Xcel Brands delivered higher revenue than we had expected in the second quarter ending June 2023, as product sales were boosted by sales of inventory to the new licensee of the Judith Ripka fine jewelry brand. The topline was just the first of several details in the Company’s quarter report that reflected the impact of a restructuring plan initiated earlier in the year. Xcel is making a rapid pivot to what management calls its ‘license plus’ business model that relies on strong license partners who take on inventory risk while Xcel contributes its considerable expertise in streaming media and social commerce to support its brand portfolio. The inventory sale left the company with $798,000 in total inventory, which is expected to further decline in coming quarters as the Company shifts working capital needs to its partners.
Previously, management had estimated potential reduction of annual operating costs by as much as $13 million. The quarter report confirms the team is delivering on the promised savings as cash operating expenses in the June 2023 quarter were $5.2 million. This compares to $9.5 million in the same quarter of the previous year and $7.0 million in the first quarter 2023.
The Company has nearly completed its shift to a brand license strategy, with strong names such as WHP Group, G-III Apparel Group and One Jeanswear among its licensing partners. Management apparently is still working on the best arrangement for its Longaberger home goods brand. Also in the works is a new digital ‘marketplace’ that will serve as a compensation platform for individuals following and promoting the Company’s brands. Management has guided for significant savings in advertising costs with implementation of the marketplace, which enables a shift away from digital advertising platforms toward more effective social commerce.
We reiterate our Speculative Buy rating of XCEL with an elevated price target of $6.00 in the next twelve to eighteen months. The increase in our price objective follows an updated valuation exercise that reflects adjusted estimates for the years 2024 and 2025, as well as shifts in comparable valuation metrics in the apparel sector. Our valuation exercise is presented on pages 6 and 7 of this report.
The stock has moved higher in recent weeks, in large part due to bullish commentary from the Company’s newest brand licensees. Xcel’s partners for its iconic Isaac Mizrahi and Halston brands have already begun strategies to grow and build distribution of apparel and other consumer products bearing these well-known names. Supportive commentary and information from the license partners.
Click on the image below to read additional details in our full 10-page report dated August 15, 2023.
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