LXRandCo Inc

TSX:LXR

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the LXRandCo's Second Quarter 2020 Financial Results Conference Call. This morning, LXRandCo issued a news release reporting its financial results for the second quarter of 2020. That news release, along with the company's MD&A and financial statements are available on SEDAR and the company's website, www.lxrandco.com and can be located in the company's investors Relations section. Please note that today's call is being broadcasted live over the Internet and will be archived for replay both by telephone and via the Internet beginning approximately 1 hour following the completion of this call. Today -- details of how to access the replays are available in our news release. Before we begin, a brief reminder that forward-looking statements may be made today during or after the formal part of this conference call and that any and all material assumptions that have been applied in providing these statements are beyond the company's control and are to be considered as such. These statements which may be provided as guidance, are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in any forward-looking statements. A summary of these underlying assumptions, risks and uncertainties are provided in the company's various securities filings, including LXRandCo's MD&A for the quarter ended June 30, 2020, which are 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 would like to now turn the call over to Cam di Prata, LXRandCo's Interim Chief Executive Officer. Mr. di Prata, you may proceed.

[Camillo di Prata, Interim CEO & Executive Director]

Thank you, Joanne, and to everyone on our call today, and on behalf of our Chief Financial Officer, Nadine Eap, we wish you a good morning, and we thank you for joining us today. The agenda for today's call is as follows: I will provide an overview of the key strategic highlights and a high-level financial overview of the second quarter ended June 30, 2020, Nadine will then review our Q2 financial results in greater detail and I will then return for some concluding remarks before turning the call over to any questions. By way of background, you may recall that nearly 5 months ago this week, LXRandCo temporarily closed all of its 59 retail store locations due to the COVID-19 outbreak. As previously announced, 2 months later, on May 18, midway into our second quarter, our company reopened its first store location in the Florida area. And since then, we have been gradually easing into a store reopening cycle that now has us at the end of the second quarter with 39 stores in operation across the North American theater or approximately 67% of our store network now being open. Needless to say, the impact on the company from these closures will significant both financially and in terms of the personal toll that it is taken on our people as we were compelled to furlough all our store staff and most of our corporate personnel. Financially, our retail and wholesale revenues went to 0 for most of Q2, and while our e-commerce business compensated somewhat, particularly our lxrco.com direct-to-consumer website, which more than doubled revenue from last year, the opportunity loss in revenue from our brick-and-mortar store closures placed a heavy burden on the company. Nonetheless, during this period, our entire team got to work. First, as previously disclosed, we successfully refinanced the company, bringing in $3.8 million in new capital, of which approximately $800,000 came in the form of an equity issue, which closed in the second quarter. Secondly, best we could, we proactively resized and recalibrated our expense base with our revenue streams so as to minimize the cash burn throughout this period. And lastly, we aggressively increased our focus on all our e-commerce activities. Despite the challenges brought on by the outbreak on our operations, we are satisfied with our Q2 financial performance, which is one of our traditionally weakest quarters of the year. Nonetheless, the combined effect of these 2 factors, COVID and seasonality has had a material financial impact on the revenue of the entire second quarter as our Q2 revenue declined by 83% versus the comparable quarter last year, coming in at just under $1.5 million for the quarter as compared to $8.6 million last year. While revenue declined materially during the quarter, the company worked hard at managing its cost base and continue to excel in all areas of expense control, resulting in a gross margin that approached 34% and delivering an adjusted EBITDA that while still in a loss position, did improve 46% versus the prior period, this despite an 83% drop in revenue. To be more specific, during the quarter, while our revenue dropped by $7 million, our free cash flow came in at just under negative $1 million, and our adjusted EBITDA was contained to a loss of $644,000. In addition, during the quarter, we repaid approximately $2 million of bank debt, ending the quarter with total bank debt of $5.4 million, which is $400,000 lower than at this time last year, and cash resources available to the company of $2.6 million. To say that I'm pleased with the efforts of our team under this period of duress would be an understatement. This having been said, our operating economic environment has not materially changed, and in certain circumstances, remain severely challenged. While some of our partners' retail stores have selectively reopened with reduced operating hours and lower staffing levels and we have followed in their wake, customer traffic patterns have been generally slower in developing. And while this is expected to improve with time, overall revenue in certain cases continues to materially lag that experience for similar periods in 2019. To counter the pressures in the retail space, in Q2, we decisively pivoted strategically, placing a concentrated and accelerated focus on aggressively building out our e-commerce capability in 3 distinct directions: the first and most vital is a full concentration of our resources on our lxrco.com platform, which has undergone an exciting new content and platform transformation; the second includes making the e-commerce channels of our retail partners equally successful; and the third is the leveraging of existing third-party online platforms through commercial arrangements. In Q2, we redeployed and hired new talent aimed at reenergizing our brand identity, improving the customer experience on the web, implemented a focused revenue growth strategy across several social media platforms and through the launch of our new web platform, which went live on April 1, we are now focused on materially growing our e-com revenue from the current revenue run rate, which as I mentioned earlier, has doubled from the prior year. I look forward to discussing more about these and other online initiatives in the quarters to come. Before handing over to Nadine, I wanted to express, on behalf of our Board of Directors, our gratitude to our dedicated employees across North America and Japan, as well as our channel partners and suppliers for their continued ongoing support and to extend our very best wishes to them during these unsettling times. With that, I will now turn the call over to Nadine, who will review the Q2 financial results with you in more detail. Nadine?

[Nadine Eap, Chief Financial Officer]

Thank you, Cam, and good morning, everyone. In the interest of time, I will confine my remarks to the key financial highlights 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. Now going to our results. Owing largely to the adverse impact of the COVID-19 outbreak, this resulted mainly in the decrease in wholesale orders and temporary closure of LXR retail store network during the quarter with its first store reopened on May 18, 2020. Consequently, net revenue for the second quarter was 83.3% lower at $1.4 million compared to $8.6 million for the same period of 2019. Additionally, in the second quarter, e-commerce revenue accounted for 56.1% of net revenue compared to 11.2% in Q2 last year. Reported gross profit for the second quarter decreased by 83.2% to $0.5 million, representing 33.6% of net revenue, compared to $2.9 million, representing 33.4% of net revenue for the same period last year. And the 3-month ended June 30, 2020, SG&A expenses decreased to $1.4 million compared to $4.2 million for the same period last year. We began the second quarter with most stores in operation and most of our staff furlough are on a reduced hours. The overall improvement in SG&A expenses is primarily due to exceptional measures taken in response to the COVID-19 impact. Net loss for the second quarter decreased to $1.7 million from $2.2 million, and adjusted EBITDA loss, a non-IFRS measure, decreased to $0.6 million from $1.2 million. Turning now to our balance sheet. We ended the second quarter with $0.8 million in cash. During the second quarter, from a cash flow perspective, we saw $1.6 billion (sic) [ $1.6 million ] improvement with cash flow used in operations improving to $0.7 million from $2.3 million in the prior period. During the second quarter of 2020, continuing with the closing of the business credit availability program loan of $3 million, the company also renewed the line of credit of $12.5 million with new terms, making the comparability of cash and liquidity resources difficult with that of prior quarter. The line of credit now requires the company to regularly net any excess cash on hand against its outstanding loan balance, leading to additional borrowing availability of $1.6 million during the second quarter of 2020. The total cash reserves amount to $2.6 million, $8 million coming from cash and $1.6 million in additional borrowing availability. As of June 30 this year, we had $2.5 million drawn on our revolving credit facility and $2.9 million on the BCAP loan, totaling $5.4 million in borrowing, which is down from $8 million at the end of the fourth quarter last year. This concludes my review for the -- of the quarter. I'll now turn the call back to Cam. Cam?

[Camillo di Prata, Interim CEO & Executive Director]

Thank you, Nadine. So before signing off, I think it is important to underscore that the ongoing effects of COVID on our operations are not over and that the possibility of future outbreaks and possible lockdowns will continue to have a material negative impact on our financial results and liquidity. Nonetheless, while we experienced this to be the case for the second half of the year, we are preparing the best we can to adapt to this rapidly changing and volatile environment, and we are decisively repositioning, as I mentioned earlier, our business to a more agile model and into a more dynamic and highly performing digital business. As a sign of the times and the pressures brought about by COVID-19 on the retail industry, on Wednesday this week, Stein Mart, a retail channel partner of the company filed for creditor protection. As per their filing, it expects to close a significant portion of, if not all, of its brick-and-mortar stores across the United States and has launched an orderly liquidation process. Currently, as we have 36 of our 59 LXR stores situated with the Stein Mart retail network, we, too, will be permanently closing these stores by early next week, and we are currently in the process of recovering all of our store inventory from these locations. At present, there are no material receivables or other outstanding assets at risk or any material closing costs to the company arising from this event. While the company, LXR, believes that the Stein Mart store closures will have a material impact on future retail revenue dollars, this coming, obviously, from the closure of 36 stores, for the reasons stated above, we believe that the impact on cash flow and our profitability for the balance of the year will be more muted. This concludes our presentation for you on our Q2 update and report. We thank you, on behalf of Nadine, we thank you for joining us. And I think right now, we'll turn it over to any possible questions and hand it over to you, Joanne. Thank you.

[Operator]

[Operator Instructions] There are no questions at this time.

[Camillo di Prata, Interim CEO & Executive Director]

Okay. Well, thank you for that, and thanks once again to everyone for joining us. We look forward to speaking with you again at the next time of our call in Q3. Thank you. Signing off.

[Operator]

And thanks once again to everyone for joining us today. We look forward to speaking to you again. You may now disconnect.