LXRandCo Inc

TSX:LXR

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to LXRandCo's Second Quarter 2019 Financial Results Conference Call. Yesterday, LXRandCo issued a news release reporting its financial results for the second quarter ended June 30, 2019. That news release, along with the company's financial statements and MD&A for the second quarter are available on SEDAR and on the company's website, www.lxrco.com in the Investors section.Please note that today's call is being broadcast live over the Internet and will be archived for replay, both by telephone and via the Internet beginning approximately 1 hour following completion of the call. Details of how to access the replays are available in this morning's news release.Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of its conference call. Certain material assumptions were applied in providing these statements, many of which are beyond the company's control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in the company's various security filings, including LXRandCo's MD&A and the second quarter ended June 30, 2019, which is available on SEDAR. These forward-looking statements are made as of today's date. And except as required by applicable securities law, the company undertakes no obligation to publicly update or revise any such statements.I'd now like to turn the call over to Steven Goldsmith, President and Chief Executive Officer of LXRandCo. Please go ahead, Mr. Goldsmith.

[Steven Goldsmith]

Thank you, Matthew, and thank you to everyone for joining us today. With me for today's call is LXRandCo's interim Chief Financial Officer, Nadine Eap. In terms of the agenda for today's call, I'll begin with a review of the operational and financial highlights for the second quarter. Nadine will then review the second quarter results in detail. And then I'll return for some concluding remarks before opening the call to questions.The end of the second quarter of 2019 marked 1 year or 4 full quarters of operations since we implemented our revised strategic plan designed to realize the full potential of our company. We have seen clear evidence of the positive impact of that revised plan on our financial results, with meaningful, progressive in each successive quarter, punctuated by the continued improvement in the second quarter of 2019.As I discussed last quarter, from a year-over-year perspective, LXRandCo now has a smaller but much healthier retail store network which accounts for the vast majority of our sales. The smaller network is a result of our decision last year as a fundamental part of our revised plan: focus our network on quality sales at stores in the right locations and the right partners targeting the top 30 markets in the United States and Canada. As a result, while we opened a number of new stores, over the past 12 months, we closed a number of stores that were not aligned with our strategy. We also transitioned 12 stores with 1 of our partners to nonbranded wholesale locations, meaningfully improving theirs and our economics.Specifically, for Q2 2019, this resulted in a retail store network that had 23 fewer stores than Q2 2018 or 84 stores this year versus 107 last year. And I'll remind you that last year's total does not include the European stores that were subsequently closed and classified as discontinued operations. Despite having 22% fewer stores in Q2 this year, sales were just $700,000 or 8% lower at $8.6 million compared with $9.3 million. Another way we look at the performance of the store network internally is the store contribution margin, or what is often referred to as four-wall EBITDA margin, which measures the profitability of our stores in and of themselves. That number -- those numbers saw a dramatic increase in Q2 of this -- increasing 1,400 basis points to 12% from negative 2%. This is a remarkable turnaround in just 12 months and really underscores the potential of our network. We are also turning our inventory much quicker as evidenced by our churn ratio, which improved to 1.96 in Q2 of this year from 1.77 in Q2 of last year. Earlier, I mentioned our strategy to target the top 30 designated market areas, or DMAs, in the U.S. and Canada. We are now making our decisions around store openings and closings on this basis and making steady progress towards the goal. As a quick example, in one of our partners where the performance was not good in one of their locations and this location was not in one of the designated market areas, we have to make a decision amongst their fleet of stores, where to put the next store and where to transfer the merchandise. We made the decision to transfer to Southern California, where the Los Angeles designated market area, we were underpenetrated. So anyway, that is the one example. The store network is clearly more productive on a top line basis. Another core component of our strategic plan is expanding gross margin on our sales. Our strategic plan and our decisions to exit our unprofitable businesses in Europe due to the significantly higher costs there and narrow our product offering to a mix of handbags and accessories, naturally support better and higher gross margins. We have now essentially sold down essentially all of our inventory in these noncore product categories. In addition, I personally revisited each of our partner agreements in the context of maximizing profitability of each relationship across the breadth of their existing stores and new store opportunities resulting in lower licensing fees. Over the past 12 months, we have also put a specific emphasis on gross margin expansion through supply chain and logistics. I'll give you a quick example of that. When we prepare an item for sale and we purchase it, we -- it has to go through a lot of cases. We have to -- authenticity, photography, copy. But when we sell things to wholesale, the copy and the photos need to be a much smaller amount. We used to prepare everything the same way, whether it was going to our stores, e-commerce or wholesale channels. Now if it's specifically going to wholesale channels, we actually are able to spend less money in preparing the goods. While our gross margin does vary from quarter-to-quarter, over the 12 months, we have marked an improvement. Following previous management's push into Europe and expansion into other product categories, gross margin fell dramatically to 20%. Our strategic decisions and ongoing efforts has significantly restored gross margin -- 25% in Q1 of this year and now 32% in Q2 of this year, which is a 1,300 basis point improvement over Q2 of last year. We also continue to benefit from the success of our cost management initiatives in the second quarter as we saw selling, general and administrative expenses decline meaningfully on both a year-over-year and sequential basis. In absolute dollars, SG&A decreased 38% year-over-year to $4 million from $6.5 million in Q2 last year and was also down from $5 million in Q1 of this year. While a much of this is driven by lower head count due to the smaller store network, it is also a function of a much leaner but more efficient corporate office, a leaner buying operations and rigorous cost controls across the organization. That is clearly apparent in the significant improvement in SG&A as a proportion of our sales, which declined 47% from 70% in Q2 last year and also improved in Q1 of this year. In fact the 47% SG&A, it's lower than any quarter since the third quarter of 2017 in the quarter after we went public. Our strong Q2 results contributed to significant year-over-year improvement in each of profitability measures. Each of net sales, adjusted EBITDA and adjusted net loss showed strong improvement compared to Q2 of last year. And while cash flow used in operations was higher in Q2 of this year, mainly due to my decision upon taking on the CEO role to hold spending on already oversized inventory, on a year-to-date basis, cash flow actually in operations is down $5.4 million to $3.3 million in the first half of the year. And a quick reminder that the first half of the year tends to be the bigger use of cash than the second half of the year. With that, I'd now like to turn the call over to Nadine who will review the fourth quarter financial results -- sorry, will recall the second quarter financial results in greater detail. Nadine?

[Nadine Eap, Chief Financial Officer]

Thank you, Steven, and good morning, everyone. In the interest of time, I will confine my remarks to the key financial metrics for the second quarter. Our full second quarter financial results are available in our financial statements and MD&A, which are posted on our website and filed with SEDAR. Before I begin, I want to remind you that our second quarter financial results are presented on a continuing operation basis. Thus stating -- starting in the third quarter of last year, our European operations were classified as discontinued following the closures of all of those stores. Now on to our results. As Steven discussed, our second quarter revenue reflects our smaller but much healthier retail store network, 84 in Q2 of this year versus 107 in the corresponding period last year. Despite the 20% smaller network, net revenue for the second quarter was just 8% lower at $8.6 million compared with $9.3 million in Q2 last year. Gross profit for the second quarter increased 53% to $2.9 million or 32% of net revenue from $1.9 million or 20% of net revenue for the same period last year. The significant year-over-year improvement is directly attributable to the continued success of our gross margin expansion initiatives, specifically lower licensing fees with 2 major retail partners, a decrease in inventory obsolescence provision as well as a significant reduction in inventory shrinkage and freight expense. We also continue to see the benefit of the more focused retail network as well our ongoing cost management efforts on selling, general and administrative expenses. SG&A for the second quarter decreased 38% year-over-year to $4 million from $6.5 million for the same period last year. While this decline is very much a factor of the smaller store network and last year's number did include store closing costs that weren't incurred in Q2 of this year, the decrease is also very much the result of the lower corporate head count and related costs. This is clearly reflected in the significant decrease in SG&A as a proportion of net revenue, which declined to 47% from 70% in Q2 last year. And as Steven mentioned, we are not to a level we were 2 -- at 2 years ago. The significant improvement in gross margins and SG&A translated into significant improvements across our profitability measures. Net loss for the second quarter narrowed considerably to $2.2 million from $9 million, while EBITDA loss improved to $1.2 million from $4.8 million. Both net loss and EBITDA loss also improved from the first quarter of this year despite Q1 having a higher top line number. Turning now to the balance sheet. We ended the second quarter with $3.5 million in cash, down slightly from $5.1 million at the end of the first quarter. During the second quarter, we used cash in operations of $2.3 million compared to a use of $0.7 million in Q2 of last year, bringing our total cash used in operations year-to-date to $3.3 million, a significant improvement over $8.7 million in the first half of last year. At June 30 of this year, we had $5.8 million drawn on our revolving credit facility, which is unchanged from $5.8 million at the end of the fourth quarter of 2018. We remain on site without tapping on this facility.This concludes my review of the quarter. I'll now turn the call back to Steven for some concluding remarks. Steven?

[Steven Goldsmith]

Thanks, Nadine. Our second quarter results, more than any other over the past year, demonstrate our progress on the strategic plan we implemented last year. Our continued focus on our strategic priorities, prudent revenue growth, margin expansion and positive cash flow generation, with continued improvement across our key financial metrics underscores the long-term potential of our business to generate value for our shareholders. We expect to see the continued positive impact of our progress reflected through the remainder of 2019 and beyond as we continue to advance these priorities. The LXRandCo retail store network, the only national network of vintage luxury retail stores in the United States and Canada, and by far and away the largest, provides significantly strengthened foundations for future growth. And we are doing this with an optimized real partner model to maximize contribution margin and support sustainable profitability with each and every partner. Moving forward, we will continue to pursue prudent expansion of our network as we strengthened our presence in the top 30 designated market areas in the United States and Canada, with the overriding goal to operate profitably with each and every partner and generate sustainable positive cash flow generation. We had exceptional mutually beneficial partner relationships that provide a long runway for expansion of our store network as well as opportunities to grow our e-commerce business, leveraging their online strategies as well as through other online partner initiatives. We are ramping up our efforts here, but it will take time. It's a huge opportunity and one that we are uniquely positioned to capitalize on. Similarly, our -- we have a significant untapped opportunity within our wholesale business. It's high gross margin business with great operating leverage, allowing us to profitably expand our business with very little impact on SG&A. We recently added an executive with specific responsibility for driving the future growth and success of this channel. Finally, we are simply operating the business better. We are managing our inventory better and turning it quicker. We are getting better throughout the supply chain, buying better, making our already very efficient logistics even more efficient and managing our cash better. All of this continues to position LXRandCo at the leading edge of the retail revolution. The U.S. is by far and away the largest single country in the massive nearly $300 billion personal luxury goods market, which is growing by being to grow at a healthy 3% to 5% through 2025 in the full price luxury market. Against this is the backdrop of the rapid emergence and growth of the resale retail market also referred to as the reuse economy or re-commerce, which according to Wells Fargo could represent as much as 10%, yes, 10% of that number by 2022. By that same year, they predict that as much as 40% of shoppers' closets will be composed of pre-owned goods. LXR's differentiated omnichannel channel strategy of owned rather than consigned merchandise and a focus exclusively on women's handbags and accessories, positions us very well in this fast-growing and exciting retail category. We are proficient and efficient in moving this inventory from our suppliers to our distribution centers, from our distribution centers to our branded and wholesale store locations and to our e-commerce customers. We pride ourselves in our deep product and brand expertise which enable us to offer a customer experience unlike any other. This unique set of capabilities at its core, we are leveraging retail partnerships existing and new branded stores, wholesale locations and online to maximize these opportunities using a holistic, integrated approach to put our inventory in front of as many potential customers as possible.And with that, I'd like to open the call to questions. Matthew?

[Operator]

[Operator Instructions]There are no questions at this time. I'll turn the call over to Mr. Goldsmith.

[Steven Goldsmith]

Thank you, Matthew, and thanks again -- once again to everyone for joining us today. We look forward to speaking with you again at the time of our next call. Have a good day. Bye.

[Operator]

This concludes today's conference call, and you may now disconnect.