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Edited Transcript of XELB earnings conference call or presentation 14-Nov-18 2:00pm GMT

Q3 2018 Xcel Brands Inc Earnings Call

Parsippany Nov 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Xcel Brands Inc earnings conference call or presentation Wednesday, November 14, 2018 at 2:00:00pm 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. - Chairman, CEO & President

* Seth Burroughs

Xcel Brands, Inc. - Executive VP of Business Development & Treasury and Secretary

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Conference Call Participants

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* Jeffrey Link

* Michael Milton Yuji Kawamoto

D.A. Davidson & Co., Research Division - Research Associate

* Andrew M. Berger

SM Berger & Company, Inc. - MD

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Presentation

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Operator [1]

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Welcome to Xcel Brand's Third Quarter 2018 Earnings Conference Call. (Operator Instructions) 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 call is being recorded. I would now like to turn the conference over to Andrew Berger of SM Berger & Co. Thank you. Andrew, you may begin.

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

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Good morning, 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 had access to the earnings release for the third quarter ended September 30, 2018, which went out earlier this morning. And in addition, the company plans to file with the Securities and Exchange Commission its quarterly report on Form 10-Q later today. 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 earnings per share 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 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 measures of financial performance calculated and presented in accordance with GAAP. You may refer to the attachments of the company's earnings or 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. - Chairman, CEO & President [3]

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Thank you, Stan. Good morning, everyone, and thank you for joining us today. I'll start with an overview of our recent performance, 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. Then we will conclude by opening up the call for Q&A.

First, let me start with a few highlights before I get into the business overview. In the 9 months ended September 30, 2018, we continue to show strong result from the launch of our wholesale and e-commerce jewelry business and the continued solid performance of our interactive television business.

Our third quarter total revenue and operating income increased over last year approximately 5% and 11%, respectively. Also, our total revenue and operating income for the 9 months ended September 30, 2018 increased by approximately 3% and 39%, respectively, compared with last year.

Our net income for the current quarter and 9 months was approximately $1 million and $1.4 million, respectively, compared with $250,000 and $66,000 in the prior year periods. Our current 9-month EBITDA is $6.7 million, up 2% from last year.

We continue to transition from a licensing company to a vertical consumer products, media and technology-based operating company that provides a 360-degree solution for our retail customers. We believe our operating platform, including our fast-to-market production and integrated technologies capabilities, provides us with significant competitive advantages as compared to more traditional wholesale and licensing companies.

Our focus remained on expanding distribution of our brands through our media and ubiquitous channel approach, including wholesale and direct-to-consumer sales of our products. We are encouraged by our current growth and continue to make strides in developing this platform, and we believe we are well positioned for sustainable, long-term growth.

Now taking a closer look at our business by distribution channel. Our interactive television business is performing well that show achievement rates and the productivity from our on-air lifestyle brands continue to be strong. We continue to work closely with Qurate Retail Group to increase customer count and productivity for our brands and look for opportunities for expansion in this channel.

Last month, we launched Judith Ripka on HSN with excellent results. We are excited to now have Judith Ripka in both QVC and HSN. We believe there are other significant opportunities for us within the Qurate Retail Group.

Now moving to our wholesale brick-and-mortar business. In the first 9 months of 2018, our wholesale business continue to grow across multiple categories. We continue to improve our fast-to-market production platform for our branded products, which is providing us with the ability to leverage this platform with private label opportunities.

Beginning October 2018, we transitioned our department store business from a licensing model to a wholesale model, which will result in recording sales, margin and sourcing fee income in lieu of licensing fees. Our operating model is set up to minimize inventory risk and working capital needs. Our wholesale business model will include those to our branded and private label products. We believe the rationale for this change is to improve efficiencies within our supply chain and greater control over our brands and grow top line and bottom line revenue while compared to just licensing -- when compared to just licensing piece.

The transition to a wholesale model does not require significant operating changes and only minimal incremental overhead. Finally, we continue to explore additional growth and distribution opportunities with our existing and new retail partners while remaining focused on selectively leveraging our platform across new brands and retailers, both domestically and internationally.

Now turning to specialty retail. We continue to increase the assortment of product we offer through this channel and to gain momentum in specialty retailers nationwide. Our beauty products with Revlon and our Isaac Mizrahi bedding programs are performing well. We remain committed to exploring new specialty retail opportunities, collaborations and partnerships as we seek opportunities with different specialty retail concepts. We expect that we will announce in 2019 some new and exciting programs that are planned to launch from that year.

Now, finally, I will discuss our direct-to-consumer business. As previously mentioned in December of 2017, we launched a direct-to-consumer e-commerce platform for our Judith Ripka Fine Jewelry brand offering items in gold and silver. As we have reported previously, we transitioned our jewelry business from a traditional license to a wholesale bricks-and-mortar e-commerce business. We believe the wholesale bricks-and-mortar and e-commerce strategy is the right path forward to growth for our jewelry and apparel businesses. We believe this will contribute to the growth in our brands across all channels of distribution while creating digital relevance with our followers. I'm encouraged by the positive momentum in our jewelry e-commerce business and expect sales to continue to grow as we expand into new retail accounts and drive increased traffic to our e-commerce site.

We expect to launch e-commerce businesses for some of our power brands in 2019. In conclusion, through our ubiquitous channel approach, we are positioning ourselves to establish our presence in all forms of distribution, so that we can reach our customers everywhere they shop. To this extent, the expansion and diversification of our business model as a technology-based operating company, which began earlier this year, represents a logical next step in this strategy, and we are enthusiastic by the progress made and early results achieved. We are confident in our strategy and the long-term prospects of the company and our ability to create value for our shareholders.

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 morning, everybody. I will briefly discuss selected financial results for the quarter ended September 30, 2018. And 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 later today.

In the third quarter of 2018, total revenue increased by approximately $0.4 million to $8.3 million compared with $7.9 million in the prior year quarter. Sales from our jewelry wholesale and e-commerce business contributed approximately $0.4 million to the overall increase in total revenue in the current quarter and $0.2 million to our net revenues, which was partially offset by a $0.07 million decrease in net licensing revenue.

Net revenues are total revenues less cost of goods sold. Our operating expenses were $6.6 million in both the current and prior year quarters. Although total operating expenses were flat as compared to the prior year quarter, we had a $0.5 million decrease in salaries and stock-based compensation. This was primarily offset by an increase in design and marketing expenses. Interest expense decreased by $0.05 million compared to the prior year quarter by virtue of reducing our term debt.

Our net income for the current quarter was approximately $1 million or $0.05 per diluted share, which compares to net income of $0.3 million or approximately $0.01 per diluted share in the prior year quarter. Non-GAAP net income for the current quarter and the prior year quarter was $1.6 million or $0.09 per diluted share based on approximately 18.2 million and 18.9 million weighted average shares outstanding, respectively. Adjusted EBITDA in the current quarter was approximately $2.33 million compared to the prior year quarter's adjusted EBITDA of $2.36 million.

Moving now to our 9-month results. Total revenue for the 9 months ended September 30, 2018 increased by approximately 3.4% to $25.5 million compared with $24.7 million in the prior year period. Sales from our jewelry wholesale e-commerce business contributed $1 million to the overall increase in total revenue in the current 9 months and $0.44 million to net revenues.

During the current 9 months, net licensing revenue decreased approximately $0.23 million compared to the prior year period as higher licensing revenue from the ongoing interactive business and wholesale department store business were offset by lower revenue of $0.87 million associated with the termination and transition of the C. Wonder brand from QVC. .

Our operating expenses decreased by approximately $0.9 million compared with the prior year period. The net decrease in operating expenses was primarily attributable to a $1.5 million decrease in total compensation, including a decrease of approximately $1.1 million of stock-based compensation. This was partially offset by an increase in design and marketing expenses.

Interest expense decreased by approximately $0.2 million compared with the prior year period by virtue of reducing our term debt. Our net income was approximately $1.4 million for the 9 months ended September 30, 2018 or $0.07 per diluted share. This compares to net income of $0.07 million or $0.00 per diluted share in the prior year period. Non-GAAP net income for the current 9 months was approximately $4.5 million or $0.25 per diluted share based on approximately 18.3 million weighted average shares outstanding compared with non-GAAP net income of approximately $4.3 million, which will be $0.02 per diluted share based on approximately 18.9 million weighted average shares outstanding in the prior year period, representing an increase of 6% and 12%, respectively.

Adjusted EBITDA for the current 9 months was approximately $6.71 million compared to the prior year period's adjusted EBITDA of $6.56 million, an increase of $0.15 million or 2%. As previously announced, effective January 1, 2018, we adopted the new FASB revenue guidance Accounting Standard Codification 606 under the modified retrospective adoption method by applying new guidance to contracts that were not completed as of January 1, 2018, and the adoption did not result in material differences for the company's prior revenue recognition policies or in revenue recognized in the current quarter and the current 9 months. As a reminder, non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA on non-GAAP unaudited terms. Our earnings press release, as well as our quarterly report on Form 10-Q present a reconciliation of these items with the most directly comparable GAAP measures.

Turning now to our cash position. As of September 30, 2018, the company had total cash and cash equivalents of approximately $8.6 million compared with the total cash of approximately $10.2 million at December 31, 2017. This $1.5 million net decrease in cash and cash equivalents was primarily attributable to $4.5 million principal repayments on our term debt; $1.1 million for capital expenditures for our department store business; $0.7 million in shares repurchased for the investment of restricted stock rents, which were partially offset by $4.7 million of cash provided by operating activities. The $4.7 million of cash provided by operating activities was primarily driven by net income of $1.4 million, which includes noncash expenses of approximately $4.6 million; $0.8 million increase in accounts payable and other liabilities; and partially offset by an increase in accounts receivable of $1.1 million and an increase in inventory of $0.9 million. The noncash expenses consist of deferred income tax provision, stock-based compensation and depreciation and amortization.

Looking at our debt. At September 30, 2018, total liabilities were approximately $35.1 million, which includes $17.6 million in term debt, $3 million of contingent obligations and $8.1 million of net deferred tax liability. Of these amounts, $2.9 million of contingent obligations and $0.5 million of term debt are payable in stock or cash at the company's option.

At September 30, 2018, total current liabilities were $12.4 million, inclusive of approximately $5.3 million of the current portion of long-term debt and $3 million of contingent obligations payable in stock at our option.

Our working capital at September 30, 2018 was approximately $11.2 million, exclusive of the contingent obligations payable with stock compared with $10.2 million at December 31, 2017. As of September 30, 2018, our term debt payable in cash was $17 million. With approximately $8.6 million of cash, our net term debt was $8.4 million. Our adjusted EBITDA on a rolling 12-month basis to net-debt ratio was approximately 1x as we continue to be positioned with very low and manageable leverage.

With that, I would like to turn the call back over to Bob. So Bob?

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

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Thank you, Jim. Ladies and gentlemen, this concludes our prepared remarks. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Michael Kawamoto with D.A. Davidson.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [2]

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Just first off on the fast-to-market department store business, how are those discussions going? I think you said last time you'd have more private label programs launching in the back half, which is maybe more of a back-half-weighted revenue year. Are those still on schedule? Or do you have any initial feedbacks on those?

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

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Yes, they are on schedule, and we've picked up a few additional programs. So we're now doing private labels for Saks, Saks OFF 5TH, Lord & Taylor, Hudson's Bay and Dillard's and working with additional retailers for new programs heading into '19. So we are on plan, and we expect, and barring any unforeseen circumstances, a strong Q4.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [4]

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Got it. So, I mean, is it fair to characterize it that you see a pretty meaningful acceleration in revenue growth in 4Q? I think that's how I understood it last time.

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James F. Haran, Xcel Brands, Inc. - CFO & Assistant Secretary [5]

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I would say, Michael, yes, I would expect that. But what I would also say is, as we get into these retailers and private label programs, there is a ramp. So you should expect to see further ramp and to clean 2019 as we get into next year.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [6]

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Okay. That, it sounds good. And then just on the licensing revenue in the quarter being down a touch, is that just due to the C. Wonder business at QVC going away, and it's fair to characterize that the rest of the business there is doing well in their active channel?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [7]

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Yes.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [8]

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Okay. And then in terms of pivoting to the department store -- or sorry, the wholesale model and department store business and carrying some inventory, are you seeing the benefits of that when you talk to potential partners? They're responding favorably to your changes to your operating structure?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [9]

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Yes, there is significant -- there is a significant need in the industry for fast-to-market capability. And we spent the last 2.5 years building this, as you know. And I would say that we expect to continue to see demand. There are more companies beginning to embrace this and set up for it. So I would expect to see as the industry supply chain production cycles coming down.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [10]

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Got it. And then you mentioned Judith Ripka on HSN. Congrats on that. Do you plan on putting some of the other brands on HSN as well?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [11]

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I think it's a little early to tell. And of course, Qurate will drive that. And we don't have total visibility into that. But certainly, I think everyone was happy with the performance of Judith Ripka on HSN, and we'll continue to explore the possibility of putting some of our other brands on both networks.

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James F. Haran, Xcel Brands, Inc. - CFO & Assistant Secretary [12]

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Yes, Michael. And I think, as we look at the HSN and QVC opportunity, a lot of our discussions center around how do we leverage the design platform that we've built to develop new brands for HSN. So I think there's more opportunity for new brands as well.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [13]

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Got it. And then just on Judith Ripka, I think the jewelry business was down a little bit the first part of the year. Does that bounce back to you guys at all? Or what are you seeing there?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [14]

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Actually, it has. Judith Ripka has performed well on QVC. We are ahead of plan. And I would attribute that to adjustments that we made in design. Jewelry, like apparel, has become much more casual, and that was a design shift that we needed to make. We're pleased with early results, particularly results that we've seen over the last 3 months with some of the new product that we've introduced. We are clearly seeing that on our e-commerce platform, where we've introduced a line that is cleaner, more casual. It's doing very well for us, and we'll begin to lean into that collection. So we're optimistic. We think we've made the right design adjustment to meet customers' demands.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [15]

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Good to hear. It's encouraging. Just a couple more. Just on the Lord & Taylor and walmart.com. I know last time you said it was a little early to get any sort of feedback there, but now you've been doing it for a little bit. How are orders trending there? And what's been the store reception to the product been on site?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [16]

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I think it's still a little early. I mean, quite frankly, we're not seeing a big uptick in e-commerce traffic on Lord & Taylor because they're on Walmart. I think there's a bit of a discovery phase that both retailers will need to go through with the customer base at Walmart.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [17]

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Okay. And then just on C. Wonder. I think you talked about it launching in China on the last call. If you can just give an update there. Anything you have in addition?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [18]

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So for the first half of the year, we had strong sales on vip.com, and we're looking at now additional channels of distribution, perhaps, in bricks-and-mortar. In China, we are working on a partnership with one of our production partners for a China-based operation. So we're optimistic about the potential for C. Wonder and some of our other brands in China.

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Operator [19]

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(Operator Instructions) The next question is from Jeffrey Link with Invemed.

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Jeffrey Link, [20]

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First question is for Jim. I'm just -- since I'm newer to the story, only been in it for about 6 months now, what is -- what was C. Wonder -- did you break out C. Wonder's revenues, so that we knew what it had been and what -- now that it's not there, what the comparison was for this most recent quarter?

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James F. Haran, Xcel Brands, Inc. - CFO & Assistant Secretary [21]

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We broke out for the year where the impact was from the termination of QVC, which I think was roughly $800,000. So that was revenue that we picked up with our other licensing and interactive programs, and we didn't have breakout revenues that we generated with C. Wonder domestically, which was fairly close to what we lost for the quarter on QVC.

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Jeffrey Link, [22]

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I see. Okay. Bob, maybe you can explain to me what the advantages or disadvantages are of the switch from the licensing to the wholesale model.

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [23]

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So the advantages, Jeff, it begins with more control over product and more control over the design process. So with a licensee, you have, of course, the design direction we're handing off, and then the actual design that's happening at the licensee. We've not been happy with that and made a decision, like in our jewelry business, we want more control over it. So that is first and foremost because at the end of the day, we all win on product. And I would say that's the primary benefit that we see. And because we are working back-to-back on purchase orders, we're not really taking inventory risk in the sense of buying inventory, holding it in a DC and distributing it.

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Seth Burroughs, Xcel Brands, Inc. - Executive VP of Business Development & Treasury and Secretary [24]

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Yes, Jeff. I would just -- this is Seth. I would just add. That's the strategic benefit, right, the financial benefit. Obviously, as you know, we have significantly more overhead than the old licensing models, where you sign a license with a retailer and collect the check. We have full design teams sourcing product development, fabric development. So for us to start selling product in wholesale, if we're not taking significant inventory risk, we can make significantly more margin than we would under a license, a typical license, royalty rates of between 6% and 8% of wholesale. On a wholesale model, we can make the full wholesale margin, which generally is between 15% and 35% to 40%. So it's significantly higher for really not taking much risk.

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [25]

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And I would add to that, Jeff, if we were a traditional licensing company that didn't have a design and sourcing capability, this would be a really difficult transition. But for us, since we have the platform, it's a fairly easy transition.

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Jeffrey Link, [26]

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And this is on the IMNYC, the Halston and other? Any other brands that this is being -- the transition is being impacted by?

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Seth Burroughs, Xcel Brands, Inc. - Executive VP of Business Development & Treasury and Secretary [27]

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All of them. All of them.

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Jeffrey Link, [28]

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And so with you now doing the designs in-house when you haven't been before, when can we begin to see those new -- when is the new inventory going to be able to hit the floor? What's the lag?

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [29]

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I would say that you will expect to see it April/May deliveries.

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Jeffrey Link, [30]

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Okay. And just on the HSN QVC front, in addition -- I'm curious if there are other things that are going on that are potential initiatives that you can do to continue to grow that business.

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [31]

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So we are working with the Qurate team on how can we collectively improve the jewelry business overall, not just our brands. And we collaborate closely with them, and we're looking at ways to improve jewelry, ways to deliver to the customer more casual jewelry that they're seeking, but, yes, still collectible. And then, of course, we're looking at new opportunities on what kinds of brands can we bring to them to help them to bring new customers to Qurate Retail Group. And we are working on programs now that we're considering.

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Operator [32]

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There are no further questions registered at this time. I would like to turn the conference back over to the management for any closing remarks.

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Robert W. D'Loren, Xcel Brands, Inc. - Chairman, CEO & President [33]

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Thank you, operator. Again, ladies and gentlemen, thank you all for your time this morning. We greatly appreciate your continued interest and support in Xcel Brands. And as always, stay fit, eat well and be healthy.

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Operator [34]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.