Start Time: 17:00 January 1, 0000 5:30 PM ET

XpresSpa Group, Inc. (XSPA)
Q3 2019 Earnings Conference Call
November 14, 2019, 17:00 PM ET

Company Participants

Doug Satzman - CEO

Conference Call Participants

Operator

Greetings, and welcome to the XpresSpa Group, Inc.'s Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now turn the call over to Doug Satzman, Chief Executive Officer. Please go ahead, sir.

Doug Satzman

Thank you. Good evening. Before I provide an update on our business, first I’d need to advise you of the following. Comments made on today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current assumptions and opinions and involve a variety of known and unknown risks and uncertainties.

Actual results may differ materially from those contained in or suggested by such forward-looking statements. Important factors that might cause such differences include those set forth from time-to-time in our SEC filings including our report on Form 10-K for the year ended December 31, 2018 and other current and periodic reports that we file with the SEC.

During today's call, we will refer to certain non-GAAP financial measures which we believe can be useful in evaluating our performance. The presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. For reconciliations of these non-GAAP financial measures to GAAP measures and a discussion of why we consider these measures useful, please refer to today's earnings release.

So first, I would like to thank our stockholders for approving the ballot proposals set forth by management for consideration at our Annual Meeting last month. As a reminder, the following key ballot items were approved. One, the transactions that were first announced on July 8, 2019 which provide us working capital for greater financial flexibility to operate the business; two, the conversion of Series D preferred stock to common stock, which ensures a better alignment of our objectives in the more straightforward equity structure.

Three, extending the maturity of our senior secured debt by 17 months; four, the expansion of the existing employee stock plan to allow management to provide greater incentives for employees across the whole organization as well as attract and retain the strongest talent; and five, the reelection of five Board members who have collectively volunteered to restructure their compensation, shifting to more common stock incentives and less cash to demonstrate their support for the future of XpresSpa.

Now turning to our business update. I think it is clear that our third quarter results serve to validate our operating strategy and reflected continuation of the progress that we demonstrated during the second quarter. Our performance improvement in our top line as measured by comparable store sales growth, steady store level operating margin improvement, lower G&A and an improvement in our bottom line as measured by a reduction in our operating loss from continuing operations as well as our adjusted EBITDA loss.

Obviously, our turnaround is a journey and we are still far away from where we intend to go over time. However, we are increasingly confident about the track record that we are already on and hopeful that we can build upon what we've already accomplished during the fourth quarter, and more importantly next year.

In particular, we look forward to what should be a very active holiday travel season as we close out 2019 while positioning ourselves to generate positive adjusted EBITDA and operating cash flow in calendar year 2020.

Now let’s review the quarter and these new developments at XpresSpa. Third quarter comparable store sales increased 3.7%, which was on par with the 3.8% gain we realized in the second quarter. Notably, however, in this third quarter, we successfully cycled over a price increase for massage services from last year and were still able to grow our comparable store sales during the entire three-month period.

Through the first three quarters of the year, comparable store sales rose 2.2%. Average sales per store also increased with an even more impressive 8.4% during the third quarter reflecting the growth strength within our footprint. We held steady margins. We held store margin steady, despite a decline in total revenues because of several store closures compared to last year and reduced our G&A significantly by streamlining processes in the field and corporate level along with a reduction in stock-based compensation versus the prior year.

The totality of these efforts led to a 36% reduction in operating loss from continuing operations to 1.8 million from 2.9 million compared to the prior year, and a substantial decrease in our adjusted EBITDA loss to 303,000 compared to an adjusted EBITDA loss of 363,000 in the third quarter of 2018.

In terms of initiatives, I'd like to start with how we're better utilizing technology to train our employees, optimize our labor scheduling, and enhance overall customer experience before discussing our progress across other strategic priorities.

First, we launched an online training tool that incorporates gaming methodology which increases participation, effectiveness, and retention of the training material. We started with our concierge employee population as our first investment into improving our customer experience and further supporting upselling behaviors.

Second, we will begin testing a new scheduling model in December which is designed to help us optimize labor hours. Given lower unemployment and rising wages, it is even more critical than ever that we deploy our staff efficiently and this tool should help us realize greater productivity.

Third, as we have discussed in the past, we’ve already rolled out Phase 1 of our new in-store app across all U.S. spas capturing more customer data, enabling us and enabling us to better schedule services. The app includes a digital queue and text capabilities to text customers when we are ready for them. This is leading to greater customer satisfaction and higher retention, as we minimize walkaways.

In spring 2020, we’ll be rolling out Phase 2, an XpresSpa customer-facing app, which will enable customers at the airport to schedule services before they get through security and reach the spa. We will also better track loyalty, so we can increase the frequency of our best, highest spend customers. Technology will be one of the future unlocks to success.

As you know, our revenues consisted both products and services. And while we have made some headway in upselling services, we have only recently been able to fix our retail supply chain issues that have hurt our ability to sell more products in the past. Thankfully, we have now improved our product assortment and supply issues and are now able to offer customers a wider array of quality retail items in the styles and colors that they are interested in purchasing.

We also have two new Calm.com products we launched that we're very excited about, a weighted sleep mask and a weighted travel blanket. These new Calm products are designed in collaboration with industry leader Gravity and will be exclusive to XpresSpa. The sleep mask is currently in all of our spas and the blanket will be available before Christmas.

With respect to spa development, we’ve expanded XpresSpa brand to Austin with a company-operated and a franchise-operated spa opening in September 2019, and we are off to a great start. This is our first franchise spa. We also opened our third spa in Las Vegas on November 1st and we’ll be opening our fourth spa in Atlanta before Christmas. Our Philadelphia opening, which represents our second spa in that airport, has now been pushed to early next year.

We’ve also refreshed seven spas to-date and consider this as both an offensive and defensive move to elevate perceptions of XpresSpa. And as always, our focus remains on thoughtful and regimented capital allocation so that we can maximize our ROI for our shareholders.

We have also closed five spas during the third quarter, including our only off airport spa. Three of these closures were a result of lease expiration in San Francisco that unfortunately could not be renewed, while the remaining two closures reflect our systematic pruning of underperforming locations during this transition year. We will continue to closely monitor all of our spa locations, and when necessary close other locations for the health of the overall business.

Managing G&A expenditures is also a key focus for us and we’re continuing to streamline processes and reduce costs at the field and corporate level. We recently relocated our Global Support Center in New York City to a renovated office space near Penn Station which will yield an annual cost reduction in occupancy expenses of $300,000 or approximately 60%. This is but one demonstration of our determination to realize savings through all means at our disposal. For third quarter itself, G&A fell $800,000 compared to last year.

Turning now to our partnership activations. We have announced two this year and are exploring conversations with several other health and wellness and beauty companies as well. Above all, we think we have a great opportunity to not only bring the new products and services to our spas but also to monetize our desirable real estate and affluent customer base.

As you know, we’ve extended and broadened our strategic partnership with Calm.com, the world’s number one app for sleep, meditation and relaxation. Our relationship now encompasses XpresSpa’s international portfolio and all future spas, and we are collaborating on testing an expanded Calm brick-and-mortar experience at select domestic XpresSpa locations potentially as soon as 2020.

This broadened partnership includes also the introduction of the Calm branded weighted eye mask and weighted travel blanket in partnership with Gravity that I referenced earlier. The eye mask launched in November and the travel blanket will launch before Christmas holiday.

Second, we’ve recently partnered with Persona, which is part of Nestlé Health Science. Persona has revolutionized the vitamin industry through its personalized subscription program and shares our commitment to health and wellness. Under the agreement, we will offer Persona's subscription and products in all of our domestic airport locations with staff trained on the products by Persona's nutritionists.

Customers will be able to purchase three different nutrition packs especially designed for travelers to support relaxation, health and immunity or jet lag with customers receiving an exclusive discount on their first order. We will be launching Persona in our spas by the end of this year.

Finally, we are continuing to test the cashless payment program in select spas and will assess customer feedback before considering next steps. Collecting cash and depositing it in the bank from an airport is actually more expensive than credit card fees, so we’re eager to see if this test proves beneficial as a cost savings initiative.

To conclude, we’re getting progressively stronger as we execute on our strategic priorities and our encouraged by our traction with respect to comparable store sales growth and a substantial narrowing of our operating losses. Everything that we have accomplished since early this year supports my belief that we have a lot of potential and keeps me bullish on the future.

We intend to achieve positive operating cash flow and positive EBITDA by the end of next year and if we can’t enhance the results of our existing spas, continue to identify strategic opportunities and partnerships and expand wisely, I am confident we will get there.

Most importantly, we’re stepping up our game in providing great hospitality and holistic wellness experiences to our customers, making it easier for them to engage with us by enhancing our technological platform. By doing so, we are strengthening their perceptions of our brand which should ultimately yield greater loyalty and frequency.

Now, I will walk through the third quarter itself. In terms of the third quarter 2019, revenues were 12.5 million, representing a 3% decrease or $390,000 compared to the prior-year three-month period. This narrow decrease was despite having a net of six fewer stores, 51 versus 57 in the prior year third quarter including five spa closures during third quarter itself.

The strength of the remaining stores partially offset the effect of the closures delivering a 3.7% increase in comparable store sales. This was our second consecutive quarter of positive comparable store sales. In addition, average sales per store increased by 8.1% in the third quarter. Store margin was $2.8 million compared to $2.9 million in the third quarter 2018. Both were 22.7% of total revenues.

Breaking this down further, as a percent of total revenues, labor costs rose 20 basis points to 46.6% from 46.4%. However, this was primarily driven by lower turnover, which is a good thing in our eyes. Occupancy costs decreased 30 basis points to 15.1% from 15.4% reflecting comparable store sales growth and the closure of underperforming locations.

And products and other operating costs increased 20 basis points to 15.6% from 15.4% due to higher product costs, partially offset by leverage on comparable store sales growth, cost savings initiatives taken by management to streamline processes and reduce store level costs and the closure of underperforming locations.

General and administrative expenses decreased 21.2% to $3.1 million compared to $3.9 million in the prior three-year period, as we made traction in reducing our administrative costs through streamlined processes at the field and corporate level coupled with a reduction in stock-based compensation.

General and administrative expenses decreased 570 basis points from 24.8% to 30.5% of total revenues. Loss from continuing operations decreased to $1.8 million in the third quarter from $2.9 million. Adjusted EBITDA loss decreased to $303,000 compared to an adjusted EBITDA loss of $363,000 in third quarter 2018.

Thank you for your time today and interest in XpresSpa. Now we will open it up for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Ryan Perkin [ph], a private investor. Please go ahead.

Unidentified Analyst

Hi, Doug. Regarding these new partnerships, do you expect that they will have a slotting fee for access to your real estate along with a revenue sharing agreement? And what types of products could we expect?

Doug Satzman

So, each of these strategic partners we’re talking about were required some type of participation outside of a normal exchange of buying products and reselling them in our environments or for their products for us to use in the services. One of our biggest assets is the real estate that we have, some of the best in the world and the most important airports with the most desirable consumers walking by every single day. And as I’ve been talking to these outside companies, some very innovative and creative companies, they understand the value and are very excited to partner with us. So whether it’s a slotting fee or a marketing fee or an investment in the company, there is a range of rebate – there’s a range of ways companies are offering to participate and have an opportunity to associate with our brand. And as far as our product and services, the two examples with Calm.com and Persona, these are both technology companies who have been disruptive in the industry and really don’t take a lot of space in our spa. But they are very interested in the customer profile that we both share. But some will be more traditional. They could be beauty products, they could be more traditional products and services that we offer and looking for industry and category leaders or emerging leaders is our first target. So more to come.

Unidentified Analyst

Great. Thanks.

Operator

Our next question is from Steven Mill [ph], a private investor. Please go ahead.

Unidentified Analyst

Hi, Doug. How are you? I realized that it is early but how is the new franchise location performing in Austin and are you in talk with other potential franchisee? Thank you.

Doug Satzman

Thanks for the questions, Steven. Our first franchise store has turned out to be very, very successful. It was an unusual situation where we opened the company owned and a franchise store in the same airport. Both stores are doing above expectations. We have a great partner franchisee who is very experienced in the industry and is helping us learn how to become a great franchiser. We are in early conversations with a lot of interested parties, but I’d rather walk before we run. This is a new vertical for this company. I have franchise and experience, but there’s not a lot of people here who do. So we want to nail this first one right to build the right programs and systems that support our larger franchise systems. And that’s part of the reason we decided to open in the same venue so we can both kind of learn from each other and make sure they get off to not only a successful financial start but we want them to be a great operator and a seamless guest experience. Any customer coming to an XpresSpa, they don’t have to worry about who’s signs their paycheck. They get the great service for the same prices and the same guest experience. So far we’ve been really very happy and likely more to come, but it won’t superfast.

Unidentified Analyst

Okay. Thank you.

Operator

[Operator Instructions]. Our next question comes from Marissa Steele [ph], a private investor. Please go ahead.

Unidentified Analyst

Hi. Thanks for taking my questions. I’m just wondering, how much more cutting do you think is possible I guess with your D&A or you kind of need to grow into leverage with our revenues and more spas?

Doug Satzman

Well, before I joined the company in February, there was an active cost cutting in the turnaround activities and behaviors had already started. And I was liking it to surgery with an axe. At this point we’re doing surgery with a scalpel now. So there is more cut cost to cut but we have been very thoughtful that we are not going to risk our top line sales, we’re not going to risk our guests experience. As you’ve heard before, our people initiatives are very important to the turnaround. Nobody wants a massage from a disgruntled massage therapist. So we’re going around looking under each category, each part of our business, value engineering processes. And frankly this was a founder-led private company for a long time and those historically are not efficient organizations. In my background I’ve been at some very efficient companies. Things like professional fees are – has been high at times and we’re being very thoughtful where that happens looking at our corporate overhead. So we moved our offices, bringing the substantial savings, but still being able to maintain the workforce we have with very inexpensive sublease. I think there’s more to be done in the spas and how we manage our inventory of our supplies. In some instances, I think we’ve gone too thin where some of our technicians have kind of run out of nailfiles that afternoon and the delivery is coming the next morning. So I don’t want to go too far where we inhibit sales, but it’s charging every person in the corporate office as well as my leadership in the field. Every day, you should either be doing something to grow sales or save money and possibly both. And if you’re not doing something to support either one of those activities, that’s not how you turn a business around. But I want to underscore maintaining our customer experience and enhancing it will not be sacrificed, but there’s certainly more efficiency.

Operator

Our next question comes from Bill McGovern [ph], a private investor. Please go ahead.

Unidentified Analyst

Hi, Doug. Good evening. Thank you for taking my call. Hopefully you could turn this company around. So what I wanted to know was, are you able to provide any insights on the litigation? And pardon me for saying this, but the business [indiscernible] brought against this company, and when do you feel that you’ll be profitable? Thank you.

Doug Satzman

On legal issues, I can’t really comment on it. I’m not highly concerned. But it’s not something I’m allowed to talk about. Your second question, when we’ll be profitable? I expect next year in 2020 with the trends that we’re going. And from our sales growth, especially if you look at our average store sales and our same store sales and the trajectory we’re on with saving money, we’re getting very close. And I am confident next year will be that turning point.

Unidentified Analyst

I appreciate it. Thank you for taking the call, sir.

Doug Satzman

Sure. Thanks for your interest.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Doug Satzman for any closing remarks.

Doug Satzman

Okay. Well, just in summary, this is a company with a lot of potential. Health and wellness continues to boom. Airport traffic continues to grow. And I looked joining this company, I thought long and hard about it. But what I saw was an underperforming and an undervalued asset. Right now, I’m working on the performance and the values are going to follow. We are absolutely in a transition year but in many instances I’ve been pleasantly surprised. Some things are going faster than I expected, and positive things. And the team is really very committed.

The moral has definitely returned. If you have ever gone in our spas and I encourage you to go and enjoy our services, you can immediately feel whether there’s a great team environment or if it feels like a room full of independent contractors. We have more and more of our spas that are transitioning from that feel of independent contractors and hired guns to a team and people who are very passionate about healing, about beauty, about health and wellness and certainly about XpresSpa. And that is why you see the turn in our sales.

And we just came out of a three-day quarterly business review with our team reviewing our Q3 results and our commitments to finish the year strong and planning for next year, and there is so much energy as much from our tenured, long-term leaders and the new leaders that have come on. So I think this is a great time to watch and participate, and the turnaround is taking root. And I would say we’re probably in the second or third inning of a nine-inning game, so you’re not too late. Thank you and I look forward to speaking to everyone next quarter.

Operator

This concludes today’s conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.