Neighborhood Intelligence, Inc. (NXH) Earnings Call Transcript & Summary

[Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mehgan Peetz, Chief Administrative and Legal Officer. Please go ahead.

Thank you, Operator. Joining me on the call today are Executive Chairman and Chief Executive Officer Marcus Lemonis, President Amy Sullivan, and Interim Chief Financial Officer Paul Kosturos. Today's discussion and our responses to your questions reflect management's views as of today, November 5, 2026, and may include forward-looking statements, including, without limitation, statements regarding our future business strategies, goals, financial performance, outlook for the remainder of the quarter, or any other period, anticipated growth, stock price, profitability, macroeconomic conditions, the value of any of our brands and investments, relationships with third parties and agreements we are entering into with them, margin improvement, expense reduction, marketing efficiencies, conversion, customer experience, changes to brands or websites, product offerings, completed, pending, or contemplated mergers, expected change in listing exchange, expected name and ticker change, blockchain and tokenization efforts and strategies, and timing of any of the foregoing. Actual results could differ materially from such statements. Additional information about our risks, uncertainties, and other important factors that could potentially impact our financial results is included in our Form 10-K for the year ended December 31, 2025, and our Form 10-Q for this and subsequent filings with the SEC. During this call, we will discuss certain non-GAAP financial measures. Our filings with the SEC, including our second quarter earnings release and now our third quarter earnings release, which is available on our Investor Relations website at ir.neighborhoodintelligence.com, contain important additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Following management's prepared remarks, we will open the call for questions. A slide presentation with supporting data is available for download on our Investor Relations website. Please review the important forward-looking statements disclosure in that presentation. With that, let me turn the call over to you, Marcus.

Thanks, Mehgan. Good afternoon, everybody. Amy Sullivan and I are happy to join you today. Over the last year, we've transformed Neighborhood Intelligence by bringing together some of the most recognized brands in the home category, along with retail, manufacturing, sourcing, and home service capabilities. Now our focus changes. We are not pursuing any additional acquisitions. We believe there's significant opportunity with the businesses we already own and our priority is to make them work better together and to grow organically and to improve profitability. We've already seen what that approach can accomplish. I'm proud to say that our core e-commerce business grew approximately 9% year-over-year, the largest growth we've had in 19 quarters, led by 75% growth at our overstock.com brand, and reached adjusted EBITDA neutrality for the first time in many, many years. Those are important milestones, particularly in a difficult consumer environment. What gives me confidence is that we're not relying on a housing recovery to make this business work. Consumers are dealing with affordability challenges and historically low housing turnover, but they continue to spend on maintaining, organizing, and improving their homes. Our brands are positioned to serve those needs today with additional opportunity as housing activity improves. We've assembled the businesses and capabilities we believe we need. Now it's time to make the most of what we have. Paul, let me turn it over to you for the financial results.

Thank you, Marcus. I'll now turn to our third quarter financial results. Revenue increased 98% year-over-year to $509 million in the third quarter, primarily driven by the merger with Kirkland's that was completed on April 2, 2026, the merger with SFV Services that was completed on June 30, 2026, and the merger with The Container Store that was completed on July 8, 2026. Gross margin was 34.0% for the quarter, an 870 basis point increase compared to the same period last year, driven by the mix benefit of The Container Store and Kirkland's, which carry structurally higher gross margins. Third quarter included a planned $14 million purchase price accounting benefit associated with inventory conditions identified and factored into the acquisitions before closing. This benefit was substantially offset by the company's planned elimination of dated, obsolete, and underperforming inventory. Importantly, our core Bed Bath & Beyond business grew revenue by $23 million year-over-year, driven by a 7.4% increase in average order value and 1.5% growth in orders. Sales and marketing expense of $54 million improved by 330 basis points as a percent of revenue versus last year to 7.7%, primarily driven by the mix benefit of the acquired entities. General and administrative and tech expense of $165 million increased by $132 million year-over-year. Of that increase, $119 million came from the acquired businesses, mainly the inclusion of store occupancy expenses associated with Kirkland's and The Container Store, including rent and store payroll. The remaining change is related to various items such as professional fees related to the acquisition and other 1-time items. All in, adjusted EBITDA came in at a loss of $26 million, a $21 million decline versus the third quarter of 2025. GAAP net loss was $26 million, or $0.28 per diluted share, which included a $21 million non-cash gain on the remeasurement of the convertible notes derivative and an $18 million income tax benefit from the release of a tax valuation allowance. Adjusted diluted earnings per share was a loss of $0.28 per share, or a 9-cent decline year-over-year. We ended the quarter with $127 million in cash and cash equivalents and restricted cash. This represents an increase of $1 million, or 0.6%, versus the second quarter of 2026. With that, I'll turn the call over to Amy.

Thank you, Paul. As Marcus outlined, we've brought together a portfolio of brands and capabilities that gives us a much broader opportunity to serve customers in and around their homes. The work in front of us is to connect those businesses in ways that drive organic growth, improve margins, and make the customer experience better. I want to start with our legacy e-commerce business because it demonstrates what disciplined execution can accomplish. We committed to returning that business to growth while improving profitability, and we delivered on both. Revenue has grown consistently quarter to quarter and the business reached adjusted EBITDA neutrality. That progress came from being more intentional about assortment, marketing, and expenses and focusing on profitable growth. We're now bringing that same approach to our expanded retail business. At The Container Store, we're encouraged by customer engagement and growth in general merchandise as we introduce complementary Bed Bath & Beyond categories. At Kirkland's, our sharper focus on seasonal home decor is also encouraging. We're seeing better merchandise margins and significant improvement in inventory productivity. We're bringing the traditional Bed Bath & Beyond assortment and brand into more than 75 stores, with product being stocked now and signage and branding expected to be completed in early 2027. That gives customers more reasons to visit and creates an opportunity to grow revenue within the stores we already operate. But making our stores more productive is only part of the opportunity. We also need to improve the economics behind the products we sell. Through Kirkland's, we acquired product development and global sourcing capabilities, including direct factory relationships. Those capabilities allow us to complement national brands with differentiated products, improve product costs, and strengthen margins. We expect meaningful benefits from new sourcing and assortment programs beginning in the middle to latter part of 2027. We're also consolidating distribution centers and simplifying how products move through our network. Along with clearing dated and underperforming inventory identified during acquisition diligence, this work is helping us build a more efficient operation and make room for the assortments customers want. And our opportunity with customers doesn't stop when they purchase a product. Increasingly, we want to help them complete projects that make their homes work better. That's where home services becomes an important part of our strategy. Elfa is the foundation of that business. It brings decades of heritage along with product design, manufacturing, and professional design capabilities. Our immediate focus is on restoring product availability, rebuilding lead generation and lead management, and making the process easier for customers from initial design through installation. Our acquisition of SFV adds experienced talent and an extensive installation network. It strengthens our ability to install Elfa and Closet Works, but it also gives us the capabilities to expand into other rooms of the home, including painting and assembly services. That's how we begin to build a broader home services offering around the customer, not just around a single product category. That same thinking applies to the needs customers have throughout their homes and their lives. With buybuy BABY, we have an opportunity to rebuild a trusted brand around the essentials parents and growing families need, using our existing e-commerce and retail infrastructure and remaining disciplined about that investment. What connects these opportunities is our customer base. The acquisitions we've completed have doubled our active customer base with very little duplication. That gives us a near-term opportunity to introduce customers to more of our family of brands, and our broader database of more than 100 million customers remains one of the most important assets as we build this portfolio of products and services. We have to execute all of this with discipline. Year-to-date, we've eliminated more than $50 million in annualized SG&A costs and merger synergies, and we've identified more than $40 million in additional annualized savings opportunities. We expect the benefits of integration and merger synergies to develop over the next 6 to 9 months. Those actions matter because they help us fund the growth while building a more productive business. Our strategy is not to simply own more brands. It's to connect the brands, products, and services we have, create more value for our customers, and earn more of their business over time. That's where I see the opportunity for sustainable organic growth and stronger margins. Marcus, I'll turn it back to you. Thanks.

Before I turn into my closing remarks, I want to point out a couple of things that need to be clarified because working capital has been an important component for many shareholders, including our management team. The company's available sources of liquidity include, but are not limited to, $127 million of cash and cash equivalents, as well as restricted cash at the end of the quarter, $228 million in inventory and real estate owned free of borrowings of $26 million, equity of $1.5 million in equity in inventory of $110 million. And I think when we look at net of the ABL borrowings of $118 million and we want to make sure that people understand that between the cash, the equity in our inventory, and our free and clear real estate, there is a sufficient amount of working capital as we sit here today. We know that it's important to continue to eliminate what we think was redundancy and extra costs, particularly from The Container Store acquisition. And to be candid with you, Amy and I were quite surprised during the diligence process at the lack of rigor and discipline that existed in The Container Store. We have acted swiftly since July 8, which is less than, call it, 90 days ago, to put the kind of rigor that both Bed Bath & Beyond, Overstock, and Kirkland's operate at, and we are committed to making sure that through headcount reduction, through redundancies, through fleet rationalization, that we continue to demonstrate our knowledge and our skill of bringing SG&A in line to reach a level of profitability that we know we're capable of. And if you look back over the last 12 to 24 months at the costs that were taken out of the original legacy Overstock business that's now experiencing the kind of growth that we expect it to have, we hope that that provides proof point and a confidence point that Amy, myself, and the rest of the management team is capable of extracting out these costs. As we look at the future, we want to provide guideposts. This is not guidance, but it gives everybody a chance to understand what it is that we own and how we're thinking about building the base of the business. It's also important to understand that our business is relatively subjected to the housing market. And as a matter of clarity, and you'll see that with the slides that we posted in our investor deck, that the housing market today between new home starts and existing home sales is now lower than the period during the Great Financial Recession of 2009. In one breath, we're disappointed by that, disappointed by the cost of living for consumers and the cost of mortgages. But on the other breath, the fact that we were able to reach an inflection point in our e-commerce business in the face of all that tells us that we have confidence that the housing market is going to return to some level of normalcy at some point. If you go back and you look at the data around the housing market, we're extracting out the high peak of what it was during COVID, we had 6.3 million home sales, we don't think that that's possible. If you go back and you look at 2016, 2017, 2018, and 2019, when it looked a little bit more like what a normalized mid-cycle was, that's around 5.3 million existing home sales. We're on pace this year to do about 3.9 million. The reason I make all those points is that we see tremendous opportunity in front of us. And while we know people are frustrated with us making acquisitions of these big brands in a trough environment, we want people to walk away and say, well, wait a minute, this trough market, which is the worst it's been from a housing market standpoint in call it almost 15 to 17 years, is an unbelievable place to start. And if you can really refine your SG&A and improve your margins and start to have organic growth, that the scalability of this business when it starts to just moderately normalize is pretty significant. For the fourth quarter, we're expecting about 5% revenue growth over Q3, so that's sequential growth, and we're going to have to continue to provide that level of context because we don't have reportable numbers from the businesses we acquired of what they were last year. They're not reportable and they're not audited by our auditors. Looking ahead to 2027, we want to provide a guidepost of what we think the base business is. Now, the number that we're going to give you includes modest organic growth of call it 5%. It includes a store rationalization, because we are in the process, as we sit here today, of closing a number of stores by consolidating them into other markets. And we've been pretty good at getting out of leases. And we feel like we got to get a good return on capital for every dollar that we deploy. And there were a number of stores that did not meet those standards, and we did not see a path forward. There were a few stores that remain that were modestly negative on a 4-wall basis, but what we saw is we saw margin erosion, not revenue erosion. So looking ahead to 2027, we expect consolidated revenue to be approximately in a range of $2 billion to $2.1 billion, and that includes modest organic growth. And we are projecting gross margins to be between 33% and 34%. But we do see a clear path to 37%. And if you look at the margin improvement that our company has experienced over the last call it 8 quarters, we know how to generate margin. We know how to eliminate those unprofitable SKUs, those unprofitable vendors, and how to properly calibrate assortment and sourcing. In fact, one of the key things that we believe will drive us to that 37% margin is actually the infrastructure that came with Kirkland's. And it's the global sourcing team that has demonstrated world-class margins. Now, we know that Bed Bath & Beyond made a number of mistakes at the end of their demise. And that was walking away from big brands like Shark and Cuisinart and Laura Ashley—I can give you just like a variety of big known brands. At Bed Bath & Beyond and The Container Store, we think there's the perfect balance, and Amy, who has demonstrated—maybe the best merchant I've ever met in my life—has demonstrated the perfect balance between understanding how to have brands on the shelf that give customers confidence in the business, but how to give people the pricing flexibility as consumers continue to struggle by sourcing products globally that not only break the elasticity curve to create demand, but give us the kind of margins that allow us to achieve 37%. Part of that other fuel to 37% is what we found in the home services business that we acquired with The Container Store. And Amy was mentioning Elfa earlier. Elfa is the hidden gem that should never be underestimated. Now, on a negative point, it is down 50% from its all-time high. And what happened is as Container Store struggled to generate working capital and started to make significant mistakes by taking on massive fixed costs, non-variable, payroll, eroding margins, it stopped investing in the Elfa business the way that we're going to invest in it, all the way from the tooling and the sourcing and the manufacturing over in Sweden to the parts and pieces that are carried here in the U.S. In the last 12 months, Elfa also went through a lot of tariff turbulence because that product was coming and it started to take on a lot of tariffs, and the ability to raise prices and pass them on to consumers, it just didn't exist. So we've repriced the product, we've rationalized the SKUs, they have arrived daily, they're now in our distribution center and are making their way to the stores. And that particular product offering, together with our SFV installation business, is a 60% margin business. That's what's actually pulling it up. That and the sourcing is actually what's pulling it up. And while we don't believe that in the short run we can get back to that all-time high, essentially doubling the size of that business, every incremental dollar is meaningful to our bottom line. In fact, it takes $2 of general merchandise to make up for $1 of our home services business, which is why you hear us talk about it all the time. Many people are aware that we fell off of the F9 transaction and we fell off the Fathom transaction for a variety of reasons. But what we learned through that process, particularly today, is that when we walked away from the F9 transaction, the number of other home service providers that approached Amy and I both together and separately that want to use our 80 locations as distribution points, want to use our SFV installation team as installation points, and want to use our fabulous sales organization, it started to become more clear. We don't need to invest more of our own capital to execute that strategy. We're going to rely on other people's balance sheets, other people's manufacturing, but our own infrastructure and sales organization. What's important about those expectations in the environment we're building is the environment that we're building them around. And as I mentioned, the home sales aren't good, but we believe there's a tremendous amount of opportunity there. Our longer-term objective is to prove to everybody that off of this base of $2 billion to $2.1 billion, every incremental $100 million of revenue, either because we grow organically, because the housing market comes back, because we gain in market share, whatever those variables are—and that's organic $100 million, not opening new stores and not making acquisitions, of which we're not making any acquisitions—that we believe that $30 million of the $34 million will fall to the bottom line. That $4 million is singularly attributable to incentivizing our staff, our sales staff, our general managers, and our senior management team for generating that additional gross profit. We think that's really clear. So we have a plan that we believe works in today's housing market, but we have a plan that we think works even better as the housing market returns to some sort of normalization. I want to now turn it over to our Q&A section. Thank you.

[Operator Instructions] Your first question comes from the line of Steven Forbes with Guggenheim Securities.

Marcus, with the first Bed Bath & Beyond, I guess new Bed Bath & Beyond store opening this Sunday, I was hoping you could provide some guidance around annual lease cost expectations for 2027, inclusive of maybe providing a little more color on the status of store closures and lease exit plans across the various banners, as we just try to right-size the fixed cost structure of the business and get a better appreciation for the incremental margin profile you're framing up. Thank you.

Yes, so the lease cost that we reported in Q3 2026 is a high watermark and what we've been exiting out of are what we consider these unaffordable leases. We will have closed 11 Container Store locations by the end of the year and we've had really good, quite frankly, really good luck in getting out of them. Additionally, we are in the process of exiting 39 Kirkland's locations that were 4-wall negative that have natural lease expirations largely happening in January 2027 with some dribbling out. The average lease amount of those locations falling off when you blend them together is somewhere in the $55,000 to $60,000 range, so it's a significant amount that's actually falling off when you look at them. The store you identified in Arizona that is scheduled to open on Saturday was an existing Container Store location that was 4-wall negative. And Amy and I went back and renegotiated with that landlord, got a significant reduction in that lease, and then was able to achieve securing $650,000 in tenant allowance to make all of the changes. This is really the first store that's going to look more like a traditional Bed Bath & Beyond store: white fixtures, wood floors, bright lights. The other stores are in the transformation phase, and I know people have heard that for a while now, but there have been phases in, and Amy will walk you through kind of what the timing is. But there are no plans to take on any additional fixed cost expense once we exit 2026, other than leases falling off, which there are more scheduled to fall off, and then being replaced by significantly lower cost per square foot leases in markets where we can avoid cannibalization, almost identifying white space.

And Steve, as you think about our large format locations, so the existing Container Store locations, you'll see product arriving every day right now. And so if you go out in any of our stores right now, you will see some stores that have had the opportunity to fully set a bedroom, bathroom, and kitchen assortment, and at the same time had sort of a recalibration and a revitalization of their legacy storage and org department. I'm really encouraged by the early green shoots that we're seeing in the stores that are fully set. At the same time, you will walk into some stores who are receiving inventory by the pallet every single day, and you know, where we're building this business live in front of the customer. And so we expect the stores to be fully set going into the back half of this month. And as we think about the branding changes and all of those things, sign changes are in process with landlords and going through the production process and we expect that to be fully set as we go into early 2027. But like I said, the positive green shoots that we're seeing in those early stores that are fully set are really encouraging.

Steve, I think the one thing that maybe Amy and I—excuse me, I didn't communicate clearly or people didn't appreciate—is that we didn't make any significant investments in inventory prior to closing on The Container Store on July 8 because it was nip and tuck every day. And as we learned more through the diligence process and kept renegotiating that price down, and you can see that really there's only $30 million of goodwill on our books and that's largely attributable to what we believe Elfa and The Container Store brand is, we did not take any chances to go out and speculate and buy in the inventory because we thought if the deal doesn't happen, what do we do? And so when we closed on it, it started to flow in. And we had bought, I think, 2 or 3 stores worth just to test out what kind of green shoots are there. If you visited any of the 80 stores today, you would see a spectrum of fully stocked and fully loaded with sign changes all the way to pallets all over the floor. And over the next several weeks, we expect that to normalize because we wanted to be ready before the holiday season to hit it running. We tested out selling Kirkland's product in the stores. We tested out different bedding programs. And we think we found kind of the proper calibration. The one thing that we were quite surprised about is the poor utilization of square footage in the stores. We've tried to be very careful. We wanted to be very CapEx mindful because we don't have a ton of cash sitting around. We wanted to be very CapEx mindful around fixtures, spending money on construction, and even signage until we really understood what we were doing. And now that we're starting to see it, and Amy mentioned the green shoots, we have a few stores where they're fully set and fully operating. They're doing 10%, 12%, 15% revenue growth, and that's even without Elfa improving. So we want to be very modest and conservative about the expectations that we're setting, but we're very excited about what the opportunity could be. But let me put just a little blanket on that. Container Store has the bulk of the SG&A problem as we sit here today. We announced yesterday, unfortunately to our team, that we are closing our location in Aberdeen, Maryland. That is the #2 distribution center. The good news is we're 22% under market on a per square foot basis to be able to get out of that lease, and we think we actually could potentially have some arbitrage to the upside and move that inventory down to Dallas. And we're looking at our entire supply chain, trying to understand how do we start to rip out big chunks of costs. The tough part was in the first 90 days of owning Container Store, we made some very difficult headcount decisions that we did not love to make. Unfortunately, all of the headcount modifications across the entire organization are not done. And that includes modifying certain pay plans. Not that we want people's pay to go backwards, but we want less of a fixed mentality pay plan. Amy and I come from the school of, you get a nice base and then you're going to get performance-based pay. That was a cultural problem that existed at Container Store. It wasn't a problem at Overstock, and it, candidly, wasn't a problem at all at Kirkland's. And so that's a little bit of what we're dealing with right now. And so when we look at Q3 and a little bit of Q4, we have more wind-down costs, we have more exiting costs, we have more storage closure costs. It is not going to be death-defying or monumental by any stretch of the imagination, but there is still some work to be done. And we'd like to enter 2027 as clean as we possibly can. Some things may linger, you know, a week or 2 into January.

We feel really good about it. And then my follow-up is on the core e-commerce business. Obviously, great to see the 9% growth profile on the top line. But as we try to understand the improvement at the EBITDA line, the $5 million year-over-year, can you maybe help frame up what the gross margin profile was in the core e-commerce business versus other costs out, right, or expense leverage contribution to that improvement?