Earnings Call Transcript - XELB Q1 2025

Seth Burroughs, EVP

Good afternoon, everyone, and thank you for joining us. Welcome to Xcel Brands combined Fourth Quarter of 2024 and First Quarter of 2025 Earnings Call. We greatly appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert D'Loren; and Chief Financial Officer, Jim Haran. By now, everyone should have access to the earnings releases for the quarter and fiscal year ended December 31, 2024, and the quarter ended March 31, 2025, which went out last Wednesday and yesterday, respectively. In addition, the company filed with the Securities and Exchange Commission its annual report on Form 10-K last Wednesday and will file our quarterly report on Form 10-Q for the quarter ended March 31, 2025, tomorrow. The releases, the annual report, 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 most recent annual reports filed with the SEC. 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. The dynamic nature of the current macroeconomic environment means that what is said on this call could change materially at any time. Finally, please note that on today's call, management will refer to certain non-GAAP financial measures, including non-GAAP net income, non-GAAP diluted EPS, 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 our company's results of operations. Our management believes these financial performance measurements are also useful because these measurements adjust for certain costs and other events that management believes are not representative of our core business results, and thus, they provide supplemental information to assist investors in evaluating the company's financial results. These non-GAAP measures should not be considered in isolation or as alternatives to net income, earnings per share, or any other measure of financial performance calculated and presented in accordance with GAAP. You may refer to the attached to the company's earnings releases for the Form 10-K and 10-Q for a reconciliation of non-GAAP measures. And now I'm pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Bob, please go ahead.

Robert D'Loren, Chairman and CEO

Thank you, Seth. Good afternoon, everyone, and thank you for joining us today. I would like to start today's call with a brief update on our performance over the two most recent quarters and our outlook for 2025 and beyond. After that, our CFO, Jim Haran, will discuss our financial results in more detail. But first, I'm happy to report that we have closed a strategic transaction with United Trademark Group in April. This transaction brings together two industry leaders in brand management, supply chain management, licensing, and video and social commerce to create a global powerhouse. The UTG alliance significantly enhances Xcel's goal of achieving global distribution of our existing and new creator-driven brands and our ability to deliver great products with a high-quality-to-value ratio across multiple product categories through UTG's supply chain capabilities. The initial transaction provided the company with $3 million of liquidity and saves us over $1 million per year in interest and principal payments through March of 2027. Also, UTG puts us in a great position to more aggressively pursue acquisitions, some of which may be transformative to the company. We have been working hard and fast with UTG to present the strength of the combined platforms to retailers across multiple channels of distribution and conducting due diligence for potential acquisitions. We believe that this partnership will accelerate our formation of additional creator influencer brands on our platform. We continue to work hard with all of our production partners to drive our business. We announced our new creator influencer brands with Cesar Millan, Gemma Stafford, and Jenny Martinez in Q2 of 2025. We have identified key category license opportunities for all of these new creator influencer brands. Our social media reach across our brand portfolio has grown from 5 million followers in January of 2025 to 45 million to date. We believe this is an extremely important and valuable media currency going forward given the recent dramatic growth in video commerce and creator-led brands. C. Wonder and Christie Brinkley remain the two fastest-growing brands on HSN. We have a strong pipeline of additional new creator influencer brands that we hope to announce in the near future. All that said, we are approaching Q3 and Q4 of this year with caution given the impacts of the tariffs on QVC and HSN's business and our licensees, including G-III for our Halston brand and the coming consolidation of HSN's operations into QVC's headquarters in Pennsylvania. Judith Ripka continues to operate on plan at JTV. In fact, our most recent on-air rotation was our most successful to date. Our Longaberger brand launches on QVC this fall. The Orme team has onboarded 25 premium beauty brands as it focuses its efforts on the beauty category. User downloads have reached 50,000, and the influencer base now reaches over 10 million followers. As previously mentioned, this is a joint venture with a technology company in which Xcel owns a 19% interest in this new marketplace. We believe that our goal of building a portfolio of creator influencer brands that reaches 100 million followers has the potential to accelerate the growth of Orme. We generated an adjusted EBITDA loss of $792,000 in Q4. That is a $361,000 improvement over Q4 '23. I should note that the 2024 loss is approximately $150,000 more than we expected, which was caused by the impacts of the Florida hurricanes in Q4 of 2024. While we forecast a range of $1 million to $2.5 million of adjusted EBITDA for 2025, much of it is weighted on the results of the back half of this year. We are assessing the impact of the tariffs and the HSN Tampa studio closure on our businesses and working on potential solutions, including short-term domestic production for some of our brands. Jim will more fully cover Q4 2024 and the full year '24 results and Q1 '25 results. Jim?

James Haran, CFO

Thanks, Bob, and good afternoon, everyone. I will now briefly discuss our financial results for the quarter and fiscal year ended December 31, 2024, and the quarter ended March 31, 2025. Total revenues were $1.2 million for the fourth quarter of 2024 and $8.3 million for the full fiscal year. For both the quarter and full fiscal year period, our revenues were roughly half of what we reported in the prior year comparable period due to the sale of the Lori Goldstein brand in the second quarter of 2024 and the exit from our wholesale operating businesses as part of our project fundamentals that began in 2023. Total revenues for the first quarter of 2025 were $1.3 million, up slightly from the fourth quarter. As we restructured and transformed our business operating model over the past two years, starting in 2023 and continuing through 2024, we have taken numerous actions to reduce our payroll, operating, and overhead costs. As a result, our direct operating costs and expenses decreased by nearly 50% year-over-year from fiscal year 2023 to fiscal year 2024 and similarly from the fourth quarter of 2023 to the fourth quarter of 2024. Management has continued to implement additional cost-cutting measures throughout the first quarter of 2025 to further optimize the company's cost structure. As a result, our direct operating expenses for the first quarter were approximately $2.3 million, which was approximately 40% lower than the prior year period. As of the end of the first quarter, we have reduced our operating cost to a run rate of approximately $9 million on a go-forward basis. Looking at our other operating costs and expenses, which are predominantly noncash in nature, our depreciation and amortization expense has declined significantly year-over-year for both the fourth quarter of 2024, the full fiscal year 2024, and the first quarter of 2025, all primarily as a result of the sale of the Lori Goldstein brand. During fiscal 2024 and to a lesser extent, in Q1 2025, we recognized some significant charges related to our equity method investments, including $1.9 million for our proportional share of losses, a $10 million of other charges related to the valuation of our investment in IM Topco and our contingent contractual obligations to transfer a portion of our equity ownership interest in IM Topco. Similar charges for the current quarter were approximately $0.3 million. And I'd like to reiterate that these charges are noncash in nature and are excluded from our non-GAAP measures of performance. Further, with the subsequent resolution of the contractual obligation related to IM Topco in April of 2025, the resulting reduction of our ownership interest in IM Topco from 30% to 17.5% and the implications under applicable accounting rules. Overall, we had a net loss for the first quarter of 2024 of approximately $7.1 million or minus $3 per share on a GAAP basis and $1.6 million loss and minus $0.69 per share on a non-GAAP basis. This represents a 53% improvement over last year. Fourth quarter adjusted EBITDA was negative $0.8 million and also a 31% improvement over last year. For the full fiscal year 2024, we had a net loss of approximately $22.4 million or $9.84 per share on a GAAP basis, although this does include $16.5 million of various noncash charges, as mentioned earlier. On a non-GAAP basis, we had a net loss of $5.1 million or minus $2.23 per share, which represents a 58% improvement over 2023. Our fiscal year 2024 adjusted EBITDA was negative $3.5 million, a 40% improvement over the prior fiscal year. For the current quarter, we had a net loss of approximately $2.8 million or minus $1.18 per share compared with a loss of $6.3 million or minus $3.09 in the prior year quarter. On a non-GAAP basis, our first quarter net loss was $1.4 million or minus $0.58 per share compared with an $8 million loss or minus $0.88 per share in the prior year quarter. This represents a 56% improvement on a GAAP basis and a 24% improvement on a non-GAAP basis. Our adjusted EBITDA was negative $0.7 million, a 56% improvement over the negative $1.6 million reported in the prior year quarter. These bottom line results exhibit the significant strides we have taken in rightsizing our business and cost structure and moving towards profitability. And once again, as a reminder, our earnings press releases and Form 10-K and Form 10-Q present a full reconciliation of our non-GAAP measures with the most directly comparable GAAP measures. Turning now to our balance sheet and our liquidity. As of March 31, 2025, the company's balance sheet reflected stockholders' equity of approximately $26 million and unrestricted cash of approximately $0.3 million and also reflected $8.7 million of long-term debt, of which the first payment of $250,000 is due on March 31, 2026. In April 2025, we refinanced our term debt, resulting in a net increase of approximately $3 million in the company's liquidity and working capital. Currently, our term debt is $13.6 million, and we do not have any principal repayments under the amended term loan until March 31, 2026. For the majority of the term loan, approximately $9.1 million, the interest will be paid in kind, meaning that it will accrue and not require cash payments until 2027. And with that, I would like to turn the call back over to Bob.

Robert D'Loren, Chairman and CEO

Thank you, Jim. This concludes our prepared remarks. Operator?

Operator, Operator

And your first question comes from the line of Michael Kupinski with NOBLE Capital Markets.

Michael Kupinski, Analyst

I just have a couple. First of all, I just had a couple of clarifications. Robert, you indicated that you thought adjusted EBITDA for full year 2025 would be $1 million to maybe $2.5 million. Did I get that right? And does that include the impact of tariffs or not?

Robert D'Loren, Chairman and CEO

So it includes potential impacts from tariffs and also any disruption that may occur with the move of HSN from Tampa to West Chester, PA, Michael. We just don't know. We don't have enough visibility to know if that move will disrupt the business and cause disruptions in airtime, which would push sales of products potentially into next year. And of course, we just don't know yet what the potential impacts from tariffs would be. We've been working very hard on mitigating measures, including entering into a short-term license with a group that can produce our apparel domestically to provide products if we need them.

Michael Kupinski, Analyst

Got you. And then, Jim, you indicated that the run rate of $1 million, I assume that's per month. Is that correct, the cost?

James Haran, CFO

Are you talking about the run rate of overhead? Because I think we indicated...

Michael Kupinski, Analyst

You mentioned that it's going to be $1 million.

Robert D'Loren, Chairman and CEO

It's about $9 million for the year.

Michael Kupinski, Analyst

Okay. And then can you remind us what are the guarantees from G-III on Halston? And when did those royalties revenue start to kick in? I believe that Halston was featured in Neiman Marcus and Saks for the spring. But I was just wondering, so does that royalty revenue start kicking in, in Q2? And maybe if you can kind of give us some thoughts about how Q2 is shaping up in terms of revenue?

Robert D'Loren, Chairman and CEO

Sure. So the guaranteed minimum under the license is $1.7 million per year. We plan the business on the minimums with very little pickup on actuals over the minimums in Q2. So minimums Q1, a little bit of pickup in Q2. And then as they ship for fall, we anticipated that they would come in over the minimums.

Michael Kupinski, Analyst

I was wondering if you could discuss your liquidity situation. You mentioned bringing in an additional $3 million this quarter, but I understand there are some financial needs related to the upcoming launches and recently announced brands for this year and into 2026. Can you elaborate on your liquidity requirements as you move into this year? Is the $3 million enough to sustain you until 2026 and accommodate your other product launches? How do you assess your liquidity at this stage?

Robert D'Loren, Chairman and CEO

So our liquidity is good now. We do have more transactions in the pipeline, and we've issued letters of intent on additional transactions that are beyond what I would call pipeline is something where we've signed an LOI, and we're drafting licenses, but we have more in the pipeline. If we see that we're going to have additional need for capital, we'll address it when the time comes. But at the moment, we believe we're okay.

Michael Kupinski, Analyst

Got you. While your recent planned brand launches are very exciting, some of them may have more revenue and cash flow potential than others based on their target markets. I was wondering if you could provide some insights on the revenue potential of your recently launched or upcoming brands. I'm particularly eager to hear your thoughts on the prospects of the Cesar Millan pet products and other recently launched brands.

Robert D'Loren, Chairman and CEO

So all of them are very exciting to us, Michael. Cesar, of course, is by far the biggest voice in the pet world. We anticipate that this business will be stronger than we initially thought just based on the feedback we're getting from potential licensees. Hopefully, we'll start to see some income from the Cesar program this year, and then it will really pick up going into next year. We also believe that Gemma Stafford, besides her launching on QVC, which we anticipate will happen late this year. We see a lot of opportunities for her in bricks-and-mortar retail and in e-commerce with food products, kitchen, and baking gadgets, and similarly for Jenny Martinez. So we're excited about all three of them. Between the three of them, they reach over 30 million social media followers. We do believe that influencer brands are the new currency in media, particularly when those brands have credible voices in a category as opposed to, say, a pop star that wants to get into a particular category, and that we will continue to do deals like this going forward.

Michael Kupinski, Analyst

Got you. And in terms of the Isaac Mizrahi brand, given the number of brand initiatives that you have that seemingly offers significant growth prospects, is there a reason that the company would want to own a minority interest in this brand? Or are you considering monetizing this interest? Just your thoughts.

Robert D'Loren, Chairman and CEO

Isaac Mizrahi has been a brand that has been great for us over the years. We had a tremendous 14-year run with Isaac. We will continue to support the brand in any way that we can. We currently oversee the QVC business. We are not really involved in the third-party licensing. That's handled by WHP Partners. To the extent that WHP wants us to continue to coordinate the business at QVC, we will do that.

Michael Kupinski, Analyst

And you mentioned the prospect of acquisitions and maybe possibly even transformative acquisitions. I was just wondering if you can just kind of give us some thoughts on those types of acquisitions that you're mostly interested in.

Robert D'Loren, Chairman and CEO

We are interested in brands that have significant social media followings, and we've been looking at many of those. We are looking at media companies that could extend our reach. Those are the kinds of acquisitions we're focused on.

Operator, Operator

Your next question comes from Anthony Lebiedzinski with Sidoti & Company. You mentioned the prospect of acquisitions, including potentially transformative ones. Could you share your thoughts on the types of acquisitions you are primarily interested in? We are interested in brands with substantial social media followings and have been considering several of these. Additionally, we are looking at media companies that could help us expand our reach. Those are the types of acquisitions we are concentrating on.

Anthony Lebiedzinski, Analyst

So first, just a couple of housekeeping items. As far as the impact of Lori Goldstein. So I think it was about $1.1 million in the fourth quarter. Can you go over what that was in the first quarter? And can you also remind us how much did Lori Goldstein contribute to your second quarter revenue last year?

Robert D'Loren, Chairman and CEO

Jim, can you take this one?

James Haran, CFO

Yes. Is it the second quarter or the first quarter from last year?

Anthony Lebiedzinski, Analyst

Can you provide the first quarter figure? Also, could you remind us of Lori Goldstein's contribution to your second quarter revenue from a year ago?

James Haran, CFO

The revenue in the first quarter of 2024 was $1.1 million, and it increased to $1.4 million in the second quarter. We had significant expenses related to that brand, but in terms of cash flow, the impact of divesting from the brand was not substantial.

Anthony Lebiedzinski, Analyst

Okay. And then if I could just follow up on the question that Mike had before as far as looking at the number of social media followers. So obviously, you've seen that growth from $5 million to $45 million. How do we think about the revenue growth associated with that? And obviously, you have a goal to get to 100 million followers. So how does that translate to revenue growth? Can you expand on that? I don't know if you're willing to quantify that, but just curious to get your take on that, Bob.

Robert D'Loren, Chairman and CEO

So I think you can look at each of these opportunities where they have the potential to generate anywhere from $5 million to $10 million of...

Operator, Operator

Robert?

Anthony Lebiedzinski, Analyst

I cannot hear Robert.

Operator, Operator

Alright, we're experiencing a technical difficulty, everyone.

Robert D'Loren, Chairman and CEO

Anthony, can you hear me?

Anthony Lebiedzinski, Analyst

Yes, I can hear you. Yes.

Seth Burroughs, EVP

Anthony, can you repeat the question so we can answer again?

Anthony Lebiedzinski, Analyst

Absolutely. Yes. So as far as the number of social media followers, obviously, as you pointed out in your press release and your prepared remarks, it has grown from $5 million to $45 million, and you have a goal to get to $100 million. So how do we think about the revenue growth? I know you started answering the questions, Bob, before we got cut off. So maybe if you could just finish your thoughts, that would be great.

Robert D'Loren, Chairman and CEO

Yes. When considering the potential of these kinds of transactions, especially regarding Cesar Millan, Gemma, and Jenny, we believe they could generate between $5 million and $10 million in royalty income annually. It will take some time to reach that level, but that’s the potential we see. We won’t have a precise figure until we enter the market and finalize all agreements across different categories for each brand. For instance, with Cesar, we are currently in discussions with 50 companies in various sectors to develop his brand. We believe Cesar has the potential to reach the high end of that range.

Anthony Lebiedzinski, Analyst

That's very helpful. I know you have done an excellent job of reducing costs and you're currently at an annual run rate of about $9 million for operating expenses. As the business shifts towards growth, how should we think about operating expenses? I'm curious about the fixed versus variable nature of your expenses.

James Haran, CFO

Our structure is designed to scale. The only real incremental cost we're going to have where we pay our co-brand partners, we'll pay them additional commissions on revenue that's generated with those brands. So the only real cost we're going to incur as we scale the business is going to be incremental that's going to be correlated with our revenue growth. But in terms of fixed costs and with our platform and structure, that cost is going to be an impact. We've developed it to the point where we can scale the business without incurring additional costs outside of the variable costs I just mentioned.

Anthony Lebiedzinski, Analyst

Got you. Okay. That's very helpful. And I guess, as we look to update our models, given that you're now more than 2 months into the second quarter, how should we think about the second quarter either compared to last year or compared to the first quarter that you just reported? Any sort of high-level thoughts as far as revenue and profitability.

Robert D'Loren, Chairman and CEO

I think we're good with where you are, Anthony. And certainly, if we become aware of anything that will impact the numbers, we'll report on that.

Operator, Operator

There is no further question at this time. I will now turn the call back over to Robert for closing remarks. Robert?

Robert D'Loren, Chairman and CEO

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

Operator, Operator

This concludes today's conference call. You may now disconnect.