Xcel Brands Q3 2023 Earnings Call Transcript

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November 20, 2023

There are 9 speakers on the call.

Operator

Please be advised that reproduction of this call in whole or in part is not permitted without prior written authorization of Xcel 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 and Company. Andrew, you may now begin.

Speaker 1

Thank you, and good evening, everyone, and thank you for joining us. Welcome to the XL Brands Third Quarter 2023 Earnings Call. We greatly appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert DeLauren Chief Financial Officer, Jim Herron and Executive Vice President of Business Development and Treasury, Seth Burrows. By now, everyone should have access to the earnings release for the Q3 ended September 30, 2023, which went out this evening.

Speaker 1

And in addition, the company plans to file with the Securities and Exchange Commission its quarterly report on Form 10 Q tomorrow. The release and the quarterly report will be available on the company's website at www.xcelbrands.com. This call is being webcast and a replay will be available 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.

Speaker 1

These risk factors are explained in detail in the company's most recent annual report filed with the SEC. XL Brands does not undertake any obligation 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 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 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 You may refer to the attachment on the company's earnings release or to Part 1, Item 2 of the Form 10 Q for a reconciliation of non GAAP measures.

Speaker 1

And now, I'm pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob, please go ahead.

Speaker 2

Thank you, Andrew. Good evening, everyone, and thank you for joining us. I would like to start today's call with an update on our transformation efforts and how our business is performing under the new operating model. After that, our CFO, Jim Haran, will discuss Our financial results in more detail. I would be remiss if I did not extend a special thanks, Jim, for powering through a serious bike injury this last weekend to get the 10 Q filed.

Speaker 2

As stated earlier this year, starting in the Q1 of 20 23, we began to restructure our business operations, shifting from a working capital and intensive Wholesale

Speaker 3

business models,

Speaker 2

a business model that is working capital light, highly profitable and focused on high touch licensing, live stream shopping And social commerce growth strategies. During the Q3 of 2023, we continue to execute on this plan and I am pleased to report As a result of all of our restructuring efforts, going forward, we expect to now save approximately $14,000,000 in operating $7,000,000 of reduced payroll costs and $7,000,000 in lower operating costs. These cost savings began in the Q1 of 2023 and are expected to be fully realized by the end of 2023. Based upon Some delays in concluding the Longaberger licensing agreements and softness in our QVC business that resulted from scheduling conflicts With our on air talent, our current financial forecast indicate that we expect to return to profitability by Q1 of 2024, driven by these cost savings combined with revenue from our new licenses and brand launches in 2023 that will continue to ramp and grow in 2024. To effectuate this transformation, we have engaged with best in class Business partners entered into multiple new licensing agreements, some of which I spoke about on last quarter's call and some of which are new this quarter.

Speaker 2

We believe that the evolution of our operating model through these new arrangements, coupled with the launch of our live stream and social commerce platform We'll provide our company with competitive advantage and significant cost savings going forward, while offering our customers exceptional quality at attractive prices. We also believe our live stream and social commerce platform will enable us to fully engage with and entertain our customers in ways that were not possible in the past. I look forward to sharing more information about this as we get closer to the launch. In May, We signed a master licensing agreement with G III Apparel Group for the Halston brand. We started to realize revenues from this agreement in the Q2 of 2023, I'd expect that more meaningful growth will come after G III launches their first collection in fall 2024, which is a season later than we initially had hoped for.

Speaker 2

Our partnership with G III, given their extensive production and distribution capabilities, provides us with a tremendous opportunity to grow the brand and take Halston to the next level. For our Judith Ripka brand, We entered into new licensing agreements in the 1st and second quarters to move all segments of our Judith Ripka business to Jewelry TV. The brand launched on air October 16. The launch was among the best launches on JTV and exceeded all business metrics established by the network. In fact, early indications show over 10,000,000 media impressions generated by the marketing efforts for the launch show.

Speaker 2

We expect significant growth with the Judith Ripka brand in this new and exciting partnership For our Sea Wonder brand, we launched on HSN at the end of March with the first show achieving over 200% of planned sales And sales continue to gain strong momentum during Q3. As previously stated, the wholesale production for our HSN business Has been licensed to 1 Jeanswear Group. We are working on some exciting license extensions in other categories for the C. Wonder brand. Finally, we expect to be announcing before the Christmas holiday a new brand launch on HSN in March of of influencers and creators to drive our TV and live stream and social commerce businesses.

Speaker 2

With respect to the Longaberger brand, We entered into a new license agreement with an industry leading outsourcedecommercemanagement company to manage and operate the e commerce business. Also, we have executed a license for made in America U. S. Baskets. Finally, we are in discussions with other potential partners to Additional home product categories under the brand, Longaberger is an iconic American brand and we're excited after reestablishing the brand the past few years to now bring in partners who can help grow the brand and business.

Speaker 2

Finally, regarding our QVC Interactive Television business, Both the logo by Lori Goldstein brand and Isaac Mizrahi brands did not perform as we expected during the Q3 of 2023, primarily due to scheduling conflicts with on air talent as QVC transitions post COVID from remote shows to 100 drive the business in 2024, including product refreshments and possible dedicated shows with our backup guests. In summary, we are on track with the execution of our transition plan and we look forward to growth in 2024. And now, I'd like to turn the call over to Jim to discuss our results and financial highlights. Jim?

Speaker 4

Thanks, Bob, and good evening, everyone. I will briefly discuss our financial results for the quarter 9 months ended September 30, 2023. Total revenue for the Q3 2023 was $2,600,000 representing a decrease of approximately $1,900,000 from the Q3 of 2022. This decline was primarily driven by a $2,100,000 decrease in net product sales due to the exit from our wholesale apparel And fine jewelry sale operations early in 2023 as part of the restructuring and transformation of our business operating model. Partially offsetting the decline in net sales was an increase in net licensing revenue of $200,000 primarily driven by the relaunch of our Sea Wonder brand on HSN.

Speaker 4

It should be noted that our Judith Ripka brand launched on air on JTV this past October. Thus, we expect to see a positive impact from the brand beginning with the Q4 of this year. On a year to date basis, revenue for the current 9 months decreased by approximately $6,200,000 from the prior year 9 months to 15,500,000 This decline in revenue was driven by a $6,300,000 decrease in licensing revenue, primarily attributable to the May 2022 sale of a majority interest in the Isaac Mizrahi brand. Net product sales were essentially flat year over year as we sold off all of our apparel and jewelry inventory during the first half of twenty twenty three. Our direct operating cost expenses were $5,600,000 for the current quarter, down by $1,300,000 or 19 percent from $6,900,000 in the prior year quarter.

Speaker 4

It should be noted that $1,300,000 in non recurring costs associated With the restructuring, we're included in the current quarter's operating expenses and if backed out, would represent a $2,600,000 reduction from the prior year quarter. On a year to date basis, our operating costs and expenses were $17,800,000 in the current year period, down by $7,000,000 or 28 percent from $24,700,000 in the prior year 9 months. This decrease in operating expenses It was primarily attributable to the restructuring and transformation of our business in 2023 that Bob discussed earlier, And in addition, the elimination of costs associated with the Isaac Mizrahi brand following sale in May 2022. As Bob mentioned, we recently announced the licensing of our Longaberger operations. Together with the restructuring of apparel And Fine Jewelry host operations, our operating costs and expenses will continue to decrease and we expect to reach a run rate of under $4,000,000 per quarter on the Q1 of 2024.

Speaker 4

By comparison, the Q4 of 2022 had a run rate of approximately $7,500,000 in cost. Overall, we had a net loss excluding non controlling interest for the current quarter of approximately $5,100,000 or minus $0.26 per share compared with a net loss of $4,000,000 or $0.21 per share in the prior year quarter. On a non GAAP We had a net loss for the current quarter of $3,000,000 or minus $0.15 per share compared with a net loss of 3,300,000 or $0.17 per share in the prior year quarter. This non GAAP net loss includes the $1,300,000 in non recurring Restructuring charges that I mentioned earlier. Adjusted EBITDA was negative $1,400,000 for the current quarter, An improvement of approximately $1,500,000 compared with negative $2,900,000 in the prior year quarter.

Speaker 4

This level was approximately $400,000 Overall, our forecast as it relates to reduced royalty revenue generated by our QVC businesses. On a year to date basis, our net loss, Excluding non controlling interest, for the current 9 months was approximately $14,300,000 or $0.72 per share compared with net income of $2,000,000 or $0.10 per share in the prior year comparable period. On a non GAAP basis, We had a net loss for the current 9 months of $8,700,000 or minus $0.44 per share compared with a net loss of 8,800,000 or minus $0.45 per share in the prior year 9 month period. And finally, adjusted EBITDA was negative $4,600,000 for the current 9 months, representing a $2,000,000 improvement over negative $6,600,000 of EBITDA in the prior year 9 months. Once again, as a reminder, non GAAP net income, non GAAP diluted EPS and adjusted EBITDA are non GAAP unaudited terms.

Speaker 4

Our earnings press release and Form 10 Q present a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our balance sheet and liquidity. As of September 30, 2023, the company had cash and cash of approximately $2,200,000 and positive net working capital of $2,900,000 excluding the current portion of our lease obligations. Since executing our restructuring and transformation plans earlier this year, our cash usage has decreased significantly is projected to continue to improve. Cash used in operating activities during the current 9 months was $2,800,000 compared with cash used and operating activities of $11,000,000 in the prior year 9 months.

Speaker 4

Also in October 2023, We entered into a new 5 year term loan of $5,000,000 in which quarterly repayments will commence in April of 2024. We believe that the additional liquidity provided by this new term loan, coupled with our operating expense cost 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?

Speaker 2

Thank you, Jim. It's great to see you recovering so fast Ladies and gentlemen, this concludes our prepared remarks. Operator?

Operator

Your first question comes from the line of Anthony Lebiedzinski of Sodeto. Your line is open.

Speaker 3

Yes, good afternoon. It's Anthony Lubzinski from Sidoti. And thank you for taking the questions. And Jim, I hope you're feeling better and we'll get better 100% quickly. So yes, so first, just looking at the Q3, Bob, you mentioned that was came in lower than What you guys expected, part of that was because of the QVC issues.

Speaker 3

So, have those issues been resolved with QVC or do you think it will still be a drag on the Q4?

Speaker 2

So there are Two things that were driving the difference between where we thought we would be And where we ended up in the quarter, 1, about $400,000 in revenue, we were lower And we had about $200,000 more of expenses with the transition of the Longaberger Business. We thought we would be able to get everything in place a little sooner than we did, but the good news is that's behind us now. And we are working on solutions to get talent back on calendar and on schedule so that We don't miss. It was a fairly sudden change in policy at QVC. And as you can imagine, most of our on air guests have busy media schedules and we just had conflicts.

Speaker 2

We think there will be some continued conflicts in Q4, but we're working on And revised agreements with all of our on air guests, so that we can get back to normal on air

Speaker 3

Okay. Yes. Thanks for that, Bob. And in terms of the license deal that you Announced last week with Alpha OES for Longaberger. How should we think about the impact of this deal out going forward?

Speaker 3

Maybe you can give And then kind of going forward, how should we think about this in terms of the financial impact?

Speaker 2

Okay. Well, I think Seth can talk a little bit about Alpha.

Speaker 5

Yes. So Anthony, the license is structured with Royalty, like many traditional licenses, there's also incentive on the bottom side On the margin generated by the business, if you look at the business, say, we don't report earnings by brand or contribution by brand. That said, Longaberger, we've been investing in the business over the last several years. So there should be a positive impact. So it will be a negative impact to revenue since we won't be recognizing The direct to consumer revenues from the longer route business, but it should be a very positive impact to our EBITDA contribution.

Speaker 3

Okay. That's good to hear. Okay. So going forward, you will it sounds like you will only be reporting net license I guess the other line item net sales, I mean this quarter you only had 256,000 Sales there, so I guess going forward, it's going to be pretty much 0 or is that correct?

Speaker 5

Yes, I believe that's correct.

Speaker 4

Yes, there'll be some sales in the 4th quarter As we had transitioned Lagerburger during the quarter, thereafter, we don't anticipate having sales cost of goods sold.

Speaker 3

Got you. Okay. And then last question before I pass on to others. So in terms of the expense run rate, I know some of the Q3 came in Higher because of some non recurring items. As far as the Q4, do you think it can be close to $4,000,000 or above that?

Speaker 3

Like Just roughly speaking, should we expect?

Speaker 4

Yes. We're just Cleaning up some final transition items. So there'll be a little bit more cost, but this is the end of these transition costs and going into the New Year, It will be exactly where Bob mentioned. There will be a run rate on the phone line.

Speaker 3

All right. Well, that's good to hear. Well, thank you very much. Best of luck and happy Thanksgiving to all.

Speaker 4

Thanks, Jamie. Thank you.

Operator

Your next question comes from the line of Pat McCahon of Noble Capital Markets. Your line is open.

Speaker 6

Hey, this is Pat on for Mike Kupinski. Thanks for taking my questions and congratulations on completing the restructure. So actually, Some of my questions have already been answered, but I do have one additional question, which is just broadly what are you seeing In the marketplace, for your various brands so far in this quarter, just when it comes to As we head into the holiday season, what is the demand like from the consumer? What are you seeing? Do you have any Leading indications of what we should expect this holiday season given the state of the economy?

Speaker 2

So it's an interesting question. Apparel historically The month of December has not been a big month in interactive TV because the networks tend to pivot to electronics, Food and giftable items. So we don't expect Any change in their product mix going into December. And quite frankly, Our brands were tracking ahead of GVC overall results in apparel. If we didn't have the scheduling conflicts, I think we would have been very, very pleased with where we were in Q3 and now Heading into Q4.

Speaker 2

So that tells us that There remains high demand for our products with the consumer. And of course, we are watching that Carefully, people are making a lot of hard decisions about where they should be spending their money. But overall, We haven't seen anything quite yet. It's just we need to deliver the talent to Westchester, PA, which as I said, we're working on.

Speaker 6

Great. Thanks for the color. That's it for me.

Speaker 2

Thanks, Pat.

Operator

Your next question comes from the line of Aaron Warwick of Breakout Investors. Your line is open.

Speaker 7

Hey, guys. Thanks for taking my call and appreciate all that commentary. It sounds like some good things ahead. One of those I imagine is your social commerce platform. Could you talk a little bit more about what your current thinking on that is in terms of when it's going to launch, What we should be looking for and what your expectations are, especially as we come up on the holiday shopping season?

Speaker 4

Yes. So

Speaker 2

we have completed everything we wanted to complete with the tech itself, including Building in for AI engines, 2 recommendation engines, 1 content filter And all of those are done and ready to go. We expect that we will be conducting an Investor Day or perhaps At one of the conferences that we're scheduled to present at in December, we will provide The complete rollout plans and a detailed overview of the technology and its revenue model.

Speaker 7

Okay. So looking at December timeframe for that, and is that where you have You had mentioned the supermodel before, I think on the last call. And is that for a specific brand or is that As part of the social commerce platform or both?

Speaker 2

It's both. It's both. We would expect All of our brands to be participating on the social commerce platform and then of course many third party brands as well. And we hope to be able to make the announcement before the Christmas holiday About who that supermodel is, of course, the planned launch is in March of 24 and HSN doesn't want to get too far out ahead of the launch.

Speaker 7

The launch of what is in March 2024?

Speaker 2

The launch of our supermodel.

Speaker 4

Okay. Yes.

Speaker 7

Final thing for me, I guess, is that you do have that $5,000,000 available now. You're talking a lot of good things happening expected to happen in the Q4 and Beyond and even profitability next year, has there been any thought given especially at the current levels to Potentially stock buyback or anything like that?

Speaker 2

So the answer to that is yes. It is something that We're looking at it carefully. And I think we need to get a read on the launch of the live stream platform. And that will, to some extent, We'll guide us in when and the size of Some type of stock buyback program if we decide to do that.

Speaker 7

I guess one more that came to mind Here, if you don't mind, there was seem to be quite a bit of heavy selling way beyond what is normal. Is there any idea what was going

Speaker 2

Yes. When we acquired Halston From HOKO and their partner, there was an indemnity bucket That was formed. The collateral in that indemnity bucket was shares of XL that were held Hi, HOKO. And they settled their litigation and shares were sold To realize on the indemnity bucket, and that's what it was. There was a lot of pressure on the stock while that selling was happening.

Speaker 7

Okay. Well, that makes sense. So I mean, that was price insensitive essentially then? I mean, they just had to sell.

Speaker 4

Yes. Yes.

Speaker 7

That explains a lot. Okay. That's good to hear. I appreciate The commentary around that, have a happy Thanksgiving, good holiday season and look forward to the future here.

Speaker 2

Thank you. Sounds good. Thanks, Aaron. Yes. Everyone, happy holidays.

Operator

Your next question comes from the line of Walter Shanker of MAZ Partners, your line is open.

Speaker 8

Actually, my main question was just asked by Aaron, Which is given an asset light model and expectation of profitability, I 2nd, right, not second, I would have asked the same question about a buyback. But as a holder, I think that's a very good use

Operator

There are no further questions at this time. I will now turn the call over to Bob D'Loren for some closing remarks.

Speaker 2

Thank you, operator. Ladies and gentlemen, thank you all for your time this evening. We greatly appreciate your continued interest and support

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Xcel Brands Q3 2023
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