a.k.a. Brands Holding Corp.

Greetings and welcome to the AKA Brands Holding Corp second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Casey White. Thank you. You may begin.

Good afternoon. Good afternoon. Thank you for joining AKA Brands' second 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 Kieron 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 margins. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the release furnished to the SEC and available on our website. With that, I'll turn the call over to Kieran.

Thanks, Casey. Good afternoon, everyone, and thanks for joining our second quarter earnings call. Before I review a few key highlights from the quarter, I would like to again take a moment to thank our team for their continued commitment to building on our portfolio of next generation brands for the next generation of consumers. This was another quarter in which the team's agility and flexibility in executing our strategic priorities while keeping our customers at the center of every decision we make enabled us to deliver strong quarter top line and operating results that exceeded our expectations. I continue to be very confident in our team's ability to execute and in the many profitable future growth opportunities we see for AKA Brands to expand our brand portfolio reach and total addressable markets. Before I go through the results in more detail, let me share a few highlights from the second quarter. Net sales far exceeded the high end of our guidance as we achieved year-over-year growth of more than 9%. Momentum in our US business meaningfully accelerated with year-over-year net sales growth of more than 19%. We delivered a strong gross margin of 57.7%, up 80 basis points from the prior year, which combined with marketing expense leverage of 120 basis points contributed to adjusted EBITDA of $8 million, a year-over-year increase of 44%, exceeding the high end of our guidance. Despite a late-in-the-quarter build of inventory as we chased into demand, we generated $3.5 million of operating cash flow. We registered another strong quarter of active customer growth, up 11.7% on a trading 12-month basis. We ended the quarter with net debt down 13% from the prior year and down 20% in a two-year stack. In addition to planned new Princess Polly store openings in Scottsdale's Fashion Square and on Newbury Street in Boston and in the Fashion Valley Mall in San Diego, we signed two new leases for additional locations in Irvine and Santa Clara, California, which we expect will bring the Princess Polly physical presence to six locations by year end. and with more expected to come in 2025 and beyond. Petal & Pup's expanded omnichannel presence has exceeded expectations, setting the stage for continued growth and brand expansion. Leveraging the successful experience of Petal & Pup, our streetwear brand Minimal launched a small test on Nordstrom.com. And lastly, Country Kings US delivered another strong quarter of double-digit net sales growth on top of strong results last year. Turning now to more details on the second quarter, we generated 149 million of net sales, a 10% constant currency increase over last year, far exceeding our expectations. The momentum in the U.S. business accelerated, with net sales growing 19.3% over the prior year period, reaching 95 million and accounting for 64% of net sales for the quarter, up from 54% last year. We remain very pleased by the accelerated strength we are seeing in the U.S. region, which remains our fastest growing and most profitable growth region. Our success remains broad-based with strong product acceptance across our brands, coupled with growing brand awareness and attracting many new customers. Our Australian New Zealand region results sequentially improved, ending the period with a net sales year-over-year contraction of only 5%. With a combination of reduced inventories in the region and our shift to a test and repeat merchandising strategy, we expect to experience second half year-over-year gross margin expansion. And as I mentioned, our operating performance well exceeded the high end of our expectations as we registered adjusted EBITDA of $8 million, a year-over-year increase of 44%. Looking at our first half performance, our momentum is accelerating and our results are being fueled by the transformational work we started in 2023. We registered first half year-over-year net sales growth of 3.6% with strong flow-through, resulting in EBITDA growth of 15%. Although there is much work ahead of us, with our strong first half results, I'm even more confident in the opportunity we see in the US to expand our brand portfolio and total addressable market. We are committed to our strategic priorities as we continue to build on our portfolio of next generation brands for the next generation of consumers. Just as in our first quarter call, I would 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. Over the last 12 months, we added 420,000 new customers, which included the addition of 180,000 new customers during the second quarter, resulting in our active customers for the quarter increasing by nearly 12% over the prior year. As our teams remain disciplined and adhering to our test and repeat merchandising approach and staying close to our customers, our level of product newness has never been higher. Our assortments are strongly resonating enabling a greater level of full price selling which is fueling expanded gross margin results we're very pleased with the quality and composition of our inventory and marketing efforts are yielding strong return on investment positioning as well for continued active customer growth across our brand portfolio priority number two remain committed to showing up for our customers wherever they choose to shop with us in addition that To enhancing our online channels, we continue to test and expand our omnichannel strategies, including experiential stores, wholesale, and marketplaces. I'll touch on each of our omnichannel strategies by brand momentarily, but I'm pleased to report that we are seeing success across all channels of distribution. Another clear signal that our brands are meaningfully under-penetrated in the U.S. market. As our awareness increases, we continue to expand our total addressable market. Priority number three, continue to streamline our operations to deliver financial benefits. The strong second quarter flow through in which our net sales growth of 9.5% contributed to adjusted EBITDA growth of 44% as compared to the same period in the prior year, showcases our ability to drive outsized profitability. is a direct result of the transformational work we started in 2023, as well as the instilled culture to always look for ways to improve overall efficiencies, share best practices, and leverage the AKA platform to drive additional improvements in our results. Now let me share some highlights from our brands. Our largest brand, Princess Polly, which focuses on trend-based fashion targeting Gen Z and millennium women, posted another strong quarter of growth. Princess Polly's strong second quarter performance was broad-based with particular strength in dresses. We're also very pleased with the brand's category expansion efforts, including our newest product launches in sleepwear, loungewear, and activewear. And just in time for back to college, Princess Polly is now offering an assortment of everyday essentials, such as fleece hoodies, quarter zip sweatshirts, shorts, and more. I am also pleased to report that approximately 35% of the brand's new styles were made with lower environmental impact materials, which is up from 30% a year ago. Staying close to our customers, focusing on product innovation, and leveraging our test and repeat model to provide fresh, new, and affordable merchandise daily remain key brand tenants of the Princess Polly's DNA, which continues to fuel a high level of product newness and a higher hit rate on winners. Shifting to physical stores. We believe stores serve as a powerful customer acquisition tool and provide customers unique and immersive brand experience, creating a halo effect beyond each store, expanding our surrounding digital reach. Princess Polly's first store opening in Century City, LA back in September 2023 continues to perform strongly. We're excited for the five new Princess Polly store openings expected to occur in the second half of 2024. with two scheduled in the third quarter and three in the fourth quarter, all in time for the holiday season. The team remains focused on developing and executing unique in-store immersive brand experiences, engaging influencers, college ambassadors, and customers all designed to expand Princess Polly's brand awareness and attract new default customers to the brand. Petal & Puppets are other women's fashion brands focused on elevated trends, and event-based fashion for all of the little and big moments in her life, with more than 70% of the customers between the age of 25 and 34. Petal & Pop's second quarter performance was outstanding, with particular acceleration and strength across the brand's omnichannel efforts. Petal & Pop is now being offered on Nordstrom.com, Macy's.com, and Target.com, and the brand saw significant uptake in new-to-file customers in the second quarter, in part fueled by the fact that a high percentage of their omnichannel customers are first-time brand shoppers, which bodes well for continued brand growth. We remain very pleased with Petal's launch of Modern Romance, a wedding guest collection, and the May launch of Euro Diaries collection, with many styles selling out in the first few weeks. Although dresses represent the dominant portion of the category mix, the growing appeal of Petal & Pop as a lifestyle brand sets the stage for expanded product tests in the near future that could further accelerate the brand reach, whitening the total addressable market. Turning now to our streetwear brands. As I mentioned earlier, Culture Kings US delivered another quarter of strong double digit net sales growth on top of strong results last year. We remain thrilled with the consistent strong sales performance and forward profitability in the US flagship Las Vegas location, as well as the growth in the online business. Culture Kings is disrupting the streetwear market. There is simply nothing like the immersive experience of our Culture Kings store and our offerings across channel span a curated assortment from over 100 leading third-party streetwear brands, as well as a large and growing portfolio of in-house design brands and exclusive products that embody the relationship between music sports arts and fashion our first party brands such as loiter american thrift and minimal continue to be top performance with first party brands accounting for more than 50 percent of total culture kings u.s sales on the engagement front culture kings developed and hosted another phenomenal lineup of events in the second quarter ahead of edc weekend one of the largest electronic music festivals in the world, CK teamed up with DJ Matroda and Insomniac Records for an incredible live DJ set on the ground floor of the Las Vegas flagship store. For the milestone UFC 300 event, CK launched an exclusive capsule collection in collaboration with UFC and also created a one-of-a-kind varsity jacket with celebrity designer Jeff Hamilton. Culture Kings also teamed up again with Lyrical Lemonade's Summer Smash Festival in Chicago with another limited edition merchandise collaboration. Going deeper on Minimal, Minimal's spring collection achieved record-breaking seasonal sales, highlighting Minimal's ability to swiftly identify and deliver on emerging customer demands and bring fresh ideas to market faster than traditional brands. Following its successful spring and summer test phase with retailer DTLR, Minimal Effective expands to all of their locations in August, representing a major step for Minimal's wholesale strategy. As I mentioned, Minimal launched on Nordstrom.com in July with a limited number of SKUs. Initial selling is strong and we look forward to potentially expanding the SKU availability over the coming quarters. We remain bullish on our streetwear brand's long-term growth potential in the U.S. as well as globally. Now, I'll provide more detail on the P&L before taking your questions. For the second quarter, as I mentioned, net sales increased 9.5% to $149 million and 10.1% on a constant currency basis compared to the same period last year, driven by strength in our U.S. business. in which net sales increased 19.3% compared to the second quarter of last year. We also experienced meaningfully sequential improvements as our brands gained momentum in the US. While we saw softer sales in Australia and New Zealand as compared to the second quarter of 2023, ending down 5% for the period, sales trends generated significant sequential improvement. Net sales in the rest of the world declined 1.5% as compared to the second quarter of last year. Total orders for the second quarter were 1.9 million, increasing 16.4% as opposed to the second quarter last year. In the U.S., we saw order growth of 31%, driven by the impact of our U.S. stores and omni-channel initiatives, which was offset by lower demand in the Australian New Zealand region where orders declined 7%. As I mentioned, our training 12-month active customer count rose to 4 million by the end of the second quarter, a 12% increase compared to a year ago. Our second quarter average order value was $78, down 4.9% compared to the second quarter last year, due to softer sales in Australia and New Zealand, and the actions we've taken to improve our inventory position at Culture Kings in Australia and move them to our test and repeat merchandising model. Turning now to profitability, gross margin expanded 80 basis points in the second quarter to 57.7% compared to 56.9% in the same period last year, driven by lower air freight costs and strong full price selling. This was slightly offset by the channel mix shift to wholesale and planned promotions at Culture Kings Australia. Selling expenses were 41.2 million compared to $35.9 million in the second quarter of 2023. Selling expenses were 27.7% of net sales, compared to 26.4% a year ago, due primarily to the impact from growing marketplace initiatives and additional stores. Marketing expenses in the quarter were flat year over year. As a percentage of net sales, marketing expenses leveraged 120 basis points to 12.3%, compared to 13.5% in the second quarter of 2023. We experienced enhanced marketing efficiencies driven by strong performance at Petal & Pup, Princess Polly and Culture Kings US, as well as leverage from higher sales at wholesale and in stores. General and administrative expenses were 25.9 million compared to 24.2 million in the second quarter of 2023. As a percentage of net sales, G&A expenses decreased to 17.4% from 17.8% in the second quarter of last year due to leverage from higher net sales. We delivered adjusted EBITDA of $8 million compared to $5.6 million in the same period last year ahead of expectations. Adjusted EBITDA margin for the second quarter of 2024 increased 130 basis points to 5.4% compared to 4.1% in the same period last year. Turning now to the balance sheet. We ended the quarter with 25.5 million in cash and cash equivalents, debt totaling 106.9 million at the end of the quarter compared to 120 million a year ago. On inventory, we ended the quarter with 107 million in inventory, flat with a year ago during the quarter we made continued progress reducing our culture kings inventory levels and we and we are comfortable with our inventory levels as our investments are in our strongest trending brands a quick update on our stock repurchase program in the second quarter we repurchased 11 046 shares for a total cost of approximately a hundred thousand as of the end of the quarter we have 1.7 million remaining in our share repurchase authorization. Now turning to our outlook for 2024. Given the strength in our first half results, we're adjusting our outlook and now expect to deliver between 560 to 565 million in net sales for the full year. For the year, we expect gross margin between 56 and 57%, and we anticipate selling expenses to be approximately 27% of net sales and marketing expenses of approximately 12.5%. We expect G&A expense between 100 million and 110 million for the full year 2024. As a reminder, as we continue to expand into other channels such as wholesale and marketplace, we expect it will impact the composition of our expenses. While the EBITDA contributions are similar to our core business, our wholesale and marketplace initiatives have lower gross margin with a corresponding benefit in selling and marketing expenses. We expect to see more of an impact in the back half of 2024 as these channels grow. For the year, we now expect adjusted EBITDA of between 20 million and 22 million, weighted average diluted share count of 10.6 million, capital of expenditures between 12 and 14 million, and an effective tax rate of 10%. For the third quarter, we expect net sales between 141 million and 145 million, and adjusted EBITDA of between six and seven million. In summary, as you've heard, we delivered a very strong quarter with double digit constant currency top line growth with healthy flow through resulting in EBITDA growth of 44% over the prior year period. The transformational work we started in 2023, combined with our culture of innovation is driving meaningful improvement across the business. We remain committed to building our portfolio of next generation brands for the next generation of consumers, while staying relentlessly focused on executing our strategic priorities to enable AKA brands to fuel consistent, long-term profitable growth, capitalizing on the tremendous opportunity we see to expand our total addressable market. We operate with the mindset of continuous improvement. So while we recognize there is more work ahead of us, we're encouraged and motivated by the momentum in our business, and I'm excited to continue executing our strategies as we head into the back half of the year. Now, I will open up the call to your questions.