Xcel Brands Inc (XELB) 2017 Q1 法說會逐字稿

Welcome to Xcel Brands First Quarter 2017 Earnings Conference Call. Please be advised that reproduction of this call in whole or in part is not permitted without prior written authorization of Xcel Brands. And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Jeff Sonnek of ICR. Thank you. Jeff, you may now begin.

Good evening, everyone, and thanks for joining us. We appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert D'Loren; Chief Financial Officer, Jim Haran; And Executive Vice President of Business Development and Treasury, Seth Burroughs.

By now everybody should have access to the earnings release for the quarter ended March 31, 2017, which went out today at approximately 4:20 Eastern Time. And then in addition, the Company will file with the Securities and Exchange Commission its quarterly report on Form 10-Q by the end of the week. The release and the quarterly report will be made 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.

But before we begin, please keep in mind that this call will contain forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from certain expectations discussed here today. These risk factors are explained in detail in the Company's SEC filings. Xcel does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Finally, please note that on today's call, management will refer to certain non-GAAP financial measures such as non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA. Our management team uses these non-GAAP metrics as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the Company's results of operations. Our management believes these financial performance measurements are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus they provide supplemental information to assist investors in evaluating the Company's financial results. These non-GAAP measures should not be considered in isolation or as alternatives to net income, earnings per share or any other measure of financial performance calculated and presented in accordance with GAAP. You may refer to the attachment to the Company's earnings release or to Part 1 Item 2 of the Form 10-Q for reconciliation of the non-GAAP financial measures.

Now I'm pleased to introduce Robert D'Loren, Chairman and Chief Executive Officer. Please go ahead.

Thank you, Jeff. Good evening, everyone, and thank you for joining us. I'll start with an overview of our first quarter and then provide some thoughts on the rest of the year. After that, our CFO, Jim Haran will discuss our financial results in more detail. And then we will conclude by opening up the call for Q&A.

Our first quarter of 2017 showed improvement in top line revenues, and most importantly, a 20% improvement in operating income, that despite the ongoing headwinds and challenges in the retail industry. We remain focused on executing our long-term goals and vision for the Company, while at the same time continuing to be prudent and strategic in how, where and when we allocate resources for the growth of our business and manage our balance sheet.

We are especially pleased with the strong performance of our interactive television business during the quarter as well as the momentum building in our department store business. We continue to adjust and fine-tune our Quick Time Response or short lead production platform to make this the best solution it can be for today's retail challenges.

Now taking a closer look at our businesses by channel. Our interactive television business saw significant growth in revenues from the first quarter of 2016 as well as on a sequential basis from the fourth quarter of 2016. This growth demonstrates our team's ability to adjust, strategize and collaborate with our retail partners in order to optimize our business and leverage the strength of our brands. We continue to work closely with QVC to engage existing customers, identify new customers and look for opportunities for expansion in this channel.

In our Quick Time Response department store business, we grew both our revenues and market share during the first quarter of 2017. In Q1 2017, the retail sales in our brands saw improved sell-throughs and higher margins compared with the prior quarter of last year.

During the quarter, we were excited to announce the successful launch of our H Halston brand at Dillard's. While still early, this launch is off to a great start. As previously stated, we continue to adjust and fine-tune the Quick Time Response platform to optimally position our business for growth alongside our retail partners, while maximizing sales and gross margin for them. In fact, our investments and efforts to fine-tune and optimize the business model during the latter portion of 2016 have begun to produce returns in the form of improved margins and higher sell-throughs at Lord & Taylor and Hudson's Bay during the first quarter of 2017.

From a production perspective, we are now able to achieve the desired speed and quality required to meet our customers' expectations. Finally, we continue to actively work on additional categories for our brands and are further enhancing our big data capabilities through utilizing trend data analytics. We plan to share more information on both of these initiatives as they develop.

In our specialty retail business, we continue to develop exciting opportunities and new channels of distribution. This year, we expect to launch Isaac Mizrahi cosmetic tools [with Revlon] and bedding with Bed Bath & Beyond.

Now looking ahead to the rest of the year, we expect the retail environment will continue to be challenging throughout 2017 and perhaps beyond. However, with that said, we see opportunities to capitalize on our strategic advantages by acquiring market share and pursuing new retail partners, which we believe will deliver value to all of our stakeholders.

In our interactive television business, we expect solid performance. And as I have stated on previous calls, this is barring any unanticipated behavioral changes in our customers or unforeseen external or noncontrollable events. Our revenue growth for interactive television in the first quarter of 2017 is a solid indicator that we are off to a good start in this channel.

We just reached an agreement with QVC to reposition our C Wonder brand in bricks and mortar without some of the current restrictions placed on us by QVC. Therefore we will exit the QVC business with QVC in 2018. It is our belief that having C Wonder operating outside QVC will enhance our growth potential with the brand and reduce potential cannibalization of our other brands on QVC.

In our QTR department store business, we expect strong double-digit sales growth in 2017 as well as improvements in profitability. We anticipate continued momentum in retail sales of our brands and are excited and optimistic about the growing market share and expanding this business. Finally, we are aggressively pursuing new brand and media opportunities to develop this business with additional retailers and media partners.

Now I'd like to turn the call over to Jim to review our financial results for the quarter. Jim?

Thanks, Bob. I will briefly discuss selected financial results for the quarter ended March 31, 2017. Please note that our financial results are described more fully in our quarterly report on Form 10-Q, which will be filed with the SEC later this week.

In the first quarter of 2017, revenues increased by approximately 1% to $8.43 million, compared with $8.36 million in the prior-year quarter. This is primarily attributable to the strong performance of our interactive television business and increase in revenues from our Quick Time Response department store business. These increases were partially offset by a $500,000 decrease in revenue associated with the discontinuance of the LCNY brand on QVC in 2016. And as a reminder, we did not own the LCNY brand. It was licensed as part of the original Isaac Mizrahi program on QVC, and the license was not planned for renewal by J.C. Penney, the brand's owner.

Our GAAP net loss for the quarter was $400,000 or $0.02 per diluted share, compared with a GAAP net loss of $45,000 or $0.00 per diluted share in the prior-year quarter. The net loss in the first quarter of 2017 was largely attributable to a discrete item in our income tax provision as we had pretax income of approximately $100,000 for the quarter, compared with a pre-tax loss of approximately $100,000 in the prior-year quarter. This improvement in pretax income was driven by the aforementioned higher revenues as well as $100,000 increase in interest and finance expenses.

Non-GAAP net income for the current quarter was $1.1 million or non-GAAP diluted EPS of $0.06 per diluted share, compared with non-GAAP net income of $1.2 million or non-GAAP diluted EPS of $0.07 per diluted share in the prior-year quarter. Adjusted EBITDA in the current quarter was approximately $1.9 million, compared with the prior-year quarter's adjusted EBITDA of $2 million. These slight declines in our non-GAAP net income and adjusted EBITDA for the prior-year quarter are mainly attributable to the increased staffing and investments that we made in our operations and infrastructure, including QTR, in order to support future growth in our business and enhance the value of our brands.

Overall, our operating expenses in the current quarter were flat compared to last year, which include $100,000 decrease in stock-based compensation that is an adjustment to non-GAAP results. Once again, as a reminder, non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA are non-GAAP unaudited terms. Our earnings press release as well as our quarterly report on Form 10-Q present a reconciliation of these items with the most directly comparable GAAP measures.

Now turning to our cash position. As of March, 31, 2017, the Company had total cash and cash equivalents of approximately $10.2 million, compared with total cash of approximately $14.1 million at December 31, 2016. This $3.9 million decrease in cash and cash equivalents was primarily attributable to approximately $2 million in scheduled principal payments on our term debts, $1 million of cash used in operating activities and $800,000 for common share repurchases related to vested restricted stock in exchange for withholding taxes. The $1 million used in operating activities include an increase of $2 million in accounts receivable and prepaid expenses and a decrease in accounts payable and deferred revenues of approximately $800,000. These working capital adjustments in the quarter are timing based and typically occur in the first quarter of each year.

Looking at our debt. At March 31, 2017, combined debt was approximately $30 million. Our debt consisted of $23.5 million in senior bank term loan, $3.4 million of seller notes and $3.1 million of contingent obligations. Of these amounts, $2.9 million of contingent obligations and $500,000 of seller notes are payable in stock or cash at the Company's option. As of March 31, 2017, total current liabilities were $9.3 million, inclusive of $6.2 million of the current portion of long-term debt.

Our working capital at March 31, 2017 calculated as our current assets, including cash, less our current liabilities were $10.5 million, compared with $11.5 million at December 31, 2016. With $10.1 million of cash and $26.4 million of term debt, our net debt to adjusted EBITDA ratio as of March 31, 2017 on a rolling 12-month basis was 1.9, and we continue to be positioned with one of the lowest leverage ratios of any of our industry peers. We anticipate during the balance of 2017, we will further reduce our term debt by approximately $4.5 million, all paid through operating cash flow.

And with that, I'd like to turn the call back over to Bob for his closing remarks.

Thank you, Jim. As I stated on previous earnings calls, our Company vision is to reimagine shopping, entertainment and social as one. While at our core, we're a working capital light licensing Company, we are truly much more than that today. We are a media and brand management company that is strongly positioned as an innovator in the industry in bringing a scalable, fast action vertical production or as we call it, Quick Time Response model to the market. Frankly, we are built to provide solutions for our retail partners that address many of today's industry challenges. In fact, I'm happy to report that Apparel Magazine recently named us one of the most innovative apparel companies in America.

Finally and looking ahead, we are positioned to continue to take market share in our channels of distribution, achieve reprove top line growth across our brand, expand profitability, continue to be please and provide our customer and bring long-term value to all of our shareholders or stakeholders, including our shareholders and our retail partners.

That concludes our prepared remarks. Jim, Jeff and I are now available to take questions. Operator?

(Operator Instructions)

And we'll go to Eric Beder with Wunderlich.

Good afternoon. Congratulations on a nice start to the year.

Thank you, Eric.

Could you talk about the C Wonder piece here? First of all, how much do you think that will impact your overall QVC sales giving that up? And what does this let you do or does this give you an opportunity in the department store businesses that you didn't have before?

First, no impact to any of the numbers, Eric, that we've been forecasting because we've had this model out of our numbers. And I would say in terms of some of the restrictions that the current agreement placed on -- that limits our flexibility in channel distribution, and we see potential opportunities that we would hope to be announcing in the near future, and it was an amicable solution to what we saw as an opportunity for the brand.

Okay. And in terms of the Dillard's roll-out, could you tell me kind of what your initial impressions are? When did that exactly roll-out and where do you see that going forward?

So we started Dillard's this spring with our Halston brand in approximately 150 Dillard's, and it is going well although it's still early. We've been in for just about six weeks. Sell-troughs have been as expected. Margins -- maintained margins are very good, surprisingly good, quite frankly, and we would hope to continue to grow. And now we're in the process of exploring -- bringing additional brands -- our brands to Dillard's.

And when you look at opportunities to expand outside of the core apparel with other licenses, how has that been working and where do you see that going?

So within HBC and Lord & Taylor and also Dillard's, currently we are distributing core apparel, women's sportswear, handbags, footwear, sleepwear, eyewear, and we're looking at all categories, including costume, jewelry, outerwear and other categories where we see opportunities. So we have to walk, quite frankly, before we started to run within those retail partners. And based on performance to-date, there is more receptivity to launching these additional categories.

Great. And what's the -- in terms of -- how is -- (inaudible) international. How is that doing for you with QVC? And is there potential to expand that with the HBC properties also?

Yes, QVC international is going well for us, in fact a little ahead of the plan. So we're excited about the potential of international in interactive. And clearly, there has been a focus both at QVC and within Xcel to sell our brands across their global network. I would say now with (inaudible) behind us at HBC and the amount of work that we have been able to put into product development, more specifically quality control, that's in place today, we can begin to explore opportunities in GALERIA Kaufhof and [GALERIA Uno] with HBC.

Eric, this is Seth. I would just add to that. We also have television businesses in Canada and Korea. Those businesses are actually going incredibly well. Our brands and our expertise and intelligence that we developed in partnership with QVC over the past several years had really resulted in us really understanding that channel in those countries. So we are excited about those. We are excited about the expansion opportunities. That being said, international today represents a small piece of our business. I think it's a big opportunity for us and one that we're looking at, particularly as we get into this fall and next spring. We're really focused on to expand our brands globally.

And just to add to that, Eric, it was important for us to really solidify our production capabilities so that it would position us to be able to enter into distribution deal in bricks and mortar with our global expansion. And we are at a point now where we're ready to start to have those conversations with potential distribution partners.

And with no further questions in the queue at this time, I'd like to turn the conference back over to Mr. D'Loren for any additional closing remarks.

Thank you, ladies and gentlemen. Thank you all for your time tonight. We greatly appreciate your continued interest and support in Xcel Brands. And as always, stay fit, eat well and be healthy.

Again, that does conclude today's presentation. We thank you for your participation.