Earnings Call Transcript - LCUT Q2 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Lifetime Brands' Second Quarter 2022 Earnings Conference Call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speakers' remark there will be a question-and-answer period. I would now like to introduce your host for today's conference, Andrew Squire. Mr. Squire, you may begin.

Andrew Squire, Host

Thank you. Good morning, and thanks for joining Lifetime Brands second quarter 2022 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 today's press release and others 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 today's press 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 to the comparable financial measures calculated in accordance with GAAP. That introduction, I'd like to turn the call over to Rob Kay. Please go ahead, Rob.

Rob Kay, CEO

Thank you. Good morning, everyone, and thank you for joining us today. Our performance in the second quarter was strong compared to pre-pandemic levels but we continue to feel the impact of the macroeconomic challenges that companies across industries continue to face. Inflation and supply chain disruptions have created inventory buildup at major retailers. Combined with weaker end market demand across many channels, these factors have created a slowdown in purchases from consumers as well as our retail customers this quarter, notably in off-price retailers. Despite this environment, we were pleased to record results that exceeded pre-pandemic levels, which is a testament to the progress the team has made, executing on our strategic objectives. These results demonstrate that Lifetime continues to effectively manage our business, notwithstanding macroeconomic and other external impacts. We delivered $151.3 million in net sales and $7 million in adjusted EBITDA compared to $188.6 million in net sales and $18.2 million in adjusted EBITDA for the 2021 period. However, compared to the 2009 quarter, which is a relevant benchmark prior to the significant impact of COVID-19, our growth in net sales and adjusted EBITDA is 6.2% and 6.3%, respectively. We believe that we have positioned Lifetime well to navigate these headwinds and have taken a number of mitigating actions, including implementing pricing adjustments where possible and reducing our SG&A over the course of 2022. Our business model has proven resilient through all market cycles, and we are confident we are on the right path. Starting with our core U.S. business. Our distribution remains solid, and we continue to consolidate the market share gains we have made over the last several years. That said, inflationary pressures have dampened the end market demand with many retailers pushing back their scheduled deliveries due to supply chain disruptions and over inventory positions that occurred as a result. Because of the recent supply chain challenges, retailers have received late shipments across many categories and have missed seasonal windows, resulting in a shift in focus to selling down inventory on hand versus selling in with new product orders. Ultimately, while some decrease in consumer demand related to inflation is likely to persist, we expect orders from our retailers to return to more consistent levels in the latter half of the year once they are able to sell down their built-up inventory. We have already seen public comments from a number of major retailers suggesting they expect a more normalized second half of the year. For the quarter and year-to-date periods, respectively, e-commerce sales represented 18.7% and 18.9%. This was an increase from the prior year, which was 16.1% for the second quarter and 18.4% for the year-to-date period. Strong performance in Amazon and growth in our burgeoning DTC channel contributed to the increase. Drop-ship sales through omnichannel retailers declined approximately 17% for the year-to-date period as this channel showed reduced demand driven by the inventory and related issues that I've already discussed. We continue to gain traction on our various growth initiatives, including Year & Day, which has now successfully relaunched and is seeing strong growth every quarter. Turning now to our international business. While we continue to gain market share in Europe, our performance in our European business was significantly impacted by several factors. The ongoing uncertainty caused by the war in Ukraine, in addition to even more severe inflation and supply chain pressures than those we face in the U.S., have dampened end market demand across Europe and resulted in a corresponding decline in shipments for our EU-based operations across all channels. We continue to see a long-term opportunity to expand our business in the international markets, and we will continue to pursue our growth initiatives with this objective in mind. Our new distribution center in the Netherlands is now fully operational and performing in line with our expectations. We are already in discussions with several customers about expanding our business in Continental Europe later in 2022 and beyond as a result of this new capability. In Asia, we have also seen a falloff in growth as a result of supply chain and inflationary challenges. But our Asian business continues to be profitable, and we continue to see a significant opportunity with consumers in Asian markets going forward. It's worth noting that the challenges in our international business are no longer operational in nature as in the past, prior to our reorganization of the business and are primarily a result of macroeconomic factors. We continue to feel good about the progress we have made on our European and Asian expansion, further as a result of the successful execution of the international turnaround strategy. We believe our full year 2022 will continue to show incremental financial progress, notwithstanding the current economic environment. In commercial food service, Mikasa Hospitality continues to gain traction. We are confident with the new leadership that we added earlier this year. We are well-positioned to pursue our strategic objectives in this important growth initiative. While we have seen a rebound in the commercial food service sector this year, we are cautious about the impact the recessionary environment would have on this industry which could delay our progress in the short term but may accelerate our long-term penetration due to our strong financial position compared with most of our competitors in this space. Our other growth initiatives to expand into additional product categories also remain on track and are showing results. While the demand environment remains somewhat challenged, we are starting to see an easing in the global supply chain and shipping disruptions of the past couple of years. Our ocean freight costs are down noticeably compared to the prior year, and more importantly, availability has greatly increased. As I mentioned briefly earlier, we have already taken actions to mitigate the inflationary and supply chain impacts we are experiencing. We have discussed our successful strategy of gaining competitive advantage by investing in higher inventory levels the past couple of years, which has resulted in market share gains for Lifetime. With the shifting demand picture in the second quarter, we have adjusted our strategy and are now focused on reducing our inventory levels gradually over time while still ensuring we are adequately stocked to be a reliable partner to our customers and maintain our strong relationships with retailers. In addition, we have implemented plans to reduce our SG&A across the globe and we previously implemented price increases in line with broader economic inflation. We believe the actions we have taken will enable us to maintain robust earnings in this challenging environment but we will continue to be nimble and flexible in responding to the market as we navigate ongoing macro challenges. In addition, considering lessons we have learned from the pandemic, as well as macroeconomic and geopolitical factors, we have made a concerted effort to reduce our reliance on China-based manufacturing and build alternative sourcing options into our global footprint. This initiative is long term in nature, and we are actively working on opportunities in Mexico, Eastern Europe, and multiple Asian countries. This is an important long-term effort to reduce our risk and enhance our operational flexibility, addressing unexpected supply chain challenges in the future. Turning now to our financial guidance. In light of the current environment and our results in the second quarter, we are revising our outlook for the full year 2022. While we had anticipated softening of demand and accelerated inflationary cost pressures in the outlook we issued in May, we did not anticipate the abrupt short-term change in order trends across most channels in the quarter, due to the dynamics discussed earlier, which have delayed many shipments in the first half of the year. While we continue to view these impacts as short term and expect a degree of normalization in the second half of the year, we now expect our adjusted EBITDA to be in the range of $73 million to $79 million and our net sales to be in the range of $800 million to $850 million for the full year. Looking ahead, we will continue to be proactive in managing through this environment, and we are focused on maintaining a healthy balance sheet and strong cash flows to maximize our operating flexibility. On last quarter's call, we spoke about our commitment to the goals we announced in our five-year plan. While we believe that the goals of the plan can still be achieved due to the current economic and geopolitical conditions and potential impact on global growth, we are not, at this time, providing an update, while near-term visibility in our results is limited. We remain committed to being transparent on our long-term objectives and as more certainty emerges, we look forward to sharing our strategic path forward as we have consistently shared with our stakeholders in the past. Overall, our business model has proved resilient through all market cycles, and our strong balance sheet and cash generation remain significant competitive advantages for Lifetime despite fluctuations in consumer behavior. We continue to execute well on all of our growth drivers, and we believe that our leading brands, strategic growth initiatives and financial flexibility will continue to drive significant long-term shareholder value. With that, I'll now turn the call over to Larry.

Larry Winoker, CFO

Thanks, Rob. As we reported this morning, the net loss for the second quarter of 2022 was $3.5 million or $0.16 per diluted share versus net income of $5.8 million or $0.26 per diluted share in the second quarter of 2021. Adjusted loss was $2.9 million for the second quarter, a loss of $0.22 or $0.14 per diluted share compared to adjusted income of $6.1 million or $0.28 per diluted share in 2021. Loss from operations was $500,000 for the second quarter of 2022, as compared to income from operations of $11 million in 2021. Adjusted EBITDA was $79.9 million for the trailing 12-month period ended June 30, 2022. Adjusted net income, adjusted income from operations and adjusted EBITDA are non-GAAP financial measures and are reconciled to our GAAP financial measures in the earnings release. The following comments are for the second quarter of 2022 and 2021 unless stated otherwise. Consolidated sales declined 18.9% from 2021. The impact of very high inflation and unprecedented supply chain disruptions resulted in significant excess inventory levels at retail that have adversely affected our business in the current quarter. These results look especially weak when we compare them to a very strong 2021. However, when compared to the last pre-pandemic second quarter of 2019, they were up 6.2%. The U.S. and International segment sales declined in the current quarter. The decreases were for the reasons following a very strong performance in 2021. When compared to the last pre-pandemic second quarter of 2019, the U.S. segment sales were up 11.5%. A portion of this increase came from higher selling prices and the acquisition. Gross margin increased to 36.5% from 35.4%. For the U.S. segment, gross sales, gross margin percentage rose to 37.1% from 35%. This is driven by product mix, a tariff reduction on certain products, and lower containment costs as capacity has improved. International gross margin was 30.5% compared to 32.3% last year. The decrease primarily reflects the impact of fixed overhead costs on lower sales volume. Our distribution expense as a percent of net sales increased to 11.5% from 10.1%. For the U.S. segment, distribution expenses as a percentage of goods shipped from its warehouses, excluding nonrecurring expenses increased to 11.3% from 9.4%. The increased rate was attributable to lower shipment volume and higher labor rates, partially offset by lower warehouse equipment and supply expenses. Additionally, the rate was adversely affected by higher inventory levels which reduced labor efficiency. For international, distribution expense as a percentage of goods shipped from its warehouses was 22.1% in 2022 versus 17.5% last year. This increase was primarily attributable to lower shipment volumes, higher labor costs, and an increase in business occupancy tax expense for the U.K. warehouses. This increase was partially offset by lower freight cost as we now ship goods for distribution in Continental Europe through our facility in the Netherlands. Selling, general and administrative expenses were $38.3 million for 2022 versus $36.2 million in 2021. For the U.S., these expenses were $29.1 million in 2022 versus $26.4 million in 2021. The increase was predominantly due to the acquisition of S'well, including integration expenses. SG&A Expenses for International were $4.3 million in 2022 and $4.2 million last year. Foreign currency transaction losses were offset by lower intangible asset amortization. Unallocated corporate expenses were $4.9 million in 2022 versus $5.7 million in 2021. The decrease was driven by lower incentive compensation expense, partially offset by an increase in professional fees. Our tax rate for the quarter was 2.5%. The rate was lower than the statutory rate of 21% primarily due to foreign losses with no benefit tax recognized as such benefit is offset. In comparison to the 2021 quarter, the income tax rate was 25.3%, which was higher than the federal sector rate. Primarily due to state and local tax expense, borrowing loss of out benefit, net of a benefit related to share-based equity compensation. Looking at our debt and liquidity at June 30, 2022, net debt was $259.1 million. The net debt-to-EBITDA leverage ratio based on pro forma adjusted EBITDA was 3.1x and liquidity, which includes $7.2 million of cash plus availability under our credit facilities was approximately $131 million. The Company's balance sheet liquidity remains strong, notwithstanding the funding of the S'well acquisition and higher inventory levels. Regarding our asset-based loan agreement, which expires in March of 2023, I'm pleased to report that we have signed commitments from all lenders to extend the agreement to August 2027 in terms we believe are competitive for the financing market. JP Morgan Chase will continue as the administrative agent. The definitive agreement is subject to completion of the agreement documentation. This concludes our prepared comments. Operator, please open the line for questions.

Operator, Operator

Our first question comes from Linda Bolton.

Linda Bolton, Analyst

Yes. Hello. Good morning. How are you doing?

Rob Kay, CEO

Doing well and yourself?

Linda Bolton, Analyst

Good. So can you hear me? Let me start again. So last quarter, Rob, you had spoken about a few issues that dampened sales last quarter but were expected to help sales this quarter. One of them was the Amazon distribution center log jams or something like that was corrected. And also the planograms were shifted into this quarter. Did those things occur? Or were those not things that actually helped this quarter?

Rob Kay, CEO

Amazon resolved some issues that positively impacted our business, leading to a noticeable increase in their performance. This contributed to the significant growth in e-commerce sales as a percentage of total sales. Generally, all retailers have been dealing with the effects of planogram resets, which have drawn considerable attention. Both brick-and-mortar and e-commerce retailers were heavily over-inventoried. As a result, shipments have faced delays across virtually all channels, particularly with the planogram resets, which have been pushed back between 90 to 120 days. We did not see any improvement related to that situation. Retailers are primarily focused on reducing their over-inventory levels before introducing new products.

Linda Bolton, Analyst

So if you were to estimate how much your retail inventory is currently up year-over-year, what would that be?

Rob Kay, CEO

You're talking about the inventory of our goods in retailers? It differs by channel, with many of the big guys starting to reduce inventory levels, and you've heard the big public omnichannel mass retailers announce they're expecting pickups in the second half of the year, and we're actually seeing some of that more in August as we look at that order book than in July. So we are seeing that. If you look at the off-price segment which has been a robust segment for us, we do very well. We basically shipped them what they needed. They were just very over-inventoried, particularly with apparel. The delays in shipping issues resulted in a lot, not just for them but other retailers experienced this, and it's a good example in off-price. They had a lot of apparel, particularly winter apparel, and they kind of missed the season, right? So there has been a lot of discounting that some retailers, as you may be aware, have even started to look to sell inventory through liquidators rather than just flowing them out through sales, just retailer by retailer base. So we are seeing no pickup of order flow. We remain cautious and there's hard visibility to really see, but there has been a decline at retail of inventory levels. And again, what we don't know is other people's inventory. And one of the problems we face is when they're over-inventoried, even if it's not our inventory, there's no room to order goods. We've seen a little bit of that in Amazon. We have out-indexed our category by threefold over the last quarter so quite noticeably. And we've seen a pickup as they are replenishing, but not as much as the sell-through, and it's because it's still the inventory level that's being worked through.

Linda Bolton, Analyst

Okay. And we have started to look at the IRI data a little bit. It's for the tracked channel, POS, for your company. And even though it doesn't tell the full picture, those numbers do look like they really slowed down to pretty big year-over-year declines in POS, so that has to do with consumer behavior and buying and all that. But what do you think you're seeing in those trends? And do you kind of see the trend worsening here near term? Or are you seeing things maybe start to improve a little on the POS front?

Rob Kay, CEO

Yes. By the way, I'm glad for our dialogue, IRI and NPD merging because we've described a lot of NPD data. Now they're the same, right? So you're getting to see what we see, so that's nice. If you look at the sell-through, there has been a softening of demand. The biggest impact on us has been more the inventory levels that people haven't been buying and not necessarily sell-through. So it has been softening. The question is if we go into a recession, well, that will continue. There's no question that inflation has impacted people buying, and exit price and gas is more expensive. People are spending less discretionary. We've seen that more in Europe, which we believe is already in a recession, and there has been a bigger impact from consumer demand in Amazon. As I mentioned, we're doing quite well in Amazon in the States, but not in Europe because the consumer demand is not there. So without completely answering your question, the visibility is poor. I think it will be over the six months, a function of whether the economy declines which will have a dampening effect on consumer demand. But we've seen some dampening; the biggest impact on us in this quarter has been more supply chain disruptions with the retailers.

Linda Bolton, Analyst

Okay. Did you mention how much the S'well acquisition contributed to revenue in the quarter?

Rob Kay, CEO

Yes. By the way, we factored all of what we think is going to happen in our guidance. So I'll defer to Larry. We've fully integrated S'well now into our business as part of our built business unit. We're very optimistic. It's going to be a very good acquisition for us, probably exceeding what we've been discussing it. But there's always a chance when you acquire things. So we have to work through some major over-inventory situations in channels that were stocked prior to our acquisition of the business. But Larry?

Larry Winoker, CFO

Yes, sure. So in the second quarter, S'well added about $3.5 million revenue year-to-date, it's just under about $4.5 million.

Rob Kay, CEO

There's a lot though that we didn't include in our estimates that we are now aware of including. We'll be able to drive a lot of the cost side of the goods. And we've integrated it more effectively than we thought, not that we thought I should say, but what we planned and talked about.

Linda Bolton, Analyst

Okay. And then finally, we've been hearing from one of my companies, a cosmetic company that sources out of China that maybe some tariffs will expire in September. And if they're not renewed, they will expire, and you'll get those benefits. Are you thinking that that could happen, that you could get some tariff relief here in the foreseeable future?

Rob Kay, CEO

Yes. We've gotten some this year. We are very closely following and involved with these changes. The good thing is that there are a lot of hundreds of categories that fall into that. We're not counting on that, though, to provide a pickup for us on margin. We view that if there's a benefit, we'd be neutral, but there's potential upside there.

Linda Bolton, Analyst

Okay. I'll leave it there. Thank you very much.

Rob Kay, CEO

Thank you. Operator, are there other questions? Operator? Andrew, you still on? Can you hear us?

Andrew Squire, Host

Yes, I'm here.

Rob Kay, CEO

There seems to be a technical difficulty. We've lost the operator.

Operator, Operator

I'm sorry, my line was muted. Our next question comes from Anthony Lebiedzinski.

Rob Kay, CEO

Hey Anthony.

Operator, Operator

Anthony, are you there?

Anthony Lebiedzinski, Analyst

Sorry, my line was muted. Can you hear me now?

Rob Kay, CEO

Yes, Anthony. Hi.

Anthony Lebiedzinski, Analyst

Okay. So first, I definitely appreciate the color on the geographic breakdown. As far as just looking at the product categories, is the weakness that you're seeing? Is that kind of across the board? Or are there any particular product categories that stand out?

Rob Kay, CEO

Pretty much across the board. It would be biggest in our tools category only because that's our biggest category, right? But again, this is much more driven by retailers not buying because they have too much inventory. So that makes it fairly uniform across all categories.

Anthony Lebiedzinski, Analyst

Got you. And then actually, just a follow-up on Linda's question about the tariff relief. So you said you've got some relief this year. Is there any way you can quantify that? I just wanted to know as far as how meaningful that was?

Rob Kay, CEO

Yes. Larry mentioned in his comments, there was some pickup. It's not what's driving our numbers, but we get some benefit.

Larry Winoker, CFO

I mean it's the fact that some called it out, but I don't have the specifics.

Rob Kay, CEO

It's not driving the numbers.

Anthony Lebiedzinski, Analyst

Got it. Okay. I was just wondering if there was anything meaningful to call out as far as the impact of that. So overall, looking at your comments, Rob, as far as your SG&A reduction that you planned, how should we think about that as we look to update our models here for the back half of the year?

Rob Kay, CEO

So Anthony, yes. As you know, we actively manage our business. We assessed the changes we saw in 2022 and have already implemented global expense reductions, which will affect the second half of the year. We executed these reductions as part of our six plus six plan, meaning we made six actual changes in our forecast. That's why you don’t see any benefit in the first six months, but these changes have been made globally. Overall, we reduced our SG&A by 5%. Keep in mind that as you model our performance, we've experienced significant growth, doubling our profitability over the last three years. We have prioritized investing in growth rather than just accumulating profits. Year-over-year, this includes more investment, but it will now be reduced by 5%, as we've cut our run rate based on the first six months.

Anthony Lebiedzinski, Analyst

Right. Right. Got it. Thanks for the additional colors, Rob. So as you work to reduce your inventories, should we expect anything in terms of the discounting of that as you look to get that inventory sold? Or do you think you'll be able to sell it at full price or close to full price?

Rob Kay, CEO

It's a good question. Over the past couple of years, we have been cautiously investing in inventory, which has been a successful approach. However, the current environment has changed that, and we want to monetize our inventory, but we are not discounting it. We can sell all of it and don't feel pressured to discount, as we have strong liquidity and financial strength. We are not discounting now, nor have we in the past. While discounts may be seen in the off-price channel, which is improving and is beneficial for us, we chose not to deeply discount our inventory even when given the opportunity this quarter. This decision has allowed us to maintain strong margins. Unlike others who are discounting due to excess inventory and declining operating margins, we do not have that issue. We are mindful of our inventory levels and extra storage costs. Even though we didn't significantly reduce inventory during a weaker quarter, we made minimal purchases. You will see improvements on this front in the second half of the year.

Anthony Lebiedzinski, Analyst

Got it. Okay. And then you also mentioned in your prepared remarks about the new facility that you have in the Netherlands that you'll be able to expand more into Continental Europe. I certainly recognize that now is a tough period in Europe. But just if you could just kind of expand on that as far as the potential opportunity. I assume it would be probably next year, but if you could just give us some more color, that would be great on that.

Rob Kay, CEO

Yes, we will increase our distribution this year. We are making progress. The advantage of our facility is that we can ship across the continent within 24 hours, or 48 hours in the worst-case scenario. Our availability on the continent remains stable. We could potentially achieve cost savings even better than expected. We are enhancing our distribution in line with our direct selling strategy, and this capability will facilitate further growth. We are providing a more attractive value proposition: cheaper, faster, and better services. We have gained Carrefour as a partner and have also secured significant business in Donal, located in the U.K. While that doesn't pertain to the Netherlands, we are expanding our e-commerce operations throughout the continent due to our ability to drop-ship from this facility. This capability is advantageous. Although we have gained market share, overall business performance has declined as the negative impacts have outweighed those gains.

Anthony Lebiedzinski, Analyst

Got it. All right. Understood. Thank you very much and best of luck.

Rob Kay, CEO

Thanks, Anthony.

Operator, Operator

And that was our final question.

Rob Kay, CEO

Great. Thank you, operator. And thank you, everyone, for joining us on this call. Larry and I are available for anyone who wants to reach out for further discussions or questions, and we look forward to speaking to everyone in our third quarter's call in a few months. Thank you.

Operator, Operator

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.