Good afternoon, everyone. Thank you for joining Noble Capital Markets Virtual Emerging Growth Conference. I am Michael Kupinski, the Director of Research and analyst who covers Alliance Entertainment. That stock symbol is AENT. There will be time to address your questions, so please feel free to send those in. We will get to as many of those as possible. With that, it is my pleasure to introduce Bruce Ogilvie. He is going to introduce the company. Go ahead, Bruce. Welcome.
Thank you, Michael. Thank you for inviting us here today. I am the Chairman of Alliance Entertainment, and what we do is we are a distributor of entertainment products consisting of movies, music, video games, toys, and collectibles. We buy all these important products from these large suppliers. I am giving you a sample of what our top 20% suppliers are, which generate over 80% of our revenue. You can see these are the top-shelf suppliers of all media. They are in movies, music, video games, toys, and collectibles. Not easy to get on with these suppliers. You have to be fiscally responsible, pay your bills on time, add value. We are a stocking distributor, and as a stocking distributor, we have over 340,000 SKUs in stock in our distribution center in Shepherdsville, Kentucky, which is about 25 minutes south of the airport there in Kentucky.
Very close to UPS Worldport, which is fantastic for us, where we get next- day air delivery service for two-day air prices. Of those 340,000 SKUs, we offer to make them available to a lot of these leading retailers, which I am sure you are all familiar of. We are a traditional wholesaler where we ship directly to their stores, their distribution center. Also, 35% of our revenue is generated from we are doing drop shipping on behalf of these retailers, where we ship directly to their consumers, and it is white- label made to look like it came from Walmart or Costco or whoever. It says ship from, sold by, but behind the scenes or the backroom, we are basically the fulfiller of record there. We have to meet all their stringent SLAs in order to get that privilege of being their fulfiller of record.
Amazon, even as good as Amazon is, they need somebody else who can fill stuff in when they are out of it, and that is where we come in there. We make that countdown clock that they have where it says, "Ship within six hours," or we have to ship within six hours or less. So you will see the clock ticking away. Order now, ships in three hours and 22 minutes, and we are part of that very program there. We make it very easy for these retailers wanting to buy from us. We provide them all the hard work, the metadata, the images, the track listings, all the information they need to populate their websites. With populating their websites there, we just send them a beginning stock on-hand file of what the inventory is for the day.
Every 15 minutes, there's a delta file, and that delta file includes the current stock on hand, the current price, the cost import, and what ZIP code it ships from there. A lot of the retailers like buying from us because we have the tribal knowledge, the expertise, knowing what to buy, what not to buy, and what to bring in. And where they have a tremendous problem, we have tremendous turmoil with our buyers that come and go all the time there. We just have all that expertise that creates a higher value or perceived value for our inventory, and it's just a service that the industry really needs. I talked about doing e-commerce fulfillment for retailers. There's over 200 online retailers that makes up that 35% of our revenue, plus more than 30,000 physical store locations that we service.
Primarily wholesale, 65% wholesale, 35% drop shipping, which is wholesale to those retailers. You can see that we're very diversified and do a good job. A little breakdown of our volume here. You can see for the 12 months that just ended June 30 of 2026 compared to 2025. Vinyl grew from $340 million- $383 million. That's an increase of 13% there. Our video business, consisting of DVD, Blu-ray, and Ultra HD Disc, grew from $279 million to $339 million, an increase of 22%. We do have some gaming headwinds. Nothing we're doing wrong. It's just that the industry is changing. Microsoft and Sony want to really get out of the shiny disc business and make everything digital where you have to rent it. The CD sales you can see are growing from $125 million- $156 million. There seems to be a little bit of comeback happening.
People say, "Well, what's going on with music? Why is it suddenly doing well?" There's a lot of things going on with music there. There's a segment of the consumer base that they really believe that they want to own their physical media and not rent it. We're seeing the benefits of that. Plus, from an awareness standpoint, some of the fans are aware that the artists make more money when you purchase physical product versus renting and streaming. You're dealing with fractions of a cent that they're fighting over for there. The artists don't even get 100% of that money. It's all divided up based upon market share. The economics from the artist and the fan, it's better for them to buy a physical product versus buying digital product. There's no reason why the consumer can't do both.
They can have streaming, which is a fantastic way to listen to what they own, but they have the bragging rights of what they physically own, and they can share with everybody there. Collectibles, which is our Handmade by Robots, which I'll talk more about that later. Growth area for us. You can see we went from $22 million- $32 million. Electronics is turntables, Bluetooth speakers, electronic-related items to listening to physical media. That went up by 1%. It went up a small amount there. And then ancillary revenue, that's going to be freight income, digital distribution income, some digital income there that we have there. From a non-GAAP perspective here, you can see that our revenue is up 8% overall, and we expect that trend to continue. That should be good news to everybody on this call today.
Gross margin did go up from 80 basis points, and we expect that gross margin to improve even more going forward. We just had a change in a relationship with Walmart. We used to have to sell our video movies through a third party, which added additional cost, but we convinced Walmart, and that just started September 1st, that instead of having one supplier sell to Walmart, now there can be two suppliers. We have won our opportunity back to sell direct. That is just going to have our accounts receivable will be paid quicker, and our gross margin will go up. It is going to have quite an effect over the next. You will not really see the full benefit of there till the end of December 31 or our fiscal Q2. This all did not start till September 1st, but it is all a win.
Adjusted EBITDA is up 14%, up to $41.5 million from $36.5 million. You can see our adjusted earnings are up to $46 million from $37 million. From a GAAP perspective, same numbers, green. The one thing I just want to call out is showing from a GAAP perspective, our earnings per share were $0.26. We had a one-time charge of, we had a vendor that owed us some money for future purchases to offset some rebates they owed us. Unfortunately, that vendor went out of business and went away. We originally started out that vendor, we were owed about almost $15 million. By the time they filed business and went away, it was down to $7.8 million. It is a one-time charge, but that was like a $0.15 hit from a GAAP perspective to our earnings share.
You can really take that $0.26 number and add $0.15 as a one-time, and that is not going to be recurring ever again with us. Quickly over our balance sheet, you can see our AR inventory, very fast-turning assets. Having all these assets gives us a lot of availability in our ABL line. Currently in our ABL line, it is a $120 million line. We have about $70 million you can see we are borrowing, and we have $50 million with availability. There is suppressed availability of close to $40 million. We have a lot of dry powder, and our cost of money is very reasonable. We are borrowing at SOFR plus one and five-eighths. SOFR just went up by 25 basis points. Overall, in previous slides, you can see that our interest costs have been going down because we have the lower cost of money.
Just a snapshot of the overall market cap of us. You can see the cap structure, 51 million shares outstanding. Float has about 3.3 million. I know it says insider shares almost 78%. It is really closer to 90% insiders. That could be perceived good or perceived bad. I think the good part of it is we are highly aligned with all our shareholders, even though it is not as much float as we would like, that we want to make sure we are doing the right thing. We do not want to cause any dilution because we do not want to hurt the stock price in any way. We did come from a SPAC on February 10th of 2023, so there are warrants that are outstanding. The strike price is $11.50. We cannot push through a sale unless the stock is trading at $18, set to expire February 10th of 2028.
Our big strength in our distribution center is AutoStore. You look at this big red box there and just think of it as a warehouse inside of a warehouse. This is a 22,000 sq ft box or warehouse, but inside of it are all these totes stacked on top of each other to a tune of 14 tall, and the totes are all stacked up in stacks next to each other, and there's no aisles. Not only do we get advantage of the cubic space, we get more floor space back, eliminating aisle space. That gives us more storage capacity, gives us more sales per square foot, which is a win for any, whether it's a retail store or a warehouse.
The big win was instead of the employee walking to the shelf to pick the product in a very efficient pick path, they don't have to do that anymore. The tote comes to them. They pull from that tote as they're processing an order, and every 10 seconds, they're doing a new tote. We went from 41 employees down to seven. Big savings. We also got the same benefit on put away. When you receive inventory and you have to put it on a shelf, you'd have to walk to an empty shelf and put it away, and that's not very efficient. You're just walking all around there. We got that same benefit, too. Savings amount to about $3 million-$3.5 million a year. We're on our fourth year of using AutoStore. We were basically paying about $250,000 a month.
We just have three payments left on it, and the last payment due being January 1st, and we basically paid back that $10 million investment in a four-year period there, and we now own it 100%. That now gives us an additional $250,000 a month to look for the next investment we want to make. The same fantastic system of AutoStore, which is great for pulling loose vinyl, as you can see here in the picture. We have a lot of pallets and boxes associated with the pallets, the cartons, and there's a pretty sophisticated system like AutoStore that can deal with bringing pallets. Instead of a person driving around in a forklift, plus not to mention the aisles are very, very wide for pallet locations. If you ever go into Costco and you see how wide those aisles are, we have the same situation.
That's how our warehouse looks with all those pallets. But with this system that we're looking at there, we could eliminate those aisles and get the efficiency where the pallet using robots would bring it to the person to pick from. That would save us labor, give us more storage capacity, and we have the CapEx budget already that we can use, so it won't be any new CapEx requirements. It would just be a continuation of what we've already been doing. We're looking forward to that opportunity. We have many different channels that we sell to. One that I didn't mention of all those retailers that I showed earlier, we have over 2,500 independent record stores that we sell to. These record stores are never doing better than ever. If you own a record store today, you're very happy because it's just a very profitable business.
What is driving all those sales is Record Store Day. Record Store Day is an amazing event where it is done twice a year, and the industry just got together over 18 years ago and decided, "Hey, what do we do to get people back into a record store?" So they came up with this idea to come up with exclusive content that is only available to independent music stores, not available in any chain retailers. Twice a year, two periods in a year, they would make these products available there. Last Record Store Day, that just was in April, we shipped over 700,000 units compared to 660,000 units the year before. Every year it just keeps getting better and better. With our deep music connection and dealing with all these independent labels, it just keeps growing. We keep getting a better market share.
What is driving that is our AMPED Music division. That is our independent label division. I call this your do-it-yourselfers. This is over 110 music labels and artists that want to do it themselves, and they do not want to go to a major record company. There is a fantastic press release that we just released yesterday that talks about Virgin Music Group, who is just one of our new labels that we added, and how happy they are with AMPED. The impressive thing is Virgin Music Group is owned by Universal Music, so they decided to go outside their ecosystem and go to our system of how we reach these independent retailers, and they are seeing tremendous success. I encourage everybody to read that press release there. This is the growth area for us.
When Jeff and I started this back in 2013, it was basically doing less than $10 million our first year there. We have grown it to be it is over $120 million a year now. Just continue growing there. Overall market share for the major distribution companies used to be about 87%, it is down to about 80%, which means the independent labels and the independent artists are just getting more market share, and Alliance continues to get benefit of that. This is Handmade by Robots. This is an acquisition we did. We acquired the IP, and you can see the IP on these little plastic figurines. We are very familiar with a company called Funko. We have great respect for them.
We are a distributor for Funko, and we thought, "What if we could have our own line of products not competing with Funko, just complementing what Funko does?" Because you could collect Funko and you could collect Handmade by Robots. It is just a matter of getting a license. If we could just grow this division to $100 million, that would generate about $45 million a year in EBITDA. Skipped one. Oh, there it is. Alliance Home Entertainment. This is our division where we, our licensing opportunities. We have over 60 movie studios we are the exclusive distributor of, but roughly right around three of them. That would be Amazon, Paramount and Disney, where we are a licensor. We licensed rights to manufacture and distribute exclusively those titles. This has been very successful for us. You saw our video numbers continue to grow.
Paramount was that we started last year, January 1st, and MGM Studios, we just started January 1st of this year. A big title for us that's going out this year is Project Hail Mary. Pretty excited about that. Happy to see that we're going to be shipping Marshals this period, too. That's another great. Whatever's on television, on their streaming services, whatever movies, whether it be Paramount or whether it be Amazon MGM, we get the benefit of that, and it just continues to drive. People want to own physical media. People just don't want to rent it anymore. They want to own it, and we're getting the full benefit of that, whether it be music or movies. Our latest thing that we started is called Alliance Authentic. That's just getting launched off the ground here. That's just a way to create authenticity and to make collecting vinyl more formal.
The trading cards are all getting encapsulated into some type of grading. We kind of took the same idea there, taking those trading cards, encapsulate them there, except we add in a NFC chip to create authenticity. We've got a real good thing coming down the road there where we can get the artist involved with this. We can create limited quantities, create a lot of scarcity. It's just getting started and we're very happy with what we're seeing so far. We liked the technology that Alliance Authentic uses so much, so we bought this company called Endstate. They've got some great. They have some very strong IP here. Two conversations going on. There's big changes in the EU for a Digital Product Passport.
That's basically you have to. The EU is requiring companies, and the companies they're requiring is the clothing industry and, believe it or not, tennis shoes, that you have to give full disclosure of exactly what's going on with those products and what's in it, how it's made, and what. A perfect solution for that is putting an NFC chip in that product there. So Endstate Authentic, the team there, they're busy talking to those people there, looking to do something there to meet the EU requirements. Then the second opportunity is we've been talking to a lot of the graders, the people that grade the products, whether it be the trading cards. I'm sorry, the Yu-Gi-Oh! cards, the Pokémon cards, the baseball cards, where, "Hey, you should add this chip to your product there.
And that way, it's a way of authenticating." The authentication is really important here because there's just a lot of bootlegging of product that's happening in the marketplace, and this is the way to do that there. So we're really happy to be part of that. These are our retail brands that we own. We don't compete with any of our customers. We use these to keep our pulse on the marketplace, and we try and use them to deal with if ever any situations where we have some inventory that we could not return for full credit, we can sell that at a discount through these channels without selling it to a third party at a very low price. So a little summary here. We've done 16 acquisitions. I joined the company in 2001. Jeff and I were doing about $18 million in revenue.
Fast-forward, adding those acquisitions in 2020, we got as high as $1.4 billion. That was with a lot of help of COVID during that time. Since then, we had the COVID headwind there. We have pretty much been steady state for the last four years, about $1.1 billion a year. This year, you saw a breakthrough for us where our sales increased by 8%, so we are pretty happy about that. I talked about Handmade by Robots there. We are always looking for other brands or other things we can do, other licensing opportunities, and we are constantly in conversations about doing acquisitions in order to add something big and scale us to where we have really moved a needle as far as growing our sales and diversifying more. With that, I will pause there for any Q&A questions.
All right. Thank you, Bruce. I will moderate the Q&A session. Again, feel free to type in your questions into the Q&A box, and I will get to as many of those as possible. I did get a comment and a question coming in from an investor. They said that you have a super cool warehouse and do you have tours? The comment was, "Probably no dust on this inventory." I could tell you that I did tour the warehouse. It is fascinating, and it is worth going to, but I will let you address that, Bruce.
Yeah, Michael, thank you for making that travel. That is probably why we connected up with you, because you took the time to go meet us. I remember that very well. If there is any investor that ever wants to go visit our warehouse, they could just email our PR service, and we would set it up, and we would set up a tour for them there. Yeah, we are very proud and happy to show it to anybody and everybody.
It is well worth the trip. Bruce, you generated, like you mentioned, 8% revenue growth in fiscal 2026 and 14% Adjusted EBITDA growth, and you also mentioned that the gross margins expanded 80 basis points. As we move to fiscal 2027, what are the two or three biggest drivers that could allow EBITDA to grow faster than revenue as you look to next year?
Well, as I mentioned, that change in selling Walmart directly versus going through a third party, that will have a big impact on that part of our division there. A complaint that I've seen in doing non-deal roadshow calls is concerned about our cash flow or how the working capital works through our cash flow there. AR had drifted up, and AR drifted up because of two things, one being that we were selling to a third party using a third party, so there was 90-day terms. Prior to that third party arrangement, we always had the ability to take advantage of Walmart's supply chain financing through Wells Fargo. When we went to that third party, it went away. We're going to get that back now, so that's going to help make our cash flow look stronger, which is very important to investors.
Not only that, then the cost, the tax of going through that third party will be eliminated, and that's going to improve our margins. So we see those two things really improving there. On the rest of our business, music still continues to be strong, and we've got a lot of great stuff coming out here for the rest of the year. So those areas are very strong there. We only have six months of the MGM Amazon relationship, so we still got those six months now to be added to what we had. So we haven't got a full year of Amazon under our belt yet, but we're also getting the benefit of that.
Bruce, the physical media and the fact that it grew so well this year, in light of inflationary pressures and discretionary income pressures and so forth, are you kind of surprised that it performed so well? Secondly, do you think that that's the misperception that investors have about the story, that they think that the physical media is not likely to grow? Do you think that that's an issue?
Well, we saw music just start taking off in early this year. January, February, March, we were just, "Wow, why are sales so much better this year versus last year?" There was a lot of good artists that came out through that time period, so timing of artists and new releases definitely helped. The CD was quite a pleasant surprise. We have the K-shaped economy. They talk about it a lot. Obviously, if you're in the upper K, you don't care what the price of an LP is, but if you're in the lower K, you can't really spend extra money on an LP, but you could buy a CD and get the same amount of songs for a lot less money. At first, it started with Shein. When we started selling on Shein, we were surprised how many CDs were selling on Shein. That was last year.
We saw it picked up at Walmart there. I think the consumer is leaning more on the CD because it is a better value for what you can get if you want to own physical media, and that's what we're getting the benefit that physical media has. It's been talked about a while. Will the CD ever come back and be like the LP? I'm not saying that's going to happen. The LP doesn't seem to be slowing down, and we're really glad to see that the CD is picking up steam.
Got you. You've described Alliance as moving toward higher value businesses. If we look maybe three to five years out, how different do you expect the revenue mix, and probably more importantly, the margin profile of the company to look compared to today?
I think over time, we'll always work hard to distribute products that have a higher margin, and it's going to require us to lean in on licensing opportunities. Being just a traditional distributor, it's pretty hard to get your margins higher than 15% as a distributor. But if you are more than just a distributor and you can do that licensing and provide guarantees, we don't have to provide any guarantees now, but if you have to, we could. Being a public company, we're such an open book that helps us to have those serious conversations with these publicly-traded companies.
I think as physical media percentages change for the companies that have all those rights and their core competency in physical media becomes smaller or less, then we want to be there to grab that and steal that, take that business away from them or take it off their hands so we can convince them that, hey, instead of having all this headache and all this extra overhead, why don't you outsource it to us and we'll send you'll get your mailbox money instead of-
Yeah
That's the big picture strategy, and what I am describing to you is nothing new. Back in the 1980s when the record industry, the CD was overtaking the LP, the eight-track, and the cassette, the record companies licensed to third parties the manufacturing rights for LPs. So companies like Mobile Fidelity and Nautilus were born in the 1980s because of that changeover.
Yeah. Another question coming in, are you selling LP songs in languages other than English, like Spanish for instance, and others?
I am sure we have some music that we can distribute that is exclusively Spanish. We are very happy to lean into the Latin category. It is one of our genres that we sell. We stock anything and everything as long as there is a demand for it.
Bruce, Alliance Authentic, I think, might be one of the more interesting pieces of your story. In your presentation, you explained the product proposition well, but does not really quantify the incremental economics, and I was wondering, can you walk us through the economics? What does Alliance earn on an authenticated product versus simply distributing the underlying vinyl record or figure or movie?
Well, the current selling price for an encapsulated piece of vinyl is about $180. That is the selling price. The cost associated with that, you got the cost of the LP because we have to buy the record. You got the case and all that there. We could probably add another $20 on top. I am sorry. The cost of the LP is anywhere from $15-$20, and then you would add all the other stuff, so you probably got about all in a little over $30- $35 and counting labor.
That is just if you sell it once, and then if it gets traded in the marketplace and goes back and forth a couple of times through the Alliance Authentic Marketplace, then whatever it sells for from one owner to a new owner, we would earn some type of fee on that the same way that Amazon and eBay earn fees when they make sales in their marketplace. So that is our long-term thought process, how that would work.
Yeah. I know that we are running out of time, and there is a whole bunch of questions I could ask here about your collectibles, which is a great opportunity for you as well. You have completed 16 acquisitions and continue to identify opportunities. Given your working capital needs of the business and your current balance sheet, what has been true for your— I guess, what are you looking at in terms of the next acquisition, and where does debt reduction rank in the capital allocation hierarchy?
Well, if we did not acquire a company, then we would have lots of debt reduction. If we do acquire a company, it is always better to take on debt than issuing more shares.
Yeah.
If you are going to do acquisitions, you have to be prepared to take on debt because you do not want to give up equity, and because that is better for shareholders if we do not give up equity. It will be a combination of both. When we were going to buy Diamond last year, our plan was to. We could have done 100% with the debt, but we were going to issue some shares just so we could get some more shares in the float, and that would have been a good time to tell that story. That did not happen.
Yeah. There are obviously a lot of growth drivers for the company. I wish we could have had more time to talk about some of the collectibles and others, Alliance Authentic even more. That is all the time we have. I want to thank Bruce for his time and to all those in the audience for participating. I want to remind everyone that I do follow the company with an outperform rating and a $9 price target. The research is available to you on channelchek.com, where you can also find a replay of this presentation. Stay tuned for another great presentation at Noble's Emerging Growth Conference. Thank you.