The Singing Machine Company, Inc. (NASDAQ:MICS) Q2 2024 Earnings Call Transcript

The Singing Machine Company, Inc. (NASDAQ:MICS) Q2 2024 Earnings Call Transcript November 23, 2023

Operator: Good morning, everyone, and welcome to Singing Machine’s Second Quarter Fiscal 2024 Financial Results Earnings Call. My name is Natalie, and I will be your operator today. As a reminder, today’s call is being recorded. We have a brief safe harbor and then we’ll get started. This call contains forward-looking statements under U.S. federal securities law. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. I would now like to turn the call over to Gary Atkinson, company’s CEO.

Gary Atkinson: Good morning, ladies and gentlemen. I would like to start off this morning by thanking everyone for taking the time to listen in and participate in our second quarter 2024 earnings call. Joining me on today’s call, I have Lionel Marquis, company’s CFO; and Bernardo Melo, Chief Revenue Officer. As is customary with our business, the second quarter is typically one of the busiest times of our fiscal year. This is when we start to deliver our programs for the holidays to our retail partners, and we are very, very active in fulfilling these orders daily from July through October with final replenishment into November, and drop shipments starting in December. Due to the timing of our long-standing warehouse lease and its expiration in Ontario, California back in August, we were challenged to execute a complete transition from a 100% in-house logistics model to a fully outsourced 3PL model right at the peak of our shipping season.

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For those that may not be aware, this process involved a complete overhaul in our entire customer fulfillment operations process, which impacted staffing, IT integration, accounting data flow, internal reporting and customer relationship management. While this was a massive undertaking for the entire team, I am very pleased with how the team has executed and made it happen day in and day out for a week time and as we made the transition. The impacts moving forward should be significant to our business. We avoided absorbing significant rent cost increases related to our previous warehouses. We’ve eliminated a large percentage of our workforce and we’ve moved our entire logistics returns and repairs model to a variable just-in-time solution that should mitigate hundreds of thousands of dollars in cost increases annually for the foreseeable future.

Beyond this major milestone, it was largely business as usual. The piping challenges and inbound container prices have fully normalized for this year. We saw customer demand reverse much closer to our normal just-in-time delivery model. We also participated in several forward-looking industry events such as last month toy fair in New York that indicate that 2024 should see further stabilization and improvement in the overall U.S. retail environment. We were very active presenting and promoting our upcoming 2024 product offering which include our new Sesame Street licensed line of products, along with new Karaoke innovations and technology that we plan to unveil in the early part of 2024. With this context in mind, I would like to turn the call over to Lionel Marquis, company’s CFO, to present greater details on the results of operations for our second quarter.

Lionel Marquis: Good morning, everyone. Without further delay, I’d like to walk through some of the brief highlights on results of operations for our second quarter ended September 30, 2023. Revenues for the three months ended September 30, 2023, were $15.9 million as compared to $17.1 million for the same period in the prior year. The decrease was due to delays in — a few delays in product shipped in late September that will ultimately shift in the first two weeks of October and an increase of approximately $900,000 in co-op incentive accruals planned for the holiday promotions and this was an increase over 2022. Gross profit margin, gross profit for the second quarter of fiscal 2024 was approximately [$3.7] million, yielding a 23.2% gross profit margin as compared to approximately $3.9 million or 22.8% in margin in the second quarter fiscal 2023.

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Q&A Session

Overall, the difference in dollar terms was due to the decrease in revenues, as we’ve already detailed, However, the improvement in margins in the first quarter of this year is primarily due to slight changes in the product mix and a decrease in ocean container prices that lowered the Company’s cost of inbound freight. Operating expenses during the second quarter of 2024, operating expenses increased $3.6 million compared to $3.3 million in the second quarter of the prior year. The increase was in part due to approximately $2 million to $0.2 million increase in selling expenses associated with the onetime marketing promotion and $0.1 million in general and administrative expenses. Just a brief note on liquidity. As of September 30, 2023, we had cash on hand of approximately $3.2 million.

During the next 12-month period, we plan on financing our working capital needs primarily from a combination of vendor financing, cash on hand and projected cash flows from operations. I’d like to now turn the call back over to Bernardo and to Gary.

Gary Atkinson: Thank you, Lionel. At this point, we’re going to turn the call over to Bernardo Melo, our Chief Revenue Officer, for an update on sales for the holiday season. Go ahead, Bernardo.

Bernardo Melo: Yes, and welcome, everybody, to our Q2 earnings call, I’ll try to be brief. Just as we move into the holiday season, a couple of changes are happening. Obviously, retail is a very tough environment right now, consumers are shifting their buying patterns and concentrating on essentials moving forward. But what we’ve seen is there’s still demand for Karaoke. It has come a little bit later than usual due to some transition — transitions at Walmart moving employees to the consumer electronics department. That started about 1.5 years ago, and the full transition will emerge by spring of 2024. With that being said, we still have a couple of SKUs in the toy department that are performing recently. And in the singing department, we currently have a feature right now, which you’ll see at about 1,800 stores performing well.

We got off to a slow start. We’re now somewhere around 50% sell-through and expect it to sell through by mid-December that future. Our regular SKUs are doing well. We still have a good mix of new tech in Walmart with the casting items that are bound to generate some back-end dollars. So we’re looking forward to that. We’re also going to be on the floor now for Black Friday with an item at a very aggressive price point. With some really good features that Walmart partnered up with us. They did ship this year instead of shipping in July and August from direct import. We were shipping in our full December that due to storage issues and just a change of strategy there. You will see a full assortment at the Walmart stores for Sam’s Club. We also have two SKUs going.

They’re all fully set now in the stores. They said a little bit later as well, just similar to Walmart entering in late October and early November. But one of the items is off to a good start. The other one will be on promo here in like Friday, and we expect some good results. It’s a brand-new item that they’re carrying for 2023. Target is back with four SKUs. Last year, we were cut down to two SKUs. This year, we managed to bring in four SKUs and also New tech with the casting model at $99. You also see some promotion now during November and then second week of December. So charge data is stabilizing with four SKUs, which we’re happy about. We’re also doing a lot of promotions on Amazon. We’ve engaged with a brand new agency by the name of Vendo, they’re top-of-class in data-driven and marketing-driven so we are going to see a shift on Amazon.

More of a split, we were mostly 1P. And now we’re switching and balancing out from 1P to 3P. That allows us to control the pricing, control promotional activities and also drive sales to market, not only within the Amazon environment, but also through social media influencers few TV ads on Hulu and Netflix and some of the other major streaming services. So we’re starting to test that out, see how that goes and then go into full campaign come 2024. We have a good mix of products there, and we’re constantly battling the marketplace environment with the Chinese of brands. We have a good strategy and we feel that we are with the right partners in Vendo. So you should see a lot of activity there. also beyond the lookout on your social media where, like I mentioned before, we’re partnering up with some [indiscernible] bloggers, some influencers that we’ve done a really good campaign for and it’s starting now in November, and you’ll see it all the way through January and February.

So the envelope out there, we’ve got really good feedback on some of the initial ads that we put forward. Internationally, Canada has really taken off for us. We did a big program with Costco Canada, where we participated for the first time in their October book which is a little bit early for Karaoke, but it performed well. We had forecast of about 8,700 pieces. We came in at 13,000 pieces. So that was a huge success and Costco is extremely happy with those numbers. We’re running a secondary ad for Black Friday and Cyber Monday, and we should see close to 90%, 95% sell-through there. Costco U.S.. We launched a very brand-new WiFi model. We usually do the pedestal there, but we’ve done a table top this year, and the consumers seem to embrace the new form factors.