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Lifetime Brands (NASDAQ:LCUT)
Q3 2021 Earnings Call
Nov 04, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, and welcome to the Lifetime Brands third quarter 2021 earnings conference call and webcast. [Operator Instructions] I'd now like to introduce your host for today's conference, Andrew Squire. Mr. Squire, you may begin.

Andrew Squire -- Head, Investor Relations

Thank you. Good morning, and thank you for joining Lifetime Brands third quarter 2021 earnings call. With us today from management are Rob Kay, chief executive officer, and Larry Winoker, chief financial officer. Before we begin the call, I'd like to remind you that our remarks this morning may contain forward-looking statements that relate to the future performance of the company.

And these statements are intended to qualify for the safe harbor protection from liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance. And factors that could influence our results are highlighted in today's press release and others are contained in our filings with the Securities and Exchange Commission. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments.

Except as required by law, the company does not undertake any obligation to update such statements. Our remarks this morning and today's press release also contain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Included in such release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. With that introduction, I'd like to turn the call over to Rob Kay.

Please go ahead, Rob.

Rob Kay -- Chief Executive Officer

Thank you. Good morning, everyone, and thank you for joining us today to discuss Lifetime Brands third quarter 2021 financial results. On today's call, I'd like to cover our third quarter financial results and also discuss our revised long-term financial objectives, which we disclosed in this morning's press release and have posted in detail on our corporate investor relations site. Beginning with our results.

We are pleased with our strong performance in the third quarter, which marks another quarter of growth. We continue to see robust demand for our products across categories. Our growth has been achieved as a result of the Lifetime 2.0 strategy we implemented over the past two-plus years to create top line growth and improve profitability. Further, the mitigating actions we have taken to offset inflationary and supply chain disruption also contributed to our results.

Our trailing 12-month adjusted EBITDA increased by more than 25% compared to the end of 2020 and even greater when compared to the year ago period, which demonstrates the continued momentum that Lifetime has created and reinforces the impact from our significant progress in accelerating our long-term growth trajectory. Our supply chain mitigation efforts, coupled with disciplined operations, enabled us to deliver a gross margin dollar increase of roughly $4 million or 5.5%, as we managed cost pressures throughout our business. As a result, we are well positioned to meet customer demand and continue to benefit from increased market share. In our core U.S.

business, we continued to see strong performance across most of our product categories. Home Solutions produced strong results this quarter, while we saw a moderate growth in tableware. As we highlighted last quarter, one area of incremental growth is coming from the launch of new product and brand initiatives such as the launch of Beautiful at Walmart, which is gaining traction, as well as the successful rollout of our KitchenAid cutlery line. Let's turn now to our International business, which has benefited from the transformation that we began in 2019 and fully implemented in 2020.

During the third quarter, we maintained the strong momentum we've been building throughout 2021 and delivered revenue growth of approximately 17% compared to the same period last year. Further, we are pleased to report that we are now actively pursuing new and existing opportunities as a result of our successful implementation of country managers in 12 different geographies around the world, which will enable Lifetime to go direct in those markets. I will touch more on this shortly. But we believe there are numerous growth opportunities ahead for our International business.

And we are well positioned to win market share and increase profitability. As COVID restrictions and infection rates abate, consumers are returning to brick-and-mortar stores. As a result, pure-play e-commerce sales in general have declined as a percentage of retail sales. However, Lifetime has seen growth in this important channel in both percentage of total sales and absolute dollar growth.

Our e-commerce sales for the quarter were 19% of total net sales compared to 16.4% a year ago and 16.1% in the second quarter of this year. Dollar sales growth in e-commerce continued to grow, reaching $42.7 million in the third quarter and $113 million in the year-to-date period. I want to take a moment to talk about the ongoing macroeconomic headwinds and supply chain disruptions that many companies across industries are experiencing. While we feel as prepared as possible and have taken proactive steps to mitigate these pressures, we are not immune to these disruptions.

And we are still navigating a number of macroeconomic factors, including inflation and increased labor and shipping costs, and most importantly, the availability of adequate shipping containers vessels and trucks to get our goods to end markets. Specifically, we have experienced a significant increase in ocean freight costs coupled with declining container availability and difficulty in unloading and getting goods to our distribution centers or directly to our customers. As a result, we were unable to fulfill some orders in the third quarter despite the strong customer demand. However, we expect all of these orders to roll over to the fourth quarter.

We are actively working to mitigate these headwinds through a number of initiatives to drive down our operating costs, increase prices in line with inflation, and invest in inventory levels to ensure availability of our products. In particular, our strong supply chain and proactive inventory management have enabled us to significantly reduce the impact of these headwinds thus far. While we expect these headwinds to persist in the fourth quarter, the cost of ocean freight began to decline in October, while shipping availability increased. As a reminder, while the nature of our business is typically weighted toward the latter part of the year, the vast majority of inventory that we saw in the fourth quarter typically ships in the third quarter.

So we believe the actions we have already taken will positively impact the supply chain impact on our results for the fourth quarter. Notwithstanding these actions, as I just noted, we had noticeable delays in shipping product in the third quarter, which in turn reduced our overall shipments, and consequently, revenues for the quarter. Let me now turn to a discussion of our financial guidance. Despite the macroeconomic headwinds I just described, based on our continued strong performance, we are raising full year EBITDA guidance to a range of $88 million to $92 million, while maintaining our previous revenue guidance of $880 million.

We are confident in our ability to continue executing in a challenging environment and look forward to building on our successful track record of strong growth. Before I pass it over to Larry to discuss our financials in more detail, I would like to discuss the revised long-term financial objectives we announced this morning. Since launching Lifetime 2.0 in 2018, we have taken significant steps to optimize our business model, utilize our infrastructure more efficiently, and invest in meaningful growth opportunities. Our strategy is working.

And thanks to the hard work of our team, we have made incredible progress improving our operations and taking our business to the next level. We believe there are significant opportunities for us to deliver long-term sustainable growth. Building on this successful execution of Lifetime 2.0, we have now fully developed a detailed strategy for our next five-year plan. This strategy is targeted to deliver approximately $1.25 billion in net sales and $145 million of EBITDA by 2026.

We intend to achieve this growth through multiple levers, which I'll briefly touch on now. First, we expect continued strong organic growth in our core categories. Since implementing Lifetime 2.0, our company has grown significantly and gained market share. As we execute on our brand and product strategies, we expect this trend to continue.

This includes a robust product development portfolio and the continued execution of the many product initiatives that we have previously discussed. Second, as we have discussed frequently, we expect to further penetrate the commercial food service market in the front of the house through our Mikasa Hospitality business unit. We are encouraged by our recent sales conversations in Mikasa Hospitality. And we now have greater visibility into what this opportunity looks like in the near, medium, and long term.

Over the last year, we have invested in top talent in this area, and are pleased to report that our Hospitality business is now staffed with world-class professionals. As a result, we have successfully entered the market and believe we can generate consistent growth in the food service markets. As we build our book of business, we expect to start seeing revenues increase over the next year, and Mikasa Hospitality remains on track to be profitable by the second half of 2022. We are executing on a detailed plan design for our commercial food service unit to be a $60 million revenue business for Lifetime by 2026.

Notably, this is a fairly conservative target given the $2 billion total addressable food service market, where we think we have a strong customer value proposition. Long term, we see this as a huge market opportunity for us and one where we are well positioned for success. Third, we will look to expand our presence and profitability in international markets. As I mentioned earlier, our International business has performed well as a result of the restructuring we undertook beginning in 2019.

Lifetime is in over 100 markets, with specific country-by-country plans tailored to capitalize on each market's opportunity. Specifically, we have installed 12 in-country managers for targeted geographies, mostly in Europe and Asia Pacific. As we look across our International business, we are pleased with the successful implementation of our new sales initiatives in Asia, which includes a growing e-commerce presence in China and Southeast Asia. We have also made numerous operational improvements, including the establishment of a new warehouse and distribute our products from Continental Europe and increased direct-to-consumer logistics in China.

The business is poised to continue its growth trajectory, and we look forward to capitalizing on our enhanced international operations to drive future success. Fourth, we have now relaunched the operations of Year & Day in the fourth quarter. We anticipate that this will increase our reach to millennials and Gen Z consumers, while enhancing our Dinnerware offerings. As a reminder, we expect the Year & Day transaction to be accretive by 2022.

Finally, Lifetime will continue to expand into adjacent categories, including barbecue, pet, and storage and organization. We consider each of these categories to be high-growth, high-margin opportunities for us in areas that are consistent with our core competencies in product design and development. While we are still in the early stages of establishing these categories, initial product launches have been successful. And we are positioned to see more meaningful revenue contributions starting in 2022.

Beyond these five growth drivers, we will also plan to continue to focus on operational excellence. Over the past year, we undertook a U.S. operational redesign centered around our warehouses and distribution infrastructure. We are now moving forward with plans to implement this expansion and redesign of our U.S.

distribution footprint, which will drive further operational efficiencies across the business and deliver incremental profitability moving forward and support our growth plans. In closing, the strong results we delivered in the face of a challenging macroeconomic environment underscores that we have the right strategy in place to drive long-term value. We expect the investments we've made in our business to deliver tangible results as we navigate the macroeconomic environment and react to the challenges and opportunities in the marketplace. While we are proud of what we have accomplished during the past few years, we remain focused on executing against our next strategic plan and delivering value for all lifetime brand stakeholders.

With that, I'll now turn the call over to Larry.

Larry Winoker -- Chief Financial Officer

Thanks, Rob. As we reported this morning, net income for the third quarter of 2021 was $12.6 million or $0.57 per share versus $13.9 million or $0.65 per share in the third quarter of 2020. The decline in net income was due to a higher income tax rate in the current quarter. Income before income taxes increased to $18 million in the current quarter from $17.5 million in the 2020 quarter.

Adjusted net income was $13.4 million for the 2021 quarter or $0.61 per share as compared to $13.9 million or $0.65 per share in 2020. The table reconciling this non-GAAP measure to reported results was included in this morning's release. Adjusted EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $96.7 million for both the trailing 12-month period ended September 30, 2021 and June 30, 2021. As Rob mentioned, this represents a 25.1% increase over the $77.3 million achieved for the full year 2020.

Net sales were $224.8 million for both the '21 and '20 quarters. U.S. segment sales were down slightly by $3.8 million to $197.7 million. The decrease was primarily driven by lower sales due to supply chain constraints, which primarily impacted sales of Kitchenware products, partially offset by higher selling prices.

Further, the comparable 2020 period experienced a very strong level of sales as the economy began to reopen. International segment sales were $3.9 million, up $3.9 million to $27.1 million on a reported basis, $2.5 million in constant U.S. dollars. Sales increased in e-commerce.

Continued recovery in brick-and-mortar. Retailers of economies began to reopen, and higher selling prices. The global trading business in Asia also contributed to the growth in net sales. Gross margin for the 2021 quarter was 37% and for the 2020 quarter 35.1% on a reported basis.

Correspondingly, gross margin dollars increased $4.3 million to 5.5%. The U.S. segment gross margin was 37.7% in the 2021 quarter versus 35.6% last year. For International, gross margin was 31.7% in the '21 quarter compared to 30.2% in 2020.

The improvement in gross margin was driven by several factors, including channel and product mix and price increases to offset higher inventory costs. Distribution expenses for '21 and '20 were both 8.4% net sales, with U.S. segment distribution expenses as a percentage of sales shipped from its warehouses were 8.4% for both '21 and '20 quarters. While the company incurred higher wage rates, these costs were offset by labor efficiencies.

For the International segment, distribution expenses as a percentage of sales shipped from its warehouses, excluding moving and relocation costs for the U.K. operations in 2020, were 14.5% and 13.6% for the '21 and '20 quarters, respectively. The increase was primarily attributable to increased shipping costs for products shipped from the U.K. warehouse to Continental Europe, which have been temporarily heightened as a result of Brexit.

Further, freight rates have increased in the U.K. and the EU, driven by a shortage of drivers. Selling, general, and administrative expenses were $42.5 million for the 2021 quarter versus $38.3 million in 2020. U.S.

segment expenses were $29.4 million in the '21 quarter versus $27.3 million last year. As a percentage of net sales, SG&A expenses increased to 14.8% from 13.5% last year. The expense increase was primarily attributable to lower expenses in the prior period through the company's savings initiative in response to the COVID-19 pandemic. SG&A expenses for the International segment was $6.3 million in the 2021 quarter compared to $4.8 million for the 2020 quarter.

The increase came from foreign currency exchange losses and increased professional fees. Unallocated corporate expenses were $6.9 million in the '21 quarter versus $6.3 million in the 2020 quarter. The increase was driven by higher incentive compensation expense. Interest expense was $3.8 million versus $4.1 million last year due to lower debt outstanding.

For the 2021 quarter, the income tax rate was 31.1%. The rate was higher than the federal statutory rate, primarily due to state and local income taxes and foreign losses for which there was no tax benefit recognized. For the 2020 quarter, the income tax rate was 21.2%. This reflects the federal statutory rate increased by state local tax expense and offset by credits.

None of which were individually significant. Looking at our debt and liquidity. Our balance sheet and liquidity continues to be strong. At September 30, 2021, net debt was $245 million, and the net debt-to-EBITDA ratio was 2.5 times liquidity, which included $8.7 million of cash availability plus availability under our credit facilities with $153.8 million.

As discussed in the release, we are issuing updated financial guidance for the full year of 2021: with net sales of $870 million to $890 million, a 13.1% to 15.7% increase over 2020; adjusted income from operations of $59.5 million to $63 million, an increase of 24.2% to 31.5% over last year; adjusted net income of $31.2 million to $33.9 million, an increase of 54.5% to 67.8% over last year; and adjusted EBITDA of $88 million to $92 million, an increase of 13.8% to 19% over last year. This guidance utilizes a forecasted pound sterling to U.S. dollar exchange rate of 1.35. And net income per share is calculated based on an effective income tax rate of 30%.

Finally, as discussed in this morning's release, the company has revised its long-term financial objectives through 2026, with sales expected of $1.25 billion and adjusted EBITDA of $145 million. Sales is expected to be driven by core organic growth, further penetration in commercial food service, expansion into adjacent categories and international markets. While we evaluate acquisition opportunities, we assume there are none in these projections. In order to accommodate this planned growth, we have developed a redesign and expansion plan of our U.S.

distribution operations. We expect this redesign and expansion will incur incremental capital and other costs of approximately $12 million, with an expected payback of only 1.2 to 1.9 years. Additional information about the long-term objectives and operations redesign can be found in the investor presentation of the investor relations section at our website. This concludes our prepared remarks.

Operator, please open the line for questions.

Questions & Answers:


Operator

[Operator instructions] Speakers, it appears we have no questions at this time. I'll return the floor to you for any additional remarks.

Rob Kay -- Chief Executive Officer

Thank you, Keith. As always, thanks, everyone, for interest in Lifetime Brands and our disclosures and calls. We look forward to speaking to everyone in the future and to continue our strong performance. Thank you.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Andrew Squire -- Head, Investor Relations

Rob Kay -- Chief Executive Officer

Larry Winoker -- Chief Financial Officer

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