Xcel Brands, Inc. (XELB) Earnings Call Transcript & Summary

Hello, everyone. This is Paul Kuntz with RedChip Companies. I want to thank everyone for joining us on today's call with Xcel Brands. Xcel Brands trades on the NASDAQ under the ticker symbol XELB. With us today, we have Xcel Brands' Chairman and CEO, Bob D'Loren; and Executive VP of Business Development, Seth Burroughs. I'll be turning the call over to Bob in a moment for a brief presentation, and then we'll open up the event for Q&A thereafter. For those that do have questions, you can type those in by clicking the Q&A button at the bottom of the screen any time during the presentation or the Q&A session. Now before we begin, I will run through the safe harbor statement real quick. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements pertaining to future financial and/or operating results, along with other statements about the future expectations, beliefs, goals, plans or prospects expressed by management constitute forward-looking statements. Any statements that are not historical facts should also be considered forward-looking and of course, forward-looking statements involve risks and uncertainties. With that said, I will now turn the call over to Bob. Please go ahead.

Thank you, Paul, and welcome, everyone. I'm Bob D'Loren, I'm the CEO of Xcel Brands. I'll start today's webinar with some opening remarks and Seth and I will share a company presentation including an introduction to our new short-form video marketplace, ORME. So just real high level, Xcel is an industry-leading media and consumer products company focused on live streaming sales on linear television and streaming online. Last year, we achieved $4 billion in lifetime total retail sales of our brands through livestream encompassing over 20,000 hours of content reduction time. I'm excited to announce that we are launching our short-term video marketplace ORME, that we believe will change the way people think about sharing over social media and solve the significant problems that the industry is having today with extremely high customer acquisition costs associated with digital affiliate and influential marketing. Just a reminder, please post your questions to the chat box. And when we end the presentation, we'll be happy to answer all of those questions. So let's turn right to the presentation, and Seth will start and then we'll both present.

So just to get into a few high-level numbers about Xcel, we've been around for about 12 years, uplisted in NASDAQ in 2015. And since the beginning, the prior slide that both from Bob that we were built to reimagine shopping, entertainment and social media and social commerce. That's been our mission since day 1. So since we started, we have acquired 7 brands in our portfolio, and we'll go over what those brands are, but primarily household names and fashion, jewelry and one brand in homes. We generate approximately $600 million per year in annual retail sales by the brands in our portfolio. As Bob mentioned, we have over 20,000 hours of livestream programming, over 6 million followers in social media across our brands, and we've done over $4 billion in total sales at retail generated through livestream. And we'll walk you through what that means in terms of revenue to Xcel brands. We operate a working capital-light business model. But as far as we can tell, nobody has done nearly as much livestream shopping social commerce as we have, and it is where we think the market is going. So we're excited to be at the forefront of that.

And just to note on working capital light, that means we don't take inventory risk. It's not that we haven't ever in the history of the company, but for the most part, we are working capital-light company. [indiscernible]

So as I mentioned, we own 7 brands today. I'll just quickly cover each of our brands. Judith Ripka is one of the foremost fine jewelry brands in the United States. The brand have distribution all the way from new markets in Saks down to QVC, where it was the #1 fine jewelry brand on QVC for a number of years. We acquired the brand in 2014 and took over the QVC business. We recently signed a pretty massive deal with Jewelry Television, who's become the largest livestream television retailer of fine jewelry in the country. So that launched in October of last year and is well on its way to growing with JTV. LOGO by Lori Goldstein is the #3 brand in QVC that we acquired in 2021. Halston is an iconic American brand, if you're not familiar with it, you should be. It's one of the top American fashion brands. We acquired also in two phases in 2014 and in 2019 where we had the opportunity to reunite the brand as one. And Halston, we're really excited about. Last year, we signed a 25-year master license agreement with G-III. G-III has lost their license to Calvin Klein and Tommy Hilfiger [indiscernible] those brands back in-house and G-III plans to replace Calvin Klein with Halston. In the words of their Chairman on their last earnings call, they expect that in 3 years, Halston will be a $500 million wholesale business. And so we expect over the next 25 years, Halston should generate approximately $160 million to $175 million in royalties to Xcel Brands. That will be pretty much dropped to our bottom line. Isaac Mizrahi is a brand that we have owned since we started Xcel Brands in 2011. It is the #1 designer brand in QVC, iconic American fashion brand also and we'll take you through when we get into the numbers. In 2022, we sold a majority interest in Isaac Mizrahi to a brand management company called WHP Global. We still retain a 30% interest in Isaac Mizrahi and we're able to completely delever our balance sheet in 2022 with the sale of Isaac [indiscernible]. C. Wonder is a brand that was started by Chris Birch. In 2014, we acquired the brand from Chris in 2015. We've built the brand for television. And lastly, we bought Christian Siriano and launched the brand on the HSN. We were just awarded brand of the year at HSN for the launch. It's been one of the successful launches they've ever had in the network, and that actually grew nicely into 2020 -- into this year to 2024. Longaberger is the lone home brand in our portfolio. We acquired that brand out of bankruptcy in 2019. It was one of the top direct selling companies in the country with over $1.2 billion of sales as peak in 2000. We acquired Longaberger and as we get into where we're going with ORME, really as a test in social commerce and it's done very well for us. We've had a very engaged customer base, over 100,000 independent salespeople, and we've been able to take our learnings from Longaberger and translated into what we built out in ORME which is a social [indiscernible] single entity. And our most recent brand is TWRHLL. TWRHLL is different than the other brands. We did not have to acquire the brand, and it should represent an example of maybe some of our future growth in Xcel by partnering with existing brands or existing celebrities to develop new brands. We've partnered with Christie Brinkley, one of the top supermodels in the country to start TWRHLL, and it will be the first apparel brand under Christie Brinkley. We're launching at HSN in March of this year.

So this slide is a very important sign that we look at our brands. It's a leading indicator of brand health. And if you look at trends in retail sales of our brands, you'll see that in 2020 when COVID hit, topline sales were down, but we do not sell any essential retailers seeing mass retailers quite [indiscernible] or any of the clubs. By coming into '21, because we took over certain operations at Halston and in our Judith Ripka business, we started to see very strong growth coming into '21. '22, that growth continued nicely. At '23 again, you'll see the ops. The big jump here is coming from the G-III license and the Jewelry TV license as well as what we believe will be very strong growth on HSN with the TWRHLL brand with Christie Brinkley and what is happening with the Christian Siriano program. So looking at the P&L, you can see that the company was profitable from inception and coming into 2019, two of our licensees went into liquidation, the Halston company that was operating the Halston premium line to labels that we didn't know at that time, went to liquidation. And now a jewelry licensee [indiscernible] went into liquidation. We made a decision to take those businesses over and operate. We had to move fast, which we can do if we need to. And coming into '20, we were able to stay profitable, but as COVID presented challenges with deliveries and cancelable orders from retailers, increased logistics costs that eroded margins, we lost about $2.5 million in '21, but continue to grow topline sales of the brands, which positions us as well to do the kinds of transactions that we did in Q1 of 2013 with G-III and JTV. Looking at '22, it looks like the company lost $12 million, but this is the year that we had the sale of the 70% interest in Isaac Mizrahi, and that resulted in a reduction in topline of about $16 million and nearly $7 million of EBITDA. So that was the big swing there, but then going into '23 when we realized we had the deals in place with G-III, Jewelry TV, and One Jeanswear Group to do all the production that we were doing for HSN, we made $13 million of overhead cuts coming into '23 to position the company to turn around '24 with all the new license programs that we have and the coming launch of ORME. So if you look at the balance sheet, it mirrors this. You can see that in '21, we ended the year with $28 million of term debt, which we have accumulated through all of these acquisitions that we've been talking about will be completely delevered, the company and was able to use excess current savings to complete with our transition or the discontinuance of the wholesale businesses. And then coming into '24, based on our contractual minimums, we believe we are being nicely positioned with asset values on our brands based on the market comp from the sale of Isaac of about $110 million. And the way we get there is we're forecasting $18 million of royalty revenues in 2024. We used the same multiple that we received on Isaac, which is 6x royalties, it's about $110 million. Today, we have $5 million in debt. So we believe that based on asset values alone, we're severely undervalued, the intrinsic value or the implied value based on asset values should be around $5 per share, not prescribing any value to ORME which we're going to discuss.

So just to quickly summarize on Xcel, we've covered a lot of these points. We definitely want [indiscernible] talk about ORME, we're really excited about that. One, we believe we have a valuable brand portfolio with our existing brands with significant growth potential. We met a bunch of that built in, for instance, with G-III. 6 Million followers across our brands, working capital like business model. We have a proven track record, we've successfully harvested one of our brands and given the value that Bob just mentioned of the remaining brands in our portfolio, you could expect that we would explore potential sales at the appropriate times. We have a strong balance sheet today. A seasoned team of executives with unparalleled experience in livestream and social commerce and several opportunities for growth, both organic, if you think of Xcel as a brand management company that primarily owns brands that would do well in social commerce. They're seeing brand development like we did with Christie Brinkley and we'll hopefully have some new brands [ selling ] out to the next 3 months. And obviously, there should be opportunities for us to acquire brands that do well in social commerce -- in a social commerce model. We definitely want to turn this to ORME and talk about what we believe is the first AI or short form video marketplace launch in the world. And it's really based on the culmination of our experience in livestream shopping, social commerce in partnership with a technology company. I will say before we get in at settlements 30% of ORME. So the technology company owns the balance of the equity in ORME, but we're really, really excited to be launching this because it -- I think it solves problems for a lot of brands and retailers that were struggling right now and really fulfill the void in the marketplace. So with that, I'll turn it to Bob to talk about ORME.

Okay. So we are very excited about ORME. It's been 2.5 years in the making. We've teamed up with an extraordinary technology company that had the top engineering and coding capability but did not exactly kind of develop the technology to do the kinds of things that we needed it to do. And we have applied AI across the platform. There are 4 AI engines built into this that I will get to. And if -- the next slide, really covers ORME from the shopper or the influencer perspective. So for shoppers and influencers, to summarize this slide succinctly, this is a place where they can create, shop and share and get paid cash fees. People are making money on information today in social media or the social media platforms. Of course, they are add-driven cash flow models. What this model does is it flips this thing around and it gives the ad dollars to the people, to the users for sharing and it turns the everyday shopper into a paid social media influencer. And we believe that this will change the way people think about sharing information about products, brands and retailers over social media today. When they realize that they can be paid for doing it, it's going to change everything. Also, from a brands and retailers' perspective, quite frankly, this is a bit of a no-brainer. It's free to integrate. It's a very fast integration with almost any platform, whether it's Shopify, Magento or Salesforce and they don't spend anything on marketing until there is the sale. So it changes the model from a pay-to-play model to the performance-based model. No one makes money on ORME until there's -- no one incurs costs on ORME or makes money until there's a sale. It is a solution for today's problems with high customer acquisition costs and affiliate influencer in digital marketing and it results in an incremental return on ad spend. So we believe that this technology is the game changer that everyone has been waiting for in the west. It is working in the east in places like China and couple of little bit of the market size. But this is what everyone has been waiting for. This end-to-end ecosystem that enables it all to happen. And it brings every consumer and influencer into the commerce flywheel of retail. And going to what is ORME for our investors? It comes with a management team that has over 20,000 hours of production time and $4 billion in livestream sales of television. And we believe ORME, if it scales the way we think it's going to scale, it has uniform potential. It is state-of-the-art technology and it is a leading applier of AI across the technology platform. On to the next slide. This is a forward-looking slide. Musk, had said, through Neuralinks in the next 5 years, he will solve the brain chip language and we have built this technology to be ready for when that happens. It is the most advanced platform that will be introduced to the livestream and retail marketplace in many, many years. So in lay terms, what does ORME really do? The tech inside, we call it Athena and it really enables shoppers brands and retailers to create shoppable content as easy as it is to do on TikTok. It's a 3-click checkout process in video and shoppers and influencers earn fees for sharing. It's performance-based payout model. There are no more big return on ad spend reports and ORME boost content 100x. Today, companies that create content, often lose that content by the end of the same business day because the algorithms and all the social platforms push it down. On ORME when participants start to engage on the ORME platform, each and every one if them can create their digital store and they can preserve content in their digital store, and they can either share content that they pull down from ORME or create their own content and get paid a fee for doing that. The AI engines that we've built into the platform are 4. First, ORME will serve up content based on individual expressed interest and actual behavior. So the ORME app when it opens, it opens to content but the content that one person sees will not be the same based on what the next person sees because the AI engine will serve up what that particular person was interested in. The second recommendation engine that we built into this. If someone that is on the app clicks to purchase and the product is sold out, it will recommend similar product to that person preserving, hopefully, preserving that sale. Third engine is a style chat bot engine, think of ChatGPT for style, on buying how-tos, and I need to know the best start to style with it or going out to X restaurant in L.A. Sunday and need to know what the best thing to wear is. It's a place for people to get information about style, think of it as a personal shopper. And then the last engine is a content filter. We built 30 criteria into the algorithms that we monitor content before it actually hooks to ORME. So some of the obvious things would be hate speech, nudity, inappropriate language and 27 other filters that we built into this. So the machines are looking for things that are not appropriate to be posted up on to ORME. And going into the market opportunity, pretty much everyone in the retail space, those billings are up progressed. And in Asia, livestream short-form video sales have grown from $3 billion to $500 billion since 2017 and now accounts for about 25% of all e-commerce in Asia. The reason it's working there and not here is there are no platforms that have built this end-to-end solutions. And the forecast for total [ auction ] sales in the U.S. for 2024 are about $35 billion, half of that will be sort of like [indiscernible] and half to live streaming [indiscernible]. And then going to the next slide is what's happening in the industry that's disrupting it and has disrupted it over the last 10 years. Everything that you see in the blue boxes in here are things that have been occurring over the last 10 years and most in the industry believe that these things came at us fast. Well, AI is accelerating this at breakneck speed. And just a way of example, Netflix took 3 years to grow from 0 users to 1 million. ChatGPT grew from 0 to 1 million in 5 days or 100 million in 1 year. In June, 1.6 billion people visited the ChatGPT website. There will be two types of players in AI: Creators and appliers. We plan to be a leading applier of AI as ORME grows and moves forward. There will be positives and negatives about AI, I don't think I need to cover those in this presentation. And we all know that ORME was built to reimagine shopping, entertainment and social media and social commerce. It switches the retail model fundamentally from the one to many, one retailer to many people, to many people selling many things to many people. So it's a new model for retailing and ORME leverages every retailers' customers as influencers. So moving to the next slide. ORME solves today's problems. If you look at conversion rates on affiliate marketing today, they're less than 1%, influencer marketing is about 3%, livestream shopping conversion rates worldwide on average, it's 28%. This number was compiled by McKinsey in their recent report. Moving to the next slide. Now imagine a platform that combines the best of affiliate digital marketing, influencer marketing with video shopping and solves the very, very low conversion rate problem. That's what ORME is. Moving [indiscernible] download the app, the future is here guys and we are onboarding vendors as we speak. So with that, I'll turn it over to Q&A.

Yes. So we have a few questions. I don't know if you want to review them but I'm happy to go through them. One is, are you still doing beta testing on ORME and if so, when do you expect to officially launch it?

So we are doing beta testing with our own brands. We will turn it on for actual commerce for the next week or so and then begin to onboard third-party vendors.

So another question, who do you consider today's competitors for ORME in the U.S.? I mean I can answer that. Look, TikTok Shop is spending hundreds of millions of dollars on building your shops out. It will be interesting to see what happens, if you go into TikTok Shop now, there's a lot of $10 shirts in the [indiscernible] model. I don't know, and they're also seeing a decline in user engagement because of TikTok Shops. I don't know how that will play out. But I will say, even though they have a lot more money, I think ORME as a technology is much cleaner than TikTok Shops. And I think it's a much more focused center for shopping. ORME is going to be a destination for shopping, not for funny content, not for videos of your friends and I think that is a really important differentiator. There's another company called [ Cliff ], who we also think has done a nice job in the technology. But again, does not have a major brand. And we think that will be a differentiator for us. Does ORME have patents?

So the technology behind ORME has patent filed and ORME has an exclusive to create marketplaces for -- with the technology.

The next question, you recently sold one of your brands for 6x royalties? Are you considering the sale of any of your other brands?

So we're not considering the sale now. There is a moment that is right to [indiscernible] assets. We believe there's a tremendous amount of upside in our brands, for instance, Halston, next year, we've only modeled $1.7 million of royalties for 2024 but we believe stabilized or at least based upon forecasts that G-III has provided in their earnings call, we'll very quickly get to $8 million. So we see very strong growth over the next 2 or 3 years with Halston. We believe that C. Wonder at HSN could double this year from where it was last year based on plans that we are working on with HSN and we believe Christie Brinkley has a lot of upside as does Longaberger, putting Longaberger on the ORME platform. It was one of the largest direct sales customer -- companies in the country. And we believe a lot of the former Longaberger sellers will like what we've built with ORME.

So two more questions. One is what type of marketing are you doing to create awareness for ORME?

So the strategy is to launch ORME with enough vendors that we have a database of approximately 10 million people that we're going to e-mail. The only obligation that brands have when they come to ORME is they have to agree to issue or create two e-mails per week for the first 6 weeks introducing all of their customers and all of their salespeople like, frankly, to ORME. We will provide them with all the marketing assets that they need to do that based on testing over the last year. And we believe 3% of those people will download the app and begin to participate. And based on our testing, the average person will share with 10 people. So we see ORME as something that will scale to 300,000 users relatively fast. And then if those 300,000 share with 10 people and those people use the app, that will quickly accelerate to 3 million and faster rollout [indiscernible]. And when that flywheel begins, then ORME itself will begin to do marketing to deploy the app beyond the launch.

So there's no other questions, Paul, unless there's any on your end?

No. I just want to remind you is if you do have any further questions, just click that Q&A button at the bottom. But if nothing else is coming in, then we want to thank you for your time and sharing the great story. It's definitely a very a lot of exciting things going on. And for our audience, if you have any questions after we wrap up here, you can always e-mail us directly at the XELB, that's just the ticker symbol [email protected], and we'll absolutely be happy to help you out.

Sounds great. Thank you, Paul, and thank you, everyone, for joining us today.

Thanks, everybody.