LXRandCo Inc

TSX:LXR

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to LXRandCo's Fourth Quarter 2019 Financial Results Conference Call. This morning, LXRandCo issued a news release reporting its financial results for the fourth quarter of 2019. That news release, along with the company's MD&A and financial statements, are available on SEDAR and the company's website at www.lxrco.com and can be located in the company's Investors Relations 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 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 have been provided as guidance, are subject to a number of risk 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, risk and uncertainties are provided in the company's various security filings, including LXRandCo's MD&A for the quarter ended December 31, 2019, 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 now like to turn the call over to Cam di Patra (sic) [ Cam di Prata ], LXRandCo's Interim Chief Executive Officer. Mr. di Patra (sic) [ di Prata ], you may proceed.

[Camillo di Prata, Interim CEO & Executive Director]

Thank you, Julie, and good morning, and thank you to everyone for joining us today. Also joining me for today's call is our Chief Financial Officer, Nadine Eap, who will present shortly.In terms of the agenda for today's call, I will be sharing some high-level insights for the fourth quarter ended December 31, 2019, and provide you with an update on the implications of the coronavirus outbreak on our operations. Nadine will then review our Q4 and year-end financial results in greater detail, and then I'll return to open up the call for any questions.As we originally communicated with you in our press release in January of this year, we are pleased to confirm that the company exceeded its fourth quarter revenue target of 30% year-over-year growth, and we are extremely proud of the collective efforts of our entire team. While our retail environment was somewhat challenged in Q4, strong performance in our wholesale and e-Commerce channels highlighted the benefits of having a diversified omnichannel presence, which resulted in material increases, not only in revenue growth, but in our gross profit dollars and gross profit margin for the quarter.On behalf of our Board Chair and Office of the President member, Valerie Sorbie, I wish to thank our dedicated employees and our channel partners for their ongoing support and commitment and to extend our very best wishes to them all during this chaotic and unsettling times that we are all experiencing.As a reminder, at the end of Q3 2019, your Board of Directors decided to get more hands-on in the stewardship of the company and created the Office of the President to do so. The Office of the President is composed of 2 directors: The Board Chair and myself, acting as interim CEO of the company. We are both full-time engaged with the company.Now let us turn to Q4. On December 31, 2019, from a year-over-year perspective, our retail network of 80 LXRandCo-branded locations was smaller, but a far more productive network as compared to the 86 stores we had in operation at the end of 2018. This refocused network, which reflected the opening of 5 new stores and the closure of 11 stores during 2019, is a reduction of 6 stores from prior year, primarily as a result of the Board's decision to terminate an unprofitable retail partnership in the United States.In 2019, approximately 90% of total net revenue was generated in the United States with the balance coming from our Canadian activities. As an omnichannel player with a core presence in retail, wholesale and e-comm channels and a unique model in the growing pre-owned vintage space, where we own all the merchandise we sell, we are constantly managing our portfolio of assets across all our channels with an eye towards optimizing, over time, both store productivity and the return on our investment in terms of inventory and people. Q4 was a successful quarter in this regard as the company delivered gains not only in growth and profitability, but also material improvements in key fundamentals, such as inventory turns and revenue per square foot.Highlights for the fourth quarter ended December 31, 2019, are as follows. Our net revenue in Q4 increased by 33% to a quarterly record level of $14.4 million. Of this, our e-Commerce channel represented 8% of the total. By contrast, our gross profit dollars increased by 44%, while our gross profit margin increased to just under 33% of revenue, which is pretty close to an all-time record in terms of gross profit margin for the company. While still a work in process, we are proud of our progress on cost containment and productivity. This is especially evident when looking at our performance on a pretax cash flow basis, where we nearly broke even for the quarter, with adjusted EBITDA coming in at a loss of $74,000.While we broke even on an adjusted EBITDA basis or nearly broke even on an adjusted EBITDA basis, cash flow from operations for the period was positive, with net cash generated from operations over this period improving by over $300,000 to nearly $800,000 for the quarter as compared to Q4 2018.We had a successful fourth quarter, and we are very proud of it. But as we all know, times are somewhat changed today from Q4's operating environment. Now I'd like to provide a short update on the implications of the coronavirus outbreak on our operations and to share with you the point of view of our Board.With the World Health Organization's recent declaration of the coronavirus as a global pandemic and after our careful assessment of the recent escalation of the spread of the virus in North America, the impact in actions undertaken by our retail partners in ensuring the well-being and safety of employees and consumers and the uncertainty as to the duration of the virus's contagion period, the company wishes to express that it has concluded that there now exist material uncertainties related to events or conditions that may cast significant doubt upon the assumptions underpinning the company's 2020 forecast, and accordingly, quite possibly, its ability to continue as a growing concern.The company further believes that the ongoing effects of coronavirus on its operations, particularly in the instances of a prolonged lockdown scenario, will have a material negative impact on its financial results and liquidity for quarter -- for the first quarter of this year and the rest of the year. As a result, the Office of the President has been proactive in taking actions to protect and improve the company's liquidity and revenue sources, including by accelerating its e-Commerce online activities where possible and initiating material expense reductions.On March 20, in response to the issues surrounding the coronavirus and consistent with actions undertaken by our retail partners, the company temporarily closed all 80 LXRandCo stores until April 1. Given the material reduction to our revenue base and to minimize the expense burden on the company and to ensure the safety of our employees, we have temporarily laid off our staff of over 225 people across North America and have taken action to significantly reduce the workloads of our corporate support staff, allowing them all the possibility of working from their homes where possible.While these are unprecedented and uncharted waters, rest assured that your management team will keep monitoring the situation very closely and be prepared to respond proactively to any and all new developments to the best of our ability.With that, I'd now like to turn the call over to Nadine, who will review the fourth quarter financial results in greater detail, along with highlights for the full year 2019. Over to you, Nadine.

[Nadine Eap, Chief Financial Officer]

Thank you, Cam, and good morning, everyone. In the interest of time, I would confine my remarks to the key financial highlights for the fourth quarter. Our full fourth quarter and full year 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 fourth quarter financial statement -- financial results are presented on a continuing operation basis. As starting in the third quarter of last year, our European operations were classified as discontinued following the closure of all our European stores.Now on to our results. Net revenue for the fourth quarter was 32.9%, higher at $14.4 million compared with $10.9 million for the same period of 2018. Additionally in the fourth quarter, e-Commerce revenue accounted for 8.1% of total revenue, compared to 4.7% in Q4 last year. Reported gross profit for the fourth quarter increased 43.8% to $4.7 million or 32.8% of net revenue from $3.3 million or 30.3% of net revenue for the same period last year.The material improvements in gross margins for the 3-month period ended December 31, 2019, reflect the company's objective of optimizing its retail operation and, among other things, include the cumulative effects of reduced licensing fees with 2 retail partners, the termination of an unprofitable retail partnership, a more efficient and disciplined product sourcing strategy, a decrease in inventory obsolescence provision and a significant reduction in inventory shrinkage and trade expense.We also continue to see the benefits of a more focused retail network as well as our ongoing cost management efforts on selling, general and administrative expenses. In the 3-month period ended December 31, 2019, SG&A expenses decreased by 23.9% to $5.8 million or 40% of net revenue, compared to $7.6 million or 68.9% of net revenue in the 3-month period ended December 31, 2018. The improvement in SG&A expenses is primarily due to the operation of fewer unprofitable stores through the period, which resulted in decreased store and corporate head count costs, lower costs related to the storage and transportation of inventory and fixtures resulting from the store closure undertaken in 2018. And the absence of onetime fees and expenses relating to the strategic revenue initiative and financing that occurred in 2018.The significant improvement in gross margin and SG&A translated into significant improvement across our profitability measures. Net loss for the fourth quarter decreased to $2.1 million from $3.7 million.Turning now to our balance sheet, which we believe to be in good position. We ended the fourth quarter with $3.5 million in cash. During the fourth quarter, from a cash flow perspective and cash flow from operation was positive, with cash provided from operations improving by $0.3 million to $0.8 million versus $0.5 million in Q4 of last year, bringing our total cash used in operation year-to-date to $5.3 million, an improvement from $7.3 million in the previous year.As of December 31 of this year, we had $8 million drawn on our revolving credit facility, which is up from $5.8 million at the end of the fourth quarter. We remain [ on-site] with all covenants from this facility.This concludes my review of the quarter. I'll now turn the call back to Cam for some concluding remarks. Cam?

[Camillo di Prata, Interim CEO & Executive Director]

Thank you, Nadine. And thank you all for joining us on the call today. I'd like to now open up the call to any questions. Julie, over to you. Thank you.

[Operator]

[Operator Instructions] And there are no questions at this time.

[Camillo di Prata, Interim CEO & Executive Director]

Okay. Thank you, Julie. And then thanks again to everyone joining us today. We do look forward to speaking with you again at the time of our next call, hopefully, under better economic and world circumstances. Thank you very much. Signing off.

[Operator]

This concludes today's conference call. You may now disconnect.