Xcel Brands, Inc

Hello everyone and welcome to Excel Brands Incorporated fourth quarter and fiscal year 2023 results earnings conference call. Please note that this call is being recorded. You will have an opportunity to ask questions to our speakers for today by pressing star number one on your telephone keypad later in the Q&A session. I'd now like to hand the call over to Craig Gralsford from Red Chip. You may now go ahead, please.

Good evening, everyone, and thank you for joining us. Welcome to the Excel Brands fourth quarter and fiscal year 2023 earnings call. We greatly appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer Robert DeLauro, 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 fourth quarter and fiscal year ended December 31, 2023, which went out this evening. And in addition, the company has filed with the Securities and Exchange Commission its annual report on Form 10-K. The release and the annual report will be available on the company's website at www.excelbrands.com. This call is being webcast and the 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. The dynamic nature of the current macroeconomic environment means 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 EPS, 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-K for a 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, Craig. Good evening, everyone, and thank you for joining us. I would like to start today's call with an update on our strategic transformation efforts, a plan that we affectionately refer to internally as Project Fundamentals for May 9th, and I'll also talk a little bit about our core business plan. and how it's performing under this plan. After that, our CFO, Jim Herron, will discuss our financial results in more detail. I am happy to report that we have fully completed our restructuring plan, which included discontinuing all wholesale operating activities and outsourcing these activities to industry-leading licensing partners. As I mentioned in our last earnings call, we are currently tracking annual operating cost reductions of approximately $14 million compared with 2022 and are working hard with all of our new production partners to drive our business. We plan to launch our new brand, Tower Hill by Christie Brinkley, on HSN next month, followed by the launch of additional categories of products outside of HSN starting this fall. We have received strong interest from potential licensing partners for the brand across multiple categories. The recently launched Sea Wonder by Christian Siriano brand is also doing very well and generated 12.5 million of retail sales in its first nine months in 2023. Sea Wonder won the Rising Star Brand Award on HSN in 2023, and we expect to see sales volume ramp up to about 20 to 25 million in 2024. with a goal of over $50 million in 2025, including HSN and other retailers. Also, we expect to announce the launch of another celebrity designer brand on HSN before the end of this year. JTV, our partner for our Judith Ripka brand, launched its first Judith Ripka on-air shows in the fourth quarter of 2023. Sales results were very strong. In fact, we exceeded every business metric they planned. We are working with JTV to offer greater product assortments, including our Judith Ripka couture jewelry products, both on air and on JTV.com. This has the potential to add over 50 million visitors to the Judith Ripka e-commerce business and allows for email marketing campaigns to an additional 2.1 million customers. We look forward to seeing strong sales momentum carry forward. forward through 2024 and beyond. G3 is on schedule to launch Halston for fall of 2024. We expect them to begin shipping shortly after the second quarter. I should note that this launch is a season later than we initially planned. They recently reiterated their three-year forecast for Halston at $500 million wholesale just in apparel, shoes, and bags from their core productions. We expect revenues from this license to begin to pick up later this year, and we will hit our $8 million maximum royalty after they exceed approximately $160 million in annual wholesale sales. We have soft-launched our video and social commerce marketplace, Ormi, with seven vendors. 1,000 users downloaded the app in the first week. As previously mentioned, This is a joint venture with a technology company in which Excel owns a 30% interest in this new video and social commerce marketplace. We believe this marketplace has the potential to transform video and social commerce in the US, and its use and growth potential is virtually unlimited. Based on all of our progress with Project Fundamentals and the organic growth in our brands, we will return to profitability in 2024. I should note that the QVC and HSN business overall was softer than expected in Q1 of 2024. This was caused by continued scheduling conflicts with talent. We continue to work with all on-air talent to get their on-air schedules and the businesses back on track for the remainder of 2024 and beyond. As you know, we closed the credit facility in October of 2023 with Israel Discount Bank. to improve our balance sheet liquidity and recently closed a $2.4 million common stock offering to improve stock liquidity and further improve our balance sheet. Jim will cover the fourth quarter and full year 2023 financial results in more detail. Finally, we are working hard at IR Activity and thank our long-term and new shareholders for their support.

Now I would like to turn the call over to Jim to discuss our financial highlights. Jim? Thanks, Bob, and good evening, everyone.

I will briefly discuss our financial results for the quarter and fiscal year end of December 31, 2023. Total revenue for the fourth quarter of 2023 was $2.3 million, representing a decrease of approximately $1.8 million from the fourth quarter of 2022. This decline was primarily driven by a $2.5 million decrease in net product sales due to the exit from and licensing of the wholesale apparel and fine jewelry businesses. Partially offset the decline in net sales was an increase in net licensing revenue of $0.7 million, primarily driven by the combination of better performance during the quarter by the logo by Lori Goldstein Brand on QVC and growth of the Sea Wonder brand on HSN. For the full year, revenue decreased by approximately $8 million from the prior year to $17.8 million. This decline in revenue is driven by an approximate $5.5 million decrease in licensing revenue, primarily attributable to the May 2022 sale of a majority interest in the Isaac Brizari brand, partially offset by increased licensing revenue generated by the C1 the brand. Net product sales decreased by approximately $2.5 million to $8.6 million as we sold off all of our apparel and jewelry inventory during the first half of 2023 as part of the restructuring and did not have any jewelry or wholesale apparel sales in the second half of 2023. Our direct operating costs and expenses were $5.5 million for the current quarter, down by $2.9 million, or 34% from $8.4 million in the prior year quarter. On a full year basis, our operating costs and expenses were $23.3 million in the current year, down by $9.8 million, or 30% from $33.1 million in the prior year. This decrease of operating expenses was primarily attributable to the restructuring of our business in 2023, as well as the elimination of costs associated with the Isaac Nazari brand following our sale of the majority interest in the brand. It should be noted that in the fourth quarter and for the full year, there were certain non-recurring costs associated with restructuring the company. As a result of all of our efforts to transform our business model in 2023, And as we move into 2024, we expect our direct operating costs and expenses to reach an average run rate of under $4 million per quarter. Overall, we had net loss excluding non-controlling interest to the current quarter of approximately 6.8 million or 34 cents per share compared with a net loss of 6 million or minus 30 cents per share in the prior year quarter. On a non-GAAP basis, we had a net loss for the current quarter of $4.7 million or minus $0.24 per share, compared with a net loss of $6.2 million or minus $0.32 per share in the prior year quarter. Adjustment EBITDA was negative $1.2 million for the current quarter, an improvement of approximately $4.7 million compared with negative $5.9 million in the prior year quarter. For the current year, our net loss excluded non-controlling interest. was approximately $21.1 million or minus $1.07 per share compared with a net loss of $4 million or minus $0.20 per share in the prior year, which included a $20.6 million gain on the sale of a majority interest in the Isaac Mazzari brand. On a non-GAAP basis, we had a net loss for the current year of $12.2 million or minus $0.62 per share, which represents an improvement from the net loss of $15 million or minus 77 cents per share for the prior year. Also, it should be noted that the non-GAAP net loss for 2023 includes approximately 5.1 million of various non-recovering restructuring related charges. And finally, adjusted EBITDA was negative 5.7 million for the current year, representing a $6.8 million improvement over negative 12.5 million EBITDA in the prior year. I would like to take this opportunity to remind everyone that non-GAAP net income, non-GAAP diluted EPS, and adjusted EBITDA are non-GAAP unordered terms. Our earnings press release and Form 10-K present a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our balance sheet and our liquidity, as of December 31, 2023, the company had cash and cash equivalents of approximately $3 million and positive net working capital of 2.1 million, excluding the current portion of our lease obligations. Since executing our restructuring and transformation program in 2023, our cash usage has decreased significantly and is projected to continue to improve with the launch of Halston by G3 this fall, the launch of Tower Hill by Christie Brinkley, and continued growth in our C1 and Juniper licensing businesses. Cash use and operating activities during the current year was 6.5 million compared with cash use and operating activities of 14.2 million in the prior year. Over the past few months, we have taken additional steps to further solidify our balance sheet. First, in October 2023, we entered into a new five-year term loan of $5 million, to which quarterly repayments begin April 2024. Second, in March 2024, we issued approximately 3.6 million shares of stock for net proceeds of approximately $2 million. We believe that the additional liquidity provided by these financing transactions, coupled with our expense cuts and working capital position, provides the company with adequate liquidity going forward. 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?

Thank you. We are now opening the floor for question and answer session. If you'd like to ask your question, please press star and number one on your telephone keypad.

Our first question comes from Michael Kopinski from Noble Capital Markets.

Your line is now open.

Thank you, and good evening, everyone. A couple questions. Bob, to what extent, you had mentioned that HSN and QVC is a little soft. To what extent do you think that might affect, you know, if that continues on, how that might affect the, you know, the return to profitability that you expect? Can you give us some benchmarks of that? And then also, is there a way to quantify the impact on the revenues for the, you know, what's going on there versus, you know, the talent versus what might be the macro situation with the consumer and so forth? Is there a way to kind of gauge what the impact might be for macro versus the talent?

So I don't think there's a systemic problem, Michael. I recently attended the QVC Vendor Summit, and they seem to have everything back on track. I don't think there was a real appreciation of the implications of their warehouse fire, how deep that cut into the organization and how difficult it was for them to recover from that. Most people don't realize that 100% of their returns were processed through that warehouse. There was hundreds of millions of dollars of inventory that burned and 30% of their distribution capability. That's pretty devastating to any company. And they've managed to work their way through that. And I think the business is really back on track based on everything that was presented at the vendor conference. So less of a systemic problem in the business. And that said, there's general softness out there In the consumer world, I don't think that is being covered quite right by the media. People are making choices between fuel and energy costs and food costs and buying discretionary items. Although you could argue that apparel is a necessary item, people will delay those purchases. The real problem, the problem's been with getting talent in. We have the Isaac Mizrahi situation in a good place now with Isaac and the backup guest. JVC has decided to give Jackie Stadford, our backup guest, a primetime show, which is great. Takes a little pressure off Isaac. And we're working on similar things for Lori Goldstein. So I think it's a little... A little difficult for us to really forecast for that because we make our on-air requests on a monthly basis to our talent. And the assumption is they're going to do it. But it's been complicated since coming out of COVID. Talent became accustomed to doing remote shows from places where they were very comfortable. to have them to go back into studio, which requires travel. And we're doing everything we can to get them back in studio or lean more into backup guests that perhaps live a little closer to QVC and HSN studios.

Gotcha. Thanks, Bob, for that. And a couple quick questions here. Can you talk a little bit about I know that there were some startup costs to kind of get Christie Brinkley up and running and was just wondering how much of that cash do you think that will be allocated towards startup for additional brands? Can you just kind of give us a sense of that? And then maybe give us a sense of how much cash you currently have right now, because since we're already, you know, kind of close it closed on the, the next quarter is just wondering if you can kind of give us an update on that as well.

Sure. So, In terms of cash required for brands that are launching, Christie launches next month. All of the startup costs there have been incurred. We have a small brand that we're launching on HSN this year. There were really no startup costs associated with that one because the designer himself is doing all of the lifting on design with a third-party vendor that we assigned him to. so no real uses there. I think Jim can give you a current position on cash and available working capital, which is all receivables from good sources. Jim, do you have that number handy?

We'll be at approximately three million dollars of cash. We have our collections for the first quarter coming in now. So I figured the balance of cash is pretty similar to what it was at 1231.

Gotcha. And then just another question on Christy. How should we benchmark the success for Christy's products? Do you have any goals? I mean, can you outline those for us again? And if you've already talked about those, I'm sorry, but maybe you can remind me what your plans for Christie and what your opportunity for revenue might be from that.

So the plan, there are contractual guaranteed receipt minimums with HSN for both the Christian Siriano and the Christie Brinkley brand. This year we're forecasting in the $7 million range, maybe a little more for Christie depending on outside of HSN. Kirstie is not an exclusive to them. But then there's a significant bump up next year under the agreement for the minimum at HSN. And we do think that Kirstie has great potential both on HSN and outside of HSN. So we would expect that business to maybe double going into next year, if not more.

Great. And then just final question, how do we benchmark the success on Army? Can you kind of give us like some parameters of what you might look for in terms of whether it be subscribers or how should we benchmark the opportunity there going forward?

The key metrics are a number of vendors on board and number of users on the app. Those are the key metrics. That's how the company is going to be valued. And that's what I would look at from quarter to quarter.

And Bob, do you have certain benchmarks like by the end of the year, what you're anticipating in terms of the number of vendors or number of users? I mean, anything that you can share with us at this point?

No, I really need Ormi to give that to us. And I mean, there are company goals. We're being very selective of the types of brands that come on to Ormi. We could load a lot of small vendors on, but that's not really what Ormi is targeting. We're targeting bigger brands, household names, brands that are in better and premium department stores. And then, of course, with good brands and great product, then more people will participate.

Well, it looks like it's going to be an exciting year. Thanks. That's all I have. Okay, Michael. Thank you. Operator?

Our next question comes from Anthony from SIDOTI and Company. Your line is now open.

Good afternoon, and thank you for taking the questions. Yes, it's Anthony Levijansky from Sidoti. So, yeah, nice job with lowering your expenses, certainly. Do you think there could be some additional expense efficiencies that you can gain, or do you think you're pretty much tapped out as far as what you can do as far as expenses going forward here?

So we're looking for a little more, Anthony. We have been saying 14, but now with the savings on the lease, with the whole subleasing of the 30,000 feet we were in and moving into 12,000 square feet, which is perfect. It's a really beautiful live stream studio. We cut some additional expenses beyond the 14, and we're looking for a little more. So we want to operate as lean as we can. And we'll know in the next quarter or so if we can take a little more out of it.

Understood. Yeah, thanks. And then, you know, in terms of the various different initiatives with the different licensing partners, you spoke about the Christie Brinkley, obviously G3, you announced that. last year I guess if you could just kind of like you know go over like as far as which ones you think will be the most impactful kind of go you know go over that in terms of how you think that's going to contribute to your top and bottom line so clearly Holson will lead that with the G3 license and

But as you know, they're just launching this fall. And the only information we really have on how they're doing is what they've been saying on their earnings calls. And we're assuming that we will hit the maximum under that license over the next year or two. And that would be $8 million per year, most of which would drop to the bottom line. So that will be driving... top and bottom line, EBITDA. And then Sea Wonder is doing beautifully for us in its first nine months in the launch in 23. It did $13.5 million on HSN. Plan for this year is $25 approximately. The commitment for next year is $50. And we are now working on category extensions on Sea Wonder. So that brand is doing well and has strong growth potential for us. We do think that Christy will ramp up as fast. Christy is loved by everyone in America. She has a great social media following. And almost any woman over 45, if you stop them on the street and ask them to name three top fashion models, that name would come up. and she is trusted and loved, so we think it has similar potential, if not more, outside of HSN in person order than perhaps we wondered.

Okay, that's very helpful.

And then, Bob, you also mentioned that you expect to be profitable this year. Just wanted to see if you could clarify that. Did you expect to be profitable for the full year or just part of the year? And are you talking about EBITDA positive or net income positive?

EBITDA positive and net. That will start Q2, Q3, Q4, and then we expect the pickup from the Halston license as G3 begins shipping in Q3 and 4.

That's very helpful. Thank you very much, and best of luck.

Thank you.

Question comes from Howard Broust from Wellington Shields. Your line is now open.

Thank you. Robert, first of all, congratulations on the transformation of the business. It's been a spectacular job, and we do thank you. 2024 is a transitional year. Everybody's been talking about what's going to start and when it's going to start. But effectively, when you look at 2025, The estimates on the street of EBITDA are almost $10 million. The company's stock is selling for less than one and three quarter times EBITDA. What are your thoughts?

Well, one, it's a very low EBITDA multiple, particularly when you think of selling Isaac for eight times EBITDA contribution. And from an asset value perspective, Howard, it's incredibly low, given that we sold Isaac for six times royalties. And that's the going rate for royalties. The going rate is anywhere, say, from a low of five to a high of eight. Six is a very common multiple, with 15 million of top-line royalties as a round number for 24 growing. It implies $100-plus million value against $5 million of debt.

So I think we're undervalued.

Let me skip to what's going on with Army marketing and interest. You mentioned it during the call, but I'd like to see if we can get some more information.

Sure. So we onboarded our seven first vendors, premium denim company, actually two of them, and some premium beauty brands, as well as some of our own brands. And we've been doing beta testing right up through today, taking little bugs out of the technology. And Ormi is getting ready to launch a very significant PR campaign and digital marketing campaign. Army's begun hiring influencer recruiters. They started this week, and they're reaching out to influencers around the country to get them on board. And then the goal is now to onboard some additional big vendors, because each time we onboard a vendor, Howard, We want to debug it before they start the email campaigns to their customers. In week one, we had 1,000 users onboard the app with no email campaigns. It was just almost word of mouth. And all of that is about to start. So we are excited about where we are with Ormi, excited about where the tech is. It is almost completely bug-free, which is amazing. We do a lot of beta testing before we put anyone on it, obviously, but you always find things when new sets of eyes start playing around in technology, particularly in apps.

Congratulations, Robert. Thank you. Thank you, Howard.

As of right now, it seems like we don't have any questions. I'd now like to hand back over to the management for their final 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. Good night.

Thank you for attending today's call. We hope you have a wonderful day.