Lifetime Brands, Inc. (NASDAQ:LCUT) Q2 2016 Earnings Conference Call August 9, 2016 10:30 AM ET
Harriet Fried - Investor Relations, Lippert/Heilshorn & Associates
Jeffrey Siegel - Chairman and Chief Executive Officer
Laurence Winoker - Senior Vice President Finance, Treasurer and Chief Financial Officer
Frank Camma - Sidoti & Company, LLC
Good day, ladies and gentlemen, and welcome to the Lifetime Brands Q2 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder today’s conference call is being recorded.
I would now like to turn the conference over to Ms. Harriet Fried of LHA. Please go ahead.
Good morning, everyone, and thank you for joining Lifetime Brands conference call. With us today from management are Jeff Siegel, Chairman and Chief Executive Officer; and Larry Winoker, Senior Vice President and Chief Financial Officer.
Before we begin, I’ll read the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are about to be made in this conference call that are not historical facts are forward-looking statements and involve risks and uncertainties, including the company’s ability to comply with the requirements of its credit agreements, the availability of funding under those credit agreements, the company’s ability to maintain adequate liquidity and financing sources and an appropriate level of debt, changes in general economic conditions, which could affect customer payment practices or consumer spending, changes in demand for the company’s products, shortages of and price volatility for certain commodities, the effect of competition on the company’s markets, the impact of foreign exchange fluctuations and other risks detailed in Lifetime’s filings with the SEC.
The company undertakes no obligation to update these forward-looking statements. The company’s earnings release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. Included in this morning’s release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP.
With that introduction, I’d like to turn the call over to Mr. Siegel. Please go ahead, Jeff.
Thanks, Harriet. Good morning, everyone, and thank you for joining us today to discuss our second quarter 2016 results. Before I go into a detailed review of this quarter, I’d like to update you on the restructuring program we undertook with a major international consulting firm last year, to assess the opportunities to drive growth in our revenue, gross margin, operating profit and cash flow.
We completed phase one earlier this year, among other things identified various opportunities for effectiveness and efficiency savings including organizational realignment, brand management, SKU management and indirect spend management. Based on those findings we realigned the U.S. Wholesale divisions in our organizational structure, reduced headcounts and incurred restructuring expenses.
For this quarter, restructuring expenses amounted to $1.1 million following restructuring expenses of $640,000 for Q1.
As you may recall, SG&A started to coming down this quarter and we were able to bring it down again in Q2 by implementing just a small portion of the study’s findings.
We recently completed Phase 2 of the consulting project, which focuses on designing and executing solutions to increase efficiency on the front-end by, for example, reducing secondary SKUs, strengthening brand management and reducing complexity throughout the organization. The consultants have given us a clear roadmap and we have begun implementing the changes they’ve laid out.
The entire process will take about 18 months and we believe the changes to our organization will contribute to growth in sales and even more so to profitability, especially as we enter 2017. I’ll also report on few other important trends in our business.
First, we are seeing shifts in consumer spending that we expect to continue for the foreseeable future, and we are positioning ourselves to capitalize on those shifts. To that and the most notable are the shift to spending online versus the brick-and-mortar stores and the growing influence of millennial-consumers.
Percentage of our products sold by both online sites of our traditional retailers, as well as sold at pure-play online retailers is growing at an extremely rapid rate, though this is mainly offsetting a reduction in business at traditional stores. We have been positioning Lifetime to capitalize on the shift by developing a first-class team that understands how to drive this business.
The skill-set needed to do this is quite different than the skill-set needed to drive business through traditional retailers. This has been a major investment for Lifetime over the last several years and that investment is beginning to show important results, which will be evident both in the second-half of this year as well as in 2017.
The second major shift is the growing importance of millennials. Brands that we have positioned specifically for millennials are among our fastest growing brands: Farberware, Colourworks, BUILT NEW YORK and Mikasa are three that has shown me the greatest growth.
The Farberware is a brand that is well over 100 years old. We revitalized the brand with the addition of the Colourworks line that was developed by our UK subsidiary. And this has proven to be a real winner that has enabled us to get significant net placement for the brand.
In the case of BUILT, we’re getting tremendous placement for our stainless steel water bottles and coffee mugs. Based on orders that we have already - that have already been confirmed, this is a business that will be very important for us in the second-half of this year.
For over 60 years, Mikasa has steadfastly focused on consumers that are younger and millennials are developing a significant purchasing power now. Mikasa has become our most important brand for dinnerware, glassware and flatware.
I would also like to mention our direct outreach program, which if you recall is designed to help support our independent retailers, a channel that offers promising opportunities for growth. Earlier this year, we structured our territories and selected independent rep-groups to provide coverage, attend the right trade shows and make sure we were offering the right brands and inventory for the channel.
More recently, we invited all the reps to Garden City, taking them around our showroom, hosting presentations from all our divisions and giving them details on all our products and their features. This is a really good step to forge a closer relationship and additional sales from this new channel, and we expect to get those and plan to repeat it in future years.
With that high-level background, let me run to some of the specifics of our second quarter by division.
Our results for the second quarter were generally in line with our expectations. For the period, we reported a very modest decrease in net sales, about 2%, which primarily reflected the timing of shipments.
I want to emphasize that we are not a company that [runs in] [ph] 90-day quarters, and we don’t invest in 90-day quarters. Our business plans are for a full-year. And though this causes shifts in quarterly results, we will not chase businesses in a particular quarter that are not in the best interest of our full-year results.
Now, moving to the U.S. Wholesale segment, total sales were down 2%, largely due to the timing of some retailer programs. We had many businesses that showed great strength, in particular kitchen tools and gadgets, metals, and as I mentioned, BUILT NEW YORK.
We had an outstanding quarter in our flagship kitchen tool and gadget area, where we leveraged the new end cap program at one of our big customers, and had strong sales and preparations from the back-to-school period. We expect the slight decrease in the U.S. Wholesale segment to reverse in the second-half of 2016.
Particularly, as we progress with Colourworks and our successful Edgekeeper cutlery program, as well as an expected strong second-half tabletop business and the continued growth of our Wire Storage business.
I mentioned last quarter that Colourworks, the full collection of high function, high designed kitchen tools and gadgets, pantryware and cutlery targeted to millennials, to millennials taste and spending pattern, has been one of the fastest growing product lines in our company’s history.
It’s been picked up by top retailers and big-box stores across the country. Many of them reported that it is one of their most successful lines in all the housewares. In the second quarter, we continued to push ahead successfully with our efforts to expand distribution in those retailers where Colourworks tested well.
We’ve also been making headway with additional retailers. We’re getting good indications from some big accounts, who responded to the impactful and unique use of color and design. We’ve also been continuing to get good response to our patent-pending Edgekeeper line of products, which have built-in sharpners that automatically keep knives sharp for optimal performance.
We expect Edgekeeper to be a key driver for our cutlery lines. Farberware, which is now the largest brand, as well as the fastest growing brand in our portfolio, continues to gain market share in just about every class of business we are in. It’s a brand that resonates well with all customers of all ages.
Moving on to tableware, here sales were down, but still higher than our internal expectations. As I mentioned, we have great expectations for tabletop in the second half of the year. Our tabletop division has done an outstanding job of developing wire storage and organization programs, to compensate for the declining space retailers have devoted to tableware products.
These continue to do well and we are expanding them into second-half of 2016. As well as growing our distribution of colorful Kim Parker ceramic tableware products.
Our flatware line of products also turns in a strong performance in the second quarter, where we’re building on a selection of giftables we introduced after our acquisition of Empire Silver in 2014. As we expected, Empire has been a great addition to our family of brands. In addition, our newly acquired Wilton Armetale brand has begun shipping and retailers are highly enthusiastic about this line of contemporary serving products.
Finally, turning to home solutions, the third and smallest category in our U.S. Wholesale segment, sales were down slightly, in part due to the slow home décor market. But we expect things to pick up in this category in the coming quarter, especially as we begin shipping the significant new program I mentioned under the BUILT NEW YORK brand.
As part of our restructuring, BUILT has been tasked with accelerating development of our hydration and food storage businesses, designed to make today’s, what we call, lifelong to go easier and more enjoyable.
Our first new hydrational offering is an outcome of that. And as I mentioned, based on the orders we have in hand, it will have a strong impact on our second-half performance. Among the most popular new products is the extra-large insulated tumbler, a double-walled vacuum-sealed cup that keeps cold-beverages cold and hot-beverages hot for several hours. So it’s perfect for road trips, camping, fishing and work.
BUILT also has been introducing new solutions for outdoor dining and lunch packing and storage for both kids and adults as they go to work, school, or the beach.
Turning now to our international segment, we reported the modest 1% increase in net sales in local currency. Despite the challenging European economy, our KitchenCraft business has been growing very nicely, well ahead of our internal expectations and it’s also solidly profitable.
As I mentioned last quarter, in addition to being strong with independents, KitchenCraft leads that market with a very robust sales at online retailers, and that has been growing double-digit. Other promising initiatives are our introduction of Fred & Friends brand into KitchenCraft earlier this year, which received an excellent response at recent tradeshows. We also believe we are well-positioned for the second-half with our [Hollywood brand, Debbie Meyer] [ph].
KitchenCraft will also begin distribution of Fred & Friends products in Continental Europe starting in 2017.
In the International arena, one overarching question is whether the Brexit referendum will have any effect on our UK subsidiaries. Their net sales account for approximately 19% of our consolidated net sales.
In the short-term, we expect any effect to be modest as Creative Tops and KitchenCraft have both hedged a portion of their anticipated U.S. dollar purchases and by selling inventory that was purchased earlier in the year at a most favorable exchange rate.
In the future, we anticipate that by relying on Lifetime’s global sourcing infrastructure Creative Tops and Kitchen Craft should be able to source products at lower cost than their small competitors. However, longer-term a prolonged decline in the value of the British pound could negatively affect the translation of financial results at the U.S. dollars.
As you know, our business is very weighted to the second-half of the year, so that seasonally more significant period for Lifetime is the second half. I’m happy to say that we currently foresee a healthy holiday shipping season, with top-line growth in the second-half as a result of the expansion of our assortment, particularly the Colourworks and BUILT products I described and increased store-count.
I’ll now turn the call over to Larry Winoker for his detailed financial review. Larry?
Thanks, Jeff. As we reported this morning, the net loss for the second quarter 2016 was $1.2 million, $0.08 per diluted share, as compared to a net loss of $1.7 million or $0.12 per diluted share in 2015 period. Adjusted net income for the quarter was $90,000 or $0.01 per share as compared to an adjusted net loss of $600,000, $0.04 per diluted share in 2015.
A table which reconciles non-GAAP measure to reported results was included in this morning’s release.
Loss from operations was $300,000 for the 2016 quarter compared to a loss of a $1 million for the 2015 period.
Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $5.2 million for the current quarter and $4.4 million for the period in 2015.
Consolidated EBITDA was $43.5 million for the 12 months ended June 30, 2016 and $44.3 million for the same period in 2015. For our U.S. wholesale segment, net sales in the 2016 quarter decreased $1.9 million or 2% to $92.7 million. The decrease reflects timelier program launches particularly for dinnerware and home décor.
U.S. Wholesale segment gross margin was 35.6% in the 2016 quarter compared to 35.5% in the 2015 quarter. This increase reflects an improvement in product margin, partially offset by the impact of product mix. U.S. Wholesale distribution expense as a percentage of sales shipped from our U.S. warehouses were 10.3% in the 2016 quarter versus 10.2% in 2015.
The increase reflects the effect of a decrease in sales shipped from warehouses, partially offset by a reduction in certain variable expenses. U.S. Wholesale SG&A expenses were $20 million in the 2016 quarter, a decline from $20.2 million in the prior year’s quarter.
For our International segment, on reported basis net sales in the 2016 quarter were $21.6 million versus $22.5 million last year. In constant currency terms, net sales in the 2016 quarter increased by 1.2%. Growth from kitchenware, e-commerce and export sales more than offset a decline in tableware sales.
International segment gross margin was $34.8 million in the 2016 quarter, compared to $32.3 million in the 2015 quarter. Gross margin increased as a result of reduction in promotional activities for the tableware business, which more than offset it sales decline and a favorable change in customer mix for kitchenware products.
International distribution expense, as a percentage of sales shipped from warehouses, were approximately 13.4% in the 2016 quarter versus 13.8% last year. The improvement reflects an increase in sales shipped from our UK warehouses.
I will continue. It’s just a fire drill, but I’ll continue anyway. International SG&A expenses were $5.3 million for the quarter of 2016 and $7.8 million in 2015. The 2015 period includes a charge of $1.5 million related to the change in fair value of contingent consideration attributable to the KitchenCraft acquisition.
The decrease in expense was also due to foreign currency transaction gains resulting from hedging activity and foreign currency translation rate changes. For our Retail Direct segment, net sales were $3.8 million in the 2016 quarter versus $3.9 million in the 2015 quarter.
Gross margin decreased 65.9% in 2016 from 68.4% last year, reflecting additional cost to reduce shipment breakage and higher royalty expense. As a percentage of net sales, Retail Direct distribution expenses were 28.9% versus 31.4% last year. The improvement reflects reduction in shipping expenses from fewer product breakage replacements.
Retail Direct SG&A expenses were $1.3 million as compared to $1.8 million last year. The decrease in expense was due to a headcount reduction and also reduction in selling expenses. With respect to non-segment items, unallocated corporate expenses were $3.2 million in the 2016 period versus $2.2 million last year. The increase in 2016 was primarily due to acquisition related expenses, whereas the 2015 period included reimbursement of expenses for an acquisition not completed.
Interest expense declined to $1.1 million in 2016 from $1.5 million last year, as average borrowings decreased and the average borrowing rate decreased due to term loan repayments. The effective tax rate for the quarter was 28.1% compared to 29.3% last year. The low effective tax rate benefit for 2016 was due to capitalized acquisition cost, partially offset by lower taxes outside the U.S.
Equity in earnings was insignificant for the 2016 and 2015 quarters. The 2016 quarter, a $200,000 gain on the sale of the investment in GSI was offset by an equity loss of Grupo Vasconia.
Grupo Vasconia reported income from operations of $2.1 million in the current quarter versus $3.9 million last year. The 2016 results primarily reflect the decline in the aluminum division’s result.
At June 30, 2016 leverage ratio was 2.8 times and our liquidity was approximately $58 million. Looking at the balance of 2016, we currently project full-year sales to grow approximately 3%, excluding foreign currency impact. Based upon this expected sales volume, gross margin and distribution as a percentage of sales should be in line with 2015 with a modest improvement in the SG&A expenses.
This concludes our prepared comments. Operator, please open the line for questions.
[Operator Instructions] And our first question comes from Frank Camma of Sidoti. Your line is now open.
Good morning, guys.
Good morning, Frank.
Hey, what kind of feedback are you getting from the retailers? You said you’re expecting pretty healthy holiday season, so you must be obviously you’re going to get - sounds like you’re getting get orders there. And I was just wondering if you can comment on that.
Yes, it’s - no, it’s true. We have - looking at our order flow and looking at our projections, we are very confident on the second-half of the year, as I mentioned. In general, things are okay. The brick-and-mortar retailers are certainly having some of the tough time. It’s compensated for - by the shift that both they have and by the pure online retailers growing.
And we’re gaining share on the online part of it. So we’re quite happy about that. But in general, I would say, retail is robust by any means. But we’re still expecting to have a good second-half, really good second-half.
Okay. And there - I mean, correct me, if I’m wrong, but their inventory levels are obviously pretty in check. I mean, you wouldn’t expect them to be heavy on any of these categories. So I would expect with over the last couple of years they have been pretty conservative with their levels, is that still true?
Yes, retailers are certainly conservative within inventory levels and that hasn’t changed. But they certainly expect suppliers like Lifetime to be able to ship basically next day. And we do. We’ve learnt how to do it the right way. We’ve done it without increasing our inventories of anything. We’ve been decreasing our inventories by better management. And frankly, the consulting firm that we’ve worked with has given us the tools and the ability to significantly reduce inventories and more going forward over the next couple of years, without affecting our business and we certainly could make use of those tools.
Okay. And just comment on the - because you mentioned the millennials obviously growing here as a portion, which is important. And housing numbers are, obviously, actually pretty good. So ultimately that’s got to help you as well, right, as housing formation, assuming rate stay low. That’s got to help housewares in general. Isn’t that inconsistent with what you’ve seen in the past?
Yes, historically as new household formations increase our business and interest of our industry increases as well. And as you also know, millennials up to now have not been moving out of their parents’ homes. So that’s been a negative over the last couple of years for us.
But they will start breaking up, obviously, and we see it by the kind of products that have been bought now. They have been projected to be a big force as consumers over time. And I think we’re finally seeing that start, so I think we are kind of enthused, not only for this year, but really into 2017, 2018 there should be some significant increases in new household formations and that should certainly be beneficial.
Good. And my last question just on the - obviously, part of your plan, I actually don’t know that how big your plan is on SKU rationalization. But how much if you look at it, I’m just talking longer-term not in the near-term, but as you take out the SKUs, how much will that kind of negatively impact your ability for revenue growth, because obviously you’re going to be taking some out? I was just wondering if you can comment on that.
We don’t expect it to negatively impact growth at all. It’s largely just that having the right tools put in place to be able to not overlap with SKUs that are not necessary. I mean, you have to be - this whole thing obviously has to be very carefully and we recognize that and we will do it.
But I’d say, as a very quick example, if we have a kitchen tool and gadget program at a retailer that’s only in the south, and we have a program of kitchen tools and gadgets at a retailer that’s only in the north, there is no reason why they can’t have the same program with maybe some slight tweaks; in the past, where that they have different programs.
So we’re not doing that going forward. We’re being more insistent on one program. And so far, there has been no negative out there from the retailers on doing that. They recognize that it will be easier for us to maintain inventories properly for them. And also there’s cost savings involved, because if we buy one item in bigger quantity, it’s better for the manufacturer and we get a better cost.
So we pass some of that on to the retailer. So it’s really all positive. We’re not looking to lock out [ph] part of our business or SKUs there, just because they’re a little bit unprofitable, because we’ve always believe in all of our SKUs being profitable. That’s not the case, it’s just swapping off the SKUs that we don’t need frankly.
Okay. Great, thanks guys.
Thank you. [Operator Instructions] And I’m showing no further questions at this time, I would like to turn the conference back over to Mr. Siegel for closing remarks.
Thanks everyone for joining us today. And as you’ve heard, we have a lot of plans and product offerings underway to make the second-half of the year a really good one, as well as to position ourselves really well for 2017 and going forward. Enjoy the rest of the summer and we look forward to giving you an update in three months. Thank you.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day, everyone.
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