Xcel Brands, Inc. (NASDAQ:XELB) Q2 2023 Earnings Call Transcript

Xcel Brands, Inc. (NASDAQ:XELB) Q2 2023 Earnings Call Transcript August 12, 2023

Operator: Hello, and welcome to Xcel’s Second Quarter 2023 Earnings Conference Call. My name is Krista, and I’ll be the conference operator today. We will have a question-and-answer session the end of the call. [Operator Instructions]. I will now turn the call over to Andrew Berger, Investor Relations. Please go ahead.

Andrew Berger: Good evening, everyone, and thank you for joining us. Welcome to the Xcel Brands’ Second Quarter 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, Seth Burroughs. By now, everyone should have had access to the earnings release for the second quarter ended June 30, 2023, which went out this evening. And in addition, the company plans to file with the Securities and Exchange Commission its quarterly report on Form 10-Q tomorrow. The release and quarterly report will be available on the company’s website at www.xcelbrands.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. 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 earnings per share, 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. 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-Q 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.

Robert D’Loren: Thank you, Andrew. 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 and how our business is performing under the new operating model. After that, our CFO, Jim Haran, will discuss our financial results in more detail. Starting in the first quarter of 2023, we began to restructure our business operations, shifting from a working capital-intensive wholesale business model to a business model that is working capital light, highly profitable and focused on high-touch licensing, livestream shopping and social commerce growth strategies. During the second quarter of 2023, we continue to execute on this plan, and I’m pleased to report that we have substantially completed this transition of our operating businesses.

As a result of all of our restructuring efforts going forward, we expect to save approximately $13 million in operating expenses on an annualized basis as compared to 2022 expense levels, including approximately $6 million of reduced payroll costs and $7 million in lower operating costs. These cost savings began in the first quarter of 2023 and are expected to be fully realized by the end of the third quarter of 2023. Our current financial forecast indicates that we will return to profitability by the end of this year, driven by these cost savings combined with revenue from our new licenses and brand launches in 2023 that will continue to ramp and grow in 2024. To effectuate this transformation, we have engaged with best-in-class business partners and entered into multiple new licensing agreements, some of which I spoke about on last quarter’s call and some of which are new this quarter.

We believe that the evolution of our operating model through these new arrangements powered by extraordinary livestream and social commerce technology that solves many of today’s challenges in e-commerce, will provide our company with a competitive advantage and significant cost savings going forward, while offering our customers exceptional quality at attractive prices. We also believe our live streaming technology will enable us to fully engage with and entertain our customers in ways that were not possible in the past. In May, we signed a master licensing agreement with G-III Apparel Group for the Halston brand, under which G-III has taken over and assumed all of the existing licensing contracts for the brand together with apparel wholesale operations and distribution in department stores, e-commerce and other retailers.

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This is a 25-year license agreement, which includes a market rate royalty, certain royalty advances, escalating guaranteed minimum sales requirements, certain guaranteed minimum payments, and a right for G-III to acquire the brand at the end of the license term. We started to realize revenues from this agreement in the second quarter of 2023 but expect that more meaningful growth will come in fall of 2024 when G-III plans to launch their Halston line at better department stores. Our partnership with G-III, given their extensive production and distribution capabilities, provides us with a tremendous opportunity to grow the brand and take Halston to the next level. G-III management has publicly stated that they have assigned some of their premier talent to develop the brand, and they are targeting to grow the Halston brand globally to $250 million in annual wholesale sales by year 4 of the license agreement.

We are excited about our long-term partnership with G-III, we believe is one of the best wholesale companies in our industry. For our Judith Ripka brand, we entered into a new licensing agreement in the first and second quarters to move all segments of our Judith Ripka business to Jewelry TV. JTV, as it is known, has rapidly become one of the largest jewelry retailers in the U.S. The brand launched on jtv.com on July 1, and is scheduled to launch on air on JTV in October with a surprise celebrity appearance planned for the launch. We expect the brand will have dramatically increased airtime compared to QVC with significant on-air presence for the JTV network in the first year and beyond. Also, JTV launched the wholesale and judithripka.com business is under their management last month, we believe this presents a fantastic and exciting opportunity to grow the brand on TV, on judithripka.com and in wholesale distribution with our partners going forward.

This license agreement provides for royalties on net retail sales generated through JTV’s television, e-commerce, and other direct-to-consumer outlets and royalties on wholesale sales as well as a profit share on the wholesale and judithripka.com businesses. In connection with executing the JTV licenses, we sold JTV all of our remaining jewelry inventory in April of 2023. For our C. Wonder brand, we launched on HSN at the end of March with the first show achieving over 200% of planned sales and sales continued to gain strong momentum during Q2. During the second quarter, HSN reported it had its best week of 2023 and noted Christian Siriano’s appearances in [indiscernible] earnings call. The wholesale production for our HSN business has been licensed to One Jeanswear Group or OJG.

OJG is an industry-leading supplier of apparel across multiple points of distribution. This license commenced during the second quarter, and we are working on some exciting license extensions in other categories for the C. Wonder brand. Finally, we expect to be announcing sometime in September a new brand launch on HSN with an iconic American supermodel. This continues our push into building a brand portfolio of influencers and creators to drive our TV and direct-to-consumer livestream and social commerce platform. With respect to the Longaberger brand, we are in the process of launching our latest version of our social commerce technology that we believe will revolutionize social commerce and e-commerce in general and plan to incorporate Longaberger into a home product social commerce marketplace.

Finally, regarding our QVC interactive television business, the logo by Lori Goldstein brand is performing well on QVC with sales in the second quarter of 2023 exceeding quarterly sales for the last three sequential quarters. The Isaac Mizrahi brand was below plan for the quarter in net sales during the second quarter of 2023 due to a one-time increase in return rate on certain items and scheduling conflicts with Isaac. In this connection, we worked with QVC and Isaac to coordinate on-air scheduling and are making improvements to Isaac’s Remote Studio and expect sales to rebound in the latter half of 2023 and return to planned level. And now I’d like to turn the call over to Jim to discuss our results and financial highlights. Jim?

James Haran: Thanks, Bob, and good evening, everyone. I will briefly discuss our financial results for the quarter and 6 months ended June 30, 2023. Total revenue for the second quarter of 2023 was $6.8 million, representing a decrease of approximately $1.7 million from the second quarter of 2022, but an increase of approximately $0.7 million or approximately 11% from the first quarter of 2023. This year-over-year revenue decline from the prior year quarter compared with the current quarter was driven by a $2.7 million decrease in licensing revenue, primarily attributable to the sale of a majority interest in the Isaac Mizrahi brand in May 2022 and partially offset by an increase of approximately $1.1 million in net sales, largely due to the sale of our Judith Ripka Fine Jewelry inventory to JTV in connection with the entrance into our new contractual arrangements with JTV.

On a year-to-date basis, revenue for the current 6 months decreased by approximately $4.4 million from the prior year 6 months to $12.8 million. This decline in revenue was driven by a $6.4 million decrease in licensing revenue, primarily attributable to the sale of the majority interest in the Isaac Mizrahi brand and partially offset by an increase of approximately $2.1 million in net product sales, largely due to the sale of our Judith Ripka Fine Jewelry inventory and C. Wonder apparel inventory to HSN as part of the restructuring and transformation of our business operations and the launch of the C. Wonder brand. Gross profit margin from product sales decreased from approximately 22% in the prior year quarter to approximately 13% in the current quarter and also decreased on a year-to-date basis from 30% in the prior year 6 months to 21% in the current year 6-month period.

These decreases in gross margin were the result of exiting the wholesale operations portion of our business, which included the sale of our inventory at discounted prices. The only inventory the company had at June 30 was Longaberger inventory. Our operating cost and expenses were $5.2 million for the current quarter, down by $4.3 million or 45% from $9.5 million in the prior year quarter. On a year-to-date basis, our operating cost and expenses were $12.1 million in the current year period, down by $5.7 million or 32% from $17.8 million in the prior year 6 months. For both the quarter and year-to-date periods, this decrease in operating expenses was primarily attributable to the restructuring and transformation of our business and costs associated with the Isaac Mizrahi brand.

We expect that our operating costs and expenses will continue to decrease to reach a run rate of approximately $4 million per quarter by the end of 2023. We did not have any significant amount of interest in finance expense in the current quarter or the current 6 months as we fully repaid all of our outstanding term loan debt in the second quarter of 2022. Overall, we had a net loss excluding noncontrolling interest for the current quarter of approximately $3.5 million or minus $0.18 per share compared with net income of $9.5 million or $0.48 per share in the prior year quarter. The prior year quarter included a $20.6 million gain on the sale of the majority interest of the Isaac Mizrahi brand. The current quarter’s results also represent an improvement for the first quarter of 2023 net loss of $5.6 million or $0.28 per share.

On a non-GAAP basis, we had a net loss for the current quarter of $1.7 million or minus $0.09 per share compared with a net loss of $3.6 million or minus $0.18 per share in the prior year quarter. Adjusted EBITDA was negative $0.9 million for the current quarter compared with negative $2.8 million in the prior year quarter. The current quarter’s adjusted EBITDA of $0.9 million compares favorably with adjusted EBITDA of negative $2 million and negative $5.9 million in immediately preceding two quarters ended March 31, 2023, and December 31, 2022, respectively. For the balance of 2023, we expect our adjusted EBITDA to continue to improve throughout the year, and we currently project that as a result of the restructuring and transformation plan, we will achieve positive monthly EBITDA by the end of 2023.

It should be noted that the reported current EBITDA includes an adjustment for certain costs and operating losses relating to the wholesale apparel and jewelry operations as these businesses have been transitioned to third parties. On a year-to-date basis, our net loss, excluding noncontrolling interest for the current 6 months was approximately $9.1 million or minus $0.46 per share compared with net income of $6 million or $0.30 per share in the prior year comparable period. On a non-GAAP basis, we had a net loss for the current 6 months of $5.3 million or minus $0.27 per share compared with a net loss of $5.5 million or minus $0.28 per share in the prior year 6-month period. And finally, adjusted EBITDA was negative $2.9 million for the current 6 months, representing a $0.8 million improvement over negative $3.7 million of EBITDA in the prior year 6 months.

And once again, as a reminder, non-GAAP net income, non-GAAP diluted EPS, and adjusted EBITDA are non-GAAP unaudited terms. Our earnings press release and Form 10-Q present a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our balance sheet. As of June 30, 2023, the company had cash and cash equivalents of approximately $3.5 million and positive net working capital of $6 million, excluding the current portion of our lease obligations. The new strategic [indiscernible] license with our new licensee for the Halston brand, which was executed in May 2023, include a certain upfront cash payment. Under our current financial projections, we believe this, 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. Bob?

Robert D’Loren: Thank you, Jim. This concludes our prepared remarks. Operator?

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Anthony Lebiedzinski from Sidoti.

Anthony Lebiedzinski: Sales on the bottom line better than expectations here. So first, I guess, starting in the third quarter, we will have clean comparisons for the licensing part of your revenue as we’re now past the 1-year anniversary of the sale of Isaac Mizrahi. So Bob, you mentioned the challenging retail environment, but you certainly have done a lot of work, you’ve been busy with signing new licensing agreements. So how should we think about just overall the licensing revenue piece of your business now going forward?

Robert D’Loren: When you say how should we look at it, Anthony, can you be specific?

Anthony Lebiedzinski: For the balance of the year as far as how should we think about as far as the revenue. Do you expect that to grow even with this challenging retail environment? Just wanted to get a better sense as to what you expect from here.

Robert D’Loren: Sure. Overall, at QVC, well, they are down for the year. We’re trending better than QVC overall. So we expect that our royalties coming from our interactive television businesses will be as forecasted. We were a little below plan on Isaac. It was really — there were some high returns and we’ve looked very carefully of what the items were that we’re returning. We didn’t see anything from a product perspective. So we’re still trying to understand what drove that? And is it likely that that will be the case going into Q3 and Q4? We don’t think so. But we’ll know better as the months go by here. I would say, as it relates to all of the new licenses, we’ve modeled in only the minimums under those contracts. G-III launches in fall of ’24.

So we’ll be continuing to collect minimums under that agreement until they launch. And JTV, they have launched online, and they have begun shipments both for judithripka.com and for the wholesale business. The on-air launch is scheduled for mid-October. Assuming that happens on schedule, then we’re anticipating that we’ll be off to a very strong start there, given the number of hours and the big event that’s planned around the launch show and all the marketing that JTV is doing for the launch. So we’re fairly comfortable with where we are in terms of our forecast. And then going into next year, as all of these outsourced programs really begin to kick in, we’re going to see a big pickup in the royalty revenues in ’24, ’25, ’26 as all of them ramp up.

And as I said on the call, these are the best-in-class partners that we could be in business with. JTV has become one of the largest jewelers in the country. One Jeanswear is a very significant wholesale of apparel across almost every point of distribution. And G-III, I think, speaks for itself. So we’re very bullish on where we think royalties will go on the core brands.

Anthony Lebiedzinski: Absolutely vivid. That’s great to hear. And then, Jim, you mentioned that the only inventory left on the balance sheet is from Longaberger. I know you guys have discussed previously about potentially divesting the Longaberger or maybe doing some other things with it. So do you have any updated thoughts on that brand?