Luvu Brands Inc

Greetings, ladies and gentlemen, and welcome to Lou Vu Brands, Inc.' 's Fiscal Fourth Quarter and Full Year 2021 Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Ron Scott, the company's Chief Financial Officer. Mr. Scott, you may begin.

Thank you, Kate, and thank you to everyone who has joined us today for Lubu Brand's fourth quarter fiscal 2021 conference call. Joining me today is Louis Friedman, our founder, president, and CEO. Yesterday afternoon, we filed our annual report on Form 10-K for the year ended June 30, 2021, and issued an earnings release that highlighted the company's fourth quarter and full year performance. There are a number of items that we look forward to discussing with you this morning, including Lubu Brand's financial results for the fourth quarter and year ended June 30, 2021, recent developments in Lubu Brand's operational activities, as well as the company's near-term plans for the future. At the conclusion of this call, we will be answering questions during a brief Q&A session. Before we get started, I'd like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections, and our plans and prospects. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company's filings with the SEC, which includes yesterday's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them except as required by applicable law. Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. The reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as supplemental information in our press release. Now, with that long paragraph completed, I'd like to start the call with a few words from Lubu Brandt's founder and CEO, Louis Friedman. Louis?

Good morning, everyone, and thank you, Ron, and thank you, everyone, for joining us this morning. We are very pleased with our fourth quarter and full year results. For the year, we reported record sales of 23.1 million, an increase of 26% over the prior fiscal year, and for a record gross profit of $6.3 million with a net income of $2.6 million. During that time, we acquired over $1 million of new manufacturing equipment, literally doubling our foam processing production. Included was actually a second foam contour cutter and a larger foam compression system, which reduces our freight costs, contributes to our sustainability goals, and allows us to be more competitive with super large bean bags, chaises, and day beds. Also added is a new high-speed fabric cutter that gives us 30% more production capacity needed for new product rollouts. We believe our continued success stems from growing awareness of our brands across many channels and the value we deliver to the consumer. We are fortunate to be a vertically integrated U.S.-based manufacturer. This has allowed us to avoid many of the supply chain and shipping container shortages faced by competition, purchasing materials from China, and other offshore manufacturers. Now I'll turn the call back over to Ron Scott, LUFU Brands Chief Financial Officer, to summarize some of the financial highlights of the fourth quarter and the full year fiscal 2021. Ron, please go ahead. Thanks, Louis.

I'll touch briefly on some of the financial highlights from the fiscal fourth quarter of 2021. Net sales increased 7% to a fourth quarter record of 5.8 million compared to 5.5 million in the same year-ago quarter. Sales of Liberator products increased 45% to 2.5 million from 1.7 million in the prior year. Jaxx product sales totaled $1.9 million of 16% from $1.6 million in the fourth quarter of the prior fiscal year. Havana products decreased 51% to $852,000 from $1.7 million in last year's fourth quarter. But I should point out that Havana sales last year included $780,000 in PPE products, which were primarily masks and medical gowns. That business did not continue in any material way after Q4 of last year. Gross profit for the fourth quarter totaled $1.5 million compared to $1.8 million in the prior year fourth quarter. Gross profit as a percentage in net sales decreased 26% this year from 33% in the prior year, mainly driven by the loss of the PPE business. The PPE business last year contributed over $400,000 in gross profit, which if we back that out, we would have had a slight increase in gross profit in the fourth quarter. Operating expenses were $1,115,000 for the three months ended this June. an increase of 27% or approximately $235,000 from prior year fourth quarter. Fourth quarter operating expenses last year were reduced by approximately $272,000 of costs that we capitalized for software costs relating to our e-commerce website upgrades. So that was basically the the in-house costs that we incurred with our in-house staff to create the website upgrade. Net income for the fourth quarter was $300,000 or zero cents per share compared to net income of $796,000 or one cent a share in the prior year fourth quarter. Looking now at the full year results, Fiscal 2021 net sales increased 26% to $23.1 million compared to $18.4 million in fiscal 2020. Sales at Liberator Products increased 43% to a record $9.8 million. Jaxx Product Sales increased 42% to $6.8 million. And Avana Branded Product Sales decreased 21% to $3.7 million. Product sales purchased for resale increased 20% to $1.8 million, and other revenue, which is primarily some contract work and shipping and handling charges, increased to $1.1 million. Total gross profit for the year was $6.3 million, up 14% from $5.5 million in fiscal 2020. However, gross profit as a percentage in net sales decreased to 27% from 30% in the prior fiscal year, due primarily to production cost increases, and those consistent mainly of raw material and labor cost increases. During last year, we continued to increase the quantity of products owned by our contractor in Mexico, and it's now running at 20% to 25%. of all our sound products. And I think in the prior year we were at about 10%. Operating expenses were 4.5 million compared to 4.1 million in fiscal 2020. The 9% increase in operating expenses from the prior year was primarily due to higher advertising and promotion expenses and the higher occupancy and personnel related costs. Other income for fiscal 2021 included a $1.1 million gain on the forgiveness of the PPP loan, and interest expense was reduced during the year from $591,000 last year to $375,000 in fiscal 2021, which is a reduction of about 37%. Net income for the year was $2,563,000 or 3 cents a share compared to net income of $860,000 or 1 cent share in fiscal 2020. And adjusted EBITDA for the year was over $3 million at $3,173,000 compared to $1,622,000 in the prior year. Cash and cash equivalents at June 30 2021 totaled $1 million compared to $1.1 million at June 30 of the prior year. And I'm pleased to report that the company no longer has a going concern audit opinion, which opens the door to lower cost financing options for the company. Now I'd like to turn the call back to Louis for some additional comments regarding current developments. Louis?

Thank you, Ron. Again, I'm pleased with the fourth quarter and full year results. Our diverse offering of lifestyle consumer products across many retail and e-commerce channels continues to attract new and repeat customers. With new product introductions, I expect to see continued strong demand as we approach the holiday season. Our new product introductions are across all three brands. Some highlights include a novel headboard collection, which we call the Panelist, It's composed primarily of excess foam trim. We also have an expanded children's collection of modular play seating and some exciting new Ivana and Liberator products soon to be announced. We also have expanded our channel presence, moving into hospitality with a new collection of outdoor sombrella-style beanbag sofas and lounges. As the hospitality market continues to recover from the pandemic, we're beginning to see ongoing sales growth into that market. Our domestic manufacturing capacity allows us to continue to execute within a challenging supply chain environment. Sustainability continues to be a driving principle for us, and the more Liberator and Havana products and foam-based products we produce and sell, the more free foam trim that becomes available to repurpose into beanbag fillings. We remain focused on executing against our key growth strategies to drive long-term value for shareholders. We appreciate the recent strong support we've received from shareholders and look forward to keep you updated on our progress and developments as we finish our first quarter and through the second quarter. That wraps up our formal presentation. Operator, we're now open for the call for Q&A, and after the Q&A, we'll provide some closing comments.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, you may press star 1 on your phone at this time or press the ask question button on your screen to ask a question through the webcast. We do ask that if you are listening via speakerphone to please pick up your handset for optimum sound quality. Once again, you may press star the Ask Question button for the webcast or press star 1 on your phone to ask a question through the audio lines. Please hold a moment while we poll for questions. Our first question today is coming from Olivier Colombo. Your line is live. You may begin.

Yes, good morning, Luis and Ron. Nice to talk to you in person.

Hi, Olivier. Hi, Olivier.

I have a few questions for you this morning. The first one is now with the installation of the two machines that you have added, what is the maximum capacity that you have now available today?

Well, you know, that's a pretty good question. For contouring, well, you want it in foam buns or in dollars, but actually the two machines that relate to foam contouring and foam processing literally double our capacity. So whatever revenue we're doing in phone-based products, which is probably most of our revenue, we have conveniently doubled actually on one shift, so without incurring any additional labor.

Okay, that's perfect. Thank you very much. The other one was regarding labor shortage. Have you faced that over the last couple of months? And if yes, how have you reacted?

Well, I think that we'd be living in a vacuum if we didn't have labor shortages, and so we do. You know, it's kind of interesting because we have different categories of labor within our plant. Sewing machine operators are kind of a niche, and people who want to sew are not really affected by labor shortages, per se, because that's what they want to do. Other areas like shipping clerks and forklift operators. They have other opportunities to work at Amazon and others. So we're kind of pivoting, but right now I guess we employ about 207 or so people, and we probably have another 15 or so people in Mexico, and that's growing. And so the fact that we're able to utilize Mexico for... an ongoing stream of, of simpler products to make. And certainly as we introduce new products, we don't give them to Mexico, but as products, you know, grow in, in demand and the ones that Mexico is able to handle, we keep pivoting to there. So I think we, we have a good system to, uh, you know, in avoiding those kinds of, uh, problems with, with our Mexico, with our Mexico plant.

Yeah. But we have certainly had some turnover, um, more turnover than we have in the prior years, and we've seen some wage escalation as well. You know, there's a general labor shortage, so wages are going up, but prices have been going up as well. And we continue to raise prices where we can.

So just continuing on that question, when you say you can raise prices, I guess those are on the products that you manufacture, so you're passing over the increase of raw material costs to the consumer. Is that correct? And if yes, how are consumers reacting? I mean, it's probably not easy to answer because, I mean, if the customer is not happy, not buy. But have you tested the watches here? What is the reaction to the price increases?

Well, you know, our strategy is not that simple in terms of raising prices. Ideally, we try to reduce costs. And some of our equipment, especially foam, compression, we're able to reduce the size of outgoing packages and reduce the cost of corrugated. On one side of the fence, we are motivated to continue to reduce costs wherever possible. And certain products that we have are sold on good design and price-to-value products. And other products are sold primarily on brand. So Liberator, with the increased prices that we've had on Liberator, the sales have grown to, I guess they're up 43%. So that product line, for the most part, has not been affected in any manner or form. The Jaxx line also comes mostly from free foam trim. We're the only manufacturer in that category of beanbags, which is a growing category. You might check. to see what Lovesac does in bean bags is pretty remarkable. But our foam fill comes, most of it comes free. A good portion of it comes free off of our trim. So the more Liberator products we sell, the more free foam we have. And where other products like Ivana, which tend to be more sensitive to price increases, we have designed some new novel designs yet to be introduced and some novel products You might say, yeah, I would say designs, novel designs that would give us a competitive edge to what's out there and enable us to continue to raise prices in that area. So we're doing our best to raise prices wherever possible without affecting sales. And I guess Jax and Liberator have proven that we can do that, and Ivana we need to work on a little bit.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, press star 1 on your phone now or enter it through the webcast in the Ask Question box. Our next question today is coming from Dr. Michael Levine. Your line is live.

Hi. Good morning, gentlemen. Hi, Mike. I have a couple of questions. Mr. Olivier, Mr. Colombo asked one of them, so I'm going to follow up. I noticed that inventories were up 70% year over year. I believe it's 3.39 million versus 1.98 million. Why is that?

Well, you know, the balance sheet is really just sort of a snapshot on a specific day. So on that particular day, we had a fair amount of inventory in-house. There's really no specific reason. We do have more fabrics in stock because we're offering a broader range of fabrics and color choices. And we also had more, you know, we're doing more outdoor products. And so the growth in Jack's sales is really related to the outdoor products in the fourth quarter And that took more fabric as well. And then because we have more product in Mexico, that's sort of another pipeline that has to be filled with inventory. Yeah, that's true. So we bring fabric to Mexico and it's sewn and then it comes back to us.

Yeah, well, some of the fabrics that we buy are custom and we have to bring in what we bring in because they're made specifically for us. And then others, in order to... If some vendors have some supply chain issues or we think there's going to be some stoppages, we stock up to make sure that we don't have any of those. We don't run out. We don't run out. Just in time in this environment is kind of difficult.

Yeah. But, yeah, no, that's a good question. Okay. But we try to manage it as best as we can to minimize it.

Okay. To follow up on another macroeconomic issue, Do you see an increase in business orders based upon, first off, your North American location and the fact that you don't have shipping concerns and that you have vertical integration? Have more, I guess, companies come to you going, we can't wait for an order coming from China. Can you do this?

I would say you're referring to either private label or contract manufacturing. Yes. As a matter of fact, we just... Let's say that we're close to Ashley at this particular point, fairly close with Ashley and with others. Yes, there seems to be an interest. And, you know, we only take on work that is within our core competency and requires very little training of our operators because that's key. It could be, you know, really it's debilitating to do all new things. But, yes, private label work with companies like FrontGate and Ashley and some hospitality. Human Board. Human Board, yes, is pretty common, and we are getting a fair amount of business and response in that area. So we call that Create ATL, and that's our contract services or private label side of the business, which is growing nicely.

To follow up on that, is there, because sometimes, you know, what you guys could really use, It's almost like that breakthrough product that you never expected to be such a huge hit. Do you see any potential in any of your new items or items you're planning on to be that breakthrough item?

Yeah, what's kind of interesting about the panelist, I don't know if you took a look at it, but it's selling really well for the short introduction that it has. And what's kind of interesting about it is, is number one, our cost of foam on that product is basically zero because it comes off our foam trim. And second of all, it's so diverse in the number of fabrics and colors, and it's very easy for us to produce. It has a low freight rate on it because it's so lightweight to ship in comparison to conventional headboards, which are now oversized. And so that product gives us a real competitive edge, and it's truly novel. We're also looking at it in a wide variety of children's configurations and fabrics. We haven't introduced that yet, but it's in the works. So I think that product has breakthrough. It could be a $5 million business. I mean, who knows? But also, we've added more and more of these large beanbag products to compete with Love Sack. big fur products, huge beanbag products. And our new compression equipment allows us to compete very favorably with them. And I think if you check Lovesac's quarter or financial statement, they're doing about $50 million in beanbags, something like that. And so we can produce them at a fraction of the price in a wide variety of different fur designs and whatever. But we have some other ideas that Things are in the works, and we're always designing new things and coming out with new products that fit within our channels. Okay. Thank you.

My final question is, I guess, referring to guidance. It seems like you guys are growing at a 25% clip. Are you comfortable in providing any kind of guidance for Q1 or fiscal year 2000, the current fiscal year?

Mike, I think it's going to be difficult for us to give too much guidance. Certainly, we're still seeing double-digit growth in sales, but for the full year, it's going to be tough. We'll have to see how the Christmas holiday shakes out and then even into Valentine's Day in February.

One thing I would add to that, is we have relationships with a wide variety of mass marketers, and we have access to their back-end websites, and it's really a matter of feeding A-plus content. In the old days, you had to convince a buyer as to what to buy. Well, today, there's no buyers to convince, to talk to, being that we're about 90% e-commerce through our own websites and all these other websites. It's simply a matter of feeding them content and waiting for the sales. And so because these relationships are established and growing, I mean, we have one sales individual with about 30 years experience just selling to mass market, working on new business 100%, you know, new business development 100%. And he's opening up doors on a very regular basis. And so not only is he opening up new doors, but we're able to feed existing channels with new product, with minimal investment, and with no real, you know, it's pretty easy for us to go on Wayfair and add 20 new products. Easy for us to go on Brookstone and add new products or enhance the content. So our ability to grow is really built into this diverse channels that we have. And we're just going to keep feeding those channels with better content, and better marketing and better visuals and videos and so on to increase the sales of all of our products. And that's what we do every day.

Okay, thank you.

Thank you. I appreciate the questions.

Thank you. Our next question is a follow-up from Olivier Colombo. Your line is live. You may begin.

Yes, excuse me. It's me again, but I think I was kicked out. I'm sorry.

Oh, sure.

First time. Now, just following Louis' comment on feeding content here, what are your initiatives that you're going to put in place to be more visible on the social media front? I mean, I've seen a bit more activity on Instagram, on Facebook, but don't you think it might make sense to have a few short videos or new videos about the products that you're launching and try and get, I don't know, maybe influencers or people like that?

Yeah, well, that's a great question. We have an in-house ad agency. We have seven people right now. We're in the process of hiring a full-time videographer. And we have writers and editors and web content people, and we blast out to customers about 400,000 per week in three to four email blasts in multiple markets. We certainly need to do more in video, and we certainly need to do more in social. So our in-house agency is in place. We need to simply add more staff, and that's a goal for this first next quarter, actually, or for now, really. For the holiday season, it's a goal. Okay.

Perfect. Thank you. And finally, my last question will – Are you planning to attend any investor conferences over the next six to 12 months? And if yes, could you already give us a few names?

We're actually talking about that yesterday. We're looking at attending this Doty conference. And we may be going to the Roth conference in spring. And then some of the other smaller conferences, LD Micro, I'm not sure we'll be attending the next one, but maybe the following one. So yeah, we're working on that.

That's perfect. And then, sorry, I just had a final one here that appeared. What are the biggest challenges that you're facing going forward?

The biggest challenges that we're facing going forward. Well, I would say that our main challenge really is growing the business exponentially. I mean, that's our challenge. And utilizing the people and the systems that we have in place and our manufacturing to do whatever we can to grow the business month after month and quarter over quarter. And I guess the only things that really get in the way are things that are out of our control. Increased COVID for one, should that show its ugly head again and people start staying home and wanting to continue. We had a fair amount of people working at home, or part-time at home anyway, but for manufacturing, there is no work at home. So certainly we face the big challenges that everyone faces, and that is inflation. and supply chain and COVID. Everything else is within our control, but those are not. And so we have to, when they present themselves, we have to figure out how to continue to grow at least 25% per year, at least, and to work around those challenges as they present themselves.

Okay, perfect. That's all I had for you today. So thank you very much, Luis and Ron.

I appreciate it. Thank you for calling in.

Thank you very much.

Thank you.

Gentlemen, it appears there are no further questions. Do you have any closing comments?

Yes, I do. Yes. Thank you, operator. Once again, we are pleased with fiscal 2021 results. We believe we are building upon a solid foundation for Luvu Brand's future growth, and we're well positioned to capitalize on our growing markets. Thank you, everyone, for your time, and we look forward to updating you on further developments at www.LufoBrands.com. On behalf of the entire Lufo Brands management team, I want to thank you again for joining us today.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may disconnect from the webcast at this time. Thank you for your participation.