Good morning, ladies and gentlemen, and welcome to Lifetime Brands' Second Quarter 2022 Earnings Conference Call. At this time, I would like to inform all participants that their lines will be in listen-only mode. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, please press star one on your telephone keypad. I would now like to introduce your host for today's conference, Andrew Squire. Mr. Squire, you may begin.
Thank you. Good morning, and thanks for joining Lifetime Brands' Second Quarter 2022 Earnings Call. With us today for 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 in 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.
Thank you. Good morning, everyone, and thank you for joining us today. Our performance in the second quarter was strong compared to pre-pandemic levels. We continue to feel the impact of the macroeconomic challenges that companies across industries continue to face. Inflation and supply chain disruptions have created inventory buildup at major retailers. Combined with weaker end market demand across many channels, these factors have created a slowdown in purchases from consumers as well as our retail customers this quarter, notably in off-price retailers. Despite this environment, we were pleased to record results that exceeded pre-pandemic levels, which is a testament to the progress the team has made executing on our strategic objectives. These results demonstrate that Lifetime continues to effectively manage our business notwithstanding macroeconomic and other external impacts.
We delivered $151.3 million in net sales and $7 million in Adjusted EBITDA, compared to $188.6 million in net sales and $18.2 million in Adjusted EBITDA for the 2021 period. However, compared to the 2009 quarter, which is a relevant benchmark prior to the significant impacts of COVID-19, our growth in net sales and Adjusted EBITDA is 6.2% and 6.3% respectively. We believe that we have positioned Lifetime well to navigate these headwinds and have taken a number of mitigating actions, including implementing pricing adjustments where possible and reducing our SG&A over the course of 2022. Our business model has proven resilient through all market cycles, and we are confident we are on the right path.
Starting with our core U.S. business, our distribution remains solid, and we continue to consolidate the market share gains we have made over the last several years. That said, inflationary pressures have dampened the end market demand, with many retailers pushing back their scheduled deliveries due to supply chain disruptions and over inventory positions that occurred as a result. Because of the recent supply chain challenges, retailers have received late shipments across many categories and have missed seasonal windows, resulting in a shift in focus to selling down inventory on hand versus selling in with new product orders. Ultimately, while some decrease in consumer demand related to inflation is likely to persist, we expect orders from our retailers to return to more consistent levels in the latter half of the year once they are able to sell down built up inventory.
We have already seen public comments from a number of major retailers suggesting they expect a more normalized second half of the year. For the quarter and year to date periods, respectively, e-commerce sales represented 18.7% and 18.9%. This was an increase from prior year, which was 16.1% for the second quarter and 18.4% for the year to date period. Strong performance in Amazon and growth in our burgeoning D2C channel contributed to the increase. Drop ship sales through omni-channel retailers declined approximately 17% for the year to date period, as this channel showed reduced demand driven by the inventory and related issues that I've already discussed.
We continue to gain traction on our various growth initiatives, including Year & Day, which is now successfully relaunched and is seeing growth every quarter. Turning now to our international business. While we continue to gain market share in Europe, our performance in our European business was significantly impacted by several factors. The ongoing uncertainty caused by the war in Ukraine, in addition to even more severe inflation and supply chain pressures than those we face in the U.S., have dampened the end market demand across Europe, the corresponding decline in shipments for our E.U.-based operations across all channels. We continue to see a long-term opportunity to expand our business in the international markets, and we will continue to pursue our growth initiatives with this objective in mind. Our new distribution center in the Netherlands is now fully operational and performing in line with our expectations.
We are already in discussions with several customers about expanding our business in continental Europe later in 2022 and beyond as a result of this new capability. In Asia, we have also seen a falloff in growth as a result of supply chain and inflationary challenges. Our Asian business continues to be profitable, and we continue to see a significant opportunity with consumers in Asian markets going forward. It's worth noting that the challenges in our international business are no longer operational in nature as in the past, prior to our reorganization of the business, and are primarily a result of macroeconomic factors. We continue to feel good about the progress we have made on our European and Asian expansion.
Further, as a result of the successful execution of the international turnaround strategy, we believe our full year 2022 will continue to show incremental financial progress, notwithstanding the current economic environment. In Commercial Food Service, Mikasa Hospitality continues to gain traction. We are confident with the new leadership that we added earlier this year. We are well-positioned to pursue our strategic objectives in this important growth initiative. While we have seen a rebound in the commercial food service sector this year, we are cautious about the impacts a recessionary environment would have on this industry, which could delay our progress in the short term but may accelerate our long-term penetration due to our strong financial position compared with most of our competitors in this space. Our other growth initiatives to expand into product categories also remain on track and are showing results.
While the demand environment remains somewhat challenged, we are starting to see an easing in the global supply chain and shipping disruptions of the past couple of years. Our ocean freight costs are down noticeably compared to prior year, and more importantly, availability has greatly increased. As I mentioned briefly earlier, we have already taken actions to mitigate the inflationary and supply chain interruptions we are experiencing. We have discussed our successful strategy of gaining competitive advantage by investing in higher inventory levels the past couple of years, which has resulted in market share gains for Lifetime. With the shifting demand picture in the second quarter, we have adjusted our strategy and are now focused on reducing our inventory levels gradually over time while still ensuring we are adequately stocked to be a reliable partner to our customers and maintain our strong relationships with retailers.
In addition, we have implemented plans to reduce our SG&A across the globe as we, and we previously implemented price increases in line with broader economic inflation. We believe the actions we have taken will enable us to maintain robust earnings in this challenging environment, but we will continue to be nimble and flexible in responding to the market as we navigate ongoing macro challenges. In addition, considering lessons we have learned from the pandemic, as well as macroeconomic and geopolitical factors, we have made a concerted effort to reduce our reliance on China-based manufacturing and build alternative sourcing options into our global footprint. This initiative is long-term in nature, and we are actively working on opportunities in Mexico, Eastern Europe, and multiple Asian countries. This is an important long-term effort to reduce our risk and enhance our operational flexibility to address unexpected supply chain challenges in the future.
Turning now to our financial guidance. In light of the current environment and our results in the second quarter, we are revising our outlook for the full year 2022. While we had anticipated softening of demand and accelerated inflationary cost pressures in the outlook we issued in May, we did not anticipate the abrupt short-term change in order trends across most channels. In the quarter, due to the dynamics discussed earlier, which have delayed many shipments in the first half year. While we continue to view these impacts as short-term and expect a degree of normalization in the second half of the year, we now expect our Adjusted EBITDA to be in the range of $73 million-$79 million and our net sales to be in the range of $800 million-$850 million for the full year.
Looking ahead, we will continue to be proactive in managing through this environment, and we are focused on maintaining a healthy balance sheet and strong cash flows to maximize our operating flexibility. On last quarter's call, we spoke about our commitment to the goals we announced in our five-year plan. While we believe that the goals of the plan can still be achieved, due to the current economic and geopolitical conditions and potential impact on global growth, we are not, at this time, providing an update while near-term visibility in our results is limited. We remain committed to being transparent about long-term objectives, and as more certainty emerges, we look forward to sharing our strategic path forward as we have consistently shared with our stakeholders in the past.
Overall, our business model has proved resilient through all market cycles, and our strong balance sheet and cash generation remain significant competitive advantage for Lifetime despite fluctuations in consumer behavior. We continue to execute well on all of our growth drivers, and we believe that our leading brands, strategic growth initiatives, and financial flexibility will continue to drive significant long-term shareholder value. With that, I'll now turn the call over to Larry.
Thanks, Rob. As we reported this morning, the net loss for the second quarter of 2022 was $3.5 million, or $0.16 per diluted share, versus net income of $5.8 million, or $0.26 per diluted share in the second quarter of 2021. Adjusted loss was $2.9 million for the second quarter of 2022, or $0.14 per diluted share compared to adjusted income of $6.1 million, or $0.28 per diluted share in 2021. Loss from operations was $500,000 for the second quarter of 2022 as compared to income from operations of $11 million in 2021. Adjusted EBITDA was $79.9 million for the trailing twelve-month period that ended June 30th, 2022.
Adjusted net income, adjusted income from operations, and Adjusted EBITDA are non-GAAP financial measures and are reconciled to our GAAP financial measures in the earnings release. The following comments are for the second quarter of 2022 and 2021, unless stated otherwise. Consolidated sales declined 18.9% from 2021. The drop, the impact of very high inflation and unprecedented supply chain disruptions resulted in significant excess inventory levels in retail have adversely affected our business in the current quarter. These results look especially weak when we compare to a very strong 2021. However, when compared to our last pre-pandemic second quarter of 2019, they were up 6.2%. The U.S. and international segment sales declined in the current quarter. The decreases were for the reasons following a very strong performance in 2021.
When compared to the last pre-pandemic second quarter of 2019, the U.S. segment sales were up 11.5%. A portion of this increase came from higher selling prices and the acquisition. Gross margin increased to 36.5% from 35.4%. For the U.S. segment, gross margin percentage rose to 37.1% from 35%. This was driven by product mix, a tariff reduction on certain products, and lower container costs as capacity has improved, and we will have our non-vessel operating carriers. For international gross margin was 30.5% compared to 32.3% last year. The decrease primarily reflects the impact of fixed overhead costs on lower sales volume. Now, distribution expense as a percent of net sales increased to 11.5% from 10.1%.
For the U.S. segment, distribution expenses as a percentage of goods shipped from its warehouses, excluding non-recurring expenses, increased to 11.3% from 9.4%. The increased rate is attributable to lower shipment volume and higher labor rates, partially offset by lower warehouse equipment and supply expenses. Additionally, the rate was adversely affected by higher inventory levels, which reduced labor efficiency. For international, distribution expense as a percentage of goods shipped from its warehouses were 22.1% in 2022 versus 17.5% last year. This increase was primarily attributable to lower shipment volumes, higher labor costs, and an increase in business occupancy tax expense for the U.K. warehouses. This increase is partially offset by lower freight costs as we now ship goods for distribution in continental Europe through our facility in the Netherlands.
Selling, general, and administrative expenses were $38.3 million for 2022 versus $36.2 million in 2021. For the U.S., these expenses were $29.1 million in 2022 versus $26.4 million in 2021. The increase was predominantly due to the acquisition of S'well, including integration expenses. SG&A expenses international were $4.3 million in 2022 and $4.2 million last year. Foreign currency transaction losses were offset by lower intangible asset amortization. Unallocated corporate expenses were $4.9 million in 2022 versus $5.7 million in 2021. The decrease was driven by lower incentive compensation expense, partially offset by an increase in professional fees. Our tax rate for the quarter was 2.5%.
The rate was lower than the statutory rate of 21%, primarily due to foreign losses for which no tax benefit is recognized, as such benefit is offset by valuation allowance. In comparison to the 2021 quarter, the income tax rate was 25.3%, which was higher than the federal statutory rate, primarily due to state and local tax expense, foreign loss without benefit, net of benefit related to share-based equity compensation. Looking at our debt and liquidity at June 30th, 2022, net debt was $259.1 million. Net debt to EBITDA leverage ratio based on pro forma Adjusted EBITDA was 3.1x. Liquidity, which includes $7.2 million of cash plus availability under our credit facilities, was $130.1 million.
The company's balance sheet liquidity remains strong, notwithstanding the funding of the S'well acquisition and higher inventory levels. Regarding our asset-based loan agreement, which expires in March of 2023, I'm pleased to report that we have received signed commitments from all lenders to extend the agreement to August 2027 on terms we believe are competitive for the financing market. JPMorgan Chase will continue as the administrative agent. The definitive agreement is subject to completion. The definitive amendment is subject to completion of the agreement documentation. This concludes our prepared comments. Operator, please open the line for questions.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad at this time. Please hold while we poll for questions. Our first question comes from Linda Bolton Weiser. Please state your question.
Yes. Hello. Good morning. How are you doing?
Doing well. Yourself?
Good.
Linda?
Hi, can you hear me?
Just got you back, but we lost you.
Okay, let me start again. Last quarter, Rob, you had spoken about a few issues that dampened sales last quarter, but were expected to help sales this quarter. One of them was the Amazon distribution center log jams or something like that was corrected, and also the planograms were shifted into this quarter. Did those things occur, or were those not things that actually helped this quarter?
Taking those separately, Amazon did clear out some of the issues, and that benefited our business. We saw a pickup in Amazon noticeably, and that contributed to, as I mentioned, the meaningful growth of e-commerce sales as a percentage of total sales. In terms of in general with all retailers and this impacted planogram resets, yeah, as has gotten a lot of attention, I'm sure you're aware, is the retail, the brick-and-mortar retailers as well as the e-commerce retailers were tremendously over-inventoried. And therefore, there's been a delay in shipments and pushing back across pretty much all channels, including the major ones with the planogram resets, anywhere from 90-120 days. We did not see a pickup related to that. They were really.
Even if it's not our goods, the retailers, as you know, are really focused on selling out the over inventory positions and weren't bringing in new goods.
If you were to estimate, I know it's hard to estimate, but how much like what do you think your retail inventory is? How much is it up year-over-year currently?
You're talking about the inventory of our goods in retailers?
Yes.
It differs by channel. A lot of the big guys have started reducing their inventory levels, and you've heard the big public, you know, the omni-channel mass guys have announced they're expecting pickups in the second half of the year, and we're actually seeing some of that more in August as we look at that order book than July. We are seeing that. If you look at the off-price segment, which has been a robust segment for us, we do very well. You know, we basically ship them. They were just very over-inventoried, particularly with apparel. The delays and shipping issues resulted in a lot, not just them. Other retailers experienced this, but you know, this, it's a good example in off-price.
They had a lot of apparel, particularly winter apparel. They kind of missed the season, right? There's been a lot of discounting that some retailers, as you may be aware, have even started looking to sell inventory through liquidators rather than just blowing them out through sales, you know, just retailer by retailer basis. We are seeing, though, pickup of order flow. We remain cautious, and there's hard visibility to really see, but there has been a decline at retail of inventory levels. What we don't know is other people's inventory. One of the problems we face is when they're over-inventoried, even if it's not in our inventory, there's no room to order in goods. We've seen a little bit of that in Amazon.
You know, we have outindexed our category by threefold over the last quarter, so quite noticeably. We've seen a pickup in, you know, as they're replenishing, but not as much as the sell-through, and it's because it's still inventory levels that's being worked through.
Okay. We have started to look at the IRI data a little bit, it's for the trade channel POS, for your company. Even though it doesn't tell the full picture, you know, those numbers do look like they've really slowed down to pretty big year-over-year declines in POS. You know, that has to do with consumer behavior and buying and all that. What do you think you're seeing in those trends? Do you kinda see the trend kinda worsening here near term, or are you seeing things maybe start to improve a little on the POS front?
By the way, I'm glad, you know, for our dialogue, IRI and NPD merged because we subscribed to a lot of NPD data. Now they're the same, right? You're getting to see what we see. That's nice. You know, if you look at the sell-through, there has been a softening of demand. The biggest impact on us has been more the inventory levels that people haven't been buying and not necessarily sell-through. It has been softening. The question is, you know, if we go into recession, will that continue? There's no question that inflation has impacted people buying. When eggs are twice the price and gas is more expensive, people are spending less discretionary. We've seen that more in Europe, which we believe is already in a recession.
There has been a bigger impact from consumer demand than in Amazon. As I mentioned, we're doing quite well in Amazon in the States, but not in Europe, because the consumer demand is not there. Without, you know, completely answering your question, the visibility is poor. I think it will be over the six months a function of, you know, will the economy, you know, decline, which will have a dampening on consumer demand. We've seen some dampening. Like I said, the biggest impact on us in this quarter has been more supply chain abundance with the retailers.
Okay. I didn't see. Did you say how much the S'well acquisition contributed to revenue in the quarter?
Yeah. You know, by the way, we factored all of what we think is gonna happen in our guidance, right?
Right.
I'll defer to Larry. You know, we've fully integrated S'well now into our business as part of our branded business unit. We're very optimistic. It's gonna be a very good acquisition for us, probably exceed, you know, what we've been talking about it. You know, there's always hair when you acquire things, so we have to work through some major over-inventory situations and channels that were stuffed prior to our acquisition of the business. Larry?
Yeah, sure. With the second quarter as well enters about $3.5 million revenue. Year to date, it's just under about $4.5 million.
There's a lot, though, that we didn't include in our estimates that we are now aware of, including we'll be able to drive a lot out of the cost of the goods. We've integrated in more effectively than we thought, not that we thought, I should say, but what we planned and talked about.
Okay. Then, finally, we've been hearing from one of my companies, a cosmetic company that sources out of China, that maybe some tariffs will expire in September, and if they're not renewed, they will expire and you'll get those benefits. Are you thinking that could happen, that you could get some tariff relief here in the foreseeable future?
Yes. We've gotten some this year. We are very closely following and involved with all this on our goods. There's a lot of hundreds of categories, right, that fall into that. We're not counting on that, though, to provide a pickup for us on margin, you know. We view that if there's a benefit, we'd be neutral, but there's potential upside there.
Okay, I'll leave it there. Thank you very much.
Thank you. Operator, are there other questions? Operator? Andrew, are you still on? Can you hear us?
Yes, I'm here.
All right. There seems to be a technical difficulty. We've lost the operator.
I'm sorry. My line was muted. Our next question comes from Anthony Lebiedzinski. Please state your question.
Hey, Anthony.
Anthony, are you there?
Sorry, my line was muted. Can you hear me now?
Yes, Anthony. Hi.
Yes. Okay, yeah. Good morning, and thank you for taking the question. Firstly, I definitely appreciate the color on the geographic breakdown. As far as just overall looking at the product categories, is the weakness that you're seeing, is that kind of across the board, or are there any particular product categories that stand out?
Pretty much across the board. It'd be biggest in our tools category only because that's our biggest category, right?
Mm-hmm. Yeah.
Again, this is much more driven by retailers not buying because they have too much inventory. That makes it fairly uniform across all categories.
Gotcha. Okay. Actually, just to follow up on Linda's question about the tariff relief. You said you got some relief this year. Is there any way you can quantify that? You're just wanting to know, you know, as far as how meaningful that was.
Yeah. Larry mentioned in his comments that, you know, there was some pickup. It's not what's driving our numbers, but, you know, some benefit. I mean, it's a factor. That's why we called it out. You know, it's. I don't have the specifics, and it's. It's not driving the numbers.
Got it. Okay. No, I was just wondering if that was anything meaningful to call out as far as the impact of that. Overall, you know, looking at your comments, Rob, as far as your SG&A reduction that you plan, you know, how should we think about that, you know, as we look to update our models here for the back half of the year?
Anthony, as you know, we do manage actively our business. We took a look at the business with these changes we were seeing in 2022 and already implemented globally, expense reductions. Those will impact the second half of the year, right? You know, we really implemented them in, you know, in our, what we would call six + six plan, right? You know, six actual, six in the forecast. That's why you really don't see any benefit in the first six months. They have been implemented. It is across the globe. In general, we took out 5% of our SG&A. Now, bear in mind, as you model, we've grown tremendously, right? We've doubled the profitability of this business over the last three years.
Right.
You know, we've been looking to make sure we were investing in growth as opposed to, you know, just pocketing everything that we've achieved, right? We've been vocal, and we've been investing millions of dollars that we would be making that much more money over the last couple of years in new initiatives such as Year & Day, Mikasa Hospitality, new product adjacencies and the like. If you look at the year-over-year, that includes more investment, right? In a vacuum. Now that will be reduced by 5%, right? Because we took our run rate and cut it by 5%. Run rate as of the first six months, not our run rate, you know, for year 2021. Understand?
Right. Yeah, got it. Thanks for that additional color, Rob. As you work to reduce your inventories, should we expect anything in terms of the discounting of that as you look to, you know, to get that inventory sold? Or you think you'll be able to sell it at, you know, at full price or close to full price?
Yeah, it's a great question. You know, as you know, for the last couple of years, we've been conservatively investing in inventory, and it's been a highly successful strategy. Well, it's not a highly successful strategy at this moment in, you know, the environment that we're facing, right? We wanna monetize that, and we can. No, we are not discounting. It's all A inventory, right? We can sell it. You know, it's not like we're a company that we've gotta really monetize that, you know, and get the cash at a discount, because we don't need to, right? We got tremendous liquidity. We're very strong financially. We are not discounting. We have not discounted. Now, if you look at where you discount today, you do it in the off-price channel. The off-price channel's dead.
You know, it'll pick up. It's starting to pick up, and it's a great channel for us, and they're great relationships. We're not gonna go in any channel, including that channel, which we had an opportunity to do in this quarter and discount deeply, but we decided not to monetize and goose some sales, lower margin, and that's why you see our margins have maintained very strong. We do not intend to discount this, such as the retailers are in a different situation, right? You see them discounting and their operating margins are going way down as they've guided people to. That's because they've got the inventory, they've gotta dump it, and the only way to do that is through sales reductions, right? We don't need to do that. We can hold on to the inventory.
We are cognizant of, we have extra spend if, you know, we're overflowing in inventories and we've got to hire, you know, external warehouses. With the quarter being soft, we didn't really inventory because we weren't purchasing any more, but we weren't really down so much. You will see progress on that initiative in the second half of the year.
Got it. Okay. Thanks for that, Rob. You also mentioned in your prepared remarks with the new facility that you have in the Netherlands, that you'll be able to expand more into continental Europe. I certainly recognize that now is certainly a tough period there for in Europe. Just, you know, if you could just kind of expand on that as far as the potential opportunity, you know, that, you know, I assume would be probably next year, but if you could just give us some more color, that'd be great on that.
Yeah, we will pick up some this year. We are picking up, Anthony. The benefit of that facility is we can ship anywhere in the continent in 24 hours, 48 at worst case scenario, right? We have availability on the continent that is not disrupted, you know. We can do it on really we talk about it being cost neutral, it could even be better than that. We are picking up distribution in conjunction with our direct selling strategy and this capability. More of it'll be forward-looking, but we just have a better value proposition to offer people cheaper, faster, you know, better. We picked up Carrefour. Actually, we picked up a lot of business in Dunelm, which is in the UK, so that's not Netherlands-based.
We are expanding e-commerce throughout the continent because of this, because we can drop ship as well from this facility. It's a good capability. We have picked up market share, but the business is down because the impacts have more than offset that, the macro impact.
Got it. All right. Understood. Thank you very much and best of luck.
Thanks, Anthony.
That was our final question.
Great. Thank you, operator. Thank you everyone for joining us as always on this call. Larry and I are available for anyone who wants to reach out for further discussions or questions, and we look forward to speaking to everyone in our third quarter earnings call in a few months. Thank you.
Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.