Luvu Brands Inc

Ladies and gentlemen, and welcome to Love You Brand, Inc. Fiscal Second Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A 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 Alex Sanikov, the company's Chief Financial Officer. Mr. Sanikov, you may begin.

Thank you, Tom, and thank you to everyone who has joined us today for Luvu Brand's fiscal second quarter conference call. Joining me today is Louis Friedman, our founder, president, and chief executive officer, and Jordan Friedman, our sales director. On Friday last week, we filed our quarterly report on Form 10Q for the three and six months ended December 31st, 2022, and issued an earnings release that highlighted the company's second quarter performance. There are a number of items that we look forward to discussing with you this morning, including Louvre Brand's financial results for the three and six months ended December 31st, 2022, recent developments in Louvre 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 would 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 discussion of this risk, and uncertainties, you should review the company's filing with the SEC, which includes Friday's press release. You should not rely on our forward-looking statements as predictions of the 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 an addition to and not as a substitute for or in isolation from our GAAP result. A reconciliation of the most directly comparable GAAP financial measures to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now with that completed, I'd like to start the call with a few words from Louis Brandt's founder and CEO, Louis Friedman.

Louis. Thank you, Alex, and good morning, everyone, and thank you for joining us on Luvu Brand's second quarter conference call. Our company is driven by creativity and innovation, coupled with good design, sustainability, and affordable price to value. Our success comes from our balanced and diversified direct-to-consumer business, along with multiple channels of wholesale growth, coupled with outstanding digital marketing execution on some of the largest websites on the Internet. We delivered a strong quarter in what remains a highly dynamic operating environment. We are pleased to report better than expected results and new sales records for fiscal quarter with net revenue of $8.1 million versus $7.2 million a year ago and versus $5.7 million in the second quarter fiscal 2021. Despite widespread discounting within mass market websites, Amazon, and the pleasure products industry, We delivered 27.8 adjusted operating margin for the second quarter. Looking ahead, we believe that our brands, our growth strategy, and product development initiatives position us well to emerge strongly over time. As announced last quarter, we'll continue to implement continuous improvement initiatives, additional automation designed to generate material cost savings, streamline workflows, and operating costs. And while we seek to deliver increased sales in this environment, we are also laser focused on profitability and higher margins. Thank you to the team's hard work, and I remain confident in our ability to continue to execute past this holiday season and beyond. At this point, I'll turn the presentation over to Jordan, who will discuss our digital mass market approach to sales and brand awareness.

Thank you, Louis. Good morning, everyone. This has been a really strong and exciting first six months, and I'm elated with the results so far. Our marketing efforts are paying off as consumer demand continues to increase, while our advertising budget as a percentage of revenue remains virtually unchanged. Here at Luvu Brands, we have a vertically integrated machine for organic growth. With consistent innovative new product designs, rapid prototyping, quick-to-launch manufacturing, best-in-class in-house photography, superior video content, and an extensive product distribution network, each product can go from new design sample to bestseller within a matter of weeks. For an overview of our collections, see our catalogs now live on the LUFU Brands Investor website. For new products and new content, we flourish with any channel that allows us to edit and enhance their data and media content directly. as our rich images, video, and SEO-friendly product copy continue to impress customers and increase visibility. Our machine for growth continues to deliver results as we are pushing new photography, enhanced content, and innovative product designs on nearly a daily basis. We've continued this trend throughout Q2 with new exciting collections across multiple brands. The past six months, the Liberator and Avana brands have worked well together to push Liberator designs to new limits. While Avana sales were technically down this quarter, the Avana branding is also used to help accelerate Liberator growth through PG rebranding, thus achieving distribution into more mainstream atmospheres, including furniture sites. By utilizing mainstream content and clever terminology, the Avana branding was a large reason for the success of Liberator this quarter. as we were able to get a more mainstream audience in sales channels that were previously never willing to sell sexual wellness products. This upcoming quarter, Q3, one of our new initiatives that we've been really enthusiastic about is our new Jaxx brand educational furniture line, presented this week at the NAIS show in Las Vegas. We've greatly enhanced our offering and have significantly accelerated our ability to grow in the education and commercial furniture business. With innovative new soft seating designs in the highest quality hospitality grade faux leathers, we're at a great place for significant growth within a relatively untapped market for us. Our new educational seating collection has had a lot of positive response so far from school specialty, several school districts, all interested in large bulk orders. Regarding our advertising and distribution, we're continuing to add new e-commerce stores and retailers plus numerous large commercial, school, and hospitality clients. Regional furniture chains continue to be more and more interested in our JAX products for both online and in-store. For advertising, Google PPC, Amazon PPC, print ads, strong email campaigns, retargeting and abandoned cart emails, and advertising in many social media channels continues to pay off. Constant monitoring, A-B testing, careful site placement, and use of clever longtail keywords keep our advertising initiatives converting at a high level. We also continue to capitalize on being a made-in-America company. Wholesale partners and consumers regularly seek us out and applaud our American-made commitment. Overall, our growth potential is stronger than ever. We recorded record profits this quarter, and we've delivered consistent profitability for over three years now. This company was undercapitalized from its inception, but with the profitability we've achieved over the last three years, we can finally invest in our long-term growth in ways that were never possible before. Now, I'll turn this over to Alex Sanikov, Lufo Brand's Chief Financial Officer, to summarize some of the financial highlights for the fiscal second quarter 2023.

Thank you, Jordan. I will briefly touch on some of the financial highlights from the fiscal second quarter and first half in December 31, 2022. For the first second quarter, net sales increased to $8.1 million from $7.2 million in the prior year's second quarter, an increase of 13.2%. Liberator sales increased 49% to $4.9 million from $3.3 million in the prior year. Jaxx product sales decreased 11% to $2.1 million compared to $2.3 million. And Avana product sales decreased 31% to $0.5 million from $0.8 million a year ago. For the six months, net sales increased to $16.2 million from $13.5 million, an increase of 21%. Liberator sales increased 66% to $10 million from $6 million in the prior year. Jets product sales decreased 8% to $3.9 million compared to last fiscal year's $4.2 million. And Avana product sales decreased 28% to $1.1 million from $1.5 million a year ago. Gross profit for the fiscal second quarter totaled $2.3 million compared to $1.6 million in the prior year. Despite the fact that the company continues to experience labor and raw material cost increases, our cost-saving initiative started to pay off. Gross profit as a percentage of net sales increased 27.8% from 21.9% in the prior year's second quarter. Year-to-date gross profit was 26.1% compared to 22.9% in the prior year's six months. Total operating expenses for the three months ended December 31st, 2022 were approximately 18% of the net sales or approximately $1,476,000 compared to 19% of net sales, or approximately $1,326,000 for the same period in the prior year. For the six months, operating expenses were $2.9 million compared to $2.5 million in fiscal 2022. Net income for the fiscal second quarter was $695,000 compared to net income of $167,000 in the prior year. Net income for six months was $1,188,000 compared to $394,000 in the prior year six months. Adjusted EBITDA was $877,000 compared to $332,000 in the prior year second quarter. For the sixth month, adjusted EBITDA was $1.6 million compared to $733,000 in the prior year's sixth month. We continue to maintain a high quantity of products sawn by our contractor in Mexico, running at approximately 35% of all our sawn components. Cash and cash equivalents on December 31, 2022, totaled 1.5%. $875 million compared to $859,000 on June 30th, 2022. Working capital increased from $774,000 at the beginning of the fiscal year to $1,592,000 at the end of the fiscal second quarter 2023. Now, I'd like to turn the call back to Louis for some additional comments regarding current development. Louis. Thank you, Alex.

We manage our business for the long term. We are methodically delivering on what we need to build world-class lifestyle and lifestyle brands, and we believe that over time, the market will realize our value. 2023 marks our 21st year in business, and for the first six months, we delivered $16 million net revenue and expect to approach $300 million in cumulative lifetime-to-date net sales during the next two quarters. On behalf of the entire Luvu Brands management team, I want to thank you for joining us today and for your continued interest and support. This wraps up our formal presentation operator, and now we'll open the call for Q&A.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to enter the queue to ask a question, you may press star 1 on your phone at this time. We do ask if listening on speakerphone this morning that you pick up your handset while asking your question to provide optimal sound quality. Once again, you may press star one at this time to enter the queue if you would like to ask the question, and you may also type in your question if you are connected via the webcast today. One moment, please, while we poll for questions. And we do have a question this morning from Olivier Colombo. Olivier, your line is live. Please go ahead.

Yes, good morning. Regards from Switzerland. Hey, Olivier. Hey, good morning. Congratulations on the very good quarter. I had two questions for you, actually. The first one is regarding the comments that Louis made on the press release. And I would like to, if he could be a bit more precise on that comment, actually. So he mentioned while economic and world events remain uncertain, we expect the next several quarters to pose short term challenges in continuing this accelerated business trend.

Sure, I'd be happy to respond. You know, as all businesses, especially B2C businesses, we react to what goes on in the world in terms of how consumers buy. frequency to the website and whatever. So even though we're quite diversified, certainly world events do play a role in our ability to achieve the results. So that's basically where that's coming from. It's a fact that every business faces, especially if you're B2C, in which we are about 85% B2C.

But that does not mean that you see any kind of real slowdown in your overall business.

I can only predict that if, in fact, there's a pandemic or a war or any of that, I would assume that there would be some slowdown. But as of yet, there is no slowdown, no.

Yeah, and I think Lewis's comments were more about how we've had such really great growth rate so far. So, you know, we've been at, you know, 15% to 20% growth rate in the first and second quarter. Well, I guess we were at 13% growth rate. And, you know, we continue to expect to grow, but we're not sure if it's going to remain at that high of a rate or a slightly lower rate.

Okay. But you think you will still be able to maintain the actual profitability of the company?

Well, one of the things that's really kind of great about our business is the diverse brands that we have. And even though we are diverse, all these products are pretty much made the same way. So while the Liberator business grows during the holiday period, the outdoor business grows during the outdoor time. During the pandemic, the outdoor business skyrocketed while the Liberator business was basically challenged on the retail side. So having this diverse mix of channels, of product lines, and whatever, we're able to pretty much weather most things. What we can't measure, what we can't weather, like most businesses, is a deep recession, a pandemic, or a war. Those are the challenges that we all face.

And to add to that, this is Alex. Your question was about whether we believe that we can maintain the same level of profitability. We set a very high bar during the second quarter, and that was primarily driven by several factors, one of which was the economies of scale on our labor and our production. Now, we're going to continue implementing our cost-saving initiatives And I'm being cautiously optimistic about at least showing an improvement on margin compared to the prior fiscal year.

That's excellent. Thank you very much. The other and last question for me would be your relationship with your European distributor, Orion Wholesale, if I'm correct. Can you tell us what kind of revenues they generated this quarter, and if they're seeing any kind of acceleration or slowdown in Europe for the next couple of months, actually?

Right. Well, Orion has exclusivity on our product line, and it seems like every time they buy a container, there's another order for another container. So we're hoping each container is about $125,000. So we're hoping that they buy 10 to 12 containers a year. And that's what they're ramping up to. And so Orion is handling, for the most part, wholesale and B2C as well. And they're the largest distributor in EU. So we do work with them. We have attended the Eurofame trade show. We've exhibited in their booth. We've trained their people. and they keep adding SKUs, and they keep growing their product mix. So right now we have a container ready to leave in the next week or so, and there's another order following that. So it's kind of a building relationship.

Yeah, I mean, I'd say on the, you know, obviously we see their wholesale prices for what we're selling to them at, not their revenue. But, I mean, as far as them as a client for us, I would expect it to be, you know, well over, you know, probably about a million dollars is what I would expect for this year, um, as far as their wholesale price. And then, you know, hopefully continuing to grow from there, but the European market, it was relatively untapped for us. Um, so it's still gaining some brand awareness, still getting out there to all of the different retail stores. Um, there's a lot of distribution. and just getting into new channels that are still happening.

Now, Orion has their own chain of stores as well. They have well over 100 franchises, and so they distribute to their own chain stores and to other wholesalers as well. So they're very broad.

Perfect. Excellent. Thank you very much for the great job, and I wish you all the best.

Thank you for calling. We appreciate you. Thank you. And once again, ladies and gentlemen, if you would like to ask a question at this time, you may press star one on your telephone keypad to enter the queue. And there are no further questions from the dial-in audience at this time.

We do have a couple of questions on the webcast, so I'm going to read them out loud and I will let the team to answer. The first question is, what is the company doing to target the baby boomer generation in regards to Liberator and Havana sales?

Yeah, so I can briefly answer a little bit of that. So one thing that we're doing is just continuing to expand our Liberator and Havana offerings on a variety of websites, as I kind of hinted at in the script call earlier. One thing that we're doing that's really good is using the Ivana brand to help gain some awareness to some PG sexual wellness products, you know, products that otherwise might not be allowed on certain sites, but we can kind of rebrand them and cleverly use the language to allow them onto those sites, even though most people know what they're actually used for. You know, there's certain websites that The older crowd tends to access more, so we just want to be on all of those websites. One that we do business with currently is brookstone.com. They tend to have an older demographic, and there's plenty of baby boomers who shop on Amazon as well. It's a little bit of a changing demographic as far as where those people are going to shop. but we continue to add additional sites that appeal to that age group.

And another question on the webcast is about margin, whether the company can sustain or increase 27.8% adjusted operating margin. Well, I guess it's actually a gross profit margin into Q3 and Q4. So I can start, and I will let the team to elaborate on that. So like I said, in the quarter two, we set a really, really high bar of increasing our margin to 27.8%, and that was based on several factors. A few factors are related to our initiatives that we implemented, like putting at work our new conveyor line and thus increasing the productivity of our sewing operators, then we're constantly looking to saving on raw materials. But one of the major factors was the actual increase in sales in the second quarter, and that provided us with an economy of sales. Now, economy of scales. And whether we can maintain the 27.8% margin or year-to-date 26.1% margin, that is uncertain because we're still living in the uncertain world. But I am, like I said before, I'm very optimistic in at least showing an improvement to the margins that we showed last year. And I can remind everyone that in the fourth quarter of last fiscal year, our margin was close to 18%. And overall, fiscal year 2022 margin was 22%.

Yes, I'll just elaborate a little on that. We work daily on continuous improvement. We have plans on every aspect of our manufacturing to determine how we can reduce costs, improve margin, reduce waste. We also have an ecosystem in place where we take our waste stream from our foam processing and we turn it into beanbag fill And, of course, the more foam products we produce, the more free waste we have, the more free trim we have. We also buy surplus fabrics wherever we can. So, for instance, if you take a look at a bean bag, our fabrics come from military waste, automotive waste. Our foam trim comes from our own waste stream. And so this is both from a sustainability standpoint and a cost reduction standpoint. So, once again, the more products we sell, the more free foam we have. And we could produce these products at very little cost. And so that's one of the major contributors to our improving margin going forward. So if there are any more questions, we'd be happy to address them. Otherwise, we'll turn it back to the operator.

Thank you. And there are no further questions from the phone lines at this time. This does conclude today's conference call, ladies and gentlemen. You may disconnect from the webcast at this time. Thank you for your participation. Okay, thank you. Thank you.