Apex Global Brands Inc
Q2 2017 Earnings Call Transcript

Published: 9 Sep 2016

[Operator:]

Greetings and welcome to Cherokee Inc’s Second Quarter 2017 Earnings Conference Call. At this time, all participants are in listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host Ms. Patricia Nir, Vice President of Addo Investor Relations. Thank you, Ms. Nir. You may begin.

[Patricia Nir:]

Thank you. Speaking today will be the company’s Chief Executive Officer, Henry Stupp; and Chief Financial Officer, Jason Boling. You can find accompanying slides for today’s call on Cherokee’s Investor Relations Web site. Before I hand the call over to management, please note that on this call, certain information presented contains forward-looking statements. Certain statements contained herein may contain forward-looking statements for purposes of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. When used the words anticipates, believes, expects, may, should and similar expressions are intended to identify such forward-looking statements. Forward-looking statements included in this conference call involve known and unknown risks and uncertainties that may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. A further list and description of these risks, uncertainties and other matters can be found in the company’s Annual Report on Form 10-K for the fiscal year 2016 and the company’s Quarterly Reports on Form 10-Q. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results. The company disclaims any intent or obligation to update any of the forward-looking statements contained herein to reflect future events or developments. Certain of the information in today’s presentation, including non-GAAP SG&A, non-GAAP operating income, and non-GAAP net income may be considered non-GAAP financial measures. Management believes this information is useful to investors because it provides basis for measuring the company’s available capital resources, the operating performance of its business and its cash flow, excluding expenses related to professional fees from legal and due diligence for potential acquisitions and business developments related to the identification and establishment of new brand licenses that would normally be included in the most directly comparable measures calculated and presented in accordance with general accepted accounting principles. In addition, the company’s management uses non-GAAP financial measures along with the most directly comparable GAAP financial measure in evaluating the company’s operating performance, capital resources, and cash flow. Non-GAAP financial measures should be considered in isolation from or as a substitute for financial information presented in compliance with GAAP, and non-financial measures as reported by the company may not be comparable to similar titled amounts reported by other companies. The non-GAAP measures are described above and are reconciled to the corresponding GAAP measures in the unaudited condensed consolidated financial statements included in the company’s press release under the heading GAAP to Non-GAAP Financial Metrics, which is posted on the company’s Web site, cherokeeglobalbrands.com. And with that, I’ll hand the call over to Cherokee’s Chief Financial Officer, Jason Boling.

[Jason Boling:]

Thank you, Patricia. Good afternoon, and thank you for joining us today. I will start today’s call with a discussion of our second quarter and first-half fiscal 2017 financial results. Henry will then provide further detail about our global brand and regional partner performance before we open up the call for your questions. Prior to discussing our results, please note that we will continue to provide certain anticipated operational and financial guidance, which should assist the investment community in their understanding and evaluation of our business. In addition, as we’ve discussed before, we feel reporting on a GAAP basis is best practices. However, given the significance of the legal due diligence and business development expenses over the last several quarters, we will also be reporting non-GAAP financial information, which we believe will provide the investment community with a better picture of our underlying operational performance. Now, turning to our results for the second fiscal quarter and first-half of fiscal 2017. GAAP royalty revenues for the second quarter were flat year-over-year at $8.5 million. During the quarter, the Cherokee brand saw increased royalty revenues, particularly in South America, India, the Middle East, South Africa and Asia, as the demand for Cherokee-branded products continues to grow. These increases offset an expected decrease in North American as we transition from Target to our new wholesale licensing partners. Revenue in the quarter includes the revenue from Cherokee brand launch at Sears Canada. We remain cautious on near-term performance, given the current challenges facing Sears Canada. We continue to expect full-year fiscal 2017 total retail sales at Sears Canada to be in the range of $20 million to $25 million. Further, the acquisition of Argos by Sainsbury has been completed and we are meeting with Sainsbury executives later this month to evaluate the impact of this transaction. As we previously mentioned, we expect total Cherokee retail sales at Argos to be in the range of $9 million to $11 million for fiscal 2017. Also contributing to revenues for the quarter were approximately $443,000 of royalty revenues related to the acquisition of the franchise Flip Flop Shops. Target has started to transition sales of the Cherokee brand as we approached the expiration of this license agreement in January 2017. Cherokee brand royalties earned by Target during the first-half of fiscal 2017 were $8.6 million, with an annual minimum guarantee of $11.3 million, for which the balance will be recorded during the third and fourth quarters of fiscal 2017. Furthermore, we anticipate that we will also record revenue in the fourth quarter of fiscal 2017 from our new wholesale license agreements with domestic licensees for Cherokee-branded products, with deliveries to retailers occurring during the fourth quarter and product sales commencing in early fiscal 2018. For the first six months, revenues for all brands increased 2% to $19.2 million from $18.7 million in the prior year period. Revenues were not materially impacted by devaluations in foreign currencies. We launched our Tony Hawk Signature Collection at Walmart. For fiscal year 2018, we currently expect the total retail sales of the Tony Hawk Signature Collection at Walmart Canada to be in the range of C$50 million to C$55 million. We also launched the Cherokee brand at 80 Albert stores in the Czech Republic. GAAP selling, general and administrative expenses were $5.9 million, or 70% of revenue, compared to $5.3 million, or 63% of revenue in the prior year period. The $600,000 increase in SG&A was primarily related to an increase in professional fees from legal and due diligence expenses for potential acquisitions. And our 10-Q filing, which will be filed today, includes details relating to these expenses. SG&A expenses for the six-month period totaled $12.4 million compared with $9.8 million in the prior year period. Non-GAAP SG&A, excluding the aforementioned legal and professional due diligence fees for the three months totaled $5.3 million. This compares to $5.2 million in the prior year period. For the six-month period, non-GAAP SG&A totaled $11 million compared to $9.6 million in the prior year period. For the second quarter, operating income totaled $2.5 million, or 30% of revenue, which is down from $3.1 million, or 37% of revenue in the prior year period. Operating income for the six-month period totaled $6.8 million compared with $8.9 million in the prior year period. Non-GAAP operating income, excluding the aforementioned fees totaled $3.2 million for the second quarter of fiscal 2017. This compares to $3.3 million in the prior year period. For the six-month period, non-GAAP operating income totaled $8.2 million compared to $9.1 million in the prior year period. GAAP net income totaled $1.5 million, or $0.17 per diluted share, compared to $1.9 million, or $0.22 per diluted share in the prior year period. For the six-month period, GAAP net income totaled $4.1 million, or $0.47 per diluted share. This compares to $5.5 million, or $0.62 per diluted share in the prior year period. Excluding the legal and professional due diligence fees, non-GAAP net income totaled $1.9 million, or $0.22 per diluted share. This compares to $2 million, or $0.23 per diluted share in the prior year period. For the six-month period, non-GAAP net income totaled $4.9 million, or $0.56 per diluted share. This compares to $5.6 million, or $0.63 per diluted share in the prior year period. We recorded a tax provision of $926,000, which equates to an effective tax rate of 37.9%. This compares to a tax provision of $1 million or an effective tax rate of 35.1% in the prior year period. At July 30, 2016, our cash and cash equivalents were $6.6 million compared to $6.5 million at January 30, 2016. Net debt for the quarter was $12.7 million and our leverage ratio was 1.5 for the trailing 12 months. We’re pleased to have utilized our strong balance sheet to return to our stockholders approximately $735,000 through share repurchases in the second quarter. This program reflects our Board’s confidence in our long-term business strategy and growth plan, and we believe represents an attractive investment opportunity for our shareholders. Cash flow from operations was $5.4 million compared to $5.1 million in the prior year period. Thank you for your time. I will now turn the call over to Henry.

[Henry Stupp:]

Thank you, Jason, and good afternoon, everyone. It has been a productive and profitable first-half of fiscal 2017 for Cherokee Global Brands. We will continue to add to our portfolio of high-equity lifestyle brands, strengthen our platform of capabilities, and grow our businesses globally. Our 360-degree platform is a powerful tool that enables us and our licensing partners to expand wholesale and retail relationships. The combination of our platform of capabilities and our portfolio of high-equity lifestyle brands allows us to enter markets quicker than ever before with well-designed product and fully integrated marketing plans. The recent launches in the Czech Republic for Cherokee and Tony Hawk in Canada reflect the agility of our unique business model. Our brand portfolio sets us apart in the industry and drives the vision and scale that allows us to continue to market our brands and expand our product offering worldwide. Despite the general malaise that is occurring in the domestic retail sector, Cherokee Global Brands continued its positive momentum during the second quarter. We announced several new partnerships, including our new best-in-class licensing partners for the Cherokee brand in the U.S. as we are now adding a new licensee for home decor and are in advanced discussions for ladies’ sportswear and active wear, accessories and ladies’ and girls’ footwear, which we expect to announce in the coming weeks as new category additions for the Cherokee brand offering. We also launched the Tony Hawk Signature Collection in over 400 Walmart Canada stores with a large-scale live event and skateboard demo that received a terrific response, generating over 22 million consumer impressions in Canada that ultimately yielded a multimillion-dollar marketing impact. In addition, we debuted the Cherokee brand in multiple product categories within Ahold’s Albert stores in the Czech Republic, and we expect to announce in the very near future a further expansion of our international Tony Hawk brand through the execution of license agreements for Latin America and other international territories. And as you can see, we continue to forge new relationships that will help us navigate through an ever changing and dynamic retail environment and to deliver more diversified revenue streams from our domestic and international markets. I’ll now turn to our brand performance in greater detail starting with the Americas. Performance in the region continues to be led by our Cherokee and Tony Hawk brands and from the contribution of Flip Flop Shops. As expected, retail sales at Target decreased 19% during the quarter and 10% through the first-half. We continued to aggressively expand our domestic wholesale license fee base for our namesake Cherokee brand, as we onboard new large-scale retail partners that will ensure successful expansion of the Cherokee brand for the entire family during spring 2017. We continue to expect availability of a full assortment of Cherokee product in 800 to 1,200 brick-and-mortar locations with several national major retailers, and our licensees are anticipating a multi-category launch in the digital space with Amazon. Amazon is now the second largest retailer of apparel and accessories in the United States, and we are expecting good things as Amazon continues its focus on these very important categories. As we work towards spring 2017, engagement among our licensee partners is high and excitement continues to build. We look forward to establishing all of our lifestyle categories, including adult fashion, so that loyal Cherokee customers will have easy access to one of their favorite brands. Every day, we field calls and track social media inquiries and comments related to the future availability of the much loved Cherokee brand, and it’s truly exciting to see the ongoing demand and enthusiasm for Cherokee-branded products. We remain encouraged by the overall health of the Cherokee brand in North America. Our fall delivery with Sears Canada has resonated well with Canadian consumers, and Sears has been in contact with their domestic U.S. licensees to augment the product offering even as they work through their new rebranding store improvements and other initiatives. And now that the merger between Soriana and Comercial Mexicana is complete, we expect to return to strong growth in Mexico, where the integration and expansion of product categories and store count is underway. Comp sales per door increased over 7.5% during the quarter, and the Q4 fiscal 2017 edition of 30 new Cherokee locations will continue to drive brand performance into the future. And we continue to experience strong performance in the important Latin American marketplace with our partners, Tottus and Falabella, where retail sales increased 12% and 13% in Chile and Peru, respectively. In other Canadian news, we are truly excited about the successful launch of the Tony Hawk Signature Collection within Walmart Canada. The collection launched mid-August in over 400 Walmart Canada stores and online and featured a comprehensive assortment of apparel, accessories, and footwear for both boys and young men. To celebrate the launch, we hosted a well-publicized event that attracted thousands of excited consumers and Tony Hawk fans. The live event featured a custom vert skateboarding ramp demonstration by Tony Hawk and his pro-skate team. Images from the launch event at Toronto’s Yonge-Dundas Square can be found on the earnings call presentation supplement, featured on today’s webcast, and available on our Investor Relations site. I encourage everyone to check it out. It is a great example of how our event marketing comes to life. Post-launch, consumer reception has been very favorable and retail sales has been very strong. We will be building on this momentum in the coming weeks and months and we’ll continue to work closely with Walmart Canada to expand the Tony Hawk Signature apparel, accessory, and footwear brand. The growth, acceptance and excitement of the Tony Hawk brand with Walmart Canada and consumers is encouraging and is reflective of the benefits of taking a strategic and diversified approach to distribution to ultimately expand the Hawk brand to North American consumers. Despite some of the challenges facing Kohl’s and mid-tier retail in general, consumer demand for an expanded Tony Hawk product offering remain strong in the United States and we will continue to work with Kohl’s to optimize the brand’s performance and define future opportunities for the Hawk brand in the U.S. Tony Hawk is truly a global brand and we believe we’ve only scratched the surface of its potential more on this in a minute. I’ll now turn to the performance of Flip Flop Shops in North America. Flip Flop Shops is another powerful multi-format global growth vehicle for Cherokee Global Brands, one that offers innovative franchise via shop-in-shop opportunities, while serving as an attractive platform for brand introduction and of course product line extensions. In September, we will meet with our Flip Flop Shops franchisee partners through our annual Global Franchisee Summit in Huntington Beach, California. During next week’s event, we, along with our major brand partners, we will be meeting with our franchise owners in person to discuss best practices, introduce marketing tools, review our brand performance, and to highlight new brand and product introductions. We are very excited to show our Flip Flop Shops franchise partners in the upcoming Spring 2017 launch of the Everyday California products during the summit. When we acquired the Everyday California brand, we knew it was a quintessential California lifestyle brand, and these natural attributes make it a great fit for Flip Flop Shops. The launch of Everyday California within Flip Flop Shops is a great example of the platform synergies we are exploring and we’ll continue to leverage Flip Flop Shops to scale our growing portfolio of fashion and lifestyle brands. We’re actively leveraging and expanding Flip Flop Shops flexible, multi-format, multi-channel model through shop-in-shop concepts, e-commerce, and new format innovations. Our recently announced super kiosk is a novel and eye-catching format innovation that can be deployed quickly and at nominal CapEx cost per location for any new franchisees. From our meetings with major mall developers and travel retailers, we know that excitement for Flip Flop Shops’ expansion is building, and e-commerce is also a natural extension for this momentum. In early October, we will be launching FlipFlopShops.com, our first venture into a wholly owned e-commerce platform. FlipFlopShops.com has been designed and managed by our team with the support of our core brand partners, who will efficiently manage the inventory and supply chain. We see this as the first of many ecommerce platform launches for Cherokee Global Brands, particularly as we add to our brand portfolio. I’ll now turn to our brand performance in Europe, the Middle East, India and Africa. Starting once again with the Cherokee brand, where we are very pleased with the recent Cherokee brand launch with Ahold, Albert stores in the Czech Republic. Our partnership with Ahold builds upon our strong consumer brand awareness in the Czech Republic and presents an opportunity to leverage the Delhi’s Ahold platform, which spans more than 6,500 locations globally, including stores in Belgium, Germany, Greece, Luxembourg, The Netherlands, Romania and Serbia. At launch, we introduced a wide range of Cherokee family lifestyle categories, including men’s, women’s and children’s clothing, and we look forward to introducing additional category, including essentials, footwear, and accessories. We’re providing images from the launch in today’s earnings supplements presentation, which shows a comprehensive product assortment. As with all of our scale partners, we support the launch with a fully integrated, multi-touch point marketing campaign. Post-launch, brand performance is off to a strong start and customer response has been very favorable. The success of the launch is another great example of the great things that happen when our high equity brands are synergized with our 360-degree platform. It also showcases the power of strategic alignment with our partners. From our contract signing with Ahold in April to in-store execution in July, our teams are in lockstep, allowing us to execute with unprecedented agility and speed. Turning our attention to the Cherokee brand in the United Kingdom for a moment. We continue to be conservative regarding initial sales in the region, given Sainsbury’s recent acquisition of Argos. We are taking the long view here, and we continue to view the acquisition as a broader opportunity with Sainsbury’s and it’s approximate 1,200 brick-and-mortar locations. We are also pleased with the continued growth of the Cherokee brand with our partners in India at Unlimited Stores and in South Africa in Pick ‘n Pay, where sales of Cherokee branded products grew 27% and 34% year-over-year, respectively from local currency. Similarly, following last year’s launch with Sports Direct, broad demand for Tony Hawk branded products in the UK and Europe continues to grow once consumers and retailers alike. The demand for more Tony Hawk signature products has been stronger than initially planned and we’re pleased to report that we’ve already confirmed a contract renewal to extend the term and scope of the current licensing arrangement. We’ve used Sports Direct as a platform partner for expanding the Tony Hawk brand in Europe, and we continue to see our partnership as one of the strength. Rounding out our brand highlights, I’ll now talk about our performance in Asia Pacific region. We’re pleased with our performance, very pleased in Japan, with sales of Cherokee branded products again grew 6% in local currency. And we expect even stronger results in the future as we continue to introduce new products, category expansions, and explore other expansion opportunities. While second quarter revenues increased 13% in China, sales were generally soft in this market and we remain focused on our efforts to further build the Cherokee brand in this region. We’re also very optimistic on the long-term opportunities for the Tony Hawk brand in Asia, and here again expanding into multiple channels presents an exciting opportunity. We’re in discussion to open freestanding Tony Hawk stores in both China and in Japan, where we expect the addition of skateboarding as an official sport for the 2020 Tokyo Olympics to be an extremely positive growth driver in this region. We’re equally excited about the vast opportunities for Flip Flop Shops. We’re in discussions with new partners for the Asian and South Pacific markets for large-scale distribution opportunities. And rounding out our brand performance for the region, our Point Cove brand continues to perform well in India and we are expanding the product assortment by adding new categories in the near future and strategizing on additional ways to integrate the brand across the globe. We created Point Cove entirely in-house and it’s a great example of our team at work. Cherokee Global Brands is fulfilling its goal of delivering our brand vision, increased agility and scale as never before across multiple business models, channels, formats and categories on a global basis. We made significant progress against our goal to diversify our brand portfolio and grow our global points of distribution, allowing us to take a more balanced approach to growth. Over the past several years, we’ve invested significantly in our platform in order to prepare for next stage retail opportunities. We now have the ability to flex our platform, scale quickly and efficiently on a global basis and we’re doing so with fully aligned partners. As our domestic U.S. licensee base continues to build, so are our design and product capabilities and our retail opportunities. In turn, we are bridging new opportunities for our licensees and introducing them to new markets. Organic growth through our brand and partners is an inherent opportunity that remains our focus as we continue to identify and explore complementary brand acquisitions. As Jason noted, our business development activities are elevated, and the current landscape presents many compelling acquisition and partnership opportunities. We continue to operate from a position of financial strength, maintaining a leverage ratio that is amongst the lowest in our sector. We are especially pleased that our financial position enables us to invest in our business, both organically and through acquisitions, while returning value to our shareholders. As Jason mentioned, in the second quarter, we returned nearly $735,000 to our shareholders through our share repurchase program. We also have a very strong management team with the resources to execute against our strategic plan. I can’t emphasize enough the impact of our licensee partners, whose level of engagement and support has been very high. And now before I open up the call for questions, I would once again like to thank our shareholders for your continued loyalty and support. We are very excited as we are about the future and direction of Cherokee Global Brands. With that, we’ll open up the call for questions. Operator?

[Operator:]

Thank you, everyone. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Mr. Eric Beder from Wunderlich Securities. Please proceed with your question, sir.

[Eric Beder:]

Good afternoon.

[Henry Stupp:]

Hi, Eric.

[Jason Boling:]

Hi, Eric.

[Eric Beder:]

Hey, so I got to ask you historically have not done non-GAAP, and you were pretty adamant that it is kind of not the way to go. So what was the thought process in deciding to change the presentation with EPS?

[Henry Stupp:]

Well, I guess we have you to thank, Eric. You had originally influenced us to include, both GAAP to non-GAAP numbers to identify the true performance of the business by taking out nonrecurring items. So after listening to you and the analysts and several of our investors we decided, given the increased due diligence costs associated with business development that for this particular quarter, we will call out the difference. Generally, though, we will and expect to return back -- to turn back to strict GAAP reporting.

[Eric Beder:]

Fair enough, and thank you. In terms of – so, now looking at professional fees, you spent almost $1.8 million in the last three quarters. Where – what are you seeing in the acquisition market? And what should we be thinking about, what you are looking for and how it flows in? And is the market just not realistic enough to let you guys do a deal at the right price? How should we be thinking about that?

[Henry Stupp:]

Actually, I think the market is realistic for us to do it with the right price. We find ourselves in a good financial position with a relatively unleveraged balance sheet. Clearly, we increased our M&A activity, as Jason has indicated in his prepared remarks. We have many opportunities that have crossed our desk. We don’t comment on how many or when we intend to announce an acquisition. But one can expect, given our recent activity and the activities over the last few years, where we have added brands to our portfolio, that we can expect the same in the future. We are, I will say very encouraged by what we are seeing. The multiples that we believe are falling back down into a normal – a more normal threshold that we’re comfortable with. And we are encouraged by the opportunities that we’re faced with.

[Eric Beder:]

And I guess finally, when you look at the transition from Target to your license product, it sounds almost like how seamless is – is there going to be a period, I guess, in Q4, where there will be kind of a not as much – you won’t see there will be a gap there in Q4 in-between Target and the new businesses, and do you expect to roll out Amazon at the same time you’re rolling out the major other players at the same time?

[Henry Stupp:]

Well, what we’re willing to say in terms of roll out, we’re focused on Spring 2017 as early as February 1. We are not listing all partners at this stage for strategic reasons. There are numerous retailers that are [indiscernible] the Cherokee business. We’ve chosen to highlight one at this stage, because we felt that it was important to know that we’re taking the brand to one of the faster-growing retail opportunities and to where customers are shopping. With respect to the transition from Target through the third and fourth quarter, we have limited visibility today of where they stand. We do know that there is inventory in the pipeline. In our previous conversations with Target, they have advised us that there will be merchandise available right through to the end of the contract period. That’s what they’ve communicated to us. That’s what we know at this stage.

[Eric Beder:]

Okay, good luck on the back-half of the year, guys.

[Henry Stupp:]

Thank you.

[Jason Boling:]

Thank you.

[Operator:]

And our next question comes from the line of Mr. Jeff Van Sinderen from B. Riley and Company. Please proceed with your question.

[Jeff Van Sinderen:]

Hi, good afternoon. So, I guess, I just wanted to follow-up a little bit more on the Target situation. Is it ramping down a little sooner maybe than you expected, I guess, is my first question. And then maybe if you can just speak to, I guess, what we should expect overall for your revenues? It seems like your international business is really strong and that’s certainly helping to offset this transitional period with Target. So maybe you could just touch on what we should expect I guess year-over-year for Q3 revenues?

[Henry Stupp:]

Yes, I would say that in terms of the ramp down, we definitely believe that it happened maybe a couple of weeks earlier than originally planned, not materially earlier. And it started to happen towards the tail end of second quarter, we thought it would happen right at the start of the third quarter. It’s hard to completely forecast the sales decline, because Target as they’ve reported, they are genuinely suffering from lesser traffic on a year-over-year basis. So we believe that we did catch a bit of that in addition to the transition. So that’s the Target situation. From a domestic standpoint, we’re very engaged and very involved with the retailers. And our new retailers, our new licensees, we believe and we’re working closely with them that we have more product opportunity than we’ve had in a great number of years in development. And we’re very excited and are excited by the prospects and the reaction. It’s not easy work, given that U.S. is – the U.S. state of retail is a little challenging, but our licensees are encouraged, we’re encouraged. And overall, with respect to the United States, I would comment that the addition of new – or not the United States, but just as the company overall, I would comment that the additional new revenue streams through the new launches and the general international growth would give us a stable back-half of this year. With respect to international, I can’t comment and thank our team enough for the recent launches with Ahold in Czech Republic. It was one of the most seamless launches when we were able to flex all the capabilities of the company. The presentation was very strong at retail. The demand is great. The consumer reaction has been terrific. The product really is some of the best assortment that we’ve ever introduced in a new market. And following just a week-and-a-half later, we had one of the most significant launches we’ve ever had with Tony Hawk in Canada. The sell-throughs in Walmart are completely exceeding our expectations. We are now in a future [indiscernible], which is music to our ears. The word is getting out. We indicated that additional partnerships are imminent. I think that the best days for the Tony Hawk brand domestically and internationally are ahead of us. And we’d clearly be more encouraged by that acquisition. And frankly, the way the consumers are embracing our products, we feel that we’re in a very, very good place.

[Jeff Van Sinderen:]

That’s great to hear. And then maybe if we could just follow-up a little bit more on Amazon, since I know you mentioned that and clearly, that’s a – that can be a great channel to move product. Maybe you could just clarify, is that going through one of your new licensing, your new wholesale licensing partners? And maybe you can just talk a little bit more about that, because I think you mentioned highlighting one retailer and I’m assuming that’s the one you’re speaking about?

[Henry Stupp:]

Yes. And so our licensee, rather than go forward domestically with the one direct-to-retail relationship, we chose to go with best-in-class licensees through sort of multiple retailers for core categories for which they are product specialists. In the case of Amazon, our licensees and our team collectively met and we’re in – and they will be doing the supply. Our licensees will be supplying Amazon, a broad opportunity of products. And as all things with Amazon, it takes time to grow, but they are a major factor that we couldn’t be more pleased to see our brand in.

[Jeff Van Sinderen:]

Okay, great to hear. Thanks very much. I’ll let someone else jump in.

[Henry Stupp:]

One other thing, Jeff, that I wanted to point out with respect to our domestic licensees, and this is a critical factor. We have now nine licensees signed, and many of them are starting to service our international partners as well. The impact on the company is profound in that, we don’t have to at this stage increase our product development cost and our sourcing infrastructure to supply more product depth and more categories to our partners globally, as many of our U.S. wholesale licensees are now being bridged by our team to our international partners. It’s a real win-win, where international retailers like Nishi in Japan, Albert stores in Czech Republic, Sears Canada are now able to buy more categories more often than ever before. And it’s great for U.S. licensees who don’t get the opportunity to have – to be introduced to new retailers domestically anymore. And the opportunity then to service our global partnerships is really something that we worked hard at. And the reaction is good and our ability to roll out more categories more often is something that we really focused on, and we’re really pleased with the general reaction globally. And it’s a great level for us to continue to parlay in the future.

[Jeff Van Sinderen:]

That’s helpful. Thanks for adding that.

[Henry Stupp:]

Thank you.

[Jason Boling:]

Thanks, Jeff.

[Operator:]

And our last question comes from the line of Mr. Dave King from ROTH Capital Partners. Please proceed with your question.

[Nick Meyers:]

Hello, gentlemen, this is Nick Meyers on for Dave, how are you doing?

[Henry Stupp:]

Good. Hi, there.

[Nick Meyers:]

So, yes, with regards to the hot brand, how the roll out in in-store at Sports Direct performed? Any color on initial sell-through there? And maybe how are conversations going to further expand the brand in Europe?

[Henry Stupp:]

Well, the – Sports Direct is coming out of a couple of rough quarters in their brick-and-mortar locations. So we have very little product in store. The majority of our sales happened online. And we’ve been working with them to augment the assortment and get more product in stores. Ultimately, we it’s hard to use our sales in Sports Direct and agreed to extension of the contract, because the demand for the products was there, the supply wasn’t. So we worked with them. We anticipate as we move into the back-half of this year, we’ll see more product in stores. We were certainly hoping to see more in-store than we saw in the first-half of the year, but it seems to now be stable. And given there a critical mass, we think that there’s a great opportunity for us to expand our brand in Europe. I’ll also tell you that the demand for Hawk in many European countries is very strong. And we are in discussion in Asia, Latin America, and Europe through Hawk. So we anticipate that Hawk over the coming quarters will ultimately achieve our objective of being a globally marketed brand through our company. And we are more excited now than the day we first announced the transaction.

[Nick Meyers:]

All right, perfect. I appreciate that color. And then next, I’ll kind of piggyback off of Eric’s question. In calculating the non-GAAP EPS, can we expect the current run rate for the diligence cost? And also are the costs so far mainly related to larger deals, or maybe several smaller ones?

[Jason Boling:]

So as far as the cost for the transaction and due diligence, we do call it out, it is laid out there. It has also specifically put out in the 10-Q. So you are able to see that. As far as the run rate, we are not commenting on how much we are going to spend. And we don’t still talk about the size of deals. We look at all kinds of different deals, some large, some small. And so, we won’t be telling you, how much we spent on any one particular deal. And then as far as run rate of regular costs, if you – the reason why we did the non-GAAP was, so you can see a better picture of what operational costs are. So this quarter, for example, if you pull out the transaction costs, it was about $5.3 million versus a year ago this quarter, it was about $5.2 million.

[Henry Stupp:]

The other thing I would add is that, we are looking for more larger scale transactions, which is what our focus is.

[Nick Meyers:]

Okay, perfect. That’s really helpful. All right, just maybe one more and then I’ll step back. Can you speak a little more about the performance of Flip Flop Shops in the current retail environment and has franchise profitability suffered in anyway? Has it affected maybe the pace of openings? And how our conversations going with new franchisees, including maybe more professional ones?

[Henry Stupp:]

Well, it’s definitely a mixed bag. Domestically, our store openings slowed down a little bit in the second quarter. We try that into general mall traffic situation that we read about every single day. Internationally, we continue to perform. In the coming days and weeks, we will be announcing some larger scale partnerships to dramatically increase the store count opportunity. We are focused on more shop-and-shops, airport channel distribution and more international partnerships. We – we’ll be unveiling several new concepts at our summit next week, the interest is there. We’ll navigate through the mall-based traffic situation. Like all things, it won’t last forever. We are identifying larger partners, where we can have more efficiency than the pure, single owner operator franchisee, except for certain specialized locations. So we’ve opened up some stores this past quarter that are performing quite well and continue to roll out stores. But we are watching very closely, which locations are best for us to open in and not rushing the opening, we would rather have higher quality doors even with fewer doors. And most importantly, we are moving into the e-commerce platform in the next few weeks, which we think will be a considerable contribution to our profitability of Flip Flop Shops.

[Nick Meyers:]

Okay, thank you. That’s helpful. All right. Well, thank you, guys, for taking my questions and good luck in the rest of the year.

[Henry Stupp:]

Okay, thank you.

[Jason Boling:]

Thank you.

[Operator:]

Ladies and gentlemen, we reached the end of our question-and-answer session and the end of our call for today. We thank you for your time and participation and you may disconnect your lines at this time. Have a wonderful rest of the day.