Xcel Brands delivered encouraging strategic news with the announcement of a new master license agreement for its Halston brand. A major apparel wholesaler has given Xcel Brands an upfront cash payment for the deal and committed to minimum guaranteed royalties over a 25-year license period. The wholesaler’s expansive distribution channels with department stores, e-commerce and other retailers are expected to significantly increase sales of Halston branded apparel beginning with the Spring 2024 season. The identity of the wholesaler will be disclosed in the coming weeks.
The master license agreement is the latest development in Xcel’s effort to shift to a ‘license-plus’ business model, eliminating the Company’s wholesale activities. It is also a victory for Xcel’s strategy of acquiring and rejuvenating distressed and languishing luxury brands, then realizing strong returns on invested capital as the brands regain marketability.
The Halston development is also contributing to incremental operating cost savings that are expected through elimination of additional personnel and overhead costs. Management is now estimating $13.0 million in annual operating cost savings, 30% greater than the previous estimate of $10 million in cost savings. Reduced operating costs are expected to begin in the current quarter ending June 2023, and build throughout the balance of the year.
We continue to rate XELB at Speculative Buy and reiterate our $5.15 price target over the next twelve months.
In our view, the stock is exceptionally undervalued. Indeed, the Halston license agreement implies higher future revenue streams and reduced operating costs than are currently reflected in our earnings estimates. We expect to make additional changes to our earnings model based on financial results from the June 2023 quarter, increasing sales beginning in 2024 and reducing operating costs beginning yet in 2023. This upside potential in our estimates implies a commensurate increase in valuation and our target price.
We look to the Company’s quarter reports and disclosure of its new master license partner for its Halston brand to trigger new investor interest. The identity of the master licensee should be particularly inspiring given Xcel management’s characterization of the wholesaler as an industry leader.
Click on the image below for additional details in our most recent report on Xcel Brands.
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