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Edited Transcript of XELB earnings conference call or presentation 13-Nov-19 10:00pm GMT

Q3 2019 Xcel Brands Inc Earnings Call

Parsippany Jan 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Xcel Brands Inc earnings conference call or presentation Wednesday, November 13, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James F. Haran

Xcel Brands, Inc. - CFO & Assistant Secretary

* Robert W. D'Loren

Xcel Brands, Inc. - Founder, Chairman & CEO

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Conference Call Participants

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* Andrew M. Berger

SM Berger & Company, Inc. - MD

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Xcel Brands Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that a reproduction of this call, in whole or in part, is not permitted without prior written authorization of Xcel brands. And as a reminder, this conference call is being recorded.

I would now like to turn the call over to Andrew Berger of SM Berger & Company. Andrew, you may begin.

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

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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; and Chief Financial Officer, Jim Haran.

Before I continue, please note that management will not be taking questions on today's earnings call in light of our activities related to potential acquisitions. By now, everyone should have had access to the earnings release for the third quarter and the 9 months ended September 30, 2019, which went out earlier today. And in addition, the company plans to file its quarterly report on Form 10-Q with the Securities and Exchange Commission by November 14, 2019. The 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 risk factors are explained in detail 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 earnings per share and adjusted EBITDA. Management uses these non-GAAP metrics as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the company's results of operations. Management believes these financial performance measurements are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results. And thus, they provide supplemental information to assist investors in evaluating the company's financial results. These non-GAAP measures should not be considered in isolation or as alternatives to net income, earnings per share or any other measure of financial performance calculated and presented in accordance with GAAP. You may refer to the attachment in the company's earnings release or to Part 1, Item 2 of the Form 10-Q for a reconciliation of non-GAAP measures.

Now I am pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob, please go ahead.

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

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Thank you, Andrew. Good evening, everyone, and thank you for joining us. I'll start with our financial and operating highlights. After that, our CFO, Jim Haran, will discuss our financial results in more detail.

We are pleased to report that our total top line revenues grew 32% in the third quarter of 2019 as compared with the same period in 2018. And on a year-to-date basis, we delivered a 19% increase in total revenue from last year. This increase was driven by the continued growth in our apparel and jewelry wholesale and e-commerce businesses. Our gross profit and bottom line earnings, however, were admittedly somewhat below our expectations for the quarter. This was primarily due to the timing of inventory shipments that resulted in shifting approximately $1 million of revenue and approximately $400,000 of gross profit from Q3 to Q4. Thus, we remain on track for a strong finish for the year.

Now that we have transitioned from a licensing company to an advanced technology-based operating company, we are refocusing on seeking new opportunities for growth and expansion across all of our channels of distribution, both organically as well as through potential acquisition. We are currently actively pursuing new distribution opportunities with our brands and potential acquisitions of brands and operating businesses, which we believe are both strategic and synergistic to our existing portfolio of brands and our operating platform and are complementary to our overall strategy.

Now let's take a closer look at our business by distribution channel. Our interactive television business continues to perform well, especially in our Isaac Mizrahi brand, which includes a successful 2019 collaboration with New Balance on QVC. Our Judith Ripka brand continues to be planned on QVC. And although we continue to see some macro headwinds in the jewelry business in this channel, we have been able to manage our operating expenses in this business in line with revenue.

In our wholesale apparel business, our design, merchandising and sourcing team continue their strong performance, starting with the execution of our products. We are seeing increased sales, improved margins and expansion in our wholesale account. Our full 2019 collections are the first collection fully designed and developed under our new team and platform. We have received positive feedback from the industry on the new collections, and we expect increased sales in Q4 and future strong growth as we head towards 2020.

As previously reported, we have been focused on the tariff discussions in Washington, and starting fall 2019, preemptively sourced the majority of our product outside of China as well as reserving an allowance for potential tariff. While the industry as a whole faces increased margin compression, we believe that through advanced planning, we are well positioned to manage the tariff situation. I should note that there is no tariff impact on our jewelry business, which is primarily produced in Thailand and Italy.

Finally, our Judith Ripka e-commerce and wholesale business continues to show strong growth. I'm excited about our holiday marketing campaign, which launches later this week. We have fully implemented our integrated technology platform in our jewelry business to advance the vision of leveraging technology to drive efficiency and smarter, more informed decision-making. The process enables us to design and source more efficiently provides us with a read on demand for products we are bringing to market and drive our buying decisions in order to minimize inventory risk. This is extremely exciting, and we hope to have this fully operational in 2020.

As we previously mentioned, the Target retrospect of celebrating 20 years of our design partnerships, which includes apparel collections from our Isaac Mizrahi brand launched in September. The collection featured reproductions of original Isaac Mizrahi designs and sold out in its first week.

Also during Q3, we launched a collaboration with Sesame Street and our Isaac Mizrahi brand at Macy's. The collections feature newborn, infant, toddler, preschool, children and adult products. The program is off to a great start.

Finally, we launched a collaboration with New Balance for our Isaac Mizrahi business on QVC.

On November 12, we acquired the rights to the Longaberger brand in a joint venture with Hilco. Longaberger is an American heritage home and collectible brand that was founded in Dresden, Ohio in 1973 by the Longaberger family. Since its inception, the company has achieved total lifetime sales of over $10 billion. Longaberger was one of the original social commerce companies with sales primarily generated to the home parties hosted by the company's 100,000 independent sales consultants. We believe the brand will be synergistic with our business model and ubiquitous sales strategy. In fact, we will launch the brand on QVC tonight and plan to leverage new technologies available to us on QVC that will leverage the Longaberger family of independent sales consultants.

Separately, during the third quarter, we have incurred costs in connection with potential acquisition of the business. We continue to seek opportunities that are strategic and synergistic to our existing portfolio of brands and our operating platform and are complementary to our overall strategy.

In conclusion, through our old channel approach, we have positioned ourselves to establish our presence in all forms of distribution so that we can reach our customers everywhere they shop. Now with the operational transition of our business complete and a strong balance sheet, we believe more than ever that we are positioned for both organic growth as well as growth through potential acquisitions.

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

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James F. Haran, Xcel Brands, Inc. - CFO & Assistant Secretary [4]

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Thanks, Bob, and good evening, everybody. I will briefly discuss financial results for the quarter ended June 30, 2019, but please note that our financial results are described more fully in our quarterly report on Form 10-Q, which will be filed with the SEC tomorrow.

In the third quarter of 2019, our net revenues increased to $10.9 million, an increase of approximately $2.6 million or 32% over the prior year quarter, primarily driven by sales from the apparel and jewelry wholesale and e-commerce operations, which was partially offset by lower licensing royalties attributable to our transitioning component of our licensing business to a wholesale model. Despite this overall increase in revenues, our gross profit for the quarter was essentially flat as compared with the prior year quarter due to the shift in portions of our business from licensing to wholesale.

It is important to note that due to the timing of wholesale shipment of approximately $1 million of revenue and $0.4 million of related gross profit, which we had planned for in Q3, will now be recognized in Q4.

Operating cost and expenses increased approximately $1 million from the prior year quarter. This was driven by 3 main items: first, increased amortization expense related to the Halston trademarks; second, increased salary, IT and shipping and packaging costs related to the transition and scaling of portions of our business through a wholesale model; and finally, costs incurred in connection with potential business acquisition.

Total interest and finance expenses increased by $0.07 million from the prior year quarter, attributable to an increase in our term debt from our recent acquisition of the Halston and Halston Heritage trademarks.

Net loss for the current quarter was approximately $0.1 million or $0.01 per diluted share compared with net income of $1 million or $0.05 per diluted share for the prior year quarter.

After adjusting for certain cash and noncash items, non-GAAP net income for the current quarter was approximately $1.2 million and non-GAAP earnings per share was $0.06 compared with $1.9 million or $0.10 per diluted share in the prior year quarter. Adjusted EBITDA for the current quarter was $1.8 million compared with approximately $2.3 million in the prior year quarter.

Now moving to our 9-month year-to-date results. In the first 9 months of 2019, net revenue was $30.4 million, an increase of $4.9 million or 19% over the prior year 9-month period. This was primarily driven by sales from apparel and our jewelry wholesale and e-commerce operations and, again, partially offset by a decrease in net licensing revenue.

Gross profit decreased by $1.1 million to $23.8 million from $24.9 million in the prior year, primarily due to the decrease in net licensing revenues. Although our gross profit has decreased compared to last year, our product sales and their related margin contributions have increased. We expect this to continue, and that in the near future, our continued growth in wholesale and e-commerce and the incremental gross profit margins will more than offset and exceed the decline in net licensing revenues.

Our operating expenses increased by approximately $1.4 million compared with the prior year 9-month period. As with the trend experienced for the quarter, this increase for the 9-month period was mainly driven by the same 3 items: an increase in noncash amortization expense; increase in salary of IT and shipping and packaging costs; and cost incurred in connection with the potential business acquisition.

Total interest and finance expense for the current 9 months increased by $0.35 million from the prior year 9-month period, primarily attributable to a loss on extinguishment of debt as well as the refinancing of our bank term debt in conjunction with the acquisition of the Halston and Halston Heritage brands.

Net income was approximately $1.9 million for the current 9 months or $0.10 per diluted share compared with net income of $1.4 million or $0.07 per diluted share for the prior year period. After adjusting for certain cash and noncash items, non-GAAP net income for the current 9 months was approximately $3.8 million and non-GAAP earnings per share was $0.20 per diluted share compared with $5.3 million or $0.29 per diluted share in the same period last year. Adjusted EBITDA for the current 9 months was $5.6 million compared with approximately $6.7 million in the prior year period.

Turning now to our cash position. As of September 30, 2019, the company had unrestricted cash and cash equivalents of approximately $5.9 million compared with total cash of approximately $8.8 million at December 31, 2018. This $2.9 million decrease in cash and cash equivalents was primarily attributable to $1.6 million of cash used in the acquisition of the Halston and Halston Heritage trademarks and capital expenditures related to investments in our integrated technology platform.

Looking at our debt. At September 30, 2019, total liabilities were approximately $48 million, which includes $19.8 million term debt, $0.9 million of contingent obligations, $12 million of operating lease liability and $9.4 million of net deferred tax liability.

In conclusion, and to reiterate Bob's comments, we delivered impressive top line revenue growth in the first 9 months of this year. We expect in the near future, our continued growth in wholesale and e-commerce will lead to increased gross profit margins and higher earnings. Thus, we remain on track for a strong finish this year.

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

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

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Thank you, Jim. Thank you all for your time this evening. We greatly appreciate your continued interest and support in Xcel Brands. As always, stay fit, eat well and be healthy.

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Operator [6]

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Ladies and gentlemen, that does conclude our conference call for today. You may disconnect your lines, and thank you for participating.