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spk04: Greetings and welcome to the AKA Brands fourth quarter and fiscal 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.
spk03: If anyone should require operating assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would now like to turn the conference over to your host, Emily Schwartz.
spk00: Good afternoon. Thank you for joining AKA Brands' fourth quarter and fiscal 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 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, adjusted EBITDA margin, adjusted gross margin, and free cash flow. 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 Kiran.
spk02: Thanks, Emily. Good afternoon, everyone, and thanks for joining our call. 2023 was a transformational year for AKA, and I want to thank our teams for their continued dedication to building next-generation fashion brands for the next generation of consumers. As a group, we stepped up to every challenge, created new opportunities, expanded our customer touchpoints, and significantly strengthened our balance sheet. Before I go through the results, I want to share a few highlights from the year. We delivered US net sales growth of 1%, inclusive of 12% growth in the fourth quarter. We generated $33 million of operating cash flow. We reduced our year-end inventory by 28% compared to last year. We paid down approximately 50 million of debt, reducing our debt levels by 35%. We opened a Princess Polly store in Los Angeles, propelling the brand into physical retail for the first time. Culture King's demand continued to accelerate in the US and registered double-digit net sales growth for the year. And lastly, we tested and expanded a number of omnichannel initiatives across our brands, including wholesale engagements with PacSun, Victoria's Secret and Liverpool, and marketplace partnerships with Target and Macy's, which exceeded our expectations. Turning now to the fourth quarter, we delivered 149 million of net sales, which was flat to last year. As I mentioned, we were very pleased that the US business grew 12% in the fourth quarter, which is a testament to the strength of our offering. As a reminder, our US region is now our largest market and where we see the greatest potential moving forward. Despite the strength in the US, our total net sales came in slightly below expectations due to the ongoing headwinds in the Australia and New Zealand region. And we delivered 1.3 million of adjusted EBITDA, which was in line with our expectations. I'm really pleased that we ended the fourth quarter feeling confident with our current inventory composition and levels, which decreased 28% as compared to 2022. And lastly, we paid off an additional $13 million of debt in the fourth quarter, further strengthening our balance sheet. For the full year, we delivered $546 million in net sales. And despite the challenging macro environment in Australia, we delivered $14 million of adjusted EBITDA for the year. As we look at 2024, we have three key strategic priorities driving our strategic framework. First, we will continue to deliver innovative next-generation retail strategies to attract and retain customers. This includes the evolution of our test and repeat merchandising approach, delivering newness to customers weekly, expanding our product categories, particularly at our women's brands, and leveraging technology and differentiated marketing strategies to deepen our direct relationships with our customers. Second, As we look to the future of fashion retail, we are confident that winning brands will be wherever their customer is, whether that's online, in experiential stores, or through marketplace and wholesale channels. We are committed to showing up for our customers wherever they seek inspiration and transact. Based on the success of our omnichannel tests last year, we're excited to scale our omnichannel initiatives in 2024, which I'll take you through shortly. And third, We will continue to streamline our operations to deliver financial benefits across the company. We are focused on rapidly converting Culture Kings Australia to a test and repeat merchandising approach, which will improve the assortment and inventory levels, providing gross margin expansion in the back half of the year. And we're committed to finding additional operating efficiencies to drive rate improvements across the P&L. Now, let me share some recent highlights from our brands as well as growth drivers for the year. Starting off with Princess Polly, our largest brand that targets Gen Z and Millennium women with on-trend quality fashion. Princess Polly has gained tremendous popularity in the US over the last few years, primarily as a direct-to-consumer online brand. As I mentioned, as we continue to build durable brands for the future, we're committed to staying in front of our customers no matter the channel. Based on direct customer feedback and a shifting retail landscape, we're thrilled that Princess Polly opened its first store in Century City, LA in September 2023. This marked the first time that customers were able to truly interact with Princess Polly in real life, and the feedback was resoundingly positive. The store in the Westfield Century City Mall allows the authentic relationships and community that Princess Polly has built over the last decade to come to life in person, further strengthening brand affinity and loyalty. The store is also used as a marketing engine for content creation and in-store events, including a successful influencer Friendsgiving event in the fourth quarter and more to come this year. Based on the success of the first store, Princess Polly will expand its store footprint by three to four stores in 2024. And I'm excited to announce that we've officially signed leases on a store on Newbury Street in Boston, and another store in the Fashion Valley Mall in San Diego, which are both slated to open in the third quarter of the year. I look forward to sharing more details on store openings and further store expansion plans in the coming quarters. Equally as important as Princess Polly's store expansion strategy is their continued focus on innovating, staying ahead of trends, and driving next-generation retail strategies online. Through the use of data analytics and customer feedback, Princess Polly is launching several new categories in 2024, with sleepwear and loungewear already launched in January and performing ahead of expectations. This month, we also launched an activewear collection and we have plans for additional new categories as the year unfolds. We're confident that a broader assortment of fashion styles will resonate with their existing customers and attract new customers to the brand. Princess Polly is constantly innovating to enhance their direct connection with customers and reach new customers on every platform. TikTok remains the preferred platform for Princess Polly customers with over 54 million TikTok views reaching over 40 million people worldwide. In 2024, Princess Polly will harness the power of TikTok to both tell their brand story and drive sales. They're fine-tuning the strategy including expanding their TikTok content team and investing in more paid opportunities as well as scaling their TikTok influencer program. Moving to our other women's brands, Petal & Pup, which targets a slightly older customer base than Princess Polly and offers more elevated event-based styles. Similar to the other brands in our portfolio, Petal & Pup has achieved great success in the US as a direct consumer brand. While the brand continues to grow its direct consumer business Beginning in 2023, it also began testing omni-channel opportunities to increase its total addressable market. I'm really excited to announce that Petal & Pub is expanding its distribution and is now live on Nordstrom's website, adding to the brand's successful marketplace presence at both Macy's and Target, which launched in the second half of last year. As a reminder, over 90% of customers that shop through marketplaces have been new to the Petal & Pub brand. which demonstrates the power of expanding our distribution to new channels and getting in front of incremental customers. In the back half of 2023, Petal & Pop also tested wholesale arrangements with Victoria's Secret and one of Mexico's largest retailers, Liverpool. I'm pleased to report that based on positive results of the initial tests, both retailers have reordered product in the first half of 2024. Turning now to our streetwear brands. Culture Kings continues to take off in the US and registered strong double-digit growth in both the fourth quarter and full fiscal year in the region. Culture Kings is creating more than just a fashion brand. It's fostering a lifestyle that's culturally relevant, on trend, and where people go to be part of a community. They're disrupting the consumer market and remain very bullish on the brand's expansion in the US and globally. one-of-a-kind flagship store in las vegas continues to activate its retail statement ethos every day and they take it to the next level during key moments the brand came to life in las vegas for super bowl weekend with in-store events featuring las vegas radar star davante adams global streaming icons kai c not an rdc world and an in-store event an appearance by celebrity jacket designer jeff hamilton The unique and next-generation inter-activations brought in thousands of customers and the store recorded its two largest revenue days on record, surpassing the grand opening and Formula One weekends. Culture Kings also continues to accelerate in brand awareness across the U.S. through high-profile brand marketing activations and collaborations with top tier partners. He is an official sponsor of Rolling Loud in Los Angeles next week, where it will have stage naming rights, a full court basketball experience, and a new immersive element with onsite screen printing and exclusive merchandising collaboration. Culture Kings is also an official partner of UFC 300, the upcoming mixed martial arts event in Las Vegas next month, which will include an exclusive product range and interactivations surrounding the main event. As an apparel-led streetwear brand, Culture Kings is uniquely differentiated from many other footwear-led streetwear brands, setting Culture Kings up for continued growth over the long term. We remain very excited by the performance of the first-party apparel brands, which continue to be top sellers both online and in the Las Vegas store. While the first-party brands are a key priority, Culture Kings also continues to add new brands to its assortment, both emerging brands and large international players enhancing the brand's credibility in the streetwear space. Minimal, our other streetwear brand, remains the top-performing brand at the Culture King store in Las Vegas and is also accelerating its growth on its own platform as well. We're excited for a new exclusive capsule collection for Minimal with NBA star Trishan Mann launching this spring. and the brand continues to be spotted on hundreds of celebrities and professional athletes. As part of the broader omnichannel expansion plans, Culture Kings and Minimal are also expanding their distribution channels for their exclusive products through regional streetwear stores, starting with a more grassroots approach to reaching customers in an authentic way. Now, I'll give you more detail on the P&L before taking your questions. As I mentioned, for the fourth quarter, net sales were 149 million, which was flat compared to the fourth quarter last year. In the US, we delivered strong sales growth of 12% compared to the fourth quarter last year, which is a nice sequential improvement from 2% growth in the third quarter. Sales in the Australian New Zealand region, although improved sequentially from the third quarter, remain challenged and below our expectations, declining 12% as compared to the fourth quarter of last year. I'm pleased that net sales in the rest of the world increased 9%, representing the strength of our brands internationally, which is a long-term growth opportunity for us. Total orders for the fourth quarter were 2 million, an increase of 2% compared to the fourth quarter last year. In the US, we were pleased to see order growth of 23%, driven by higher traffic and our omni-channel test. which was slightly offset by lower demand in the Australian New Zealand region, where orders were down 9%. We served 3.7 million active customers in the fourth quarter. On a sequential basis, active customers grew nearly 3%, despite a contraction of 12% in the Australian New Zealand region. Importantly, we grew our active customer count in the US by 5%. As a reminder, Our active customer count is calculated on a trading 12-month basis. Our fourth quarter average order value of $76 represents a decrease of 1% compared to the fourth quarter last year on a reported basis and was down 2% in constant currency. Importantly, our return rate remains one of the lowest among our peers and was 17% for the fourth quarter, which was a 260 basis point improvement for the third quarter of this year. Moving now to profitability. Gross margin in the fourth quarter was 51.3% compared to 52.8% in the same period last year. Excluding the impact from actions we took in Culture Kings Australia, our gross margin would have expanded 90 basis points to 53.7% due to the strength in full price selling across our other brands. We continue to take action at Culture Kings in Australia And while I'm pleased with the progress, there's more work ahead of us. Importantly, under new leadership, the team is rapidly converting to a test and repeat merchandising strategy, similar to our successful and profitable women's brands, which will be fully implemented in the back half of the year. Selling expenses increased 8% to 42 million, compared to 39 million in the fourth quarter of 2022. Selling expenses were 28% of net sales, up 220 basis points compared to the fourth quarter of last year, primarily due to the sales shortfall in the Australian New Zealand region. Marketing expenses in the quarter were 17.3 million compared to 15.4 million in the fourth quarter of 2022. On a rate basis, marketing expenses were 11.6% of net sales compared to 10.3% of net sales in the fourth quarter of 2022, which was in line with our expectations. We are working hard to improve our marketing effectiveness over the coming quarters, and as we further our omnichannel expansion efforts, we anticipate achieving improved levels of effectiveness. General and administrative expenses declined 15% to $22.3 million compared to $26.1 million in the fourth quarter of 2022. On a rate basis, G&A expenses were 15% of net sales compared to 17.5% of net sales in the fourth quarter of last year. This was due to lower performance bonuses and a decrease in insurance costs. We delivered adjusted EBITDA of 1.3 million compared to 6.1 million in the same period last year, which was within our guidance range. Adjusted EBITDA margin for the fourth quarter of 2023 was 0.9% compared to 4.1% in the same period last year. Turning now to the balance sheet. We continued to make substantial progress strengthening our balance sheet and we ended 2023 with significantly lowers of debt and an improved inventory position and composition, which as you remember was a key priority for us at the start of last year. We ended the quarter with 22 million in cash and cash equivalents and I'm very proud to highlight that we reduced our debt by 35% or 50 million over the last year. And we ended 2023 with 93 million of debt and total liquidity of approximately 70 million. Turning now to inventory. I want to thank our teams for the continued work rightsizing our inventory in 2023. Total inventory was well managed with inventory dollars down 28% compared to last year. On a sequential basis, inventory was down 9% from the end of the third quarter of 2023. As I mentioned, the macro environment in Australia remains challenging and we continue to work aggressively to align Culture Kings Australia inventory in the region in preparation for the full transition to the test and repeat model in the back half of 2024. I'm pleased that inventory levels of Princess Polly, Petal and Pop and Minimal are in good shape across all regions in terms of composition, newness and quality. We generated 33 million of cash flow from operations in 2023, compared to cash use of 300,000 in 2022. In the fourth quarter, we generated 15 million of free cash flow, which compared to cash generations of 5 million in the fourth quarter of 2022. I'm very pleased that our positive EBITDA, coupled with prudent working capital management, enables us to have a stable, positive operating cash flow profile. A quick update on our stock repurchase program. In the fourth quarter, we repurchased 175,161 shares for a total cost of approximately 1.3 million. As of the end of the year, we have 2.9 million remaining in our share repurchase authorization. Now, turning to our outlook for 2024 and beyond. As you've heard today, we remain laser focused on our strategic priorities to deliver a strong 2024. while setting the stage for an even stronger 2025. First, we will continue to deliver innovative retail strategies to reach our next generation customers. Secondly, we will expand our omnichannel initiatives to reach new customers across multiple platforms and channels. And third, we will continue to streamline our operations to strengthen our financials. While we anticipate that the macro environment in the Australia region will remain dynamic and pressured in 2024, we're committed to building high quality and profitable fashion brands for the long term. For the full year, we expect to deliver between 540 million to 555 million in net sales. For the other lines in the P&L, 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. We anticipate selling expenses to be approximately 26% of net sales and marketing expenses are approximately 12.5%. Marketing expenses will be slightly higher in the first quarter and levered throughout the year as we expand our omnichannel initiatives. We expect G&A expense between 100 million and 110 million for the full year 2024. For the year, we expect adjusted EBITDA of between 16 and 18 million, weighted average diluted share count of 10.7 million, capital expenditures of 10 to 12 million, and an effective tax rate of 10%. For the first quarter, we expect net sales between 108 and 112 million, and adjusted EBITDA of between 300,000 and 700,000. When I think about the long term, I'm confident that we have significant opportunity to deliver both growth and profit as Gen Z and millennials continue to gain spending power. Our brands are young and at the beginning of their life cycle, we have tremendous global runway ahead of them. Our flexible business model is working and we remain steadfast in our mission to be the next generation of retail for the next generation of consumers. We are just getting started tapping into the US And we look to expand our international strategies in 2025 to accelerate growth even faster. I'm confident that we have highly talented teams who are motivated every day to serve our customers and grow these brands together. I'm looking forward to an exciting year. Now, we'll open it up for your questions.
spk04: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and the 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 your handset before pressing the star keys. One moment, please, while we call for questions. And our first question comes from the line of Yusef Squally with True Securities. Please proceed. Great. Thank you very much. Hi, Kieran. Thank you for taking the question. So starting with the weakness in Australia and New Zealand, can you maybe help us parse out what's macro and what's the maybe specific execution issues of the company and what you're doing there? And also related to that, what's baked into the guide for flat revenues for 2024 between U.S. growth and New Zealand and Australia and the rest of the world. And then I follow.
spk02: Thank you, Yusuf. As we think about the Australian market, I think overall, look, it was great to see the US market grow 12% in Q4. I think Australia down 12%, obviously getting better than what we saw in Q3, but still very much a pressured market there. As we look across our brands, we were down from a similar perspective across them, I would say more pronounced at Culture Kings, where we're not fully on the test and repeat model that we have fully implemented at the other brands, and it's really helping that growth and driving a lot of that growth that we saw in the US. Waze and the team who came over from Princess Polly are working hard to implement that test and repeat model. We expect to see the first product come in from that, you know, kind of mid Q2. And with that, we'd expect to see improvements in comps and improvements in gross margin as we go through the back half for Australia. As we think about the overall year next year, Yousif, from an Australia perspective, you know, we are modeling to be in that negative mid-teens for the year. I think we're expecting to be in negative mid-20s in Q1 and improving as we go through the year. That's somewhat based on what we see and knowing that the benefits of test and repeat will take some time to flow in there in the market.
spk04: Okay, thank you. That's helpful. on the debt management. Help us think through the path to the debt repayment. How much of it is coming due when and how much money do you need to actually continue to run the business? What's the minimum amount you need to run the business? Thank you.
spk02: Sure. Yeah, look, I think we're really happy that we paid down $50 million of debt last year, down 35%. And really that coming from just the strong cash flows, the operating cash flows we had of 33 million. And obviously a big driver of that was the EBITDA we delivered, but also just bringing down our inventory dollars by 35 million last year. You know, it's really helpful. I think as we think about our debt, you know, it becomes due in September, kind of Q3 2026, right? So it's still a ways out. And I think as we think about that, we expect to continue to make progress on paying down our debt, strengthening the balance sheet as we go through this year and next. And look, that's just going to come from the operating model that we have. We continue to generate EBITDA and expect to have strong cash flows from our EBITDA and also just continued improving our working capital management as we go through this year and next.
spk04: Okay. Thank you. Our next question comes from the line of Ashley Owens with QBank Capital Markets. Please proceed.
spk01: Great. Hi. Thanks for taking the question. So, you know, you talked a little bit about the implementation of that test and repeat and culture change and kind of how the gross margin shaping with it returning to expansion around the same timeframe in the back half of the year. Just curious if there's anything else that's pressuring the gross margin line we should be aware of, and then just maybe in terms of how you're thinking about markdowns and promotions for the year. Thank you.
spk02: Sure. Thanks, Ashley. You know, as we think about, you know, FY24, maybe we just kind of a lot of what informs that is, I would say, the progress we made on inventory last year. So, you know, it being down, 35 million, 28%, I would say across Princess Polly, Petal and Pup, and Minimal, we feel really, really good about the composition, the quality of the inventory, the newness of the product we have. We can see that it's working well. I think as well, I just point out, the fact that we were able to bring down inventory to that level, and then to be excluding the actions we took at Culture King, to be up 90 basis points in gross margin in Q4. is just a testament to the strength of the model. As we think about FY24, I feel that we should expect to see those improving those margins as we go through the year, helped by the Culture Kings being on test and repeat, but also we took a lot of pretty hard actions in Q3 and Q4 last year to move through that and progress inventory at Culture Kings. That gives us confidence. I think there are other actions the teams are working hard on, getting the right mix of air freight to sea. We think there's opportunities there. Also, as we open up more of the omnichannel opportunities and these wholesale opportunities, I think there's an opportunity to be less promotional on our own site, which I think long-term will all help gross margin. and kind of get the overall business back to the level of EBITDA production that we would expect.
spk01: Great. Thank you.
spk04: As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star 1 on this cell phone keypad. There are no further questions at this time. I'd like to turn the call back to Ciarán Long for closing remarks.
spk02: Thank you. Thank you all for joining our call. We're proud of the progress we're making across the business, across the brands, across all of the teams, and it really is driven by individual team members. I think it sets us up for a good 2024. and really shows the power of the operating model that we have and that these brands can go from strength to strength in the future.
spk04: This concludes today's conference. We may disconnect our lines at this time. Thank you for your participation.
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