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

Published: 12 May 2024

[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

[Operator:]

Thank you. [Operator Instructions] Our first question today comes from the line of Eric Beder with SCC Research. Please proceed with your questions.

[Eric Beder:]

Good afternoon. Congrats on a solid bounce back quarter.

[Ciaran Long:]

Thanks, Eric.

[Eric Beder:]

I want to 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 Kings stores in the U.S.? And I know that you're moving in terms of Australia and New Zealand through the test mode. How have the, I guess, preliminaries for that and how are the changes happening? And what's the confidence that you’ve that that's going to be the next key driver there?

[Ciaran Long:]

Yes. Thanks, Eric. I think, firstly, yes, on Culture Kings in Las Vegas, I think is 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.S. for the quarter. And overall active customer growth of 5.5% 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. We feel we will open more stores for Culture Kings and probably not at the level that we had in Las Vegas, but we certainly feel that there's opportunities for them. Right now, we are very focused on opening our three stores for Polly in Q3, but certainly looking for store opportunities for Culture Kings. And we do see tremendous runway for that brand. At the moment, 50% of product that we sell in Culture Kings are first-party brands that we own ourselves. So we feel it's really resonating with the customer. 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 Kings 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. We are seeing some early signs. Some of the new products 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, leveraging the expertise that we've and the model that we've with the other brands. So look, I think we feel confident that as we go into back half, we will see gross margin expansion coming from getting Culture Kings in Australia onto that test-and-repeat model.

[Eric Beder:]

Great. And let me just throw 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 -- what should be a more normalized rate of change in the inventory going forward? Thank you.

[Ciaran Long:]

Yes. Thanks, Eric. Yes, really good progress on inventory, down 19% and over $20 million year-over-year. And doing that, we are able to get the U.S. 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. And so I think there'll be some buildup as we go through the U.S. and continue the growth there. I think there's still some actions we will take in Australia that our overall inventory will come down sequentially quarter-over-quarter. And I think as we go through the year, overall, we will see small sequential improvements or reductions in inventory dollars. But I think that we have made the big progress there, overall.

[Eric Beder:]

Right. Thank you.

[Operator:]

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

[Ashley Owens:]

Hi. Thanks for taking my question. I guess I know you talked about some better response and newness within each of the brands. But I 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? 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?

[Ciaran Long:]

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 our Q1 performance, particularly in the U.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 brings summer season, and it's certainly a period where we shine across the four brands. We did see some -- a 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 and what we're doing in marketplaces. We continue to see that over 30% of the customers coming into the Princess Polly store in L.A. are new to the brand. And now 6 months in, we are also seeing that store have a halo effect on our online sales within that region. And so kind of that virtuous model is kind of really helping itself, the online and stores. And we are also continuing to see the 95% of the customers are -- over 95% of the customers on these marketplace channels are new to particularly Petal & 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've, the models that we have, these brands are working. They're working well and I think all underpinned by the test-and-repeat model that we have. 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 are 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 it.

[Ashley Owens:]

Great. Thank you.

[Operator:]

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

[Nicholas Cronin:]

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 20% decline versus the 19% decline that was reported. So just curious if there's anything that drove the upside there. And then as we go throughout the rest of the year, just what's baked into the 2024 guide between the relative geographies? Thanks.

[Ciaran Long:]

Thanks, Nick. Yes. As we -- I think as we went through the quarter, we are certainly pushing really hard to get Culture Kings on the test-and-repeat model that we see. Look, we obviously talk about it a lot because we see how strong it is and how well it is working across the other brands. 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 them on test-and-repeat and some gross margin expansion in the back half of the year. We still feel we've plenty of work to do there in Q2 and beyond. Sorry, Nick, I missed the second part of your question. So what's [multiple speakers]?

[Nicholas Cronin:]

Yes, what's based on the guide across the three geographies.

[Ciaran Long:]

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 are over 66% of the business now is in the U.S., so certainly, by far, our largest market. It's where we are furthest along in developing the different channels. And we're going to continue to lean into that strategy. We've got three stores opening for probably late Q3. So we will see some benefit there really in that Q4 period. And that's really how we've built the kind of model as we think about the revenue for the rest of the year.

[Nicholas Cronin:]

Got it. And then could I just ask one follow-up on capital allocation.

[Ciaran Long:]

Sure.

[Nicholas Cronin:]

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?

[Ciaran Long:]

Yes. Thanks. I think, look, we feel really good last year when we paid down $50 million 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 four great brands. They're resonating with customers. So I think as it pertains to capital allocation, it's really going after the growth opportunity there. As we've talked about, we'll spend $10 million to $12 million of CapEx this year. 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. We are not looking for this to be a highly leveraged business going forward.

[Nicholas Cronin:]

Got it. Thank you.

[Operator:]

Thank 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.

[Ciaran Long:]

Thank you. Thank you all for joining us on the call. And [indiscernible] talk to you and give you updates on where we are and the progress and all of the teams across the U.S. 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. You may disconnect your lines at this time. Thank you for your participation.