a.k.a. Brands Holding Corp.

Greetings. Welcome to AKA Brands Holdings Corp's first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Emily Schwartz. Emily, you may now begin.

Good afternoon. Thank you for joining AKA Brands' first quarter 2023 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 is Kiran 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 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. The call will also contain certain numbers presented on a pro forma basis, which includes the impact of Culture Kings as if we had owned it for all periods and comparable periods described. With that, I'll turn the call over to Kieran.

Thanks, Emily. Good afternoon, everyone, and thanks for joining the call today. Our first quarter results exceeded our expectations on both the top and bottom lines, driven by solid execution across the brands and our continued focus on managing the business prudently. We delivered net sales of $120 million compared to our original expectations of between $113 million and $116 million. Importantly, we continue to balance growth and profit, and I'm proud that we delivered $2.2 million of adjusted EBITDA, which also exceeded our original expectations. We made great progress against our strategic initiatives in the quarter, and I'm also really proud of the efficiency improvements we made to our operations. A key highlight for the quarter was our diligent approach to managing our inventory. Notably, we ended the quarter with $112 million in inventory, which is down 11% since the end of December 2022 and down 7% from the same period last year. Another highlight was that we continued to reduce our debt levels. We paid off over $11 million of debt in the first quarter and paid off another $10 million subsequent to quarter end. This brings our current debt levels down to $122 million, down from $144 million from the end of fiscal 2022. We remain focused on strengthening our balance sheet and plan to continue to pay down our debt through the remainder of the year. I want to thank our teams for their hard work and execution to deliver a strong start to the year with first quarter performance that exceeded our expectations on both the top and bottom lines. We are laser focused on growing awareness with Gen Z and millennium customers. On a trailing 12 month basis, we serve 3.6 million customers and we're confident that there is great potential for our brands to gain market share in the US and globally. We believe the key to building durable next generation brands is to be everywhere our customers are. Our brands have mastered building authentic relationships directly with customers and providing great experiences. While direct-to-consumer remains our priority and the main source of our growth, as announced last quarter, we are testing new ways to broaden our reach through select wholesale partnerships, marketplaces and physical stores. So let me share some updates on our strategic initiatives and omnichannel tests, and then I'll go into greater detail on our financials. Starting with Princess Polly, our largest brand. Princess Polly continues to be a top teen fashion website in the US, according to Piper Sandler's Taking Stock with Teens survey, and we're confident in the global potential for this brand. As mentioned, the newness is back at our brands, and we're particularly excited by the newness of Princess Polly. As a reminder, Princess Polly uses a test and reorder merchandise approach, and they're able to get hundreds of new styles on their site and socials within a matter of weeks. In the first quarter, they launched nearly 3,000 new styles and are seeing strong demand for newness, particularly in dresses, swim, and more casual festival attire as spring is in full swing in the U.S. The brand also continues to expand their sustainable, low-impact swim and inclusive sizing collections. As part of the inclusive sizing collections, they're seeing high demand for petite styles, which is already outperforming expectations, and more importantly, attracting new customers to the brand. As we mentioned last quarter, Princess Polly also launched a Princess Polly logo branded collection, which nearly sold out in the first few weeks, underscoring that brand affinity and loyalty is strong. On the marketing front, Princess Polly's priority is connecting with their customers in an authentic way and showing up wherever their customers are. They continue to refine their TikTok marketing strategy and saw a lift in follower count engagement, and ROI in the first quarter. Additionally, as part of their efforts to build brand awareness, they held a large spring break event in Miami, which was their first in-person event since 2019. During the day, the Princess Polly team drove around in a branded Jeep, giving out Princess Polly merchandise and gathering social media content. And at night, they held a private rooftop event for their top-tier customers, influencers, and college ambassadors. Feedback from customers and influencers was overwhelmingly positive, with nearly 400 influencer posts and over 55,000 social media engagements during the event. As mentioned, we are testing omnichannel initiatives across all of our brands to create more touchpoints and broaden our reach. Through surveys and focus groups, we received feedback from Princess Polly customers that they wanted to physically experience the brand in person. to be able to touch and feel the fabric, try on items in a store, and interact with Princess Polly associates. I'm excited to announce that they have officially signed a lease for the Princess Polly store, which we expect will open in the Century City Mall in Los Angeles in the third quarter. This location is a perfect strategic fit for Princess Polly's first store, given the high volume of Gen Z and millennials shopping the open-air mall daily. We look forward to the store opening and will develop and share a plan for future Princess Polly stores based on the learnings from this initial store. As announced last quarter, Princess Polly also piloted their first wholesale partnership with PacSun. The initial test, which included select Princess Polly styles online and in 15 stores, exceeded expectations with more styles selling out in just a few days. I'm excited to announce that given the success of the partnership, we will roll out select Princess Polly styles to 35 more stores for a total of 50 packs on stores by the end of June. This initial customer excitement gives us great confidence about Princess Polly's potential in the US both through direct and to consumer and omnichannels. Petal & Puck is also exploring ways to increase brand awareness through their own marketing efforts as well as through omni-channel opportunities. Petal & Pup launched on Target Marketplace in March and continues to gain traction. As a reminder, we will carefully choose our wholesale and marketplace partners, focusing on those that can truly amplify our brand awareness and drive new customer acquisition. Additionally, as I mentioned, Nunes is back at our brands and Petal & Pup launched more than 800 new styles on their own website in the first quarter. and launched a new swim collection, which is seeing strong sell-through. Pedal and Pop continues to leverage learnings from Princess Polly and is also leaning into TikTok and in-person influencer events. They've grown their TikTok followers over 140% year over year. And in April, they hosted a three-day influencer trip to Palm Springs, which generated over 18 million social media impressions. Now, turning to our streetwear brands. We continue to be very pleased with the acceleration of Culture Kings in the US since the flagship opened in Las Vegas in November. As many of you saw, the Culture Kings store in Las Vegas elevates the standard for retail with revolutionary in-store events, including a DJ booth, half basketball court, recording studio, secret room, and more. In the first quarter, the Vegas store hosted several large events which not only drove traffic to the store, but also generate viral hype and content for social media. They held an exclusive event with professional UFC fighter John Jones, which was so well attended that the line to enter the store was wrapped around the mall. They also activate the store space in innovative ways, including a media workout with professional boxer Caleb Plant in a custom 18x18 boxing ring, a full recording studio takeover and songwriting workshop with Grammy-winning artist Eric Bellinger, an in-store live performance on the LED staircase by up-and-coming singer and rapper Roy Woods, and recently they partnered with Playboy on an exhibit featuring vintage artifacts from Playboy timed with an exclusive merchandise collaboration. Culture Kings also partnered with Rolling Loud the largest hip-hop festival in the world with a Culture King stage, a limited capsule collection, and in-festival activations. The festival in LA saw over 185,000 attendees and was highly successful. We're just getting started expanding Culture Kings in the US, and we're excited by several innovative partnerships underway that will continue to amplify the brand in the US and globally. Equally noteworthy is the continued success of Culture Kings in-house design brands, which come at a higher gross margin and make up seven of the top ten brands by sales in both the Vegas store and online in the U.S. Culture Kings is also continuing to drive growth through their emphasis on graphic tees and printed license collaboration, capitalizing on pop culture themes, higher gross margins, and swift turnaround times. Some recent examples of successful collaborations with licensed properties include Harry Potter, Lord of the Rings, and Batman, with upcoming releases of Transformers to coincide with the new movie, as well as WWE Classics and UFC athlete printed T-shirts. The Vegas tour marked the official launch of Culture Kings in the US, and I'm pleased with the response from customers, vendors, and potential partners. Since the launch of Culture Kings, we've received numerous inbound vendor requests, and they recently signed on a number of third-party footwear brands, including New Balance and Crocs, and they recently secured Puma, UGG, Clarks, and Salomon. We're also particularly encouraged by the synergies between Minimal and Culture Kings, as Minimal has become a top five brand at Culture Kings in the US, and is leveraging Culture Kings as a distribution platform to further expand their brand. In conjunction with Caleb Plant's Vegas event, Minimal collaborated with Plant on an exclusive capsule collection, which exceeded sales expectations. We're also really excited that Minimal is resonating not only with sports fans, but also with athletes themselves. Minimal was spotted on NBA players over 100 times this year, pre and post games, and their outfits have featured on team, league, and player socials. Now, I'll give you more detail on our financials before taking your questions. As mentioned for the first quarter, net sales were $120 million, a decline of 19% compared to the first quarter last year, which exceeded our expectations. On a constant currency basis, net sales were down 16% compared to last year. Total orders for the first quarter were $1.5 million, up 7% on a two-year stack, and down 17% to last year. Order volume was impacted by lower marketing spend compared to last year, as well as the challenging macro backdrop which impacted conversion. As we increased our marketing efforts throughout the quarter and improved product newness, we saw an improvement in traffic trends. We are pleased with the improvement, but remain cautiously optimistic as the macro background remains uncertain. Average order value of $80 was down 4% compared to the first quarter last year on a reported basis and flat in constant currency. As we accelerate the inflow of newness throughout the quarter, we are encouraged to see improvements in AOVs. We're also pleased with our industry-leading return rate, which was approximately 17% for the first quarter, which was relatively flat compared to last year. Now, I'll provide a few highlights from our three regions. The US, our largest market, continues to be our strongest region. Importantly, in the first quarter, the US accounted for 60% of net sales compared to 52% last year, demonstrating the shift to the US across our portfolio. First quarter net sales were 73 million, up 44% on a two-year stack on a pro forma basis, and down 6% compared to last year, primarily due to macro factors, including softness in demand trends, and the highly promotional macro environment. In Australia, net sales were $36 million, down 31% compared to last year, and down 27% on a constant currency basis. In the first quarter, Australia accounted for 30% of net sales, down from 35% last year. Australia remained challenging due to the macroeconomic environment and inflationary pressures. We also continue to see an exaggerated shift of customers returning to stores post strict COVID lockdowns. Notably, Culture King stores significantly outperformed the online business. We currently operate seven stores in Australia and look forward to opening a new store in Melbourne in the second quarter. Turning to the rest of the world, net sales of 12 million decreased 35% from the first quarter in the prior year. Our strategic decision to shift marketing dollars from the UK and Europe to our main regions, which have higher returns, continues to negatively impact trends in these regions. Moving on to profitability. Close margins in the first quarter were 56.9% compared to 56.8% in the same period last year, or up 10 basis points, driven by improved full-price selling given the increased product newness. Selling expenses were $34 million compared to $40 million in the first quarter of 2022. Selling expenses were 28.6% of net sales compared to 27.2% of net sales in the first quarter of 2022. Although the rates likely increased year over year, we have made productivity improvements in our fulfillment centers and outbound shipping, but the lower sales volume offset these improvements due to the higher fixed cost to leverage. Marketing expenses were $14.8 million compared to $15.7 million in the first quarter of 2022. On a rate basis, marketing expenses were 12.3% of net sales compared to 10.6% of net sales in the first quarter of 2022. Through the first quarter, we ramped up our marketing investments in line with the increased newness in the assortment, which drove more sessions, traffic, and conversions. We are fully leveraging our flexible marketing model to achieve the highest returns in marketing spend. We continue to refine and further develop our marketing muscle across the portfolio to attract new customers and enhance our relationships with existing customers. General and administrative expenses were $25.9 billion compared to $24.8 billion in the first quarter of 2022. On a rate basis, G&A expenses were 21.5% of net sales compared to 16.7% of net sales in the first quarter of 2022. The change on a rate basis was driven by net sales deleverage. We delivered adjusted EBITDA of $2.2 million, which exceeded our expectations when we gave our guidance at the beginning of the year. This compares to $10.7 million in the first quarter last year. Adjusted EBITDA margin for the first quarter of 2023 was 1.8% compared to 7.2% in the same period last year. Net loss was $9.6 million or $0.07 per share in the first quarter of 2023 compared to net income of $1.5 million or $0.01 per share in the same period last year. Turning to the balance sheet, we entered the quarter with $30 million in cash and cash equivalents and $132 million in debt. At the end of the first quarter, we had total liquidity of approximately 50 million. As I mentioned earlier, I'm pleased that we paid down 11.4 million of debt in the first quarter, and subsequent to the quarter end, we made additional payments of 10 million, bringing our total debt pay down to more than 21 million year to date. The teams have been hard at work managing the inventory, and we're very pleased with the improvement. Inventory at the end of the quarter was 112 million, compared to 121 million at the end of the first quarter of 2022. Total inventory dollars were down 7% and units were down 14% compared to last year. We feel confident in the composition, newness and quality of our inventory and we expect to see continued sequential decline in inventory dollars and units in fiscal 2023 on a constant currency basis. Touching on cash flow, in the quarter, we used 3 million of net cash, which compared to 15 million in the first quarter of 2022. The reduction in cash use was primarily driven by more prudent inventory management. Turning to our outlook, as we look at the remainder of 2023 and beyond, we're excited by our brand's growth initiatives and the channel expansion opportunities to drive heightened awareness. That said, we continue to manage the business prudently and will balance growth and profitability. We are controlling the controllables and we continue to find efficiencies in our operations, improve our inventory position, reduce our debt and effectively strengthen our balance sheet. Overall, we are adjusting our guidance to reflect our stronger than anticipated first quarter. We now expect to deliver between 575 million and 605 million in net sales, and between 36 and 38 million in EBITDA. We still anticipate that the first half of the year will be more challenging from a sales comparison perspective due to our strong performance in the first half of last year, and we anticipate comps easing in the back half. For the second quarter, we expect to deliver net sales between 137 and 140 million and adjusted EBITDA in the range of 5.5 and 6 million. To give more color on the middle of the P&L, we expect gross margin and marketing rates in the second quarter to be similar to the rates in the second quarter last year. And we anticipate selling expenses to improve on a rate basis due to the operational efficiencies we've been working on in the business. Before I take your questions, I want to let you know that Jill continues to work through her medical issues, but she's doing well and appreciates everyone's well wishes. To conclude, our Go Forward priorities are clear. We're heads down executing on our growth strategies and exploring new ways to broaden our reach. We will continue to operate with flexibility and discipline, taking the necessary steps to strengthen our financial foundation and reinvest in our business. We're optimistic about the future of our brands and business model and remain committed to delivering both growth and profit over the long term. Now, we'll open it up for questions.