Luvu Brands, Inc. (OTC:LUVU) Q1 2023 Earnings Call Transcript

Luvu Brands, Inc. (OTC:LUVU) Q1 2023 Earnings Call Transcript November 18, 2022

Operator: Greetings, ladies and gentlemen, and welcome to Luvu Brands, Inc. Fiscal First Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Alex Sannikov, the company’s Chief Financial Officer. Mr. Sannikov, you may begin.

Alexander Sannikov: Thank you, Holly, and thank you to everyone who joined us today at Luvu Brands fiscal first quarter conference call. Joining me today is Louis Friedman, our Founder, President and Chief Executive Officer; and Jordan Friedman, our Sales Director. On Monday, we filed our quarterly report on Form 10-Q for the three months ended September 30, 2022, and issued an earnings release that highlighted the company’s first quarter performance. There are a number of items that we look forward to discussing with you this morning, including Luvu Brands financial results for the three months ended September 30, 2022, recent developments in Luvu Brands operational activities, as well as the company’s near-term plans for the future.

In conclusion of this call, we will be answering questions during the brief Q&A session. Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. This includes statements about our future expectations, financial projections and our plans and products. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company’s filings with the SEC, which includes our press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on our call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law.

Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now with that completed, I’d like to start the call with a few words from Luvu Brands’ Founder and CEO, Louis Friedman. Louis?

Louis Friedman: Good morning, everyone, and thank you for joining us on Luvu Brands first quarter conference call. We delivered a strong quarter in what remains a highly dynamic operating environment. For the three months ending September 30, 2022, we reported record sales of $8.1 million, an increase of 29.5% over the prior year. Our company is driven by creativity and innovation. Our success comes from our balanced and diversified direct-to-consumer business, along with multiple channels of growth, coupled with outstanding digital marketing execution. Looking ahead to calendar year-end and to 2023, we continue to expect macroeconomic headwinds to persist but believe that our brands, our growth strategy and product development initiatives position us well to emerge strongly from this period.

As announced last quarter, we continue to implement initiatives designed to generate material cost savings, streamlined workflows and lowering operating costs. And while we seek to deliver increased sales in this environment, we are also laser-focused on profitability and higher margins. Thanks to the team’s hard work, I remain confident in our ability to continue to execute into the holiday season and beyond. At this point, I’ll turn the presentation over to Jordan, who will discuss our digital mass market approach to sales and brand awareness.

Jordan Friedman: Thank you, Louis. Good morning, everyone. This has been a really strong and exciting start to the year for us, and I’m extremely pleased with the results so far. Our marketing efforts are paying off as consumer demand continues to increase and extensive online distribution allows our customers to find our products in more locations than ever before. We raised awareness online through a multichannel marketing approach and by making products available on all major e-commerce sites related to our categories. We have three main brands: Liberator, Jaxx and Avana, all containing a variety of product categories. Jaxx is a lifestyle brand of luxury beanbags, modular outdoor furniture, daybeds and children’s play seating.

Avana is our comfort product brand that integrates a sense of style combined with an unmatched lounging experience. While some of our products lend themselves to sales growth innately through Amazon and other marketplaces, other products reach success through mass retailers like Wayfair or regional furniture chains and specialty stores. Commercial outdoor furnishings and education accounts play their own role as well as continuing to keep business flowing throughout the year. With our extensive product offering and distribution network, each product can find the correct customer base, leading to ongoing and steady sales growth. For e-commerce, we flourish with any channel that allows us to edit and enhance their data and media content directly as our rich images, video and SEO-friendly product copy continue to impress customers and increase visibility.

Our in-house creative team is always during the best quality content to enhance our offerings every day. As long as we have great photography, enhanced content and innovative product designs, consumer demand increases naturally every year. Regarding our distribution network, we’re constantly adding new e-commerce stores and retailers plus numerous large resorts, commercial, school and hospitality clients. Researching and adding new wholesalers is something we do daily. Likewise, with our innovative product designs and expertly crafted media content, new wholesale and commercial clients are regularly seeking us out. In existing channels, long-standing relationships with buyers gives us a leg up in terms of personal knowledge and history, which leads to greater placement and visibility.

In terms of advertising and marketing, we test and deploy many mediums, including Google PPC, Amazon PPC, print ads, strong e-mail campaigns, retargeting and abandoned cart e-mails, and many social channel advertising, including Reddit, Pinterest, Instagram and Facebook. Constant monitoring, AB testing, careful site placement and use of clever long-tail keywords keeps our advertising initiatives converting at a high level. We also continue to capitalize on being a made-in-America company. Wholesale partners and consumers regularly seek us out and applaud our American-made commitment. In the first quarter, we really took advantage of our domestic manufacturing as we were able to adapt and react instantly to changes in demand. When we experienced a large surge in Liberator business due to increased awareness of sexual wellness products, we were able to adapt and supply the inventory customers wanted at a time when international producers were twiddling their thumbs waiting on the next ocean container to ship.

Overall, our growth potential is stronger than ever and we’re really looking forward to what we can deliver in the upcoming months and years to come. Now I’ll turn this over to Alex Sannikov, Luvu Brands’ Chief Financial Officer, to summarize some of the financial highlights for the first quarter 2023.

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Alexander Sannikov: Thank you, Jordan. I’ll briefly touch on some of the financial highlights from the fiscal first quarter ended September 30, 2022. . For the first three months of fiscal 2023, net sales increased to $8.1 million from $6.2 million in the prior year’s first quarter, an increase of 29.5%. Liberator sales increased 86% to $5.1 million from $2.7 million in the prior year. Jaxx product sales decreased 5% to $1.8 million compared to $1.9 million. And Avana product sales decreased 25% to $0.6 million from $0.7 million a year ago. Gross profit for the fiscal first quarter totaled $2 million compared to $1.5 million in the prior year. Despite the fact that the company continues to experience labor and raw material cost increases, gross profit as a percentage of net sales increased slightly to 24.5% from 24.1% in the prior year’s first quarter.

Operating expenses for the first three months were approximately 17% of net sales or approximately $1,397,000 compared to 19% of net sales or approximately $1,176,000 in the prior year. Net income for the first fiscal quarter was $492,000 compared to net income of $227,000 in the prior year. And adjusted EBITDA was $675,000 compared to $398,000 in the prior year’s first quarter. We continue to increase the quantity of products owned by our contractor in Mexico. It now is running at approximately 35% of all of our sewn products. Cash and cash equivalents on September 30, 2022, totaled $1,348,000 compared to $859,000 on June 30, 2022, and working capital increased from $774,000 on June 30 to $1,025,000 at the end of fiscal first quarter 2023.

Now I’d like to turn the call back to Louis for some additional comments regarding current development. Louis?

Louis Friedman: Thank you, Alex. We continue to increase brand awareness for Liberator by telling our story, building our community and launching new products. As background, Liberator started in 2002 with a single offering the Wedge/Ramp Combo. For over two decades, we’ve been the only company focused solely on the sex furniture, a market we created. We now offer over 60 novel products across the sexual wellness erotic lifestyle categories. Liberator products are designed to enhance intimacy for couples of all ages, shapes and sizes, regardless of physical limitations or sexual orientation. This quarter, Liberator sales increased 86%, primarily attributable to strong consumer demand from our digital and retail channels accelerated by exposure from Netflix series How to Build a Sex Room.

Our innovation and product engine are humming like never before. We are also adding new retail distribution strategy across all mass market channels. As a consequence of climate change becoming ever present, we incorporate sustainable practices, methodologies and designs across our brand portfolios to reduce our carbon footprint. This now wraps up our formal presentation. Operator, we’ll now open the call for Q&A. After the Q&A, we’ll have some additional closing comments.

Q&A Session

Operator: Your first question for today is coming from Bryan Robson from Breakout Investors.

Bryan Robson: Congrats on the results. And Jordan, I’d like to say I really appreciate the additional commentary that you provided just now. That’s very helpful. My first question is perhaps a bit more of a tough one. In that your last quarter, or I should say, your first quarter, you grew 30%. And right now, you’re about halfway through your second quarter, the calendar fourth quarter. And although I realize probably the majority — the vast majority of your sales are as the holiday season begins, but what are you seeing in terms of sales growth momentum and what are you expecting for this quarter that we’re in?

Jordan Friedman: Yes. Thanks a lot for that question. We are definitely very confident about Q2. We’re expecting to deliver strong results, and we expect to consider — continue to deliver strong results. So obviously, we’re just going into Black Friday and holiday season weekend next week. But so far, everything is looking good, and we expect to continue to deliver what you want to see.

Louis Friedman: Yes. We have the whole crew working tomorrow, Saturday, just to make sure we have enough inventory and we’re ready for the holiday season. We have quite a few new products that we’ve introduced. If you go to jaxxbeanbags.com, you’ll see a bunch of new products there. Liberator has new products. Avana has new products. And these products have been positioned and placed across mass market sites. So it’s going to be interesting to see what the holiday season produces. So we’ll sit back and wait. But we’re ready. All guns are loaded, so to speak.

Bryan Robson: And my understanding is the Netflix show has been renewed for a second season, is that correct?

Jordan Friedman: As far as we know, that is correct.

Louis Friedman: Right. Yes, we’ve been in contact with them and offering product and working with them whichever way we can, but it is their final choice as to what they select. But I’m sure we’ll benefit one way or another. So we’ll see.

Bryan Robson: Okay. And if you have kind of the increase in sales that you experienced in your first quarter in this current quarter, how well positioned do you feel you are to meet what could be significant demand?

Louis Friedman: Yes. We’re really very well — there’s really no problem doing $8 million a quarter or $10 million a quarter with our current facility, supported by Mexico and the staff that we have. So it’s pretty easy for us to do as we’re vertically integrated, and we can pivot quite easily. We’ve had a surge in some of the Jaxx products recently more than what we expected. Perhaps you could elaborate on that a little bit maybe before Black Friday?

Jordan Friedman: Yes, yes. I mean we’ve already been experiencing some increase in holiday traffic, and it’s all been looking good so far, and we’ve been able to meet that demand. So we’re just going to continue to work hard to meet and get out whatever orders come in, but we’re very well positioned across a lot of our brands and categories on making sure we have a lot of inventory ready to ship for when we get back from the holidays in two weeks’ time.

Bryan Robson: Okay, very good. So with this recent boost in sales, I’m certain that you had a number of new customers. What do you typically see when you get new customers? Are they typically repeat buyers? Do they then also explore other products? And what can you kind of tell me about the value of acquiring new customers such as what I’ve just — what I imagine you’ve just experienced recently?

Louis Friedman: Right. Well, we are about, what, 86% direct-to-consumer through mass market in addition to our own website. So with our own websites, we’re about — we have checkout surveys, which go into in-depth questions, , we ask customers for recommendations and so on. And so we analyze them and read them every two weeks and see where they’re up to. We produce 400,000 e-mail blasts per week actually.

Jordan Friedman: 4,000 different e-mail?

Louis Friedman: Well, they’re not different. There’s 100,000 4x.

Jordan Friedman : Right, right, right.

Louis Friedman : It’s 100,000 4x of e-mail blast to our customers. And they come back and they buy other things. So repeat customers are — I would say, the average about 30%.

Jordan Friedman: Yes. We’re very good at e-mail follow-up and e-mail marketing, and that’s where a lot of revenue comes from for liberator.com. So any time we’re collecting e-mails, it’s a big boost for return visits well. So we expect to capitalize on a lot of those new customers who will become repeat customers.

Louis Friedman: Right. So if you’re interested in following us, please sign up for free mail blast on Jaxx and Liberator and Avana and you can see how we’re constantly tracking and going after the customers in a wide variety of ways to keep them close to us.

Bryan Robson: Okay. Very good. One last question for me, and this one is on the margin side. So you’re at, I think, 24.5% for the quarter. You’ve talked about additional outsourcing of selling in Mexico. I know you also have over the last fiscal year — or over the last 12 months, you’ve gotten a number of new pieces of equipment. And my question is, are those — is some of that new machinery is that more towards increasing your throughput? Does it have an impact on margin? And essentially, the question is where do you foresee margin in this environment? Do you feel you’re able to maintain the margin that you have going forward? Or is there even room to increase it?

Jordan Friedman: Yes. I think a lot of the machinery we’ve gotten has increased throughput a lot. But obviously, if we’re increasing efficiency, then it can also increase margin as well. And our partners in Mexico are helping as well and also just are constantly honing in pricing and seeing what consumers are willing to pay for the products that we are offering without reducing demand. So yes, we — I mean, we expect to be able to deliver this amount of margin, if not more. Our goal is to consistently increase our margins. So we’re trying to get it up even higher.

Alexander Sannikov: And Jordan, to piggyback on that, Bryan, it’s understandable that it takes a little bit of time to actually see the impact of the new machinery being installed. For example, our latest and greatest investment was in our Eton 3 conveyor line, but that conveyor line was installed in fact, in the first quarter, and it took a few months to get it up and running. So we’ll hope to start seeing impact on the margin from that implementation in the further quarters down the year.

Operator: Your next question for today is coming from .

Unidentified Analyst: I actually had two. One of them is your company seems to be getting a lot more visibility, I’m sure, in some part to the Netflix show. And I’m wondering, the first question is, are you seeing a change in your opportunities to partner with either people on the distribution side or the joint marketing side in terms of digital distribution?

Jordan Friedman: We are seeing some, I’d say, a lot of a lot of our Liberator stores as well are coming back to us for possibly retail locations that haven’t carried Liberator before. Or haven’t carried Liberator in some years, a lot of them are coming back because the demand is there. And also, we have had several e-commerce sites reaching out to us, wanting to carry our products across the board. So yes, there has been some of that. But at the same time, we’re also still seeking out new partners because that’s part of our daily goals is to increase the amount of wholesale partners and different places where we can sell our products.

Louis Friedman: The Netflix show has added a lot of excitement to the industry, the pleasure products industry and what used to be called the adult industry, now it’s called sexual wellness. So everybody is excited about it. Retailers are building How to Build a Sex Room facility in their retail stores. And being that we’re really the only player in this market that has what is perceived to be the sex furniture or love lounger kind of category that there’s been a lot of interest in expanding retail space within hospital stores and other e-commerce sites as well. So it’s good — it’s great for us, it’s great for the industry. And anytime there’s this sort of publicity, whether it’s Fifty Shades of Gray or the show that was on goop recently that actually featured Jaiya who’s been on our site for quite a few years, all of that is always good for us.

As you might know, we’ve been advertising in Rolling Stone magazine now for almost 18 years. That magazine — our ads have never left the book and is seen by the entertainment industry. And so we get quite a bit of play off that placement. And we’ve been the only sex product in Rolling Stone ever to appear in the magazine. So it’s sort of like a franchise for us.

Jordan Friedman: And the other thing I would say, too, is that when something like this happens in mass media, we generally see increased brand awareness from these types of shows or movies that we’ve been in, in the past for many years. So this is not the kind of thing that it’s going to be seen by a single audience over a brief period of time and then never seen again because that’s not the way that people watch TV, people watch reruns. They watch…

Louis Friedman: Yes, well, that’s still streaming on Netflix.

Jordan Friedman: And it’s going to be streaming on Netflix for probably 10 years.

Louis Friedman: It could be.

Unidentified Analyst: Yes. I had one more, which is you knew a little bit to this particular story, but I wondered what kind of protection do you have in terms of intellectual property? Obviously, you have trademarks. But I’m just — I’m curious about or worried a little bit, I guess, about what if other people wanted — someone like a LoveSac is like, hey, we could make this stuff. How do you kind of think about protecting your position in the market that you’ve built up?

Louis Friedman: Right. Well, I guess it depends on the brand. In the case of Liberator, we’ve had patents for almost, I guess, they’re probably 18 years at this particular point on assorted Liberator products. We have an unusual factory unlike those in the sex toy business, when someone comes out with a sex toy, 100 companies are ready with molding equipment and motors and electronics to copy those toys instantly. But I invite you to see our factory tour that’s on Luvu Brands. We have a unique factory that’s unlike any other factory in the sex business. And it’s not really a mattress factory either. So we’re vertically integrated. We’re able to produce — well, starting with Liberator products, we’ve created the category. The brand is at this point, extremely well-known with consumers based on all the advertising dollars we have spent, and there’s truly no competition on the Liberator side.

On the Jaxx side, there’s plenty of competition. However, we are vertically integrated. Our waste stream throws off basically zero cost foam products that we convert into beanbags, unlike LoveSac who outsources everything and buy and pays money for their foam product and outsources their covers. We produce it vertically. So really, our beanbag business, which actually came from really our waste stream and part of our sustainability program here at Liberator is a 100% trim, 100% waste. And our liners are also 100% surplus material from military and from the automotive industry. So we have extremely low costs on producing beanbags, and we process about 5,000 pounds of waste foam per day. So really in an excellent position to compete with anybody, whether it’s from China or LoveSac or whatever.

So that’s how we protect that side of the business. But I’ll just add one other thing. The Jaxx products are sold on good design and price to value and Liberator products are sold on brand and where Jaxx — and even Avana has lots of competition, Liberator, the only competition we truly have is individual habits in the way that they — whatever they do in the bedroom, however they choose to make love, that’s really our competition.

Jordan Friedman: Yes. And I would add to that, too, that we’re constantly innovating and we release a lot of new products every year. And so we’re always looking for better design, better quality and affordable price point to the consumer. So anytime that we have had companies who have tried to knock us off in the past, either they don’t last that long or they might release a product that’s similar to ours, but ours winds up being better in the end. And then we release new versions that also gain attention and they’re slow to catch up.

Louis Friedman: Yes. So it’s really all about content and distribution. I mean we try to cover all markets for all products, and we try not to leave any cracks allowing competition to get in. So we just sell over here and leave this market wide open. Well, we don’t do that. We market to the consumer and they have a choice as to where they choose to buy and we try to offer them many places, many places to buy Liberator products, and that’s fine with us.

Operator: Gentlemen, there appear to be no further questions from the phone lines.

Louis Friedman: Okay. Well, thank you, operator. I’ll finish up the call. I’d like to say that we manage our business for the long term. We are methodically delivering on what we need to build world-class brands. And we believe that over time, the market will realize our value. And 2022 was our 20th year in business, and this quarter, we delivered 29.5% net revenue growth. We expect to surpass $275 million in cumulative lifetime-to-date net sales during the second quarter of 2023. On behalf of the entire Luvu Brands management team, I want to thank you for joining us today and for your continued interest and support. Thank you, operator.

Operator: Ladies and gentlemen, this concludes today’s conference call. You may disconnect from the webcast at this time. Thank you for your participation.