Good day, and welcome to Xcel Brands’ Third Quarter Earnings Conference Call. Please be advised that reproduction of this call in whole or in part is not permitted without prior written authorization of Xcel Brands. And as a reminder, this conference call is being recorded. I would now like to turn the call over to Andrew Berger of SM Berger & Company. Thank you. Andrew, you may now begin.

Good morning, everyone, and thank you for joining us, and welcome to the Xcel Brands third quarter 2022 earnings call. We greatly appreciate your participation and interest. With us on the call today are Chairman and Chief Executive Officer, Robert D’Loren; Chief Financial Officer, Jim Haran; and Executive Vice President of Business Development and Treasury, Seth Burroughs. By now, everyone should have had access to the earnings release for the third quarter ended September 30, 2022, and which went out last evening. And in addition, the company filed with the Securities and Exchange Commission its quarterly report on Form 10-Q yesterday, November 14. The release and the quarterly report are available on the company’s website at www.xcelbrands.com. This call is being webcast, and a replay will be available on the company’s Investor Relations website. Before we begin, please keep in mind that this call will contain forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from certain expectations discussed here today. These risk factors are explained in detail in the company’s most recent annual report filed with the SEC. Xcel does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The dynamic nature of the current macroeconomic and geopolitical environment means what is set on today’s call could change materially at any time. Finally, please note that on today’s call, management will refer to certain non-GAAP financial measures, including non-GAAP net income, non-GAAP diluted earnings per share and adjusted EBITDA. Our management uses these non-GAAP metrics as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the company’s results of operations.…

Thanks, Bob, and good morning, everyone. I will briefly discuss our financial results for the quarter and nine months ended September 30, 2022. Total revenue for the third quarter was $4.5 million, representing a decrease of approximately $6.8 million from the prior year quarter. For the current nine months, total revenue decreased approximately $8.1 million from the prior year period to $17.2 million. These revenue declines were driven by declines in both net licensing revenues and net sales. Net licensing revenue for the current quarter was approximately $2.2 million, representing a decrease of approximately $4.7 million or 68% as compared with the prior year quarter. This decrease in licensing revenue was primarily attributable to the May 31, 2022, sale of a majority interest in the Isacc Mizrahi brand. Net licensing revenue for the current nine months decreased by approximately $8.1 million to $21.7 million or 27% as compared with the prior year period. This decrease in licensing revenue was primarily attributable to the sale of the Isacc Mizrahi brand, partially offset by licensing revenue generated from the Lori Goldstein brand during the entire nine months in 2022. Sales decreased by approximately $2.1 million in the current quarter and $4 million for the nine months ended September 30, 2022, which is 47% and 32%, lower, respectively, as compared with the prior year comparable period. These decreases were primarily attributable to declines in wholesale apparel revenue, which early in the year were driven by a combination of discounts on seasoned inventory and canceled orders caused by temporary closing of overseas factories and, more recently, are being driven by reduced or paused orders from retailers due to industry-wide excess inventory levels. Gross profit margin from product sales increased slightly from 35% in the third quarter of 2021 to 37% in the current quarter.…

[Operator Instructions] Your first question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

Good morning gentlemen. Thank for taking the question. So first, just some questions about the third quarter. So just curious, as far as the 3Q performance. So were there any notable changes to the business as the quarter progressed? Or was it fairly consistent month-to-month? Robert D’Loren: I would say, Anthony – it’s Bob, that the quarter was exactly as we thought would turn out. That we’re – there were some canceled sales in our wholesale business, which we did anticipate coming into the current inventory situation that exists with most retailers. But for the most part, the quarter shaped up exactly the way we thought it would. When we sold the Isaac brand or the 70% interest in Isaac, we anticipated losses until we brought online the five or six new initiatives we have in the pipeline, three of which, of course, we have announced. And the first launch of the new initiatives will be – well, Q-Optics has already launched on both networks, and C. Wonder launches in March 2023. And then that will be followed by the whole new Halston, Ken Downing line. Ken has been very busy working with the creative teams involved with Halston. And he’s had some very successful shows at HSN. And we expect that we’ll be making more announcements over the next 90 to 120 days that will fill out the roster that we were planning to bring into the business in 2023.

Got it. Okay. Yes. Thanks for that Bob. And then as far as the gross margin percentage, it was good to see that being up versus last year and certainly up versus the second quarter. So what would you attribute that to? Robert D’Loren: I would say the sourcing team did a very good job here and we did manage inventory very, very tight. So I think that’s a good piece of it. Going forward into 2023, we will bring the warehouse in Mexico online. That’s going to help significantly with cost both from a logistics perspective as well as a duty perspective. So we’re excited to get that warehouse up and running.

Okay. And what’s the timing of the Mexico warehouse opening? Robert D’Loren: It’s – we are testing now shipments this month. We’re fully integrated into the warehouse. We are moving goods from our 3PL in Los Angeles to the 3PL in Mexico. So by year-end, we should be fully operational there.

Got it. Okay. That’s good to hear. And then – so right now, you’re sort of midway through the fourth quarter. Can you share with us, just kind of broadly speaking, what are you seeing so far from a demand perspective for apparel, jewelry trends? And then any sort of – and comments also on Longaberger, what you’re seeing there? Robert D’Loren: Yes. So I’ll answer the apparel question first. Most retailers are backed up with inventory. I think many retailers and a lot of wholesalers, because of the supply chain problems that we’ve all been experiencing since the beginning of COVID, got a little ahead of inventory because it was difficult to buy it in 2020 and 2021. And now most retailers are over-inventoried. And we’re starting to see that in headlines as recent as today in the Wall Street Journal that retailers are discounting significantly to move that inventory. I do believe that, it will take a good part of Q1 and Q2 for all of that inventory to flush itself out and for everyone to get back to normal operating levels with inventory. So we expect that wholesale demand will be a little soft in the department store channels in Q1 and Q2, and then we’ll see that return to more normal levels of buying in Q3 and Q4. Our interactive television business is less sensitive to that. There are by commitments in place with HSN on the new programs that we’re launching, and we’re on track with that business.

Got it. Okay. And then that business a year ago was certainly hurt severely by the QVC warehouse fire, so I guess you have, in theory, an easier comparison, right? Robert D’Loren: Yes. I don’t think most people fully understand the implications of that fire and the impact on QVC and curate in general. It’s – they didn’t really have the capacity in their other warehouses. It’s not so easy to just switch to a 3PL. It doesn’t happen overnight. And I do think QVC did an amazing job of navigating through a very difficult situation.

Got it. Okay. Well, thanks and best of luck for the holiday season. Robert D’Loren: Thank you, Anthony.

Your next question comes from the line of Debra Fiakas with Crystal Equity Research.

Good morning and thank you for taking my questions. I was hoping to return to the gross margin discussion. Just one additional – just a follow-up. Would we perhaps see an impact in the December quarter from your Mexico operations and the benefits thereof? Or would it perhaps really not be visible until the first quarter in 2023? Robert D’Loren: So you won’t see it, Debra, until first quarter. When we brought those goods into the U.S. into the LA 3PL, we paid the duty. We’re moving goods down to Mexico now really just to run test. And just be sure by January, everything is running efficiently. And then go forward next year, goods will arrive in port in LA and will be trucked from LA bonded to Mexico and then shipped direct to consumer for the duty savings.

Thank you. And then another question. I appreciate you perhaps don’t want to provide dollar figures or number figures, but I was hoping you might provide a little bit more color on the launch of the optical product, at least perhaps tell us whether or not it’s tracking your expectations and your plans in the early days of the introduction. Robert D’Loren: So I would say on both networks, they were soft launches, and there were a lot of back-end pieces to it that had to be debugged, so to speak, and it’s operating efficiently. Heading into the New Year. I do believe QVC will begin and HSN will begin to market more aggressively the program. The program really brings to QVC and HSN eyewear brands that they previously did not offer their customer base. So we are very optimistic that, over the coming years, this will develop into a strong business for us.

Thank you. And then I also wanted to ask about the two newest additions to your roster of personalities and designers. Ken Downing already got into the – just jumped right in. Will we see the same thing with Christian Siriano? Or will we have to wait until spring of 2023 before we see him on air? Robert D’Loren: So Christian’s first show is scheduled for March of 2023. The goods are – we expect goods to land in the warehouse early January. So first show will be toward the end of March. And is it possible that we may do some type of marketing before? Absolutely. I think Christian will become very visible as the face and the Creative Director of C. Wonder when we start the new year.

Very good. And then just last question, it has to do with – it’s more of a shopping question really. You’ve talked about putting together a multi-brand site. And I just wanted to know, technically speaking or just a description of how shoppers will navigate or if they can navigate, between the QVC platform and HSN, two Xcel Brands site where you’re going to allow direct-to-consumer sales to take place? How would they interact – how is the interaction going to be crafted? Robert D’Loren: Well, first and foremost, there are collection differences, generally speaking. If you look at our Judith Ripka brand, we have a significant presence on QVC with Judith. The product is not the same as the Judith Ripka brand, which is sold through direct-to-consumer channels, wholesale channels as well as live streaming. So it’s going to be a similar strategy. There will be some overlap in product. And we don’t view this any different than, say, Michael Kors being available on michaelkors.com and being there virtually every department store America.

Okay. Thank you very much. That was all very helpful. Robert D’Loren: Thank you.

[Operator Instructions] Your next question comes from the line of Marc Lunder with Lunder Capital.

Good morning. Thanks for taking the question. Where sales have always been kind of a next year type situation, can you talk a little bit and give some more specifics about what you’re going to do to kind of bridge us to there as far as compensation and SG&A, reducing those, both of those? Robert D’Loren: Sure. So we have a plan in place Marc, to reduce overhead by $2.5 million, maybe more by year-end, and there will be some announcements soon about more specifically how we’re going to do that. And we believe those reductions in costs will right size the business. The challenge for us Marc is we built a significant platform for our wholesale apparel and jewelry business, and literally launched that in December of 2019, and then were hit with COVID in March of 2020. And it has been challenging at best to navigate through having onboarded all of those people, launching a business, making supply commitments to various retailers to only have to deal with COVID. So we have been working on rightsizing the overhead. So that now in 2023, when we think things really get back to normal, we can return the company to growth and profitability.

And do you have a – what kind of growth you’re looking to do? I mean it’s been a number of years where we’ve been looking for growth and profitability, I’m just wondering if you have some measurable objectives that you guys are shooting for that investors can say, okay, they’re meeting their objectives or they’re not. Robert D’Loren: We do. There is analyst guidance out there as we think they’re looking at the business appropriately in terms of how we believe the business will grow. And a lot of that growth will come from us returning back to our core business in interactive TV with both HSN and QVC. And QVC is doing a great job navigating through this and some of the micro challenges they had with their warehouse fire, and we would anticipate that going into the second half of the year, QVC will work through their inventory issues. Certainly, work through their warehousing issues. And with all the new launches that we anticipate, we think that we’ll come out of all of the effects of COVID nicely and continue to grow the company.

Thank you. Robert D’Loren: Thank you, Marc.

And at this time, there are no further questions. I’ll turn the call back to the speakers for any closing remarks. Robert D’Loren: Ladies and gentlemen, thank you for your time this morning. We greatly appreciate your continued interest and support in Xcel Brands. As always, and more than ever, stay fit, eat well and be healthy.

This concludes today’s conference call. Thank you for participating. You may disconnect your lines.