Xcel Brands, Inc.
Q3 2020 Earnings Call Transcript

Published: 16 Nov 2020

[Operator:]

Good day, and welcome to the Xcel Brands 2020 Q3 Financial Results Conference Call. . Please note this event is being recorded. I would now like to turn the conference over to Andrew Berger, Investor Relations. Please go ahead.

[Andrew Berger:]

Good evening, everyone, and thank you for joining us. We appreciate your participation and interest and hope that all of you are safe in these challenging and uncertain times. 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 access to the earnings release for the third quarter ended September 30, 2020, which went out a short while ago. And in addition, the company plans to file with the Securities and Exchange Commission its quarterly report on Form 10-Q by November 13, 2020. The release and quarterly report will be available on the company's website at www.xcelbrands.com. This call is being webcast, and a replay will be available on the company's Investor Relations website.

[Robert D'Loren:]

Thank you, Andrew, and good evening, everyone, and thank you for joining us. I hope all of you and your families are staying safe and healthy. I will start today's call with some brief opening remarks followed by an overview of our third quarter financial performance and then provide some operating highlights. After that, our CFO, Jim Haran, will discuss our financial results in more detail.

[James Haran:]

Thanks, Bob, and good evening, everyone. I will briefly discuss financial results for the quarter and 9 months ended September 30, 2020. Please note that our financial results are described more fully in our quarterly report on Form 10-Q, which we expect to be filed with the SEC by November 13. Total revenue for the third quarter of 2020 was $7.4 million, a net decrease of approximately $3.5 million or 42% from the prior year quarter. This decrease was most pronounced in wholesales, which were down approximately $2.3 million year-over-year due to canceled and reduced wholesale orders related to COVID-19. Licensing revenue declined approximately $1.2 million from the prior year quarter due to a combination of the economic impact of COVID-19 on our licensees and also by a reduction in guaranteed minimum revenues of our existing licensing arrangements upon renewal effective January 1 of this year. Despite these revenue declines, our overall gross profit margin was 83% in the current quarter, up from 73% in the prior year quarter. Gross profit margin from product sales increased from 35% in the prior year quarter to 41% in the current quarter, which results in roughly equal margin contribution on less sales. Our operating expenses were $6.5 million for the current quarter, representing a $1.1 million decrease from $7.6 million in the prior year quarter. This decrease is primarily due to the cost reduction actions taken in response to the COVID-19 pandemic, including temporary reductions of employee compensation and cutting nonessential costs and includes $0.17 million Payroll Protection Program relief. Partially offsetting the decrease in operating expenses were $0.36 million of bad debt reserves related to the bankruptcy of several retail customers. Net loss is approximately $0.5 million for the current quarter or negative $0.02 per basic and diluted share compared with a net loss of $0.1 million or $0.01 per basic and diluted share for the prior year quarter.

[Robert D'Loren:]

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

[Operator:]

. Our first question comes from Robert Marsden with Penn Capital .

[Unidentified Analyst:]

Congratulations on making it through the other end. It appears that the diversification really worked this time.

[Robert D'Loren:]

Thank you. It's been a tough time in the industry, as you know.

[Unidentified Analyst:]

Yes. On something more positive, could you comment regarding the outlook for Walmart? How's the brand doing there? C. Wonder, in the last call, you mentioned that they like the product and they were asking for more SKUs and categories. And if the online testing continues to do well, is there a shot that you get any kind of exposure to the stores in 2021?

[Robert D'Loren:]

We are experiencing very high value customer engagement on their e-commerce platform, which is really interesting when you think about the 4 brands that are currently testing higher price points and higher product value benefits for their customers. But we -- in spring, when we launched, there was an impact from COVID. Fall to date has been much, much better. We're seeing much more engagement. We have some items that are doing very well. We launched 10 new categories under our licenses. So we're seeing some strong sell-throughs with some of the bags at the price points that we're marketing. And we are currently now looking at what the business would look like as we roll forward into perhaps spring or fall, the next phase of this, which would be 250 doors, what that would look like in terms of order minimums, where we can bring the MSRPs in line with what's already on Walmart's floors. And based on where we are so far, we're feeling positive that we can adjust those MSRPs with greater volumes on the production to succeed on the floor. So that's where we are. And as we go forward, we'll keep everyone apprised in our next call.

[Unidentified Analyst:]

Excellent. It sounds like there's progress being made there. On a second issue, the Longaberger deal. I guess you could say Xcel now is a basket case. But that business, at one point, I think, in the year 2000, did $1 billion in revenues. I know there was a bit of a collection fad going on for that. But as you look out for the next 2, 3, 4 years, do you have any idea that if you guys execute well with this strategy in this business and this format, what type of revenues you could achieve? Is it something to get back to 5% or 10% of the all-time peak and $50 million to $100 million or was that such an outlier that every other year was only that level, and that would be asking a little too much.

[Robert D'Loren:]

So Longaberger historically sold more than baskets. They had a fairly strong tabletop business, the food business. They had a very significant jewelry business. And David Longaberger's vision for the company was that Longaberger, at one point in time, would sell everything for the home. In fact, Dave would say, "Someday, we're going to give the baskets away for free and sell our customers everything for their home." Our strategy was to continue Dave's vision. Over the last month or so, we're seeing our sales shift. When we launched it with baskets first, and that's really all we brought to market because that's what we had. But today, we're at about 850 SKUs on the site. Last month, 40% of our sales were all things accept baskets. And we anticipate that the business will be at above 1,500 SKUs by the end of Q1, perhaps 2,000 by the end of Q2. And where we will have just about everything that someone would want for their home. We will be launching a wine subscription business very shortly. And the mathematics in that business are a bit geometric. Today, we have over 3,500 members, 1,100 of them are now trained sellers. And like most direct sales businesses, there's an 80-20 rule. About 20% of your sellers do 80% of your volume. We anticipate that we'll be at about 10,000 members by the end of Q2, maybe even sooner. And if you think of historically, this company, their sales associates did about $6,000 in annual sales. If you're running 10,000 stylists out there, and they're each doing $6,000, you can run the math yourself in terms of where this could go.

[James Haran:]

This is Jim Haran. Just to put a little color on the third quarter, we launched our Longaberger e-comm in the first quarter this year. We did 155% of sales in Q3 than we did in the first 6 months. So we're very pretty pleased at the early progress of the brand and returns on our sales.

[Unidentified Analyst:]

I would expect -- you hope for 7 figures of revenues next year, and that's going to be under what line item in the income statement, the wholesale business? .

[Robert D'Loren:]

It will appear in our wholesale sales, but it's really direct-to-consumer. And one other thing I will add, the ROAs in that digital business is in excess of 5x. It is just -- we couldn't be happier. .

[Unidentified Analyst:]

Have you been able to create any marketing buzz via social networking with it now that you've tried to resurrect it? Or is it sort of still the Middle America stodgy business than it was when it went bankrupt? .

[Robert D'Loren:]

We've generated over 500 million media impressions since we started marketing.

[Operator:]

. Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Bob D'Loren for any closing remarks.

[Robert D'Loren:]

Thank you, Operator. Ladies and gentlemen, thank you all for your time this evening. We greatly appreciate your continued interest and support in Xcel Brands. We wish all of you peace, harmony and happiness in the fast approaching holiday season. And as always, stay fit, eat well and be healthy.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.