Lifetime Brands Inc

NASDAQ:LCUT

Earnings Call Analysis

Company Exceeds Expectations, Plans Growth

Despite the uncertain market, the company outperformed expectations and believes there is clarity for future growth. With strong cash flow and balance sheet, they are undervalued by their own admission. A significant partnership with Dollar General positions them in over 20,000 stores, impacting revenue, notably in 2024, with further potential in 2025.

Company's Financial Health & Inventory Strategy

The company takes pride in its robust financial profile, boasting a strong free cash flow and a solid balance sheet. Purposeful investment in inventory during recent, less robust market conditions has paid off significantly. Not only was the company able to maintain or even improve margins while drawing down inventory levels, but they also put themselves in a position to repay a substantial $100 million term loan in 2023. While there's still capacity to further slim down inventory, particularly internationally, the company adeptly navigated retail trends, where retailers leaned more on vendors like them for replenishment inventory—this strategic move has been advantageous and can further improve inventory turnover.

Market Performance and Product Launches

The company's performance in Q4 outstripped their revised upward guidance, leaving management positively surprised by the market's resilience. This dovetails with their strategic product launches, which they expect to garner substantial market share, though overall visibility remains cautious, particularly concerning international markets. A major product launch at Dollar General—with a reach to ALL its stores, increasing to an anticipated 23,000 outlets, is expected to significantly impact revenue, with much of this growth forecasted for 2024.

Competitive Positioning in the Market

In the dynamic hydration segment, where the 'Stanley craze' dominates, the company is investing in advertising and product development to assert its presence, particularly with its Swell and Built brands. By rejuvenating these brands and pushing them more aggressively in e-commerce and social media platforms, the company is poised to reinforce its stake in this competitive yet growing product category.

Long Term Growth Prospects and Valuation

Despite recent success, the company believes its stock remains 'tremendously undervalued'. They expect the international business and especially the Mikasa Hospitality line, despite prior delays, to contribute to an extended period of growth, as they see the business entering a phase where strong traction in 2023 will yield tangible results in 2024 and beyond. The nature of the hospitality business suggests a promising annuity-like income going forward. Additionally, strategic M&A opportunities are on the horizon, with management maintaining a disciplined approach to potentially capitalize on these as they present themselves.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Lifetime Brands Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions].

I would now like to introduce your host for today's conference, T.J. O'Sullivan. Mr. O'Sullivan, you may begin.

[Unknown Executive]

Thank you. Good morning, and thank you for joining Lifetime Brands Fourth Quarter and Full Year 2023 Earnings Call. With us today from management are Rob Kay, Chief Executive Officer; and Larry Winoker, Chief Financial Officer.

Before we begin the call, I'd like to remind you that our remarks this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the safe harbor protection from liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and factors that could influence our results are highlighted in today's press release and other factors are contained in our filings with the Securities and Exchange Commission.

Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update such statements. Our remarks this morning and in today's press release also contain non-GAAP financial measures within the meaning of Regulation G. promulgated by the Securities and Exchange Commission.

Included in such release is a reconciliation of these non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP.

With that introduction, I'd like to turn the call over to Rob Kay. Please go ahead, Rob.

[Robert Kay, executive]

Thank you, T.J. Good morning, everyone, and thank you for joining us today. We had a strong fourth quarter, delivering results that helped us to meet or exceed net sales, income from operations and adjusted EBITDA targets from the revised full year guidance metrics we provided last quarter as well as analyst estimates. We are pleased with the strong net sales growth we are driving across categories, especially in our e-commerce channel, which continues to gain share. And coupled with our continued focus on driving efficiencies across the business, this outperformance translated to meaningful operating income growth that we expect will continue in 2024.

To start, I'd like to walk you through our fourth quarter and full year results at a high level. In the fourth quarter, we delivered $203.1 million in net sales and $21.5 million in adjusted EBITDA compared to $207 million in net sales and $19.7 million in adjusted EBITDA in the prior year period. For the full year, we generated $57.3 million in adjusted EBITDA compared to $58.2 million in 2022, coming in ahead of our internal estimates thanks to diligent expense management and a focus on incremental revenue opportunities throughout the year.

Of note, our performance was notwithstanding $3.6 million of onetime charges in 2023. We have been encouraged by the improving supply chain environment in recent quarters and experienced no disruptions in the fourth quarter. Though we are monitoring potential issues stemming from ongoing geopolitical challenges in the Red Sea, which have had some initial impact on ocean freights costs and shipping times. Further, with another quarter of normalized shipment and ordering activities now behind us.

We believe that the oversupply issues our retailers experience coming out of the pandemic have dissipated. Turning now to our international business. Throughout 2023, we remain diligent in the execution of our international turnaround strategy, and we are pleased with the meaningful progress we have made, including market share gains in these end markets. In Australia and New Zealand, the direct go-to-market strategy we implemented earlier this year is translating to increased liftings with additional accounts, products and brand listings.

Additionally, we continue to drive incremental revenue opportunities as we roll out new product lines into our international markets, driven by our highly successful KitchenAid offering. As a result of these factors, in the fourth quarter, we saw the first turnaround in year-over-year international revenues since 2021. As part of our international turnaround plan, we took a noncash inventory write-off in the fourth quarter, which impacted our bottom line performance. But we expect that the aforementioned initiatives will have a meaningful impact on our international channels bottom line in 2024.

In our Food Service business, we remain on track to achieve significant growth in 2024 and as Macassa Hospitality continues to gain traction and capitalize on the market positioning achieved in 2023. While this business is still in its early stages, we are confident that Lifetime is now recognized as an important participant in the foodservice industry and will continue to expand its product placement across North America. We maintain our long-term view that we can grow our total Food Service business to $60 million in revenues by 2026.

Refining and building out our e-commerce strategy remains a key strategic priority for lifetime. This quarter, e-commerce net sales exceeded 23% of our total net sales for the quarter, contributing meaningfully to our overall outperformance. This represents an increase of nearly 3.5% from the comparable quarter a year ago when our e-commerce net sales were slightly below 20%. We are continuing to hone our online strategy to ensure we are best positioned to capitalize on the significant opportunities we see in the channel. We maintain a strong focus on new product development and channel expansion to bolster our market position. Looking ahead, we are excited about our robust new product pipeline, many of which are incremental revenue opportunities.

Production of our previously announced Dali Partin branded products is well underway, with shipments on track to begin in April and the majority of products slated for the second half of the year. This launch is across 4 different product categories, all in the dollar channel, which is a new channel for lifetime. We are also reinvigorating our robust pipeline of swell products with new items being launched in the first quarter of 2024. These will initially be available online on swell.com as well as across e-commerce channels. In line with our commitment to reduce our exposure to supply chain issues in China. We continue to ramp up production capacity in our Mexico facility. With the facility now operational and on track to reach full capacity in 2024. And combined with other sourcing initiatives, we are well on our way to meeting our previously stated target of approximately 25% of our spend on goods being outside of China by the end of the year. Active balance sheet management remains a priority for us, and we are pleased with our financial position as we enter 2024. Our disciplined cash management throughout 2023 led to a noticeable improvement in working capital year-over-year in both our U.S. and international businesses, which Larry will discuss in further detail shortly.

We remain prudent in our approach to capital allocation and are open-minded to value-enhancing M&A opportunities that align with our strategic priorities. We will continue to evaluate opportunities as they arise, especially in the current market, which favors strategic buyers. In summary, we are pleased with the strong momentum across our business as we close out 2023. The significant work we have done over the past several years to transform and reposition our business is paying off and we are entering 2024 as a more focused, agile company.

Looking ahead, we are excited by the meaningful work already underway across our organization. to continue innovating new products, expanding into new channels and growing market share, generating significant value for our shareholders.

With that, I'll now turn the call over to Larry.

[Laurence Winoker, executive]

Thanks, Rob. As we reported this morning, net income for the fourth quarter of 2023 was $2.7 million or $0.13 per diluted share versus $3.3 million or $0.15 per diluted share in the fourth quarter of 2022.

Adjusted net income was $6.3 million for the fourth quarter of 2023 or $0.29 per diluted share as compared to $7.5 million or $0.35 per diluted share in 2022. Income from operations was $15.7 million for the fourth quarter of '23 as compared to $12.8 million in the 2022 period. Adjusted income from operations for the fourth quarter of '23 was $19.4 million compared to $18.2 million in the 2022 period. And adjusted EBITDA for the full year, 2023 was $57.3 million.

Adjusted net income, adjusted income from operations and adjusted EBITDA are non-GAAP measures, which are reconciled to our GAAP financial measures in the earnings release. Following comments are for the fourth quarter of 2023 and 2022, unless stated otherwise. Consolidated sales declined by 1.9%. U.S. segment sales decreased by 4% to $185.2 million. The decrease occurred in the Tableware and Home Solutions categories. Tableware was lower as most of its warehouse program shipped during the first 9 months of the year and Home Solutions decline was due to lower hydration products in the corporate sales channel. The decrease was partially offset by strong sales in the Kitchenware category.

International segment sales increased by $3.8 million or $2.9 million in constant U.S. dollar to $17.9 million. As Rob discussed, in the fourth quarter, International had its first up earn in sales since the fourth quarter of 2021. The increase was attributable to higher e-commerce sales and market share gains from the launch of the go-to-market strategy and an increase in Asia sales, too.

Gross margin increased to 36.4% from 34.9%. U.S. segment gross margin increased to 37.2% from 35.8%. The improvement is due to lower inbound freight rates and favorable product mix. For International, gross margin decreased to 27.2% from 37.1%, most notably from reserves to certain slow-moving inventory. U.S. segment distribution expenses as a percent of goods shipped from its warehouses, excluding warehouse redesign expenses, were 8.7% versus 9.2%. The improvement was attributable to the significant reduction in inventory, which eliminate the need for outside storage and improved operating efficiency. In addition, better safety experience lowered insurance costs and abating inflation to reduce some other expenses such as [indiscernible] pellets.

These reductions more than offset the cost of higher labor rates. International segment distribution expenses as a percent of goods shipped from [indiscernible] warehouses were 19.1% versus 19.6%. The improvement was due to lower outbound freight rates and more shipments from the Netherlands warehouse. Selling, general and administrative expenses decreased by 4.1% to $38.7 million. U.S. segment expenses decreased by $3.2 million to $29.1 million. And as a percentage of net sales, expenses decreased to 15.7% from 16.7%. The decrease was attributable to lower allowances for bad debt and a decrease in acquisition-related contingent consideration. International SG&A expenses increased by $700,000 to $4.5 million. As a percentage of net sales, expenses decreased to 25% from 26.7% due to the effect of period expenses on higher sales volume.

Unallocated corporate expenses increased by $0.8 million to $5.1 million. The prior year reflected an expense reduction for performance stock awards not expected to be earned. Interest expense, excluding a mark-to-market adjustment for swaps, increased by $0.5 million due to higher interest rates on our variable rate debt, substantially offset by lower average borrowings. [indiscernible] of debt was for the write-off of unamortized term loan fees due to loan amendment. For income taxes, in both Q4 '23 and '22, the rate exceeded the statutory rate, primarily due to state and local tax expense, nondeductible expenses and foreign losses for which no benefit is recorded.

And related to our 24.7% equity interest in Grupo Vasconia. We recorded our proportional share of its losses. Grupo Vasconia is a passive investment for us. Finally, turning to our balance sheet. In November, we amended and extended our term loan. We now have no debt maturities until August 2027. In connection with the term loan amend and extend, we repaid $48.7 million of principal. And as a reminder, in June of '23, we repaid $47.2 million of principal 2. Notwithstanding this $97 million reduction in permanent debt, our balance sheet continues to be very strong with $134 million of liquidity. Liquidity includes cash plus availability under our credit facility and receivable purchase agreement. Our adjusted EBITDA to net debt ratio as of year-end was 3.4x, a considerable improvement from at year-end 2022. This concludes our prepared comments.

And operator, please open the line with questions.

[Operator]

[Operator Instructions] And our first question comes from Anthony Lebiedzinski with Sidoti & Company.

[Anthony Lebiedzinski, analyst]

So first, just a quick follow-up in terms of the fourth quarter sales. So I know on your last conference call in November, you guys talked about a timing shift for shipments to a certain large warehouse club customer. So was the U.S. segment sales hurt -- was that the primary reason why U.S. segment sales were down from a year ago was because of this timing shift? Or was there anything else that happened there? .

[Robert Kay, executive]

Yes. So the fourth quarter came in above our revised guidance, right? If you look at it on a year-over-year basis, there was a club program, which didn't repeat, and that's driving year-over-year performance. The outperformance versus our revised upward guidance that we issued last quarter was not related to the club channel.

[Anthony Lebiedzinski, analyst]

Okay. Got you, Rob. And then just to follow up in regards to the overall, the e-commerce strategy. So you mentioned that it was 23% of your sales in the fourth quarter. Do you have that number for the full year? And then as you look forward, I mean, do you guys have a goal in mind in terms of how high you want to get this to and just wondering about the margin profile for that channel versus others?

[Robert Kay, executive]

Yes, Anthony, let me start and then Larry will give you the particulars. By the way, 23.2%, I believe in the quarter. So we do not have a target number in mind our sales philosophy is to sell wherever the consumer is and to maximize those opportunities. So we did reorient in terms of how we spend in our approach, which is why we've been successful across all channels growing and growing our share in each channel.

So we tweaked that a little bit about 6 to 8 months ago, and it's paying off nicely for us in gaining market share. So we're trying to maximize pie in every channel for us. But we -- there's no specific target and part of that is based upon the overall market and again, where the consumer is spending, right? So if the consumer spend 50% of their dollars in the e-commerce channel, we want to be at least 50%, right? So that will drive it more than what we're experiencing now, which isn't being driven by a shift in the quarter or the last 6 months really towards e-commerce in the total market, it's more just light times approach to that channel, which has been giving us enhanced success. Larry, you want to give full number [ for 2 years now ].

[Laurence Winoker, executive]

Yes. So for the full year, e-commerce sales increased 2022 was 18.7% of sales, and the '23 full year was $19.3 million.

[Anthony Lebiedzinski, analyst]

Got you. Perfect. And so as far as the margin profile for e-commerce versus others, is that comparable?

[Robert Kay, executive]

Yes. Sorry, I got to answer that. Yes. it is comparable, but there are different channels, which have different dynamics. As we talked about the club channel, which is a very healthy and good channel for us, does usually run at a lower gross margin. It does have working capital benefits. Again, it's all priced accordingly. But in general, yes, the answer is your question is yes.

[Anthony Lebiedzinski, analyst]

Got you. Okay. So I know you're not yet providing guidance. I know typically you do that in May. But as far as should just -- just if you could -- wondering if you guys could provide some additional color. So as you have your conversations with your top customers, what are you hearing from them in regards to overall demand as far as retail traffic or online traffic. Just what can you share with us as we try to recalibrate our models here after the results.

[Robert Kay, executive]

So the market seems to be stable and retailers are definitely more comfortable. There's less discounting than you see when they're having trouble. So there isn't discounting that we're seeing in the market. There is a healthy dialogue the industry's big show happens next week with no more after that. But we are comfortable with the conversations we're having. We don't see there being a downward discussion.

[Anthony Lebiedzinski, analyst]

Got you. Okay. And then last question before I turn to others. So you done a nice job with improving your cash flows. It looks like a healthy inventory levels as well. as we look forward, do you think you can further reduce inventories? I know there are some quarterly variations, obviously. But I mean, as far as just when you look at managing inventories, do you think there's some further improvements that you can make? Or do you think this is kind of like the bulk of that has already been realized?

[Robert Kay, executive]

Anthony, again, just backing up the second, Lifetime's financial profile is a very strong free cash flow. So we generate very good free cash flow, and we have a very strong balance sheet. In a lot of the macro-driven challenges over the last couple of years, including trade issues, ocean freight issues, availability and COVID-related.

We made a decision, as we were very public about to invest heavy in inventory, and we use that to help gain market share, which we've retained and by investing in more higher inventory levels. In 2022, '23, when the market wasn't as robust, we -- in an orderly basis because as we said, this is always good inventory. We reduced those inventory levels. And again, we point out that our margin maintained or grew. So it wasn't like we were dumping the inventory, and it was in excess. It was just an investment, and we monetize that. That helped us, as Larry mentioned, it helped us be in a position to repay almost $100 million of term loan in 2023. So just in general, it's very strong.

Do we have an ability to further reduce inventory levels from where they are today. We do in our international markets, more so in the U.S. with the 1 caveat that the trade, retailers in general have relied more, which has been beneficial to us, but it relied more on vendors for replenishment inventory and less in their own distribution centers because they're smart and they can push that down to strong people like us in very robust economic times, that ships where they want quicker turns into their stores. That -- we're not in that environment now in a high-growth environment. So that always helps us in terms of inventory turns because it's not an RDCs and theirs. But the big numbers we've taken off of our balance sheet in the U.S., there is still room international.

[Operator]

[Operator Instructions] Our next question comes from Brian McNamara with Canaccord Genuity.

[Brian McNamara, analyst]

So Rob, in November, you mentioned that you did not expect much of a rebound in the U.S. end markets in either Q4 or 2024 as visibility remains pretty poor. I'm curious if that view has changed at all relative to 4 months ago. .

[Robert Kay, executive]

Tough to answer that, Brian. Yes, a little bit. I mean, first, starting with Q4 we exceeded right, we had revised our guidance up to we exceeded everyone's expectations, including our own. So the market performed stronger than what we expected positive. But in terms of our expectations and were fairly on top of our business, it did better than we expected, and that's good, obviously.

So we're still getting the data points. We are particularly this year as we launch a whole new channel and a new line, there's a big market share pickup. So that's not end market delivery results, we'll get results from that by our newness incremental. There is a little better clarity, but I think that we're still in a market where there is still unknowns in terms of general economy, less so in North America than internationally, but there is an absolute clarity of what we'd see in normal conditions.

[Brian McNamara, analyst]

That's helpful. It's nice to hear the new product launches for Sell in Q1. I guess, I'm curious your views on the hydration segment overall, given the recent Stanley craze and how you intend to position the brand in the market with competitive intensity ramping here?

[Robert Kay, executive]

Yes. Stanley is the phenomenon and has gained tremendously. The whole category has grown driven primarily by Stanley and 1 other participant has done particularly well, particularly at Walmart. They've been driving that category. Still a very good category as well as a phenomenal brand was needed additional investment from when we bought it and we have done that. And [indiscernible] it's really a phenomenal brand with great equity. From a product development perspective, we inherited a 0 pipeline, and we just need to reinvigorate that. And we have. And actually, you can see just by going on spell.com or one of the e-commerce channels, pure-play guys, you'll start to see our products. So -- but scale everyone, including us, has entrance into these keep you very high-graded with really big model, right, which is what Stanley is.

And look, they've done a phenomenal job. So we are increasing our advertising because Stanley has a good example, has done a tremendous job in social media. We need to get the story out. It's a great brand. We need to reemphasize the story that are already people now, particularly with Swell, but also built. Built is a major participation in hydration. So we're spending more to reinforce our brand equity we reinvigorated both had built and sell product development, you'll see go online, you will already see and you will continue to see that come to market, which we are very enthusiastic about.

[Brian McNamara, analyst]

Great. That's helpful. I know you're not providing obviously, fiscal guidance until May, but is it reasonable to expect top line growth this year?

[Robert Kay, executive]

Yes. I mean, wait until May, but one thing just mathematic to look at is we are doing a major launch into a channel with Dollar General has 20,000 stores, right? They'll have 23,000 very shortly. We're going to be in every one of those. So that's going to have an impact. Part of that won't be until '25, but a decent amount will be in '24.

[Brian McNamara, analyst]

Okay. The stock has done quite well since your Q3 earnings. I'm curious what should it get investors excited for 2024 and moving forward. And then I'm done.

[Robert Kay, executive]

So as you know, Brian and the people management and our key shareholders that are on the Board own a lot of this company and we're very committed with our own money in terms of stake in the company. And we're very pleased with the runup of the stock this year. We still think it's tremendously undervalued, and just the math and everyone can vote with their own dollars. So we are pleased. We think there is just where we are today. particularly relatively so. There's undervalue if you look at the cash flow that we generate and just the math. But we've been turning around our international business has got huge potential. There's huge opportunity there. We're starting to see some traction. Mikasa Hospitality, as we grew the business when we relaunched the business change management in 2018, we put something together. We streamlined the operation, but we also launched our Food Service initiative in Mikasa Hospitality and that takes time, COVID delayed that.

But we've -- as we've talked about, gained real traction in 2023, we'll see real results in 2024 and beyond, in particular. That business is really an annuity business, once you're spec-ed on, you're selling that same product for years. So that will ramp up, and that's something that we are have talked about being excited about. We see that now fomenting and remain very, very excited. There's been some bumps. We haven't lost any market share, but there have been some bounds in 2022 after COVID. The company is very streamlined. And as we continue to grow, a lot of that falls just proportionately, which is a positive to the bottom line. Very excited about that.

We talk -- we don't overemphasize in terms of the M&A opportunities, but strategics have an advantage for the first time in 20 years and have brought dozens of companies. So we're cautiously optimistic that will translate in opportunities for us. Frankly, if we wanted to be much more aggressive, we'd be buying a lot more businesses today but we will maintain a very strict financial discipline. And -- but we think the opportunity is and Hopefully, we'll be able to transact it takes 2, and we're not going to sacrifice our discipline to do that.

So there's many different levers that excite us and hopefully excites the public in terms of the ability to continue to create value, let alone just from a cash flow generation basis, we continue to create equity value with the cash flow that we generate, even if we did not grow. And of course, we all these levers, we think there's ample opportunity for nice growth above market.

[Operator]

There are no further questions at this time. I'll hand the floor back to management for closing remarks.

[Robert Kay, executive]

Thank you, operator. Thank you, everyone, for attending our call. We look forward to issuing our full year guidance as is our custom with our next call. Larry and I remain open for anyone who has questions or comments or want to discuss any aspect with us in the interim. Thank you very much, and have a great day. .

[Operator]

This concludes today's call. All parties may disconnect. Have a good day.