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LXRandCo Reports Strong Year-Over-Year Revenue Growth for Second Quarter 2018 as Company Initiates Updated Strategic Plan Focused on Margin Expansion and Sustainable Cash Flow Generation

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LXRandCo Reports Strong Year-Over-Year Revenue Growth for Second Quarter 2018 as Company Initiates Updated Strategic Plan Focused on Margin Expansion and Sustainable Cash Flow Generation

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Company Initiates Strategic Review to Identify and Evaluate Potential Alternatives to Unlock Value

MONTREAL, Aug. 14, 2018 /CNW/ - LXRandCo, Inc. ("LXRandCo" or the "Company") (TSX:LXR, LXR.WT)), an international omni-channel retailer of branded vintage luxury handbags and accessories, today reported its financial results for the second quarter and six-month period ended June 30, 2018.  As permitted under applicable law and by the TSX, the Company's results for the second quarter and six-month period ended June 30, 2018 have not, at this time, been reviewed by the Company's auditors, as is the Company's historical practice, due to certain normal course outstanding audit activities that are still to be completed.

"We have a begun a new chapter in the LXRandCo story with the initiation of our updated strategic plan intended to realize the Company's full potential, with a specific focus on disciplined top-line growth, margin expansion and sustainable cash flow generation," said Steven Goldsmith, President and Chief Executive Officer, LXRandCo Inc.  "Our strong year-over-year revenue growth is continuing evidence of both the consumer and retailer partner demand for LXRandCo's unique vintage luxury retail offering.  Adjusted EBITDA continues to reflect the Company's past pursuit of the significant unmet demand for its stores in an unprofitable and inefficient manner, prior to the implementation of our updated strategic plan at the very end of the second quarter of this year, as well as the initial costs of executing the updated plan."

"Importantly, our progress in working capital management, including more efficient purchasing, cash management and cost control resulting in a dramatic reduction in cash used in operations compared to the first quarter of this year.  We expect to begin to see the continued positive impact of the updated plan on our results, including further improvement in cash used in operations, in the third quarter.  LXRandCo remains uniquely positioned for long-term success within the rapidly emerging vintage luxury sector.  I am encouraged by the early progress on our updated strategic plan and enthusiastic about the potential for our Company."

With the appointment of new President and Chief Executive Officer, Steven Goldsmith, and the subsequent announcement and  the  implementation of the Company's updated strategic plan (see "Announcement of Updated Strategic Plan" below), it was the CEO's intention to address certain operational and accounting related matters (e.g. store closures, inventory count, cost structure), prior to the end of the second quarter 2018 to be in a position to report financial results in the third quarter of 2018 and going forward that enable shareholders to clearly assess the impact of the updated strategic plan on the Company's financial results.

Financial Highlights for the Second Quarter ended June 30, 2018
(All comparable figures are to the second quarter ended June 30, 2017 – restated1)

  • Net revenue increased 39% to $9.9 million from $7.2 million;
  • The retail network consisted of 119 stores compared to 61 at June 30, 2017.  During the quarter, the Company opened 16 stores, which was offset by the closure of 32 stores (including 14 stores as a result of the bankruptcy and wind-down of operations the Company's retail partner, The Bon-Ton Stores, Inc., and 15 of its 27 stores in Europe as a result of the Company's decision to close all European stores and focus its retail presence in U.S. and Canada only);
  • Average revenue productivity for the Company's 37 stores that were open for 12 months or more was approximately $2,044 per square foot;
  • Net e-commerce revenue increased to 6.3% of net revenue compared with 6.2% of net revenue;
  • Gross profit increased by 3.4% to $2.1 million from $2.0 million. Excluding the outsized inventory shrinkage expense due to the large number of store closures and a prolonged period since the previous inventory count, gross profit increased by 21% to $2.5 million compared to $2.0 million in the three-month period ended June 30, 2017;
  • Gross profit margin was 21.2% of net revenue compared to 28.4%. Excluding the Company's increased shrinkage expense in the three-month period ended June 30, 2018, gross profit margin would have been 24.8%. 
  • Net loss was $9.2 million in the three-month period ended June 30, 2018, compared to $45.7 million in the three-month period ended June 30, 2017.  Net loss for the three-month period ended June 30, 2018 includes a good will impairment charge of $3.7 million.
  • Adjusted EBITDA  (a non-IFRS measure) was $(5.4) million, compared with $(0.6) million. Excluding the Company's European and Burlington locations, Adjusted EBITDA for the three-month period ended June 30, 2018 was $(4.4) million compared with $(0.5) million;
  • Adjusted Net Loss (a non-IFRS measure) was $6.1 million compared with $0.9 million.  Excluding the Company's European and Burlington locations, Adjusted Net Loss for the three-month period ended June 30, 2018 was $5.0 million compared with $0.7 million; and,
  • Cash used in operating activities in the three-month period ended June 30, 2018 improved significantly to $2.7 million from $4.5 million;

Operational Highlights for the Second Quarter Ended June 30, 2018

  • Late in the second quarter, LXRandCo began implementation of an updated strategic plan intended to realize the Company's full potential, with a specific focus on disciplined top-line growth, margin expansion and sustainable cash flow generation.  Under the updated plan, the Company is refocusing its physical retail network presence with only the right partners located in only the U.S. and Canada.  To this end, the Company also closed 15 of its 27 European stores, the remainder of which were closed subsequent to quarter end.  The Company's European business has been negatively impacted by higher store costs than their North American counterparts and a critical lack of scale. Subsequent to quarter end, the Company closed all of its 16 store locations with its retail partner Burlington, which were underperforming the Company's other retail partners.  The full details of the Company's updated strategic plan are described in the Company's news release of June 13, 2018; and,
  • Added two new independent directors, Lauri Kien Kotcher and Stephane Guerin.

Initiation of Strategic Review Process

In parallel with implementation of the Company's updated strategic plan, LXRandCo's board of directors, with the support of management, have formed a special committee of independent directors (the "Strategic Review Committee") to identify and evaluate a broad range of strategic and financing alternatives available to the Company to unlock the value of LXRandCo's unique omnichannel platform.  These alternatives could include, among other things, equity financing solutions to support continued execution of the Company's updated strategic plan, the sale of part or all of the Company, a sale of certain assets of the Company, a merger or other business combination with another party, any combination of the forgoing, or other strategic transactions.  The board of directors has not set a timetable for the evaluation of alternatives, and there can be no assurance that any alternative will be implemented.  The Company does not intend to provide announcements or updates unless or until it determines that further disclosure is appropriate or necessary.  The Strategic Review Committee will be chaired by Stephane Guerin and includes Javier San Juan and Lauri Kien Kotcher.

Discussion of Second Quarter 2018 Results

Unless otherwise indicated, all amounts are expressed in Canadian dollars. Certain metrics, including those expressed on an adjusted basis, are non-IFRS measures. See "Non-IFRS Measures" further below. For a reconciliation of non-IFRS measures to their most directly comparable measure calculated in accordance with IFRS, see "Select Consolidated Financial Information" further below.

The following provides an overview of LXRandCo's financial results for the three-month period ended June 30, 2018 compared to the three-month period ended June 30, 2017 (restated1).

Net Revenue

Net revenue increased by 39% to $9.9 million in the three-month period ended June 30, 2018 from $7.2 million in the three-month period ended June 30, 2017. The increase in net revenue was primarily attributable to the increase in sales from LXRandCo operating 58 more stores by the end of the three-month period ended June 30, 2018 compared to the number of stores at the end of the three-month period ended June 30, 2017. LXRandCo's retail network consisted of 119 stores as at June 30, 2018 compared to 61 stores as at June 30, 2017. There were 16 new store openings in the three-month period ended June 30, 2018, all of them with an existing retail partner in the United States.  LXRandCo closed 32 stores in the period, of which 17 were in the United States, three in Germany, and two in the UK. The increase in net revenue was also due to another quarter of revenue growth from e-Commerce revenue to $0.6 million

Gross Profit

Gross profit increased by 3.4% to $2.1 million in the three-month period ended June 30, 2018 from $2.0 million in the three-month period ended June 30, 2017. The increase was primarily attributable to the increase in net revenue.

Gross profit margin was 21.2% in the three-month period ended June 30, 2018, compared to 28.4% in the three-month period ended June 30, 2017. The decrease in gross profit margin was due to several factors, including:

  • Outsized inventory shrinkage expense due to the large number of store closures and a prolonged period since the previous inventory count, which is now occurring on a regular basis to reduce future shrinkage. Excluding the increase in the shrinkage expense, the gross profit margin would have been 24.8%, an improvement from 23.7%  for the period ended March 31, 2018;
  • The addition to the omni-channel network of new retail partners with higher licensing fee rates that started in the fourth quarter of 2017;
  • The potential for slow-moving inventory given the increase in the size of the omni-channel network;
  • An unfavourable foreign exchange impact, mainly linked to a decrease in the value of the US Dollar, as a large portion of sales are in the United States;

Selling, General &Administration ("SG&A") Expenses

SG&A expenses were $7.0 million in the three-month period ended June 30, 2018, compared to $2.9 million in the three-month period ended June 30, 2017.

The increase was due to several factors including:

  • Expansion of the retail network, which increased salaries and related costs for in-store staff by $0.9 million to $2.7 million in the three-month period ended June 30, 2018 from $1.8 million in the three-month period ending June 30, 2017;
  • Increase in costs of re-deploying inventory and fixtures from Bonton stores to new locations in addition to Burlington store-closure costs ($0.2 million);
  • Increase in store closing costs as a result of the Company being in the process of closing all of its 27 stores in Europe ($0.4 million);
  • Increased headcount relating to head office and support personnel; and
  • Public company costs such as professional and consulting fees.

SG&A expenses were 69.9% of net revenue in the three-month period ended June 30, 2018, compared to 40.0% of net revenue in the three-month period ended June 30, 2017.  Compared to the previous quarter of the current year, SG&A expenses are up by 10.8%, mainly due to the increase in store closure related costs and corporate office and retail network salaries & wages.

The number of employees increased by 176 in the three-month period ended June 30, 2018 to 399, compared to 223 employees as at June 30, 2017.

Net Loss

Net loss was $9.2 million in the three-month period ended June 30, 2018, compared to $45.7 million in the three-month period ended June 30, 2017. The increase in profitability was largely attributable to the lower SG&A expenses. Other factors which contributed to the Net Loss in each period was an impairment of goodwill charge of $3.7 million in the three-month period ended June 30, 2018 and excess of fair value over net assets acquired charge of $43.1 million in the three-month period ended June 30, 2017.

Adjusted Net Loss

Adjusted Net Loss was $6.1 million in the three-month period ended June 30, 2018, compared to adjusted net loss of $0.9 million in the three-month period ended June 30, 2017. This increase was the result of the factors discussed above.

Adjusted EBITDA

Adjusted EBITDA was ($5.4) million in the three-month period ended June 30, 2018, compared to ($0.6) million in the three-month period ended June 30, 2017. This increase was primarily due to the factors discussed above. Adjusted EBITDA Margin was (54.2%) of net revenue in the three-month period ended June 30, 2018, compared to (8.2%) of net revenue in the three-month period ended June 30, 2017. This decrease was primarily due to the factors discussed above.

The accompanying unaudited condensed interim consolidated financial statements have been prepared by management on a going concern basis, which presumes the Company will continue its operations for the foreseeable future and will be able to realize on its assets and discharge its liabilities and commitments in the ordinary course of business for the foreseeable future. As reflected in the accompanying condensed interim consolidated financial statements, during the six-month period ended June 30, 2018, the Company incurred a net loss of $13.5 million and used cash in operations of $10.0 million. The use of the going concern basis may not be appropriate. These results raise doubt about the Company's ability to continue as a going concern within one year after the date that the amended and restated financial statements are issued without obtaining additional financial resources or realizing successfully its updated strategic plan.

The financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

Notes

The Company intends to restate its financial results for the year ended December 31, 2017 and 2016, including the three- and six-month periods ended June 30, 2017 are restated.  Management has determined that a restatement of the originally filed consolidated financial statements was required for the stated periods in respect of the accounting treatment of the equity consideration resulting from the acquisition of LXR Produits de Luxe International Inc. ("LXR International") that occurred on June 9, 2017 (the "LXR Acquisition") as well as other identified changes. The intended restatement has no impact on the past and current aggregate cash flows of the Company.

The Company's results for the second quarter and six-month period ended June 30, 2018 have not, at this time, been reviewed by the Company's auditors, as is the Company's historical practice, due to certain normal course outstanding audit activities that are still to be completed.

Consolidated Financial Statements and Management's Discussion and Analysis

The Company's unaudited interim condensed consolidated financial statements for the three-month period ended June 30, 2018 and Management's Discussion and Analysis ("MD&A") thereon are available on the Company's web site at http://investors.lxrco.com/financials-reports-information and under the Company's profile on SEDAR at www.sedar.com.

Conference Call

A conference call to discuss the Company's second quarter results is scheduled for tomorrow, Wednesday, August 15, 2018 at 8:30 a.m. (ET).  Participants can access the conference call by telephone by dialing 647-427-7450 or 1-888-231-8191, or via the Internet at http://investors.lxrco.com/events-and-webcasts.

The conference call will be archived for replay both by telephone and via the Internet beginning approximately one hour following completion of the call. To access the archived conference call by telephone, dial 1-855-859-2056 or 416-849-0833 and enter the pass code 5292504 followed by the pound key.  The telephone replay will be available until Wednesday, August 22, 2018 at midnight. To access the archived conference call via the Internet, go to http://investors.lxrco.com/events-and-webcasts.

About LXRandCo

LXRandCo is a rapidly growing, international omni-channel retailer of branded vintage luxury handbags and other personal luxury products. LXRandCo sources and authenticates high-quality, pre-owned products from iconic brands such as Hermès, Louis Vuitton, Gucci and Chanel, among others, and sells them at attractive prices through: a retail network of stores located primarily in major department stores in the United States and Canada; wholesale operations primarily in the United States; and its own e-Commerce website, www.lxrco.com.

Caution Regarding Forward-Looking Statements

Certain statements in this press release are prospective in nature and constitute forward-looking information and/or forward-looking statements within the meaning of applicable securities laws (collectively, "forward-looking statements"). Forward-looking statements generally, but not always, can be identified by the use of forward-looking terminology such as "outlook", "objective", "may", "could", "would", "will", "expect", "intend", "estimate", "forecasts", "project", "seek", "anticipate", "believes", "should", "plans" or "continue", or similar expressions suggesting future outcomes or events and the negative of any of these terms. Forward-looking statements in this news release include, but are not limited to, statements concerning future objectives and strategies to achieve those objectives, including, without limitation, store openings, as well as other statements with respect to management's beliefs, plans, estimates and intentions, and similar statements concerning anticipated future events, results, outlook, circumstances, performance or expectations that are not historical facts.  Forward-looking statements reflect management's current beliefs, expectations and assumptions and are based on information currently available to management, which includes assumptions about continued revenues based on historical past performance, management's historical experience, perception of trends and current business conditions, expected future developments and other factors which management considers appropriate. With respect to the forward-looking statements included in this press release, management has made certain assumptions with respect to, among other things, the Company's ability to meet its future objectives and strategies, the Company's ability to achieve its future projects and plans and that such projects and plans will proceed as anticipated, the expected growth of the Company's e-Commerce revenue, the expected number and timing of store openings in North America and internationally, entering into new and/or expanded retail partnerships in North America and internationally, the Company's ability to source products, the Company's competitive position in the vintage luxury industry, and beliefs and intentions regarding the ownership of material trademarks and domain names used in connection with the marketing, distribution and sale of the Company's products as well as assumptions concerning general economic and market growth rates, currency exchange and interest rates and competitive intensity.

Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the future circumstances, outcomes or results anticipated or implied by such forward-looking statements will occur or that plans, intentions or expectations upon which the forward-looking statements are based will occur.

All forward-looking statements included in and incorporated into this press release are qualified by these cautionary statements. Unless otherwise indicated, the forward-looking statements contained herein are made as of the date of this press release, and except as required by applicable law, the Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Readers are cautioned that the actual results achieved will vary from the information provided herein and that such variations may be material. Consequently, there are no representations by LXRandCo that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements.

Selected Consolidated Financial Information

The following table summarizes LXRandCo's recent results for the periods indicated:


For the Three-Months Ended
June 30,


For the Six-Months Ended

June 30,

Consolidated statements of loss and comprehensive loss:

2018


2017


2018


2017









Net revenue

$9,940,014


$7,174,723


$19,912,528


$13,320,685


Cost of sales

7,831,998


5,136,572


15,445,691


9,478,026

Gross profit

2,108,016


2,038,151


4,466,837


3,842,659


Selling, general and administrative expenses

6,948,914


2,872,517


13,219,641


5,455,144


Amortization and depreciation expenses

174,197


73,395


444,224


156,387


Impairment of goodwill

3,683,987



3,683,987


Results from operating activities

(8,699,082)


(907,761)


(12,881,015)


(1,768,872)


Finance costs

496,959


308,222


774,374


666,793


Debt extinguishment costs


612,939



612,939


Foreign exchange loss (gain)

(72,306)


(72,355)


(249,251)


(3,275)


Change in fair value of convertible redeemable preferred shares


188,355



226,101


Convertible redeemable preferred share dividends




48,112


Change in fair value of warrants




257,532


Non-recurring gain from a step business combination




(1,465,090)


Excess of fair value over net assets acquired


43,081,701



43,081,701


Non-recurring acquisition costs


774,785



774,785


Gain on expiration of warrants




(2,401,402)

Loss before income taxes

(9,123,735)


(45,801,408)


(13,406,138)


(43,567,068)

Income tax expense









Current

38,661


85,876


38,661


86,996


Deferred


(197,531)


44,000


(197,531)


38,661


(111,655)


82,661


(110,535)

Net loss for the period

(9,162,396)


(45,689,753)


(13,488,799)


(43,456,533)

Other comprehensive income (loss)









Cumulative translation adjustment

(69,019)


127,987


(69,019)


32,263

Comprehensive loss for the period

(9,231,415)


(45,561,766)


(13,557,819)


(43,424,270)

 

The following table provides a reconciliation of net loss to EBITDA and Adjusted EBITDA for the periods indicated:


For the Three-Months Ended
June 30,


For the Six-Months Ended

June 30,

Reconciliation of net loss to EBITDA and Adjusted EBITDA:

2018


2017


2018


2017

Net loss

($9,162,396)


($45,689,753)


($13,488,799)


($43,456,533)

Amortization and depreciation expense

174,197


73,395


444,224


156,387

Finance Costs

496,959


308,222


774,374


666,793

Income tax expense

38,661


(111,655)


82,661


(110,535)

EBITDA

(8,452,579)


(45,419,791)


(12,187,540)


(42,743,888)

Adjustments to EBITDA:









Debt extinguishment costs


612,939



612,939


Foreign exchange loss (gain)

(72,306)


(72,355)


(249,251)


(3,275)


Change in  fair value of convertible redeemable preferred share dividends


188,355



226,101


Convertible redeemable preferred share dividends




48,112


Change in fair value of warrants




257,532


Non-recurring gain from a step combination




(1,465,090)


Excess of fair value over net assets acquired


43,081,701



43,081,701


Non-recurring acquistion costs


774,785



774,785


Gain on expiration of warrants




(2,401,402)


Impairment of goodwill

3,683,987



3,683,987



Stock-based compensation expense

(547,732)


247,439


(459,226)


735,975

Adjusted EBITDA

(5,388,630)


(586,927)


(9,212,030)


(876,510)

Adjusted EBITDA Margin

(54.2%)


(8.2%)


(46.3%)


(6.6%)

 

The following table provides a reconciliation of net loss to Adjusted Net Loss for the periods indicated:


For the Three-Months Ended
June 30,


For the Six-Months Ended

June 30,

Reconciliation of net loss to Adjusted Net Loss:

2018


2017


2018


2017









Net loss

(9,162,396)


(45,689,753)


(13,488,799)


(43,456,533)

Adjustments to net loss:









Debt extinguishment costs


612,939



612,939


Foreign exchange loss (gain)

(72,306)


(72,355)


(249,251)


(3,275)


Change in fair value of convertible redeemable preferred share dividends


188,355



226,101


Convertible redeemable preferred share dividends




48,112


Change in fair value of warrants




257,532


Non-recurring gain from a step combination




(1,465,090)


Excess of fair value over net assets acquired


43,081,701



43,081,701


Non-recurring acquisition costs


774,785



774,785


Gain on expiration of warrants




(2,401,402)


Impairment of goodwill

3,683,987



3,683,987



Stock-based compensation expense

(547,732)


247,439


(459,226)


735,975

Adjusted Net Loss

(6,098,447)


(856,889)


(10,513,289)


(1,589,155)

 

The following table provides selected retail network data for the periods indicated:


For the Three-Months Ended
June 30,


For the Six-Months Ended

June 30,

Selected retail network data:

2018

2017


2018

2017







Number of stores, beginning of period

135

47


133

46


Store openings

16

15


23

18


Store closures

32

1


37

3

Number of stores, end of period

119

61


119

61

 

SOURCE LXRandCo, Inc.

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