Recently Xcel Brands management delivered welcome news to shareholders of plans to adjust the Company’s operating structure to a ‘license plus’ business model. The Company began in early April to reduce staff focused on the production supply chain and expanded a license partnership for manufacture of branded apparel. As much as $10 million in annual operating cost savings are expected as a result of the shift in structure as the Company leaves production and materials sourcing to larger partners with the scale to handle sourcing and supply challenges. By focusing on its own strengths in social commerce, shopping entertainment with livestreaming and communications with consumers, we expect the Company to experience faster growth at the top line as well as operating efficiencies. Indeed, management has guided for profitability beginning in the fourth quarter 2023.
We are more enthusiastic than ever about Xcel Brands. In our view, the move to streamline the business model is an astute move following monetization of the Company’s success with its Isaac Mizrahi brand in May 2022. The earlier strategic change made it possible to deleverage Xcel’s balance sheet and eliminate interest burden while retaining an equity interest in a strong apparel brand. The more recent decision to focus on core strengths in marketing and promotion offers great promise for generating sales growth and profits. Additionally, the move eliminates inventory risk.
With the adjustment in business model, we discarded our precedent transactions method to value XCEL and adopted comparable multiples method using ninety apparel companies. As expected, our valuation exercise resulted in higher intrinsic and future values.
Accordingly, we have adjusted our target price to $5.15 per share. Our rating remains Speculative Buy as we acknowledge there is much to be proven by the Company as it carries out strategic plans. We expect brand announcement and earnings reports over the next few quarters to help boost confidence among shareholders and investors.
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