U.S. Markets closed

Edited Transcript of XELB earnings conference call or presentation 9-Aug-17 9:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Xcel Brands Inc Earnings Call

Parsippany Aug 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Xcel Brands Inc earnings conference call or presentation Wednesday, August 9, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* James F. Haran

Xcel Brands, Inc. - CFO, Principal Financial & Accounting Officer and Assistant Secretary

* Robert W. D'Loren

Xcel Brands, Inc. - CEO & Chairman

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

Conference Call Participants

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

* Andrew M. Berger

SM Berger & Company, Inc. - MD

* Eric Martin Beder

FBR Capital Markets & Co., Research Division - Research Analyst

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

Presentation

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

Operator [1]

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

Good day, and welcome to the Xcel Brands Inc. Fiscal Second Quarter 2017 Investor Conference Call. 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 is being recorded.

I would now like to turn the call over to Andrew Berger of SM Berger & Company. Please go ahead.

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

Andrew M. Berger, SM Berger & Company, Inc. - MD [2]

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

Thank you, Melissa. Good evening, everyone, and thank you for joining us. We 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 access to our earnings release for the second quarter ended June 30, 2017, which went out earlier today and in addition, the company plans to file with the Securities and Exchange Commission, its quarterly report on Form 10-Q by the end of this week. Release and the quarterly report will be available on the company's website at www.xcelbrands.com. This call is being webcast, and a replay will be available on the company's Investor Relations website.

Before we begin, please keep in mind that this call will contain forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from certain expectations discussed here today. These risks factors are detailed in the company's SEC filings. Xcel does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Finally, please note that on today's call, management will refer to certain non-GAAP financial measures, such as non-GAAP net income, non-GAAP diluted EPS 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 related 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 insist -- assist investors in evaluating the company's financial results. These non-GAAP measures should not be considered in isolation or as alternatives to net income, earnings per share or any other measure of financial performance calculated and presented in accordance with GAAP. You may refer to the attachments to the company's earnings release or to Part 1, Item 2 of the Form 10-Q for a reconciliation of non-GAAP measures.

At this time, I'm pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob, please go ahead.

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

Robert W. D'Loren, Xcel Brands, Inc. - CEO & Chairman [3]

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

Thank you, Andrew. Good evening, everyone, and thank you for joining us. I'll start with an overview of our 2017 second quarter and then provide some thoughts on the rest of the year. After that, our CFO, Jim Haran, will discuss our financial results in more detail. And then we will conclude by opening up for Q&A.

Our second quarter of 2017 showed strong improvement in operating income, primarily as a result of lower operating costs and certain expenses related to organizing, launching and developing our short lead production platform were eliminated. Revenues were impacted by the transition of the C. Wonder brand from QVC and by the 2016 exit of the LCNY license agreement, while our short lead production platform perform -- performance continued to improve in the second quarter. Xcel's department store business is growing as we improve performance, increase our door count and expand into more product categories.

We are well positioned to leverage our unique operating and design platform and are exploring new opportunities with additional media partners as well as developing new brand opportunities with those our existing and new retail partners.

We continue to explore acquisition opportunities, while at the same time, continue to be prudent and strategic in how, where and when we allocate resources for the growth of our business as well as manage both our expenses and balance sheet. As mentioned in previous quarters, we are committed to building a proprietary predictive technologies platform, which is designed to ensure that the company's key strategies are supported by emerging technologies and new organizational competency. The predictive technologies platform will leverage data science, trend analytics and consumer insights to continue to support our mission of designing the best-responsive products for our followers and partners.

As part of this platform, we will be identifying and integrating market-leading technologies to improve our ability to identify emerging design trends, which we can bring to market in as little as 6 to 8 weeks through our short lead production platform. Thereby, reaching short lead social media to short lead production. We plan to build upon this by then, tying our analytics platform to internal sales data to drive recommendations on preseason and in-season design and merchandising decisions. This is all intended to improve margins for our retail partners.

As an industry innovator, we have consistently positioned ourselves as a solution provider, focused on the future of retail, and this next step is closely aligned with our core value proposition. As a key strategic initiative for the company, we have appointed an Xcel veteran, who possesses the appropriate background and training to the newly created position of Chief Digital Officer, who can work with all of our cross-functional teams including designs, marketing and merchandising to socialize these resources and drive results at all levels of incorporation.

Now taking a look -- taking a closer look at our businesses by channel. In our interactive television business, we are working closely with QVC to increase customer counts for our brands. We're expanding our apparel collection program into new categories and adjusting our offerings, based on customer feedback as we grow our audience. These new categories are expected to impact growth in 2018. We also continue to actively look for opportunities to expand sales in those channels.

During the second quarter, we experienced the effects of the overall softness in the jewelry sector, which has impacted our Judith Ripka brand on QVC and in our wholesale business. We are working on several initiatives, including focusing more on core products on QVC and expanding traditional retail distribution to improve the performance of our jewelry business. This includes some new truly exciting opportunities with new media -- with the new media partner that we hope to announce in the coming quarters.

We anticipate improving business trends throughout the remainder of the year. Our interactive television business is performing well overall, including improved achievement rates and productivity in the form of sales per minute in our apparel businesses. We expect momentum in this channel would be positive for the remainder of 2017 and continue into 2018.

In our department store business, I'm pleased with the progress we've achieved in our short lead production platform. As a reminder, this new business allows Xcel, with the help of our retail partners, to sell on-time merchandise based on customer demand, with the goal of producing less markdowns. In essence, we are giving the customer what they want, when they want it, at a price that they can confirm is fair. Combining Xcel short lead production capabilities with an internally developed and sophisticated predictive technologies platform allows Xcel to produce and deliver on-time trend rate apparel in as little as 6 to 8 weeks. We are excited about the platform we have created, and we are gaining market share as our department store business continues to grow in the second quarter of 2017.

During the second quarter of 2017, we launched H Halston women's sportswear at Dillard's. The initial customer reaction has been positive, and we have already launched certain accessories categories including footwear and sunglasses. We are planning on adding several other categories this year as well.

We are also pleased to announce that we are launching our IMNYC, Isaac Mizrahi brand in Dillard's this September. The initial launch will focus on women's sportswear, footwear and handbags.

Our exclusive programs with HBC, including Lord & Taylor in the U.S. and The Bay in Canada, and those continue to see positive results in productivity and sell-through. At the same time, we continue to work to optimize the design, production quality and speed of our products, which is driven through design and Xcel's investments in predictive technologies and production-related technology. Also, our increased presence in women's sportswear in the department store is driving growth and for all the categories under Xcel Brands, including footwear, handbags, sleepwear, eyewear, legwear, cold-weather accessories and mens'.

Finally, we have grown this business in our women's sportswear category from no shop-in-shops in Q1 of '16 to over 700 shop-in-shops heading into this fall. We believe that Xcel short lead production platform is well positioned to experience strong double-digit sales growth in '17 and beyond, which shall begin to impact revenues as we go into 2018. In addition, our margins within this channel continue to improve, as certain start-up costs incurred in previous periods are eliminated, and we are optimizing planning, asserting and visual merchandising on our platform.

In our specialty retail business, we are increasing the number of products we are selling through this channel and continue to add shelf space at specialty retailers nationwide. We are launching Isaac Mizrahi at Bed Bath & Beyond this fall and over 800 doors. And our collaboration with Revlon to launch co-branded beauty products under the Isaac Mizrahi brand remains on schedule to launch later this year. We remain committed to experience new opportunities for collaborations under our brands with specialty retailers. In addition, we see a lot of opportunities to expand our brands through pet homes, home improvements and other specialty retail concepts.

Now looking ahead to the rest of the year, we are focused on providing solutions to help retailers navigate the complex transformation underway within our industry and encouraged by the platform we have created, and we are having success expanding Xcel growing and the company's short lead production platform as well as cultivating opportunities with new media partners. While not fully reflected in our current financial results, there is a lot of an activity underway at the company, which we believe will position the company for significant long-term growth in the future.

Finally, we remain focused on our commitment to grow Xcel businesses across all channels through the development of new brands, exploring new opportunities and by pursuing new retail and media partners. We made a lot of progress during the second quarter, and I'm encouraged by the direction we are headed.

Now I'd like to turn the call over to Jim to review our financial results for the quarter. Jim?

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

James F. Haran, Xcel Brands, Inc. - CFO, Principal Financial & Accounting Officer and Assistant Secretary [4]

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

Thanks, Bob, and good evening, everybody. The following discussions relate to our financial results in the second quarter.

In the second quarter, net revenues decreased by approximately 0.8% to $8.4 million compared with $9.1 million in the prior year quarter. This was primarily attributable to lower revenue from the C. Wonder brand and a discontinuance of the LCNY brand on QVC in 2016. These decreases were partially offset by the increases in revenues from our short lead production platform, which is expanding to more product categories and an increased the number of retail stores our brands are sold at.

Our net income for the quarter was $213,000 or $0.01 per diluted share compared with a net loss of $90,000 or $0 per share in the prior year quarter.

Net income for the current quarter was primarily driven by decreased operating costs and expenses, which in the prior year quarter were affected by nonrecurring facility exiting charges and lower expenses as we eliminated some start-up cost associated with launching and developing the short lead production platform.

Net income further benefited from a decline in interest and financial expenses.

Non-GAAP net income for the current quarter was $1.5 million or $0.08 per diluted share based on approximately 18.8 million weighted average shares outstanding, compared with non-GAAP net income of $1.1 million or $0.10 per diluted share, based on approximately 19.4 million weighted average shares outstanding in the prior year quarter.

Adjusted EBITDA in the current quarter was approximately $2.3 million compared with the prior year quarter's adjusted EBITDA of $2.7 million. Moving to our 6-month results. Net revenues for the 6 months ended June 30, 2017, decreased by approximately 4% to $16.8 million compared with $17.5 million in the same period in 2016. Similarly, to our quarterly results, the decrease in 2017 6-month net revenues was primarily due to lower revenues associated with the discontinuous of the LCNY brand, which was partially offset by an increase in short lead production platform revenues, as it continues to grow and expand.

Lower revenues from the C. Wonder brand during the transition period were offset by an increase in interactive television for our apparel brands.

The current month -- 6-month net loss was $186,000 or $0.11 per diluted share compared with a net loss of $135,000 or $0.01 per diluted share for the same period in the prior year.

Non-GAAP net income for the 6 months ended June 30, 2017 was $2.7 million or non-GAAP diluted EPS of $0.14. Based on approximately 18.9 million weighted average shares outstanding, which compares with the non-GAAP income of $3.1 million or a non-GAAP diluted EPS of $0.16, based on approximately 19.3 million weighted average shares outstanding for the same period in the prior year.

Adjusted EBITDA for the current 6 months was approximately $4.2 million compared with $4.7 million for the first 6 months of 2016.

We continue to demonstrate steady improvement in our operating results, for this is the second consecutive quarter on improved non-GAAP net income and adjusted EBITDA as compared to prior quarters.

As a reminder, non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA or non-GAAP unaudited terms. Our earnings press release as well as our quarterly report on Form 10-Q presents a reconciliation of these items with the most or roughly comparable GAAP measures.

Turning now to our cash position. As of June 30, 2017, the company have total cash and cash equivalents of approximately $7.6 million compared with total cash of approximately $14.1 million at December 31, 2016. This $6.5 million decrease in cash and cash equivalents was primarily attributable to $6 million in principal payments on our term debts and $0.8 million on common share repurchases related to adjusted restricted stock in exchange for holding taxes, which were partially offset by $0.4 million of cash provided by operating activities.

The $0.4 million provided by operating activities was primarily driven by noncash expenses of $3.7 million, partially offset by merely an increase in accounts receivable of $1.8 million and a decrease of the $1.4 million in accounts payables, primarily as a result of any of those payments and overall timely payments. We anticipate that cash provided by operations will improve considerably during later this year, as the time to receive those collections and certain accruals even out.

Looking at our debt. At June 30, 2017, combined debt was approximately $26 million. That's consistent with our $19.5 million senior bank term loan, $3.4 million of seller notes and $3.1 million of continued obligations. Of these announced, $2.1 million of continued obligations and $0.5 million of seller notes are payable in stock or cash at the company's option.

As of June 30, 2017, total current liabilities were $6.4 million, inclusive of $4 million of the current portion of long-term debt.

Our working capital at June 30 was $10.8 million compared with $11.5 million at December 31, 2016.

With $7.6 million of cash and $22.5 million of term debt, our net-debt to adjusted-EBITDA ratio on an annualized basis was 1.75, and we continue to be positioned with one of the lowest leverage ratios of any of the industry peers.

We anticipate that during the balance of 2017, we will further reduce our term debt by approximately $1.3 million or pay through operating cash flow. We further think that 2017 term debt principal payments will value pay downs of $6 million in the first 6 months of this year. By virtue of low term debt payments in the second half of this year and expected increase in cash provided by operations, we anticipate our cash balance to be between $12 million to $14 million at year-end.

And with that, I would like to turn the call back over to Bob for his closing remarks. Bob?

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

Robert W. D'Loren, Xcel Brands, Inc. - CEO & Chairman [5]

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

Thank you, Jim. During the second quarter, we made significant progress, positioning the company for long-term sustainable growth while our core business was impacted by the transition of our C. Wonder brand and near-term challenges within our jewelry business. Our other brands are producing strong results and our short lead production platform is well positioned to continue its double-digit growth rate for the foreseeable future. As we enter the second half of the year, we expect momentum in our business to accelerate because of Xcel's unique and differentiated media design and production platform.

That concludes our prepared remarks. Jim, Seth and I are now available to take questions. Operator?

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) We'll take a question from Eric Beder from FBR Capital Markets.

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

Eric Martin Beder, FBR Capital Markets & Co., Research Division - Research Analyst [2]

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

Could you talk -- so you have the merger between QVC and HSN, how do you see that as a challenge plus opportunity for you guys?

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

Robert W. D'Loren, Xcel Brands, Inc. - CEO & Chairman [3]

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

All right. I don't see it as a challenge, Eric, and it's a little early to tell. I can say that over the last 1.5 years, 2 years, we've been in discussions with HSN to explore any new business that we could do with them, help them to create a virtual vertical platform, similar to the ones that we have in place with QVC. And there's always a conflict in doing business with HSN, so well, there were a lot of discussions. We just weren't prepared to pull the trigger. That said, now they're one company, so we look forward to that moment in time when QVC has fully integrated HSN and have made its decisions about how they want to proceed going forward. And we'd hope that there would be an opportunity for us to continue the conversation, we were having with HSN without any fear of creating conflicts.

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

Eric Martin Beder, FBR Capital Markets & Co., Research Division - Research Analyst [4]

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

Great. C. Wonder. So you took it back. What is the opportunity with C. Wonder? Where do you want it to end up?

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

Robert W. D'Loren, Xcel Brands, Inc. - CEO & Chairman [5]

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

So we've been in discussions with retailers at multiple tiers of distribution, and we would hope that sometime this year, we'll make an announcement about where we've landed with the brand and what we intend to do. The idea is to fully leverage the short lead production platform for bricks and mortar and online retailers with the brand.

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

James F. Haran, Xcel Brands, Inc. - CFO, Principal Financial & Accounting Officer and Assistant Secretary [6]

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

I'll just really add one thing on (inaudible). The brand has been well perceived by QVC customers, and we are encouraged by the performance of C. Wonder all that time it was there. And we look forward to the next opportunities with the brand.

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

Eric Martin Beder, FBR Capital Markets & Co., Research Division - Research Analyst [7]

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

Great. Dillard's. So what was the initial reaction to the Halston line? And I see you're at Isaac Mizrahi. Where did you expect that Dillard's can be as big an opportunity as HBC down the road?

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

Robert W. D'Loren, Xcel Brands, Inc. - CEO & Chairman [8]

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

We actually think Dillard's is a bigger opportunity for us. Of course, they have more doors. And as you know, Halston is currently in 150 of the Dillard's stores. We do see expansion potential there. Isaac this fall will be in a 100 doors. We expect it to go 150 doors in spring. And we see expansion potential there. We'll also see an opportunity with Dillard's to bring some of our additional brands there to them. So the progression that we anticipated is happening. First Halston than Isaacs, then we'll work to try to develop the business there with Highline and perhaps, C. Wonder. And as we go forward with Dillard's relationship, we're identifying white space opportunities where we may be able to develop, either proprietary brands for them or seek an acquisition of other brands that would be suitable for our short lead platform.

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

Eric Martin Beder, FBR Capital Markets & Co., Research Division - Research Analyst [9]

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

Okay. So (inaudible) You talked about some acquisition front, you're still aggressively looking further brands there?

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

Robert W. D'Loren, Xcel Brands, Inc. - CEO & Chairman [10]

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

I would say that we're well receptive and have done well in '16, as you can imagine, implementing and building the short lead production capability, consumed us during '16. While we had some feelers out, we really weren't aggressively looking for opportunities. But that said, in '17, we've been able to come up for air. And in this current environment, as you can imagine, there are opportunities. There are companies that are looking for solutions. Retailers looking for solutions. And we continue to look for the right opportunities, that can leverage our core expertise in women's apparel and accessories.

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

Eric Martin Beder, FBR Capital Markets & Co., Research Division - Research Analyst [11]

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

Okay. And last question, you talked before -- you've talked in prior conference calls about being able to really start leveraging the quick-response model. Are we starting to see the fruits of that? And do you expect -- where do you expect that to go going forward as you keep on rolling out these doors?

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

Robert W. D'Loren, Xcel Brands, Inc. - CEO & Chairman [12]

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

So if you think about where we are as an industry, we're confident that this is the right model for the future. It delivers to the retailers, customers what they want, when they want it. We're certainly delivering enhanced margins because of the virtual vertical set up that we have created. We really don't see a limit to this. It's now both. It's a matter of execution, and establishing relationships with new retailers and building on the ones that we have established with HBC. And those -- While these are very troubled times in the industry, they are also very exciting times, if you're working on solutions. We're excited about what we are doing with data sciences. We started to develop trend analytics capabilities and we will now build into that predictive capabilities. And of course, get it through consumer survey both online, and perhaps, even on television. Really get a sense of what consumers want and what they like. And then, put all that into the data science basket, so that we can support our design teams with real-time direction on what customers are looking for.

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

James F. Haran, Xcel Brands, Inc. - CFO, Principal Financial & Accounting Officer and Assistant Secretary [13]

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

So I would add to that, as you know, we launched the QTR model relatively recently. We launched in first quarter of spring in 2016. So it's been going on for a little over a year now. The [mall] Continues to evolve, so as Bob mentioned in the past, we've optimized a lot of the quality and we continue to optimize speed and decision-making. The data analytic platform will help continue to do that. We're also reviewing new ways to bring media partnerships to retailers. And I think, at this point in the platform, again, it continues to evolve. But we do have hard data now, where it's becoming easier for us to expand the platform. So if you look at our first year, when we were at HBC, we signed Dillard's and announced it fourth quarter of last year, with the launch in spring, which as you know in the industry is a relatively fast launch, and we are now sending Dillard's into an additional brand. I think you'll see a continued momentum and speed as -- we have to demonstrate actual results to other retailers and as well as our current partners. And expand these relationships in the platform.

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

Operator [14]

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

And that does conclude our question-and-answer session for today. I'll turn it back over to our speakers for any additional or closing remarks.

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

Robert W. D'Loren, Xcel Brands, Inc. - CEO & Chairman [15]

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

Ladies and gentlemen, thank you for joining us tonight. We greatly appreciate your continued interest and support in Xcel Brands. As always, stay fit, eat well, and be healthy.

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

Operator [16]

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

That does conclude our conference. Thank you, and it does conclude our conference for today. thank you for your participation.