Company History and Business Overview
Xcel Brands, Inc. (XELB) is a media and consumer products company that has been making strides in the dynamic retail landscape. Despite facing headwinds, the company has demonstrated its ability to adapt and capitalize on emerging trends, positioning itself for future growth.
Xcel Brands was founded in 2011 with the vision of reimagining shopping, entertainment, and social media as one. The company engages in the design, licensing, marketing, live streaming, and social commerce sales of branded apparel, footwear, accessories, fine jewelry, home goods, and other consumer products. In its early years, Xcel Brands built a portfolio of wholly owned brands including the Halston Brand, the Ripka Brand, and the C Wonder Brand. The company also acquired a 50% ownership interest in the Longaberger Brand and a 30% noncontrolling interest in the Isaac Mizrahi Brand. These brands generated over $5 billion in retail sales via live streaming in interactive television and digital channels.
In 2021, Xcel expanded its portfolio by acquiring the LOGO by Lori Goldstein brand, which it operated as a wholly owned brand until June 2024 when it was divested. This divestiture was part of Xcel's restructuring and transformation of its business model in 2023, shifting from a wholesale/licensing hybrid model to a licensing-focused model. The transformation included entering into various new licensing agreements and joint venture arrangements with best-in-class business partners, as well as reducing the company's payroll, overhead, and other operating costs by approximately $15 million on an annualized basis. As a result of these actions, by the third quarter of 2024, the company had reduced its direct operating expenses to a run rate of approximately $11 million per year.
Xcel's brand portfolio currently consists of the Halston, Ripka, C Wonder, TowerHill by Christie Brinkley, Longaberger, and Isaac Mizrahi brands. The company's primary strategies for growth include distribution and/or licensing of its brands through interactive television, e-commerce, and traditional brick-and-mortar retailers, as well as direct-to-consumer channels. Xcel has also been actively acquiring and integrating new consumer brands into its operating platform, leveraging its expertise in live streaming and social commerce.
Financial Performance and Ratios
In the third quarter of 2024, Xcel Brands reported total revenue of $407,000, a significant decrease from the prior-year quarter. This decline was primarily driven by a reduction in net licensing revenue, mainly attributable to the divestiture of the Lori Goldstein brand in the second quarter of 2024. The company's net loss for the quarter was $9,213,000, inclusive of a $6.3 million non-cash charge related to a contingent obligation.
On a non-GAAP basis, Xcel Brands reported a net loss of $1.3 million, or $0.06 per share, representing a 56% improvement from the prior-year quarter. The company's adjusted EBITDA for the quarter was negative $1.0 million, compared to negative $1.4 million in the prior-year quarter, showing an improvement of approximately 26%.
For the nine months ended September 30, 2024, Xcel Brands reported total net revenue of $7.05 million, down from $15.47 million in the prior year period. This decline was primarily attributable to a $7.90 million decrease in net product sales, as the company exited its wholesale apparel and fine jewelry operations and outsourced its Longaberger business. Net licensing revenue decreased from $7.03 million in the prior year period to $6.52 million in the current period.
The company incurred a net loss attributable to Xcel Brands stockholders of $15.31 million for the nine months ended September 30, 2024, compared to a net loss of $14.26 million in the prior year period. This was driven by the decline in revenues, asset impairment charges, and losses from equity method investments, partially offset by the gain on the Lori Goldstein brand divestiture.
On a year-to-date basis, Xcel's non-GAAP net loss improved by approximately 60% compared to the prior year nine months, and adjusted EBITDA improved by approximately 42%.
Liquidity
As of September 30, 2024, Xcel Brands had total cash and cash equivalents of approximately $1 million, of which $0.7 million was restricted. The company's net working capital, excluding the current portion of lease obligations, deferred revenue, and any obligations payable in shares, was a deficit of approximately $0.6 million.
Subsequent to the quarter-end, in December 2024, Xcel Brands entered into a new $10 million term loan agreement, which provided the company with approximately $3.5 million of additional liquidity after repayment of the previous term loan debt and increased its working capital by approximately $4.5 million.
The company's current ratio and quick ratio both stood at 0.52 as of September 30, 2024, indicating potential liquidity challenges. Cash on hand was reported at $242,000.
Key Brands and Partnerships
Xcel Brands' Halston brand continues to perform well, with G-III Apparel Group launching Halston apparel in the third quarter and expecting to begin shipping footwear and handbags during the fourth quarter for spring 2025. The company expects revenues from this license to begin picking up in 2025 and beyond.
The C Wonder brand, which is performing well on HSN, remained on plan and up 60% in retail sales over the prior year, despite disruptions caused by two hurricanes in the third quarter. Xcel expects to make up the lost sales with increased fourth-quarter programming and continued strong growth in 2025.
The newly launched TowerHill by Christie Brinkley brand, which debuted on HSN during the second quarter, is on track to exceed its launch plan by 90% based on third-quarter results. The brand has also signed its first ancillary product license and plans to introduce additional categories of products on HSN and other retailers.
Xcel's Judith Ripka business continues to see strong growth, with royalties increasing 45% in the second quarter and 98% in the third quarter compared to the prior-year periods. The company expects this momentum to continue into 2025 and beyond, with continued quarterly sequential revenue growth and strong Q4 royalties driven by holiday sales.
The company also owns a 30% interest in ORME Live, Inc., a short-form video and social commerce marketplace that launched in April 2024.
Challenges and Risks
Xcel Brands has faced several challenges, including the divestiture of the Lori Goldstein brand and the impact of macroeconomic factors, such as the effects of recent inflation and rising consumer debt levels, which may negatively impact the demand for the company's products.
Additionally, the company's investment in IM Topco, LLC, which holds the Isaac Mizrahi brand, has been impacted by the brand's reduced in-person studio presence and decreased hours on QVC. Xcel has recorded a $6.3 million non-cash charge to recognize the estimated value of a contingent obligation to potentially transfer a portion of its equity ownership in IM Topco to its partner, WHP Global.
To mitigate these challenges, Xcel has undertaken significant restructuring initiatives, including shifting its business from a wholesale/licensing hybrid model to a licensing-focused model, reducing overhead and operating costs, and entering into new strategic partnerships and licensing agreements.
Outlook and Conclusion
Despite the challenges faced, Xcel Brands has demonstrated resilience and a commitment to navigating the evolving retail landscape. The company's focus on live streaming, social commerce, and strategic partnerships, as well as its efforts to streamline operations and reduce costs, position it for potential future growth.
Looking forward, Xcel expects improved EBITDA in Q4 2024 and continued improvement going forward, as their new cost structure is in place and they project revenue growth. The company believes they can further reduce their operating costs by $500,000 to $750,000 going into Q1 2025 without disrupting operations.
Xcel also anticipates that their total social media following for their brand portfolio will exceed 50 million followers in 2025, indicating a strong focus on digital engagement and marketing.
As Xcel Brands continues to execute its strategic plan, investors will closely monitor the performance of its key brands, the success of new brand launches, and the company's ability to manage its liquidity and debt obligations. With a diversified brand portfolio and a strong emphasis on emerging sales channels, Xcel Brands appears well-positioned to capitalize on the changing consumer landscape, although it will need to navigate ongoing financial challenges and market uncertainties.