Shareholders of Xcel Brands were treated to an ‘as expected’ report for the quarter ending June 2022, following the previously disclosed sale of a majority share in one the Company’s principal consumer brands. The deal to sell a 70% interest in the Mizrahi brand closed at the end of May 2022, and could be observed first in the Company’s balance sheet. A portion of the $45.4 million in net cash proceeds was used to paydown all debt, leaving the balance sheet with excess cash in the bank and a debt-to-equity ratio of 0.00. The Company also reported a $20.6 million gain on the sale of the Mizrahi asset, demonstrating the success the Xcel team achieved with the asset.
Financial strength should give the Xcel team the fire-power to move opportunistically for growth. During the earnings conference call management cited projects to boost organic sales, including changes to its supply chain to exploit duty-free importation rules and new distribution points for existing brands. The Xcel team is hungry and ready to acquire another brand to manage and grow, much like Mizrahi home run.
We continue to look favorably at XELB. In our view, the stock is deeply undervalued. Based on the recent sale of the Mizrahi asset, the retained portion was valued at $19.8 million at the end of June 2022. This compares to a current market capitalization of $22.4 million and an enterprise value of $11.5 million for the entire Company. Based on the deal terms, we estimate the intrinsic value of XELB is $4.80 per share, which informs our price target. Our valuation exercise does not include the value that we expect to accrue from growth investments the Xcel team has already initiated.
Accordingly, we believe XELB is priced at a compelling level for long-term investors who can look past the unflattering top-line comparisons in the recently reported quarter. The full picture includes the lubricating potential of the Company’s investment cash kitty and the experience the team has in finding and growing strong brands. The Company’s innovative media platform remains a key differentiator for brand growth by effectively converting viewers to customers.
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