Lifetime Brands, Inc. (NASDAQ:LCUT) Q1 2024 Earnings Call Transcript

Lifetime Brands, Inc. (NASDAQ:LCUT) Q1 2024 Earnings Call Transcript May 10, 2024

Lifetime Brands, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Lifetime Brands’ First Quarter 2024 Earnings Conference Call. At this time, I would like to inform all participation that all your lines will be in listen model only. After the speaker’s remarks, there will be a question-and-answer portion of the call. [Operator Instructions] I would like to introduce your host for today’s conference, Carly King. Ms. King, please go ahead.

Carly King: Thank you. Good morning, and thank you for joining Lifetime Brands’ first quarter 2024 earnings call. With us today from management are Rob Kay, Chief Executive Officer; and Larry Winoker, Chief Financial Officer. Before we begin the call, I’d like to remind you that our remarks this morning may contain forward-looking statements that relate to the future performance of the company. And these statements are intended to qualify for the safe harbor protection from liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and factors that could influence our results are highlighted in today’s press release and other factors are contained in our filings with the Securities and Exchange Commission.

Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update such statements. Our remarks this morning and in today’s press release also contain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Included in such release is a reconciliation of these non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP. With that introduction, I’d like to turn the call over to Rob Kay. Please go ahead, Rob.

Rob Kay: Thank you. Good morning, everyone, and thank you for joining us today. I am pleased to report a solid start to fiscal year 2024, delivering first quarter results that were in line with our expectations and came in above the broader market. Our performance this quarter is a direct testament to the work we have done in the last few years to ensure we are well positioned to compete and gain share, notwithstanding market conditions. As we look ahead to the rest of the fiscal year, we are confident in our ability to continue driving operational excellence, advancing our strategic growth initiatives and investing in our business to drive value for our shareholders. We delivered $142.2 million in net sales this quarter, a decrease of 2.2% year-over-year.

This slight decrease reflects both economic headwinds and the impact of inventory rationalization efforts among select retailers, which I will elaborate on later in my remarks. It is worth noting that third-party market data, which we track reported a decline of approximately 3.5% in point-of-sale revenues, indicating that Lifetime’s top line performance exceeded the broader market across our categories. Despite these macro pressures, we delivered strong bottom line growth driven by gross margin of 40.5% for the quarter, exceeding expectations and surpassing that of our first quarter last year. This was a result of benefits from favorable product mix, new product introduction, and stability in our supply chain. Further, our margin expansion and increased profitability despite challenges in the underlying markets underscores our continued focus on disciplined expense management as we balance investment and growth with delivering financial results.

Beginning with our core US business, we delivered solid results in the first quarter and performed well in comparison to the market and our peers. As widely reported for the quarter, end markets across our industry experienced a dip in demand leading to decreased shipping volume among retailers. One factor which contributed to our decline in shipments was a lowering of in-stock levels at certain retailers, particularly in e-commerce. Lifetime tracked a noticeable divergence between shipments and sell-through rates with these retailers, which speaks to the continued customer and consumer receptivity to our products. We are confident that as demand returns, we will see a corresponding rebound in shipment activities to normal levels. I’ll now discuss our international business, where we continue to invest continue to focus on investing in growth and improving our performance across each of our end markets.

While our investments broadly are bearing fruit and supporting share gains, the ongoing recessionary environment in the UK, continues to put significant pressure on demand for the market. In the first quarter, we saw a substantial decline in UK order volume, during the period resulting from a temporary decrease in shipment volume from a major customer, and sluggishness in the independent and specialty retail channels driven. However, we expect volume return returned to normal levels in the coming months, particularly driven by recent incremental placement dividends at national retailers and a rebound in the e-commerce channel, which we have begun to experience. Turning to our other international markets, in Asia Pacific, we continue to realize the significant benefits of the change in our go-to-market strategy in Australia and New Zealand where we are consistently gaining new customers and seeing higher margin.

Additionally, our markets throughout Southeastern Asia are benefiting from the infrastructure investments we’ve made over the last several quarters, and we are confident that the solid volume growth and pickup and sell-through rates we are seeing in those regions, will continue throughout 2024 In the European markets and predominantly in our core UK market, after a strong start to the year, we saw a meaningful drop-off in shipments in March driven by core retail sales across all channels and a shutdown in shipments to our largest customer, which is in the e-commerce channel for nearly a six week period. This had an adverse impact for our international segment results for the quarter, which were basically flat to prior year, but below our expectations.

Although our international segment was not favorable in terms of contribution margin for the quarter, we remain confident this segment will produce a meaningful improvement in contribution margin for the full year, based upon the actions we have previously taken and some momentum we are starting to see in market share gains, which I will talk about in a moment. Turning to our growth initiatives. First, let me address our progress in our foodservice business. We are continuing to gain share to Mikasa Hospitality product line and remain on a path to deliver $30 million in revenue from our food service business for the fiscal year. We remain excited about the opportunity in this business, which continues to gain traction with customers and build a book of business that will serve as a solid base, for this foreseeable future.

In ecommerce, our sales for the current quarter were impacted by inventory rationalization efforts as safety stock levels at our largest ecommerce customer, were significantly reduced leading to meaningful decreases in order volume. We believe this will be a temporary pause as sell-through data, across all of our categories was strong and we picked up share in nearly all of our categories. Accordingly, we expect to see robust performance in this channel throughout 2024. New product development is one of Lifetime’s core capability that provides us with a competitive advantage. We remain excited about our robust product pipeline for we have continued to invest in a challenging end market environment, which has further differentiated Lifetime for many of our competitors.

The Dolly Parton line of products, we announced last year has now been introduced to our customers and is garnering significant interest. While we originally expected some shipments in the second quarter due to a change in shipment mechanics, shipments will begin in the third quarter and at this point will exceed our initial ethnics. Further while this line is being launched in the dollar channel, we are having meaningful conversations with other retailers about expansion across several categories. Our KitchenAid line is gaining strong traction in our international end markets, notably in Continental Europe and Australia and New Zealand. As a result, there are numerous customers where we have either gained listings or expanded listening. Now that we have established a beachhead on shelf at these customers.

We will see the benefit of this strategy this year. Looking ahead, we are preparing to announce a new partnership that we are particularly excited about for our international geographies. We expect to launch it likely this year but no later than next year, more to come on that front. But we believe these new product introductions and brand will translate to top line growth in our international segment in 2025. For our Swell product line, we received good reception following our brand relaunch, as we sold through and out of many products, delivering sales above expectations. Notably, these shipments were exclusively online as we pursued this relaunch solely on swell.com and e-commerce platforms. We will continue to roll out this reenergized swell product line across multiple channels and are pleased with the direction of this line.

Let me briefly touch on our supply chain. As I noted, stability in our supply chain was a contributor to the solid margin expansion we were able to deliver this quarter. To that end, we were pleased to lock in rates for our ocean freight contract at levels comparable to last year offering us stability in these key costs factor. In Mexico, we are pleased with our continued progress bringing our plastics manufacturing facility online. The facility remains on track to reach full production capacity this year. We continue to be active in many geographies including Mexico and across Asia. Product supply diversification will remain a priority for us moving forward as part of our continued efforts to strengthen and derisk our supply chain by moving towards sourcing 25% of our grid outside of China.

Turning now to our balance sheet. Our strong earnings and cash flows have provided us the flexibility to reduce our term loan down by almost $100 million over the past 12 months, while maintaining historical high levels of liquidity, we are pleased to be approaching our target leverage ratio of three times or below. Our continued focus on disciplined expense management has helped us maintain strong levels of liquidity above historical norms, which affords us ample flexibility with respect to capital allocation. We continue to view the market as favorable for strategic acquisitions and remain open to opportunities for value-enhancing acquisitions that align with our priorities. We will continue to evaluate these opportunities as they arise. On that note, let me now turn to our financial guidance for 2024, which we issued in our release this morning.

While we are closely monitoring the initial signs of pressure on retailer end market demand that we observed this quarter, our outlook reflects our confidence that we are positioned to continue executing and creating value, regardless of market conditions. We have growth opportunities already in our pipeline for the year and are eager to continue bringing new products to market and gaining share across categories. Our guidance is based on our belief that we can grow our top and bottom line through net market share expansion and diligent operational and expense management, a rebound in our end markets will be accretive to our guidance. We note that due to timing factors the expectation built into our full-year guidance, we saw a slight decline in the second quarter with growth in quarters three and four and for the full year.

In summary, we are operating from a position of strength as we head into the remainder of fiscal 2024. With strong momentum across our business and the flexibility to invest in our continued growth, we are well positioned to capture opportunities as demand improves and create meaningful value for our shareholders. With that, I’ll now turn the call over to Larry to discuss financials in more detail.

Larry Winoker: Thanks, Rob. As we reported this morning, net loss for the first quarter of 2024 was an improved $6.3 million or $0.29 per diluted share compared to $8.8 million or $0.41 per diluted share in the first quarter of 2023. Adjusted net loss was $3.2 million for the first quarter of 2024 or $0.15 per diluted share as compared to $2.6 million or $0.12 per diluted share in 2023. Income from operations was $1.8 million in the first quarter of ’24 as compared to a loss of $1.8 million in ’23 periods and adjusted income from operations for the first quarter ’24 was $5.7 million to $3.4 million is it ’23 periods. Adjusted EBITDA for the trailing 12-month period ended March 31, 2024 was $59.5 million, an increase of $2.22 million from $57.3 million for full year 2023.

Adjusted net loss, adjusted income from operations and adjusted EBITDA are non-GAAP financial measures which are reconciled to our GAAP financial measure in the earnings release, following comments over the first quarter of 2024 and 2023 unless stated otherwise. Consolidated sales declined by 2.2%. US segment sales decreased by 2.3% to $130.5 million. As Rob commented, a key factor was lower in-stock levels at certain retailers. Within this segment, the decrease occurred in Home Solutions and kitchenware categories from solutions decline was due to lower hydration products and tailored bath measurement products. Kitchenware decline was from kitchen tools and bowlware partially offset by an increase for cutlery imports. The segment’s decrease was partially offset by an increase in the tableware category due to a new warehouse club program.

International segment sales were down 1.6% or $200000 or — $700000 in constant US dollars to 11.7 million. As Rob commented, this slight decrease was due to the ongoing recessionary environment in the UK, the drop-off of shipments in March from a temporary decrease in shipments to a major customer. The decrease was partially offset by higher sales in Asia. Gross margin increased to 40.5% from 37%. US segment gross margin increased to 40.8% from 36.6%. The improvement was due to lower inbound freight costs and favorable product mix. International gross margin decreased to 35.9% from 42% as the prior year benefited from a very favorable currency hedge. Excluding the hedge benefit, the current quarter’s gross margin improved from better product mix and lower container costs.

US distribution expenses as a percentage of goods shipped from its warehouses were 10.5% in both quarters. Significant inventory reduction during ’23 resulted in second-quarter benefits of more efficient labor utilization and lower facility expenses in the current quarter. These benefits were offset by a temporary surcharge rate on domestic shipments. International segment distribution expenses as a percentage of goods shipped from its warehouses was 23.6% versus 24%. The improvement was due to lower outbound freight rates obtained from a new carrier. Selling, general and administrative expenses increased by 4.2% to $39.5 million. The US segment expenses increased by $1.5 million to $30.8 million, as a percentage of net sales expenses increased to 23.6% from 21.9%.

The increase is driven by inflationary factors and mostly affecting employee expenses, the largest component of SG&A. Other increases included legal expenses and expenses related to start-up of the Company’s manufacturing operations at [indiscernible]. Allowances for bad debt declined as last year included a charge of for Bed Bath & Beyond. International SG&A expense increased by $600,000 to $4.2 million as a percentage of net sales, it increased 35.9% to 30%. As in the U.S. the increase was driven by inflationary factors and mostly affected by employee expenses. In addition the current quarter reflects an unfavorable impact of foreign currency translation. Unallocated corporate expenses decreased by $500,000 to $4.5 million due to lower professional expenses.

Interest expense excluding a mark-to-market adjustment for swaps increased by $300,000 due to higher interest rates on our variable rate debt partially offset by lower average borrowings. For income taxes for the current quarter, the tax provision rate differs from the Federal Statutory tax rate, primarily due to equity-based awards with a book expense exceeded the tax deduction and foreign losses for which no tax benefit was recognized. The effective tax rate for the prior year’s quarter differs from the Federal Statutory rate, primarily due to state and local tax as well as the impact of non-deductible expenses and foreign versus losses for which no tax benefit is recognized. Related to our 24.7% interest in Grupo Vasconia, the passive investment, we recorded a loss of $2.1 million.

Our investment in Grupo Vasconia is now fully written off. On April 29th of this year, Vasconia shareholders approved a resolution to a reorganization process in accordance with the law of commercial bankruptcy in Mexico. We will evaluate the impact of this on our accounting for the investment noting that a loss of significant influence over Grupo Vasconia may result in a non-cash loss of $14.2 million that would be reclassified from the statement of other comprehensive loss to the statement of operations. Turning to our balance sheet, we continue to continue to be quite strong. As of March 31st, 2024, our liquidity was approximately $125 million which included cash plus availability under our credit facility and receivable purchase agreement.

This was achieved notwithstanding the reduction of the term loan by $96 million over the past 12 months plus $9.5 million of term loan original issue discount and fees. At quarter end, our debt-to-adjusted EBITDA leverage ratio was 3.3 times versus 3.4 times at year end 2023 and significantly improved from 4.4 times at March 31, 2023. Finally, as discussed in the release, we are issuing financial guidance for the full year of 2024 as follows. Net sales of $690 million to $730 million, adjusted income from operations of $49 million to $54 million, adjusted net income of $15 million to $17 million, and adjusted EBITDA of $57.5 million to $62.5 million. This concludes our prepared comments. Operator, please open the line for questions.

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Q&A Session

Operator: Thank you. We are now opening the floor for question-and-answer session. [Operator Instructions] Our first question comes from Anthony Lebiedzinski Sidoti & Co. Your line is now open.

Anthony Lebiedzinski: Good morning and thank you for taking the questions. So, first in regards to your first quarter commentary international segment, so it sounds like there was a big drop off there in March. As far as the core U.S. segment, were the sales kind of more even by month? Or did you see any substantial variations in that? Just wondering about how the quarter flowed?

Rob Kay: Unrelated but we did see a softer March and a strong or stronger start started the year in the U.S. markets as well. But the U.K. business — while the UK market is sluggish as we talked about, they were beating and having a very strong January and February then primarily driven by being shut down by their largest customer. No shipment had a very bad March and that put them into the slight decline.

Anthony Lebiedzinski: Understood. Okay. And then Rob in terms of your commentary about the second quarter sales being down, is that mostly because of the Dolly Parton merchandise shifting from April until to the third quarter? Or is there anything else driving that?

Rob Kay: It’s really not related to that Anthony. And while we initially expected ship start shipping Dolly in the second quarter it wasn’t substantial. It’s just that we’re going to – you know nothing or maybe 100,000 were expected to ship maybe a half a million or so. So it is timing and it’s informational. And it’s — the reason for the decline is just seasonality and how the business rolled in last year versus this year in terms of different programs. So it’s just timing of how last year played out versus this year. So the comps are different quarter to quarter and that’s why you’ll see that drop off and then pick up and not related to the Dolly Parton launch.

Anthony Lebiedzinski: Okay. Thanks for clarifying that Rob. And then certainly it was nice to see the — the gross margin improving here in the quarter. How sustainable is that improvement if you think going forward?

Larry Winoker: No that’s that was timing, happy to do with how we recognize in inventory the savings that hit the first quarter. We don’t that’s not going to we maintain for the risk for the balance of the year.

Anthony Lebiedzinski: Okay.

Larry Winoker: Excuse me, Anthony. Talking about the gross right, the comment about gross margin?

Anthony Lebiedzinski: Yes. That’s correct. Yes. I was talking about the gross margin.

Larry Winoker: So it will be — it’ll be it should be better because we had a big pickup in this first quarter so should be better than last year but it’s not going to be sustained at that level for the remainder of the year.

Rob Kay: Year-over-year there will be a higher side. And as we’ve talked and we’ve locked in things, but we’re not going to see an increasing trend.

Larry Winoker: Don’t expect 40% for the full year.

Anthony Lebiedzinski: Okay. So – thanks to clarify that. And then last time — I will pass it on.

Larry Winoker: That’s reflected in our guidance and that’s reflected in our guidance.

Anthony Lebiedzinski: Of course, right away. So I guess my last question before I pass it on to others. So you talked about the potential acquisitions just wondering how strong is your appetite for that? And then in terms of valuation multiples what you’re seeing out there in the marketplace, now.

Rob Kay: Its — our appetite is strong, but as we’ve done — as you’ve seen us done do we’ll maintain discipline. So there’s a lot we could have been announcing to the public you know for a while now, but we just maintain discipline and we’re not willing to do something unless we’re confident in it. We have seen valuations being much more attractive than they’ve been for over a decade particularly for strategic because financials are less competitive in this market. Our cost of debt is higher there and the availability of debt is lower. So they have to put in more equity therefore valuations are down for them and that’s helped the whole market and giving us an edge to strategic. So we are interested in the availability of product is out there in many cases again an advantage for a strategic as you need people who can add value and not on a standalone basis. So we are active. We are looking but we’ll maintain our interest.

Anthony Lebiedzinski: That’s good to hear. And thank you very much and best of luck.

Rob Kay: Thank you, Anthony.

Operator: Our next question comes from Brian McNamara from Canaccord Genuity. Your line is now open.

Brian McNamara: Good morning, guys. Thanks for taking the question. I guess my first one, as we look at you know the guidance implies a pickup of growth on the top line this year which kind of investors have been waiting for after I guess Q2 like when we look at H2 forward, should we kind of return to more consistent predictive top-line growth from your perspective and kind of how should that look like?

Rob Kay: Yes, Brian, as we talked about that there’s still not tremendous visibility and we’re not assuming big growth in the end markets and have not factored that into our guidance. If that happens that’s accretive. This is driven by stuff that we have in the pipeline. And yes so new product introduction and new launches and gaining share is what is driving our growth in the second half.

Brian McNamara: Okay. And then on probably a broader question, but your stock is trading at about 9000 shares since the market opened on an earnings day. So Larry you’ve been pretty vocal about your view that the stock’s undervalued. But if it makes sense to be a public company, I know it’s a big question here, but some investors can’t buy it because of the liquidity. So I’m just curious how you guys think about that in terms of getting the value that you work hard to and that you think you deserve?

Rob Kay: Yeah, we do think there’s an intrinsic value gap and management and the Board will assess different paths to realize that value, but we do recognize that gap that needs to be address.

Brian McNamara: And then my last one is, I guess, what products you have out in the marketplace right now that have been no surprises both pleasant and maybe not so good. And what’s your relative hit or miss rate in a typical year in terms of new product launches?

Rob Kay: Yes, that’s hard to answer. We launch so much and so many different levels. Some of it is just what we refer to as lipstick on the pig. And we’ve just taken something that we used to sell in blue, we sell right now and there’s different reasons why we’re launching things. But see if you look at Beautiful, if you look at your totally green whitespace I should say, we launched Beautiful in multiple categories. It is growing it’s highly successful and grown where we already had major share at Wal-Mart in terms of cutlery. But we also launched in tools in Wal-Mart where we are the number one provider as well, it did not do so well. So we’re no longer selling that right. So you’ve got hit and miss in that one. We’re highly confident in Dolly, which is all incremental.

It gets us into a new channel. You pretty much on pace. We don’t sell, which is dollar channel, but we’re very bullish on the Dolly line based upon the tremendous feedback we’ve gotten from everyone we speak to and demand of such that we’re not even selling it. So that doesn’t guarantee success, but we think that again we’re very bullish. We think that that will work and there were things that we launched in the last year, which didn’t — they were much smaller. So we didn’t really talk to them. Fortunately our biggest one that we’re launching seems to have very good traction.

Brian McNamara: All right. I’ll leave it there. Thanks a lot guys. Best of luck.

Rob Kay: Thanks.

Operator: Next question comes from Linda Weiser from Davidson. Your line is now open.

Linda Weiser: Yes, hi. So I was curious in the market where the consumer is particularly weak, I guess UK especially, are you thinking about making some changes to your merchandising plans, your product mix, your marketing plans like maybe introducing more lower price point items? I know that your items are relatively low and price point anyways, but just how are you changing your plans? I mean given the sustaining consumer weakness in some regions?

Rob Kay: Yeah. Well, using — starting with the UK that you talked about. The business historically was very dependent on independents and specialty, it look like cost could stop. And what we’ve done is to reposition what we’re selling and where we’re selling. So we picked up and we’re doing more with [indiscernible] retailers there, we’re doing a similar strategy in Continental Europe, picking up Attica [ph] and Car4 [ph] and larger players in the major geographies. So it’s really a strategy more shifted to channel that has a price implication in terms of yourself points as well and what you’re selling. So we had to have the right product for that. Secondarily is we’ve been exploiting because we didn’t always have KitchenAid internationally.

And when we got that, we’re now, we’ve been selling that. And we’re now positioning. And that’s giving us a big check, as many particularly retailers and larger retailers are very interested and want the KitchenAid brand. And now that we’re getting that in there we’re now selling our complete portfolio. So those are two main prongs that we’ve implemented which different from how we did business in the past.

Linda Weiser: Okay. And then, on Mikasa Hospitality, is there any way of telling us roughly the sales level roughly in 2023? And then, what kind of growth rate you’re expecting in 2024?

Larry Winoker: So yeah, our foodservice business was in the neighborhood of $20 million of which Mikasa Hospitality was a very small piece of that, for 2023. It’ll grow five-fold in 2024 at a minimum, based upon what we believe we’ve already achieved. That means the Mikasa Hospitality piece, the rest of the business will grow like 5% and that combined will get us we believe, close to are the $30 million at the top.

Linda Weiser: So for $30 million total in 2024?

Larry Winoker: Yes.

Linda Weiser: Okay great. And then …

Larry Winoker: …versus $20 million in 2023, right? Linda?

Linda Weiser: Yes. Got you. Thank you. And then, I’m sorry, I missed this a little bit or I didn’t understand the Dolly Parton, you said there is a possibility of expanding it. Did you say into another retailer in the Dollar channel or even beyond the Dollar channel I didn’t quite catch that?

Rob Kay: Yeah. So when we launched Dolly, it’s not an exclusive in the Dollar channel, but we did — it allowed us to get into the Dollar channel. So we launched it first, in the Dollar channel with one retail large player in Dollar channel. We are in conversations sell it in many other — too many other customers that we traditionally do business with outside the Dollar channel.

Linda Weiser: Okay. And what would be the timing of that potential expansion? Would it be now until next year 2025 or?

Rob Kay: There might be some that shifts some likely 2025. Yes, but there’s a chance of some in 2024, but most likely in 2025.

Linda Weiser: Okay. And then, I was curious on the cost side, you mentioned of Ray, that you had contracted for that to be fairly flattish going into next year which is good. What are you seeing more on the commodity side and just given that there’s been some little increase in oil and things like that or what are you seeing in the rest of the cost base?

Larry Winoker: We have been very effective in reducing our cost of goods sold not just in freight, and we don’t see inflationary pressures on that. And in this end market environment it’s kind of a buyer’s market and you can translate that into being more aggressive on costs.

Linda Weiser: Okay. That’s it for me. Thank you very much.

Rob Kay: Thank you, Linda.

Operator: As of right now we don’t have any raised hands, and I’d like to hand back over to Rob Kay for final remarks.

Rob Kay: Thank you, and thank you for — to everyone for spending your time and listening on our call. And we look forward to continued dialogue. Have a great day.

Operator: Thank you, so much for attending today’s call. Have a wonderful day. You may now disconnect.