Alliance Entertainment Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Alliance Entertainment Third Quarter Fiscal Year 20 24 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward looking.

Operator

While these forward looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events. Throughout today's discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10 ks for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors.

Operator

During this conference call, we will discuss non GAAP financial measures, including a discussion of adjusted EBITDA. We believe non GAAP disclosures enable investors to better understand Alliance Entertainment's core operating performance. Please refer to the investor presentation for a reconciliation of each non GAAP measure to the most directly comparable GAAP financial measure. A press release detailing these results across the wire this afternoon at 4:0:1 p. M.

Operator

Eastern Time and is available in the Investor Relations section of our company's website, aent.com. Your host today, Bruce Ogilby, Executive Chairman and Jeff Walker, Chief Executive Officer and Chief Financial Officer, will present the results of operations for the fiscal Q3 ended March 31, 2024. At this time, I will turn the call over to Alliance Entertainment Executive Chairman, Bruce Ogilvy.

Speaker 1

Thank you, operator, and good afternoon, everyone. I'm pleased to welcome you to today's fiscal Q3 ended March 31, 2024 financial results conference call. For those of you that are new to our story, we bring entertainment to you. Alliance stocks the world's largest selection of music, movies, video games, gaming hardware, arcades, collectibles, toys and consumer electronics. We are a trusted omnichannel supplier to the largest retailers and wholesalers across the globe and a trusted distributor to the world's most recognized entertainment content and gaming brands.

Speaker 1

As from our most recent June 30, 2023 fiscal year end, we produced over $1,100,000,000 in annual revenue and employed over 700 team members. Alliance is the gateway between brands and retailers. We are a trusted omnichannel supplier to Walmart, Amazon, Best Buy, Costco, Target, Kohl's, BJ's, Meijer, Barnes and Noble, Dell, Verizon, over 2,000 additional independent music retailers and wholesalers worldwide and a trusted distributor for Walt Disney, Paramount, Sony Pictures, Warner Brothers, Universal Pictures, Microsoft, Nintendo, Activision, Electronic Arts, Mattel Hasbro, Funko, Arcade 1 Up, Universal Music, Sony Music, Warner Music Group and over 600 other suppliers. We have over 200 customers that sell online worldwide that rely on our supplied metadata of descriptions and images we ship to more than 35,000 storefronts in 72 countries and our stocking distributor of over 325,000 in stock SKUs to the largest retailers and wholesalers in the world. For this slide, you will see 9 months of sales of our current fiscal year compared to the previous 4 years.

Speaker 1

We wanted to show you how diversified Alliance is and how consistent sales by configuration are. The diversified products offered are a big part of Alliance's winning formula and will balance out steady flow of new releases with evergreen consistent catalog titles. Over $200,000,000 of our $1,100,000,000 is product where we are the exclusive distributor, but we have licensed and sell exclusively. Amped and Distribution Solution divisions distribute physical exclusive music and exclusive videos, respectively, and our Mill Creek division engages in exclusive video licensing with content from Disney, Sony, Universal, Lionsgate, CBS and others. Distribution solution, being $120,000,000 of the $200,000,000 has over 62 significant exclusive video studios that rely on distribution solutions to manufacture, supply, market video products and has direct sales accounts with Amazon, Walmart, Target, 1,000 of retailers and websites through Alliance Entertainment's vast distribution channels.

Speaker 1

By having exclusive content that creates a sticky relationship with retailers. Distribution solution is also developed digital video distribution consisting of streaming and premium downloads with fiscal year 2023 digital revenue of $8,400,000 and year to date fiscal year 2024 is 17,000,000 Of the $17,000,000 year to date fiscal year 2024, two titles consisting of Nefarious and The Blind totaled $7,900,000 AMT has more than 90 exclusive labels that rely on AMT to supply end market music, vinyl and CD and sells and markets music through Amazon, Walmart, Target, Barnes and Noble, Best Buy and over 2,000 independent music stores in the U. S. Through Alliance Entertainment's worldwide distribution channels. Artists and labels are attracted to AMP like Usher or ATEEZ, a K Pop artist, because they use AMP as their exclusive physical distributor and the artists do their own digital and social media marketing to maximize their profitability.

Speaker 1

K Pop artists like Ateez, a rapidly growing genre for Amped. Mill Creek licenses video content from studios to create, manufacture, market and sell video DVDs with content license from Walt Disney, Sony Pictures, Universal Pictures, Lions Gate, CBS Paramount and other significant studios. This is a little history about our growth and where we are today. In 2013, Jeff and I had built up SuperD from $18,000,000 in sales starting in 2,001 to $194,000,000 The major event that happened in 2013 was SuperD acquiring Alliance Entertainment. Alliance was $725,000,000 in revenue to our $194,000,000 We merged our operations in California into Alliance's warehouse operations in Kentucky.

Speaker 1

After the acquisition of Alliance combined, we became the largest distributor of music and video in the world and was the start of our major consolidation path. 2016, we acquired Anderson Merchandisers, which included the vendor managed inventory accounts providing all music to 3,900 Walmart stores and all 900 Best Buy stores. Being solely music and movies, we were looking for a 3rd category of content to distribute. This led us in 2018 to the acquisition of MEKA. MEKA had direct relationships with Microsoft, Sony and Nintendo.

Speaker 1

By acquiring them, we were able to become a distributor of video game products. The Mecca acquisition gave us about another $100,000,000 worth of revenue. In the same year 2018, we were offered the opportunity to take over distribution solutions from Sony Pictures. Distribution Solutions gave us another vendor number with Walmart, which allowed us now become a supplier to Walmart about 20 different movie studios that we were the exclusive to for distribution solutions. In 2020, we acquired MEKA's competitor Kokam and eventually consolidated Mecha into Kokam.

Speaker 1

That expanded our relationship with Best Buy, Target, Kohl's, Dell and Verizon. We also started distributing retro arcades from Arcade 1 up. We only show this slide to share that we have a proven track record of completing acquisitions and we'll continue with that same strategy to grow and diversify our company. We are currently working on 4 possible future transactions. We put ourselves on hold for acquisitions in 20 22 2023 for our SPAC merger and gaining our new 3 year line of credit in place.

Speaker 1

Alliance provides traditional retailers with world class distribution and e commerce capabilities by focusing on service, selection and technology, providing retailers superior service, stocking the world's largest physical media and entertainment selection in state of the art technology systems and facilities. Alliance provides efficient omnichannel expansion solutions for retailers, offering a full enterprise level infrastructure and white label dropships orders directly to consumers on behalf of its customers. The entire ordering, confirmation and invoicing process is automated, allowing customers to focus on sales, while we refer all the stocking, warehousing and shipping functions. To the consumer, the shipment they received looks like it was sent by the large retailers we service. It's a win for retailers as there's no inventory risk for all the 200 online retailers that rely on Alliance.

Speaker 1

Alliance is also a leader in vendor managed inventory solutions, providing solutions tailored to customers that support their inventory needs. These value add services provide highly technical, critical business function for our partners. Alliance consolidates and distributes a vast portfolio of entertainment products over 6 major categories, while our proprietary database powers retailers' online music and gaming offerings, including vinyl, CDs, DVD, Blu Ray, gaming products and retro arcades. Currently, we have over 325,000 unique SKUs in stock to support our customers' vast selection needs. Alliance has invested in enhancements to our automated handling equipment, which reduces shipping times, streamline order processing, reduce labor costs and also improve overall warehouse management.

Speaker 1

In January 2023, we announced we went live with AutoStore, automated storage and retrieval system in our Shepherdsville warehouse. The system improved warehouse operations, allowing us to achieve increased levels of speed, reliability, capability, precision that result in the significant cost savings. With Autostore, we went from 41 pickers down to 7 and receiving went down from 14 associates down to 4. During the last quarter, we announced the installation of SureSort X, a cost saving sortation technology system from the warehouse automation solutions provider, OPEX, at our Kentucky facility. Utilizing this new SureSort X technology results in annual labor savings of nearly $400,000 along with an immediate savings of $460,000 from avoiding retrofitting older sorting technology set to be retired.

Speaker 1

With the introduction of SureSort X, the larger format sorter complements the 5 existing CD, DVD and vinyl record sorters at Alliance, giving our warehouse the ability to move away from manual sortation of larger products, specifically toys and electronics and accessories. In the investor presentation, there are hyperlinks to see Autostar, OpEx and other processes we do in Kentucky. This slide highlights our strategically located operations that includes 7 offices and 4 different distribution centers, including 873,000 square foot facility in Shepherdsville, Kentucky. In 2023, warehouse shipments totaled over 70,000,000 units through our highly skilled workforce and tech enabled facilities and infrastructure that allows Alliance to achieve industry leading speed and accuracy metrics. I will add that in Shakopee, Minnesota, because of Autostore in Kentucky, we were able to close the larger two buildings removing 198,000 square feet of our 220,000 square feet we have currently leased.

Speaker 1

That closure process started in January will be fully completed by May 31. The warehouse cost savings will be significant in our 2025 fiscal year numbers. I will now hand the call over to Alliant's CEO and CFO, Jeff Walker, my partner.

Speaker 2

Thank you, Bruce, and thank you all for joining us today. We will now turn to an overview of our financial results in the Q3 ended March 31, 2024. Net revenues for the fiscal Q3 ended March 31, 2024 were $211,000,000 compared to $227,000,000 in the same period of 2023, a decrease of 7.3%. Consumer direct shipments were 33% of gross sales revenue for the 3 months ended March 31, 2024. Year over year for the 9 months ended March 31, revenue generated by consumer direct shipments increased from 34.4% to 39.1 percent of gross sales, an increase of 4.7%.

Speaker 2

Gross profit for the fiscal Q3 ended March 31, 2024 was $28,000,000 compared to $27,300,000 in the same period in 2023, an increase of 2.5%. Gross profit margin for the fiscal Q3 ended March 31, 2024 was 13.3%, up from 12% in the same period of 2023, an increase of 130 basis points. Net loss for the fiscal Q3 ended March 31, 2024 was $3,400,000 compared to net loss of $7,800,000 for the same period of 2023, an improvement of $4,400,000 Adjusted EBITDA for the fiscal 3rd quarter ended March 31, 2024 improved by $5,300,000 to $2,900,000 from an adjusted EBITDA loss of $2,400,000 for the same period of 2023. We have taken significant steps over the past year to strengthen our balance sheet with additional cost savings initiatives planned. Throughout 2023 and into 2024, we are highly focused on reducing inventory and debt, with fiscal 3rd quarter year over year inventory decreasing from $163,000,000 to $108,000,000 and debt down from $127,000,000 to $87,000,000 We also expect significant cost savings with the planned closing of our Minnesota facility on or before May 31, 2024.

Speaker 2

Additionally, to support growth, we recently secured a new 3 year $120,000,000 senior secured asset based credit facility with White Oak Commercial Finance. The proceeds of which was used to refinance existing credit facility, fund working capital needs and provide for general corporate purposes. These steps have also positioned us to focus and execute on implementing our acquisition strategy going forward. On this slide, you can see fiscal year 2022, we were experiencing the benefits of COVID with peak sales of $1,420,000,000 Fiscal year 2023, our sales normalized after COVID with sales of $1,160,000,000 For fiscal year 2023, adjusted EBITDA was negatively affected with one time supply chain costs of $35,800,000 We have gotten past those one time supply issues. For the fiscal 9 months ending March 31, 2024, our adjusted EBITDA was 2.6% of revenue.

Speaker 2

We are continuing to reduce operating costs and improve margins in 2024 to maintain a 4% to 5% adjusted EBITDA through sales. In addition to growth in our year over year quarterly gross profit, we reduced operating costs $4,500,000 dollars or 15.2 percent through warehouse efficiencies and new technology implemented going from $29,700,000 down to $25,200,000 These efficiencies will have an ongoing positive impact going forward. Gross profit improvements and expense reductions also led to a 4th consecutive quarter of positive adjusted EBITDA increasing to $2,900,000 in the fiscal Q3 compared to an adjusted EBITDA loss of $2,400,000 in the prior year. Net revenue for the 1st 9 months of our fiscal year ending March 31, 2024, totaling $864,000,000 compared to $912,000,000 in the same period of 2023, a decrease of 5.3%. Gross profit was $102,000,000 compared to $74,000,000 in the same period of 2023, an increase of 38.4%.

Speaker 2

Gross profit margin was 11.8%, up from 8.1% in the same period of 2023. Net income was $2,100,000 compared to a net loss of $30,800,000 for the same period of 2023. Adjusted EBITDA for the 9 months ended March 31, 2024 was $22,200,000 compared to adjusted EBITDA loss of $21,000,000 for the same period of 2023. This slide shows the quarterly results since Q1 2020 for gross profit, GAAP net income and adjusted EBITDA. Comparing Q3 fiscal year 2020 to Q3 fiscal year 2024, adjusted EBITDA has decreased from $4,800,000 to $2,900,000 which is a decrease of 39% over the past 4 years.

Speaker 2

We have taken significant steps over the past year to strengthen our balance sheet with additional cost savings initiatives planned. Throughout 2023 2024 to date, we have been highly focused on reducing inventory and debt, with 3rd quarter year over year inventory decreasing from $163,000,000 to $108,000,000 and debt down from $127,000,000 to $87,000,000 We also expect significant cost savings for the fiscal year ending 2025 with the planned closing of our Minnesota facility in May of 2024. Additionally, to support growth, we recently secured a new 3 year $120,000,000 secured asset based senior credit facility with White Oak Commercial Finance. The proceeds of which was used to refinance existing credit facility, fund working capital needs and provide for general corporate purposes. These steps have also positioned us to focus and execute on implementing our acquisition strategy going forward.

Speaker 2

I will now turn the call back over to Bruce.

Speaker 1

Thank you, Jeff. Alliance has a proven track record of successfully acquiring and integrating competitors and complementary businesses. We have acquired over a dozen companies in the last 20 years, including Alliance Entertainment, A and Connect, MEC Electronics, Distribution Solutions, Kokam and Think 3 Fold. We also continue to focus on acquiring more licenses and exclusive distribution agreements in music, video gaming, collectibles and electronics. Expanding our existing product and service offerings and executing our acquisition strategy will drive Alliance's efforts towards increasing market share.

Speaker 1

Alliance will further invest in automating facilities and upgrading proprietary software. Alliance's direct to consumer or DTC services are in greater demand as consumer preferences shift and stress retailers' e commerce and DTC capabilities. Enhancing DTC relationship will grow existing revenue lines and improving capabilities will generate a more attractive overall service offering. Leveraging existing relationships, Alliance can expand the new consumer product segments, growing its product offerings and providing more selection and diversity to our existing customer base, while attracting new customers in the process. In closing, Alliance is a leading global entertainment wholesaler, direct to consumer distributor and e commerce provider for entertainment industry with over 30 years of operations and experience within the entire Alliance management team, which beneficially owns more than 81% of the common shares outstanding and has extensive knowledge and tribal knowledge to lead the company towards future growth.

Speaker 1

We are a leader in fulfillment and e commerce distribution with over 325,000 SKUs physically in stock protected by focused commitment of service, selection and technology. Suppliers and brick and mortar retailers, omni retailers, online retailers and consumers rely on our company's platform to build transactional volume for trusted dependable relationships. Through the expansion of partnerships with our vendors and our customers as well as investment in existing facilities, Alliance expects to continue to grow revenue and expand margins. Again, we have a proven track record of M and A, having successfully acquired and integrate 12 significant businesses in 2,003. There are significant future acquisition and consolidation opportunities to drive future growth through the acquisition of complementary businesses and competitors.

Speaker 1

Finally, the company's technology platform increases the efficiency of transactions, reduces labor costs, provides great mobile accessibility and incorporates modern marketing and fintech tools. We look forward to providing our shareholders with further updates in the near term as we strengthen our leadership position as the premier distributor of music, movies, video games, arcade, toys, collectibles and consumer electronics. We also look forward to seeing some of you at our upcoming Investor and Analyst Day at our warehouse in Shepherdsville, Kentucky next week on May 16. I thank you all for attending now. I'd like to hand the call back over to the operator to begin our question and answer session.

Speaker 1

Operator?

Operator

Thank you. At this time, we will be conducting a question and answer session. Our first question is from Ashok Kumar with ThinkEquity.

Speaker 3

Thank you very much. And just a 3 part question. How much further room for gross margin expansion do you see as you optimize for profitable sales? And what's your realistic long term gross margin target? Then 2 is you've had good success with M and A historically.

Speaker 3

So what does the pipeline look now in terms of potential acquisitions to drive inorganic growth and expand it to new categories? And the 3rd part is the what are the biggest opportunities you see to grow your DTC and e commerce as a percentage of sales and how are you investing to enhance your capabilities here? Thank you.

Speaker 2

Thank you, Ashok. This is Jeff Walker here. Okay. You got me 3 lots of questions here. On the gross margin side, we're definitely seeing a lot more focus on profitable sales.

Speaker 2

Last fiscal year, we were definitely still working on some liquidation sales that really impacted our gross margins. So we're continuing to see our gross margins improve here for fiscal 2024 and I think you're going to see an improvement in gross margin going into fiscal 2025 as well. So from the gross margin side, we're pretty strong there. One of the other things that we are seeing is from our gross profit with operating expenses, We are consolidating into Kentucky from Minnesota and we are also seeing less labor pressure. A couple of years ago, there was definitely a lot of pressure on labor, where we were having to do a lot of extra bonuses and things in the warehouses.

Speaker 2

And that has definitely used up a little bit that's helping our margins operating costs going forward. From the acquisition side, some very robust conversations right now. We really built Alliance over the years through acquisition. And there is with the diversity of our business in all the different categories that we mentioned earlier on the call, there's a lot of different participants, competitors, small competitors, big competitors in each of the different categories. And there's a lot of good strategic acquisitions there.

Speaker 2

But we also have to be cautious that we're focused on the right acquisition at the right price. We're not known to overpay on acquisitions and we're not going to go down that path to do that today. So, some of the acquisitions become conversations that last for a time period as everybody kind of settles into what's the right price for a transaction to happen. And we're really looking for acquisitions that become accretive to value in the business. So we want to look at something that when we do 1 plus 1, we get 3 out of that equation.

Speaker 2

And that's really the critical component there is that there's either really in our acquisitions there's kind of 2 components. 1 is a straight consolidation where we're taking out a lot of overhead and expenses and we compete on a lot of the same customers and products. That part is very good accretive value. And then there's acquisitions where it gets us into a new category or with some new vendors or customers like in the past when we acquired MEKA and that got us into the gaming component there. So there are still some other product configurations in areas that are within entertainment and also within collectibles and things that people collect?

Speaker 2

On the third question, the DTC, we're having some great success in our direct to consumer. You have to realize that Alliance is really the leading direct to consumer fulfillment company in all of entertainment. And what drives that is for Internet fulfillment, it's all about having the product in stock and on the shelf. And you heard us earlier in this call specifically say that we have 325,000 SKUs and in stock is the very important component of that. It's not 325,000 in the database.

Speaker 2

Those are actually in stock, available for sale on major websites here in the U. S. And around the world. That aspect is what our major retailers and our major customers on DTC are relying on. And a couple of examples of that is, in this last 6 months, we have picked up all of the target.com video and music direct to consumer fulfillment.

Speaker 2

So all CDs, vinyl records, DVDs are purchased on Target are coming from the Alliance warehouse facility with Target's brand and name on those orders. We also have been doing for years all the music and video for Walmart as well as Barnes and Noble. And we are also over in the gaming side, we are doing all the Microsoft Xbox products for Costco and Costco.com and Costco Warehouses. So on the DTC side, that's an area where the retailers, it's a fantastic opportunity for the retailers. And they don't have any inventory risk in that.

Speaker 2

They take inventory feeds from us, what's available, they sell it, they send us the order, we ship it direct to the customer. And the last part on the DTC is, we've been very big on the arcades from Arcade 1 up. We've got significant DTC business there with Wayfair, Dell, Best Buy, Walmart, Target, Amazon, Home Shopping Network, QVC, Home Depot, all of the arcades that are up on all those retailer sites are coming from Alliance and are getting filled from Alliance.

Speaker 3

Bruce and Jeff, thank you so much and all the best.

Speaker 2

Thank you,

Speaker 4

Our first webcast question asks, can you speak to why net revenues decreased for the 3 9 month period and how should we think about fiscal Q4?

Speaker 2

Yes. We have had a decrease in the quarter 9 months fiscal. I mentioned a little bit about that previously. We in the previous year, we definitely had a lot of liquidation product that we were selling through and moving through. That product we no longer have and it has impacted our top line revenue a little bit because we were doing sales on those.

Speaker 2

The good part is we're more focused on the profitable sales and we don't have that we have less liquidation sales going through. And so that's part of the reason why you're seeing the margin and so forth increase as we're moving forward here. End of fiscal Q4, we put out a press release about our record store day sales. It was a record for our record store day as well as our indie sales team. They had our highest monthly sales to date.

Speaker 2

And April started off very strong. Revenue was about 10% above last year for April of 2024. And we really had a pretty big aspect all put together within that. Obviously, we have Record Store Day. We all know that Taylor Swift's new release came out here in April as well.

Speaker 2

And with that Taylor Swift one, we did all the exclusive vinyl for target.com. We filled all their orders on that, which was very significant numbers this year. And then also, we've had a pretty big project we've been working on with Microsoft and Verizon. I'm sorry, not Microsoft, Nintendo and Verizon. And Verizon is doing a lot of Nintendo Switch giveaways and we're the distributor in the middle selling the Nintendo product to Verizon.

Speaker 2

So all of that's been a very positive impact for the beginning of Q4 here and should continue for the rest of the quarter.

Speaker 4

Our next question asks, in terms of new growth initiatives, what are you doing to improve the revenue line? Can you talk about any verticals that showed elevated growth during the quarter? For example, vinyl, gaming, digital, etcetera.

Speaker 2

Well, I've been talking to a lot of people recently and I keep saying it's a great time to be a music artist right now. Music is really on fire. And from an artist perspective, CDs are still selling. Vinyl is going through the roof and it's continuing to be super strong. Obviously, music artists have digital revenue and they also have concerts and things like that that they're doing.

Speaker 2

So the music side has been super strong. You really have to realize that vinyl is a collectible item. People are collecting it and it's really becoming strong there. We also have put out some press releases in the recent past on the K Pop music coming out of Korea. I can't say anything more than that stuff's on fire right now.

Speaker 2

And the collectability of that from the fans has been very, very strong. One of the other parts of that is our AMP division, which is exclusive distribution of music. We do have some K pop labels in there and one of them that has ATEEV is a pop K pop artist that they are really producing some great sales there on that side. We've also moved into some new areas. We have gone down the path of live commerce.

Speaker 2

There's Internet sales that are happening obviously on Amazon, Walmart, Target and websites. But in today's world, a lot of sales are starting to move towards live commerce. And that is live auction, live commerce on Why Not and we just did one this last week with Star Wars product with eBay Live and we feel that that's a very strong category of a new sales channel that wasn't in existence a few years ago. When we look at the breadth of products that we have and the collectability of those products, Alliance is primed to be a leader in the live commerce sales channels there. And then the additional one that has been a really big win for us here in fiscal 2024 and expected to continue into 2025 and forward is our digital expansion into digital video.

Speaker 2

We've had digital video for several years now and it's really starting to pick up with the volume there. And Bruce mentioned Nefarious and Blind, 2 big DVD titles that came out this year that drove a lot of digital revenue and are continuing to be very strong weekly digital revenue right now.

Speaker 4

Next question asked, congratulations on the record store day event. It seems like vinyl is continuing to grow. Can you talk about the macro thematic to what is driving this and is this sustainable going forward?

Speaker 2

Well, it's everything vinyl today. I think part of it is vinyl is obviously a collectible item. People like to have a vinyl collection, show it off to their friends and so forth. And obviously, people like the sound of vinyl as well. So it's continuing to really drive forward.

Speaker 2

And we definitely have seen a pretty big shift from the music artists and the record labels where they were previously thinking of vinyl as kind of an afterthought because in the past the sales weren't that significant. But in today's world, the sales of vinyl on a big new release are becoming very significant numbers. And it's something that the record labels are spending much more time focusing on. And then the other component in the vinyl is a lot of great collectible sets, where a lot of limited edition items in vinyl as well. Like a good example right now, we do all the music, including vinyl and CD for Walmart.

Speaker 2

And over the last 12 months, we've secured over 100 different exclusive vinyl titles for Walmart. And one of the big ones that I'm a big fan of is the Bob Marley legend vinyl. That's an evergreen seller, a top 10 or top 20 seller for years years. Well, the limited edition one was a rainbow vinyl version. So the disc is rainbow color and not just a black vinyl.

Speaker 2

So that's something new and collectible that people want to have and people want to not only collect it, they want to watch it turn on their turntable. So that's what's driving vinyl. And we have to also realize that vinyl is a collectible item. The collectible products in all across all entertainment, across sports, across cars, everything is very popular right now with people and people are collecting a lot of stuff. And Alliance is really selling a lot of product that is collectible and that's the majority of the product that's in our warehouse is stuff that people are collecting and adding to their collections.

Speaker 4

Our next question asked, can you talk more about DTC and the progress there?

Speaker 2

Yes. I hit on that quite a bit there with Ashok's question. We're really continuing to fine tune our direct to consumer. We definitely have added some people into our direct to consumer team. That's really focusing a lot with a lot of our major retailers, making sure listings and product selection and product pages and everything are dialed in and are looking great to really support the e commerce initiatives that all the retailers have.

Speaker 2

That's a big initiative for every brick and mortar retailer and e commerce retailers continue to expand their selection, have that stuff available for sale. It's really driving a lot of sales for Alliance and for the retailers.

Speaker 4

And our last webcast question asks, can you provide additional color on your views of the consumers' posture around your products? Also are the restructuring costs all behind you

Speaker 2

now? Well, on the consumer, I mean, the consumers are definitely still rapid fans of entertainment products. So we're still seeing strong demand on our product categories there. I think the restructuring costs, we didn't have a whole lot of overall restructuring costs. We are definitely winding down the warehouse there in Minnesota.

Speaker 2

There was a small amount of cost to wind that down. It's really the cost savings of that consolidation. And the other big part to think about is we acquired Kokam in September of 2020. So it's been 3.5 years at this point. This consolidation came about because the lease on the main facility was expiring here in May.

Speaker 2

And the other component though is we have been operating on 2 legacy computer systems. And so the Kokam legacy computer system is being retired as well here, which is it's not just the rent of the building and things like that, but retiring a whole separate computer system definitely helps us from IT costs as well as accounting costs, as well as audit costs and compliance costs and all those things to not have to have 2 legacy operating systems. So there is a pretty substantial savings that we're seeing some of that savings here and the majority of that savings is going to hit fiscal 2025 starting really in the next couple of months here.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And I would now like to turn the call back to Mr. Ogilvy for closing remarks.

Speaker 1

Thank you, operator. I'd like to thank each of you for joining our financial results conference call today and look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer your questions, please reach out to our IR firm, MZ, who will be happy more than happy to assist with you. Thanks everybody today and thank you for your time. Thank you, operator.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect.

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Key Takeaways

  • Despite a 7.3% drop in Q3 net revenues to $211 million, Alliance grew gross profit by 2.5% to $28 million, lifted its gross margin to 13.3% (+130 bps), turned adjusted EBITDA positive at $2.9 million versus a $2.4 million loss a year ago, and cut its net loss to $3.4 million from $7.8 million.
  • Alliance has strengthened its balance sheet, cutting inventory from $163 million to $108 million, reducing debt from $127 million to $87 million, and securing a new $120 million senior secured credit facility to fund working capital and future acquisitions.
  • The company has driven significant cost savings and efficiency improvements by deploying AutoStore and SureSort X automation in its Kentucky warehouse, reducing picker headcount by over 60% and generating nearly $400 thousand in annual labor savings plus $460 thousand in avoided capital expenses.
  • Building on a track record of 12 acquisitions—including exclusive content divisions for music, video and gaming—Alliance is pursuing four potential transactions to expand into new categories and capture further inorganic growth.
  • Alliance’s omnichannel and direct-to-consumer business now represents 39.1% of YTD sales, as it fulfils DTC orders for major retailers (e.g., Target.com music/video, Walmart, Barnes & Noble, and Xbox for Costco) and explores new channels such as live commerce and digital video distribution.
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Earnings Conference Call
Alliance Entertainment Q3 2024
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