A new update report for Xcel Brands discusses the financial results announced earlier this month. The Company reported financial performance for the third quarter ending September 2022, the first full quarter that financial results reflected the new minority ownership in Mizrahi brand. Shareholders had already seen a deleverage balance sheet and the use of cash proceeds from the sale of the majority interest in the highly successful Mizrahi brand. Sales came in at $4.5 million, lower than our admittedly aggressive target of $6.1 million. We were not surprised by the reported loss on the quarter of $4.0 million. More important in our view given management’s growth strategy is that a significantly lower figure of $2.3 million in cash was required to support operations.
We are undeterred in our interest in the Xcel strategy to buy and build strong apparel and footwear brands. We may not have pegged the third quarter, but we remain confident in management’s growth strategy to deliver value to shareholders. Xcel is vertically integrated through most of the fashion pipeline – design, sourcing, retail relationships, and direct sales to consumers. Importantly, management has crafted a sophisticated distribution strategy featuring live streaming to reach consumers. The Company is well distinguished in the industry by its production knowhow and media relationships with television shopping networks. We believe Xcel Brands presents an attractive partner for up-and-coming designers who need an ally to navigate the thornier challenges in the fashion value chain. This bodes well for successful acquisitions to expand Xcel’s brand portfolio.
Based on our precedent transaction analysis, XELB is trading at a steep discount to intrinsic value. Some of the discount might be linked to limited liquidity given significant insider ownership. Lack of market visibility could also be a factor. In our view, the current price level does not reflect Xcel’s successful track record in building consumer brands, its pristine balance sheet for executing on an acquisition strategy, or the superior growth potential in its media-focused distribution scheme.
We reiterate our Speculative Buy rating on XELB and maintain a near-term price target of $4.80, which coincides with our estimate of intrinsic value. Key catalysts for the shares include 1) further evidence of building revenue and returns through the revised minority position the Mizrahi brand, 2) new awareness of the benefits of a deleverage balance sheet that eliminates interest expense and reduced risk for the stock, 3) progress on brand projects including the relaunch of the C. Wonder brand and new distribution arrangements in the U.K. for Halston, and 4) new projects such as the Q-Optics product line through the HSN and QVC shopping networks. We also note management’s concerted efforts to gain new visibility for XELB among investors.
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