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Edited Transcript of FH earnings conference call or presentation 28-Mar-19 8:30pm GMT

Q4 2018 XpresSpa Group Inc Earnings Call

New York Apr 9, 2019 (Thomson StreetEvents) -- Edited Transcript of XpresSpa Group Inc earnings conference call or presentation Thursday, March 28, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas Satzman

XpresSpa Group, Inc. - CEO & Director

* Janine Canale

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

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Conference Call Participants

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* Will Coughlin

- Private Investor

* Michelle Merino

- Private Investor

* Ryan Maguire

- Private Investor

* Stephen Young

- Private Investor

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Presentation

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Operator [1]

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Greetings and welcome to XpresSpa Group, Inc. Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. Today's call -- today's conference call will be hosted by Mr. Doug Satzman, CEO; and Ms. Janine Canale, Controller and Principal Financial and Accounting Officer.

Before I turn the call over to Mr. Satzman 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 our -- in or suggested by such forward-looking statements.

Important factors that may cause differences to -- 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 ending December 31, 2018, which will be filed shortly and other current and periodic reports for the company files -- 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 used in evaluating its performance. The presentation of these measures and other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

For the reconciliations of these non-GAAP financial measures to GAAP measures and discussion of why the company considers these measures useful, please refer to the company's earnings release.

With that, I'd like to turn the call over to Doug Satzman, CEO of XpresSpa. Doug?

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Douglas Satzman, XpresSpa Group, Inc. - CEO & Director [2]

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Thank you, operator. I appreciate everyone joining us today. I am very excited to be here as XpresSpa's new CEO for my inaugural conference call. I intend to use our time together this afternoon to briefly share with you my relevant career experiences; what attracted me to the company; and what I have learned over the past several weeks in meeting and speaking with our team members; and finally, what are longer-term priorities and near-term focus areas for the business.

As I'm sure you can all appreciate, I am highly confident that over time, we will enhance the guest experience, improve our financial condition and capitalize on the many opportunities ahead.

By way of background, I have worked as a C-level executive and have a 20-plus year track record across various roles at blue-chip multinational retailers across the U.S. and EMEA. I've led successful business transformations, characterized by significant improvements in sales and profitability. In doing so, I have also prioritized the development of human capital and talent because I've learned how important they are to an organization's health and competitiveness.

Before coming to XpresSpa, I served as the CEO of Joe Coffee Company, a premium specialty coffee chain with over 20 company-owned cafes in New York City and Philadelphia. During my tenure, I developed a multichannel national growth plan, created infrastructure and assembled a leadership team after the first private equity investment in a 15-year-old family business.

Prior to that, I was the CEO for the U.S. business of Le Pain Quotidien, a premium Belgian bakery and full service restaurant chain with over 90 company-owned restaurants across the U.S. and over 20 -- 250 across the globe.

While at LPQ, I developed a long-term growth strategy, focused on building organic sales, opening new stores in new markets, creating a multichannel growth platform and leveraging technology. I also reorganized the corporate and field teams, which resulted in improved customer service, improved store-level support and it reduced costs.

Earlier in my career, I've spent 14.5 years at Starbucks Coffee Company, with roles of increasing responsibility across the U.S., Europe, Middle East, Russia and Africa, culminating in being named Senior Vice President, EMEA business development and channel operations.

Along my direct responsibilities was leading the travel vertical, including operations and business development across all airports and train stations and significant -- with significant revenue, profit and growth.

In short, these experiences have shaped my business philosophy and approach, and I intend to leverage what I've learned and accomplished at these companies in my new role at XpresSpa as the new CEO.

In fact, there are actually 2 primary considerations that attracted me to XpresSpa that, I believe, are important to share with you. First, I saw an opportunity to lead an exciting global brand that is the industry leader within the growing health and wellness industry, which controls some of the best airport real estate in the world. As you know, XpresSpa is the leading airport retailer of spa services and related products with unique offerings and a unique value proposition commanding approximately 50% market share in the U.S., nearly 3x the number of domestic locations as its closest peer. Both within the U.S., internationally, this provides us with a great foundation upon which to build given the increased consumer demand for spa services and related wellness products.

Second, as the company's financial performance clearly demonstrates, we are underperforming our potential and by extension, I believe, very undervalued by the investment community. With all due respect to the board and prior management what I have -- what I believe has been lacking is clear vision, effective leadership and the implementation of sound business disciplines. These are all among the areas that I've already begun to tackle and where, I believe, I can be most effective in strengthening the brand and positioning it to achieve.

In broad strokes, I already see our early -- our biggest opportunities as the following: one, elevate the customer experience, which I believe I can help with, with my hospitality background; two, develop a people-first culture, again, which I feel very confident I can cultivate and nurture by leveraging my strong people culture employer history; three, activating new partnerships inside and outside the spas, which I view as a natural extension of the brand and intend to leverage my business development deep background; and four, bringing health and wellness innovation to our spas, such as product, services and new technology, again, relying on my innovation track record across 3 major brands.

Over the past several weeks, I participated in a listening tour, traveling in the field to various spas across the country, speaking with both our team members and customers. Through these interactions, I've come away with the following themes: one, we have great real estate in some of the best airports with direct access to the most desirable consumer segments; two, our people are engaged and highly skilled professionals, but there is a clear opportunity to move from the independent contractor mentality to an XpresSpa team mindset in some airports; three, the slimmed-down and retooled field leadership team put into position within the last 6 months is starting to gain traction; four, our therapists and technicians are consistent in providing exceptional services, but there are clear gaps in the overall customer experience; five, our loyalty program is completely underutilized and there's an opportunity to focus on increasing frequency of our best and highest spend customers; six, finally, we have had significant problems with our retail supply chain, which has resulted in shortage -- shortages of some of our best products.

Given this background, we view 2019 as a transition year where we will focus on getting the core business healthy. In the near term, my focus will be: growing sales by staffing up through recruiting, training this new staff and then retaining our top employees; second, building transactions through improved scheduling practices, further development of our loyalty program and launching an XpresSpa app; three, increasing our average ticket by fixing our retail supply chain issues and upselling services at a higher rate; and four, selectively opening high-performing new stores, including the launch of our first franchise spa in Austin International by Q3 this year.

Of course, growing sales is only half the battle, as we also need to do a better job controlling costs, therefore, we need to be managing our labor more effectively, further monitoring and work on our G&A and then relocating our corporate office. We have a very expensive office, whose lease is due later this year, but we will remain in Manhattan.

Given my short time with the company, I am not yet in a position to share any more specifics on these topics, but for now, I considered it important to convey my thought process and near-term priorities. I am looking forward to setting the plan in motion and sharing more details with you at a later date.

Now with respect to Q4, it was, obviously, a difficult and disappointing quarter and makes what I've laid out already even more timely. Our revenue fell due to the schedule of openings and closures relative to a year-ago period as well as our lower comparable sales.

Moreover, store margin fell due to a higher product, supplies and other operating costs, although we continue to make progress by controlling labor costs.

G&A costs, an area of the business where we made greater progress over the previous 3 quarters, was still simply too high. These factors unfortunately led to nearly $0.5 million in negative adjusted EBITDA compared to roughly $0.4 million in positive adjusted EBITDA in the year-ago quarter. Janine will review the details momentarily.

I am sure that you will recall Calm, the leading app for sleep, meditation and relaxation, made a strategic investment in XpresSpa of $3 million in convertible preferred equity midway through the fourth quarter. As was said at the time, 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.

We now have access to Calm's substantial and growing user base with over 45 million downloads who, like our existing customers, are interested in health and wellness and are now offering them in a host of in-store benefits and treatments.

We're promoting Calm subscriptions within our spas as part of our revenue sharing agreement.

Ongoing, we're utilizing XpresSpa's loyalty program to drive subscriptions to Calm and vice versa, enhancing retention and increasing revenue for both brands.

Although we did not open any spas during Q4, we have several high-visibility new store openings planned for this year, along with the one in Austin Airport, which will be operated by our first franchisee. Our focus remains on thoughtful, regimented capital allocation so that we can maximize our return on investment for our shareholders.

To conclude, this will be an important transitional year at XpresSpa and we're going to be working hard to execute on the aforementioned priorities. While I'm not in a position to offer any definitive guidance, it is our intention to achieve positive adjusted EBITDA and positive operating cash flow in due time. And if we effectively execute against our road map, I'm confident we will ultimately get there.

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

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

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Thank you, Doug. Let me briefly review highlights from the full year financials before going into more detail on fourth quarter itself.

During the year ended December 31, 2018, we recorded total revenue of $50.1 million, which represents an increase of $1.3 million or 2.6% as compared to $48.8 million recorded in the year ended December 31, 2017. The increase in revenue was mainly due to the timing of the opening of new XpresSpa locations during the fourth quarter of 2017 and the first 3 quarters of 2018, which contributed to an incremental $1.9 million in noncomp store revenue.

Although we had 56 locations at both year-end periods, we had 57 locations as of September 30, 2018, compared to 51 locations as of September 30, 2017.

During 2018, we generated 83% of our revenues from services and 17% of our revenues from retail sales. Note that comparable store sales also decreased 3% on an annual basis.

Total cost of sales of $39.5 million represented a 1.2% increase from the prior year and was consistent with the increase in revenues. Cost of sales increased due to higher labor and occupancy costs due to the opening of the new stores during the fourth quarter of 2017 and the first 3 quarters of 2018. However, this was partially offset by initiatives taken to streamline processes and reduce store-level costs, which included reduced warehousing and shipping charges, as we completed the transition of inventory sourcing to our strategic partners during the first half of 2018.

Goodwill impairment of $19.6 million was related to a number of triggering events early last year, such as: our rebranding efforts to a pure play health and wellness services company; the decline in our stock price; and management transition.

General and administrative expenses decreased to $16.2 million from $16.6 million in 2017. This decrease is a result of streamlined processes at the corporate level to reduce administrative costs as well as a $1.8 million reduction in stock-based compensation expense to $0.9 million from $2.7 million in the prior year. The overall decrease in G&A was partially offset by $2 million in costs related to nonrecurring severance, professional fees and project costs.

Operating loss from continuing operations increased to $34.7 million from $14.7 million, inclusive of the $19.6 million in goodwill impairment and $2.1 million of fixed asset impairment.

Now turning to the fourth quarter ended December 31, 2018. Revenue was $11.5 million, representing a 2.3% or $8.3 million decrease compared to the prior year's 3-month period of $11.8 million. The revenue decrease was due to lower comparable store sales, along with a slightly lower revenue contribution from noncomp store locations.

Cost of sales decreased to $9.3 million from $9.4 million in the prior year. Notably, our labor costs declined 8.2% as a percentage of revenue due to efforts to optimize scheduling. However, decreased labor costs were more than offset by higher product and other operating costs and, to a lesser extent, higher occupancy costs as a percentage of revenue. Higher product and other operating cost rose due primarily to higher outside labor cost, while occupancy cost rose due to sales deleveraging on a lower comparable store sales and higher rents at newly opened locations.

We generated gross profit of $2.2 million compared to $2.4 million in the prior year period, while gross profit margin decreased to 19.1% from 20.4% in the prior year.

General and administrative expenses were $3.8 million compared to $3.5 million in the prior year 3-month period. Year-over-year was relatively flat, although our fourth quarter G&A on an absolute dollar basis represented the lowest of the entire 2018 and marked a $0.4 million (sic) [$0.1 million] sequential improvement from the third quarter. In fact, we made traction throughout the year in reducing our administrative costs through streamlined processes at the corporate level.

Operating loss from continued operations increased to $5.7 million in fourth quarter from $2.7 million. The fourth quarter operating loss includes $4.1 million of noncash depreciation, amortization and impairment of fixed assets, $1 million in merger and acquisition, integration and onetime costs and $0.2 million in stock-based compensation.

Highlights from our balance sheet and cash flow statement include current assets of $5.8 million and cash and cash equivalents of $3.4 million.

Our $16.7 million in current liabilities included $2 million in short-term convertible notes for which principal repayments may be made in our common stock at our discretion and $1.7 million in obligations that will not settle in cash and an additional $0.5 million of liabilities that are not expected to settle in the next 12 months.

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

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Douglas Satzman, XpresSpa Group, Inc. - CEO & Director [4]

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To conclude, I am extremely excited to be here today supporting our approximately 700 XpresSpa team members. With passion and commitment, we plan on dissecting every aspect of the business, so we can provide the best quality, value and hospitality for our guests. Our brand has so much potential, which makes me bullish about the future of this company and which is why I am here.

We will work closely with the board on refining our approach to the business in both the short term and the long term. I'll put together a very detailed strategic plan to maximize the results of our existing spas, identify strategic opportunities and expand wisely.

Our objective is to enhance value for our key shareholders and stakeholders, our guests, our team members, our vendor, supply partners and of course, our shareholders.

And with that, we'll now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of [Will Coughlin], a private investor.

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Will Coughlin, - Private Investor [2]

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When can we expect to hear more specifics on your near-term priorities? And will those involve any incremental costs and investments?

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Douglas Satzman, XpresSpa Group, Inc. - CEO & Director [3]

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Thank you for the question. I'm not in a position to provide any further detail other than what I outlined on my near-term priorities and then highlighting the longer-term opportunities. We have just started to put some of these plans in motion, but frankly, I've been here 4 or 5 weeks and most of the time has been spent out in the field and spending time with the leadership in the office to develop this view.

And I think the second part of your question was incremental costs or investments. There's nothing that I'm planning right now beyond making our investments in, hopefully, profitable new stores and things that are already lined up.

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Operator [4]

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Our next question from the line of [Michelle Merino], a private investor.

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Michelle Merino, - Private Investor [5]

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Doug, congratulations on the new role. Given that we are essentially done with Q1, can you tell us about the performance, if anything?

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Douglas Satzman, XpresSpa Group, Inc. - CEO & Director [6]

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Well, I can't tell you that much. We're still working on our books for the quarter. We haven't even closed Q3 yet. But what I can share is our top line sales are performing better than they did in Q4. We're still in a negative comp environment, but the gap is closing. And it gives me continued optimism that some of the plans set previously are coming through influencing this and helps me you look forward to Q2, Q3 and Q4.

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Operator [7]

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Our next question comes from the line of [Ryan Maguire], a private investor.

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Ryan Maguire, - Private Investor [8]

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You mentioned activating new partnerships due. Can you mention any specifics around that?

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Douglas Satzman, XpresSpa Group, Inc. - CEO & Director [9]

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Yes, I'm not in a position to disclose any deals that might be in the works, but what I can share, what this organization has learned from our partnership with Calm is there are win-win opportunities with others in -- directly in the health and wellness space and maybe outside that are all after that very desirable consumer segment that is in the airports in the biggest cities, walking by our space, but also using our services. And there are several other companies that are interested in participating and partnering to have access to these customers, whether it's in our spas or taking our brand outside of our spas and working with the airlines and credit card companies, who have loyalty programs that reward their members, again, that very desirable top 1% of our economy in finding ways that our brands can be part of that reward and recognition program outside our spas.

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Operator [10]

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Our next question comes from the line of [Stephen Young], a private investor.

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Stephen Young, - Private Investor [11]

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Doug, congrats, again, on your new role. Just a quick question from me. How long do you think it'll take before you can put your plan into action and we can begin seeing some tangible results?

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Douglas Satzman, XpresSpa Group, Inc. - CEO & Director [12]

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Yes, I'd like to be able to tell you next month, but the reality is it takes some time. We have some initiatives that should have a very quick impact, but some are going to take a couple quarters. And we have a long-term view on this business to make good sound business decisions, but at the same time, we recognize the urgency in picking up some quick wins. So again, I can't forecast when you'll see tangible results, but know that we're approaching it with a combination of short-term quick initiatives, but still building a long-term muscle that will continue this company for the next 10 years.

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Operator [13]

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We have no further questions at this time. I'd like to turn the floor back over to management for closing comments.

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Douglas Satzman, XpresSpa Group, Inc. - CEO & Director [14]

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Well, I think you got all my best stuff. So thank you, everyone, for your participation today. Have a nice day, and I look forward to engaging with you next quarter.

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Operator [15]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.