Apex Global Brands Inc
Q1 2019 Earnings Call Transcript

Published: 15 Jun 2018

[Operator:]

Greetings, and welcome to the Cherokee Incorporated First Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Laura Bainbridge, Investor Relations.

[Laura Bainbridge:]

Thank you, and good afternoon. Speaking today will be the Company's Chief Executive Officer, Henry Stupp; and Chief Financial Officer, Steve Brink. Before I hand the call over to management, please note that on this call, certain information presented contains forward-looking statements. Forward-looking statements are neither a prediction nor a guarantee of future events or circumstances, and are based on currently available market, operating, financial, and competitive information and assumptions. Our actual results could differ in a material manner from those expressed in such forward-looking statements for any reasons, including those listed in the Company's SEC filings. The Company assumes no obligation to update any such forward-looking statement. Please also note, that past performance is not a guarantee of future results. Further, this call contains a discussion of non-GAAP financial measures as that term is defined in Regulation-G. The most directly comparable GAAP financial measures, and information reconciling these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP are included in the earnings release, which is posted on the Company's website at www.cherokeeglobalbrands.com. And with that, I'll hand the call over to Cherokee's Chief Financial Officer, Steve Brink.

[Steve Brink:]

Thanks, Laura, hello everyone, thanks for joining us today. It's been a busy couple of months since we last spoke and I have several updates to provide during today's call. First, I'll review our results for Q1 which shows some positive trends. Before turning to the specifics of our outlook for the full year, I'll highlight some elements of our recent efforts to reduce our overall operating costs and share some additional details of our sale of Flip Flop Shops to Bearpaw Holdings. So let's start with our results for the first quarter. Revenues were $5.4 million compared to $6.8 million in Q1 last year. This $1.4 million decrease was due primarily due to expiration or non-renewal of several licensing agreements which reduced revenues by $2.6 million compared to Q1 last year. This was partially offset by $1.2 million increase in royalties from our continuing license fees. The biggest driver was Hi-Tec, Magnum and Interceptor. Our revenues from these brands grew 58% or $900,000 versus Q1 of last year. This is the first quarter since the Hi-Tec acquisition where revenues from our Hi-Tec portfolio of brands are an apples-to-apples comparison, here now included in both Q1 for this year and Q1 last year. SG&A for the first quarter was $4.4 million, compared to approximately $6.0 million in the first quarter of last year; this is a 27% decrease or $1.6 million. We significantly reduced headcount this year in comparison to Q1 last year which was the first full quarter after the Hi-Tec acquisition. We lowered professional fees and reduced our operating cost as well. The operating loss for the first quarter was $200,000 compared to an operating loss of $2.3 million in the first quarter of last year. The net loss for the quarter which is after income taxes and interest was $2.7 million or $0.20 per share on a diluted basis compared to a net loss from continuing operations of $3.5 million or $0.27 per share in the first quarter of last year. The net loss [ph] looked better in comparison to Q1 of last year if it wasn't for some unusual items affecting our income tax expense. Because of recent net losses, we are not providing any tax benefits for the net loss expected this year, and for certain foreign subsidiaries we are continuing to provide deferred tax expense. The cash before income tax for this quarter was $200,000 but our overall tax expense was $800,000. You may recall that last quarter represented adjusted EBITDA to better understand operating performance. The reconciliation is in the press release but to arrive at adjusted EBITDA, we'll start with operating profit, then add-back the various non-cash charges and business acquisition and integration costs; alternatively you can start with revenues that subtract SG&A. So for the first quarter, adjusted EBITDA was just under $1,050,000 compared to $869,000 in Q1 last year which is an increase of 20%. We announced last week that we sold the Flip Flop Shops franchise to Bearpaw Holdings. Strategically, the sale of Flip Flop Shops is an opportunity to streamline our portfolio and zero-in on our core licensing model. We are now solely focused on our high growth global brands that we operate using licensing model. We used 100% of the net proceeds received thus far from the sale of Flip Flop Shops to paydown a portion of our long-term debt. At this point, we have $45.6 million outstanding under our credit agreement and $2.6 million of cash-on-hand. As we previously disclosed, due to the financial planning process that we initiated at the start of the year, we identified an issue related to complying with liquidity covenant under our credit facility. As a reminder, our credit agreement has several key financial covenants, including maintaining $2 million worth of liquidity either in the form of cash or availability under our revolving credit facility. We're also required to receive [indiscernible] report. However, as outlined in our 10-K and mentioned on the fourth quarter call, following our financial planning process, we forecasted that it was unlikely we will be able to stay in compliance with our liquidity covenant for the next 12 month without infusion of cash or an increase in borrowing capacity. This resulted in an explanatory paragraph in last year's audit report. So at this point we are in default under this provision of our credit agreement. We've been working with our lenders, now the potential lenders, to remedy the default and we made progress. However, even though we expect to come to a satisfactory resolution for all parties involved, we are not yet through the process. Without a resolution, we are facing significant liquidity challenges. One thing that we were able to accomplish was to develop and initiate a restructuring plan that will right size our SG&A. This plan includes headcount reductions, less spending on overheads, and less spending on professional fees. The plan will save us millions of dollars per year but importantly, we will have a streamlining organizational structure that will enable us to act as one global company. The cost of this restructuring plan will be reflected in our second quarter financials. Now let's turn to our fiscal 2019 guidance which is now updated to reflect the sale of Flip Flop Shops. We now expect revenues to range from $25 million to $27 million. However, due to the SG&A reductions and restructuring efforts, we are maintaining our adjusted EBITDA guidance of approximately $8 million to $10 million. This implies SG&A of $17 million. In summary, we've managed by [indiscernible] since January when I joined the company. We finished the consolidation and conversion of Hi-Tec to a licensing model, we streamlined our brand portfolio with the disposition of Flip Flop Shops, and we've taken important steps to reduce our overhead and set the Company up for profitable growth going forward as we leveraged our reduced level of operating costs. We still have work to do of course, so we believe our Company is in position to take advantage of the opportunities in front of us once we resolve our liquidity situation. Now, I'll turn the call over to Henry, who will give us the general business update.

[Henry Stupp:]

Thanks, Steve and good afternoon, everyone. As you can tell, it has been a busy time at Cherokee Global Brands. Steve outlined the positive measures we're taking to streamline our operations as we enhance our overall profitability. The results of these efforts will lead to a more focused and profitable organization allowing to run scale on our high growth brands globally. We enter fiscal 2019 with a business that is more balanced and diverse across geographies, licenses, channels, retail and wholesale partners and product categories. We are narrowing this increased diversification with an intense focus on profitable growth. As Steve noted, when we took cost reduction efforts that are nearly complete, and that we expect the results to make 33% annualized reduction in our ongoing SG&A. The early results were reflected in Q1 and we expect them to continue to improve and positively impact our financial results in future quarters as the restructuring and efficiencies takeover [ph]. After navigating several years of disruption in the retail environment we are beginning to see signs of stabilization, a period where consumers and retailers are again embracing brands alongside their private brand, private label initiatives. In this environment, we are positioned to leverage our platform to drive growth within our existing brand portfolio, and partners who are continuing to build awareness and traction amongst new partners and attract new customers globally. Our dual platform and portfolio business model continues to distinguish us in the marketplace. It may be most reflects [ph] both our owned high equity brands, and our ability to create exciting products and expand our brand development capabilities for existing and new retail partners. This has never been more relevant as we fairly seek to balance national brand recognition with the margin benefits in differentiation inherent with private brand. With this as a backdrop, I will now turn to our brand highlights for the first quarter. Starting with the Hi-Tec portfolio of brands; as a reminder, we now operate this business entirely through a license royalty model. No mention for Hi-Tec's portfolio of brands continues to accelerate with license revenues increasing 58% year-over-year to $2.6 million in Q1, growth respond about the U.S. and international markets and across product categories including our recently expanded apparels and accessories product line. It is increasingly apparent for their strategy to globalize Hi-Tec beyond full year to a full family lifestyle brand has been successful and gaining attraction, especially as we expand distribution and release new product categories as we head into the back half of the year. Supporting our strategy, outdoor process of apparel continues to gain international appeal, and Hi-Tec is highly regarded within this category as high priority value offering. In the U.S. and Canada as I noted, we're seeing strong adoption and sell-through of our footwear, apparel and accessory collections. We've continued to build distribution on the hills of our multi-category launch with Hi-Tec product placement in most national and regional department stores, specialty change, and value through retail in addition to all major e-commerce retailers. Before we expect, the continued adoption of apparels and accessories will fully support growth within our footwear category. In the next few weeks we will be launching our domestic consumer marketing campaign to support the placement of our fall and winter apparel, accessory and footwear collections. The integrated campaign will include a mix of in-store branding, digital, influencer endorsements, sponsorships and promotions, and we will target over 90 million impressions in the United States alone. Some of our marketing programs have been deployed throughout Europe with much success as we support the multi-category Hi-Tec opportunity. We expect to provide more details on these marketing initiatives on our Q2 quarterly call. Also, within our Hi-Tec portfolio, our Interceptor brand continues to do very well at Wal-Mart while the new revenue growth continues to be supportive to new product launches and the focus on continued geographic expansion. I'll now turn to our Cherokee Brand. We continue to experience growth in key international markets including South Africa, Mexico, Latin America and India where organic growth increased 25% in the quarter. In Europe, we look forward to the pending launch of legal which will include Cherokee's full assortment of management in children's apparel and accessories at approximately 10,000 locations. We couldn't be more pleased with the partnership we are building with Hereto for the long-term, and are working collaboratively on several future initiatives to build awareness and availability of the Cherokee Brands throughout Europe. With products now shipping, we expect to recognize royalty revenue in our second fiscal quarter. I'll turn my attention now to Cherokee Brand in the U.S. Our e-commerce presence continues to grow, customer reviews are quite positive which is an important benchmark for future growth. We are seeing more interest among prospective retailers which we expect will help support additional account penetration and points of distribution. Undoubtedly, the rebuilding effort has been slow and the transition from a strong legacy partner coupled with the unprecedented disruption in the U.S. retail is indeed difficult. Nonetheless, our licenses and our new retail partners remain committed and we are anticipating double-digit domestic growth as we head into the back half of fiscal 2019. I'll now turn to our legacy -- to our Tony Hawk Brand. We have transitioned from our direct-to-retail legacy partner in the U.S. to a new wholesale model. While this transition is reflected in our fiscal 2019 forecast our U.S. distribution is building a demand for these Hawk product brand is growing. Tony's profile continues to build as we grow these commercial partnerships such as it's recent announcement with Chase Bank. These efforts and Tony's direct participation in our brand building and retailer outreach will allow us to penetrate a wider audience as renewed interest in the state culture continues to grow. In international markets, we're excited to announce an expanded relationship with the Barter [ph] Group for the Pan-European license of the Tony Hawk Brand. We recall that the Barter [ph] Group has been our licenses for Hi-Tec portfolio of brands in Europe, and also as direct expertise in launching marquee active brands in Europe and around the world. We feel very fortunate that our partners like the Barter [ph] Group onboard that embodied the best-in-class standard we expect for our licensee partnerships. We look forward to leveraging their expertise to make our full sort of Magnum boys' apparel and accessories to especially in department store retailers throughout Europe. In summary, we're pleased with the start to fiscal 2019. Last 24 months have been disruptive as we navigated the acquisition and integration of the complex international business, as well as the broader retail environment that was very much in the state of the transition. We believe we are now moving into the period of stability and ultimately growth. We had solid financial controls in place, the portfolio of high equity brands and the network of best-in-class licenses that can help us realize the potential of our brands on a global scale. With our operating model positioned to execute with greater efficiency and profitability, and with the talented and experienced business development and marketing leadership in place, we are optimistic about our growth prospects. Thank you for your attention and for joining us on today's call. We look forward to keeping you posted on our progress in the quarters ahead.

[Operator:]

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