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spk04: Greetings and welcome to the AKA Brands Holding Corp. 3rd Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like the opportunity to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Emily Schwartz. Thank you. Please go ahead.
spk11: Good afternoon. Thank you for joining AKA Brands' third quarter 2022 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 today are Bill Ramsey, Chief Executive Officer, and Kiran Long, 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 refer 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 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 earnings release furnished to the SEC and available on our website. With that, I'll turn the call over to Jill.
spk03: Thank you, Emily, and thanks, everyone, for joining our call this afternoon. I'd like to start by congratulating the Culture Kings team on the grand opening of their first U.S. store this past weekend and appreciating all of our teams for their ongoing hard work, agility, and grit in what continues to be a dynamic and challenging macro environment. As we discussed last quarter, during this time of less predictable demand, we are focused on improving profitability while building great brands for the long term. Demand remains impacted by inflationary pressures on consumers, shifts in customer spending, and a competitive marketing landscape. Despite these headwinds, I'm pleased that the U.S. region, our largest, had solid net sales growth of 8% in the quarter, on top of very strong 84% growth last year. However, net sales overall decreased 4% to $156 million, or were flat when adjusted for foreign exchange impact. Australia declined 9% or negative 2% in constant currency. Like the U.S., Australia is experiencing macro effects from consumer inflationary pressure and a shift back to stores post-pandemic. Additionally, we were impacted by significant FX headwinds, which Kiran will discuss further when he takes you through our financials and revised outlook. Thanks to the agility and swift work of our teams, we increased our gross margin rate 50 bits and improved EBITDA margin 220 bits on a sequential basis, while continuing to make progress on our inventory position. We took a number of actions during the quarter, marketing spend reallocations, inventory optimizations, and team and resource right-sizing, We anticipate another challenging quarter and will be prudent about identifying efficiencies in our operation and managing inventory while balancing our long-term focus on growth. AKA Brands is the next generation of fashion, and our flexible asset-light model enables us to adapt quickly during dynamic market conditions. Our data-driven approach to merchandising combines test and repeat buying with short lead times and a high mix of exclusives. This allows us to efficiently manage our inventory and deliver strong gross margins while navigating shifts in consumer demand and supply chain dynamics. We have a modern approach to marketing, combining a social first strategy with performance and in-house channels to attract and retain customers at low cost. And our ability to quickly shift spend across channels and geographies ensures we optimize our marketing yield during dynamic times. We have a unique mix of talent with veteran e-commerce leaders and operators who have experienced multiple economic cycles combined with innovative next-gen talent. Importantly, we continue to build our brand's awareness and expand our customer base as evidenced by 23% growth in active customers compared to the same period last year, led by growth in the U.S. We are still in the early days of our U.S. market awareness and have significant opportunity ahead of us We made great progress on our growth initiatives this quarter, and I'm pleased to share some highlights. While I usually start with the women's brands, what I'm most excited to talk about today is the Culture Kings Grand Opening. Our first Culture Kings U.S. flagship store opened on Saturday, November 5th in the iconic foreign shops at Caesars Las Vegas. It's an unrivaled retail experience unlike any store out there. With 14,000 square feet of selling space, an LED staircase, the largest hat wall in the world, live in-store DJs spinning daily, a half-bath to ball court, a bar, a secret room with rare and exclusive merchandise, an on-site customizer for sneakers and apparel, a recording studio, and more. In addition to some Vegas-only features, the flagship store includes the best of Culture King's signature in-store activities and games, including the legendary Sharpshooter Basketball Challenge, the Holy Grail Arcades, and one-of-a-kind giveaways that all add to the excitement and unforgettable atmosphere in-store. Similar to Culture King's other stores, the U.S. flagship serves as a powerful marketing engine and is a key accelerator of brand awareness in the U.S. Known for their experiential stores and unique retail payment model, Culture Kings frequently hosts athletes, DJs, and music artists for in-store appearances. DJ drama was spinning, Ferg stopped by, and a number of other streetwear influencers attended the opening. All of this creates great buzz, brand association, and awareness for Culture Kings. On top of the immersive experience, the flagship officially introduces the U.S. consumer to Culture Kings' 18 exclusive in-house fashion brands, including Carre, St. Morta, Goat Crew, and Loiter. These in-house design brands make up approximately half of the Culture Kings business today and are a key focus area for the U.S. expansion. No one brings together the elements of streetwear lifestyle quite like Culture Kings. In addition to the popular in-house fashion brands, the store sells thousands of styles from 60 leading third-party brands, including fan gear, footwear, and hats. and online the customer can find even more great selection. We're confident that Culture Kings will become the new authority in streetwear and capture significant white space in the U.S. market. As Culture Kings expands in the U.S., they continue to build their penetration of exclusive products with an emphasis on the fast-growing printed tees and hoodies segment. As a reminder, our print-on-demand capability allows Culture Kings to quickly jump on trends and print licensed properties at attractive gross margins. This quarter, Culture Kings had a successful collaboration with Netflix, licensing their Stranger Things property, which exceeded expectations. They continue to ramp the print and licensing business and will deliver 30 new collaborations, including Playboy, J. Cole's label Dreamville, and a series of world-exclusive USC events and talent in the fourth quarter. While Culture King's current priority is U.S. expansion, we're pleased that the Australian stores rebounded in the third quarter with the return of live events and in-store activations. Turning to Minimal, our streetwear brand specializing in denim and bottoms, I'm excited to share that the synergies between Minimal and Culture King are coming to fruition. Minimal is now the fastest growing brand on Culture King's website, And there is a dedicated section and wide range of Minimal assortment at the Culture King store in Las Vegas. We were pleased with the performance of Minimal during the opening weekend. It was both one of the top performing brands overall and the best selling brand in the bottoms category. We're also pleased with Minimal's ability to quickly leverage shared learnings and resources from the AKA platform. They're shifting their merchandising strategy to align with our proven test and repeat model, enabling them to drop more new styles on a faster production timeline. Turning to our women's brands, Princess Polly, our largest brand, continues to be a top fashion website for female teens, as ranked once again by the most recent Piper Sandler survey. While we have seen macro impacts on demand this fall in line with the broader market, I remain incredibly confident that we're still in the early innings of expanding this brand, and I'm bullish on its growth potential in the U.S. and globally. Given that roughly 70% of Princess Polly's customers are students, a primary focus this quarter was the homecoming and back-to-school season. Their expanded homecoming collection, which featured new, more formal dresses, along with existing favorites, exceeded expectations and gives them confidence to expand their formal wear offerings. Princess Polly also expanded their back-to-school assortment focused on casual apparel, which was further amplified on social media by Princess Polly's growing community of college ambassadors who serve as powerful micro-influencers. Princess Polly continues to make headway on their mission to make on-trend fashion sustainable and accessible. They've made great progress expanding their sustainable range, made with lower-impact materials. and will surpass their goal of converting 40% of their new styles to low-impact fabric by the end of the year. They continue to transform their supply chain to support this and are committed to maintaining the same gross margins and accessible price points for customers. Princess Polly's extended size collection, Curve, also continues to gain traction and grew nearly 20% quarter over quarter while continuing to attract new customers. These initiatives strengthen their position with their Gen Z audience and create a competitive differentiation from other fashion players. As the digital marketing landscape continues to evolve rapidly with the rise of new channels, the popularity of new formats, and privacy updates, Princess Polly is agile and well-positioned to quickly react. They constantly test new social platforms, shift content, and reallocate marketing spend to wherever the customer goes. Growing on TikTok has been a huge priority for Princess Polly as their customer shifts from engaging with still imagery to video content. They grew their TikTok followers by over 40% year over year and are expertly balancing influencer partnerships and paid ads on the platform. Princess Polly is doubling down where they see the highest return on spend and leaning into their in-house channels even further. Subsequent to quarter end, Princess Polly piloted a live video shopping event on their own website and drew thousands of viewers, exceeding expectations. We look forward to them launching Princess Polly Live, a video series that showcases a live shopping experience combined with authentic and interactive conversations between influencers and customers. This is an exciting initiative that they'll expand upon in the coming quarters and share learnings across our group of brands. Text message marketing, which is one of Princess Polly's highest returning channels, continues to be an outstanding marketing engine with over 1.5 million subscribers and growing. Through surveys, Princess Polly has learned the text is a top channel for customers to learn of new style drops, offers, and promotions. Petal & Pup also continues to scale in the U.S. and was once again our fastest growing brand this quarter. They are leveraging the proven text and repeat merchandising strategy to quickly expand their assortment into accessories, jumpsuits, and matching sets, which now account for 10% of sales compared to 4% in the third quarter last year, further diversifying their category mix. As they also follow the AKA Playbook, they're expanding their penetration of in-house designed exclusive items, which come at higher gross margins. Category expansion is a key area of growth as Petal & Pup bolsters their assortment in the U.S., and they recently launched a dropship program for underpinning traded categories such as jewelry, shoes, and accessories. This initiative allows us to easily expand offerings and test new categories with no inventory risk, while still gaining rich consumer insights. Dropship items now account for 20% of sales in these categories, with plans to add highly seasonal categories to the site. Similar to Princess Polly, Petal & Pop is also evolving their marketing approach as the landscape rapidly changes. The brand piloted their first shoppable event in Nashville over three days in July. The event was an incredible brand awareness exercise. Approximately 100 influencers attended, garnering 10 million social media impressions, and 5,000 people passed through the event. Petal & Pop has a large and growing customer base in the south and the middle of the country. and the success of this initial test gives us confidence to roll out more shoppable events in key cities next year. Petal & Pup and RevDolls are both doubling down on video content through Instagram and TikTok, and Petal & Pup is seeing great traction on Instagram Reels, with some Reels generating over 2 million views. Before I turn the call over to Kiran, I want to emphasize that we're laser-focused on growing our current brands profitably. While we're still committed to our M&A strategy, given the state of the market and the macroeconomic environment, we have no plans to acquire any brands in 2022. However, we remain in active conversations with highly talented founders and will continue to shop the world for the best brands, but we'll only transact when the time is right for our business and our shareholders. As we enter the fourth quarter, the macro environment remains dynamic and is rapidly changing. We are anticipating a highly promotional holiday season and a competitive marketing landscape. We will continue to pull all necessary levers to balance growth and profitability for the remainder of the year. We have an exciting quarter ahead with the opening of the Culture Kings US flagship, and our women's brands are well positioned for the holiday season. While we anticipate the macroeconomic backdrop to remain fluid over the next few quarters, The strength of our brands and our flexible platform gives me full confidence that we'll deliver on our long-term goals. With that, I'll turn it over to Gerard.
spk07: Thank you, Jill, and good afternoon, everyone. We are pleased to report third quarter net sales above our expectations, along with improving profitability metrics and quarter-end inventories, despite a dramatic macro backdrop and evolving consumer environment. For the third quarter, net sales declined 4% to 156 million compared to 162 million last year. On a constant currency basis, net sales were flat. We continue to see solid active customer growth. On a trailing 12-month basis, the number of active customers in the third quarter increased 23% to 3.8 million. Total third quarter orders were flat to last year at 1.8 million, and the average order value of $85 was also flat to last year on a constant currency basis and down 4% on a reported basis. We are encouraged by the stability of our average order value as it is a reliable indicator of the desirability of our brands and products. Now, I'll provide a few highlights from our three regions. In the US, third quarter net sales increased to $82 million up 8% from the third quarter last year, primarily driven by the addition of minimal, as well as Petal & Pops growth, which continued to be our fastest growing brand in the US. Australian net sales decreased 9% to $58 million and were down 2% on a constant currency basis. Australia's sales were impacted by the macroeconomic environment, including inflationary pressures, as well as consumers returning to stores post-pandemic. Notably, in the third quarter, Culture King stores were the fastest growing area of the business in Australia. Turning to the rest of the world, net sales of 16 million decreased 27% from the third quarter in the prior year. Given the significant appreciation of the U.S. dollar, we made a strategic decision to shift marketing dollars from the U.S. and Europe to our main regions, the U.S. and Australia, that have higher marketing returns. Additionally, our pricing model for markets outside of the U.S. and Australia is tied to the U.S. dollar, so when the dollar strengthens, our products become more expensive for customers in international regions. Moving to profitability. As Jill mentioned, we are pleased with the sequential improvements in profitability driven by the initiatives we highlighted last quarter. Reported gross margins were 55.7% compared to 53.2% last year in the third quarter. The 250 basis point increase in gross margin was due to a $6 million fair value adjustment related to the Culture Kings acquisition included in the prior year. Excluding this impact, gross margins contracted 140 basis points due to increased promotional activity as we balanced capitalizing on demand and maximizing profitability. Sequentially, gross margin improved by 50 basis points over Q2. Selling expenses increased by $0.9 million to $41 million. As a percentage of revenue, selling expenses were 26.6% compared to 25.1% in the third quarter of 2021. The 150 basis points deleveraged was primarily due to increased costs for distribution and future store facilities. While we saw 200 basis points sequential improvement over Q2, we expect 60 basis points of the improvement in selling expenses to continue and carry forward into Q4. Marketing expense increased by $1 million to $17 million. As a percent of revenues, marketing expenses were 10.6%, a 100 basis point increase compared to the third quarter of 2021. This increase was primarily due to the inclusion of minimal, which is a higher rate of advertising spend, as well as overall increases in marketing costs. We are actively working to improve marketing efficiencies by reallocating marketing investments to areas with higher returns. Based on these actions, we have seen a sequential improvement of 140 basis points in marketing as a percentage of sales compared to Q2. G&A expenses were $26 million compared to $29 million in the third quarter of 2021. G&A expenses were 16.8% of net sales compared to 17.9% of net sales in the third quarter of 2021. The decrease was primarily due to reduction in equity-based compensation and other efficiency improvement initiatives. During the quarter, we took action to right-size our team structures to better align resources. These actions will reduce our G&A expenses by approximately $2 million on an annual basis going forward. For the quarter, adjusted EBITDA was $9 million versus $19 million in the prior year, or adjusted EBITDA margin of 5.9% compared to 11.9% in the prior year third quarter. On a sequential basis, we delivered improvements of 220 basis points over Q2 2022. Net loss was 0.1 million or 0 cents per share for the third quarter of 2022, compared to a net loss of 9.9 million or 11 cents per share in the third quarter of 2021. Our weighted average shares outstanding were approximately 128.7 million in the third quarter of 2022. Turning to the balance sheet, we ended the quarter with 31 million in cash-to-cash equivalents and 130 million in debts. At the end of the quarter, we had total liquidity of approximately 56 million, including 25 million available on our credit facility. Subsequent to quarter end, we drew 15 million on our revolver as we entered into the holiday period. Inventory at the end of the quarter was 137 million compared to 96 million at the end of the third quarter of 2021. The increase in inventory was primarily associated with Pulitzer King's New Fulfillment Center, our U.S. store opening, and the addition of minimal. Compared to the end of the second quarter, we are flat on inventory on a constant currency basis. We did see a sequential decline in inventory for our women's brands that are more fully on our test and repeat model. Overall, we are comfortable with the composition and quality of our inventory, and we expect to see a sequential decline in inventory dollars at the end of year on a constant currency basis. and we believe we're well positioned for fiscal 2023. Touching on cash flows. In the third quarter, we generated $12 million of operating cash flow, marking the first quarter of positive cash flow generation in fiscal 2022. We also invested $8 million in CapEx, tied to our new flagship, Culture King Store. We expect capital expenditures to be $20 million for the full year. Turning to our outlook. As we enter the fourth quarter, we are managing our business with a disciplined approach, controlling what we can't control while driving efficiencies across our operations. As we did in Q3, in Q4, we plan on optimizing marketing investments and will continue taking actions to reduce costs on non-customer-facing activities. As a result of the significant incremental currency headwinds, the company has adjusted its expectations for Q4 net sales and EBITDA. We now expect Q4 net sales in the range of 158 to 165 million. Our revised outlook contemplates FX to be an additional 10 million headwind year over year to our Q4 results. Incremental to the 5 million headwind we projected when we released our results at the end of Q2. We are now expecting Q4 adjusted EBITDA of 11.2 to 13 million. This contemplates a 1.7 million headwind from the impacts of the FX offset by $500,000 of cost saving initiatives. I'll also touch on a couple of points from modeling 2023. We are currently forecasting FX rates to remain at the current levels through fiscal 2023 and to have significant impact on our financial performance in FY23. Through the first nine months of 2022, Our revenue would be $25 million lower if we had experienced the current exchange rates for that period. With this FX headwind, we expect our first quarter of 2023 will be our most challenging comparison for net sales due to our strong first quarter in 2022. We expect comps to become easier as we go through the remainder of FY23. We believe we have differentiated brands and a highly efficient business model that will support long-term growth and profitability. With that, I will turn the call over to the operator for Q&A.
spk04: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you please limit yourself to one question and one follow-up. Again, that is star one to register a question at this time. The first question today is coming from Lorraine Hutchinson of Bank of America. Please go ahead. Thank you. Good afternoon.
spk02: I'm just curious if you're seeing any differences in customer behavior in the U.S. versus Australia. And more specifically, maybe how have customers reacted to the surgical price increases that you've added?
spk03: Yeah. Hi, Lorraine. Look, we're seeing the demand pressure across our brands and across regions. The benefit of having a portfolio is you're really able to measure that and understand the macroeconomic impact, and we're certainly seeing that pressure. And, you know, I guess one distinction is over in Australia where we do have stores, we have seen that customer shift back into stores as we've reopened the Culture King stores and really gotten back into events and in-store activations, seeing nice growth there. Of course, they are lapping some closures from last year. Our focus really is the U.S. market where we have a lot of continued growth and runway ahead, just very early days and Excited about what's ahead, especially for Culture Kings with that store opening. On the price increases, we had made some price increases earlier back in Q3 and monitored that very closely. Did not see impact. We're able to get a nice 60 bps increase in gross margin, sequentially quarter over quarter. We do not plan any additional price increases at this time, although we're, of course, constantly always able to optimize our pricing accordingly. given our high mix of exclusive and first-party brands and just very focused on profitability and controlling what we can control. Thank you.
spk04: Thank you. The next question is coming from Oliver Chen of Cowen. Please go ahead.
spk10: Hi, Jill and Taryn. Regarding the promotional activity and the gross margin, What are you forecasting ahead for that, and what are you seeing in the environment there? And it sounded like your inventories are under good control and have good freshness. And a second follow-up, customer acquisition costs. There were different comments on the call regarding the marketing costs and the efficiencies you're seeing. So going forward, has that stabilized? Do you expect it to continue to be dynamic as it's been – consideration for a lot of companies. Thanks.
spk03: Yeah, thanks, Oliver. I'll comment on the promotions and gross margin ahead and let Turan jump in, and then we'll come back around to the CACs. First, we, of course, are anticipating a highly promotional environment for Q4. Of course, we're already starting to see that. It has pulled forward, certainly, this year versus last year. Very different environment, very different inventory position for the whole market. We have certainly factored that into our outlook, and our brands are in quite a good inventory position from a composition and quality of our inventory. We feel good going into Q4. and have a very flexible agile model where we can really adjust and pivot as needed in the quarter. Karan, anything to add on just how we've forecasted that into the model?
spk07: Yeah, I think, you know, we assume Q4 will be a little bit lower than we experienced in Q3, just with the level of promotions. I think as we think about gross margin, you know, We are seeing improvements or reductions in the cost of air freight and bringing in product. I think that will kind of allow us to counteract any kind of increased promotional activity we see on top of that. So kind of feeling good about the gross margins that we've modeled in for Q4. As it relates to inventory, you know, we are We're really happy with the composition and the quality of the inventory that we have. As we mentioned, we're flat on dollars in Q3 versus Q2, down in units. I think within our women's brands, we are down in dollars, so it really kind of shows the strength of that test and repeat model. I think on the men's brands, we still have some work to do. They have more third-party vendors and kind of not able to adjust as quickly there. I think we'll see more of that in Q4 and as we go into next year. But overall, just very happy with the quality of the imagery.
spk03: And on your question about the CACs, we have seen CACs stabilize as we have lapped the impacts of iOS. I will say there is a lot happening in the marketing landscape. There's a lot of major changes. The biggest one, of course, being the shift from imagery to video, which is driving that downstream platform impact change as customers migrate away to from Instagram and over to TikTok. Our brands have been out on TikTok for some time now, really testing and learning and tuning our efficiency there. Now we are seeing that as one of our highest returning channels for us and able to shift some of our spend there. As well, we do shift into in-house and focus on SMS, which is also incredibly efficient for us. For all these reasons, we have a very diversified marketing mix and ability to shift and adjust and very committed to our efficient 10% marketing spend and plan to hold, and that is factored into the outlook.
spk10: Thank you. Happy holidays. Best regards. Thanks, Oliver.
spk04: Thank you. The next question is coming from Edward Yeruma of Piper Sandler. Please go ahead.
spk05: Kate, thanks so much for taking the questions. I guess first, could you just maybe refine a little bit? So the guidance changed for the fourth quarter. How much of it was strictly due to the FX versus how much is either transvestite or conservatism? And if you could maybe give us a little bit of insight back to the third quarter, kind of what did the trajectory performance look like in the quarter? And if you can make any comments on the exit velocity, that would be great. Thank you.
spk07: Sure. Yeah, as it relates to FX, Ed, I would say all of it in there is really related to that change of $10 million really is all related to FX. You know, when we gave Q2 guidance, we were modeling kind of US to Australia dollar rate at about the 0.7. We kind of saw it all throughout October at about 0.63. It's obviously kind of, it is moving every day at the moment, but we've kind of modeled that 0.63 through the rest of the year. And then just as it relates to the trajectory in Q3, I would say it's kind of, it was kind of stronger going through July and August. As we went through September, it's certainly kind of late in the month, late in the quarter, started to soften. Obviously, you know, we did see some FX impact particularly high in that period as well, and that does impact our international customers. You know, as we've modeled out Q4, we're kind of taking that run rate that we've seen out of Q3 into Q4, and that's kind of what we're using to project those for the rest of the year.
spk05: Thank you.
spk04: Our next question is coming from Noah Zatkin of KeyBank Capital Markets. Please go ahead.
spk09: Hi. Thanks for taking my questions. You know, just on the Culture Kings opening, if you could provide any color on just how you're thinking about the store opportunity there in the U.S. over time and just any color on the economics of the four walls, that would be really helpful. Thank you.
spk03: Yeah, hey, Noah, thanks for your question, and thanks for coming out to see the grand opening. We are incredibly excited about the store, and, you know, just a huge congratulations and appreciation out to the founders, Simon and Tani. They have an incredible vision for these stores, really like nothing else out there. Feel very pleased with the early – it's very, very early days. We just opened last weekend, but pleased with the out-of-the-gates – feel that we really nailed the location, the format, the merch mix, and the marketing and content. We will continue to look at other markets and opportunities. We'll take a real test and learn approach. The stores are not all going to be that big. That is certainly... a large flagship model, and Vegas is an incredible tourist location where you get just a ton of foot traffic, and we nailed that. Traffic is really back in Vegas. As we look to roll out to a broader market, we will look for other high tourist markets. It's a great way to scale your brand fast. You can reach a lot of unique customers that are changing quickly. So just really excited about the potential here, and we're just getting started, and it has incredible awareness element to grow and scale this brand in the US. I'll let Kiran jump in and comment on the four-wall economics.
spk07: Yeah, hey, Noah. We're certainly expecting the store to be four-wall profitable. Obviously, it will take a little bit of time to ramp up. For us, kind of expecting payback on a, I would say, kind of between four and five years on just that four-wall basis, not counting, obviously, the kind of the broad benefit we'll get from the store. You know, the store is about 13,000, 13,500 square foot of retail space. It rents about 1.9 million on a gap basis. You know, you can kind of, I would say AOV is a little bit higher usually than what you see online. And, you know, we feel the, you know, the economics will be very strong from an EBITDA perspective as well once the store kind of gets over that initial ramp.
spk09: Thank you.
spk04: Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.
spk01: Good afternoon, everyone. As you think about the regions, the U.S. and Australia, obviously a moderation in the U.S., but it seemed like the deceleration in Australia improved a little bit. What are you seeing, and how does it differ by brand, and how are you planning North America, the U.S., go forward? Thank you.
spk03: Yeah, I will say, in general, we have seen a bit of that demand pressure across brands and across regions. And in Australia, though, we uniquely have stores over in Australia and really saw that customer shifting back into stores as we started back to events and in-store activation. So that really helped improve on the Culture Kings part of the business, certainly helped offset some of the online demand pressure. And, you know, really we are focused on the U.S. We're most excited about the potential for these brands to keep scaling and growing in the U.S. market. Culture Kings is just getting started, and it's the perfect time to be opening this store and leaning in and really excited about what we're seeing ahead here.
spk01: And then just as the marketing spend, and Jill, you mentioned the reallocation of marketing. What are you doing on the marketing side in the reallocation and what do you see as the spend as a result of that?
spk03: Yeah. Well, between Q2 and Q3, we did make some adjustments in our marketing mix and reallocated into higher returning marketing channels, shifting more of our focus into in-house like SMS tax where we see really, really great returns and efficiency. as well as starting to shift more into TikTok, where we've also tuned the business to have a higher return. Shifting out of rest of world, we had put some marketing spend into Europe, but we shifted that out, and so we've made some regional adjustments, shifting more of that into the U.S. It's not an ideal time to push into Europe right now, given the strength of the dollar. So ensuring that we are focused on profitability and getting our most efficient marketing returns. So we are committed to that marketing spend at around 10% going forward, and that is all factored into the model.
spk01: Thank you.
spk04: Thank you. The next question is coming from Yusef Squally of Truist Securities. Please go ahead.
spk08: All right. Thank you very much. Hi, guys. So a couple questions. The first is around just the Q4 guide and what's implied in terms of growth of the U.S. business. Arguably, I think there's probably going to be some deceleration just based on the numbers, but I'd love for you to maybe quantify that for us. And then also, can you address the balance sheet liquidity? I know you've decided that 2022 you will not make any M&A, but just as you look at the business and the ongoing trends through 2023, kind of any idea about one, whether ultimately you have enough free cash flow generation to kind of get you to the other side of it without the need for capital. Yeah, maybe those two, and I have a quick follow-up.
spk07: Sure. Yeah, I think as we think about, you know, the guidance for Q4, I think we do kind of expect the, I would say, the same level of organic growth or organic little deceleration that we've seen in Q3, Yusuf. if you adjust for minimal. So inside in Q3, we had a full quarter of minimal. This year, or last year, we had minimal in there for 10 weeks of the 12-week period. So there'll be a little bit of headwind from that. I think as we unpack it, we are seeing certainly pressure from an AOV perspective is where we're seeing most of the pressure as we model that out. I think we might be a little bit kind of flat again in order of volume. And then I think from an active customer perspective, I think there'll be, you know, low single digit growth. We are kind of dropping off some really big quarters where we acquired customers. If you think of Q2, Q3 last year, where the kind of US was coming out, that will impact that. And then from a, you know, from a balance sheet perspective, I think, you know, it's really good for us to see in Q3 that we got back to operating, generating strong operating cashflow, you know, 12 million in the quarter was really good to see. You know, we did draw down some of the revolver. And I think in particular, you know, early in Q3, or sorry, early in Q4, we had a couple of big payments. You know, obviously the Culture Kings, you know, capital spend for the store. We also had some legacy payments for the minimal acquisition and for some old sales tax at Princess Polly. So there's kind of some one-off stuff there. I think, you know, We feel that we'll be positive cash flow again from an operating perspective in Q4 and back generating cash, and I think we'll continue to do that as we go forward into FY23. I think we're still looking to do acquisitions, but very committed first to drive the organic growth and support the growth of the brands that we have. I think we'll kind of focus on that first.
spk08: Any big earnouts next year?
spk07: No, no one else at all.
spk08: All right. And then, Jill, you talked a number of times about SMS or text message marketing. Can you maybe expand on that? Is that a relatively new channel for you? It seems like you're pretty excited about that. Maybe which channels are operating the best for you at this point and for which brands? Thank you.
spk03: Yeah, so SMS marketing or text, you know, where you collect the customer's cell phone and, you know, reach them via text is really replacing email as one of the most efficient in-house channels. We've been able to really grow our subscriber base and our customers. We did focus groups recently and the customer was very clear that was their favorite way to hear from us and learn about new product drops and new promotions and So we've really seen that be a very effective way to quickly communicate out with the customer. It does tend to drive more repeat in returning customers, so it's a great retention tool. But for new customer acquisition, we're certainly still very focused on social media and Our wide influencer program, we, of course, go after a much broader, wider network of smaller influencers and have grown that with college ambassadors and really scaled that out. But ultimately, our brands are very innovative and out ahead of a lot of others on the marketing front and constantly testing and learning and tuning their marketing channels. The one I'm also really excited about is the live video. live streaming shopping is certainly going to be a new platform for us that we are leaning into and super excited about.
spk08: Great. Thank you both.
spk04: Thank you. The next question is coming from Ike Burchow of Wells Fargo. Please go ahead.
spk06: Hey, guys. This is Jesse on for Ike. Thanks for taking my question here. I was just wondering, there were some comments that included that women's inventory sounded down year over year right now, while men's remains a little elevated due to third-party inventory. So it sounds like liquidations are actually the inverse of what prior expectations were for men's to be clean now and women's by end of year. I'm just curious what happened there. And then looking forward, if there are any differentiated dynamics to consider by gender heading into what's anticipated to be a heavy promotional holiday environment this year. Thank you.
spk07: Hey, Jesse, this is your own. Um, I, I, let me, let me just be super clear in the inventory. So we haven't been doing any particular liquidations. I would say because of the test and repeat model, the women's brands are just, you know, they're not buying out and committing to inventory, you know, um, they're doing that very short periods. So they're able to adjust their inventory bodies and their inventory dollars much, much quicker. That's why we saw in, know in q3 where the inventory dollars are down versus q2 right so they're sequentially down and that was very much our women's brands that are on those tests and repeat models they're still slightly up year over year but but much much uh you know closer and then the men's brands they because they're buying third-party um from third-party vendors you know, they're not able to adjust their inventory as quick, and so that's why it will take longer for us to, you know, adjust their inventory. I'd say, like I said, very happy with what we have, and, you know, stay as much more relevant for a longer period with men's inventory, so really like the composition that we have going into holiday, but the men's will take just a longer period, I would say, to adjust down the dollars.
spk03: I'd just add that the majority of our inventory is bought on that test and repeat model. All of our women's brands are buying on that, which really de-risks your inventory, and we are now expanding that over into our men's and streetwear businesses and adding more of our mix onto that short lead time buying. So eager to have even more control in inventory management as we expand upon that into next year.
spk06: Okay, cool. Thanks for elucidating that for investors.
spk04: Thank you. The next question is coming from Michael Bonetti of Credit Suisse. Please go ahead.
spk00: Hey, guys. This is Carson on for Michael. First off, congrats on a nice quarter, and thanks for taking our question here. We've heard some instances of consumers starting to trade down on lower price point categories and brands. Are you guys seeing that within your banners? And if so, how are you positioning inventory for the spring? And then another one, did we hear you correctly that you used the September exit rate for forecasting fourth quarter? Did October perform in line with September or was there a change in the trend there? Thanks.
spk03: Yeah, hey Carson, thanks for your question. Look, we are seeing as we guided in August, you know, and anticipated a demand pressure back half, we are seeing that across the brands and regions. As far as like Clear signals of trade down, I'd say we have seen a little bit of an uptick in our mix of markdown versus reg sales. So where we have put some things on markdown, we are seeing a little bit more of customer shifting into that. I think just reflecting that deal-seeking mindset and the customer being a little bit more frugal with the macro backdrop. As far as how we trended out the business and the outlook, I'll let Kieran comment on that.
spk07: Yeah. Hey, Kirsten. We've been using the most recent trends, right? So what we've been seeing for October and the first kind of 10 days of November is what we've used to model out Q4 from a sales perspective.
spk00: Makes sense. Thanks.
spk04: Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.
spk03: Yeah, just thank you all for joining. And if you haven't had a chance yet to get out to Vegas and see the new store, we invite you to come check it out. It's unlike anything you've ever seen. It's incredible. So thank you all.
spk04: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your launch or log off the webcast at this time and enjoy the rest of your day.
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