Stran & Company, Inc. (SWAG) Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Strahan Company [Operator Instructions] Please note this call is being recorded. I will now turn the conference over to your host, Alexandra Schultz, Investor Relations. Floor is yours.

Good morning, and thank you for joining Strawn & Company's 2026 Third Quarter financial results and business update conference call. With us today are Andy Shape, Chief Executive Officer; and David Browner, Chief Financial Officer. Yesterday, we issued a press release detailing our results, which is available on our website at ir.strong.com. Before we begin, please note that today's remarks may include forward-looking statements that involve risks and uncertainties as described in our SEC filings. We will also discuss EBITDA, a non-GAAP financial measure. A reconciliation of EBITDA to net income, the most directly comparable GAAP measure is included in yesterday's press release. With that, I'll turn the call over to Andy Shape. Please go ahead.

Thank you, Ali. Good morning, everyone, and thank you for joining us today. The third quarter represents another important step and strong evolution as we continue transitioning from a period of investment and expansion towards one focused on profitable growth, stronger cash generation and increasing shareholder value. Our results demonstrate that this strategy is gaining traction. Revenue increased 8% to $28.1 million while gross profit grew more than 32% to $9.4 million. Gross margin expanded by more than 600 basis points, and we remain profitable for the third consecutive quarter this year. Importantly, these improvements are not simply the result of higher revenue. They reflect our continued efforts to improve the underlying economics of our business. Over the past several years, we have invested in acquisitions, technology, operational capabilities and customer relationships to establish a stronger and more diversified business. We are now leveraging that foundation to generate greater profitability, improve cash flow and pursue growth opportunities that create meaningful results. Our priority is to accelerate profitable organic growth. Strata has established relationships with major corporations across a broad range of industries, providing promotional products, branded merchandise, employee recognition, loyalty programs and fulfillment solutions. Our objective to expand these relationships by becoming a more integrated partner to our customers. Rather than competing solely for individual promotional product orders, we are focused on securing larger, more comprehensive programs that allow us to support multiple departments, locations and business objectives. We believe this approach creates opportunities to increase revenue per customer strengthen long-term relationships and improve operating efficiency. Recent customer agreements and program expansions reinforce our ability to compete for larger opportunities, and we intend to continue building on this momentum. We are also investing in technology and operational capabilities that allow us to manage increasingly complex programs without requiring a proportional increase in our cost structure. A central part of that investment is artificial intelligence. We are deploying AI across the business to build agents that support our teams, automate manual processes and help us operate more efficiently. Internally, we are applying AI to workflows such as order entry, quoting, artwork and proof preparation, inventory management and customer service. These tools reduce manual touch points, shorten turnaround times and allow our people to focus on higher value work for our customers. For our customers, we are building AI-enabled capabilities into our technology platform to help us respond faster, tailor programs more precisely and provide better insight into program performance. We believe AI will be an important source of operating leverage, allowing us to support larger and more complex programs while maintaining a disciplined cost structure. This is an important part of our strategy. Our objective is not growth at any cost. It is growth that contributes to stronger margins, greater profitability and long-term value creation. Our second priority is expand the contribution from strong loyalty solutions. SLS continues to demonstrate the value of our expansion into casino and gaming market. During the third quarter, SLS increased gross profit by more than 90% year-over-year and generated approximately $687,000 in operating income compared with an operating loss to the prior period. This represents meaningful progress. We entered this market because we recognized an opportunity to provide casino operators with an intergrated merchandize and loyalty solutions that support customer engagement and retention. Today, we believe we have established a stronger operating foundation from which to pursue additional opportunities. Our focus is on expanding relationships with existing customers developing new partnerships and increasing the profitability of the segment. The improvement in SLS also demonstrates the broader opportunity within Stran as we integrate businesses, strengthen operations, apply technology and AI and improve execution, we believe we can unlock greater value from our existing platform. Our third priority is disciplined expansion through strategic acquisitions. The Promotional Products industry remains highly fragmented, and we continue to see opportunities to expand our capabilities, customer base and market presence through acquisitions. Our view of strategic opportunities also extends beyond promotional products only. We see potential and complementary businesses with synergistic capabilities that would allow us to offer a broader range of marketing services and solutions to our customers through a single integrated platform. We believe that adding the right combination of capabilities could meaningfully expand Stran's platform, deepen our customer relationships, increasing our relevance across our customers' marketing needs and increasing the value we delivered. However, our approach remains selective. We are focused on businesses that offer strategic value and can benefit from Stran's infrastructure, customer relationships and operating capabilities. We believe our existing platform provides an opportunity to integrate complementary businesses while improving their operational efficiency and profitability. Importantly, our acquisition strategy is not simply about increasing the size of the company. It's about building more profitable and scalable organization with the potential to generate stronger returns over time. We believe our financial position provides flexibility to evaluate these opportunities while continuing to support organic growth. I also want to address important developments related to our capital structure and shareholder value. First, on November, our publicly traded warrants which were issued in connection with our 2021 initial public offering expired in accordance with their terms. Approximately million warrants expired unexercised. In addition, our remaining warrants, which total approximately $5.7 million are scheduled to expire by December 10. Once they do, all of the approximately 10.1 million warrants we had outstanding at the end of the third quarter, equal to more than half of our shares outstanding will have expired. This is an important development because it eliminates a substantial source of potential future dilution. The expiration did not result in additional shares being issued and had no impact on our operating results. We believe the elimination of these outstanding warrants is a positive step towards simplifying our capital structure and providing greater clarity for shareholders. Second, we continued executing on our share repurchase program. During the third quarter, we repurchased and retired approximately 109,000 shares of our common stock for approximately $208,000 and approximately $5.6 million remained available under the authorized repurchase program at quarter end. Since program inception, we have repurchased a total of approximately 2.4 million shares for approximately $4.4 million at a weighted average price of $1.81 per share. We believe repurchases can represent an attractive use of capital when balanced against our operational requirements and strategic growth opportunities. Our approach to capital allocation remains disciplined with a focus on investments that we believe can generate the greatest long-term value for shareholders. Looking ahead, we believe Stran's is well positioned to build on this momentum and accelerate our next phase of profitable growth. We expanded our business, diversified our capabilities and established a platform capable of supporting larger customer programs. We are now focused on translating those investments into sustained profitability and stronger cash generation. Our priorities are clear: accelerate profitable organic growth, expand SLS, pursue strategic acquisitions, leverage AI and technology advancements to drive efficiency and continue to strengthen our financial performance. We believe these initiatives, combined with our balance sheet and disciplined approach to capital allocation positions us to continue to build value for our shareholders. I'll now turn the call over to our CFO, David Browner, for a more detailed review of our financial results. David, please go ahead.

Thank you, Andy, and good morning, everyone. I'm pleased to provide a detailed overview of our financial performance for the 3 and 9 months ended September 30, 2026. For 3 months results, total sales increased 8.2% to $28.1 million for the 3 months ended September 30, 2026 from $26 million for the prior year period. Sales by our strong segment increased to $18.5 million for the 3 months ended September 30, 2026, from $17.6 million for the prior year period. Sales by our SLS segment increased to $9.6 million for the 3 months ended September 30, 2026, from $8.3 million through the prior year period. Total gross profit increased 32.4% to $9.4 million or 33.3% of sales for the 3 months ended September 30, 2026, from $7.1 million or 27.2% of sales for the prior year period. The increase in the dollar amount of the total gross profit was primarily attributable to the customer mix, effective cost management, and the tariff refunds received during the quarter ended September 30, 2026. Gross profit of our Stran segment increased to $6.4 million for the 3 months ended September 30, 2026, from $5.5 million for the prior year period. For the Stran segment, the increase in the dollar amount of gross profit was due to the customer mix. Gross profit of our SLS segment increased to $3 million for the 3 months ended September 30, 2026, from $1.6 million for the prior year period. For the SLS segment, the increase in the dollar amount of gross profit was primarily attributable to the improved customer mix, effective cost management and lower tariffs in addition to the tariff refund received in the quarter ended September 30, 2026. Total operating expenses increased 7.5% to $9.5 million for the 3 months ended September 30, 2026, from $8.9 million for the prior year period. As a percentage of sales, total operating expenses decreased to 33.9% for the 3 months ended September 30, 2026, from 34.1% for the prior year period. Operating expenses of our Stran segment increased to $6.4 million for the 3 months ended September 30, 2026, from $6.2 million for the prior year period. As a percentage of sales, operating expenses of our Stran segment decreased to 34.4% and for the 3 months ended September 30, 2026, from 34.9% for the prior year period. For the Stran segment, the increase in the dollar amount of the operating expenses was primarily due to higher employee-related costs and our investment in Stran digital solutions to provide enhanced functionality and offerings to scale client programs. Stran, our operating expenses for our SLS segment increased to $2.3 million for the 3 months ended September 30, 2026, from $2 million for the prior year period. As a percentage of sales, operating expenses of our SLS segment increased to 24.1% for the 3 months ended September 30, 2026, from 23.6% for the prior year period. Operating expenses for other consisting of unallocated corporate costs, including salaries of corporate officers, audit-related fees, Board of Director compensation and other stock-related charges. Such costs increased by $114,000 to $838,000 for the 3 months ended September 30, 2026, from $724,000 for the prior year period. The increase was primarily due to higher legal and accounting expenses. Net income for the 3 months ended September 30, 2026, was $35,000 compared to a net loss of $1.2 million for the prior year period. This change was primarily due to an increase in profit margins for the reasons described above, partially offset by an increase in operating expenses. EBITDA for the 3 months ended September 30, 2026, was $260,000 compared to a negative EBITDA of $1.1 million for the prior year period. For 9 months results, total sales increased 6.3% to $92.7 million for the 9 months ended September 30, 2026, from $87.3 million for the prior year period. Sales by our strong segment increased to $65.2 million for the 9 months ended September 30, 2026, from $60.3 million for the prior year period. With the strong segment, the increase in sales was primarily due to higher spending from existing clients as well as business from new customers. Sales by our SLS segment increased to $27.5 million for the 9 months ended September 30, 2026, from $26.9 million for the prior year period. With the SLS segment, the increase in sales was primarily attributable to higher spending from existing clients as well as from new business. Total gross profit increased 14.2% to $29 million or 31.3% of sales for the 9 months ended September 30, 2026, from $25.4 million or 29.1% of sales for the prior year period. The increase in the dollar amount of total gross profit was primarily attributable to increases in sales volume. Gross profit for our Stran segment increased to $21.3 million for the 9 months ended September 30, 2026, from $19.9 million for the prior year period. For the Stran segment, the increase in the dollar amount of gross profit was due to an increase in the sales of $8.4 million, which was partially offset by an increase in cost of sales, approximately $3.4 million. Gross profit of our SLS segment increased to $7.7 million for the 9 months ended September 30, 2026, from $5.5 million for the prior year period. For the SLS segment, the increase in the dollar amount of gross profit was primarily attributable to an improved customer mix, effective cost management and the receipt of $0.2 million in tariff refunds. Total operating expenses increased 4% to $28.4 million for the 9 months ended September 30, 2026, from $27.3 million for the prior year period. As a percentage of sales, total operating expenses decreased to 30.7% for the 9 months ended September 30, 2026 from 31.3% for the prior year period. Operating expenses of our Stran segment increased to $19.5 million for the 9 months ended September 30, 2026 from $18.3 million for the prior year period. As a percentage of sales, operating expenses of the Stran segment decreased to 30% for the 9 months ended September 30, 2026 from $30.4 million in the prior year period. For the Stran segment, the increase in the dollar amount of operating expenses was primarily due to an increased headcount and employee-related costs, higher sales-related costs and our investment in strong digital solutions to provide enhanced functionality and offerings to scale program or client programs. Operating expenses of our SLS segment decreased to $6 million for the 9 months ended September 30, 2026, from $6.2 million for the prior year period. As a percentage of sales, operating expenses of our SLS segment decreased to 21.9% for the 9 months ended September 30, 2026, from 22.9% for the year-end period. For the SLS segment, the decrease in the dollar amount of operating expenses was primarily attributable to a small reduction in head count and lower sales-related costs. Operating expenses for other consisting of unallocated corporate costs, including salaries for corporate officers, audit-related fees, or directors' compensation and other stock-related charges. Such costs increased by 36,000 to $2.89 million for the 9 months ended September 30, 2026, from $2.85 million for the prior year period. The increase was primarily due to higher payroll-related costs offset by lower legal and accounting expenses. Net income for the 9 months ended September 30, 2026, was $1.1 million compared to a net loss of $1 million for the prior year period. This change was primarily due to an increase in gross profit. EBITDA for the 9 months ended September 30 was $1.8 million compared to a negative EBITDA of $384,000 for the prior year period. As of September 30, 2026, we have -- we had 12.6 million -- $12.6 million in cash and cash equivalents and investments. I'll now turn the call back to Andy.