iMedia Brands, Inc. (NASDAQ:IMBI) Q1 2022 Earnings Conference Call May 24, 2022 8:30 AM ET
Tom Zielecki - Senior Vice President & Chief Financial Officer
Tim Peterman - Chief Executive Officer
Conference Call Participants
Tom Forte - D.A. Davidson
Mark Argento - Lake Street Capital Markets
Alex Fuhrman - Craig-Hallum Capital Group
Greetings and welcome to the iMedia Brands First Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Tom Zielecki, Senior Vice President and Chief Financial Officer for iMedia Brands. Thank you. You may begin.
Good morning, everyone and thank you for joining. We issued our Q1 earnings release earlier this morning. If you do not have a copy, you may access it through the News section of our IR website at imediabrands.com. This release is also an exhibit to the Form 8-K filed this morning. A webcast replay of the call will be available via the link provided in today's press release as well as on the IR section of our website.
Some of these statements made during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update or revise these forward-looking statements. We believe the expectations reflected in our forward-looking statements are reasonable but give no assurance such expectations or any of our forward-looking statements will prove to be correct. For additional information, please refer to the safe harbor statement in today's earnings release and our SEC filings. Finally, we will make references to non-GAAP measures on this call, such as adjusted EBITDA. Please refer to our earnings release for further information about these measures, including reconciliations to the most comparable GAAP measures.
Now I would like to turn the call over to the CEO of iMedia Brands, Tim Peterman. Tim?
Thank you, Tom and good morning, everyone. We are on plan and off to a good start this year. Within our media commerce services segment, our digital advertising services flagship business, iMedia Digital Services or iMDS, performed better than we expected and remains on track to grow its 2022 revenue by at least 50% compared to 2021.
More importantly, we continue to see progress with attracting new clients and renewing existing clients for our digital services. In fact, a few weeks ago, we signed a new multiyear renewal agreement with Lumen Technologies. As many of you know, Lumen is a $19 billion plus leading U.S.-based Internet service provider, providing network edge cloud, security, communication and collaboration solutions that support businesses and consumers with one of the fastest and most secure platforms for next-generation apps and data.
iMDS' value-added solutions will be providing Lumen with a fully managed web portal containing highly engaging content, support and communication services, e-commerce shopping experiences and digital advertising solutions. iMDS will aid Lumen in retaining, scaling and monetizing their users through innovative content and advertising solutions on desktop and mobile web platforms.
Within our Consumer Brands segment, our omnichannel flagship brand, Christopher & Banks, also performed better than expected and remains on track to grow its revenues by at least 50% in 2022 compared to 2021. In addition, as part of our Consumer Brands operating segment, I'd like to report that our development plans to launch our new 1-2-3.tv travel website here in the U.S. continues to progress on track with an estimated launch date in Q3 2022. Within our Entertainment segment, our flagship networks, ShopHQ and 1-2-3.tv performed a bit below expectations in the first quarter related to what we believe our ongoing consumer concerns about the economy.
All those highlights being said, I would like to note that our ability to deliver consolidated company growth in times like these centers on our unique business strategy, designed to grow 4 separate revenue streams, namely t-commerce, e-commerce, advertising and business-to-business services, each focused on the same boomer customer demographic which, in turn, enables us to cross-promote and share data. These 4 revenue streams monetize our delivery of compelling interactive entertainment to consumers on all engagement platforms, including linear television, over-the-top television online, social, catalog and physical stores.
In short, this recent evolution of our business model to capture multiple revenue streams gives us an advantage we have not had historically. We now have the potential to traverse headwinds that may arise in one revenue stream like logistic costs in t-commerce and e-commerce while we capture opportunities that may arise in another revenue stream like first-party data and digital advertising.
I would like to now talk a bit about our balance sheet and provide some additional insight regarding our 2022 and 2023 debt service and working capital plan and how our recent equity raise fits within this plan. Our strategy is designed to reduce our interest expense and reduce our net senior debt leverage ratio over time in a methodical fashion. For 2022, our plan centers on increasing our levels of cash generated from inventory optimization, profitability growth and our just completed equity raise.
More specifically, for fiscal years 2022 and 2023, we're targeting to reduce our senior debt by 10% to 15% each year which will reduce our net senior debt leverage ratio from a 3-plus as of Q1 to about 2.5 at the end of 2022 and then to about 2.0 by the end of 2023. Specifically, for fiscal 2022, this means a debt reduction of approximately $20 million to $30 million by the end of the year generated by the following: number one, increased profitability at ShopHQ in Q3 and Q4, driven by an approximate $20 million reduction in ShopHQ operating expenses, primarily driven by the reduction in negotiated television distribution expense and the reduction of other operating expenses.
Number two, reduced inventory levels at ShopHQ, 1-2-3.tv and Christopher & Banks in Q2, Q3 and Q4 of this year. In 2021, we intentionally increased our inventory level by $23 million year-over-year to ensure logistic delays did not impact our ability to deliver to our customers and also to get ahead of price increases taken by our suppliers. In 2022, our plan is to bring that inventory level back down by about $12 million to $15 million by the end of the fiscal year. Number three, the equity raise we just completed will provide about $22 million in additional cash to strengthen our working capital and reduce our debt. Four, during May, we renegotiated our short-term seller note payable from $14.5 million to $7 million which reduces our 2022 debt service requirement. The other $7.5 million will be payable in Q1 2023.
I would like to also note that in 2021, we incurred roughly $9 million in onetime expenses related to our 2021 financings and acquisitions which we do not expect to occur again in 2022. For fiscal 2023, our plan is to fund our debt reduction with the additional cash generated from ShopHQ's planned increased profitability and normal working capital management.
Regarding the timing of our recently completed equity raise, this was a judgment call we made based on our belief that the global and U.S. economy will not improve and may even worsen throughout the remainder of 2022. We see all of the same indicators as you do. The S&P 500 is performing at its lowest year-to-date levels since 1939. U.S. monetary policy continues to drive significant inflation and rising mortgage rates. Russia's invasion of Ukraine and the associated economic sanctions continue to create macroeconomic global uncertainty. China's increased COVID-related lockdowns continue to exacerbate already challenging global supply chain issues.
The University of Michigan's May consumer sentiment report indicated the U.S. consumers assessment of their current financial situation relative to a year ago is at its lowest reading since 2013. And consumers' assessment of the buying conditions for durables reached its lowest level since 1978. In addition, we believe we will likely see additional market volatility this fall driven by the midterm U.S. elections. We recognize dilution is always a sensitive subject and one we do not take lightly. In this instance, we believe the achievement of our 2022 and 2023 goals explained in more detail today will accelerate our per share growth and more than absorb the short-term dilutive effect of this raise.
Before I turn it over to Tom, who will provide more detail regarding our Q1 performance and outlook for the remainder of 2022, I would like to provide a brief introduction of Tom. I met Tom in 2018 when I hired him as my CFO for a direct-to-consumer business, I operated in Chicago. I know him, I trust his judgment and I appreciate his pace. He has already relocated himself and his family here to Minneapolis from Chicago. He has already added new finance and accounting talent to our team and I am confident he will help us tackle the complexities of a rapidly growing company and help us capture the new opportunities we see for the future.
Tom, welcome to the jungle.
Thanks, Tim and good morning, everyone. I would like to start with a few words about why I relocated here and why I'm excited to join this journey at iMedia Brands.
First, I will say that I love Tim's mantra that a company's success requires 3 ingredients, an entrepreneurial culture, operating discipline and grid. I've seen firsthand how this mantra builds shareholder value, I have also seen how companies fail because they were missing one or all of these. Second, the business strategy here is compelling. I like how we can cross-promote and share data to drive 4 separate revenue streams focused on the same boomer demographic.
To me, it's exciting to join an organization at the beginning of what I believe is a meaningful run. There are many things that a CFO focuses on each day but I want to share with investors today what my immediate top 2 priorities are: one, help ensure the operational disciplines are in place to deliver our targets to our shareholders, to our vendors, to our employees and to our lenders, both near term and long term; two, ensure we continually strengthen our balance sheet, through proactive treasury management, including working capital, debt service, capital allocation and expense optimization.
Regarding the Q1 financial results, as Tim mentioned, we are pleased to report that we are off to a good start. I'd like to hit a few highlights that Tim did I cover. Gross margin is 39.7%, a 96 basis point decrease versus the prior year. The rate is impacted by sales mix. 1-2-3.tv and iMDS, have historically lower gross margin rates than ShopHQ. For 1-2-3.tv, we are taking actions to improve the margin rate, increased ASP, including testing the strongest ShopHQ brands and products on 1-2-3.tv.
The 12-month customer file increased 48% which was driven by solid performances at ShopHQ, great performance at Christopher & Banks and the addition of 1-2-3.tv's customer counts. Regarding our outlook for the second quarter 2022, we anticipate reporting net sales of approximately $158 million which is approximately 40% growth over the same prior year period. We anticipate reporting adjusted EBITDA of approximately $10 million which is approximately a 12% increase over the same prior year period.
For the full year, 2022, we reiterate our previously reported 2022 guidance. We anticipate reporting revenue of approximately $675 million to $725 million, adjusted EBITDA of approximately $50 million to $60 million and we anticipate reporting positive quarterly earnings per share beginning in the back half of 2022, specifically in the fourth quarter. As a reminder, from a tax perspective, we have approximately $389 million in federal NOLs that are available to us to offset future taxable income.
Thank you for your time this morning. Tim and I are now pleased to take any questions.
[Operator Instructions] Our first question comes from the line of Tom Forte with D.A. Davidson.
Great. So I have one question and one follow-up. So the first question I have is, can you in 3 short snappy bullets explain why you're retaining your full year guidance, given the laundry list of challenges you've highlighted that have emerged after you gave your original outlook, including the economic challenges, inflation, Ukraine-Russia conflict, etcetera?
Thanks, Tom. Certainly, the -- as you think about the challenges that I talked about and all of them, we talked about in Q4 as well and at our Capital Markets Day. The resiliency of our approach with these 4 different revenue streams, each focused on the same consumer demographic allows us to have a little bit more elasticity when there is a challenge in one particular area versus the other. So as you think about our Q1, certainly, iMDS, overperformed our advertising, digital advertising business, Christopher & Banks overperformed against our expectations. Yet 1-2-3 and ShopHQ later in the quarter started to see pressure just from consumer distraction. So we already thought about what might be surprises in 2022 related to all these factors when we put out our initial guidance last Christmas season, then it reiterated it again.
So the $675 million to $725 million, we still feel good about. We still feel good about the margins and the EBITDA that we put out there. We think about all these things before we put it out. So we're we anticipate some surprises. We also have some surprises on the other side of that, meaning there are businesses like our 1-2-3 travel that we're launching later in the fall that aren't even in our forecast. So those are also things that move in the other direction as we seek to again meet expectations and achieve our guidance. I'm pretty sure that was -- I tried to be as brief as I could there.
I appreciate it. So for my follow-up question, you talked about your current financial structure and some of the targets you're aiming for. Can you give your current thoughts on the construction of your portfolio and where you are today on considering additional strategic M&A.
Great question, Tom. So think about it this way. As we talked about before, we have 4 catalysts, 1-2-3.tv, ShopHQ, Christopher & Banks, iMDS. Those are the 4 catalysts driving our growth that make us bullish about achieving the targets we laid out on our Capital Markets Day. From a balance sheet perspective, we've talked about the need for a debt reduction in that $20 million to $30 million range. We've been talking about that for 4, 5, 6 months. And so I wanted to make sure I spend the time on this call laying out exactly what that meant to give people the more understanding of why we did our equity was raised today and why it's the only equity raise that we are anticipating because we don't need to do any more M&A in that regard, certainly not in 2022 or 2023.
What we need to do is exactly how we described it, execute, digest the assets that we have, strengthen our balance sheet and most importantly, deliver positive EPS in Q4 which hasn't been done in 20-plus years, although it was done in 2017, it hasn't been done since then. So very important that we achieve those things which we think will only accelerate our per share growth. We don't see any type of M&A activity driven by equity in our future right now. It's all about execution.
Our next question comes from the line of Mark Argento with Lake Street Capital Markets.
Tom, just a couple of quick ones. Obviously, inflation really beaten up on the traditional retail guys. I'm assuming your pricing model as you'd be a little more dynamic in terms of pricing and not getting pinched on the margin. Maybe talk a little bit about that? And then just also, I know you mentioned I believe that you were able to renegotiate the seller note. And I just wanted to understand if that was directly related to the performance of 1-2-3.tv.
Yes. So certainly, the retail environment and even competitors within our space have been reporting earnings that are certainly headwinds from a capital market's perspective and what folks think will continue to do. But in our case, on our journey, our gross margins have been -- were fixed back in 2020 with a discipline around minimum floors, IMUs and just a real process to how we do it. That's why we were able to deliver the gross margins that we did and the revenue that we talked about and provided as guidance.
Other types of businesses have other pressures, right? So a lot of times, folks are not nimble enough to adjust their receipts quickly enough. So what they have to do is they have to burn through the inventory at much lower margins in order to make room for the new inventory. Ours is -- our model is a little bit more nimble. We have a few long lead businesses but a lot of our businesses are shortly. Beauty, jewelry, watches, they are not as dynamic and cost as much 9 months out to where you're committed. So that flexibility on our merchandising mix also gives us the ability to maintain margin better than some of the retailers that you see out there.
In terms of the renegotiation of the seller note, no, it doesn't have anything to do with 1-2-3.tv's performance. We have the seller as well as us, we're very pleased with in the direction we're going. This just has to do with just normal blocking and tackling. We've been talking to them about it for quite some time and finally came to terms with what we were going to do. I think that what it speaks to is really the flexibility of the partners that we have from a lender perspective, from a vendor perspective. We built strong relationships here because we're all in this journey together and everybody is focused and aligned on similar goals. So it's very easy to move and pivot as the market dictates.
[Operator Instructions] Our next question comes from the line of Alex Fuhrman with Craig-Hallum Capital Group.
Tim, I was wondering if you can tell us a little bit about the pipeline of new brands that you have for the back half of the year heading into the holiday season. You guys have done a great job launching new brands over the last couple of years with everything going on with the supply chain and just consumer spending, wondering if you continue to have strong availability of new brands and if there are any particular category that it looks like you're going to be highlighting for the holidays this year?
Sure thing, Alex. Thanks for the question. When we talked about this several years ago, when we were launching 100-plus brands every -- every year in order to put our customer growth back on the positive, order to drive revenue, order to drive our programming calendar. The key difference of how we did it since 2019, certainly in 2020 versus our history was that we worked with our existing vendors to develop white space that we see on our calendar. And as a result, we became more important to our existing vendors and we were able to launch more new brands as a result that fit the customer need. That's a big change from where we used to do it where we would just try to capture an outside third-party brand.
And as you saw over the years, ShopHQ became a testing ground where they would trade up and try to move to a bigger network, where we have not actually lost any of our key brands in these last 4 years, 3 years and we've actually gotten some back that have left. So because they want to be part of an organization where we believe every vendor we bring in, it's our priority to grow their brand, to grow their product mix and to brainstorm about what other capabilities they have and what other brands, can they create that we have white space for. So when you think about this fall, we have all sorts of brands in the core categories that we are -- what we think we're best at which is the wearable categories. But what we're not going to do and we haven't done since its launch new brands, just to launch new brands. I call it the one and done or the two and out which is often a historical pattern we did, too, where we wouldn't give something to enough time to mature. So we're being very thoughtful about this fall.
When we bring a brand on, we want to make sure we put enough wood behind the arrow to make sure it has a realistic chance to evolve into a reoccurring business. And so that's our big focus for this fall. You'll hear more from us on these new brands as they launch. I haven't really provided any of that color yet but we will be in the coming months.
Okay. That's really helpful. And then if I could ask one on Christopher & Banks. It seems like that has been a really strong performer for you. How do you think about the next couple of years? I mean, obviously, really strong growth for that brand this year. I mean is there an opportunity to kind of rebuild Christopher & Banks back closer to its sales volume historically but with more of a TV presence than brick and mortar? I mean, just wondering how big you think this brand can get back to over the next few years?
Sure thing, Alex, it is 1 of our 4 main catalysts. So let's set the table. Christopher & Banks was a $300 million retailer that tipped over at the beginning of last year, primarily because of its business model, right? And this business model was driven by 350-plus retail stores at brick-and-mortar experience. Now that business model is not something we believe in. Our business model is driven by television, whether that's television, linear television, OTT television but that experience of getting in your home every day is what we believe. So it's not that we don't believe in physical stores. We do. It's just the driver is this television, this video, this experience, personal experience that you have.
So think about that and then let's talk about the tale of the tape which is last year, we relaunched with that strategy in March, April from a standing stop and produced $40 million in revenue last year, profitable revenue, very exciting, capturing back a lot of our existing customers and to complement that television, we did actually reopened 5 of the Christopher & Banks stores last fall, you have Coon Rapids in Minnesota; Fort Wayne, Indiana; Greensburg, Pennsylvania; Branson, Missouri; Canton, Ohio. All of those were strong performing stores that we reopened to make sure that we have that complement to our business model. But remember, the reason Christopher & Banks, the reason we acquired it and the reason we believe in it is it has a very strong reason for being everything from the sizing to its proprietary fabrics and its core customer is the same as our core customer. So we can use all of our media assets to cross-promote with it, share data to make sure we're having as high conversion as we can.
So as you look at 2022, we talked about us growing it by 50%. We talked about $60 million in 2022 and then we talked about how it would grow from there. If you think about how our ambitions are and what we have in our guidance, we have a -- in our guidance, we have it growing from the 40% to 60% range. And that includes possibly opening some retail stores in the fall again but not a lot and it's not a requirement but we are exploring maybe opening 2 or 3, 4 more retail stores, again, as a complement. So when you think about overall over the next 2 to 3 years, we are bullish on the brand. We think we can get back the entire $300 million that they were doing before they tipped over at the beginning of last year. And we think that our model of driving it through television and digital media will replace the physical stores and make the brand just as important to the customer and more profitable for our shareholders.
Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Peterman for any final comments.
I would just like to thank everybody for the time this morning and I look forward to sharing our results for Q2 soon.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.