Polished.com Inc. (AMEX:POL) Q2 2023 Earnings Call Transcript August 16, 2023
Operator: Good morning, and welcome to the Polished’s Second Quarter Earnings Conference Call. Please note that certain statements made during the call constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These statements and uncertainties are described in the company’s financial statements, press release and its filings with the SEC. The forward-looking statements today are made as of the date of this call, and the company does not undertake any obligation to update the forward-looking statements. I would now like to turn the call over to Polished’s CEO, Mr. Rick Bunka; and Polished’s CFO, Mr. Bob Barry. Please go ahead, gentlemen.
John Bunka: Good morning, and thank you for joining the call. It hasn’t been that long since our last call. We remain committed to regular communication with investors. And so we wanted to briefly provide some color on the results that we posted last night and give the opportunity to ask some questions. Before I do hand the call off to Bob to discuss the results in greater detail, I’ll provide some context on the second quarter results. Similar to the first quarter, the second quarter was characterized by a net sales decline largely attributed to our core appliance businesses. Unlike the first quarter though, the second quarter experienced declines in the luxury category that were now comparable to the declines we were seeing in mass appliance.
These 2 categories are the main drivers of our performance at Polished, and both experienced similar headwinds. Our team continues to focus on stabilizing the business and strengthening the foundation. As with the first quarter, our second quarter results demonstrate that we can deliver more normalized margins and positive EBITDA on reduced volume. I’d like to take a moment to reiterate some of the steps that we spoke of on the last call and underscore the steps that we are taking and have taken toward those goals. First, we entered into a loan amendment with our banking group led by Bank of America, under which the bank would waive specific technical defaults and reestablish operating conditions for our operating loan. Second, we continue to focus on improving our marketing spend and engaged a leading digital marketing agency to help us improve with our company’s performance and return on investment with respect to the advertising and pay-per-click lead generation in particular.
Third, we have continued to enact expense reductions and headcount reductions to consolidate our operations and improve efficiencies, including the steps to consolidate our distribution activities into a single warehouse by the end of the year. Fourth, we’re in the final phases of implementing new financing options for our customers, including a branded private label credit card and a leasing alternative for customers who do not qualify conventional credit, in addition to some payment processor changes that we’ve made to improve additional – improve and provide additional liquidity. Fifth, we’re prioritizing specific categories where – which produce higher margin, including small appliances as opposed to value-based mass market appliances.
And lastly, we are actively negotiating with our largest vendors to improve terms of – several of the terms that we’re operating by and sell products under. Now with that, I’d like to pass the call over to Bob to give some color on the financial results and talk about the forward projections. Bob?
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Robert Barry: Thanks, Rick, and good morning. For the quarter, sales were $87.8 million and that compares to $138.5 million in the second quarter of 2022. Our gross profit margin was $19.6 at a percentage rate of 22.3%, and that compares to gross profit of $23 million and a 16.6% margin in the second quarter of 2022. This over 500 basis point improvement in gross margin is a result of our emphasis on improving profitability versus pursuing revenue growth at any cost. Operating expenses for the quarter were down to $19.5 million compared to $23.8 million in the second quarter of 2022. The largest expense items were personnel costs of $6 million, G&A of $4.9 million, advertising of $4.5 million and bank and credit card fees of $3 million.
Net income for the quarter was $1 million or $0.01 per diluted common shares – per common share, and that compares to $4.3 million or a loss of $0.04 per diluted share for 2022. Adjusted EBITDA was $1.6 million with a margin of 1.8%. As we look forward, we are reaffirming our full year guidance provided in the last conference call of having revenue between $375 million and $400 million for 2023 and the low single-digit EBITDA margins. In making our estimates and our assumptions for the rest of the year, we considered a couple of things. One is Q4 is typically a very big quarter for the company. We rolled out, as Rick mentioned, a store-branded credit card. Actually, we rolled that out yesterday. We haven’t had one since May. And our Citizens Pay is a card we’re using, and they are offering us a special term of no interest rate financing for 12 months at the same rate we would pay on a normal credit card charge.
That’s good for, I believe, 30 days and $5 million. We’re expecting improvements in our marketing – results of our marketing consultants. And finally, we are rolling out an alternative financing customers through progressive leasing that do not qualify for conventional credit, and Progressive Leasing will be helping us with the marketing of that product. So with those comments, I’d like to turn it back to the operator for the Q&A.
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Q&A Session
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Operator: [Operator Instructions] And our first question will come from Eric Landry with BML Capital. Please go ahead, sir.
Eric Landry: Good morning. I’d like to talk about opportunities, if any, for generating cash from the balance sheet. I know there’s been some questions in the past about the vendor deposits, and the answer seems to be that there’s nothing there that we can do to generate cash. So if you could please expand on that and whether or not that’s a correct assumption? Thank you.
Robert Barry: I’ll handle that question, this is Bob. Actually, Eric, no, we’ve looked at the balance sheet and we have nothing on the balance sheet that we could do to raise cash with the exception of closing out our interest rate swap transaction, which is required by the loan agreement. All of the – as you mentioned, all the vendor deposit account is pledged to secure our accounts payable at DMI, our primary vendor. So there’s nothing on the balance sheet that we can use – that we could monetize to use to reduce debt.
John Bunka: The only color I would give to that, Eric, is that aside from the core of our business is buying and selling inventory, and we will and have been reducing carefully the inventory levels and shortening the lead time of having product and delivering it. That improves turn and it does free up cash. Over this period, we have done some reduction of inventory, but you’re going to see us become much more efficient at available product. We were housing product last year for sale. And this year, it’s generally available so we can narrow the time. And our program will have efficiency of working capital – is a priority for the team right now, which naturally provides liquidity.
Eric Landry: Okay. So the $30 million in vendor deposits, is that a static number no matter how big your inventory is? Or will that have to go up still with higher inventory if by some chance you do grow in the future?
Robert Barry: That number is not related to the inventory. That was our primary vendor, as I mentioned, is DMI. And we use them – that $30 million we have there, secures the accounts payable with them. So as we – as that balance grows and it grows by vendor, by increasing, by deposit rebates that we get from DMI and others, that money is earmarked, just allowing us to increase the amount of accounts payable we have. So to that extent, we are improving our cash flow by not having to come out of pocket for accounts payable. But that is a static number. And the inventory – and I’ll add one thing to what Rick mentioned about inventory. We’re working with a vendor to – that might be able to source some of our product.
We would not have to carry it. They would fulfill it from their facilities. We’re not – we have not signed a contract but something we’re working on, which would enable us to free up and reduce our inventory. Inventory is down a little over $2 million from year-end. And it is something that we always are looking at as to how we can reduce that number. Our inventory turn traditionally runs about 12x. I’d love to see that in the 15 to 16x range. So there are a couple of things we’re working on. Vendor deposits is one of those things we just simply can’t touch. It’s contributing to working capital by not having to make the – pay for the purchases that we get from DMI.
