Earnings Call Transcript - XELB Q4 2023

Operator, Operator

Hello, everyone. Welcome to the Xcel Brands Incorporated Fourth Quarter and Fiscal Year 2023 Results Earnings Conference Call. Please note that this call is being recorded. I would now like to hand the call over to Craig Brelsford from RedChip. You may proceed.

Craig Brelsford, Host

Good evening, everyone, and thank you for joining us. Welcome to the Xcel Brands Fourth Quarter and Fiscal Year 2023 Earnings Call. We greatly appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert D'Loren; Chief Financial Officer, Jim Haran; and Executive Vice President of Business Development and Treasury, Seth Burroughs. By now, everyone should have had access to the earnings release for the fourth quarter and fiscal year ended December 31, 2023, which went out this evening. And in addition, the company has filed with the Securities and Exchange Commission its annual report on Form 10-K. The release and the annual 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 report 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 relating to the company's results of operations. Our management believes these financial performance measurements are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus, they provide supplemental information to assist investors in evaluating the company's financial results. These non-GAAP measures should not be considered in isolation or as alternatives to net income, earnings per share or any other measure of financial performance calculated and presented in accordance with GAAP. You may refer to the attachment to the company's earnings release or to Part 1, Item 2 of the Form 10-K, 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, CEO

Thank you, Craig. Good evening, everyone, and thank you for joining us. I would like to start today's call with an update on our strategic transformation efforts, a plan that we affectionately referred to internally as Project Fundamentals for many months, and also talk a little bit about our core business and how it's performing under this plan. After that, our CFO, Jim Haran, will discuss our financial results in more detail. I am happy to report that we have fully completed our restructuring plan, which included discontinuing all wholesale operating activities and outsourcing these activities to industry-leading licensing partners. As I mentioned in our last earnings call, we are currently tracking annual operating cost reductions of approximately $14 million compared with 2022 and are working hard with all of our new production partners to drive our business. We plan to launch our new brand, Tower Hill by Christie Brinkley, on HSN next month, followed by the launch of additional categories of products outside of HSN starting this fall. We have received strong interest from potential licensing partners for the brand across multiple categories. The recently launched C. Wonder by Christian Siriano brand is also doing very well and generated $12.5 million of retail sales in its first nine months in 2023. C. Wonder won the Rising Star Brand award on HSN in 2023, and we expect to see sales volume ramp up to about $20 million to $25 million in 2024, with a goal of over $50 million in 2025, including HSN and other retailers. Also, we expect to announce the launch of another celebrity designer brand on HSN before the end of this year. JTV, our partner for our Judith Ripka brand, launched its first Judith Ripka on-air shows in the fourth quarter of 2023. Sales results were very strong. In fact, we exceeded every business metric they planned. We are working with JTV to offer greater product assortments, including our Judith Ripka couture jewelry products, both on air and on jtv.com. This has the potential to add over 50 million visitors to the Judith Ripka e-commerce business and allows for email marketing campaigns to an additional 2.1 million customers. We look forward to seeing strong sales momentum carry forward through 2024 and beyond. G-III is on schedule to launch Halston for fall of 2024. We expect them to begin shipping shortly after the second quarter. I should note that this launch is a season later than we initially planned. They recently reiterated their three-year forecast for Halston at $500 million wholesale just in apparel, shoes and bags from their core production. We expect revenues from this license to begin to pick up later this year, and we will hit our $8 million maximum royalty after they exceed approximately $160 million in annual wholesale sales. We have soft launched our video and social commerce marketplace, ORME, with seven vendors; 1,000 users downloaded the app in the first week. As previously mentioned, this is a joint venture with a technology company in which Xcel owns a 30% interest in this new video and social commerce marketplace. We believe this marketplace has the potential to transform video and social commerce in the US and its use and growth potential is virtually unlimited. Based on all of our progress with Project Fundamentals and the organic growth in our brands, we will return to profitability in 2024. I should note that the QVC and HSN business overall was softer than expected in Q1 of 2024. This was caused by continued schedule conflicts with talent. We continue to work with all on-air talent to get their on-air schedules, and the business is back on track for the remainder of 2024 and beyond. As you know, we closed a credit facility in October of 2023 with Israel Discount Bank to improve our balance sheet liquidity and recently closed a $2.4 million common stock offering to improve stock liquidity and further improve our balance sheet. Jim will cover the fourth quarter and full year 2023 financial results in more detail. Finally, we are working hard at IR activity and thank our long-term and new shareholders for their support. Now I would like to turn the call over to Jim to discuss our financial highlights. Jim?

Jim Haran, CFO

Thanks, Bob, and good evening, everyone. I will briefly discuss our financial results for the quarter and fiscal year ended December 31, 2023. Total revenue for the fourth quarter of 2023 was $2.3 million, representing a decrease of approximately $1.8 million from the fourth quarter of 2022. This decline was primarily driven by a $2.5 million decrease in net product sales due to the exit from and licensing of our wholesale apparel and fine jewelry businesses. Partially offsetting the decline in net sales was an increase in net licensing revenue of $0.7 million, primarily driven by the combination of better performance during the quarter by the logo by Lori Goldstein brand on QVC and growth of the C. Wonder brand on HSN. For the full year, revenues decreased by approximately $8 million from the prior year to $17.8 million. This decline in revenue was driven by an approximate $5.5 million decrease in licensing revenue, primarily attributable to the May 2022 sale of a majority interest in the Isaac Mizrahi brand, partially offset by increased licensing revenue generated by the C. Wonder brand. Net product sales decreased by approximately $2.5 million to $8.6 million as we sold out all of our apparel and jewelry inventory during the first half of 2023 as part of the restructuring and did not have any jewelry or wholesale apparel sales in the second half of 2023. Our direct operating costs and expenses were $5.5 million for the current quarter, down by $2.9 million or 34% from $8.4 million in the prior year quarter. On a full year basis, our operating costs and expenses were $23.3 million in the current year, down by $9.8 million or 30% from $33.1 million in the prior year. This decrease in operating expenses was primarily attributable to the restructuring of our business in 2023 as well as the elimination of costs associated with the Isaac Mizrahi brand following our sale of the majority interest in the brand. It should be noted that in the fourth quarter and for the full year, there were certain nonrecurring costs associated with restructuring the company. As a result of all of our efforts to transform our business model in 2023 and as we move into 2024, we expect our direct operating costs and expenses to reach an average run rate of under $4 million per quarter. Overall, we had a net loss, excluding noncontrolling interest, for the current quarter of approximately $6.8 million or $0.34 per share compared with a net loss of $6 million or minus $0.30 per share in the prior year quarter. On a non-GAAP basis, we had a net loss for the current quarter of $4.7 million or minus $0.24 per share compared with a net loss of $6.2 million or minus $0.32 per share in the prior year quarter. Adjusted EBITDA was negative $1.2 million for the current quarter, an improvement of approximately $4.7 million compared with negative $5.9 million in the prior year quarter. For the current year, the net loss, excluding noncontrolling interest, was approximately $21.1 million or minus $1.07 per share compared with a net loss of $4 million or minus $0.20 per share in the prior year, which included a $20.6 million gain on the sale of the majority interest in the Isaac Mizrahi brand. On a non-GAAP basis, we had a net loss for the current year of $12.2 million or minus $0.62 per share, which represents an improvement from the net loss of $15 million or minus $0.77 per share for the prior year. Also, it should be noted that the non-GAAP net loss for 2023 includes approximately $5.1 million of various nonrecurring restructuring-related charges. And finally, adjusted EBITDA was negative $5.7 million for the current year, representing a $6.8 million improvement over the negative $12.5 million EBITDA in the prior year. I would like to take this opportunity to remind everyone that non-GAAP net income, non-GAAP diluted EPS, and adjusted EBITDA are non-GAAP terms. Our earnings press release and Form 10-K present a reconciliation of these items with the most directly comparable GAAP measures. Now turning to our balance sheet and our liquidity. As of December 31, 2023, the company had cash and cash equivalents of approximately $3 million and positive net working capital of $2.1 million, excluding the current portion of our lease obligations. Since executing our restructuring and transformation program in 2023, our cash usage has decreased significantly and is projected to continue to improve with the launch of Halston by G-III this fall, the launch of Tower Hill by Christie Brinkley, and continued growth in our C. Wonder and Judith Ripka licensing businesses. Cash used in operating activities during the current year was $6.5 million compared with cash used in operating activities of $14.2 million in the prior year. Over the past few months, we have taken additional steps to further solidify our balance sheet. First, in October 2023, we entered into a new five-year term loan of $5 million, to which quarterly repayments will begin in April 2024. Second, in March 2024, we issued approximately 3.6 million shares of stock for net proceeds of approximately $2 million. We believe that the additional liquidity provided by these financing transactions, coupled with our expense cuts and working capital position, provides the company with adequate liquidity going forward. And with that, I would like to turn the call back over to Bob. Bob?

Robert D'Loren, CEO

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

Operator, Operator

Our first question comes from Michael Kupinski from Noble Capital Markets.

Michael Kupinski, Analyst

I have a couple of questions. Bob, you mentioned that HSN and QVC are a bit weak. How do you think this could impact your expected return to profitability if it continues? Can you provide some benchmarks for that? Additionally, is there a way to quantify the revenue impact from this situation compared to the talent issues and the broader macro situation with consumers? Can you help us understand the potential impact of macro factors versus talent?

Robert D'Loren, CEO

I don't believe there is a systemic issue. I recently attended the QVC Vendor Summit, and it seems they have everything back on track. Many people do not fully understand the effects of their warehouse fire and how significantly it impacted their operations. That facility processed all of their returns, and the loss of hundreds of millions of dollars of inventory, along with 30% of their distribution capacity, is incredibly challenging for any company. However, they have managed to overcome these issues, and based on what was shared at the vendor conference, it appears the business is returning to normal. While I'm not concerned about systemic problems in the business, there is a general softness in the consumer market that isn't being accurately portrayed by the media. People are facing tough choices between fuel, energy, food costs, and discretionary spending. While apparel can be seen as a necessity, consumers may postpone those purchases. The real challenge lies in sourcing talent. We have the Isaac Mizrahi situation under control now, with him and backup guest Jacqui Stafford for the primetime show, which eases some pressure. We are also addressing similar situations for Laurie Goldstein. Forecasting talent availability is challenging since we make monthly requests, which we assume they will fulfill. However, things have become complicated post-COVID, as talent got used to doing remote shows from their comfortable locations instead of returning to the studio, which involves travel. We're striving to bring them back to the studio or utilize backup guests located closer to QVC and HSN studios.

Michael Kupinski, Analyst

Could you provide some insight on the startup expenses for Christie Brinkley? How much of that budget will be set aside for launching additional brands? Also, could you update us on your current cash position as we approach the end of the next quarter?

Robert D'Loren, CEO

So in terms of cash required for brands that are launching, Christie launches next month, all of the startup costs there have been incurred. We have a small brand that we're launching on HSN this year. There were really no startup costs associated with that one because the designer himself is doing all of the lifting on design with a third party vendor that we signed him to. So no real uses there. I think Jim can give you the current position on cash and available working capital, which is all receivables from good sources. Jim, do you have that number handy?

Jim Haran, CFO

We'll be at approximately $3 million of cash; we have our collections for the first quarter coming in now. So we figure the balance for cash looks pretty similar to what it was at 12/31.

Michael Kupinski, Analyst

Can you provide insight on how we should evaluate the success of Christie's products? Could you outline any specific goals again? If you've discussed this previously, I apologize, but could you please remind me of your plans for Christie and the potential revenue opportunities from that?

Robert D'Loren, CEO

So the plan, there are contractual guaranteed receipt minimums with HSN for both the Christian Siriano and the Christie Brinkley brand. This year, we're forecasting in the $7 million range, maybe a little more for Christie depending on distribution outside of HSN. Christie's not exclusive to them. But then there's a significant bump up next year under the agreement for the minimum at HSN. And we do think that Christie has great potential, both on HSN and outside of HSN. So we would expect that business to maybe double going into next year, if not more.

Michael Kupinski, Analyst

Could you provide some parameters to benchmark the success of ORME? Specifically, what metrics should we consider, such as subscriber numbers, to evaluate the opportunity moving forward?

Robert D'Loren, CEO

The key metrics are the number of vendors on board and number of users on the app. Those are the key metrics because that's how the company is going to be valued and that's what I would look at from quarter-to-quarter.

Michael Kupinski, Analyst

And Bob, do you have certain benchmarks like by the end of the year what you're anticipating in terms of the number of vendors or number of users? I mean, anything that you can share with us at this point?

Robert D'Loren, CEO

No, I really need ORME to give that to us. And I mean there are company goals, we're being very selective of the types of brands that come onto ORME. We could load a lot of small vendors on, but that's not really what ORME is targeting. We're targeting bigger brands, household names, brands that are in better and premium department stores and then, of course, with good brands and great product, then more people will participate.

Operator, Operator

Our next question comes from Anthony Lebiedzinski from Sidoti & Company.

Anthony Lebiedzinski, Analyst

It's Anthony Lebiedzinski from Sidoti. So yes, a nice job with lowering your expenses certainly. Do you think there could be some additional expense efficiencies that you can gain or do you think you're pretty much tapped out as far as what you couldn't do as far as expenses going forward here?

Robert D'Loren, CEO

So we're looking for a little more, Anthony. We have been saying $14 million, but now with the savings on the lease with the whole subleasing of the 30,000 square feet we were in moving into 12,000 square feet, which is perfect. It's a really beautiful livestream studio. We cut some additional expenses beyond the $14 million and we're looking for a little more. So we want to operate as lean as we can. And we'll know in the next quarter or so if we can take a little more out of it.

Anthony Lebiedzinski, Analyst

And then in terms of the various different initiatives with the different licensing partners, you spoke about Christie Brinkley, obviously, G-III, you announced last year. I guess if you could just kind of like go over like as far as which ones you think will be the most impactful, kind of go over that in terms of how you think that's going to contribute to your top and bottom line?

Robert D'Loren, CEO

So clearly, Halston will lead that with the G-III license. But as you know, they're just launching this fall and the only information we really have on how they're doing is what they've been saying on their earnings calls. And we're assuming that we will hit the maximum under that license over the next year or two, and that would be $8 million per year, most of which would drop to the bottom line. So that will be driving top and bottom line EBITDA. And then C. Wonder is doing beautifully for us in its first nine months. In the launch in '23, it did $13.5 million on HSN, plan for this year is $25 million approximately. The commitment for next year is $50 million. And we are now working on category extensions on C. Wonder. So that brand is doing well and has strong growth potential for us. We do think that Christie will ramp up as fast. Christie is loved by everyone in America. She has a great social media following. Almost any woman over 45, we stop them on the street and ask them to name three top fashion models, her name would come up, and she is trusted and loved. So we think it has similar potential, if not more outside of HSN in the first quarter than perhaps C. Wonder.

Anthony Lebiedzinski, Analyst

And then, Bob, you also mentioned that you expect to be profitable this year. Just wanted to see if you could clarify that. Did you expect to be profitable for the full year or just part of the year? And are you talking about EBITDA positive or net income positive?

Robert D'Loren, CEO

EBITDA positive, and that will start Q2, Q3, Q4, and we expect to pick up from the Halston license as G-III begins shipping in Q3 and 4.

Operator, Operator

Next question comes from Howard Brous from Wellington Shields.

Howard Brous, Analyst

Robert, first of all, congratulations on the transformation of the business. It's been a spectacular job, and we do thank you. 2024 is a transitional year. Everybody's been talking about what's going to start and when it's going to start. But effectively, when you look at 2025, the estimates on the Street of EBITDA are almost $10 million. The company's stock is selling for less than one to three quarter times EBITDA. What are your thoughts?

Robert D'Loren, CEO

Well, one, it's a very low EBITDA multiple, particularly when you think of selling Isaac for 8 times EBITDA contribution. And from an asset value perspective, Howard, it's incredibly low given that we sold Isaac for 6 times royalties and that's the going rate for royalties. The going rate is anywhere from a low 5 to a high of 8. 6 is a very common multiple with $15 million of top line royalties as a round number for '24 growing; it implies a $100 plus million value against $5 million of debt. So I think we're undervalued.

Howard Brous, Analyst

Let me skip to ORME, what's going on with ORME, marketing, and interest. You've mentioned it during the call, but I'd like for you to shed some more information.

Robert D'Loren, CEO

So we onboarded our seven first vendors, premium denim company, actually two of them, and some premium beauty brands as well as some of our own brands. And we've been doing beta testing right up through today, taking little bugs out of the technology. ORME is getting ready to launch a very significant PR campaign and digital marketing campaign. ORME has begun hiring influencer recruiters. They started this week and they're reaching out to influencers around the country to get them on board. And then the goal is now to onboard some additional big vendors because each time we onboard a vendor, Howard, we want to debug it before they start the email campaigns to their customers. In week one, we had 1,000 new users onboard the app with no email campaigns. It was just almost word of mouth. And all of that is about to start. So we are excited about where we are with ORME, excited about where the tech is. It is almost completely bug-free, which is amazing. We do a lot of beta testing before we put anyone on it, obviously. But you always find things when a new set of eyes start playing around in technology, particularly in apps.

Operator, Operator

As of right now, it seems like we don't have any questions. I'd now like to hand back over to the management for their final remarks.

Robert D'Loren, CEO

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 then be healthy. Good night.

Operator, Operator

Thank you for attending today's call. We hope you have a wonderful day.