues, including our acquisition of the Laurie Goldstein brand early this year. For the nine-month ending September 30th, 2021, total revenues increased approximately $7.9 million to $29.8 million, or 36% over the prior year period. Net licensing revenue increased increased by approximately $1.6 million in the current quarter to $6.9 million, or 31% as compared to the prior year period. This increase in licensing revenue was primarily attributable to organic growth in our QVC businesses, including Isaac Mizrahi, and growth in our licensing royalties across all of our brands and the recent acquisition of the Lorry Goldstein brand. Net licensing revenue for the nine months ended September 30th increased by approximately $2 million to $17.4 million, or 13%, as compared with the prior year period. Net wholesale and direct-to-consumer sales increased by approximately $2.2 million in the current quarter to $4.4 million, or 100% over the prior year period. Net wholesale and direct-to-consumer sales for the nine months ending September 30, 2021, grew approximately $5.9 million to $12.4 million, or approximately 90%. as compared with the prior year. Our operating expenses were $9.7 million for the current quarter, up from $6.5 million in the prior year quarter, primarily driven by a return to normalized payroll and marketing costs in our business, higher shipping, warehouse, and logistics costs, and expenses related to the recently acquired Lorry Goldstein brand. This increase in operating expenses also represent our continued investments in growing our wholesale and direct-to-consumer businesses which we expect will begin to contribute strongly to a bottom line moving into 2022. It is important to note that the prior quarter operating expenses reflect the impact of cost reduction actions that we took in response to the COVID-19 pandemic, including temporary reductions of employee compensation and cutting non-essential costs, while the current quarter operating expenses did not. Net loss excluding non-controlling interest was approximately 1.1 million for the current quarter, or minus 6 cents per basic and diluted share, compared with a net loss of 0.4 million, or minus 2 cents per basic and diluted share for the prior year quarter. After adjusting for certain cash and non-cash items, non-GAAP net income for the current quarter was essentially break-even, or 0 cents per share, compared with non-GAAP net income of approximately 0.8 million, or 4 cents per share in the prior year quarter. Adjusted EBITDA for the current quarter was $1 million compared with $1.4 million for the prior year quarter. While we saw material increases in top-line revenue in the third quarter, our continued investments in our wholesale and direct-to-consumer businesses, along with the normalized operating expenses discussed above, were the primary drivers of the year-over-year change in EBITDA. This is the second consecutive quarter where the company has generated approximately $1 million of EBITDA as we emerge from the impacts of COVID-19. As a reminder, non-GAAP net income, non-GAAP diluted EPS, and adjusted EBITDA are non-GAAP unordered terms. Our earnings press release and Form 10Q present a reconciliation of these items with the most directly comparable GAAP measures. Turning to our balance sheet. As of September 30, 2021, the company had unrestricted cash and cash equivalents of approximately $4 million and positive net working capital of $8.9 million, excluding the current portion of our lease obligations. Our total debt at September 30, 2021 was $25.2 million, comprised of $22.7 million of term debt and $2.5 million under our revolving credit facility. Bank debt net of cash was approximately $21.2 million. As of November 1st, our cash balance was approximately $6.5 million, and our bank debt net of cash was approximately $17.7 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?

Thank you, ladies and gentlemen. 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're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two.

We will pause for a moment as callers join the queue. The first question comes from Howard Braus from Wellington Shields. Please go ahead.

Congratulations on what's turning out to be a vast improvement year over year. Just a couple of quick questions. Your traditional licensed business has consistently been highly profitable. You've been reinvesting those profits to support your emerging direct to commerce, excuse me, direct to these contributing to profitability.

So you broke up Howard.

Sorry, so let me repeat the question. Sorry, I'm in the car. Your traditional licensed business is highly profitable and has been for years. You've been reinvesting those profits to support your direct-to-consumer and wholesale business. What point are we gonna see these investments pay off and start contributing to profitability?

So, Howard, if it weren't for COVID, We would have crossed over sometime in 2020. We had a very strong order book. And it's been a battle coming out of COVID. I think, as Winston Churchill best said, when you find yourself in hell, you better put your shoulder down and run hard and fast until you find yourself running out of it. I think we're out. And... We expect that 22 will be that year where those businesses become very profitable for us, of course. The decision to take control of the core categories under our brand was one that we thought was critically important to the overall success of the licensing programs in the business. There are engines. And there are cabooses, and the engines have to be strong. And it's best in this overall environment for us to be in charge of our own destiny, particularly as it relates to direct-to-consumer. So we made those investments. A lot of the heavy lifting is done, and COVID is behind those. And what we're beginning to see now in the top line is the results.

Let me take one other tangent here. Longaberger. Longaberger several years ago was a billion-dollar business. How do you see Longaberger? I'm not concerned about Q4 2022-23.

Longaberger is growing at a very dramatic rate. It's double digits by the month, and we don't anticipate that that will change. In fact, we just put some additional capital into that business, and we are anticipating that that will accelerate dramatically in 22. It is very much tied to one critically important metric, and that is the recruiting of our nano-influencers or stylists. We're up over 50%. this quarter with that metric. And we are working very hard to accelerate the growth and the recruiting of the nano-influencers for that business. And the math for that business, Howard, is generally each stylist or nano-influencer that we recruit generates about 6,000 in sales. We would anticipate that going into next year, We'll add between another 3 and 5,000, which will add a lot to the top line of that business for us.

That was going to be my next question. So let me just finish with my last one. Seven months ago, you secured a $75 million financing. if you use the bulk of that financing for an acquisition and that's basically what my understanding was as at the time and basically still is. If I look at acquisitions that you've made in the past using a multiple of on average three and a half times EBITDA, you're talking about a possible projection just from that acquisition after interest expense of more than 50 cents a share based on the number of shares outstanding. Where are you in terms of a cadence looking at a company that fits your parameters for acquisition? Because it's been seven months now.

So in the ordinary course, we are looking at transactions, and we are an opportunistic buyer. As you know, it's not easy to find acquisitions at three and a half to four times EBITDA. But we've been pretty good at it over the years, and we will continue to do that. And we don't expect to deviate from the way we buy businesses. The last one we made, Laurie Goldstein, I believe by year end, for the most part, we will have recouped the capital that we put into that. The rest of it is upside now for us. And we would expect that at some time going into 22 that there will be an opportunity out there that fits into our underwriting box, if you will.

That's all I have. Robert, stay safe, everybody. Thank you very much.

Thank you, Howard. Thank you, Howard.

Once again, if you have a question, please press star then 1 now. The next question comes from Jim Dowling of Jefferies Capital. Please go ahead.

Hello, Bob. How are you? I have two quick ones. If you have it handy, or Jim does, can you give us a sense of what the comparison for the quarter was versus 2019 as opposed to the COVID-impacted 2020?

You have that, Jim? I do in the back of my desk. I wasn't prepared to give 2019 comparisons on this call. I don't want to give misinformation. If you want to call me, Jim, privately, I can get that to you.

All right. In the meanwhile, you've been going back and forth with Walmart, I think, for the C Wonder brand. Is there any updates you have?

So, yes, we are planning our first live stream, Jim, with Walmart for Sea Wonder in March of 22, which I think will be good for them and good for us. We've had a great result with the live streaming that we've been doing with both Judith Rupta and Longaberger. And we believe that retailers like Walmart and Macy's have been putting their toe in on live streaming, trying to understand really how to make it work here in the US. And we have had great results that exceed sales per minute by many interactive television networks, if that's the bar that you're going to measure it against now. So we think we can really help them to drive live streaming not only for our brand, but for other brands that they may have in their retail stores. And that will strengthen our relationship with both Walmart with Sea Wonder and Macy's with our Halston brand.

Thank you. Thanks, Jim. Thank you, Jim.

Once again, if you have a question, please press star then 1 now.

There are no further questions at this time. I will now turn the call back over to Mr. DeLoren for 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.

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