a.k.a. Brands Holding Corp. (NYSE:AKA) Q4 2023 Earnings Call Transcript
a.k.a. Brands Holding Corp. (NYSE:AKA) Q4 2023 Earnings Call Transcript March 7, 2024
a.k.a. Brands Holding Corp. misses on earnings expectations. Reported EPS is $-1.31 EPS, expectations were $-0.46. AKA isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the a.k.a 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. [Operator Instructions] 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.
Emily Schwartz: Good afternoon. Thank you for joining a.k.a. 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-brand.com. With me on the call is Ciaran Long, Interim Chief Executive Officer and Chief Financial Officer. Before we get started, I'd like to remind you of the company's safe harbor language. Management may make forward-looking statements, which 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 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, 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 Ciaran.
Ciaran Long: Thanks, Emily. Good afternoon, everyone, and thanks for joining our call. 2023 was a transformational year for a.k.a., 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 touch points and significantly strengthen our balance sheet. Before I go through the results, I want to share a few highlights from the year. We delivered U.S. 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 Kings demand continued to accelerate in the U.S. and registered double-digit net sales growth for the year. And lastly, we tested and expanded a number of omni-channel initiatives across our brands, including wholesale engagements with Paxson, 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 U.S. business grew 12% in the fourth quarter, which is a testament to the strength of our offering. As a reminder, our U.S. region is now our largest market and where we see the greatest potential moving forward.
Despite the strength in the U.S., 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 omni-channel tests last year, we're excited to scale our omni-channel 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 millennials women with on-trend quality fashion. Princess Polly has gained tremendous popularity in the U.S. 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 [Friends Gimme] 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 the store openings and further store expansion plans in the coming quarters. Equally as important as Princess Polly store expansion strategy is our 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 active wear 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. Pick off 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 achieved great success in the U.S. as a direct-to-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 & Pup 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 &Pup 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 &Pup also tested wholesale arrangement 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 U.S. 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 streamer market, and I remain very bullish on the brand's expansion in the U.S. and globally.
The one-of-a-kind flagship store in Las Vegas continues to activate its retail attainment 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 Raidar Star, Davante Adams’, global streaming icons, Kai Cenat and RDCWorld and an in-store event and appearance by celebrity jacket designer, Jeff Hamilton. The unique and next-generation interactivation brought in thousands of customers and the store recorded its two largest revenue days on record, surpassing the grand opening and Formula 1 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 load in Los Angeles next week, where we'll have stage naming rights, a full-court basketball experience and a new immersive element with on-site screen printing and exclusive merchandise and collaboration. Culture Kings is also an official partner of UFC 300, the upcoming mixed martial arts events in Las Vegas next month, which will include an exclusive product range and in-store activations surrounding the main event. As in a power-led streetwear brand, Culture Kings is uniquely differentiated from many other footwear-led streamer brands, setting Culture Kings up for continued growth over the long-term. We remain very excited by the performance of the first-party part 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 or other streetwear brand remains top performing brands 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 Man ] launching this spring. And the brand continues to be spotted in on hundreds of celebrities and professional athletes. As part of the broader omni-channel expansion plans, Culture Kings and minimal are also expanding their distribution channels for their exclusive products through regions 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 U.S., 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 Australia and New Zealand region, although improved sequentially from the third quarter, remained 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 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 was $2 million, an increase of 2% compared to the fourth quarter last year.
In the U.S., we were pleased to see order growth of 23% and driven by higher traffic and our omnichannel tests, which was slightly offset by lower demand in the Australia and New Zealand region, where orders were down 9%. We serve 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 Australia and New Zealand region. Importantly, we grew our active customer count in the U.S. by 5%. As a reminder, our active customer count is calculated on a trailing 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 Australia and 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 omni-channel 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 lower 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 their continued work right phasing 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 King's 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 with inventory levels of Princess Polly, Petal & Pup 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 generation 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 of approximately 12.5%. Marketing expenses will be slightly higher in the first quarter and lever throughout the year as we expand our omni-channel 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 million and $18 million, weighted average diluted share count of $10.7 million, capital expenditures of $10 million to $12 million and an effective tax rate of 10%. For the first quarter, we expect net sales between $108 million 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 with a 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 U.S., 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.
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