Xcel Brands: Financial Report Confirms Growth Strategy

Shareholders of consumer brand leader Xcel Brands (XCEL:  Nasdaq) 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.

Xcel’s brand portfolio could withstand the unfavorable economic conditions better than most apparel companies, given its lead in using the media to reach consumers.  Some apparel names are only just now beginning to use live media events as they grapple with store closings, inventory write-downs and personnel lay-offs.  For example, Japan’s casual and professional clothing brand Uniqlo is just now streaming its first live fashion event. We believe Uniqlo is just one of many retailers that is turning to media to save their market share.  By contrast, Xcel is in a significantly better position with a well-developed body of knowledge in how to use media to convert prospects to buyers.

More importantly, Xcel has several product development and distribution plans in the works that put the company in an advantageous position to deliver stronger sales and better profit margins.  During the earnings conference call, management provided an update.

·        A new warehouse in Mexico will be operational by the end of the 2022.  The facility is expected to be eligible for reduced tariffs under the ‘Section 321A’ trade rule that should deliver 17% to 36% in duty savings that Xcel can use to boost margins or entice wholesalers and consumers with competitive pricing. We believe this will put Xcel in a significantly better position relative to rivals.

·        Future quarters should reflect the benefits of a new third-party logistics (3PL) provider for the Longaberger brand located in Ohio.  The move could deliver savings all along the supply chain, from inventory management to fulfillment and returns.  The move should help reduce margin pressure at a time when supply chain costs are rising.

·        New distribution projects for the Halston and C-Wonder brands in the United Kingdom are already underway.  The opportunities involve a channel composed of 300 independent boutiques in the UK.  Both projects are expected to begin before the end of 2022.

·        New women’s apparel designs under the Mizrahi brand are expected in the coming months.  This is pursuant to a new license arranged by Xcel as part of the deal to sell the Mizrahi majority position to WHP Group.  Understandably, Xcel leadership is a bit tightlipped on these designs and the exact timing may of an announcement, likely for competitive reasons.        

Some investors might find 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, the estimated intrinsic value of XELB is $4.80 per share could be considered a near-term price target.  This valuation exercise does not include the value that could accrue from growth investments the Xcel team has already initiated, meaning there is upside to a $4.80 target. 

XELB appears 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.

 

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Crystal Equity Research covers XCEL under the CER Reports research series for issuer sponsored research with a has a Speculative Buy rating.