Alliance Entertainment Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 6 speakers on the call.

Operator

Greetings and welcome to the Alliance Entertainment Second Quarter Fiscal Year 20 24 Financial Results 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 is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward looking.

Operator

While these forward looking statements represent our current judgment on what the future holds, are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise our publicly released results of any revisions to these forward looking statements in light of new information or future events. Throughout today's discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10 ks for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors.

Operator

During this conference call, we will discuss non GAAP financial measures, including a discussion of adjusted EBITDA. We believe non GAAP disclosures enable investors to better understand Alliance Entertainment's core operating performance. Please refer to the investor presentation for a reconciliation of each non GAAP measure to the most directly comparable GAAP financial measure. A press release detailing these results crossed the wires this afternoon at 4:0:5 p. M.

Operator

Eastern Time, and it is available in the Investor Relations section of our company's website, aeent.com. Your host today, Bruce Ogovy, Executive Chairman and Jeff Walker, Chief Executive Officer and Chief Financial Officer, will present results of operations for the fiscal Q2 ended December 31, 2023. At this time, I'll turn the call over to Alliance Entertainment Executive Chairman, Bruce Ogovi.

Speaker 1

Thank you, operator, and good afternoon, everyone. I am pleased to welcome you to today's fiscal 2nd quarter ended December 31, 2023 financial results conference call. For those of you that are new to our story, we bring entertainment to you. Alliance stocks the world's largest selection of music, movies, video games, gaming hardware, arcades, collectibles, toys and consumer electronics. We are a trusted omni channel supplier to the largest retailers and wholesalers across the globe and a trusted distributor for the world's most recognized entertainment and gaming brand.

Speaker 1

As our most recent June 30, 2023 fiscal year end, we produced over $1,100,000,000 in annual revenue and employed over 700 team members. Alliance is a gateway between brands and retailers. We are a trusted omnichannel supplier to Walmart, Amazon, Best Buy, Costco, Target, Kohl's, BJ's, Meijer, Barnes and Noble and 2,000 additional retailers and wholesalers worldwide and a trusted distributor for Disney, Paramount, Sony, Warner, Universal, Microsoft, Nintendo, Activision, Electronic Arts, Mattel, Hasbro, Funko, RK1UP and 600 others. We have over 200 customers that sell online worldwide and ship to more than 35,000 storefronts in 72 countries and distribute over 325,000 in stock SKUs to the largest retailers and wholesalers in the world. Our Amp and Distribution Solutions division distributed physical exclusive music and exclusive video respectively and our Mill Creek division engages in exclusive video licensing and content from Disney, Sony, Universal, Lionsgate, CBS and others.

Speaker 1

Distribution Solutions has over 62 significant exclusive video studios that rely on distribution solutions to manufacture, supply and market video products and have direct sales through accounts with Amazon, Walmart, Target and 1,000 of retailers and websites through Alliance Entertainment's vast distribution channels. Amped has more than 90 exclusive labels that rely on Amped to supply and market music, vinyl and CD and sells and markets music through Amazon, Walmart, Target, Barnes and Noble, Best Buy and over 2,000 independent music stores in the U. S. Through Alliance Entertainment's worldwide distribution channels. Mill Creek licenses video content from studios to create, manufacture, market and sell video DVDs with content license from Disney, Sony, Universal, Lionsgate, CBS and significant independent studios.

Speaker 1

Alliance provides traditional retailers with world class distribution and e commerce capabilities by focusing on service, selection and technology by providing our retailers superior service, stocking the world's largest physical media and entertainment selection and state of the art technology systems and facilities. Alliance provides efficient omnichannel expansion solutions for retailers, offering a full enterprise level infrastructure and drop ship orders directly to consumers on behalf of its customers. The entire ordering, confirmation and invoicing process is automated allowing customers to focus on sales, while we perform all stocking, warehousing and shipping functions. To the consumer, the shipment they receive looks like it was sent by the large retailers we service. Alliance is also a leader in vendor managed inventory solution, providing solutions tailored to our customers to support their inventory needs.

Speaker 1

These value add services provide a highly technical, critical business function for our partners. Alliance consolidates and distributes a vast portfolio of entertainment products, while a proprietary database powers retailers online music and gaming offerings, including vinyl, CD, DVD, Blu Ray, gaming products and retro arcades. Currently, we have over 325,000 unique speeds in stock to support our customers' vast selection of needs. Alliance has invested in enhancements to our automated handling equipment, which reduce shipping time, streamline order processing, reduce labor costs and also improve overall warehouse management. Just over a year ago, we installed an AutoStore automated storage retrieval system at our Shepherdsville warehouse.

Speaker 1

This improved warehouse operations allowing us to achieve increased levels of speed, reliability, capacity and precision that resulted in significant cost savings. This slide highlights our strategically located operations that include 7 offices and 4 distribution centers, including our 873,000 square foot facility in Shepherdsville, Kentucky. In 2023, warehouse shipments totaled over 70,000,000 units to our highly skilled workforce with tech enabled facilities and infrastructure that allows Alliance to achieve industry leading speed and accuracy metrics. I will now hand the call over to Alliance's CEO and CFO, my partner, Jeff Walker.

Speaker 2

Thank you, Bruce, and thank you all for joining us today. We will now turn to an overview of our financial results in the 2nd fiscal quarter ended December 31, 2023. Net revenues for fiscal Q2 ended December 31, 2023 were $426,000,000 compared to $445,000,000 in the same period of 2022. Of note, our consumer direct shipments grew to 45 percent of gross sales revenue for the fiscal Q2 compared to 37% in the year ago period, totaling 2,300,000 shipments of 5,300,000 units. Gross profit for the fiscal Q2 ended December 31, 2023 was $47,700,000 compared to $20,900,000 in the same period of 2022, an increase of 128%.

Speaker 2

Gross profit margin for the fiscal Q2 ended December 31, 2023 was 11.2%, up from 4.7% in the same period of 2022. Net income for the fiscal Q2 ended December 31, 2023 was 8,900,000 dollars compared to a net loss of $15,500,000 for the same period of 2022. Adjusted EBITDA for the fiscal Q2 ended December 31, 2023 was $17,900,000 compared to adjusted EBITDA loss of $14,500,000 for the same period of 2022. Over the last 12 months, we have significantly reduced inventory and debt with fiscal Q2 December 31, 2023 year over year inventory decreasing from $175,000,000 down to $114,000,000 and debt down from $177,000,000 to $107,000,000 We also closed on a new 3 year $120,000,000 senior secured asset based credit facility with White Oak Commercial Finance LLC replacing the company's revolver with Bank of America. On this slide, you can see fiscal year 2022, we were experiencing the benefits of COVID with peak sales of $1,420,000,000 in revenue.

Speaker 2

Fiscal 2023, our sales normalized after COVID with sales of $1,160,000,000 For fiscal 2023, adjusted EBITDA was negatively affected with a one time supply chain cost of $35,800,000 We've gotten past those one time supply issues. For the Q2 ending December 31, 2023, our adjusted EBITDA was 4.2 percent of revenue. We are continuing to reduce operating costs and improve margins in 2024 to get back to 5% adjusted EBITDA of sales. For this slide, you will see 6 months of sales compared to the previous 4 fiscal years. We wanted to show you how diversified Alliance is and how consistent sales by configuration are.

Speaker 2

The diversified products offered is a big part of the Alliance winning formula. In addition to the huge growth in our year over year quarterly gross profit, we reduced operating costs $5,200,000 through warehouse efficiencies and new technology implemented going from $35,400,000 down to 30,200,000 These efficiencies will have an ongoing positive impact going forward. On this slide, gross profit improvement and expense reductions also led to a 3rd consecutive quarter of positive adjusted EBITDA increasing to $17,900,000 in the fiscal Q2 compared to an adjusted EBITDA loss of $14,500,000 in the prior year. EBITDA as a percentage of sales was a strong 4.2%. The first half of our fiscal year saw net revenues for the 6 months ending December 31, 2023, totaled $652,000,000 compared with $684,000,000 in the same period of 2022, a decrease of 4.6%.

Speaker 2

Gross profit was $74,000,000 compared to $46,400,000 in the same period of 2022, an increase of 59.5%. Gross profit margin was 11.3%, up from 6.8% in the same period of 2022. Net income was $5,500,000 compared to a net loss of $23,000,000 for the same period of 2022. Adjusted EBITDA for the 6 months ending December 31, 2023 was $19,200,000 compared to adjusted EBITDA loss of $18,600,000 for the same period of 2022. For this slide, it shows the quarterly results in Q1 2020 for gross profit, net income per GAAP and adjusted EBITDA.

Speaker 2

Comparing Q2 fiscal year 2020 to Q2 fiscal year 2024, adjusted EBITDA has increased from $11,200,000 to 17,900,000 dollars which is a 60% increase over the past 4 years. We have taken significant steps over the past year to strengthen our balance sheet with additional cost savings initiatives planned. Throughout 2023, we were highly focused on reducing inventory and debt, with fiscal 2nd quarter year over year inventory decreasing from $175,000,000 to $114,000,000 and debt down from $177,000,000 to $107,000,000 We also expect significant cost savings fiscal year ending 2025 with the planned closing of our Minnesota facility in May of 2024. Additionally, to support growth, we recently secured a new 3 year $120,000,000 senior secured asset based credit facility with White Oak Commercial Finance. The proceeds of which was used to refinance the existing credit facility, fund the working capital needs and provide for general corporate purposes.

Speaker 2

These steps have also positioned us to focus and execute on implementing our acquisition strategy going forward. I will now turn the call back over to Bruce.

Speaker 1

Thank you, Jeff. Going back to what Jeff mentioned regarding our acquisition strategy, Alliance has a proven track record of successfully acquiring and integrating competitors and complementary businesses. We have acquired over a dozen companies in the last 20 years including Alliance Entertainment, A and Connect, MEKA Electronics Distribution Solutions, Kokam and ThinkFree Fold. We also continue to focus on acquiring more licenses and exclusive distribution agreements in music, video, gaming, collectibles and electronics. Expanding our existing product and service offering and executing our acquisition strategy will drive Alliance's efforts toward increasing market share.

Speaker 1

Alliance will further invest in automating facilities and upgrading proprietary software. Alliance's direct to consumer or DTC services are in greater demand as consumer preferences shift and stress retailers' e commerce and DTC capabilities. Enhancing DTC relationships will grow existing revenue lines and improving capabilities will generate a more attractive overall service offering. Leveraging existing relationships, Alliance can expand into new consumer product segment, growing its product offering and providing more selection and diversity to our existing customer base while attracting new customers in the process. In closing, Alliance is a leading global entertainment wholesaler, direct to consumer distributor and e commerce provider for the entertainment industry with over 30 years of operations experience within the entire Alliance management team, which beneficially owns more than 81% of the common shares outstanding and has extensive knowledge and tribal knowledge to lead the company towards future growth.

Speaker 1

We are a leader in fulfillment and e commerce distribution with over 325,000 SKUs physically in stock, protected by a focused commitment to service, selection and technology. Suppliers and brick and mortar retailers, omni retailers, online retailers and consumer rely on the company's platforms to fuel transition volume for trusted dependable relationships. Through the expansion of partnerships with our vendors and our customers as well as investment in existing facility, Alliance expects to continue to grow revenue and expand margins. Again, we have a proven track record of M and A, having successfully acquired and integrated 12 significant businesses in 2,003. There are significant future acquisition and consolidation opportunities to drive future growth through the acquisition of complementary businesses and competitors.

Speaker 1

Finally, the company's technology platform increases the efficiency of transactions, reduces labor costs, provides great mobile accessibility and incorporates modern marketing and FinTech tools. We look forward to providing our shareholders with further updates in the near term as we strengthen our leadership position as the premier distributor of music, movies, video games, arcade, toys, collectibles and consumer electronics. I thank you all for attending now and I'd like to hand the call back over to the operator to begin our question and answer session. Operator?

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Ashok Kumar with ThinkEquity. Please proceed with your question.

Speaker 3

The first question is on I mean, basically the questions revolve around your operational key performance indicators. The first question is on distribution and fulfillment expense. So on a year on year basis, the twelvethirty onetwenty 3 versus the preceding year, you saw $5,600,000 decrease, right? So on a percentage basis, that's a full point improvement as a percentage of sales. So what's the driver behind that?

Speaker 3

And in your prepared remarks, question number 2 is on adjusted EBITDA. You indicated a $35,800,000 adjustment. And footnote indicates excessive transportation costs, markdowns and other arcade related costs. If you could walk us through that. And then the last question is on your balance sheet.

Speaker 3

Your inventory saw $61,000,000 improvement and the revolving credit also was down $69,700,000 right? Could you again provide some additional notes on the drivers behind those improvements? Thank you.

Speaker 1

Ashok, thank you for that question. Jeff, I think I'll let you start off there.

Speaker 2

Okay. So let me start off with the I'll start off with the last question. A big reduction in our inventory and our debt at twelvethirty one. They really those 2 kind of really go hand in hand. As we came out of twelvethirty onetwenty 2, we still had a high level of higher than optimal level of inventory.

Speaker 2

And we've been diligently working on reducing down that inventory during calendar 2023. And as we reduce down that inventory, the cash conversion from the inventory reduced our line of credit along the way there. The other component, one last piece that factors into there is with interest rates really increasing over the last couple of years, prior when we had very low interest costs, it was optimal for us to carry a much higher level of inventory. And as interest costs have increased in those last 2 years, it definitely makes us readjust our inventory buying processes. In some cases, we might have bought a month's worth of stock at a time.

Speaker 2

Now we might buy 2 weeks at a time and then 2 weeks later replenish the more to help continue to improve our inventory turns and so forth there. As on the question of reducing our operating expenses, We definitely had a significant improvement in our 4th quarter operating expenses. That's primarily all warehouse and facility expenses. And a big component was with our auto store system. That system is highly efficient and reduced significant amount of people to put away product in the warehouse and pick orders as well.

Speaker 2

So that was a big component. And we did also see a little bit easing up on labor over the class Q4 versus the prior Q4. We definitely in Q4 of 2022, we definitely had to do a lot more incentives for labor in the warehouse to have the warehouse fully staffed. And that eased up a little bit in 2023.

Speaker 1

This is Bruce speaking, Jeff. I'll take that last question there, a 3 part question there on the one time supply chain issues, I believe, Ashok, that's what you asked.

Speaker 3

Yes.

Speaker 1

Yes. So it really started a couple of years before, it really started in 2021 where we were doing really, really well in arcades and we placed very large orders in 2021 because we had really large orders from all the major retailers, Target, Walmart, Costco, anybody, everybody, Walmart, anybody, everybody who's carrying arcades during COVID was selling anything that would make the man caves better for people at home to have a good time. So we placed all the orders. We had to put some deposits up. We had to put some supply chain financing.

Speaker 1

We're like letters of credit. Unfortunately, we got caught up in all those supply chain issues that all retailers had to deal with, whether it be Walmart, Target, Kohl's, Bed Bath and Beyond, where the ships just could not get unloaded. And with all that products that we needed for Q4 of 2021, just did not were not able to get right, and we could not deliver to retail when they wanted it for those big high selling seasons when the arcades is at their peak time there. So we came out of the holiday there with all this arcade inventory that we were not able to ship and to add insult to injury, the supply chain costs of the containers went from $4,000 a container to $28,000 a container. Then you had to add demurrage charges and you would add storage, transloading and you can imagine there.

Speaker 1

And all our pricing that we had based it for, for the retailers who gave us POs for was based on $4,000 containers, not $28,000 container. And that may not sound like a lot of money, but we're only talking about 200 to 400 arcades that can fit in a container. Jumping by that amount of money, you're now suddenly your landed freight cost increases by close to $100 So now because we are PCAOB and we have our cost of inventory is landed cost, which includes all the carrying costs and the storage costs bringing it out, not storage costs, importing costs. And so we had an inventory on our books with a very high value of the landed cost, and then we were then trying to sell that inventory in 2022. So we came out of 2021 with over $130,000,000 in arcade inventory when we were forecasting we should have no more than $50,000,000 and we missed all the sales opportunities in 2021 that we were planning on.

Speaker 1

So 2022, now we are way overstocked in arcades and we had to deal with the fact now that the interest rates were going up, the price of gas is going up, inflation was hitting, there was no more stimulus money coming from the government there. So we spent all of 2022 selling off that inventory and trying to reduce our balance sheet down with that. So we did bring that $130,000,000 for 2022 down by $80,000,000 which was great from a balance sheet perspective, but it really just wreaked havoc with our financial statement. And if we had probably been smarter and hindsight is always 2020, we really should have put some big reserves on our 6.30 at 2023 financials there, so that we didn't have this big hit in Q2 of our financials there. We had a $35,000,000 we had a $21,000,000 loss instead of a profit there.

Speaker 1

And that just hurt everything about our financial statements. It caused a bank violation. That was the start of the bane of all our problems.

Speaker 2

The good news is, as we

Speaker 1

got through all that and we were able to turn that all in the cash and turn that all around. And as Jeff was telling, talking about how the inventory had been right sized, a lot of it had to do with it. We were able to right size our arcade in all of the calendar year 'twenty three. I think Jeff, you want to say something else? Go ahead.

Speaker 2

Yes. The reserve that we really should have put on would have been on June 30, 2022.

Speaker 1

Correct. So thank you for correcting that. Not 2020. Correct. Jeff is correct.

Speaker 1

So yes.

Speaker 2

Yes. Thank you. And so we're cloud side now. We're down to a more optimal level on arcade inventory and overall inventory going into this one. Yes.

Speaker 1

So 23 arcades, we had $50,000,000 worth of arcades and we started January 1, 2020. We bought another $20,000,000 And by the time it was December 31, 2023, the calendar year, we were down to $17,000,000 in arcades. So we are very happy where we're at right now. We do not have that supply chain risk that we had. We're not placing big orders and big bets like we did in the past.

Speaker 1

It's now just a normal sized business that we can handle and operate. And I think our Q4 resorts pretty much tell the whole results that we definitely turn things around compared to the same Q4 the year before.

Speaker 3

Got it. Thank you. Thank you again, Bruce and Jeff. I appreciate it. All the best.

Speaker 1

Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Matt Koranda with Roth and Kilometers. Please proceed with your question.

Speaker 4

Hey, guys. This is Mike Zabran on for Matt. I guess, noticed that customer direct fulfillment revs were about 800 basis points higher year over year. So now we're at 45% of sales. Maybe just discuss the outlook for customer direct fulfillment revenue mix in the second half of the year?

Speaker 4

And how should we think about how that mix will affect the P and L?

Speaker 2

Well, yes, I'll take this one. This is Jeff. We're very happy with it moving to the up there in the 45%. We do see that continuing going forward. One of the things that is really kind of one of our big winning formulas is the way our business is designed is that we have all the entertainment products.

Speaker 2

We stock a wide selection of entertainment products and the opportunity there including all the entertainment products, the opportunity is we focus on having all of those products available for sale on all the major retailers' websites. So from Walmart to Target, the Best Buy, Barnes and Noble, Wayfair, we're on Home Depot, obviously on Amazon as well and so forth. So, as we bring in new products, those products are available on those sites. And I'll give you a quick little example where our winning formula there is. We do all the vinyl that is sold at the stores in Walmart.

Speaker 2

And they at the store level, you have a curated section of about 700 titles in that store. Well, they also have more vinyl available at walmart.com. And when you go to walmart.com, we have over 30,000 unique vinyl titles in stock and those titles are all up on walmart.com. Consumers can go and order that title. It comes into directly that right away to our warehouse.

Speaker 2

Same day, we're shipping that out to the consumer with Walmart's name on it and so forth. So our big part of our winning formula there is where this fulfillment house for all the entertainment products on all the major retailers. And the last point is, they love it because they have no inventory risk. There's no inventory on hand for them. They just complete the sale.

Speaker 2

It gets shipped out. It's incremental sales for them, incremental profitability. It's a definite winning formula and we're continuing to focus a lot of our energy and attention to expanding our e commerce capability and customers there.

Speaker 1

This is Bruce. I think your question though is how is it going to affect us in the 4th quarters? Correct. We definitely see that those numbers that percentage should hold up and it's not hurting us in any way there. Whether we ship 1 or 2 units to every consumer, we ship a box into retail, we price it accordingly, so we maintain the same margins we always have because we have a business to run, not a charity.

Speaker 4

Correct.

Speaker 2

It's a profitable balance on the consumer direct.

Speaker 4

Got it. Okay. And we expect that mix to continue to climb going forward. Is that the right way to think about it?

Speaker 2

I don't think you could say it's going to grow. I don't know if it will grow as fast as it did this year over year, but it's definitely growing and will continue to expand. Got it. Okay. That makes sense.

Speaker 1

I mean, on arcades, our business has shifted more to shipping direct to consumer than shipping to brick and mortar. And so those are high dollar rings. So that has a weighting effect to some degree. And it's better for everybody involved to not try and ship it into brick and mortar retail. There's freight cost to get it into retail and you got to turn around and if you're going to ship it to the consumer, it's better to just go from one central point is the way we have it set up now.

Speaker 1

It's all on the West Coast. It comes in. We don't have to schlep it across the country to redistribute it again. So I think we've got it all dialed in now. It's the most efficient it can be for the retailer and for us.

Speaker 2

And one last thing. One thing that didn't really get into the Q4 numbers is we took over all the music and video direct to consumer business for target.com and that really went live like mid December. So it really hasn't didn't click into those numbers for the last quarter. And that's a big increase for us. They're doing a lot of vinyl and they're doing a lot of K Pop on the music side as well as new releases in all the movies and TV shows.

Speaker 1

And Taylor Swift is hotter than a pistol and Target has really leaned in heavily on Taylor Swift and there will be a big Target exclusive for Taylor Swift. Her new album comes out that we all heard announced at the Grammys.

Speaker 4

Okay, makes sense. Thanks. Thanks for the explanation. One more from me. The gross margin improvement in 2Q is pretty large.

Speaker 4

I think we're at 11% versus around 4.7% last year. Let me just specify the drivers of the improvement. So I guess how much was mix improvement and shedding lower margin revenues versus cost cutting?

Speaker 2

Well, I think on the gross margin, the bulk of the gross margin improvement is that we didn't have the big write offs and adjustments that really reduced it in 2022. But we have seen margin improvements in some of our vinyl sales and we've also seen it definitely in our arcade sales. So we were really, I would say, abnormally low in 2022 with that 4% range of gross margin. That was not in our historical history there. So the change is kind of an anomaly.

Speaker 2

So we're more in the consistent range that we're in now in this last quarter going forward. We won't see it go back to the 4% is another way to say it.

Speaker 4

Right. Okay. That makes sense. That's all for me guys. Thanks.

Speaker 4

Thank you. Thank you.

Operator

Thank you. Our next question comes from the line of Douglas Hobbs with Hobbs Family Office. Please proceed with your question.

Speaker 2

Hey, Biren. Hey, Jeff. Excellent quarter. Very impressive. It seems Alliance is utilizing software and technology much better these days.

Speaker 2

Can you expound on any cost savings, compliance and controls improvements?

Speaker 1

I can take that, Jeff.

Speaker 2

Yes.

Speaker 1

So Jeff mentioned that we installed AutoStore. That's a I call that in a Rubik's cube of auto storage retrieval systems. We put that in our Kentucky facility. We've had it we're on our 13th month now of actually using that new piece of equipment. And basically, you have all these totes and think of a tote as a shelf location.

Speaker 1

And instead of the picker walking normally a picker when they pick an order, they walk from different shelf location around our warehouse. And now with this system there, the picker just the processor picker stands in one location and all the shelf locations are brought to the picker. And that way, it cuts down the travel time. And even with all our other efficiencies and coming up with very efficient pick pass, the best we could do is right around 120 shelf presentations in an hour. And we've been able to improve that to be above 300 shelf presentations in an hour.

Speaker 1

And the main reason is that every 10 seconds, the person standing at the processing station, the tote gets delivered to them or the shelf and then they tell them how many they need out of that shelf location and they pull the quantity and then say okay. And then the next shelf presentation gets presented to them and they do the next one. We went from 41 people walking around, pulling orders, vinyl orders in the warehouse down to 7. And we get the same benefits and efficiency on the put away side. When we receive the product, we have to go find an empty shelf location and put it away in store and tell the system how many we put in that location, so that we can know where to find it when we need to pick it for an order.

Speaker 1

Well, now nobody has to walk to the warehouse and find an empty shelf location. An empty shelf comes to the receiver and where they do the receiving end of the AutoStore system there. And now you just tell the system how many you put in there and scan the barcode and boom, off it gets put away. And once it's received right there, it's available for picking right away. So using AutoStore for our vinyl, which was one of our most expensive areas as far as picking goes, it's like 3 times the cost of picking a vinyl LP versus a CD or DVD.

Speaker 1

And we've been able to cut those costs. AutoStore has given savings of right around $3,000,000 to $3,500,000 a year. We do have a lease on it. It's a 4 year lease. It was a $10,000,000 original purchase price there, but we look at we'll have a payback in 3.5 years.

Speaker 1

So we're quite happy with those type of things that we're doing.

Speaker 5

Our first webcast question asks, are you looking or working on any new acquisitions currently?

Speaker 2

Yes, I'll take that one. We are always working and looking at new acquisitions. We did our last big acquisition back in September of 2020, right in the middle of COVID. It was looking back on it, it was kind of crazy to complete a big acquisition at that time. As we go forward, now that we have our new bank line of credit in place and we've stabilized with our inventory and our operations and so forth, we're definitely back looking at acquisition opportunities here in 2024.

Speaker 2

One of the things that is an opportunity for us is our diversity of products that we sell and the focus on everything entertainment gives us really a pretty wide spread wide net of different businesses that can really complement what we're doing at Alliance. There's kind of 2 different types of acquisitions that we look at, one of which is something that might be a competitor to us in one of the categories or has a lot of similar products. And those consolidation opportunities are very accretive to value for us as we can acquire them and have a lot of consolidation cost savings. And then we also are looking at opportunities where companies have other entertainment products that we don't currently sell. Those are very valuable for us as well because they may have a different set of customers that they sell to and we have our vast selection that we can sell to their customers.

Speaker 2

And then additionally, their product can also come in and flow into our vast group of retailers that we sell to. So there's quite a bit of opportunity there within the entertainment industry. And my last point, I guess, I'd mention is the valuation on some businesses has definitely come down since 2 to 3 years ago. So we definitely see some potential opportunities for some good acquisitions that would really be accretive to value in the company.

Speaker 5

Our next webcast question asked, on the closing of your Minnesota facility, what impact will that have on your profitability?

Speaker 2

Yes, I'll take that one as well. I just mentioned that we acquired Kokam in September of 2020. They had a large facility in the Minneapolis area that neighborhood there. And the lease on that major facility expires in May of 2024. And so as we progress through the last couple of years, we've enjoyed the benefits and the work of that facility has produced.

Speaker 2

But at the end of the day, that facility is not optimal for e commerce fulfillment, which we were just speaking about earlier. That location in the U. S. Is not the most optimal location for quick e commerce delivery. And so we decided to close that warehouse and consolidate that product into our Kentucky facility.

Speaker 2

Bruce also had mentioned that the arcades are staying on the West Coast. So we have all of our arcade business that was previously going to Minnesota that is staying on the West Coast and the facility there. As far as cost savings, it's pretty significant, not only the simple things like the rent and taxes and utilities and so forth, but that was also running on a different computer system, a Nordic system. So we've been maintaining 2 computer systems and being able to retire their legacy system not only saves costs for employees and training and so forth, but also with accounting and all sorts of other functions, as well as it reduces our compliance costs with respect to everything as being a public company. So that's a big savings as well there.

Speaker 2

And the one last part I wanted to mention is, it was primarily stocking all video game product and we would also stock video game product in Kentucky warehouse. So for instance, having the new Mario Brothers video game, we would have that available in stock in both facilities. By having that product just in the Kentucky facility, we will overall have less inventory on hand, which will also help our inventory turns and will help to reduce our debt a little bit as well. So there's a lot of different components that are saving there. We're going to see the bulk of all those benefits hit us in fiscal 2025.

Speaker 5

And our last question asks, on Slide 16, I noticed that distribution and fulfillment expenses as a percentage of sales improved from 5.42% down to 4.12%. What is driving those improvements that adds up to the reduction

Speaker 1

of $5,200,000 I think we covered that in the first question already. But, Jeff, I believe you did that.

Speaker 2

Yes, I think Ashok had most of that question there that was answered.

Speaker 1

Yes, he did. But basically, the intent to answer the question there is primarily was that our operation, we were able to get more efficiency in. We've mentioned how we've been putting costs moving our arcades on the West Coast. We also introduced Auto Store, where I talked about all the savings that we're getting as far as our picking time, as far as processing time. So those are what's contributing to all those factors.

Speaker 1

And it shouldn't continue to improve, as Jeff just talked about with our closing of the facility in Minneapolis.

Operator

Right. There are no further questions. I would like to turn the call back over to Mr. Olgovy for his closing remarks.

Speaker 1

Thank you, operator. I would like to thank each of you for joining our financial results conference call today and look forward to continuing to update you on our ongoing progress and growth. If you're unable to answer any of your questions, please reach out to our IR firm, MZ Group. We'll be more than happy to assist you.

Powered by Quartr
Earnings Conference Call
Alliance Entertainment Q2 2024
00:00 / 00:00