U.S. Markets closed

Edited Transcript of FH earnings conference call or presentation 14-Nov-18 9:30pm GMT

Q3 2018 XpresSpa Group Inc Earnings Call

New York Jan 9, 2019 (Thomson StreetEvents) -- Edited Transcript of XpresSpa Group Inc earnings conference call or presentation Wednesday, November 14, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Edward Jankowski

XpresSpa Group, Inc. - CEO & Director

* Janine Canale

XpresSpa Group, Inc. - Principal Financial Officer, Principal Accounting Officer & Controller

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

Conference Call Participants

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

* Keith Goodman

Maxim Group, LLC - SVP of Wealth Management

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

Presentation

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

Operator [1]

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

Greetings, and welcome to XpresSpa Group, Inc. Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

Before I turn the call over to the company for opening remarks, I need to advise you of 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 differences include those set forth from time to time in the company's SEC filings, including the company's report on Form 10-K for the year ended December 31, 2017, 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 a substitute for the results prepared in accordance with GAAP. For reconciliations of these non-GAAP financial measures to 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 Ed Jankowski, CEO of XpresSpa. Ed?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [2]

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

Thank you, operator. Please note that I'm joined this afternoon by Janine Canale, our Controller and Principal Financial and Accounting Officer. Janine will walk through our third quarter financials momentarily.

As you may have already read in our joint press release on Monday and our earnings press release issued earlier today, Calm, the leading app for sleep, meditation and relaxation, is making a strategic investment in XpresSpa of up to $3 million in preferred equity.

Calm is funding $2 million of the $3 million of preferred yesterday and will fund the remaining $1 million by December 31, 2018, subject to compliance with the operating agreement. The convertible preferred equity has a 7-year maturity and is convertible at $0.62 per share. This is a significant premium to our current market price and demonstrates the inherent value of our industry-leading platform.

Our intention is to use these funds and our new partnership to enhance XpresSpa customer experience in a number of different ways, including raising our brand's profile across new and existing markets, elevating the assortment of retail products and upgrading facilities. In doing so, we will further our mission of giving busy travel -- travelers wellness and the opportunity to destress while on the go.

Calm is led by cofounders and CEO, Mike Acton Smith and Alex Tew. It was named Apple's 2017 iPhone App of the Year and boasts more than 35 million downloaders to date, averaging 75,000 new users daily. We view Calm's investment in XpresSpa as demonstrative of their confidence in our business model and interest in leveraging their brand across our health and wellness presence. As you know, we not only have a unique offering and value proposition, but over the past 14 years, we have become the leader in providing premier wellness solutions in 30 minutes or less.

We also operate some of the most valuable real estate in retail, which is driven by the high volumes of traffic that we experience across major airport hubs. XpresSpa commands 50% of U.S. market share in the fast-spa format and roughly 1 million transactions a year.

Beginning yesterday, Calm is offering its flagship products, which is the Digital App Subscriptions, Sleep Mist and the Calm Book at all 52 domestic locations, reflecting yet another transformation of quick to brick that is taking the digital to physical. Other examples including leading companies such as Amazon, which intends to open 3,000 Amazon Go stores by 2021; or Warby Parker, which started in an online eyewear business and now operates 90 retail locations.

We are extremely attracted to this partnership primarily for 2 reasons. First, we will now gain access to their substantial and growing subscriber base who, like our existing customers, are interested in health and wellness, and we'll be offering them a host of in-store benefits and treatments. This is particularly timely as we move into the busy holiday season.

XpresSpa and Calm are teaming up to reduce traveler stress by providing Calm subscribers with a wellness refuge to ease their anxiety and relax through promotional offers to utilize our fast-spa services. We will also be promoting Calm subscriptions within our spas as part of our revenue-sharing agreement. Ongoing, we will utilize XpresSpa loyalty program to drive subscribers to Calm and vice versa, enhancing retention and increasing revenues for both brands. We have been increasing our focus on our loyalty program since early this year, and we'll now have additional tools to incentivize repeat client visits.

Second, we have been working diligently over the past year to improve the quality and assortment of our retail products that we offer our customers. Our intention, of course, is to grow this higher-margin component of our revenue base, and we have been training our staff to support these add-on sales. We believe that Calm flagship products will go a long way to positively affect this goal.

In summary, this partnership is a great step forward for XpresSpa, providing us with revenue opportunities that we could not have realized on our own.

Turning now to the third quarter. Our performance reflects our continued traction in driving operational excellence into our spas through refined labor model and greater contribution of retail sales to our revenue mix at 20%, while reducing store level and corporate overhead cost. In fact, we now have narrowed our consolidated operating and adjusted EBITDA losses for 3 consecutive quarters in the same period last year.

Despite only a modest increase in our top line sales, we achieved our highest store profit margin of the year, which expanded to 22.9% during the third quarter from 18.2% compared to the same period last year. This was accomplished through increased contribution of retail product sales to our revenue mix and tremendous improvements in our staffing efficiencies through our new scheduling tool.

Our new POS system is also providing us with much better operational control over variable components of our model through real-time information. We also made headway in reducing overhead cost as part of our evolution to a pure-play health and wellness service company by flattening our corporate structure and further rightsizing the organization for incremental expense savings and avoidance this year.

Inclusive of costs that we consider onetime in nature, G&A fell $237,000 year-over-year to $3.9 million. But if we exclude a total of $452,000 in costs for nonrecurring expenditures, G&A would have declined 16.3% versus the third quarter in 2017, a remarkable achievement.

Since embarking on the plan earlier this year, the combination of these stores and corporate-level efforts have significantly reduced our consolidated operating and adjusted EBITDA losses and remain a priority for our leadership team as we work towards achieving positive cash flow and profitability.

In late August, we opened your third location in Hartsfield-Jackson Atlanta Airport in Concourse D. We have already been operating in the world's busiest airports since 2009 in Concourse A and Concourse C, and it remains one of our most successful markets. Our success in penetrating existing airports speaks to the value airport partners see in our luxury spa offering, which is complementary with their strategy of enhancing retail and service offerings. We also remodeled one spa in Washington Reagan National Airport during the third quarter.

Inclusive of these Atlanta locations, we have opened a total of 7 spas this year: in Pittsburgh Terminal B; Raleigh Durham Terminal 2; Westfield World Trade Center in New York City, which is our first off-airport spa; and the LaGuardia Terminal B, C, along with Houston Terminal A.

Although we will not be opening any additional spas through the end of the holiday season, we have several high-priority new store openings planned for next year, such as Concourse E and F in Atlanta, along with several others, including one that may be operated by a franchise.

Our focus remains on thoughtful and focused capital allocations so that we can maximize our return on investment for our shareholders. And while we have nothing definitive to announce at this time, we have similarly been making progress with respect to implementing our franchising model for smaller airports and look forward to finalizing and communicating these plans in the near future.

Looking ahead, our intention is to build on what we have already accomplished this year in refining our labor model, increasing our process efficiencies to maximize both store level and overall profitability, while continuing to explore means to reduce our corporate overhead. Of course, we also intend to leverage our partnership with Calm for our mutual success. In doing so, we are putting XpresSpa in a position to achieve positive adjusted EBITDA and positive operating cash flow.

I will now turn the call over to Janine for our financial review.

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

Janine Canale, XpresSpa Group, Inc. - Principal Financial Officer, Principal Accounting Officer & Controller [3]

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

Thank you, Ed. For the third quarter ended September 30, 2018, we generated revenue of $12.9 million, representing a slight increase of 0.5% compared to the prior year 3-month period.

The revenue increase was due to 6 additional XpresSpa locations opened year-over-year as we ended the third quarter 2018 with a total of 57 XpresSpa locations. This increase was offset by a decrease in comparable store sales.

Comparable store sales fell 3% overall, which was largely due to airline reconfiguration and enplanement changes in 3 of our key terminals, which had a direct impact on traffic and, ultimately, revenue.

On a sequential basis, comparable store sales improved 0.5%, marked by a 1.9% improvement at domestic spas, while international spas turned negative as they lapped a formidable gain from the prior year period.

Cost of sales decreased 4.7% to $10 million from $10.5 million in the prior year. Notably, our labor cost declined 9.6% as a percentage of revenue due to efforts to optimize scheduling. Decreased labor costs were partially offset by higher product and other operating costs because of our shift to a higher retail mix. We have, however, been able to reduce warehousing and shipping charges as we completed the transition of inventory sourcing to our strategic partner.

We generated a 28.5% increase in store operating profit to $3 million compared to $2.3 million in the prior year period, while store margin increased to 22.9% from 18.2% in the prior year.

General and administrative expenses were $3.9 million, representing a 5.7% decrease compared to the prior year 3-month period, and as a percentage of revenue, fell to 30.5% versus 33% in the prior year.

We are clearly making traction in reducing our administrative costs though streamlined processes at the corporate level, but also incurred a $194,000 in lower stock-based compensation year-over-year.

Notably, contained within our general and administrative expenses this quarter was one-time professional cost of $348,000 and one-time project cost of $104,000 related to the build-out and implementation of a business analytics tool. If we were to adjust for these nonrecurring expenses, our G&A line would have been closer to $3.5 million, reflecting a 16.3% decrease versus the third quarter of 2017.

Operating loss from continuing operations narrowed to $2.9 million in the third quarter from a loss of $3.5 million in the prior year. The third quarter operating loss includes $1.9 million of noncash depreciation and amortization, $0.5 million of one-time costs and $0.2 million of stock-based compensation. Excluding these costs, adjusted EBITDA loss was $360,000, which compares favorably to an adjusted EBITDA loss of $610,000 during the third quarter of 2017.

Rounding out our P&L discussion. Interest expense rose to $624,000 from $183,000 in the same period last year. This primarily reflects $394,000 in amortization of debt discount and debt issuance cost, $48,000 of interest related to the convertible note and $183,000 of interest on the debt.

Comprehensive loss from continuing operations was $3.1 million, reflecting a $746,000 improvement from the third quarter 2017. Our loss per share fell to $0.11 from $0.20 in the prior year.

Highlights from our balance sheet and cash flow statement include current assets of $4 million and cash and cash equivalents of $2.5 million. Our $9.2 million in current liabilities included $1.6 million in short-term convertible note, for which principal repayment may be made in common stock at our discretion, and $1.7 million in obligations that we'll not settle in cash, and an additional $465,000 of liabilities that are not expected to settle in the next 12 months.

I will now turn the call back over to Ed for some concluding remarks.

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [4]

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

Thank you, Janine. In closing, we are very excited by our new partnership with Calm and for what their investment in XpresSpa means for the future of our company in capturing more health and wellness discretionary dollars.

We are still a company in a transition, but are creating a stronger foundation for the future by capitalizing on our position as the leading on-the-go spa experience provider through new avenues that are complementary to our core competencies, pursuing growth through our existing XpresSpa platform, improving our store model from labor optimization, which is leading to expanded operating margins and streamlining our G&A. These efforts, we believe, will lead to sustainable profitability and positive cash flow over the long term.

We look forward to updating XpresSpa shareholders on our pursuit to enhance shareholder value on our next conference call. Thank you.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) The first question comes from [Anthony Grillo], a private investor.

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

Unidentified Participant, [2]

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

Tony here. Can you go through a little bit in greater detail what the Calm preferred means when you say it matures in 7 years for purposes of how that -- what actually happens over the time horizon of the 7 years and then the maturity of a preferred stock?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [3]

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

We -- when we first was -- were in conversation with Calm, we had -- Tony, we had asked them to buy common stock originally, and they felt the need of -- for a convertible preferred structure at the premium of $0.62. So as I said, it is a 7-year period to convert. The bottom line is that was what they were looking for.

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

Unidentified Participant, [4]

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

So in -- we understand. So in 7 years, it converts at -- it automatically converts at $0.62, which is 4x, whatever, 3x the price it's selling at now?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [5]

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

Exactly.

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

Unidentified Participant, [6]

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

Okay. All right. And is there an accrual rate on the preferred or not?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [7]

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

I don't believe so.

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

Unidentified Participant, [8]

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

Okay. All right. And with -- 1 other question while I have you. With regard to the 3 locations where enplanements change and the like, give us a little color on whether that is a very abnormal thing? Or is just the kind of thing that the company has to deal with more frequently than just once every long time?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [9]

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

Tony, it's literally at the airport discretion. The 3 airports, which are pretty big airports for us, were LAX, where literally the LAX, the third quarter of last year, literally changed every single airlines and the terminal that we're in. So we were in a very, very busy Delta terminal, and they ended up moving Delta to another terminal, and our terminal turned into an overflow terminal for American, which really impact enplanements. JFK Terminal 4A was the -- a wing in Terminal 4, that was a Virgin America. When it merged with Alaska Airlines, they moved over to Terminal 7 and the enplanements were -- suffered dramatically in Terminal 4A. And then in LaGuardia, we were -- we were in LaGuardia C and our terminal was American Airlines, was one of the terminals that American went out of and America consolidated all of their flights into Terminal B, and what ended up happening is we just became -- our terminal became an overflow for Delta.

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

Operator [10]

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

Our next question comes from Keith Goodman with Maxim Group.

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

Keith Goodman, Maxim Group, LLC - SVP of Wealth Management [11]

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

Just want to follow up on that, on the Calm investment. The money, so basically you're not paying them back, they're just getting equity?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [12]

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

Exactly.

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

Keith Goodman, Maxim Group, LLC - SVP of Wealth Management [13]

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

Okay. Right. Great. And the relationship with Calm, so they're basically going to -- they're going to be selling some of their retail products in your store. Do you get a royalty on that? Or how does that work?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [14]

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

Yes, we split profit share with that, with about a 50% margin on anything that we sell. We are profit -- we're also sharing revenue on any subscriptions that we sign up at -- every single subscription card that we get out to anyone that walks by or enters our spa can be downloaded with a code that traces that subscriber back to our store and the subscriptions are currently $60. They will keep $40 and they will give us $20 for every one that -- every subscriber that signs up in XpresSpa.

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

Keith Goodman, Maxim Group, LLC - SVP of Wealth Management [15]

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

Got you. Got you. Okay. Great. And your margins were up pretty nicely. I guess, that's a function of having more of a retail component in your store?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [16]

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

It was definitely the fact that we were 20% retail in the third quarter, but our store contributions were one of the highest that it's been at, at 22.9%. That was also directly impacted by our control of payroll through the scheduling model that we rolled out in the third quarter, and it really worked very, very well to get our store margins up.

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

Operator [17]

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

The next question comes from [Will Martin], a private investor.

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

Unidentified Participant, [18]

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

First one for me, a little bit more on the Calm partnership. What attracted Calm to want to partner with XpresSpa as their first investment in brick-and-mortar?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [19]

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

Well, I think the opportunity for them obviously to go from digital into brick-and-mortar and to have 52 prime locations in the health and wellness space in some of the busiest airports throughout the U.S. was very, very appealing to them. We have 1 million customers that we actually service every year and hundreds of millions of customers that pass through the airports and by our spas on an annual basis. So this was really a great opportunity for them and for us, obviously, to really join hands and to take care of our -- the weary travelers from a meditation, relaxation and sleep mode within the XpresSpa brand.

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

Unidentified Participant, [20]

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

Got it. It makes sense. And then can you talk about how Calm's integration into XpresSpa locations will drive revenue for you guys?

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

Edward Jankowski, XpresSpa Group, Inc. - CEO & Director [21]

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

Yes. We -- obviously, with the 35 million users and the 1 million subscribers, we will be communicating with them along with our own loyalty members to really cross-promote. And we have a whole list of different offerings that we will be giving to the Calm users on a monthly basis. We -- when we kicked this off on Tuesday, actually any user -- Calm user can come in and get a free gift with purchase, a free luggage tag. And the subscribers can come in and get a free 10-minute massage chair experience, which usually runs about $20. And we have a number of different offers that we will be communicating with both our loyalty members and their users on a regular basis.

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

Operator [22]

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

This concludes the question-and-answer session and today's conference call. You may disconnect your line. Thank you for participating, and have a pleasant day.