a.k.a. Brands Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 5 speakers on the call.

Operator

Greetings. Welcome to AKA Brands Holdings Corporation's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded.

Operator

At this time, I'll now turn the conference over to Kieran Long, Interim CEO and CFO. Mr. Long, you may now begin.

Speaker 1

Good afternoon. Thank you for joining AKA Brands' Q1 fiscal 2024 conference call to discuss the results released this afternoon, which can be found on our website at ir. Aka brands.com.

Speaker 2

With me

Speaker 1

on the call is Kieran 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 Management may make forward looking statements, which refers to expectations, projections and other characterization 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.

Speaker 1

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 Kieran.

Speaker 2

Thanks, Casey. Good afternoon, everyone, and thanks for joining our Q1 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 our hard work and dedication that gives me great confidence in the many profitable future growth opportunities we see for AKA Brands.

Speaker 2

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.

Speaker 2

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 and Pub on Nordstrom's website with strong initial results.

Speaker 2

And lastly, the Kosher King's U. S. Business delivered another quarter of strong double digit net sales growth. Turning now to the Q1. We delivered $117,000,000 of net sales, which is stronger than expected, down 3% compared to last year and down only 1% on a constant currency basis.

Speaker 2

We were again pleased register another quarter of solid growth in the U. S. At 6.2%. The growth in the U. S.

Speaker 2

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 AKA 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.

Speaker 2

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.

Speaker 2

Let me take a moment to reiterate our strategic operating framework for 2024, including our 3 key strategic priorities. Priority number 1, retain existing and attract new customers. During the Q1, 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.

Speaker 2

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. Buyer than number 2. 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.

Speaker 2

I will touch in each of our omnichannel strategies with the brand level review shortly. Priority number 3, 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 and 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.

Speaker 2

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

Speaker 3

from our brands.

Speaker 2

Our largest brand, Princess Polly's mission is to make on trend fashion sustainable and accessible for everyone. Targeting Gen Z and Millennia Women, Princess Polly entered a new fiscal year with more than 5,300,000 global email subscribers and approximately 2,300,000 global SMS subscribers, representing growth of 4% and 7%, respectively. We launched the Princess Polly brand into the fiscal world at December 2023 opening of the brand's first store in Century City, LA. 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.

Speaker 2

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 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 3 Princess Polly stores in the 3rd quarter, 1 in Scottsdale Fashion Square, 1 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.

Speaker 2

Moving to our other women's brand Petal and Pup. Petal and Pup entered 2024 with over 1,700,000 social media followers around the globe and continues to experience great success in the U. S. Targeting a slightly older customer base in Princess Polly, Petal and Pop 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 and puff's category mix, and we're very pleased with the March launch of a wedding guest collection, dubbed Marlon Romance.

Speaker 2

The collection comprises 75 styles, reimagined bestsellers and new styles available on the Petal and Pop site. Now to showcase the collection launch, the brand hosted a successful influencer and media event in New York City. The success we are seeing across the Pedal and Pub 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 and Pop expanded its distribution in March on Nordstrom's website, which has exceeded our initial expectations, setting the stage for accelerated growth in the future. Across Pedal and Pop's marketplace presence, we continue to see a high percentage of customers who are new to the brand.

Speaker 2

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 Cushing's 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, sports and fashion found across the globe.

Speaker 2

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 4 world profitability in the U. S.

Speaker 2

Flagship Las Vegas location. The store experience is truly unique with 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 1st party brands, which account for more than 50% of total Culture Kings U. S. Sales.

Speaker 2

Loyer, American Thrift and Minimal are top first party brands, which we 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 LA. The brand sponsored the emerging artist stage, had their signature branded basketball court activation and new to this year's event, Culture Kings had a screen print station where fans could select from exclusive designs to get custom screen print hoodies and t shirts on the spot. Our streetwear brand Minimal also continues to disrupt the streaming market. In March, Minimal launched an exclusive capsule collection with NBA star Treshawn Man with great fanfare.

Speaker 2

Minimal also continues to expand its brand distribution channels for their exclusive products through regional streetwear stores. Now, I'll provide more detail on the P and L before taking your questions. For the Q1, net sales were $117,000,000 down 3% and 1% on a constant currency basis compared to the Q1 of 2023, as strength in our U. S. Sales were offset by softer trends in Australia and New Zealand.

Speaker 2

As I mentioned, net sales in our U. S. Business increased 6.2% compared to the Q1 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.

Speaker 2

Total orders for the Q1 were $1,500,000 dollars up 1.3% compared to the Q1 of last year with strength in the U. S. We served 3,800,000 active customers in the Q1, a 5.5% increase compared to the Q1 of 2023. As a reminder, our active customer count is calculated on a trailing 12 month basis. Our Q1 average order value was $77 down 3.8% compared to the Q1 of last year on a reported basis and down 2% in constant currency due primarily to softness in Australia and New Zealand.

Speaker 2

Turning to profitability. Gross margin in the Q1 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 at Princess Polly, Petal and Pup and Minimal. 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 $34,200,000 compared to $34,400,000 in the Q1 of 2023.

Speaker 2

Selling expenses were 29.3 percent of net sales, up 70 basis points compared to 28.6 percent in the Q1 of 2023, due primarily to the effect of growing marketplace initiatives and additional stores. Marketing expenses in the quarter were $14,900,000 compared to 14 $800,000 in the Q1 of 2023. On a rate basis, marketing expenses were 12.7 percent of net sales, compared to 12.3 percent of net sales in the Q1 of 2023. Despite reduced marketing effectiveness of Culture Kings in Australia, we were pleased with the improved marketing effectiveness of Princess Polly and Petal and Pulp, and importantly, we saw positive growth in active customers. General and administrative expenses decreased 12.4 percent to 22.7 compared to $25,900,000 in the Q1 of 2023.

Speaker 2

On a rate basis, G and A expenses were 19.4% of net sales, compared to 21.5 percent of net sales in the Q1 of last year. We delivered adjusted EBITDA of $874,000 compared to $2,200,000 in the same period last year, ahead of our guidance range. Adjusted EBITDA margin for the Q1 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 $21,900,000 in cash and cash equivalents.

Speaker 2

Debt totaled $103,600,000 at the end of the quarter, a 22% reduction compared to $132,400,000 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 $91,500,000 dollars compared to $112,500,000 a year ago. We are comfortable with the level and composition of our inventory at Princess Polly, Petal and Pulp and Minimal. And we are pleased with the progress we have made rightsizing COSHA King's Australia inventory in preparation for the full transition to the test and repeat model in the back half of twenty twenty four.

Speaker 2

A quick update on our stock repurchase program. In the Q1, we repurchased 106, 153 shares for a total cost of approximately $1,100,000 As of the end of the quarter, we have $1,800,000 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 $545,000,000 to $555,000,000 in net sales for the year. We're also slightly erasing our full year adjusted EBITDA outlook range to $17,000,000 to $19,000,000 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 omnichannel tests, we would expect a neutral to marginally accretive impact to our overall EBITDA margins.

Speaker 2

However, we anticipate that there will be shifts in the lines of the P and L, including a slight drag on our gross margin, while benefiting marketing expenses. We expect this dynamic will begin to modestly influence our P and 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 a higher mix of marketplace and wholesale sales.

Speaker 2

We anticipate selling expenses to be approximately 26% of net sales and marketing expenses of approximately 12.5 percent of net sales. Marketing expenses will be slightly higher in the Q2 and leverage throughout the year as we expand our omni channel initiatives. We expect G and A expenses between $100,000,000 $110,000,000 for the full year of 2020 4. And as mentioned, we are raising our adjusted EBITDA expectations to a range of $17,000,000 $19,000,000 for the year. We expect the weighted average diluted share count of $10,600,000 capital expenditures of $10,000,000 to 12,000,000 dollars and an effective tax rate of 10%.

Speaker 2

For the 2nd quarter, we expect net sales between 133 $1,000,000 and $138,000,000 and adjusted EBITDA of between $4,500,000 $5,500,000 In summary, 2024 is off to a great start with 1st 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 AKA 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.

Speaker 2

Now, I will open the call up to your questions.

Operator

Thank you. Our first question today comes from the line of Eric Beder with SEC Research. Please proceed with your questions.

Speaker 3

Good afternoon and congrats on a solid bounce back quarter.

Speaker 2

Thanks, Eric. I want to

Speaker 3

talk a little bit about Culture Kings. Obviously, that Las Vegas store is an amazing store and it's probably not replicable, but are there opportunities to have more have incremental Culture King stores in the U. S? And I know that you're moving in terms of Australia and New Zealand to the test mode. How have the, I guess, preliminaries for that and how are the changes happening?

Speaker 3

And what's the confidence that you have that that's going to be the next key driver there?

Speaker 2

Yes. Thanks, Eric. I think, firstly, yes, on Culture Kings in Las Vegas, I think, certainly opportunity. And I think, look, as we look at the overall portfolio, we certainly feel that the strategy is working. It's great to be up 6.2% in the U.

Speaker 2

S. For the quarter. And overall active customer growth of 5.5 percent is just a great indication of the opportunities we have here across all of the brands. As I said in the prepared remarks, Culture Kings is again up double digit growth in the U. S.

Speaker 2

We feel we will open more stores for Culture Kings and probably not at the level that we have in Las Vegas, but we certainly feel that there is opportunities for them. Right now, we're very focused on opening our 3 stores for Poly in Q3, and but certainly looking for store opportunities for Culture King. And we do see tremendous runway for that brand. At the moment, 50% of the product that we sell in Culture Kings are 1st party brands that we own ourselves. So, we just feel that's really resonating with the customer.

Speaker 2

And as we think about Australia, I think the brand, the macro conditions there are more unfavorable than we've seen in the U. S. But we know that we need to get culture canes on to that test and repeat model that we see just being so strong and really underpinning that growth that we're seeing in the U. S. Across the other brands.

Speaker 2

We are seeing some early signs. Some of the new product that they've brought in is hitting all of those sales metrics that they would look at and expect and they're building a model where they can replenish into that really fast and leveraging the expertise that we have and the model that we have at the other brands. So, look, I think we feel confident as we go into the back half, we'll see gross margin expansion coming from getting Culture Kings in Australia onto that test and repeat model.

Speaker 3

Great. And let me just do a follow-up here. So you've talked you've done a great job of managing inventories here and you continue to manage them. How should we be thinking about in the second half as the business somewhat normalizes in terms of the test model and some of the other changes, how should we be thinking about like more normalized what should be a more normalized rate of change in the inventory going forward? Thank you.

Speaker 2

Yes. Thanks, Eric. Yes, really good progress on inventory, down 19% and over $20,000,000 year over year. And doing that, we're able to get the U. S.

Speaker 2

Business growing at that 6.2%. As we think about the rest of the year, I would say the U. S. Business is certainly in chase mode when it comes to inventory. So I think there'll be some buildup as we go through the U.

Speaker 2

S. And continue the growth there. I think there's still some actions we will take in Australia where overall inventory will come down sequentially quarter over quarter. And I think as we go through the year, overall, we see small sequential improvements or reductions in inventory dollars. But I think that we have made the big progress there overall.

Operator

Great. Thank you. Our next question is from the line of Ashley Owens with KeyBanc Capital Markets. Please proceed with your question.

Speaker 4

Hi, thanks for taking the question. I guess, I know you talked about some better response and newness within each of the brands, but was wondering if you could give a little bit of color on the intra quarter cadence and exit trajectory heading into 2Q. And then also just active customer is very solid even with the sales softness. Could you provide any color on how you're thinking about that piece? I know it's trailing 12 months, but should that continue to trend ahead of sales growth for the year?

Speaker 4

And I guess, how are you engaging new buyers on the platform? And if you're seeing most of this growth concentrated in any one region? Thanks.

Speaker 2

Sure. Thanks, Ashley. Yes, a lot there. So let me start with newness and the cadence. Look, I think we're just overall very pleased with that Q1 performance, particularly in the U.

Speaker 2

S, right? I think overall coming in higher than our sales guidance and then that 6.2% growth in the U. S. I think as we went through the quarter, we saw momentum build and for us builds nicely coming into Q2. That spring summer season is certainly a period where we shine across the 4 brands.

Speaker 2

We did see some little bit of impact from weather on some of the categories like swim, the Easter changes, but I would say, overall, very happy. And within that and kind of maybe segueing a little bit into active customers, I think just really happy with overall growth in active customers, but just seeing real strength across the brands. And we're seeing that growth, I would say, in all channels, direct to consumer, in our stores, in what we're doing in marketplaces. We continue to see that over 30% of the customers coming into the Princess Polly store in LA are new to the brand. And now 6 months in, we're also seeing that store have a halo effect on our online sales within that region.

Speaker 2

And so kind of that virtuous model is kind of really helping itself, the online and stores. And we're also continuing to see the 90.5% of the customers or over 95% of the customers on these marketplace channels are new to particularly Petal and Pup, which is doing so well in these channels. So really great to see them all working so well. I think reinforcing that the strategy we have, the models that we have, these brands are working, they're working well. And I think all underpinned by that test and repeat model that we have.

Speaker 2

As we think about engagement, I think, look, all of the brands are working really hard across all of the marketing channels. And I think doing that really in conjunction with feeling really good about the inventory that they have, the newness that they brought in during the quarter turned into quickly bestsellers and we're able to kind of repeat that product, replenish into those products, which is really core to this model, right? It's not just about testing new styles, it's finding new styles that become best winners and you can kind of replenish into. So, I would say, overall, the brands are feeling good about where they are, still feeling like there's lots of opportunity as we think about this overall market that we have, and they're just they're getting after us.

Speaker 4

Great. Thank you.

Operator

Thank you. Our next question is from the line of Youssef Squali with Truist Securities. Please proceed with your questions.

Speaker 3

Yes. Hi. This is Nick Cronin on for Youssef. So on the prior call, I think it was called out that you had expected Australia to show a mid-twenty percent decline versus the 19% decline that was reported. So just curious if there's anything that drove the upside there?

Speaker 3

And then as we go throughout the rest of the year, just what's baked into the 2024 guide between the relative

Speaker 2

geographies? Thanks. Thanks, Nick. Yes, as we I think as we went through the quarter, we're certainly pushing really hard to get culture kings on that test and repeat model that we see. Look, we obviously talk about a lot because we see how strong it is and how well it is working across the other brands.

Speaker 2

We did see some we are seeing the early signs of the new product that they're bringing in is working well. Customers are reacting to it. So, kind of pushing hard on that. And so, that does give us confidence that we see the benefits of getting the Montes and repeat and some gross margin expansion in the back half of the year. We still feel we have plenty work to do there in Q2 and beyond.

Speaker 2

And sorry, Nick, I missed the second part of your question. So, what's the guide? Yes, what's baked in the guide across the 3 geographies? Yes, look, I think as we think about the guide, very much thinking the trends that we saw and the regional trends that we saw in Q1 will continue through the year. I think, look, we're over 66% of the business now is in the U.

Speaker 2

S. And so certainly, by far, our largest market, it's where we're furthest along in developing the different channels. And we're going to continue to lean into that strategy. We've got 3 stores opening for Poly probably late Q3. And so, we'll see some benefit there really in that Q4 period.

Speaker 2

And that's really how we've built the kind of model as we think about the revenue for the rest of the year.

Speaker 3

Got it. And then could I just ask one follow-up on capital allocation? How are you thinking about balancing the debt pay down versus stock repurchases versus investing organically behind the business? Can you just kind of give us an updated framework there?

Speaker 2

Yes, thanks. I think, look, we feel really good last year when we paid down £50,000,000 of debt, down 35% and just strengthened the overall business. As we sit here today, I think it's very much going after the growth first. And we've got 4 great brands. They're resonating with customers.

Speaker 2

So I think as it pertains to capital allocation, it's really going after the growth opportunity there. As we've talked about, we spend $10,000,000 to $12,000,000 of CapEx this year. And I think that is a key focus for us. But we will continue to pay down the debt. We'll continue to look to strengthen our balance sheet.

Speaker 2

We're not looking for this to be a highly leveraged business going forward.

Speaker 3

Got it. Thank you. Thank

Operator

you. At this time, we've reached the end of our question and answer session. And I'll turn the call over to Mr. Long for closing remarks.

Speaker 2

Thank you. Thank you all for joining us on the call. And always good to talk to you and give you updates on where we are and the progress. And all of the teams across the U. S.

Speaker 2

And Australia are making on bringing great product to customers and really showing off what these brands can do. Thank you all.

Operator

Thank you. This will conclude today's conference.

Speaker 2

You may disconnect your lines at this time.

Operator

Thank you for your participation.

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a.k.a. Brands Q1 2024
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