AKA Brands Holding Corp (AKA) 2024 Q1 法說會逐字稿

Greetings, and welcome to AKA brand Holding Corp's first quarter 2024 earnings conference call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to K.C White with Investor Relations. K.C, you may now begin.

Good afternoon. Thank you for joining AKA Brands First Quarter Fiscal 2024 conference call to discuss the results released this afternoon, which can be found on our website at ir dot e. a. dash brands. 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 refers to expectations, projections and other characterizations of future, including guidance and underlying assumption. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those.

For a further discussion of risks related to our business please see our our filings with them. 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 release furnished to the SEC and available on our web.

I'll turn the call over to Ciaran.

Thanks, Casey. Good afternoon, everyone, and thanks for joining our first quarter earnings call. Before I review a few key highlights from the quarter, I would like to thank our teams for their unwavering dedication and continued commitment to building on our portfolio of next-generation brands for the next generation of consumers. Our teams remain steadfast in executing our strategic priorities and operating with tremendous agility and flexibility every step of the way it is their hard work and dedication that gives me great confidence in the many profitable future growth opportunities we see for AKA brands.

Before I go through the results in more detail, let me share a few first quarter highlights. Net sales exceeded the high end of our guidance, fueled by US growth of more than 6%. We registered a strong gross margin of 66.2% and delivered positive adjusted EBITDA of $874,000, also exceeding the high end of our guidance. We saw trailing 12-month active customer growth of 5.5%.

We continue to leverage our test and repeat merchandising approach with inventories down 19% compared to last year and newness representing a meaningfully higher penetration of our mix of goods on hand. We ended the quarter with a significant 22% reduction in debt compared to last year, Princess poly successfully launched an active wear collection, which has been well received by both existing and new customers. We expanded our omnichannel marketplace presence through the launch of platinum pop on Nordson's website with strong initial results. And lastly, the kosher King U.S. business delivered another quarter of strong double digit sales growth.

Turning now to the first quarter. We delivered $117 million of net sales, which is stronger than expected, down 3% compared to last year and down only 1% on a constant currency basis. We were again pleased to register another quarter of solid growth in the US at 6.2%. The growth in the U.S. region is further validation that we are expanding our reach, our products are resonating, and we are capturing new customers in what remains our most profitable growth regions.

For the quarter, our US business accounted for 66% of total 88 brands net sales, a penetration increase of 10%. As expected, our Australia New Zealand region results were below the prior year, but we remain confident we will begin to experience gross margin expansion in the region in the back half of this year.

On the bottom line, as I mentioned, we delivered adjusted EBITDA of $874,000 exceeding the high end of our expectations. On the heels of a transformational 2023, 2024 is off to a great start, and I'm really excited about the tremendous opportunity we see in the US to expand our brand portfolio and total addressable market.

Let me 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. During the first quarter, we added 200,000 new customers on a trailing 12-month basis, benefiting from our test and repeat merchandising approach combined with delivering meaningfully higher levels of product newness, increasing its frequency and introducing new product categories.

The composition and quality of our inventories, particularly in the US are in excellent shape, and we are chasing into many, many styles. We are well positioned to continue our growth in active customers, driving higher full-price selling, expanding our gross margin buyers. And number two, we remain committed to showing up for our customers wherever they choose to shop with us. In addition to enhancing our online channels, we will continue to test and expand our omnichannel strategies, including experiential stores, marketplaces and wholesale.

I will touch on each of our omnichannel strategies with the brand level review shortly.

Priority number three, continuing to streamline our operations to deliver financial benefits across the company. We've created a culture anchored on finding additional operating improvements across the P&L. This is less about simply removing costs and more about driving efficiencies, sharing best practices and leveraging scale. For example, we are achieving improved in-bound freight rates through a combination of lower rates and a better mix of air versus ocean shipping we've also begun to action store operations of opportunities at Princess Polly, which we will rollout to our plan 2024 openings.

Now let me share some highlights from our brands our largest brand Princess Poly's mission is to make on-trend fashion sustainable and accessible for everyone targeting Gen Z and millennial women. Princess poly entered the new fiscal year with more than 5.3 million global email subscribers and approximately 2.3 million global SMS subscribers, representing growth of 4% and 7%, respectively.

We launched the principally brand into the physical world center December, 2023, opening of the brand's first store in Century City L.A. The store continues to perform exceedingly well, attracting both existing and new customers. While also creating a halo effect for our online business. The team is doing an excellent job of crafting unique and personalized experience to engage influencers, college investors and customers alike.

Q1 showcased a variety of immersive brand moments from influencer events like exclusive in-store shop-in-shop gatherings and the Princess Polly active work launch events was spring, break deep, turn Florida tailored for students along with curated influencer edits to boost strategic brand awareness and cultivate further trend-driven content. We remain on track to open three Princess Male stores in the third quarter, one in Scottsdale Fashion Square one on Newbury Street in Boston and another in Fashion Valley Mall in San Diego.

From a product perspective, a key pillar of Poly's merchandising strategy is continued focus on product innovation following January launches of sleepwear and loungewear, we launched an active wear collection that garnered a significant positive customer response, leveraging our test and repeat models. And the early success we've seen, we will continue to build out sleepwear, loungewear and active wear as well as additional categories throughout 2024.

Moving to our other women's brand patent and top Platinum Club entered 2024 with over 1.7 million social media followers around the globe and continues to experience great success in the U.S. targeting a slightly older customer base and Princess, Polly at the top is best known for its impact to be designed and for training collections, offering more elevated events, space styles. We're seeing nice strength in dresses, which is the dominant portion of petrol and tops category mix. And we're very pleased with the March launch of a wedding gift collection. Soft month enrollments collection comprises 75 styles, reimagined bestsellers and new sizes available on the patch.

On the pulp side, at the showcase, the collection launched the brand hosted a successful influencer and media event in New York City. The success we are seeing across the Platinum product assortment sets the brand up for expansion in traditional lifestyle categories in the future.

Shifting to our marketplace omnichannel tests following successful launches on both Macy's and target sites. Federal Bob expanded its distribution in March on Nordstrom's website, which has exceeded our initial expectations, setting the stage for accelerated growth in the future across pet and plus marketplace presence. We continue to see a high percentage of customers who are new to the brand. And finally, our success wholesale tests with Victoria's Secret and Liverpool have resulted in follow-on orders.

Turning now to our streetwear brands. As I mentioned earlier, in the U.S. or King's business saw another quarter of strong double-digit net sales growth as a premier global streetwear brand and retail destination culture. Kings offers a unique blend of music, sports and fashion found across the globe. We remain bullish on Cushing's long-term growth potential in the U.S. as well as globally.

Cushing's is disrupting the streetwear market, and we are thrilled with the consistently strong sales performance and four-wall profitability in the U.S. flagship Las Vegas location store experience is truly unique on forget them and atmosphere and an exclusive buying experience on an international stage. We also remain pleased with continued strong performance and broadening acceptance of our first-party brands, which account for more than 50% of total contract King's US sales, larger commercial thrift and minimal.

Our top first party brands, which we further complement with exclusive coffee offerings, straight off of the Super Bowl high contracting partners with one load for another legendary weekend of music culture and collaborations in LA, the brand sponsored the immerse emerging artist stage are their signature branded basketball court activations. And due to this year's event classifications had a screen print station well fans could select from exclusive designs to get customers. We intend to have these and T-shirts on this call. Our streetwear brand minimal also continues to disrupt a stronger market. In March, minimal launch, an exclusive capsule collection with NBA Star Trek on men with great fanfare Lindemann also continues to expand its brand distribution channels for their exclusive products for regional streetwear stores.

Now I'll provide more detail on the P&L before taking your questions. For the first quarter net sales were $117 million, down 3% and 1% on a constant currency basis compared to the first quarter of 2023. Strength in our US sales were offset by softer trends in Australia and New Zealand. As I mentioned, net sales in our US business increased 6.2% compared to the first quarter of last year. Sales in the Australia and New Zealand region as expected, were challenging and declined 19.1% for the quarter.

Net sales in the rest of world declined 3.5% for the quarter. Total orders for the first quarter were $1.5 million, up 1.3% compared to the first quarter of last year, with strength in the US. We serve $3.8 million active customers in the first quarter, a 5.5% increase compared to the first quarter of 2023. As a reminder, our active customer count is calculated on a trailing 12-month basis. First quarter average order value was $77, down 3.8% compared to the first quarter of last year on a reported basis and down 2% in constant currency, due primarily to softness in Framedia and New Zealand.

Turning to profitability, gross margin in the first quarter was 56.2% compared to 56.9% in the same period last year. We were pleased that our direct-to-consumer channel generated gross margin expansion. The Princess poly patent impulse and minimal. During the quarter, we continued to take actions to improve our inventory levels and composition of culture gains, which impacted overall gross margins.

Selling expenses were $34.2 million compared to $34.4 million in the first quarter of 2023. Selling expenses were 29.3% of net sales of 70 basis points compared to 28.6% in the first quarter of 2023, due primarily to the effect of growing marketplace initiatives and additions stores, marketing expenses in the quarter were $14.9 million compared to $14.8 million in the first quarter of 2023.

On a rate basis, marketing expenses were 12.7% of net sales compared to 12.3% of net sales in the first quarter of 2023. Despite reduced marketing effectiveness and culture gains in Australia, we were pleased with the improved marketing effectiveness of Princess, Polly and in pulp. And importantly, we saw positive growth in active customers.

General and administrative expenses decreased 12.4% to $22.7 million compared to $25.9 million in the first quarter of 2023. On a rate basis, G&A expenses were 19.4% of net sales compared to 21.5% of net sales in the first quarter of last year. We delivered adjusted EBITDA of $874,000 compared to $2.2 million in the same period last year, ahead of our guidance range. Adjusted EBITDA margin for the first quarter of 2024 was 0.7% compared to 1.8% in the same period last year.

Turning now to the balance sheet. We ended the quarter with $21.9 billion in cash and cash equivalents, debt totaled $103.6 million at the end of the quarter at 22% reduction compared to $132.4 million a year ago.

Turning out inventory, we continue to focus on rightsizing our inventory position and ended the quarter with inventory down 19% to $91.5 million compared to $112.5 million a year ago. We are comfortable with the level and composition of our inventory of Princess poly, cotton, lint pulp and minimal. And we are pleased with the progress we have made rightsizing project King's Australian inventory in preparation for the full transition to the test and repeat model in the back, it was 2024 a quick update on our stock repurchase program. In the first quarter, we repurchased 106,153 shares for a total cost of approximately $1.1 million. As of the end of the quarter, we have $1.8 billion remaining in our share repurchase authorization.

Now turning to our outlook for 2024 and beyond. Based on the solid initial start to the year, we are raising the low end of our net sales guidance range and no expect $545 million to $555 million in net sales for the year. We're also slightly raising our full year adjusted EBITDA outlook range to $17 million to $19 million.

As you update your models. I would like to take a moment to help everyone understand that as we expand our total addressable market to omnichannel tests, we would expect a neutral to marginally accretive impact to our overall EBITDA margin. However, we anticipate that there will be shifts in the lines of the P&L, including a slight drag on our gross margin was benefiting marketing expenses we expect this dynamic will begin to modestly influence our P&L in the back half of the year as these channels grow.

Importantly, we see our omnichannel initiatives as drivers of long-term portfolio of brand awareness, top line and EBITDA. For the full year, 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 and contract changes in 2023, slightly offset by a higher mix of marketplace and wholesale sales. We anticipate selling expenses to be approximately 26% of net sales and marketing expenses of approximately 12.5% of net sales. Marketing expenses will be slightly higher in the second quarter and leveraged throughout the year as we expand our omni-channel initiatives.

SG&A expenses between $100 million and $110 million for the full year of 2024. And as mentioned, we are raising our adjusted EBITDA expectations to a range of $17 million and $19 million for the year. We expect a weighted average diluted share count of 10.6 million, capital expenditures $10 million to $12 million, and an effective tax rate of 10%. For the second quarter, we expect net sales between $133 million and $138 million and adjusted EBITDA of between $4.5 million and $5.5 million.

In summary, 2024 is off to a great start with first quarter results that exceed the high end of our net sales and adjusted EBITDA guidance. I'm extremely confident in the many profitable future growth opportunities we see for our key brands, particularly the tremendous whitespace runway we see in the US to expand our broad brand portfolio reach and total addressable market. We remain focused on executing our strategic priorities, which position us to grow our brands and deliver consistent long-term growth.

Now I will open the call up to your questions. Thank you.

(Operator Instructions) (Operator Instructions) Eric Beder, SCC Research.

Good afternoon. Congrats on a solid bounce-back quarter.

Thanks, Eric.

Who will talk a little bit about culture King's arm? Obviously that Las Vegas store is an amazing store and it's probably not replicable, but are there opportunities to have more have incremental culture, King stores in the US? And I know that you're moving in terms of Australian New Zealand to the test mode and how has the, I guess, preliminaries for that and how hard are the changes happening, Tanya, what's the confidence that you have that that's going to be is driver there?

Yes. Thanks, Eric.

And yes, I think firstly, yes, on new contract wins in Las Vegas, I think there's certainly opportunity.

And I think look, as we look at the overall portfolio.

We certainly feel that the strategy is working. It's great to be up 6.2% in the US for the quarter. And overall active customer growth of 5.5% is just a great indication of the opportunities we have here across all of the brands. As I said in the prepared remarks, Coatings is again up double digit growth in the U.S., we feel we will and we will open more stores for culture Kings and probably not to the level that we had in Las Vegas, but we certainly feel that there's opportunities for them, right. Right now, we're very focused on opening three stores for poly in Q three, and that's certainly looking for store opportunities for chicken. And we do see tremendous runway for that brand. At the moment, 50% of the products that we sell in culture Kings are first party brands that we own ourselves. So we feel that's really resonating with the customer.

And as we think about Australia, I think the brand and the macro conditions there are more unfavorable than we've seen in the US and but we know that we need to get culture, Kaes answer that test and repeat model that we see just being so strong and really underpinning that growth that we're seeing in the US across the other brands. And we are seeing so some early signs and some of the new product that they've brought in this is, you know, hitting all of those sales metrics that they would look at and expect and you know, that building a model where they can replenish into that really fast and leveraging the expertise that we have and the model that we have two other brands. So look, I think we feel confident that as we go into the back half, we'll see gross margin expansion coming from getting project things in Framedia onto that test and repeat model.

Great. And then just a follow-up here. So you talked you've done a great job managing inventories here and you continue to manage. How should we be thinking about the second half as the business somewhat normalizes in terms per test model and some of the other changes, how should we be thinking about like more normal or what should be a more normalized a change in the interest rate going forward? Thank you.

Yes, thanks, Eric.

Yes, really good progress on inventory was down 19% and over $20 million and year over year. And during that way, we're able to get that the US business growing at that 6.2%.

As we think about the rest of the year. I would say the US business is certainly in chase mode when it comes to inventory and you know, so I think there'll be some tails off. And as we go through the U.S. and continued growth there. I think there's still some actions we will take in Australia that our overall inventory will come down sequentially quarter over quarter and I think as we go through the year overall, we see a small sequential improvements or reductions in inventory dollars. But I think that we have made the big progress there overall Great.

Thank you.

Ashley Owens, KeyBanc Capital Markets.

Steve, thank you. Thank you. You talked about some better funds in municipal, but I was wondering if you could give a little bit of color on the intra-quarter cadence and exit trajectory heading into 2Q. So just active customers, very solid even with the sales right any color on how you're thinking and that's trailing 12 months, but should that continue to trend ahead of sales growth for the year, engaging new buyers on the platform? And if you're seeing most of this growth concentrated in any one region?

Sure. Thanks, Ashley. Yes, a lot there. So let me start with newness and the cadence. Look, I think we're just overall, very pleased with our Q1 performance, particularly in the U.S. rates, I think overall coming in higher than our sales guidance. And then that 6.2% growth in the US.

I think as we went through the quarter, we saw momentum builds and for U.S. and Europe built nicely coming into into Q2. That's the spring. Summer season is certainly a period where we shine across the four brands.

And we did see some a little bit of impact from weather on some of the categories like swim, the Easter changes. But I would say, overall, very happy. And within that kind of maybe segueing a little bit into active customers, I think just really happy with overall growth in active customers.

But just seeing real strength across the brands. And we're seeing that growth, I would say, in all channels, direct-to-consumer in our stores in what we're doing in marketplaces, it continued. We continue to see that over 30% of the customers coming into the Princess poly store in L.A. are new to the brand. And now six months. And we're also seeing that store has a halo effect on our online sales within that region. And so kind of you know that that virtual virtuous model is kind of really helping itself the online and stores.

And we're also continuing to see that 90.5% of the customers are over 95% of the customers. And these marketplace channels are new to particularly prevalent top, which is, which is doing so well in these channels. So really great to see them all are working so well, I think reinforcing that the strategy we have, the model that we have these brands are working. They're working well and it is all underpinned by that test and repeat model that we have.

And as we think about engagement, I think look, all of the brands are working really hard across all of all of the marketing channels. And I think doing that really in conjunction with feeling really good about the inventory that they have the newness that they brought in during the quarter turned into quickly get our best sellers, and we're able to kind of repeat that product replenishing to those products, which is really core to this model, right? It's not just about as the new style, it's finding new style that the contest winners and you can kind of replenishing to.

So I would say, overall, the brands are feeling good about where they are still feeling like there's lots of opportunities as we think about this overall market that we have, and they're just they're getting thereafter.

Okay. Thank you.

(Operator Instructions) Youssef Squali, Truist Securities.

Yes, this is Nick Cronin on for Youssef. So on the prior call, I think it was called out that you had expected Australia to show a mid 20% decline versus the 19% decline that was reported. So just curious if there's anything that drove the upside there. And then as we go throughout the rest of the year, just what's baked into the 2024 guide between the relative geographies?

Yes. Thanks, Nick. Yes, as we and I think as we went through the quarter, we're certainly pushing really hard to get closure Kings on the test and repeat model that we see. Look, we obviously talked about a lot because we see how strong it is for well. It is working across the other brands.

We did see some we are seeing the early signs of this new product that the screening in is working with our customers are reacting to it so kind of pushing hard on that. And so that does give us confidence that we'll see the benefits of getting them on test repeat and some gross margin expansion in the back half of the year. We still feel we have plenty of work to do there in Q2 and beyond.

And I'm sorry if I missed the second part of your question is that the answer is yes.

What's baked into the guide across the three geographies?

Yes. Look, I think and as we think about the guide, very much thinking the trends that we saw and two regional trends that we saw in Q1 will continue through the year. I think look, the we're over 66% of the business now is in the US. And so certainly by far our largest market where we're furthest along in developing the different channels, and we're going to continue to lean into that strategy. We've got three stores opening for poly, probably late two three. And so we'll see some benefit there will be in that Q4 period. And that's really how we is the kind of model as we think about the revenue for the rest of the year.

Got it. And then could I just ask one follow-up on capital allocation? And just how are you thinking about balancing the debt paydown versus stock repurchases versus investing organically behind the business commission. Can you give us an updated framework?

Yes. Thanks, Nick. And we feel really good last year when we paid down $50 million of debt, down 35% and just strengthened the deal for our business. And as we sit here today, I think it's very much going after the growth first, and we've got four great brands is they're resonating with customers. So I think as it pertains to capital allocation, it's really going after you've got a growth opportunity there. As we've talked about, we spend $10 million to $12 million of CapEx this year. And I think that's it. It's a key focus for us and we will continue to pay down the debt. We'll continue to look to strengthen our balance sheet and we're not looking for this to be a highly leveraged business going forward.

Got it. Thank you.

Thank you. At this time, we've reached the end of our question-and-answer session, and I'll turn the call over to Mr. Lang for closing remarks.

Thank you. Thank you all for joining us on the call and obviously talk to you and give you updates on where we are and the progress and all of the teams across the U.S. and Australia are making on and bringing great product to customers and really showing off what these brands can do.

Thank you all.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.