U.S. Markets closed

Edited Transcript of FH earnings conference call or presentation 15-May-19 8:30pm GMT

Q1 2019 XpresSpa Group Inc Earnings Call

New York May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of XpresSpa Group Inc earnings conference call or presentation Wednesday, May 15, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Douglas Satzman

XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings and welcome to XpresSpa Group, Inc. First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

Today's conference call is being hosted by Mr. Doug Satzman, CEO. Before I turn the call over to him, I need to advise you for the following. Comments made on today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current assumptions and opinions and involve a variety of known and unknown risks and uncertainties. Actual results may differ materially from those contained in or suggested by such forward-looking statements.

Important factors that might cause such difference includes those set forth from time to time in company's SEC filings, including the company's report on Form 16 -- 10-K for the year ended December 31, 2018, and report on Form 10-O (sic) [10-Q] for the 3 months ended March 31, 2019, and other current and periodic reports the company files with the SEC.

During today's call, the company will refer to certain non-GAAP financial measures, which it believes can be useful in evaluating its performance. The presentation of these measures or other information should not be considered in isolation or as substitute for results prepared in accordance with GAAP. For reconciliation of these non-GAAP financial measures, the GAAP measures and a discussion of why the company considers these measures useful, please refer to today's earnings release.

With that, I'd like to turn the call over to Mr. Doug Satzman.

--------------------------------------------------------------------------------

Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [2]

--------------------------------------------------------------------------------

Thank you, operator, and thank you all for joining us today. I'd like to begin by providing a brief business update and then reiterate our near-term and longer-term focus areas. Afterwards, I will review our first quarter financial results in greater detail before concluding the call with a few closing remarks.

Since joining the company 3 months ago, I've been working diligently with the team to prioritize initiatives geared towards enhancing the customer experience, turning around negative comparable store sales and identifying cost savings measures to improve our overall financial condition. We are obviously still very early in that process and would therefore like to remind everyone that 2019 will be a transitional year at XpresSpa. But our goal is simple, we need to implement sound business discipline to get the core business healthy while elevating the customer experience and preparing to capitalize on the many opportunities ahead.

Encouragingly, we are beginning to see some modest green shoots that we hopefully can build upon for the next few quarters and beyond. Specifically, our comparable store sales decrease of negative 1.3% during the first quarter reflected a sequential monthly improvement through the first 3 months period of the year, which also included our first positive month of comparable store sales growth in over 18 months during March with a positive 0.9%.

In fact, April and the beginning of May have continued that momentum with April yielding a positive 4.6% same-store comp. And we are now actually running positive on a year-to-date basis through this week with numbers between 0% and 1% positive for the year.

Turning to margin improvement and cost controls, we also made progress during the first quarter. At the store level, we benefited on a year-over-year basis from 2 store closures resulting in lower occupancy cost and also streamlined processes and reduced labor, products and operating costs due to various cost-saving initiatives. In fact, we can foresee total cost of sales as a percentage of revenues continuing to decline as a result of the store level performance improvements, which we continue to prioritize. At the corporate level, we reduced administrative costs and incurred lower stock-based compensation expense, which led to a 22% decrease in G&A expenditures. These efforts resulted in a significant $1.1 million narrowing of our adjusted EBITDA loss to $364,000.

In our last conference call, I communicated our near-term priorities and would like now to provide some updates to what we've accomplished and seek to accomplish over the next few months. First, staffing up through recruiting, training and retention. We're beginning to shift the mindset of some of our staff from highly skilled independent contractors to a unified XpresSpa team at every spa. This is critical to enhancing their job satisfaction and strengthening retention but also important in terms of attracting the very best people to our brand. We are also beginning to gain traction from the retooled field leadership team that was put in place last fall.

Second, building transactions through scheduling, loyalty and launching an XpresSpa app to fill in gaps with the overall customer experience. What we've accomplished this month? We will be rolling out our new Phase 1 concierge software that will capture more customer data and will enable us to better schedule services including creating a digital queue and texting customers when we are ready for them. We believe this will lead to greater customer satisfaction and higher retention as we minimize walk away.

In the summer for Phase 2, we'll be rolling out a new XpresSpa consumer app, which will enable customers when arriving at the airport to schedule services before they get through security and reach the spa. We will also better track loyalty, so we can increase the frequency of our best, high spend customers.

We are also planning to launch a new online training tool that incorporates gaming methodology, which increases participation, effectiveness and retention of training material. We will start with our concierge population for our first investment into improving our customer experience and further supporting upselling behaviors.

Third initiative, increasing our average ticket by fixing our supply chain issues and upselling services. I'm pleased to report that we have largely addressed our product assortment issues midway through the first quarter and now offer our customers an array of items that they are interested in purchasing.

And the fourth initiative that I highlighted was selectively opening performing new spas. We have several highly visible new spa openings planned for this year. These include new spas in Atlanta, Philadelphia and Las Vegas where we already operate one or more spas. And Austin, we'll be opening our first franchisee spa and a company-owned spa. Our focus on thoughtful and regimented capital allocation so that we can maximize our ROI for shareholders is paramount.

For the remainder of the year, we will also refresh our brand with 2 to 4 renovation projects in addition to the 3 we have already completed. This is both an offensive and defensive move to elevate the XpresSpa customer experience.

And of course, growing sales is only half the battle as we also need to do a better job controlling costs as I mentioned earlier. I am encouraged and energized by our biggest longer-term opportunities, which include elevating the customer experience, developing a people-first culture, activating new partnerships and bringing health and wellness innovation to our spas as products, services and technology. Capitalizing on these items is ongoing and, in some cases, qualitative in nature but I know that we can demonstrate meaningful traction over time.

So now let me review the first quarter itself. Revenue was $12.2 million, representing a decrease of 2.9% or $0.4 million compared to the prior year 3-month period of $12.6 million. The revenue decrease was due to a lower comparable store sales along with the loss of revenue from locations closed during renovation and net 2 less spas versus the prior year first quarter. We closed one spa during the first quarter itself.

Comparable store sales decreased 1.3%. Although I referenced earlier, our momentum built through the 3-month period resulting in a positive comparable store sales result in March with a positive 0.9%. Cost of sales decreased to $9.1 million from $9.8 million in the prior year due to reduced occupancy costs related to the closure of underperforming spas.

As of March 31, 2019, we had 55 locations compared to 57 locations as of March 31, 2018. Also contributing to the overall decrease in cost of sales was the cost savings initiatives we implemented of lower fixed labor costs and streamlined processes and reduced store level costs.

Gross profit, therefore, increased 10.9% to $3.1 million from $2.8 million in the prior year period. Gross profit margin increased 320 basis points to 25.6% and 22.4% in the prior year period. General and administrative expenses decreased 21.7% to $3.6 million compared to $4.6 million in the prior year 3-month period as we made traction in reducing our administrative costs, streamline processes at the corporate level coupled with the reduction in stock-based compensation.

Operating loss from continuing operations decreased to $2.8 million in the first quarter from $23.3 million. Recall that in the year ago period, we had $19.6 million in goodwill impairment, and adjusted for that, operating loss actually decreased by 24%. Adjusted EBITDA loss was $364,000 resulting -- reflecting a $1.1 million improvement compared to a $1.5 million adjusted EBITDA loss in the prior year.

Highlights from our balance sheet and cash flow statement include current assets of $5 million including cash and cash equivalents of $2.9 million. Our $17 million in current liability included $1.7 million in short-term convertible notes, of which the principal repayment may be made in common stock subject to certain conditions.

As we have previously disclosed, we will need additional working capital to support our growth and operations. We are also working on right sizing our capital structure to restructuring our outstanding debt to address our growing concern status, although there is nothing to announce at this time.

Let me review with a few concluding thoughts. This is a critical time at XpresSpa, but we are already making some progress dissecting, reevaluating our business and executing on the aforementioned priorities. These early signs of traction support my belief that we have an opportunity for success if we can continue making strides in these important areas.

We intend to achieve positive adjusted EBITDA and positive operating cash flow in due time. And if we can maximize the result of our existing spas, identify strategic opportunities and expand wisely, I'm confident we will get there. Our 700 team members are working hard every day to provide hospitality and a quality experience for our guests. I appreciate all that they are doing to support the brand. And finally, our objective to enhance value for our key stakeholders; our guests; our team members; our vendor and supplier partners; and, of course, our shareholders.

And with that, I will be happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question of the day comes from [Steven Calderon].

--------------------------------------------------------------------------------

Unidentified Analyst, [2]

--------------------------------------------------------------------------------

I have 2 questions, so I'll start with the first one here. How have you been able to turn around comp so quickly? And is it sustainable?

--------------------------------------------------------------------------------

Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [3]

--------------------------------------------------------------------------------

Thanks for the question. I've received the same question from my Board. And I'd love to say there is some magic that I brought to the table and there is initiative behind it, but really I attribute it to 2 things. One, we put a new middle management in the fall into place before I arrived. And many of them upgraded some of the spa managers -- management team we have in the airport. And when you have new operational leaders, it can take 3, 6 months before you start seeing results, and I attributed a part of the success there.

The other part, my first 6 weeks, I went out on a listening tour and visited over half the airports and spent several hours in each spa. And through this, I got my education into the XpresSpa business, but I think equally it did something for morale. And the feedback I've received is our field organization is feeling much closer to the support center and the top of the organization. And that's led to employee engagement. And when you have employee engagement with regular ongoing communication after that listening tour, which I provided, to kind of cheer them on and let them know I'm watching their results and encouraging them. And I think the combination of the 2 have helped lift up. And these are our softer skilled -- softer reasons, but I'm excited with the initiatives that we have planned that directly tie to increasing frequency of both our customers and our throughput. That's why I'm really excited to see what can happen.

--------------------------------------------------------------------------------

Unidentified Analyst, [4]

--------------------------------------------------------------------------------

Okay. Appreciate the color. And if I may, could you also discuss the Easter calendar shift between Q1 and Q2 and its impact on March and April?

--------------------------------------------------------------------------------

Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [5]

--------------------------------------------------------------------------------

Sure. So in March, we were comping over Easter weekend with a traditional week since Easter -- many Easter break vacations shifted into April and into Q2. So we did have some wind in our sail in March when we had a traditional business travel week comping against the vacation week. In April, I was prepared to gather the counter side and it really didn't impact us as much as I thought. In fact, as I shared earlier, our comp sales were even higher, positive in April than they were in March. So in some ways, I didn't see the typical trade-off when we move it from one fiscal period to another fiscal period based on how we handled demand.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And second question that we have is coming from [Ryan Moeller].

--------------------------------------------------------------------------------

Unidentified Analyst, [7]

--------------------------------------------------------------------------------

Doug, this is [Ryan Moeller]. Could you provide an update on the Calm relationship? And if you expect to renew the partnership before it expires in July?

--------------------------------------------------------------------------------

Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [8]

--------------------------------------------------------------------------------

Sure. Calm has been a very valuable strategic partner since they've come onboard. We are currently working with them on some new products to complement their offering that fits their brand that are really pretty cool. Again, we're not ready to announce them yet. But more importantly, our partnership expires this summer in July. And we are in conversations with them on terms to extend it. Both parties are interested, but we still need to finalize detail.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

And we have another quick question coming from [Michelle Corley].

--------------------------------------------------------------------------------

Unidentified Analyst, [10]

--------------------------------------------------------------------------------

Doug, so I noticed you have one franchise opening in Austin, but now you're also opening a company-operated spa in the same airport. I thought the strategy was for franchisees to open in smaller markets and for the company to concentrate on further penetrating existing airports. What has changed with the original strategy?

--------------------------------------------------------------------------------

Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [11]

--------------------------------------------------------------------------------

So the strategy remains as has been presented before. Franchisee network is well suited for the midsized and lower volume airport environment. But because we are a new franchisor and we believe that Austin airport can support 2 spa locations, we made the decision for the first time to open a company-owned alongside our franchisee in different terminals. And it's primarily there to help support our very first franchisee of a great start. We still have a lot to learn about being a franchisor as this is our first time. And I made the decision to have them open simultaneously where we can support our new business partner. And they have direct access to us to have a good first experience. And often, that first franchisee experience is critical in supporting future franchisees coming in. And long term though, our intent is not to have company-owned and franchisees in the same airport and eventually may sell that company-owned store to that franchisee as things develop over time. But no change in strategy signal.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question comes from [Will Lessing].

--------------------------------------------------------------------------------

Unidentified Analyst, [13]

--------------------------------------------------------------------------------

How many more closures are planned for this year beyond the one that was closed in Q1?

--------------------------------------------------------------------------------

Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [14]

--------------------------------------------------------------------------------

Well, as I shared before I've been looking at the new store pipeline to make sure we're only opening medium and high-volume stores. And I think we've had a history of being a bit opportunistic where we've opened. And as a result, we have a range of performance at the new stores and I've filtered it down to the ones that have the most -- the clearest path to having a good return on investment. Similarly, which I haven't talked much about, is I'm looking at the underperforming store class and where I can get out of contracts and leases without a penalty and close underperforming assets. We're going through that exercise now. In fact, we closed another store in the month of April. That was a loss-generating store. So how many more that we have to go this year? I'm not sure. We're going through the review now in context of a contract that we have. So I don't think it will be a significant number, but there are a few that dragged down the portfolio. And it's my best interest to wash those out of the system.

--------------------------------------------------------------------------------

Unidentified Analyst, [15]

--------------------------------------------------------------------------------

Got it. And on the remodeled, how much does it cost to do a remodel? What kind of sales lift do you project as a consequence of doing one? And how much downtime is involved?

--------------------------------------------------------------------------------

Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [16]

--------------------------------------------------------------------------------

Well, the remodel question is a funny one. We would like to think every time you invest capital into remodel, you're going to see a return on that investment. In my experience, you sometimes do. So when we're expanding services or offering something new, very often we see a uptick in sales and a return on that investment. But there's other times where you need to protect your brand and refinish carpets and walls and murals. And those may or may not see an increase in sales, but often -- you heard me before talking about offense and defense. We're often acquiring some contracts to renovate our stores, but regardless when we invest dollars, we try to do it very smartly. Again that's probably return on investment, but sometimes it's just protecting the brand and making sure we don't become uncompetitive. Certainly, it's a luxury service that we're providing to the traveler. And we need to ensure our environment is at the same level of our services.

You asked about how much do we spend. It ranged from $15,000 to $20,000 to $250,000. So it's really a wide range, and that can be attributed to kiosks that I have, much less expensive, of course, than very large stores on the other end of the spectrum. And in fact, in some of our contracts in the airport, they specify certain minimum dollar amount that needs to be spent. So we make sure we -- on our contract, very careful that we're not spending above the minimum unless there is a new sales-generating initiative that we're having.

And then I think the third part you said was how much downtime is involved. My goal is to have no downtime. So if we can do a remodel in the evening over multiple nights and we're still operating during the day, that's always a first choice. Sometimes we relocate it to a temporary situation to keep some level of sales and revenue going if there is more work. And there are times that we might have to close for a couple of weeks when we don't have the option to relocate to a temporary space and we're doing pretty material construction work. So always the goal is to minimize downtime, but it changes case by case.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

At this moment, we don't have any further questions. Thank you for joining the call today, and you may now disconnect the line.