Q4 2023 Lifetime Brands Inc Earnings Call
Participants
T.J. O'Sullivan; Investor Relations; Joele Frank, Wilkinson Brimmer Katcher
Robert Kay; President, Chief Executive Officer, Director; Lifetime Brands Inc
Larry Winoker; Executive Vice President, Treasurer & Chief Financial Officer; Lifetime Brands Inc
Anthony Lebiedzinski; Analyst; Sidoti & Company
Brian McNamara; Analyst; Canaccord Genuity LLC
Presentation
Operator
Good morning ladies and gentlemen, and welcome to the Lifetime Brands fourth quarter and full year 2023 earnings conference call. (Operator Instructions) I would now like to introduce your host for today's conference, T.J. O'Sullivan. Mr. O'Sullivan, you may begin.
T.J. O'Sullivan
Thank you. Good morning, and thank you for joining Lifetime Brands' Fourth Quarter and Full Year 2023 earnings. With us today from management are Rob Kay, Chief Executive Officer; and Larry Winoker, Chief Financial Officer.
Before we begin the call, I'd like to remind you that our remarks this morning may contain forward-looking statements that relate to the future performance of the company. These statements are intended to qualify for the Safe Harbor protection from liability established by the Private Securities Litigation Reform.
Any such statements are not guarantees of future performance and factors that could influence our results are highlighted in today's press release and other factors are contained in our filings with the Securities and Exchange Commission.
Such statements are based upon information available to the company as of the date hereof and are subject to change for future development. Except as required by law, the company does not undertake any obligation to update such statements.
Our remarks this morning and in today's press release also contain non-GAAP financial measures within the meaning of Regulation G promulgated by the secured by the Securities and Exchange Commission.
Included in such release is a reconciliation of these non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP.
With that introduction, I'd like to turn the call over to Rob Kay. Please go ahead, Rob.
Robert Kay
Thank you, T.J. Good morning, everyone, and thank you for joining us today. We had a strong fourth quarter, delivering results that helped us to meet or exceed net sales income from operation and adjusted EBITDA targets from the revised full year guidance metrics we provided last quarter as well as analyst estimates.
We are pleased with the strong net sales growth we are driving across categories, especially in our e-commerce channel, which continues to gain share and coupled with our continued focus on driving efficiencies across the business, this outperformance translated to meaningful operating income growth that we expect will continue in 2024.
To start, I'd like to walk you through our fourth quarter and full year results at a high level. In the fourth quarter, we delivered $203.1 million in net sales and $21.5 million in adjusted EBITDA compared to $207 million in net sales and $19.7 million in adjusted EBITDA in the prior year period.
For the full year, we generated $57.3 million in adjusted EBITDA compared to $58.2 million in 2022, coming in ahead of our internal estimates, thanks to diligent expense management and a focus on incremental revenue opportunities throughout the year. Of note our performance was notwithstanding $3.6 million of one-time charges in 2023.
We have been encouraged by the improving supply chain environment in recent quarters and experienced no disruptions in the fourth quarter, though we are monitoring potential issues stemming from ongoing geopolitical challenges in the Red Sea, which have had some initial impact on ocean freight costs and shipping times further with another quarter of normalized shipping and ordering activity.
As of now behind us, we believe that the oversupply issues are retailers experience coming out of the pandemic have dissipated.
Turning now to our international business throughout 2023. We remain diligent in the execution of our international turnaround strategy, and we are pleased with the meaningful progress we have made, including market share gains in these end markets.
In Australia and New Zealand, the direct go-to-market strategy we implemented earlier this year is translating to increased listings with additional accounts products and brand listings. Additionally, we continue to drive incremental revenue opportunities as we roll out new product lines into our international markets, driven by our highly successful KitchenAid offering.
As a result of these factors in the fourth quarter, we saw the first turnaround in year-over-year international revenues since 2021. As part of our international turnaround plan, we took a noncash inventory write-off in the fourth quarter, which impacted our bottom line performance, but we expect that the aforementioned initiatives will have a meaningful impact on our international channels bottom line in 2024.
In our foodservice business, we remain on track to achieve significant growth in 2024 as Macassa hospitality continues to gain traction and capitalize on the market positioning achieved in 2023.
While this business is still in its early stages, we are confident and lifetime is now recognized as an important participant in the food service industry and will continue to expand its product placement across North America.
We maintain our long-term view that we can grow our total foodservice business to $60 million in revenues by 2026. We finding and building out our e-commerce strategy, it remains a key strategic priority for life.
This quarter, e-commerce net sales exceeded 23% of our total net sales for the quarter, contributing meaningfully to our overall outperformance. This represents an increase of nearly 3.5% from the comparable quarter a year ago when our e-commerce net sales were slightly below 20%.
We are continuing to hone our online strategy to ensure we are best positioned to capitalize on the significant opportunities we see in the channel. We maintain a strong focus on new product development and channel expansion to bolster our market position.
Looking ahead, we are excited about our robust new product pipeline, many of which are incremental revenue opportunity. Production of our previously announced Dolly Parton branded products is well underway with shipments on track to begin in April and the majority of products slated for the second half of the year.
This launch is across four different product categories, all in the dollar channel, which is a new channel for life. We are also reinvigorating our robust pipeline of small products with new items being launched in the first quarter of 2024.
This will initially be available online on small.com as well as across e-commerce, yes, in line with our commitment to reduce our exposure to supply chain issues in China. We continue to ramp up production capacity in our Mexico facility with the facility now operational and on track to reach full capacity in 2024 and combined with other sourcing initiatives.
We are well on our way to meeting our previously stated target of approximately 25% of our spend on goods being outside of China by the end of the year.
Active balance sheet management remains a priority for us, and we are pleased with our financial position as we enter 2024. Our disciplined cash management throughout 2023 led to a noticeable improvement in working capital year over year in both our US and international businesses, which Larry will discuss in further detail shortly.
We remain prudent in our approach to capital allocation and are open-minded to value-enhancing M&A opportunities that align with our strategic priorities. We will continue to evaluate opportunities as they arise especially in the current market, which favors strategic buyers.
In summary, we are pleased with the strong momentum across our business as we close out 2023. The significant work we have done over the past several years to transform and reposition our business is paying off, and we are entering 2024 us as a more focused, agile company.
Looking ahead we are excited by the meaningful work already underway across our organization to continue innovating new products, expanding into new channels and growing market share, generating significant value for our shareholders.
With that, I'll now turn the call over to Larry.
Larry Winoker
Thanks, Rob. As we reported this morning, net income for the fourth quarter of 2023 was $2.7 million or $0.13 per diluted share versus $3.3 million or $0.15 per diluted share in the fourth quarter of 2022. Adjusted net income was $6.3 million for the fourth quarter of 2023 or $0.29 per diluted share as compared to $7.5 million or $0.35 per diluted share in 2022.
Income from operations was $15.7 million for the fourth quarter of '23 as compared to $12.8 million in the 2022 period. Adjusted income from operations for the fourth quarter of '23 was $19.4 million compared to $18.2 million in the 2022 period and adjusted EBITDA for the full year 2023 was $57.3 million.
Adjusted net income, adjusted income from operations and adjusted EBITDA are non-GAAP measures, which are reconciled to our GAAP financial measures in the earnings release following comments on the fourth quarter of 2023 and 2022, unless stated otherwise.
Consolidated sales declined by 1.9%. US segment sales decreased by 4% to $185.2 million. The decrease occurred in the tableware and Home Solutions categories. Tableware was lower as most of its warehouse programs shipped during the first nine months of the year. And Home Solutions decline was due to lower hydration products in the corporate sales channel. The decrease was partially offset by offset by strong sales in the kitchenware category.
International segment sales increased by $3.8 million or $2.9 million in constant US dollars to $17.9 million. As Rob discussed in the fourth quarter, international had its first upturn in sales since the fourth quarter of 2021. The increase was attributable to higher e-commerce sales and market share gains from the launch of the go-to-market strategy and an increase in Asia sales too.
Gross margin increased to 36.4% from 34.9%. US segment gross margin increased to 37.2% from 35.8%. The improvement is due to lower inbound freight rates and favorable product mix. For international, gross margin decreased to 27.2% from 37.1%, most notably from reserves to certain slow moving inventory.
US segment distribution expenses as a percent of goods shipped from its warehouses excluding warehouse redesign, expenses were 8.7% versus 9.2%. The improvement was attributable to the significant reduction in inventory, which eliminated the need for outside store storage and improved operating efficiency.
In addition, better safety experience, lower insurance costs and abating inflation due to some other expenses such as propellants. These reductions more than offset the cost of higher labor rates.
International segment distribution expenses as a percentage of goods shipped from its warehouses were 19.1% versus 19.6% the improvement was due to lower outbound freight rates and more shipments from the Netherlands warehouse.
Selling, general and administrative expenses decreased by 4.1% to $38.7 million. US segment expenses decreased by $3.2 million to $29.1 million and as a percentage of net sales, expenses decreased to 15.7% from 16.7%. The decrease was attributable to lower allowances for bad debt and a decrease in acquisition-related contingent consideration.
International SG&A expenses increased by $700,000 to $4.5 million. As a percentage of net sales, expenses decreased to 25% from 26.7% due to the effect of period expenses on higher sales volume. Unallocated corporate expenses increased by $0.8 million to $5.1 million. The prior year reflected an expense reduction for performance stock awards not expected to be earned.
Interest expense excluding a mark-to-market adjustment for swaps increased by $0.5 million due to higher interest rates on our variable-rate debt, substantially offset by lower average borrowings. The loss on extinguishment of debt was for the write-off of un-amortized Term Loan fees due to a loan amendment.
For income taxes in both Q4 '23 and '22, the rate exceeded the statutory rate, primarily due to state and local tax expense, non-deductible expenses and foreign losses for which no benefit is recorded. Related to our 24.7% equity interest in Grupo Vasconia, we recorded our proportional share of its losses. Grupo Vasconia is a passive investment for us.
Finally, turning to our balance sheet. In November we amended and extended our term loan. We now have no debt maturities until August 2027. In connection with the term loan amend and extend, we repaid $48.7 million of principle. And as a reminder, in June '23, we repaid $47.2 million of principal too.
Notwithstanding this $97 million reduction in permanent debt, our balance sheet continues to be very strong, with $134 million of liquidity. Liquidity includes cash plus availability under our credit facility and receivable purchase. Our adjusted EBITDA to net debt ratio as at year end was 3.4 times, a considerable improvement from 4.0 times at year end 2022.
This concludes our prepared comments. Operator, please open the line for questions.
Question and Answer Session
Operator
Thank you. (Operator Instructions)
Anthony Lebiedzinski, Sidoti & Company.
Anthony Lebiedzinski
Good morning and thank you for taking the questions. So the first the morning. So first, just a quick follow-up in terms of the fourth quarter sales. So I know on your last conference call in November, you guys talked about a timing shift for shipments to a certain large warehouse club customer.
So was the US segment sales, the hurt was that the primary reason why US segment sales were down from a year ago is because of this timing shift? Or is there anything else that happened there?
Robert Kay
And yes, so the fourth quarter came in above our revised guidance range. And if you look at it on a year over year basis, there was a club program which didn't repeat, and that's driving year over year performance. The outperformance versus our revised upward guidance that we issued last quarter was not related to the club channel.
Anthony Lebiedzinski
Okay. Got you. Thanks for that clarification, Rob. So and then just to follow up in regards to the, but overall with the e-commerce strategy. So you mentioned that it was 23% of your sales in the fourth quarter. Do you have that number for the full year.
And then as you look forward, I mean, do you guys have a goal in mind in terms of how high you want to get this to? And just wondering about the margin profile for that channel versus others?
Robert Kay
Yes, Anthony, and let me start and then Larry will give you the particular. There's by 23.2% I believe for the quarter. So we do not have a target number in mind. Our sales velocity is two, so wherever the consumer is from and to maximize those opportunities.
So we did reorient in terms of how we expanded our approach, which is why we've been successful across all channels, growing and growing our share in each channel. So we tweaked that a little bit about six to eight months ago, and it's paying off nicely for us in gaining market share.
So we're trying to maximize the pie in every channel for us and but we there's no specific target. And part of that is based upon the overall market and again, where the consumer spending, right. So if the consumer spends 50% of their dollars in the e-commerce channel, we want to be at least 50%, right?
So it's and that will drive it more than what we're experiencing now, which isn't being driven by a shift in the quarter or the last six months, really towards e-commerce in the total market. It's more just like times approach to that channel, which has been giving us enhanced success. Larry, you want to give the full number of digital units.
Larry Winoker
So for the full year, e-commerce sales increase 2022 was 18.7% of sales, in '23, full year was 19.3%.
Anthony Lebiedzinski
Got you. So thanks for that. Okay. Perfect. And then so as far as the other side, the margin profile for e-commerce versus others is that comparable?
Robert Kay
Yes, I forgot to answer that. Yes. Yes, again, profitability is comparable, but there are different channels which have different dynamics. As we've talked about the club channel which is a very healthy and good channel for us, does usually run at a lower gross margin. It does have work on cathode and benefits, but again, it's all priced accordingly. But in general, yes, the answers your questions.
Anthony Lebiedzinski
Got you. Okay. So I know you're not yet providing guidance. I know typically you do that in May, but as far as just if you could wondering if you guys could provide some additional color.
So as you have your conversations with your top customers, what are you hearing from them in regards to overall demand from as far as retail traffic, our online traffic, you know there just to support what could you share with us as we have tried to recalibrate our models here after the results.
Robert Kay
So the market seems to be our stable and retailers are definitely more comfortable. There's less discounting than is seen when they're having trouble. So that there isn't discounting that we're seeing in the market.
There is some healthy dialogue. The industry's big show happens next week. We'll know more after that. And but we are comfortable with the conversations we're having, we don't see there being a downward, discussion.
Anthony Lebiedzinski
Got you. Okay. And then last question before I turn to other. So you did have done a nice job with improving your cash flows, looks like with healthy inventory levels as well. And as we look forward, how do you feel you can further reduce inventories? I know there are some quarterly variations, obviously.
But I mean, as far as just the when you look at managing inventories, do you think there's some further improvements you could make or you think this is kind of lucky. The bulk of that has already been realized.
Robert Kay
Anthony again, just backing up the second Lifetime's financial profile is a very strong free cash flow. So we generate very good free cash flow. And we have a very strong balance sheet and in a lot of the macro driven some challenges over the last couple of years, including trade issues ocean freight issues, availability and COVID related bomb.
We made a decision as we were very public about to invest heavy in inventory, and we use that to help gain market share which we've retained and by investing in more inventory, higher inventory levels.
In 2022, '23, when the market wasn't as robust, we in an orderly basis because as we said, this is always good inventory, we reduce those inventory levels. And again, we point out that our margin maintained or grew.
So it wasn't like we were dumping inventory and it was an excess that was just scaled and investment and we monetize that helped us feel, as Larry mentioned, it helps us be in a position to really repay almost $100 million of term loan in 2023.
Yes. So just deal in general is very strong. Do we have an ability to further reduce inventory levels from where they are today. We do in our international markets, more so in the US. With the one caveat that the trade retailers in general have relied more, which has been beneficial to us, but it relied more on vendors for replenishment inventory and less in their around distribution centers.
They're smart and they can push that down to strong people like us come in very robust economic times that shifts where they want quicker terms into their stores that we're not in that environment now in a high-growth environment. So that always helps us in terms of inventory turns because it's not in our DCs. And there's but the big numbers we've taken off of our balance sheet in the U.S., there is still room International.
Anthony Lebiedzinski
Understood. Well, thank you very much for all our color and best of luck going forward.
Robert Kay
Thanks, Anthony.
Operator
Thank you. (Operator Instructions)
Brian McNamara, Canaccord Genuity.
Brian McNamara
Hey, good morning. Thanks for taking the question guys. So Rob, in November, you mentioned that you did not expect much of a rebound in the US end markets in either Q4 or 2024 as visibility remains pretty poor. I'm curious if that view has changed at all relative to four months ago.
Robert Kay
I'd love to answer that, Brian. I'm yes, a little bit. I mean, first, starting with Q4, we exceeded you're right. We had revised our guidance upwards and we know exceeded everyone's expectations, including our own. So the market performed stronger than what we expected positive.
But you know, in terms of our expectations and we feel we're fairly on top of our business, it did better than we expected, and that's good, obviously on. So we're still getting the data points. We are particularly this year as we launch a whole new channel and a new line here, there's a big market share pickup.
So that's not end market, delivering our results. We'll get results from that by our new newness. Incremental on there is a little better clarity, but I think that we're still in a market where there is still unknowns in terms of general economy, less so in North America than internationally. But there is an absolute clarity what we see in normal conditions.
Brian McNamara
That's helpful. It's nice to hear the new product launches offers as well in Q1, I guess I'm curious your views on the hydration segment overall, given the recent stand they crave and how you intend to position the brand in the market with competitive intensity ramping here.
Robert Kay
Yes Stanley has been a phenomena and has gained tremendously is the whole category has grown driven primarily by some Stanley and one other participant has done particularly well, particularly at Wal-Mart. They've been driving that category. Still very big category in as well as a phenomenal brand was needed additional investment the yield from when we bought it.
And we have done that and as well as it's really a phenomenal brand with great equity from a product development perspective, we inherited a zero pipeline, and we just need to reinvigorate that. And we have and actually you can see just by going on small.com or in our one, the e-commerce channels as a pure-play guys, you'll start to see our products on.
So but now Stanley, everyone, including us, has entrants into the CNO, keep you very high-graded with very a really big box side, which is what Stanley is, um, look, they've done a phenomenal job from. So we are increasing our advertising because Stanley, as a good example, has done a tremendous job in social media. We need to get the story out. It's a great brand.
And we need to really emphasize the story that already people now, particularly with swell, but also built as a major participation in hydration. And so we're spending more to reinforce our brand equity. We reinvigorated both at build and scale product development. You'll see go online. You will already see and you will continue to see that come to market, which we are very enthusiastic.
Brian McNamara
Great. That's helpful. I know you're not providing obviously fiscal guidance in May, but is it reasonable to expect top line growth this year?
Robert Kay
Yes, sorry. I mean, wait until May, but one thing just mathematically to look at is we are doing a major launch into a channel with Dollar General has 20,000 stores. We'll have 23,000 very shortly. We're going to be in every one of those arms. So that's going to have an impact. Part of that won't be until '25, but a decent amount will be in '24.
Brian McNamara
Okay. Just stock's done quite well since your Q3 earnings. I'm curious what should I get investors excited for 2024 and moving forward. And then I'm done. Thanks, and appreciate you taking all the questions.
Robert Kay
No problem, as you know, Brian and the people on management and our key shareholders that are on the Board own a lot of this company and we're very committed and with our own money in terms of stake in the company, and we're very pleased with the run-up of the stock this year.
We still think it's tremendously undervalued and just the math and everyone both around some. So we are pleased. We think there is just where we are today in oh is and particularly in a relatively So um, there this on the value. If you look at the cash flow that we generate now and just the math on.
But we've been turning around our international business. It's got huge potential. There is huge opportunity there. We're starting to see some traction because of hospitality as we grew the business. When we know we launched a business that we have changed management in 2018, we put something together.
We streamlined the operation but we also launched our food service initiative at Macassa hospitality, and that takes time, no COVID delay that we have, as we've talked about, gained real traction in 2023 we'll see real results in 2024 and beyond.
In particular, that business is really an annuity business. Once you're specked on, you're selling that same product for years. So that will ramp up on. And that's something that we are I've talked about being excited about.
We see that now fermenting and remain very, very excited and there's been some bumps we haven't lost any market share, but there have been some bumps in 2022 after COVID on the Company is very streamlined. And as we continue to grow a lot of that falls disproportionately positive to the bottom line. Very excited about that.
And you know, we talk we don't overemphasize in terms of the M&A opportunities, but strategics have an advantage for the first time in 20 years in that, but you know, dozens. And so we're cautiously optimistic that will translate and opportunities for us.
Frankly, if we wanted to be much more aggressive. We'd be buying a lot more businesses today, but we will maintain a very strict financial discipline. But we think there's opportunities and hopefully we'll be able to transact it takes to and we're not going to sacrifice our discipline to do that.
So there's many different levers and that excites us and hopefully excites the public in terms of the ability to continue to create value, let alone, just from a cash flow generation basis, we continue to create equity value with the cash flow that we generate, even if we did not grow. And of course, we all these levers. We think there's ample opportunity for returns, nice growth above market.
Brian McNamara
Thank you.
Larry Winoker
Thank you.
Robert Kay
Thanks Brian.
Operator
Thank you. There are no further questions at this time, I'll hand the floor back to management for closing remarks.
Robert Kay
Thank you, operator, and thank you, everyone, for attending our call, and we look forward to issuing our full year guidance, as is our custom with our next call. Larry and I remain open for anyone who has questions or comments or wants to discuss any aspect with us in the interim. Thank you very much and have a great day.
Operator
And this concludes today's call. All parties may disconnect it. Have a good day.
