a.k.a. Brands Holding Corp. (NYSE:AKA) Q1 2024 Earnings Call Transcript May 12, 2024

a.k.a. Brands Holding Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to a.k.a Brands Holdings Corp.'s First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I will now turn the conference over to Ciaran Long, Interim CEO and CFO. Mr. Long, you may now begin.

Kenneth White: Good afternoon. Thank you for joining a.k.a Brands first quarter fiscal 2024 conference call to discuss the results released this afternoon, which can be found on our website at ir.aka-brands.com. With me on the call is Ciaran Long, Interim Chief Executive Officer and Chief Financial Officer. Before we get started, I'd like to remind you of the company's Safe Harbor language. Management may make forward-looking statements, which refers to expectations, projections and other characterizations of future events, including guidance and underlying assumptions. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed. For a further discussion of risks related to our business, please see our filings with the SEC.

Please note, we assume no obligation to update any such forward-looking statements. This call will contain non-GAAP financial measures, such as adjusted EBITDA and adjusted EBITDA margin. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the release furnished to the SEC and available on our website. With that, I'll turn the call over to Ciaran.

Ciaran Long: Thanks, K.C.. Good afternoon, everyone, and thanks for joining our first quarter earnings call. Before I review a few key highlights from the quarter, I would like to thank our teams for their unwavering dedication and continued commitment to building on our portfolio of next-generation brands for the next generation of consumers. Our teams remain steadfast in executing our strategic priorities and operating with tremendous agility and flexibility every step of the way. It is their hard work and dedication that gives me great confidence in the many profitable future growth opportunities we see for a.k.a brands. Before I go through the results in more detail, let me share a few first quarter highlights. Net sales exceeded the high end of our guidance, fueled by U.S. growth of more than 6%.

We registered a strong gross margin of 56.2% and delivered positive adjusted EBITDA of $874,000, also exceeding the high end of our guidance. We saw trailing 12-month active customer growth of 5.5%. We continue to leverage our test-and-repeat merchandising approach with inventories down 19% compared to last year and newness representing a meaningfully higher penetration of our mix of goods on hand. We ended the quarter with a significant 22% reduction in debt compared to last year. Princess Polly successfully launched an activewear collection, which has been well received by both existing and new customers. We expanded our omni-channel marketplace presence through the launch of Petal & Pup on Nordstrom's website with strong initial results.

And lastly, the Culture Kings U.S. business delivered another quarter of strong double-digit net sales growth. Turning now to the first quarter. We delivered $117 million of net sales, which is stronger-than-expected, down 3% compared to last year and down only 1% on a constant currency basis. We were again pleased to register another quarter of solid growth in the U.S. at 6.2%. The growth in the U.S. region is further validation that we are expanding our reach, our products are resonating, and we are capturing new customers in what remains our most profitable growth region. For the quarter, our U.S. business accounted for 66% of total a.k.a Brands net sales, a penetration increase of 10%. As expected, our Australia and New Zealand region results were below the prior year, but we remain confident we will begin to experience gross margin expansion in the region in the back half of this year.

On the bottom line, as I mentioned, we delivered adjusted EBITDA of $874,000, exceeding the high-end of our expectations. On the heels of a transformational 2023, 2024 is off to a great start. And I'm really excited about the tremendous opportunity we see in the U.S. to expand our brand portfolio and the total addressable market. Let me take a moment to reiterate our strategic operating framework for 2024, including our three key strategic priorities. Priority number one, retain existing and attract new customers. During the first quarter, we added 200,000 new customers on a trailing 12-month basis, benefiting from our test-and-repeat merchandising approach, combined with delivering meaningfully higher levels of product newness, increased newness frequency and introducing new product categories.

The composition and quality of our inventories, particularly in the U.S., are in excellent shape and we are chasing into many winning styles. We are well-positioned to continue our growth in active customers, driving higher full price selling and expanding our gross margins. Priority number two, we remain committed to showing up for our customers wherever they choose to shop with us. In addition to enhancing our online channels, we will continue to test and expand our omni-channel strategies, including experiential stores, marketplaces and wholesale. I will touch on each of our omni-channel strategies with a brand-level review shortly. Priority number three, continuing to streamline our operations to deliver financial benefits across the company.

We've created a culture anchored on finding additional operating improvements across the P&L. This is less about simply removing costs and more about driving efficiencies, sharing best practices and leveraging scale. For example, we are achieving improved inbound freight rates through a combination of lower rates and a better mix of air versus ocean shipping. We've also begun to action store operational opportunities at Princess Polly, which we will roll out to our planned 2024 openings. Now let me share some highlights from our brands. Our largest brand, Princess Polly's mission is to make on trend fashion sustainable and accessible for everyone. Targeting Gen Z and millennial women, Princess Polly entered a new fiscal year with more than 5.3 million global email subscribers and approximately 2.3 million global SMS subscribers, representing growth of 4% and 7%, respectively.

We launched the Princess Polly brand into the physical world December 2023 opening of the brand's first store in Century City L.A. The store continues to perform exceedingly well, attracting both existing and new customers while also creating a halo effect for our online business. The team is doing an excellent job of crafting unique and personalized experience to engage influencers, college ambassadors and customers alike. Q1 showcased a variety of immersive brand moments from influencer events like exclusive in-store sip-and-shop gatherings and the Princess Polly activewear launch event to a Spring Break Jeep Tour in Florida tailored for students, along with curated influencer edits to boost strategic brand awareness and cultivate further trend driven content.

We remain on track to open three Princess Polly stores in the third quarter: one in Scottsdale Fashion Square, one on Newbury Street in Boston and another in Fashion Valley Mall in San Diego. From a product perspective, a key pillar of Princess Polly's merchandising strategy is continued focus on product innovation. Following January launches of sleepwear and loungewear, we launched an activewear collection that garnered a significant positive customer response. Leveraging our test-and-repeat model and the early success we have seen, we will continue to build out sleepwear, loungewear and activewear as well as test additional categories throughout 2024. Moving to our other women's brand, Petal & Pup. Petal & Pup entered 2024 with over 1.7 million social media followers around the globe and continues to experience great success in the U.S. Targeting a slightly older customer base than Princess Polly, Petal & Pup is best known for its impeccably designed and forward trending collections, offering more elevated event based styles.

We're seeing nice strength in dresses, which is a dominant portion of Petal & Pup's category mix, and we are very pleased with the March launch of a wedding guest collection [indiscernible] Romance. The collection comprises 75 styles of reimagined bestsellers and new styles available on the Petal & Pup site. At the showcase the collection launch, the brand hosted a successful influencer and media event in New York City. The success we are seeing across the Petal & Pup assortment sets the brand up for expansion into additional lifestyle categories in the future. Shifting to our marketplace omni-channel tests. Following successful launches on both Macy's and Target sites, Petal & Pup its distribution in March on Nordstrom's website, which has exceeded our initial expectations, setting the stage for accelerated growth in the future.

Across Petal & Pup's marketplace presence, we continue to see a high percentage of customers who are new to the brand. And finally, our successful wholesale tests with Victoria's Secret and Liverpool have resulted in follow-on orders. Turning now to our streetwear brands. As I mentioned earlier, in the U.S., our Culture Kings business saw another quarter of strong double-digit net sales growth. As a premier global streetwear brand and retail destination, Culture Kings offers a unique blend of music, shorts and fashion found across the globe. We remain bullish in Culture Kings' long-term growth potential in the U.S. as well as globally. Culture Kings is disrupting the streetwear market, and we are thrilled with the consistently strong sales performance and overall profitability in the U.S., flagship Las Vegas location.

The store experience is truly unique when an unforgettable atmosphere and an exclusive buying experience on an international stage. We also remain pleased with the continued strong performance and broadening acceptance of our first-party brands, which account for more than 50% of total Culture Kings U.S. sales. Loiter, American Thrift and mnml, our top first-party brands, which would further complement with exclusive third-party offerings. Straight off of the Super Bowl hype, Culture Kings partnered with Rolling Loud for another legendary weekend of music, culture and collaborations in L.A. The brand sponsored the Emerging Artist stage had their signature branded Basketball Court Activation. And new to this year's event, Culture Kings set a screen print station, where fans could select from exclusive designs to get custom screen print hoodies and T-shirts on the spot.

Activewear brand mnml also continues to disrupt the streetwear market. In March, mnml launch an exclusive capsule collection with NBA star Tre'shaun Mann with great fanfare. mnml also continues to expand its brand distribution channels for their exclusive products through retail streetwear stores. Now I will provide more detail on the P&L before taking your questions. For the first quarter, net sales were $117 million, down 3% and 1% on a constant currency basis compared to the first quarter of 2023 as strength in our U.S. sales were offset by softer trends in Australia and New Zealand. As I mentioned, net sales in our U.S. business increased 6.2% compared to the first quarter of last year. Sales in the Australia and New Zealand region, as expected, were challenging and declined 19.1% for the quarter.

Net sales in the Rest of World declined 3.5% for the quarter. Total orders for the first quarter were $1.5 million, up 1.3% compared to the first quarter of last year with strength in the U.S. We served 3.8 million active customers in the first quarter, a 5.5% increase compared to the first quarter of 2023. As a reminder, our active customer count is calculated on a trailing 12-month basis. Our first quarter average order value was $77, down 3.8% compared to the first quarter of last year on a reported basis and down 2% in constant currency due primarily to softness in Australia and New Zealand. Turning to profitability. Gross margin in the first quarter was 56.2% compared to 56.9% in the same period last year. We were pleased that our direct-to-consumer channel generated gross margin expansion of Princess Polly, Petal & Pup and mnml.

During the quarter, we continued to take actions to improve our inventory levels and composition at Culture Kings, which impacted our overall gross margin. Selling expenses were $34.2 million compared to $34.4 million in the first quarter of 2023. Selling expenses were 29.3% of net sales, up 70 basis points compared to 28.6% in the first quarter of 2023 due primarily to the effect of growing marketplace initiatives and additional stores. Marketing expenses in the quarter were $14.9 million compared to $14.8 million in the first quarter of 2023. On a rate basis, marketing expenses were 12.7% of net sales compared to 12.3% of sales in the first quarter of 2023. Despite reduced marketing effectiveness of Culture Kings in Australia, we were pleased with the improved marketing effectiveness of Princess Polly and Petal & Pup, and importantly, we saw positive growth in active customers.

General and administrative expenses decreased 12.4% to $22.7 million compared to $25.9 million in the first quarter of 2023. On a rate basis, G&A expenses were 19.4% of net sales compared to 21.5% of net sales in the first quarter of last year. We delivered adjusted EBITDA of $874,000 compared to $2.2 million in the same period last year, ahead of our guidance range. Adjusted EBITDA margin for the first quarter of 2024 was 0.7% compared to 1.8% in the same period last year. Turning now to the balance sheet. We ended the quarter with $21.9 million in cash and cash equivalents. Debt totaled $103.6 million at the end of the quarter, a 22% reduction compared to $132.4 million a year ago. Turning now to inventory. We continue to focus on rightsizing our inventory position and ended the quarter with inventory down 19% to $91.5 million compared to $112.5 million a year ago.

We are comfortable with the level and composition of our inventory at Princess Polly, Petal & Pup and mnml. And we are pleased with the progress we have made rightsizing Culture Kings Australia inventory in preparation for the full transition to the test-and-repeat model in the back half of 2024. A quick update on our stock repurchase program. In the first quarter, we repurchased 106,153 shares for a total cost of approximately $1.1 million. As of the end of the quarter, we have $1.8 million remaining in our share repurchase authorization. Now turning to our outlook for 2024 and beyond. Based on the solid initial start to the year, we are raising the low end of our net sales guidance range and now expect $545 million to $555 million in net sales for the year.

We are also slightly raising our full year adjusted EBITDA outlook range to $17 million to $19 million. As you update your models, I would like to take a moment to help everyone understand that as we expand our total addressable market through omni-channel tests, we would expect a neutral to marginally accretive impact to our overall EBITDA margins. However, we anticipate that there will be shifts in the lines of the P&L, including a slight drag on our gross margin while benefiting marketing expenses. We expect this dynamic will begin to modestly influence our P&L in the back half of the year as these channels grow. Importantly, we see our omni-channel initiatives as drivers of long-term portfolio brand awareness, top line and EBITDA dollars.

For the full year, we expect gross margins between 55.5% and 56%. We expect gross margins will increase in the back half of the year as we lap the actions we took to move through inventory at Culture Kings in 2023, slightly offset by higher mix of marketplace and wholesale sales. We anticipate selling expenses to be approximately 26% of net sales and marketing expenses of approximately 12.5% of net sales. Marketing expenses will be slightly higher in the second quarter and leveraged throughout the year as we expand our omni-channel initiatives. We expect G&A expenses between $100 million and $110 million for the full year of 2024. And as mentioned, we are raising our adjusted EBITDA expectations to a range of $17 million and $19 million for the year.

We expect the weighted average diluted share count of 10.6 million, capital expenditures of $10 million to $12 million and an effective tax rate of 10%. For the second quarter, we expect net sales between $133 million and $138 million and adjusted EBITDA of between $4.5 million and $5.5 million. In summary, 2024 is off to a great start with first quarter results that exceed the high end of our net sales and adjusted EBITDA guidance. I'm extremely confident in the many profitable future growth opportunities we see for a.k.a Brands, particularly the tremendous white space runway we see in the U.S. to expand our brand portfolio reach and total addressable market. We remain focused on executing our strategic priorities, which position us to grow our brands and deliver consistent long-term growth.

Now I will open the call up to your questions.

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