Xcel Brands, Inc. (NASDAQ:XELB) Q3 2023 Earnings Call Transcript

Xcel Brands, Inc. (NASDAQ:XELB) Q3 2023 Earnings Call Transcript November 20, 2023

Xcel Brands, Inc. misses on earnings expectations. Reported EPS is $-0.15 EPS, expectations were $-0.14.

Operator: Please be advised that reproduction of this call in whole or in part is not permitted without prior written authorization of Xcel Brands. And as a reminder, this conference call is being recorded. I would now like to turn the call over to Andrew Berger of SM Berger & Company. Andrew, you may now begin.

Andrew Berger : Thank you, and good evening, everyone. And thank you for joining us. Welcome to the Xcel Brands’ Third 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 third quarter ended September 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 the quarterly report will be available on the company’s website at www.xcelbrands.com.

A fashionable retail store showcasing the company’s apparel products.

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 Brands 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 financial performance calculated and presented in accordance with GAAP. You may refer to the attachment of 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. I would be remiss if I did not extend the special thanks Jim for powering through a serious bike injury this last weekend to get the 10-Q filed. As stated earlier this year, starting in the first quarter of 2023, we began to restructure our business operations, shifting from a working capital and intensive wholesale business model to a business model that is working capital light, highly profitable and focused on high-touch licensing live stream shopping and social commerce growth strategies.

During the third quarter of 2023, we continue to execute on this plan, and I am pleased to report that we have essentially completed this transition of our wholesale and related e-commerce operation. And subsequent to the end of the quarter, we have outsourced operations through license agreements for our Longaberger business. As a result of all of our restructuring efforts. Going forward, we expect to now save approximately $14 million in operating expenses on an annualized basis as compared with 2022 expense levels, including approximately $7 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 2023. Based upon some delays in concluding the Longaberger licensing agreements, and softness in our QVC business that resulted from scheduling conflicts with our on-air talent, our current financial forecast indicate that we expect to return to profitability by the first quarter of 2024, 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 agreement, 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 for these new arrangements coupled with the launch of our live stream and social commerce platform 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 stream and social commerce platform will enable us to fully engage with and entertain our customers in ways that were not possible in the past. I look forward to sharing more information about this as we get closer to the launch.

In May, we signed a master licensing agreement with G-III Apparel Group for the Halston brand. We started to realize revenues from this agreement in the second quarter of 2023, but expect that more meaningful growth will come after G-III launches their first collection in fall 2024, which is the season later than we initially had hoped for. Our partnership with G-III, given their extensive production and distribution capabilities provides us with a tremendous opportunity to grow the brand and take Holton to the next level. For our Judith Ripka brand we entered into new licensing agreements in the first and second quarters to move all segments of our Judith Ripka business to jewelry TV. The brand launched on air October 16. The launch was among the best launches on JTV and exceeded all business metrics established by the network.

In fact, early indications show over 10 million media impressions generated by the marketing efforts for the long show. We expect significant growth with the Judith Ripka brand in this new and exciting partnership 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 continue to gain strong momentum during Q3. As previously stated, the wholesale production for our HSN business has been licensed to One Jeanswear Group. We are working on some exciting license extensions in other categories for the C. Wonder brand. Finally, we expect to be announcing before the Christmas holiday, a new brand launch on HSN in March of 2024 with an iconic American super model. This continues our push into building a brand portfolio of influencers and creators to drive our TV and live stream and social commerce businesses.

With respect to the Longaberger brand, we entered into a new license agreement with an industry-leading outsourced e-commerce management company to manage and operate the e-commerce business. Also, we have executed a license for Madan America U.S. baskets. Finally, we are in discussions with other potential partners to license additional home product categories under the brand, Longaberger is an iconic American brand, and we’re excited after reestablishing the brand in the past few years to now bring in partners who can help grow the brand and business. Finally, regarding our QVC interactive television business, both the logo by Lori Goldstein brand and Isaac Mizrahi brand did not perform as we expected during the third quarter of 2023, primarily due to scheduling conflicts with on-air talent as QVC transitions post-COVID from remote shows to 100% in studio shows in Pennsylvania.

We are exploring ways to increase sales through the use of additional gas and other alternatives to drive the business in 2024, including product refreshments and possible dedicated shows with our backup guests. In summary, we are on track with the execution of our transition plan, and we look forward to growth in 2024. And now I would like to turn the call over to Jim to discuss our results and financial highlights. Jim?

Jim Haran: Thanks, Bob, and good evening, everyone. I will briefly discuss our financial results for the quarter and 9 months ended September 30, 2023. Total revenue for the third quarter of 2023 was $2.6 million representing a decrease of approximately $1.9 million from the third quarter of 2022. This decline was primarily driven by a $2.1 million decrease in net product sales due to the exit from our wholesale apparel and fine jewelry sell operations early in 2023 as part of the restructuring and transformation of our business operating model. Partially offsetting the decline in net sales was an increase in net licensing revenue of $0.2 million, primarily driven by the relaunch of our C. Wonder brand on HSN. It should be noted that our Judith Ripka brand launched on air on JTV this past October.

Thus, we expect to see a positive impact from the brand beginning with the fourth quarter of this year. On a year-to-date basis, revenue for the current 9 months decreased by approximately $6.2 million from the prior year 9 months to $15.5 million. This decline in revenue was driven by a $6.3 million decrease in licensing revenue, primarily attributable to the May 2022 sale of a majority interest in the Isaac Mizrahi brand. Net product sales were essentially flat year-over-year as we sold four of our apparel and jewelry inventory during the first half of 2023. Our direct operating cost expenses were $5.6 million for the current quarter, down by $1.3 million or 19% from $6.9 million in the prior year quarter. It should be noted that $1.3 million in non-recurring costs associated with the restructuring were included in the current quarter’s operating expenses.

And if backed out, would represent a $2.6 million reduction from the prior year quarter. On a year-to-date basis, our operating cost and expenses were $17.8 million in the current year period, down by $7 million or 28% from $24.7 million in the prior year 9 months. This decrease in operating expenses was primarily attributable to the restructuring and transformation of our business in 2023 that Bob discussed earlier and in addition the elimination of costs associated with the Isaac Mizrahi brand licensing sale in May 2022. As Bob mentioned, we’ve recently announced the licensing of our Longaberger operations. Together with the restructuring of apparel and fine jewelry host operations, our operating cost and expenses will continue to decrease, and we expect to reach a run rate under $4 million per quarter by the first quarter of 2024.

By comparison, the fourth quarter of 2022 had a run rate of approximately $7.5 million in costs. Overall, we had a net loss, excluding non-controlling interest for the current quarter of approximately $5.1 million or minus $0.26 per share compared with a net loss of $4 million or $0.21 per share in the prior year quarter. On a non-GAAP basis, we had a net loss for the current quarter of $3 million or minus $0.15 per share compared with a net loss of $3.3 million or $0.17 per share in the prior year quarter. This non-GAAP net loss includes the $1.3 million in non-recurring restructuring charges that I mentioned earlier. Adjusted EBITDA was negative $1.4 million for the current quarter, an improvement of approximately $1.5 million compared with negative $2.9 million in the prior year quarter.

This level was approximately $400,000 over our forecast as it relates to reduced royalty revenue generated by our QVC businesses. On a year-to-date basis, our net loss, excluding noncontrolling interest, for the current 9 months was approximately $14.3 million or $0.72 per share compared with net income of $2 million or $0.10 per share in the prior year comparable period. On a non-GAAP basis, we had a net loss for the current 9 months of $8.7 million or minus $0.44 per share compared with a net loss of $8.8 million or minus $0.45 per share in the prior year 9-month period. And finally, adjusted EBITDA was negative $4.6 million for the current 9 months representing a $2 million improvement over negative $6.6 million of EBITDA in the prior year 9 months.

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 designs with the most directly comparable GAAP measures. Now turning to our balance sheet liquidity. As of September 30, 2023, the company had cash and cash equivalents of approximately $2.2 million and positive net working capital of $2.9 million, excluding the current portion of our lease obligations. Since executing our restructuring and transformation plans earlier this year, our cash usage has decreased significantly and is projected to continue to improve. Cash used in operating activities in the current 9-month was $2.8 million compared with cash used in operating activities of $11 million in the prior year 9 months.

Also, in October 2023, a we entered into a new 5-year term loan of $5 million in which quarterly repayments were commenced in April of 2024. We believe that the additional liquidity provided by this new term loan coupled with our operating expense cost 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.

Robert D’Loren : Thank you, Jim. It’s great to see you recovering so fast from your bike accident. Ladies and gentlemen, 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 of Sidoti.

Anthony Lebiedzinski : It’s Anthony Lebiedzinski from Sidoti. And Jim, hope you’re feeling better and we’ll get better 100% quickly. So yes. So first, just looking at the third quarter, Bob, you mentioned that was — came in lower than what you guys expected. Part of that was because of the QVC issues. So have those issues been resolved with QVC? Or do you think it will still be a drag on the fourth quarter?

Robert D’Loren: So there are two things that were driving the difference between where we thought we would be and where we ended up in the quarter. One, about $400,000 in revenue, we were lower than we expected, and that was because missed shows by talent. And we had about 200,000 more of expenses with the transition of the Longaberger business. We thought we would be able to get everything in place a little sooner than we did. But the good news is that’s behind us now. And we are working on solutions to get talent back on calendar and on schedule so that we don’t miss. It was a fairly sudden change in policy at QVC. And as you can imagine, most of our on-air guests have busy media scheduled, and we just had conflicts. We think there will be some continued conflicts in Q4, but we’re working on revised agreements with all of our — on our guests so that we can get back to normal on-air times heading into January.

Anthony Lebiedzinski : Okay. Yes. And in terms of the license deal that you announced last week with Alpha OES for Longaberger. How should we think about the impact of this deal out going forward? Maybe you can give a sense to us maybe sort of like when you own the portion of Longaberger that you did previously? How much did that contribute? And then kind of going forward, how should we think about this in terms of the financial impact?

Robert D’Loren: Okay. Well, I think Seth can talk a little bit about Alpha.

Seth Burroughs: Yes. So Anthony, the license is structured with a royalty like many traditional licenses, there’s also a incentives on the bottom side on the margin generated by the business. If you look at the business, say, we don’t report earnings by brand or contribution by brand. That said, Longaberger, we’ve been investing in the business over the last several years. So there should be a positive impact. So it will be a negative impact to revenue since we won’t be recognizing the direct-to-consumer revenues from the longer of business, but it should be a very positive impact to our EBITDA contribution.

Anthony Lebiedzinski : Okay. That’s good to hear. Okay. So going forward, you will — it sounds like you will only be reporting net licensing revenue. I guess, the other line item, net sales. I mean, this quarter, you only had 256,000 sales there. So I guess going forward, it’s going to be pretty much zero or is that correct?

Seth Burroughs: Yes, I believe that’s correct.

Jim Haran: Yes, there’ll be some sales in the fourth quarter as we had transition Longaberger during the quarter. Thereafter, we don’t anticipate having sales cost of goods sold.

Anthony Lebiedzinski : Got you. Good. And then last question before I pass on to others. So in terms of the expense run rate, I know some of the third quarter came in higher because of some nonrecurring items. As far as the fourth quarter, do you think you can be close to $4 million or above that? Like just roughly speaking, should we expect.

Jim Haran: Yes. We’re just cleaning up some final transition items. So there’ll be a little bit more cost, but this is the end of these transition costs and going into the new year, it will be exactly what Bob mentioned. Will be a runway on the full guide.

Operator: Your next question comes from the line of Pat McCann of Noble Capital Markets.

Pat McCann : This is Pat on for Mike Kupinski. Congratulations on completing the restructure. So actually, some of my questions have already been answered, but I do have one additional question, which is, just broadly, what are you seeing in the marketplace for your various brands so far so far in this quarter, just when it comes to as we head into the holiday season, what is the demand like from the consumer? What — kind of what are you seeing? Do you have any leading indications of what we should expect this holiday season given the state of the economy?

Robert D’Loren: So it’s an interesting question. Apparel, historically of the month of December has not been a big month in interactive TV because the networks tend to pivot to electronics, food and giftable items. So we don’t expect any change in their product mix going into December. And quite frankly, our brands were tracking ahead of QVC overall results in apparel. If we didn’t have the scheduling conflict, I think we would have been very, very pleased with where we were in Q3 and now heading into Q4. So that tells us that there remains high demand for our products with the consumer. And of course, we are watching that carefully. People are making a lot of hard decisions about where they should be spending their money. But overall, we haven’t seen anything quite yet. It’s just — and we need to deliver the talent to Westchester PA, which, as I said, we’re working on.

Operator: Your next question comes from the line of Aaron Warwick of Breakout Investors.

Aaron Warwick: Appreciate all that commentary. It sounds like some good things ahead. One of those I imagine is your social commerce platform. Could you talk a little bit more about what your current thinking on that is in terms of when it’s going to launch what we should be looking for and what your expectations are, especially as we come up on the holiday shopping season?

Robert D’Loren: Yes. So we have completed everything we wanted to complete with the tech itself, including building in 4 AI engines, 2 recommendation engines, 1 content filter to have the machines filter negative content that our brands participating in the marketplace can set their screening filters and a style chat bot and all of those are done and ready to go. We expect that we will be conducting an Investor Day or perhaps at one of the conferences that were scheduled to present that in December, we will provide the complete rollout plans and a detailed overview of the technology and its revenue model.

Aaron Warwick: Okay. So looking at December time frame for that? And is that where you have you had mentioned the super model before, I think, on the last call. And is that for a specific brand? Or is that as part of the social commerce platform or both?

Robert D’Loren: It’s both. It’s both. We would expect all of our brands to be participating on the social commerce platform. And then, of course, many third-party brands as well. And we hope to be able to make the announcement before the Christmas holiday was about who that supermodel is. Of course, the planned launch is in March of ’24, and HSN doesn’t want to get too far out ahead of the launch.

Aaron Warwick: The launch of what is in March 2024?

Robert D’Loren: The launch of our super model.

Aaron Warwick: Final thing for me, I guess, is that you do have that $5 million available now. You’re talking a lot of good things happening, expected to happen in the fourth quarter and beyond and even profitability next year. Has there been any thought given especially at the current levels to potentially stock buyback or anything like that?

Robert D’Loren: So the answer to that is yes. It is something that we’re looking at carefully. And I think we need to get a read on the launch of the live stream platform, and that will, to some extent, will guide us in when and the size of some type of stock buyback program if we decide to do that.

Aaron Warwick: I guess one more that came to mind here, if you don’t mind. There was seemed to be quite a bit of heavy selling way beyond what is normal. Is there any idea what was going on for about a month or so?

Robert D’Loren: Yes. We when we acquired Halston from HOCO and their partner, there was an indemnity bucket that was formed. The collateral in that indemnity bucket was shares of Xcel that were held by HOCO, and they settle their litigation and shares were sold to realize on the indemnity bucket, and that’s what it was. So there was a lot of pressure on the stock while that selling was happening.

Operator: [Operator Instructions] Next question comes from the line of Walter Schenker of MAZ Partners.

Walter Schenker : Actually, my main question was just asked by Aaron, which is given an asset-light model and expectation of profitability I – second – not second half would have asked the same question about a buyback. But as a holder, I think that’s a very good use given the discount to asset value, but my question was asked and answer so thank you anyway. Happy holidays.

Operator: There are no further questions at this time. I will now turn the call over to Bob D’Loren for some closing remarks.

Robert D’Loren : Thank you, operator. Ladies and gentlemen, Thank you all for your time this evening. We greatly appreciate your continued interest and support in Xcel Brands. And as always, stay fit, eat well and be healthy.

Operator: This concludes today’s conference call. You may now disconnect.