Polished.com Inc. (AMEX:POL) Q2 2023 Earnings Call Transcript

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?

Photo by Collov Home Design on Unsplash

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

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.

Eric Landry: Okay, all right. Well, I know you guys have to be careful about what you say, but here’s the deal. At the company’s current level of sales and profitability with the current balance sheet, the equity is worthless. So a lot of work needs to be done over the next 2 to 3 quarters in order for shareholders to survive. So is there any way you could go into more detail about how it is that we’re going to survive past August of next year?

John Bunka: Well, as I said on the previous call and I’d reiterate it, I think it’s meaningful. We have retained a financial adviser for this specific purpose to look at every opportunity for the company to become more efficient. This is all about us establishing an EBITDA threshold based on operating results that improves the financial standing of the company. So our primary focus right now is just that, and that’s – we have engaged this firm to assist us, and we’re going through a process to evaluate all of our operations to become – to improve cash flow. That’s our focus and that’s the purpose that will create value long term to shareholders.

Eric Landry: What’s going to be the cost savings of the warehouse consolidation? Do you have any idea how much you’ll save once that’s all in place?

John Bunka: We are still looking at it. The primary savings as, again, I think we said, the primary savings come from not having to move product between warehouses to ship and not carrying duplicative headcount to do it and the pace that we can do it is improved. So it isn’t – this isn’t entirely an expense reduction as it is improved efficiency. So we’re going to see both headcount reductions and rental savings. However, the primary objectives – we will be next to DMI, and we will be able to be very efficient in our transport both within our markets in terms of the marketplace in New England and New York, Connecticut, Long Island, New Jersey, will be highly efficient as well as it will improve the speed that we reach all markets nationwide. So all of these are going to be improved by our ability to operate out of a single facility.

Eric Landry: Okay. What’s a good run rate for professional fees, one without audit fees and one-timers? You were at $1.8 million in the June quarter, $1.4 million in the March quarter but you were only $1.2 million last year in June. What is the run rate for professional fees?

Robert Barry: That’s a very good question. We have a lot of things going on. I would – for the 3 months, it was – we had $1.8 million in professional fees for the quarter. I think that number will gradually come down. There are several initiatives that we’ve got, several things we’re working on, we’ll be winding up. I would like to see us down to $1 million per quarter. But honestly, I don’t think that’s in the cards for maybe another 2 to 3, 4 quarters before we gradually, I hope, wind down from here from $1.8 million, but we do have several things requiring outside legal assistance that we’re working on right now.

John Bunka: Yes, I was going to say in the interest of time, too, if we can make sure we address as many callers as possible.

Operator: [Operator Instructions] Our next question will come from [Jay Feenberg] with Stone Street Partners. Please go ahead.

Unidentified Analyst: Good morning, gentlemen. It looks like you’ve done a great job getting the ship at least going in the right direction. What would it take to get EBITDA margins to, say, the mid-level, say, 5% by next year?

Robert Barry: I would say that we achieved the revenue numbers we’re looking for, for this year. We’re talking about low single digits. I think above that as we can get more revenue to cover our fixed costs. I would say that the margins – EBITDA margin would improve going forward with more revenue. We look at our expense structure, for example, when Rick and I arrived in October, we had almost 500 employees. As of right now, we have just slightly under 300. So we are looking at our expenses and trying to control those, and at the same time, increased revenue will allow us to cover the fixed costs that we have. So I would hope that this time next year we’re having a call, we’ll be looking at an EBITDA margin in the range that you’re talking about in the mid-teens.

John Bunka: Yes, And Bob’s talking about the expense structure, but – and I said at the onset, the primary challenge we have been working through has been our acquisition costs through our digital spend. And that process has considerable upside. Our external advice has been that we should see significant improvements anywhere from 25% to 40% improvements in our Google spend and in our overall digital spend. Those are where the gains will occur because obviously, the cost of acquiring a customer is meaningful, and that produces the revenue that we can leverage that Bob’s talking about. We have seen both in the industry and we’ve experienced a significant decline in the efficiency of our acquisition cost. That’s been a concern I’ve talked to now for – 8, 9 months now that you can see that that spend has not been as productive as it was in years past.

And that’s the primary driver of revenue. So even though you’re going to look at the marginal cost of the spend, it’s really the productivity, the debt yields that this gain will be made. So the spend we’re making is going to be an important step in getting there.

Unidentified Analyst: Very good. Since the Goedeker acquisition of Appliances Connection, I guess, was completed sometime June and July of 2021, is that where the restatements all went back to or did it go back even past that?

Robert Barry: It was back to – started in the June of ‘21, the year-end audit ‘21. Those statements had to be restated and that started with the acquisition and then continued into the Q1 of 2022. That 10-Q had to be restated.

Unidentified Analyst: Okay. So at the time, the auditors and the investment bank, I guess, ThinkEquity it was, I’m not really sure the name. Is there any impropriety in what was done at the time that current management has noticed or recognized?

Robert Barry: I really can’t get into that. We saw things in the financial statements that we felt we needed to correct, and we did that this year. When we had to do the 2, we had to reaudit ‘21, and of course, audit ‘22. But whether improprieties or not, I can’t get into that. So we just…

John Bunka: Well, there were 2 most – and it’s stocking. I mean, the 2 most meaningful adjustments that were made to the fiscal ‘21 period, one was a matter of the process and the other was a matter of hindsight visibility. The first what I’d call process was the method of revenue recognition and accounting from it was we took great scrutiny on and applied the changes that we have made in ‘22 back as far as we were able to and then they audited. So the change in ‘21 really was to have conformity of the process for revenue recognition, which we employ, which I said on the last call is the standard we should have. And that’s on shipment. We recognize revenue on delivery. So if we’re producing goods, we’re taking – we’re charging credit cards and we’re producing revenue on shipment of goods and that’s the standard.

And we took that and applied that all the way back. And through testing from, there should be adjustments to that time period. And the second was – second, just so you can see them both, the second was there – at the time of the first audit, there was no forward visibility of returns. And with the hindsight of our return percent, the process yielded a need for a return reserve. So that return reserve was added back on the balance sheet and again tried to make it all consistent with what we are doing today.

Unidentified Analyst: From an investor point of view, it seems like the previous management didn’t follow the general accepted accounting principles. And if that’s the case, they have a fiduciary responsibility to shareholders. Is current management going to hold them to that? Is there a potential to file litigation against the people who basically decimated the value of this company?

John Bunka: I think – we hear your question, and I don’t know that we have a response for that today. There has not been, to date, any steps that this management team has made toward that objective, but we hear your question.

Unidentified Analyst: Understood you’re hearing it, but no offense, you guys have a fiduciary responsibility to shareholders that currently own the stock today. And since you’ve taken the position in office, if previous management had essentially not followed the generally accepted accounting principles starting in 2021 when this acquisition occurred, somebody is responsible to shareholders to hold them accountable. And it falls in your lap. Are you ready to hire a law firm to hold them accountable, the previous management, for the money they received from the secondary offering? The company – basically $200 million disappeared. And shareholders deserve fiduciary responsibility from its management. Is there – you haven’t decided to look into legal representation to hold them accountable, previous management that is?

John Bunka: Bob – we said a number of things that are hard not to take exception to. How do you – I guess how do we – we didn’t say that they weren’t following generally accepted accounting practices, Bob. And I’m not trying to split hairs with you, but I guess, could you clarify that, Bob?

Robert Barry: The one that Rick mentioned of returns adjustment, that’s the case where hindsight was 20/20. We had a whole year to look back and to see the returns. What was available to them at the time and some of the other issues, some of these are judgment calls. And I can’t answer the questions whether we should go sue. We have D&O insurance. They’re covered under the D&O insurance. So to what end, I don’t know. I’m not a lawyer. I don’t know the answer to that question. Management – honestly, and I don’t want to sound pollyannish, but we’re not looking back. We’re looking forward and trying to – we were handed something. We’re working on it. We’re trying to make it better and to go forward from here.

We think that’s where the value will come from the stockholders. If we can – if we – given the time to right the ship here and to continue to grow business in the midst of a recession. But I’m – personally, I’m not looking back for retribution or anything. So I think – that’s my view. That’s not the board’s view. That’s not Rick’s view. That’s my view. I want to look forward. I don’t want to look back. It is what it is. I can’t change it. We’ve got it right. We are following GAAP. But hindsight’s 20/20 and some of these reserve adjustments, I mean, the returns reserve was a big number, $7 million to $8 million.

John Bunka: And there is an active shareholder action that is and will be processed and addressed by this team as we go forward. But your question was quite specific as to will management be holding them accountable for – in the manner you described? And that’s why you’re seeing us be fairly cautious in how we respond to that. And I hope you can appreciate that.

Operator: The next question will come from [Steven Tiberi] with Rebus Capital. Please go ahead.

Unidentified Analyst: Yes. Hi and thank you for taking my call. First of all, congratulation because you guys are consistently providing evidence that things are kind of – the intention is kind of turning around, so thank you for that. Also, I do agree that sometimes looking back and engaging on litigation, stuff like that, I mean, especially when you want to grow the head and cut the tail out, you got to be careful with that. That is a very costly process. So moving forward, it is something that I applaud on you guys. My question is, with everything that you guys are working on, what gives you the right to win? There’s a lot of competition out there. This company, honestly, on this process on getting back on track, a lot of opportunities were missed.

And there’s a lot of people that step in the market and trying to address, a lot of people trying to acquire customers through digital, right? So what gives you guys the right to win now moving forward? If you guys can summarize that. It is a very simple question.

John Bunka: That’s a great question, and I appreciate the question. What this company does extremely well and we don’t often talk about it is educate our consumer and give confidence in a very expensive purchase that is quite complicated. With the number of actions today, specifically in the appliance industry to outfit your home, the decision can be daunting and the shopping experience is quite difficult. It’s very hard to find local informed people that know product beyond their – the items they’re selling. So the consumer’s constantly challenged with, yes, I know this vendor but what other options may I have for my home? We are that option for them and we’re available. You don’t have to hunt through the halls of a big-box retailer to find an expert.

We’re available and we can coach them through this process. So what we – our best experience is when we can help someone through that decision process and we have expertise that’s immediately available. That’s something that our consumers want. And it’s very important in both their remodel experience as well as the replacement experience. What is shifting in the industry today is a shift from what has been whole kitchen remodel or full kitchen purchase back toward the percents that were historically reported on replacement units. The replacement units is as difficult because in many cases, those units are discontinued or no longer available. So the choice you make within your home to find and meet the criteria you have is something where you really need an expert that can advise you through the process.

That is what our team is. We have a talented, trained sales force that is available on call, and that is the distinctive asset of the company.

Robert Barry: Rick, let me add to that too because one thing that the question was, what separates us, the website, our website’s won awards for being the best website to go to. I think U.S. News and BorderReport was the last one that made an award. So that’s another distinguishing feature is our website.

Unidentified Analyst: Yes, that’s a good point because there is a lot of new – I would say a lot of the consumer now is a lot of the new generation kind of consumers where they make 80%, I would say, about 80% of the decision online or digital, right, and then execute on the last 20%. So if that’s where you guys are putting your effort to capture more customers and make it easier to also all about the experience like you explained, I think that was the kind of answer I was looking for. So thank you so much for taking my call. Appreciate it.

John Bunka: Thank you for the question.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Rick Bunka for any closing remarks. Please go ahead, sir.

John Bunka: Thank you all for joining the call. We truly appreciate all your continued support and look forward to being on time and timely with our next financials and the results that we’ll post in the next quarter. So thank you again.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.