Xcel Brands Q4 2023 Earnings Call Transcript

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Provided by Quartr
April 16, 2024

There are 7 speakers on the call.

Operator

Hello, everyone, and welcome to the XL Brands Incorporated 4th Quarter and Fiscal Year 2023 Results Earnings Conference Call. Please note that this call is being recorded. You will have an opportunity to ask questions to our speakers for today by pressing I'd now like to hand the call over to Craig Brailsford from RedChip. You may now go ahead, please.

Speaker 1

Good evening, everyone, and thank you for joining us. Welcome to the Xcel Brands 4th quarter and fiscal year 2023 earnings call. We greatly appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert D'Loren Chief Financial Officer, Jim Haran and Executive Vice President of Business Development and Treasury, Jeff Burrows. By now, everyone should have had access to the earnings release for the Q4 fiscal year ended December 31, 2023, which went out this evening.

Speaker 1

And in addition, the company has filed with the Securities and Exchange Commission its annual report on Form 10 ks. The release and the annual report will be available on the company's website at www.excelbrands.com. This call is being webcast and a replay will be available on the company's Investor Relations website. Before we begin, please keep in mind that this call will contain forward looking statements. All forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from certain expectations discussed here today.

Speaker 1

These risk factors are explained in detail in the company's most recent annual report filed with the SEC. Xcel does not undertake any obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. The dynamic nature of the current macroeconomic environment means that what is said on this call could change materially at any time. Finally, please note that on today's call, management will refer to certain non GAAP financial measures, including non GAAP net income, non GAAP diluted EPS and adjusted EBITDA. Our management uses these non GAAP metrics as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the company's results of operations.

Speaker 1

Our management believes these financial performance measurements are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results and thus they provide supplemental information to assist investors in evaluating the company's financial results. These non GAAP measures should not be considered in isolation or as alternatives to net income, earnings per share or any other measure of financial performance calculated and presented in accordance with GAAP. You may refer to the attachment to the company's earnings release or to Part 1, Item 2 of the Form 10 ks for a reconciliation of non GAAP measures. And now, I'm pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob, please go ahead.

Speaker 2

Thank you, Craig. Good evening, everyone, and thank you for joining us. I would like to start today's call with an update on our strategic transformation efforts, a plan that we affectionately referred to internally as Project Fundamentals for many months and also talk a little bit about our core business and how it's performing under this plan. After that, our CFO, Jim Haran, will discuss our financial results in more detail. I am happy to report that we have fully completed our restructuring plan, which included discontinuing all wholesale operating activities and outsourcing these activities to industry leading licensing partners.

Speaker 2

As I mentioned in our last earnings call, we are currently tracking annual operating cost reductions of approximately $14,000,000 compared with 2022 and are working hard with all of our new production partners to drive our business. We plan to launch our new brand Tower Hill by Christie Brinkley on HSN next month, followed by the launch of additional categories of products outside of HSN starting this fall. We have received strong interest from potential licensing partners for the brand across multiple categories. The recently launched C. Wonder by Christian Siriano brand is also doing very well and generated $12,500,000 of retail sales in its 1st 9 months in 2023.

Speaker 2

SeaWonder won the Rising Star Brand Award on HSN in 2023 and we expect to see sales volume ramp up to about $20,000,000 to $25,000,000 in 2024 with a goal of over $50,000,000 in 2025 including HSN and other retailers. Also, we expect to announce the launch of another celebrity designer brand on HSN before the end of this year. JTV, our partner for our Judith Ripka brand, launched its first Judith Ripka on air shows in the Q4 of 2023. Sales results were very strong. In fact, we exceeded every business metric they planned.

Speaker 2

We are working with JTV to offer greater product assortments, including our Judith Rip Couture jewelry products both on air and on jtv.com. This has the potential to add over 50,000,000 visitors to the Judith Ripka e Commerce business and allows for email marketing campaigns to an additional 2,100,000 customers. We look forward to seeing strong sales momentum carry forward through 2024 and beyond. G3 is on schedule to launch Holston for fall of 20 recently reiterated their 3 year forecast for Halston at $500,000,000 wholesale just in apparel shoes and bags from their core production. We expect revenues from this license to begin to pick up later this year and we will hit our $8,000,000 maximum royalty after they exceed approximately $160,000,000 in annual wholesale sales.

Speaker 2

We have soft launched our video and social commerce marketplace, Ormee, with 7 vendors. 1,000 users downloaded the app in the 1st week. As previously mentioned, this is a joint venture with a technology company in which Xcel owns a 30% interest in this new video and social commerce marketplace. We believe this marketplace has the potential to transform video and social commerce in the U. S.

Speaker 2

And its use and growth potential is virtually unlimited. Based on all of our progress with Project Fundamentals and the organic growth in our brands, we will return to profitability in 2024. I should note that the QVC and HSN business overall was softer than expected in Q1 of 2024. This was caused by continued scheduling conflicts with talent. We continue to work with all on air talent to get their on air schedules and the businesses back on track for the remainder of 2024 and beyond.

Speaker 2

As you know, we closed the credit facility in October of 2023 with Israel Discount Bank to improve our balance sheet liquidity and recently closed a $2,400,000 common stock offering to improve stock liquidity and further improve our balance sheet.

Speaker 3

Jim will cover the Q4

Speaker 2

and full year 2023 financial results in more detail. Finally, we are working hard at IR activity and thank our long term and new shareholders for their support. Now, I would like to turn the call over to Jim to discuss our financial highlights. Jim?

Speaker 3

Thanks, Bob, and good evening, everyone. I will briefly discuss our financial results for the quarter and fiscal year ended December 31, 2023. Total revenue for the Q4 of 2023 was $2,300,000 representing a decrease of approximately $1,800,000 from the Q4 of 2022. This decline was primarily driven by a $2,500,000 decrease in net product sales due to the exit from and licensing of our wholesale apparel and fine jewelry businesses. Partially offset the decline in net sales was an increase in net licensing revenue of $700,000 primarily driven by the combination of better performance during the quarter by the logo by Lori Goldstein brand on QVC and growth of the SeaWorlder brand on HSN.

Speaker 3

For the full year, revenue decreased by approximately $8,000,000 from the prior year to $17,800,000 This decline in revenue was driven by an approximate $5,500,000 decrease in licensing revenue, primarily attributable to the May 2022 sale of a majority interest in the Isaac Mizrahi brand, partially offset by increased licensing revenue generated by the C. Wonder brand. Net product sales decreased by approximately $2,500,000 to $8,600,000 as we sold off all of our apparel and jewelry inventory during the first half of twenty twenty three as part of the restructuring and did not have any jewelry or wholesale apparel sales in the second half of twenty twenty three. Our direct operating costs and expenses were $5,500,000 for the current quarter, down by $2,900,000 or 34% from $8,400,000 in the prior year quarter. On a full year basis, our operating costs and expenses were $23,300,000 in the current year, down by $9,800,000 or 30 percent from $33,100,000 in the prior year.

Speaker 3

This decrease of operating expenses was primarily attributable to the restructuring of our business in 2023 as well as the elimination of costs associated with the Isaac Basari brand following our sale of the majority interest in the brand. It should be noted that in the Q4 and for the full year, there were certain non recurring costs associated with restructuring the company. As a result of all of our efforts to transform our business model in 2023 and as we move into 2024, we expect our direct operating costs and expenses to reach an average run rate of under $4,000,000 per quarter. Overall, we had net loss excluding non controlling interest for the current quarter of approximately $6,800,000 or 0.3 $4 per share compared with a net loss of $6,000,000 or minus $0.30 per share in the prior year quarter. On a non GAAP basis, we had net loss for the current quarter of $4,700,000 or -0.24 dollars per share compared with a net loss of $6,200,000 or minus $0.32 per share in the prior year quarter.

Speaker 3

Adjusted EBITDA was negative $1,200,000 for the current quarter, an improvement of approximately $4,700,000 compared with negative $5,900,000 in the prior year quarter. For the current year, our net loss excluding non controlling interest was approximately $21,100,000 or minus $1.07 per share compared with a net loss of $4,000,000 or minus $0.20 per share in the prior year, which included a $20,600,000 gain on the sale of a majority interest in the Isaac and Azari brand. On a non GAAP basis, we had net loss for the current year of $12,200,000 or minus $0.62 per share, which represents an improvement from the net loss of $15,000,000 or minus $0.77 per share for the prior year. Also, it should be noted that the non GAAP net loss for 2023 includes approximately $5,100,000 of various nonrecurring restructuring related charges. And finally, adjusted EBITDA was negative $5,700,000 for the current year, representing a $6,800,000 improvement over the negative $12,500,000 EBITDA in the prior year.

Speaker 3

I would like to take this opportunity to remind our Board that non GAAP net income, non GAAP diluted EPS and adjusted EBITDA on non GAAP unaudited terms. Our earnings press release and Form 10 ks present a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our balance sheet and our liquidity. As of December 31, 2023, the company had cash and cash equivalents of approximately $3,000,000 and positive net working capital of $2,100,000 excluding the current portion of our lease obligations. Since executing our restructuring transformation program in 2023, our cash usage has decreased significantly and is projected to continue to improve with the launch of Halston by G3 this fall, the launch of Tower Hill by Christy Brinkley and continued growth in our C1DA and Judith Ripka Licensing businesses.

Speaker 3

Cash used in operating activities during the current year was $6,500,000 compared with cash used in operating activities of $14,200,000 in the prior year. Over the past few months, we have taken additional steps to further solidify our balance sheet. First, in October 2023, we entered into a new 5 year term loan of $5,000,000 to which quarterly repayments begin in April 2024. 2nd, in March 2024, we issued approximately 3,600,000 shares of stock for net proceeds of approximately $2,000,000 We believe that the additional liquidity provided by these financing transactions coupled with our expense cuts and working capital position provides the company with adequate liquidity going forward. And with that, I would like to turn the call back over to Bob.

Speaker 2

Bob? Thank you, Jim. Ladies and gentlemen, this concludes our prepared remarks. Operator?

Operator

We are now opening the floor for question and answer My apologies. Someone is speaking in the background. Our first question comes from Michael Kupinski from Noble Capital Markets. Your line is now open.

Speaker 4

Thank you and good evening everyone. A couple of questions. Bob, to what extent you had mentioned that HSN and QVC is a little soft. To what extent do you think that might affect if that continues on, how that might affect the return to profitability that you expect? Can you give us some bench marks of that?

Speaker 4

And then also, is there a way to quantify the impact on the revenues for what's going on there versus the talent and versus what might be the macro situation with the consumer and so forth? Is there a way to kind of gauge what that might what the impact might be macro versus the talent?

Speaker 2

So I don't think there is a systemic problem, Michael. I recently attended the QVC Vendor Summit and they seem to have everything back on track. I don't think there was a real appreciation of the implications of their warehouse fire, how deep that cut into the organization and how difficult it was for them to recover from that. Most people don't realize that 100% of their returns were processed through that warehouse. There was 100 of 1,000,000 of dollars of inventory that burned and 30% of their distribution capability.

Speaker 2

That's pretty devastating to any company. And they've managed to work their way through that. And I think the business is really back on track based on everything that was presented at the vendor conference. So less of a systemic problem in the business. And that said, there's general softness out there.

Speaker 2

In the consumer world. I don't think that is being covered quite right by the media. People are making choices between fuel and energy cost and food cost and buying discretionary items. Although you could argue that apparel is a necessary item, people will delay those purchases. But I don't think that's the real problem.

Speaker 2

The problem has been with getting talent and we have the Isaac Mizrahi situation in a good place now with Isaac and the backup guest. QVC has decided to give Jackie Stafford, our backup guest, a prime time show, which is great, takes a little pressure off Isaac and we're working on similar things for Lori Goldstein. So I think it's a little difficult for us to really forecast that because we make our on air requests on a monthly basis to our talent. And the assumption is they're going to do it, but it's been complicated since coming out of COVID. Talent became accustomed to doing remote shows from places where they were very comfortable to having to go back into studio, which requires travel.

Speaker 2

But we're doing everything we can to get them back in studio or lean more into backup guests that are perhaps a little closer to QVC and HSN Studios.

Speaker 4

Got you. Thanks Bob for that. And a couple of quick questions here. Can you talk a little bit about I know that there were some startup costs to kind of get Christie Brinkley up and running and was just wondering how much of that cash do you think that will be allocated towards start up for additional brands? Can you just kind of give us a sense of that?

Speaker 4

And then maybe give us a sense of how much cash you currently have right now because since we're already kind of closed on the next quarter. Just wondering if you can kind of give us an update on that as well. Sure.

Speaker 2

So in terms of cash required for brands that are launching, Christy launches next month. All of the start up costs there have been incurred. We have a small brand that we're launching on HSN this year. There were really no startup cost associated with that one, because the designer himself is doing all of the lifting on design with the 3rd party vendor that we assigned him to. So no real uses there.

Speaker 2

I think Jim can give you a current position on cash and available working capital, which is all receivables from good sources. Jim, do you have that number handy?

Speaker 3

I have we'll be at approximately $3,000,000 of cash where we have our collections for the Q1 coming in now. So we figured the balance of cash is pretty similar to it was at twelvethirty one.

Speaker 4

Got you. And then can you just another question on Christy. How should we benchmark when maybe you can remind me what your plans for Christy and what your opportunity for revenue might be from that?

Speaker 2

So the plan there were contractual guaranteed receipt minimums with HSN for both the Christian Siriano and the Christie Brinkley brand. This year, we're forecasting in the $7,000,000 range, maybe a little more for Christy depending on distribution bump up next year under the agreement for the minimum at HSN. And we do think that Christy has great potential both on HSN and outside of HSN. So we would expect that business to maybe double going into next year, if not more.

Speaker 4

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

Speaker 2

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

Speaker 4

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

Speaker 2

No. I really need ORMY to give that to us. And there are company goals. We're being very selective of the types of brands that come on to Ormee. We could load a lot of small vendors on, but that's not really what Ormee is targeting.

Speaker 2

We're targeting bigger brands, household names, brands that are in better and premium department stores. And then of course with good brands and great product, then more people will participate.

Speaker 3

Well, it looks like it's going

Speaker 4

to be an exciting year. Thanks. That's all I have.

Speaker 2

Okay, Michael. Thank you.

Operator

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

Speaker 5

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

Speaker 2

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

Speaker 5

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

Speaker 2

So clearly, Holston will lead that with the G3 license. But as you know, they're just launching this fall. And the only information we really have on how they're doing is what they've been saying on their earnings calls. And we're assuming that we will hit the maximum under that license over the next year or 2. And that would be $8,000,000 per year, most of which will drop to the bottom line.

Speaker 2

So that will be driving top and bottom line EBITDA. And then C Wonder is doing beautifully for us in its 1st 9 months in the launch in 2023, it did 13 point $5,000,000 on HSN. Plan for this year is 25 approximately. The commitment for next year is 50 and we are now working on category extensions on Sea Wonder. So that brand is doing well and has strong growth potential for us.

Speaker 2

We do think that Christy will ramp up as fast. Christy is loved by everyone in America. She has a great social media following. And almost any woman over 45, if you stop them on the street and ask them to name 3 top fashion models, that name would come up. And she is trusted and loved.

Speaker 2

So we think it has similar potential, if not more outside of HSN

Speaker 1

in versus the

Speaker 2

quarter than perhaps we wonder.

Speaker 5

Okay. That's very helpful. And then Bob, you also mentioned that you expect to be profitable this year. Just wanted to see if you could clarify that. Did you expect to be profitable for the full year or just part of the year?

Speaker 5

And are you talking about EBITDA positive or net income positive?

Speaker 2

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

Operator

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

Speaker 6

Thank you. Robert, first of all, congratulations on the transformation of the business. It's been a spectacular job and we do thank you. 2024 is a transitional year. Everybody's been talking about what's going to start, what and when it's going to start.

Speaker 6

But effectively, when you look at 2025, the estimates on the Street of EBITDA are almost $10,000,000 The company's stock is selling for less than 1.75 times EBITDA. What are your thoughts?

Speaker 2

Well, 1, it's a very low EBITDA multiple and particularly when you think of selling Isaac for 8 times EBITDA contribution. And from an asset value perspective, Howard, it's incredibly low given that we sold Isaac for 6 times royalties and that's the going rate for royalties. The going rate is anywhere say from a low 5 to a high of 8. 6 is a very common multiple and with $15,000,000 of top line royalties as a round number for 24 growing, It implies $100 plus 1,000,000 value against $5,000,000 of debt. So it's I think we're undervalued.

Speaker 6

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

Speaker 2

Sure. So we on boarded our 7 first vendors, premium denim company, actually 2 of them and some premium beauty brands as well as some of our own brands. And we've been doing beta testing right up through today, taking little bugs out of the technology. And Ormee is getting ready to launch a very significant PR campaign and digital marketing campaign. Army has begun hiring influencer recruiters.

Speaker 2

They started this week and they are reaching out to influencers around the country to get them on board. And then the goal is now to on board some additional big vendors, because each time we on board a vendor, Howard, we want to debug it before they start the email campaigns to their customers. In week 1, we had 1,000 users onboard the app with no email campaigns. It was just almost word-of-mouth. And all of that is about to start.

Speaker 2

So we are excited about where we are with Army, excited about where the tech is. It is almost completely bug free, which is amazing. We do a lot of beta testing before we put anyone on it, obviously. But you always find things when new sets of eyes start playing around in technology, particularly in apps.

Speaker 6

Congratulations, Robert. Thank you.

Speaker 2

Thank you, Howard.

Operator

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

Speaker 2

Ladies and gentlemen, thank you for your time this evening. We greatly appreciate your continued interest and support in XL Brands. As always, stay fit, eat well and be healthy. Good night.

Operator

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

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Xcel Brands Q4 2023
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