Lifetime Brands, Inc Q2 FY2025 Earnings Call

Good morning, everyone, and welcome to the Lifetime Brands Second Quarter 2025 Earnings Conference Call. I would now like to introduce your host for today's conference, Jamie Kirchen. Mr. Kirchen, you may begin.

Good morning, and thank you for joining Lifetime Brands Second Quarter 2025 Earnings Call. 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, and these statements are intended to qualify for the safe harbor protection from liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and factors that could influence our results are highlighted in our earnings 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 developments. Except as required by law, the company does not undertake any obligation to update such statements. Our remarks this morning and in our earnings release also contain non-GAAP financial measures within the meaning of Regulation G promulgated 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.

Thank you, and good morning. The second quarter presented a number of challenges, some anticipated and others that emerged quickly. I'll start by discussing how we have best mitigated the challenges, the impact on the second quarter. And before I turn the call over to Larry, I'll speak at a high level on our expectations for the third quarter. Despite the dynamic macro environment, we have and will remain focused on execution and positioning Lifetime to emerge stronger over the medium and long term. During our first quarter call, I walked through the proactive steps we've taken over the past 2 years to stay ahead of evolving U.S. trade policy. This includes shifting parts of our manufacturing footprint outside of China, acquiring and now expanding our facility in Mexico and diversifying sourcing across key geographies like Vietnam, Cambodia, India and other parts of Southeast Asia. Thanks to the proactive steps we have taken, we're well positioned to manage ongoing tariff-related uncertainty. That said, our second quarter results were not immune to near-term macro headwinds tied to the evolving trade environment. This was driven by meaningful swings in tariff rates across many geographies that caused a temporary stoppage of shipping until more clarity emerged. These changes led to unplanned shipment delays, particularly with key accounts in the e-commerce and club channels. That pressure was most acutely felt in our top line, which declined approximately $10 million year-over-year. We see this as mostly an unusual event in response to the tariff environment, particularly the uncertainty and magnitude of Liberation Day and the 145% China tariffs imposed in April. Many of our customers and Lifetime halted shipments and delayed orders, which directly affected our second quarter performance. With the easing of these measures by the end of May, we have seen a normalization of shipment cadence by the beginning of the third quarter. Some of the shipments that were delayed during this period have been rescheduled for the second half of this year, while a portion will not resume until 2026. While we undoubtedly experienced headwinds in the club and e-commerce channels, we did benefit from strong gains in cutlery, kitchen measurement and continued growth in our international business, which helped offset some of the declines and underscores our strategically diversified platform. Speaking to the strength of our diversified platform, I want to take a moment to remind investors that we meet consumers where they shop across a wide range of channels. This intentional diversification helps ensure we're not overly reliant on any single outlet, which we view as a key strategic advantage. As part of our response, we acted quickly introducing targeted pricing adjustments, implementing structural cost reductions and moving forward with our previously outlined resourcing strategy. As we moved swiftly on the price increases, as mentioned previously, Lifetime put a temporary and additional pause on some shipments. We view this as a necessary tariff-mitigation technique, temporarily impacting shipments as we fully implemented these price increases. As of today, we have completed our intended targeting actions related to the current tariff environment. What's more important and what we are choosing to focus on is what we can control. Noteworthy, while we saw a decline in our top line in the second quarter, our EBITDA performance remained stable. Our adjusted EBITDA was consistent with the last quarter, underlying the strength in our core operations. This was aided by the actions I referred to a moment ago, including cost-efficiency actions, which amount to over $14 million on an annualized basis. Cash flow from operations exceeded $25 million year-to-date and liquidity remains strong with over $90 million on hand to support both near-term needs and longer-term strategic initiatives. We also continue to see traction where our investments are aligned with market opportunity. International markets, especially Europe, delivered another quarter of growth. Cutlery was supported by new product introductions and performed well with continued gains in market share and innovation remains central to our category approach. The response to Build-A-Board, for example, is a reminder of our ability to identify trends and bring compelling ideas to market at scale. Turning to some segment highlights. In addition to Build-A-Board, we continue to see growth in areas such as our Taylor division, particularly in kitchen and weather measurement; our Fred product line of unique gift and accessory items; and our international business, which had another quarter of growth driven by e-commerce and a continued push into national accounts. As I mentioned, on the supply chain front, we remain on track to have the capability to move 80% of production outside of China by year-end, with new partnerships and capacity ramping up in North America and throughout Southeast Asia. This is a fundamental repositioning of our sourcing footprint, not a short-term hedge. It enhances flexibility, improves cost efficiency and materially reduces exposure to tariff volatility. Turning to potential M&A activity. We've seen a meaningful pickup in unsolicited inbound interest, driven in part by financial pressure on many industry players. While it's still early, we are actively evaluating several highly attractive opportunities. We plan to share more here in the coming weeks as our diligence progresses. Looking ahead, while we remain cautious on the broader demand environment, we believe the second half will be stronger as pricing resets, shipments resume and our cost base reflects the full benefit of our early decisions. We continue to make strides in our international business, and we'll continue to report on our progress as we work through the second half of this year. In summary, this was a tough quarter, but not a surprising one and not one that changes our longer-term view. We have a solid foundation, a healthy balance sheet and a clear operational roadmap. We're confident in our ability to manage through this period and create long-term value for all stakeholders. As discussed above, we view the extreme conditions in the second quarter to be largely mitigated as of today. Based upon this environment, we see a notable portion of the revenue impact from our second quarter as not indicative of the rest of the year, which without additional macro-driven impacts should have a more normalized demand from our retail customers based on listings and market share. With that, I'll turn it over to Larry to walk through the financials.

Thank you, Rob. This morning, we reported a net loss of $39.7 million for the second quarter of 2025, which amounts to $1.83 per diluted share, compared to an $18.2 million loss or $0.85 per diluted share for the same quarter in 2024. The current net loss includes a noncash goodwill impairment charge of $33.2 million related to our U.S. segment. In the previous period, the net loss included a noncash charge of $14.2 million from the loss of significant influence in our equity investment in Grupo Vasconia. The adjusted net loss for the second quarter was $10.9 million, or $0.50 per diluted share, compared to $600,000, or $0.03 per diluted share, in 2024. The loss from operations stood at $37.2 million this quarter, while we had income from operations of $1.2 million in the same quarter last year. This loss also includes the $33.2 million noncash goodwill impairment charge related to the U.S. segment. By June 30, 2025, our goodwill balance has been reduced to zero, which we believe will lead to a closer alignment between GAAP earnings and non-GAAP adjusted earnings in the future. Adjusted income from operations for the second quarter was $900,000 compared to $5.6 million last year. Our adjusted EBITDA for the trailing 12 months ending June 30, 2025, was $50.7 million. Adjusted net loss, adjusted income from operations, and adjusted EBITDA are non-GAAP financial measures reconciled to our GAAP financial measures in the earnings release. The consolidated sales fell by 6.9% to $131.9 million, with U.S. segment sales dropping 8.6% to $119.3 million. Sales were negatively impacted by shipment delays, particularly due to high tariffs on goods from China and the recent announcements around Liberation Day. Within the segment, major decreases were seen in home solutions and tableware, partially offset by gains in kitchenware, driven by increased sales of cutlery and board products. On the other hand, our international segment sales grew by 12.4% to $12.6 million, and when excluding the effects of foreign exchange fluctuations, the increase was 6.6%, primarily in the U.K. and Continental Europe. Overall, our gross margin remained stable at 38.6% compared to 38.5%, with the U.S. segment gross margin increasing to 39.1% from 38.7%, thanks to a favorable product mix. The second quarter margin was not impacted by tariffs. However, the international gross margin dropped to 32.5% from 36.6% due to an unfavorable mix of customers and products. Distribution expenses in the U.S. segment as a percentage of goods shipped from warehouses were 11%, up from 9.5%, primarily due to lower shipment volumes leading to reduced absorption of fixed costs and expenses linked to the implementation of a new warehouse management system, along with increased freight-out expenses. For the international segment, distribution expenses rose to 26.8% from 25.1% due to higher warehouse expenses associated with expanded distribution in the Asia Pacific region. Selling, general, and administrative expenses decreased by 2.1% to $37.5 million, with U.S. segment expenses remaining in line with last year. Increases in provisions for doubtful accounts and amortization related to a specific freight situation were offset by a decrease in employee expenses, including incentive compensation. International SG&A expenses were aligned with the previous year. Unallocated corporate expenses fell because of lower incentive compensation and legal expenses. The income tax rate for the current and prior periods was 6.5% and 0.3%, respectively. In 2025, our tax rate diverged from the federal statutory rate due to a partial valuation allowance on U.S. deferred tax assets stemming from the goodwill impairment charge. In 2024, the difference was attributed to foreign losses with no recognized tax benefits and the expiration of nonqualified stock options and equity-based awards where the book expense exceeded the tax deduction. Our balance sheet remains strong despite challenges from high tariffs. At the end of the quarter, our liquidity stood at approximately $97 million, which includes cash and availability from our credit facility and receivable purchase agreement. Year-to-date, we have reduced net debt by $80 million, and our adjusted EBITDA to net debt ratio as of June 30 was 3.5x, an improvement from 3.6x in March. This wraps up our prepared comments. Operator, please open the line for questions.

The first question comes from Anthony Lebiedzinski of Sidoti & Company.

So Rob, you talked about taking up pricing in the quarter. Maybe if you could just give us some details as to give us a framework how to think about pricing versus unit volumes, how that was in the second quarter, that would be helpful.

Sure, Anthony. In the quarter, we implemented price increases. While it may vary based on what you're selling and your customer base in the channel, it's important to apply these changes consistently across all areas. You can't sell your products at different prices in different locations. Therefore, we focused on ensuring uniformity and have put this into effect as of today. However, these price increases did not affect the second quarter.

Okay. All right. And then can you give us an update on the Dolly Parton products at Dollar General? And I know, previously, you guys talked about putting in some additional brands through Dollar General. So it would be helpful to get an update on that.

Sure, Anthony. One of the misses in the second quarter versus our expectations was Dollar General, where in April, when tariffs skyrocketed, shipments were put on hold and therefore, we didn't ship much to Dollar General in the second quarter. Everything that didn't ship will ship in 2025. The program continues to do extremely well and continues to expand versus last year. We are in discussions with launching additional brands at Dollar General, but we have not finalized anything as of today.

Got it. Your international segment showed strong sales growth. Can you provide an update on the operating income or loss in that segment and share the latest on Project Concord?

Yes. In general, and we had to write off some inventory, which had a negative impact on the international bottom line. Just as we've gotten through Concord, there was some excess that we wrote down, I should say, not. But we're still tracking a lot of what we've done in terms of cost takeout, which is not as easy to implement legally in the U.K. as it is in the U.S. So a lot of the actual financial impact starts flowing through in the third quarter. So we're still on track for what we've been doing. The big impact is going to be in the second half of the year financially. And yes, we continue to monitor closely to make sure, as we've said in the past, that we hit those milestones.

Got you. Okay. And my last question before I pass it on to others. So your distribution expenses were up 7% from last year. I think, Larry, you mentioned a new warehouse management system and a new warehouse in APAC. So is that really the only reason? Or is there anything else unusual driving those dollar increases in terms of distribution costs? And how do we think about this cost item for the back half of the year?

Yes. Another factor is the shipments we delayed or canceled in the second quarter due to the tariff, which significantly affected the warehouse club. Our warehouse club business does not operate through the warehouse; it goes directly from overseas suppliers. Therefore, when you compare sales to our warehouse expenses, it will appear worse. However, in absolute terms, those are the factors we've discussed. There is also some disruption as we transition into a new warehouse while closing an existing one.

Yes. And as we talked about, we expect some inefficiencies until we go live in our new warehouse, which will be in 2026, and we are completely on schedule.

The next question comes from Brian McNamara of Canaccord Genuity.

First off, can you reasonably quantify how much sales you might have left on the table by stopping shipments and other internal actions to kind of mitigate tariffs in Q2? And what impact, if any, lingers into Q3 in the back half?

Yes. Some of the significant changes were due to shifts and delays, totaling over $30 million. The only carryover into the second half of the year will be from delays in certain programs, which will alter ship dates. We are still working to finalize ship dates for some items; if a shipment is delayed from September to October, it will still count for this year. However, if a shipment moves from December to January, it will affect this year in favor of next year. The majority of the disruption we experienced in the second quarter has now passed.

Okay. Fair enough. Secondly, why is, I guess, guidance so difficult to provide with the improved clarity on tariffs here? We've heard from many other companies, even those perhaps more exposed that have either reinstated guidance or at least updated prior outlooks.

Yes. We have considered it, but we lack clear visibility. Conditions change frequently, and the effects of pricing increases have not yet been fully experienced by consumers. Currently, we find the visibility to be quite poor, and we prefer not to proceed with so much uncertainty. We will reassess the situation for the next quarter, though.

On your point on pricing, when do you think pricing actually hits the shelves because I would actually agree with your standpoint across consumer for the most part.

There was an article today I was reading in a major national publication that was talking about Hyster trucks doing it soon. So that's their opinion. I agree with that. I also think that it wasn't uniform. So some stuff that you started to see immediately move was some of the bigger retailers direct import private label stuff because, right, they're paying that, they're passing that through quicker. Though I think many companies have absorbed a lot and delayed price increases, but that we've seen catching up. And we expect that to be hitting shelves in Q3.

And then what kind of elasticity are you guys expecting? And what products are kind of most price-sensitive?

Well, traditionally, price increases haven't significantly affected many of our products, mainly because their average selling prices are relatively low. For instance, if a can opener goes from $7 to $8, we haven't observed a change in volume in the past. Larger items like dinnerware sets or tabletops may be more sensitive to price changes on the consumer side. However, on the foodservice side, those items are not very sensitive to price changes. The real concern arises during economic downturns when hotels and restaurants reduce capital investments, such as new store openings or even closings, which affects their purchases of tabletop goods, but pricing itself does not.

This concludes our question-and-answer session. I would like to turn it back over to Robert Kay for closing remarks.

Thank you, and thank you, everyone, for tuning in for our call this quarter. We hope to keep people updated on a timely basis and look forward to speaking to people on the next call. In the interim, as always, Larry and I are available for anyone who wants to reach out. Thank you, and have a good day.

Thank you. This concludes today's conference. We thank you for your participation. You may now disconnect your lines at this time.