Luvu Brands, Inc.
Q3 2022 Earnings Call Transcript

Published: 17 May 2022

[Operator:]

Greetings ladies and gentlemen, and welcome to Luvu Brands Incorporated Fiscal Third Quarter 2022 Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Alex Sannikov, the company's Chief Financial Officer. Mr. Sannikov, you may begin.

[Alexander Sannikov:]

Thank you, Jane. And thank you to everyone who has joined us today for Luvu Brands third quarter and first nine months of fiscal year 2022 conference call. Joining me today is Louis Friedman, our Founder, President and Chief Executive Officer, and Jordan Friedman, our Sales Director. On Monday, we filed our quarterly report on Form 10-Q for the three and nine months ended March 31, 2022 and issued an earnings release that highlighted the company's third quarter and first nine months of fiscal year 2022 performance. There are a number of items that I look forward to discussing with you this morning, including Luvu Brands financial results for third quarter ended March 31, 2022, recent developments in Luvu Brands operational activities, as well as the company's near-term plans for the future. At the conclusion of this call, we will be answering questions during a Q&A session. Before we get started, I would like to remind you that some of the information discussed today will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections and our plans and prospects. Actual results may differ materially from both set forth in such statements. For a discussion of this risks and uncertainties, you should review the company's filings with the SEC, which includes today's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to undertake them except as required by applicable law. Our discussion today will include non-GAAP financial measures, including EBITDA, and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from Our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as a supplemental financial information in our press release. Now, with that completed, I'd like to start the call with a few words from Luvu Brands, Founder and CEO, Louis Friedman. Louis?

[Louis Friedman:]

Thanks Ellis -- Alex rather and good morning, everyone. Thank you for joining us this bright and early date to discuss Luvu Brands third quarter 2022 results, as well as our fourth quarter outlook and beyond. We are pleased with our third quarter results. Net sales of $6.8 million, an increase of 9% over the prior third quarter, marking our eighth consecutive quarter of profitability. We are on a trajectory towards meaningful profitability despite the inflationary environment. We have an adequate cash position, healthy inventory and dramatically reduced lower interest debt. Our innovation and product engine across all brands is humming like never before. Needless to say, we are excited about our business and the emerging sexual health trend. As many of you know Liberator is a brand category, different from self-love vibrators and pleasure objects. Liberator is well positioned to be on the forefront of a generational change enhancing sexual performance while providing intimacy assistance to couples, regardless of their age, size, weight, physical condition or agility. As the sexual wellness trend continues to evolve into mass retailers, including Target and Walmart, we are fortunate to operate in a large and growing market of $17 billion US alone predicted to reach 30 billion by 2025. And those happy customers are spending more with us than ever before. For nine months, sales of Liberator products increased 27% to 9.3 million from 7.3 million in the prior year. That increase hasn't just come from modest price increases. It comes from two factors. First, our customers are buying more across multiple product categories from us. Plus there's an increase in the frequency of reorders from customers and distribution partners. We're also excited about building Liberator global expansion, an agreement has just been signed with Orion, one of the largest distributors in Germany, with 150 franchises and hundreds of wholesale customers. Orion extends our retail and digital reach into 27 countries across EU. In short, our belief in our ability to reach our vision for the Liberator brand is stronger today than ever before. At this point, I'll turn the presentation over to Jordan, who will discuss our omni-channel digital approach for sales and brand awareness.

[Jordan Friedman:]

Yes, thank you, Louis and Alex, and good morning, everyone. For those who don't know me or are not familiar with me, I've been managing the company's mass market, digital marketing and sales for the last seven years. For all of our brands, Liberator, Jaxx and Avana extensive online distribution meets our customers wherever they prefer to shop and buy. We raise brand awareness through a multi-channel marketing approach, starting with Amazon and including other marketplaces and mass retailers like Wayfair that give us immediate access to editing and creating their web content anytime we have a new product or change. For advertising and marketing, we test and deploy all mediums including Google Pay Per Click Amazon, PPC, and many social channels including Reddit, Pinterest, Facebook and more. We also utilize the ad roll platform to reach other blogs and content rich sites. As an example of our success, let's look at our Jaxx's brand's growth. During the last nine months, Jaxx product sales increased 25% to 6.1 million compared to last fiscal year's 4.9 million. New products for Jaxx include an expanded line of faux fur beanbags, kids play couches, and enhanced collection of day beds and outdoor loungers, plus additions to our panelist headboard collection. You can see we're always innovating. This quarter new web retailers for Jaxx include , Paragould, Front gate, Indigo Canada, Ashley Furniture, plus numerous large resorts, commercial and hospitality clients. Researching and adding new wholesalers is something we do every day. We also have longstanding relationships with buyers and various channels giving us a leg up in terms of personal knowledge and history. As long as we have great photography enhanced content, innovative product design and competitive price to value onboarding anything new turns on the sales cycle usually within just a few days. Amazon is also a significant market opportunity for Luvu Brands. It represents 35% of our annual revenue and is continuing to grow tremendously every year, as well over 50% of consumers start their product search on amazon.com. There are five keys for continued success on Amazon that I've outlined. Innovative design and a large variety of categories, in stock inventory, utilizing FBA and Amazon vendor channels, FBA is the Fulfillment by Amazon program; enhanced and optimized creative content; advertising and affordable direct-to-consumer pricing. With our Amazon expansion of FBA inventory domestically in Canada and all over the world. Our goal for all our brands is to grow revenue by a minimum of 20% on our Amazon year-over-year. Now, let's dive into the financials. I'll turn this over to Alex Sannikov, Luvu Brands, Chief Financial Officer to summarize some of the financial highlights of the third quarter and first nine months of fiscal 2022.

[Alexander Sannikov:]

Thank you, Jordan. I will briefly touch on some of the financial highlights from three and nine months ended March 31, 2022. Net sales increased 9% to a third quarter record of $6.8 million compared to $6.2 million in the same year ago quarter. Sales of Liberator products increased 15% to $3.3 million from 2.8 million in the prior year. Jaxx product sales totaled $1.9 million, up 29% from 1.5 million in the third quarter of the prior fiscal year. Avana product decreased 27%, 2.7 million from $1 million in the prior year. For the nine months, net sales increased to $20.2 million from 17.3 million an increase of 17%. Liberator sales increased 27% to 9.3 million from 7.3 million in the prior year. Jaxx product sales increased 25% to $6.1 million compared to last fiscal year's 4.9 million. And Avana product sales decreased 19% to 2.3 million from $2.8 million a year ago. Gross profit for the third quarter totaled $1.8 million, compared to 1.7 million in the prior year third quarter. The company experienced labor and raw material costs increases and gross profit as a percentage of net sales decreased to 27% from 28% in the prior year third quarter. Year-to-date gross profit was 24% compared to 28% in the prior year and nine months. Third quarter operating expenses were approximately 19% of net sales, or approximately $1,261,000 compared to the same 19% of the net sales or approximately $1,183,000 for the same period in the prior year. For the nine months, operating expenses increased 12.5% to $3.8 million. Net income for the third quarter was $452,000, or $0.01 per share, compared to net income of $469,000, or the same $0.01 per share in the prior year third quarter. Net income for the nine months was $846,000 or $0.01 per share compared to $2,263,000 or $0.03 per share in the prior year nine months. Adjusted EBITDA for three months ended March 31, 2022 was $616,000 compared to $621,000 in the prior year quarter. For the nine months adjusted EBITDA was $1.3 million, compared to 2.7 million in the prior year first nine months. Excluding the PPP note forgiveness, adjusted EBITDA in the prior year first nine months was 1.6 million. We continue to increase the quantity of products owned by our contractor in Mexico and it is now running at 25% to 30% of all our products. Cash and cash equivalents on March 31, 2022, totaled $935,000 compared to $9,777,000 at June 30, 2022. Working capital increase from $435,000 at June 30, 2021 to $1,228,000 at the end of the third fiscal quarter. Now I'd like to turn the presentation back over to Louis for his comments. Louis?

[Louis Friedman:]

Thank you, Alex. Appreciate it. Third quarter 2022 marks our 20th year in business and this following a year where we delivered 26% net revenue growth. We expect to surpass 260 million in cumulative lifetime to-date net sales during the fourth quarter of 2022. Virtually all of that came via our direct channel promotion, coupling with exceptional digital experience and growing partners in brick and mortar retail stores. Regarding our stock price, by mid-May 2022, we are down more than 50% from December 31, 2021. At the same time, we take great comfort in our ongoing business performance, which is stronger today than it's ever been. Simply put, we are methodically delivering on what we need to do to build significant consumer brands and we believe that over time, the market will catch on to what we're up to. We remain focused on executing our key growth strategies to drive long-term value for shareholders. We appreciate the continued support we have received from shareholders and look forward to keeping you posted on our progress and developments as we finish our fourth fiscal quarter. That wraps up our formal presentation. Operator, we're now open for our Q&A and after the call and that would be it basically, we'll have some closing comments after the questions. Thank you.

[Operator:]

Thank you very much. . Thank you. Our first question is coming from Olivier Colombo, a private investor. Olivier, over to you.

[Unidentified Analyst:]

Louis, I have four questions for you today. The first one is regarding.

[Louis Friedman:]

Well, we only have three people here Olivia.

[Unidentified Analyst:]

Okay. So you'll have two questions. That's perfect. No, it's regarding Orion your new partner you have in Germany. How much were they responsible for this past quarters sales and how much do you expect them to do, let's say in a year time.

[Louis Friedman:]

Okay, well, those are good questions. So Orion is an old company and in Germany, they have distribution throughout the EU, they're about 40 years old. And they're probably the one of the largest, if not the largest distributor. So they have their own franchise stores, 150 stores, and plus, they probably sell to hundreds, if not 1000s of shops or etailers around EU. So where Orion is exclusive with Liberator, and so we're not selling to anyone else other than Orion, and they're giving us one order of 100,000, one trail load at a time. So conceivably, it could be a trail load a month, which would be 100,000 a month or a million two or 100,000. They're ramping up, let's say. So they're promoting, they're feeding their pipeline. They're moving it through their retailers. So it's kind of hard to say what they're going to accomplish, but I would hope it would be at least a million dollars.

[Unidentified Analyst:]

Okay. That's perfect. Thank you very much. The other question that I had is, it looks like your direct sales fell 14% during this quarter. And on the other hand, wholesale was up 20%. How do you explain the underperformance of the direct sales here? Was there a particular –

[Louis Friedman:]

You referring to the direct sales on liberator.com? Are you referring to the direct sales through Amazon or which ones you are referring to?

[Unidentified Analyst:]

I believe it's on the direct sales, it’s the one that had 1.7 million versus 2 million last quarter?

[Jordan Friedman:]

Probably does not Amazon.

[Louis Friedman:]

Okay. Is that Avana sales? Or that –

[Jordan Friedman:]

I think that's all of the direct-to-consumer website.

[Louis Friedman:]

All the direct to consumer website.

[Jordan Friedman:]

Not Amazon.

[Louis Friedman:]

Well, I guess the Liberator sales are up for both quarters, right, I think we said they're up about 27%. And so we promote to the consumer. And then, the consumer has choices as to where to buy. So they might shop on Liberator and buy on Amazon, or they may shop on Amazon and buy on Adam and Eve, where they might shop in a Hustler store and then come back and buy on Liberator. So it's hard to say, as long as they keep buying, I guess as long as our growth sales are up. That's all we can ask. We do promote, as a brand manufacturer, we promote to the consumer. And we leave it to the customer as to where they're most comfortable to buy. And as long as they're not buying from a competitor and our sales go up per brand, we're happy. The only brand that's challenged at the moment is Avana which is down and we have some solutions that to the Avana situation that we're about to roll out in the next quarter starting, in the next couple of weeks. So we have a plan for Avana to recoup some of the business and to grow Avana exponentially new IP and new products that we have in place.

[Unidentified Analyst:]

Yes, you did answer my question and actually you read my mind. So it becomes a bit –

[Louis Friedman:]

I did read your mind.

[Unidentified Analyst:]

My next question is about Avana.

[Louis Friedman:]

But I don't want to tell everybody what's going on in your mind. So we're just keep it between us friends.

[Unidentified Analyst:]

That's perfect. Thank you very much. The other question is regarding the Q3 sales, which were, of course, 9% increase, but we were a bit used to double digits here was anything special that didn't reach the double digits here.

[Louis Friedman:]

We had some supply shortages along the way. And we had some challenges with our corrugated vendor delivering product that wasn't -- let's say good enough. So there was some problems that it should have been more like 14%. But there were delivery problems from our suppliers, which is probably understandable in today's environment. So that's what we were dealing with. But we buy from many suppliers. And we are constantly seeking out new vendors to lower our costs and improve deliveries. So we believe we have that problem clicked, but we don't want to be burdened with suppliers that shortchange us either in delivery or quality. So that's unacceptable. And that's probably what's attributed to that.

[Unidentified Analyst:]

That's perfect. Thank you very much. Those are all the questions that I had.

[Louis Friedman:]

All right. Well, it's great hearing from you. And yes.

[Operator:]

Thank you, Olivier. And we have question now from . Bryan, please ask your question.

[Unidentified Analyst:]

Hi, everyone. Congratulations on the quarter. I was surprised to see your gross margin at 27% because though it's down from the 28% in the previous year, it's actually up from 22% in the preceding quarter and 24% in the quarter before that. So how were you able to get that margin raise? What were the contributing factors for that?

[Jordan Friedman:]

I think I can answer some of that question. So I mean, there were a few different factors there. One of which was, we had some price increases that we were still pushing through from, it took us a little while to catch up on some of the cost changes that we incurred in 2021. So we had some supply side costs increases 2021. And then a lot of those were not passed along to wholesale, certain wholesale customers, certain brands into the beginning of 2022. And then, the other thing was that, there have been some cost decreases since then, as well, that we've been able to turn into more gross profit, which is based on careful shopping on the supply side, and our purchasing team has been doing a great job to bring some of those costs down.

[Unidentified Analyst:]

And going forward, are you -- what's your confidence level to be able to, I'll say, maintain, where you're at now, in terms of margin, or potentially increase that margin further?

[Louis Friedman:]

Yes. I guess I'll answer that. So we have an ongoing plan for training and automation. We want our employees to be more productive, so that we make more money, and they make more money, especially sewing in the U.S. We continue to add automation to our facility. We have new lines going in, actually this month, that will improve our productivity. And as Jordan has mentioned, we are constantly shopping for new sources of supply surplus materials that we can pick up. And we design products that are efficient to ship. So we're aware of UPS constantly raising their rates. And so we kind of look at our products to see how they can be compressed and what boxes they fit in, so that we can meet certain price points and reduce our freight costs. And as you know, as an etailer, we tend to pay a lot of freight. And so, we have to keep our freight costs as low as possible.

[Jordan Friedman:]

Yes. And actually, that was something I forgot to mention too, is that we did just reduced one of our box sizes, in a pretty significant manner on one of our best selling products. So that's saving a lot on freight costs.

[Alexander Sannikov:]

And if I can weigh in, we were constantly -- we do realize that, margins, that is a challenge that pretty much every company is facing right now. And we're constantly looking and analyzing where we can improve. And where we can automate, where we can shop for less and things of that nature.

[Unidentified Analyst:]

And the new relationship distribution relationship you mentioned with Orion. What are you hopeful that margins will be through that channel?

[Louis Friedman:]

Well, we're hoping as I mentioned earlier, we're hoping that Orion purchases from us at least a million dollars worth of product as they ramp up their marketing and promotion. And obviously, that's going to contribute to our bottom-line. And so we don't pay freight with Orion, so they buy goods, FOB Atlanta and they buy, 40 feet at a time. And so we're busy month-after-month producing basically trailer loads of goods being shipped to Germany. And so, yes, so that was certainly added to our bottom-line.

[Jordan Friedman:]

It should be in line with our percentage right now that -- it should be somewhere in the 25% to 30% range.

[Unidentified Analyst:]

Okay, appreciate that. And then, where are your open orders added at this time as we speak?

[Louis Friedman:]

As a direct consumer marketer ideally we would have everything in stock and not have a lot of open orders but we tend to keep about 800,000. They may be contract orders they may be orders with rooms to go or we're presently filling as Jordan mentioned, sandals and room and board and Margaritaville and so those are more contract orders. But for the most part we ship from our stock and so we have to provide fast shipping to all of our websites whether it's mass market or Liberator. So we manufactured for stock and ship from stock and ideally keep our open orders low.

[Unidentified Analyst:]

Okay. Appreciating that. I saw your inventory actually did rise a few 100,000 at the end of the quarter was that supply issues, timing issues, any comments on that?

[Louis Friedman:]

Well, some of that might be accumulation for Orion or it might be accumulation for contracts that we have. So it may not be our dot com business, it could be other business that we're accumulating and getting ready to ship. So but we try to carefully manage our raw materials, foam and fabric and finished goods. And, for instance, we have some large school orders that are going out, right, loads of school.

[Jordan Friedman:]

Yes. And we are trying to increase our position at Amazon's warehouses as well to kind of capitalize on their Amazon Prime program for their customers. So I think we are doing a pretty good job at increasing that inventory position in their warehouses.

[Unidentified Analyst:]

Okay, great. And in your opening remarks, you spoke about some of the opportunities that I'll say for -- in the more mass markets like Target and Walmart, can you offer a little more color on what you're referring to there?

[Louis Friedman:]

Sure, going back quite a few years ago, a company by the name of drugstore.com doesn't exist anymore, but they came up with a concept that we can sell adult goods, if we call it sexual wellness. So they produced the category called Sexual Wellness and they started, as a matter of fact, we were the first product that was on drugstore.com. And over time, more and more etailers got comfortable under the moniker of sexual wellness or sexual well-being. And then, of course, Amazon came in and said, well, we can sell these goods on the sexual wellness as well. Recently, toys, vibrators and primarily pleasure objects have found their way into Walmart and target and mass market, including Sephora selling toys as well. And so, we're presenting concepts right now it seems to be a hot category for mass market. And so we're presenting packaging that's different than our current packaging that would perhaps work in Walmart or Target and it's a category that they're really interested in at present. And Liberator has no competition within that category. It seems like they've already exhausted toys. Keep in mind that their toys have been selling in drugstores and mass market in Europe and Japan, I mean for years. And so the U.S. is slow to catch up on that. But it's an emerging trend. They've experimented online and we have sold, as a matter of fact, companies like Wayfair sell some Liberator products under another name. Brookstone sells some Liberator products. So they've been comfortable selling it online for years, and they finally dipping their toe into putting these items in store. So hopefully the new packaging that we present to mass market will result in some large orders. And so we'll see.

[Unidentified Analyst:]

When should you have a feel for the response on that?

[Louis Friedman:]

Well, I guess it's really up to them. Actually we've submitted packaging to Vitamin Shoppe before, and we're still waiting for response from them. I would say, perhaps by the end of our fourth quarter, we'll have an answer. But we don't know how quickly they're going to respond.

[Unidentified Analyst:]

Okay, very good. That's it. Thanks, guys. Good luck.

[Louis Friedman:]

And thank you for your questions. We appreciate it.

[Operator:]

Thank you. That appears to be the last question we have with the phone line. So I'm now going to hand over to Alex who's going to promote any of the web questions.

[Alexander Sannikov:]

Yes, thank you, Jen. We have a few questions on the webcast. And I am going to read it out loud and let the team answer it. So the first question comes from Mike Levine, Private Investor. In the 10-Q it was mentioned that business is seasonal. And will you experience higher sales in Q2 and Q3? How does that square with your stating that you have strong revenue growth in the present quarter? Can you break that seasonal revenue trend?

[Jordan Friedman:]

So I can touch on that a little bit. So one of the ways that we're breaking that trend is, we are continuing to expand our Jaxx outdoor line and Jaxx outdoor is very strong in the Q4 that we're in now. Basically all the way from April up until through July. So by continuing to offer more outdoor summer type items where we are kind of breaking that trend to make not just one kind of seasonal moment but multiples seasons throughout the year have kind of, one brand, it might be hot in one season and then other brands take over the rest of the year. I think that's about, you have any other comments on that?

[Louis Friedman:]

No.

[Alexander Sannikov:]

All right. The next question from Mike Levine. Today's share price is at $0.15, which, in his own opinion, very undervalued. Is there an interest by other companies based upon the current valuation in a buyout or buy in?

[Louis Friedman:]

Yes. From time-to-time, we get calls. But right now, we have no one in play right now. As an acquisition target. We'd be reluctant to sell at this valuation. And so we'll keep answering these types of calls as they come up. And we'll have to evaluate it. But right now, there's no one in play.

[Alexander Sannikov:]

All right. The next question comes from Paul Bertino, another Private Investor. On an earnings call last year, he asked if you knew about Only Fans, as a possible sales channel to Liberator, you said you would look into it. And his question is, if the company actually did into it? And is there any update with the finding?

[Louis Friedman:]

Yes. Well, we did look into it. And I believe that's one of the -- and we appreciate the recommendation. We are advertising in a variety of places including Swinger websites. I believe we have plans to advertise and promote to Only Fans. But right now we're doing some Swinger sides. And we have ads and content there. We also are advertising in Reddit, which is actually doing quite well for us.

[Alexander Sannikov:]

Another question from Paul Bertino. What are the benefits of company keeping the Avana brand? Can you please share your thoughts on concentrating exclusively on Liberator and Jaxx instead?

[Jordan Friedman:]

Yes. So I mean, one of the benefits that we may have touched on before is that we utilize all of our foam trim from any solid foam shapes. That which helps increase our profitability on the Jaxx brand of any beanbag items in the Jaxx brand. So some of the extra waste that comes off of the Avana brand helps fuel our Jaxx and other brands as well. But the Avana brand does have some fairly similar shapes and similar type items to the other brands that we carry. So they're all within our core competency without really any additional difficulties of making the Avana brand versus other products.

[Louis Friedman:]

Actually, some of our mass market customers would buy across the board. They'll buy Liberator. They'll buy Jaxx. They will buy children's products, indoor outdoor Avana. So it's the same, really the same sales cycle. And the products from a core competency standpoint. Avana is in sync with what we do here. So it's not any additional stress on the business to manufacture those products. And, yes, they tend to go with our distribution across the board model through mass market. So, we'll keep it we'll see what the next leg of Avana will bring us as we introduce some new IP to that product line.

[Alexander Sannikov:]

And the next question comes from Private Investor, Russell Valentine. Does the company have a physical room for expansion if sales continue to increase?

[Louis Friedman:]

So our building is 140,000 square feet, and we deploy lean manufacturing and warehousing. And so we're utilizing every part of this building, despite the fact that we're increasing new automation and whatever. I think we can do 50 million in this building. And if we outgrow it, we'll move the shipping department out and run a truck back and forth. And so shipping occupies about 35,000 square feet. So I believe we have certainly expansion within this building, should we needed 35,000 square feet and shipping good, being another 60,000 square feet up the block. So building size should not preclude our ability to expand.

[Alexander Sannikov:]

Thank you. And it appears that there are no further questions. Louis, would you like to?

[Louis Friedman:]

Sure. Thank you to everyone. We appreciate your time. And if you have any questions or want to discuss anything between now and the next quarter. We are always available to chat. And so we look forward to meeting with you again and have a have a good day. We appreciate.

[Jordan Friedman:]

Thank you.

[Alexander Sannikov:]

Jane, thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your phone lines and disconnect from the webcast at this time. Thank you for your participation.

[Louis Friedman:]

Thank you for your help.

[Jordan Friedman:]

Thank you.

[Operator:]

No problem. Thanks, guys. Take care.