Q2 2022 AKA Brands Holding Corp Earnings Call

August 10, 2022

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Operator: Hello, and welcome to the a.k.a. Brands Q2 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jean Fontana. Please go ahead.

Operator: Hello, and welcome to the AKA Brands Q2 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jean Fontana. Please go ahead.

Hello and welcome to the AKA brand second quarter 2022 earnings conference call. At this time all participants are in a listen-only mode. If anyone should require operator assistance please press star 0 on your telephone keypad.

A question and answer session will follow the formal presentation.

As a reminder, this conference is being recorded.

Jean Fontana: Good afternoon. Thank you for joining a.k.a. Brands Q2 2022 conference call to discuss the results we released this afternoon, which could be found on our website at ir.aka-brands.com. With me on the call today are Jill Ramsey, Chief Executive Officer, and Ciaran Long, 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 than 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 margin.

It's now my pleasure to turn the call over to Gene Fontana. Please go ahead.

Good afternoon. Thank you for joining AKA Brands second quarter 2022 conference call to discuss the results we released this afternoon which can be found on our website at ir.aka-brands.com. With me on the call today are Jill Ramsey Chief Executive Officer and Kiran Long Chief Financial Officer. Before we get started I would like to remind you of the company's safe harbor language. Management may make forward-looking statements which refer to expectations, projections, and other characteristics of the company.

Jean Fontana: Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website. The call will also contain certain numbers presented on a pro forma basis, which includes the impact of Culture Kings as if we own the brand for all periods and comparable periods described. With that, I'll turn the call over to Jill.

and adjusted EBITDA margins. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the FCC and available on our website. The call will also contain certain numbers presented on a pro forma basis, which includes the impact of Culture Kings, as if we own the brand for all periods and comparable periods described. With that, I'll turn the call over to Jill.

Jill Ramsey: Thank you, Jeanne, and thanks everyone for joining our call today. I'd like to begin by recognizing and appreciating our teams for their hard work and agility, delivering profitable growth in what continues to be a complex macro environment. As we stated on our recent press release, Q2 global net sales grew 6%, 11% in constant currency on top of last year's 76% pro forma growth for the acquisition of Culture Kings. Sales in the US, our largest region, grew 16% on top of impressive 138% pro forma growth last year. Australia decreased 5%, but was up 3% in constant currency on top of 41% pro forma growth. While we achieved double-digit global growth this quarter on top of last year's robust increases, we did experience deceleration as we moved through the quarter.

Thank you, Jean, and thanks everyone for joining our call today. I'd like to begin by recognizing and appreciating our team for their hard work and agility delivering profitable growth in what continues to be a complex macro environment.

As we stated on our recent press release, second quarter global net sales grew 6%, 11% in constant currency, on top of last year's 76% pro forma growth for the acquisition of Culture King.

Sales in the US, our largest region, grew 16% on top of impressive 138% pro forma growth last year.

Australia decreased 5%, but was up 3% in constant currency, on top of 41% pro forma growth.

And while we achieved double-digit global growth this quarter on top of last year's robust increases, we did experience deceleration as we moved through the quarter.

Jill Ramsey: Net sales in Q2 were impacted by inflationary pressures on consumers, shifts in spending behavior, and a slower than anticipated recovery in Australia. Additionally, lower return on marketing investments, a competitive promotional environment, and higher returns contributed to lower than expected adjusted EBITDA of $6 million. As we continue to manage our business through this challenging period, we are focused on driving profitable growth and protecting our margins by maintaining discipline around inventory and promotions, driving greater marketing efficiency, and carefully controlling expenses, which Ciaran will speak to shortly. Importantly, we remain confident in our long-term growth outlook. Active customers grew 34%, demonstrating the growing demand for our differentiated brand. We now serve 3.9 million active customers globally, and yet we believe this is just a small percentage of our potential target demographic.

Net sales in the second quarter were impacted by inflationary pressures on consumers, shifts in spending behaviour and a slower than anticipated recovery in Australia.

Additionally, lower return on marketing investments, a competitive promotional environment, and higher returns contributed to lower than expected adjusted EBITDA of $6 million.

As we continue to manage our business through this challenging period, we are focused on driving profitable growth and protecting our margins by maintaining discipline around inventory and promotion, driving greater marketing efficiency, and carefully controlling expenses, which Kiran will speak to shortly.

Importantly, we remain confident in our long-term growth outlook. Our number of customers grew 34%, demonstrating the growing demand for our differentiated brand.

We now serve 3.9 million active customers globally, and yet we believe this is just a small percentage of our potential target demographic.

Jill Ramsey: We are still in the early days of our expansion in both the US and the rest of the world. Our unique operating model is flexible and resilient, enabling us to pull levers to manage between growth and profit during times of volatility. First, our next-generation merchandising strategy leverages a powerful combination of data-driven test and repeat buying with fast lead times, a dual hemisphere footprint, and a high mix of exclusives, all of which create a huge competitive advantage. Our proven model gets trends to customers faster while managing inventory risk and maintaining strong growth margins. Second, our brands have an efficient approach to marketing that all starts with great content, amplified across a vast network of social media followers and influencers. We combine this with performance marketing and highly efficient in-house channels, which leads to lower costs and higher flexibility.

We are still in the early days of our expansion in both the U.S. and restive world.

Our unique operating model is flexible and resilient, enabling us to pull levers to manage between growth and profit during times of volatility.

First, our next generation merchandising strategy leverages a powerful combination of data-driven, test-and-repeat buying with fast lead time, a dual hemisphere footprint, and a high mix of exclusives, all of which create a huge competitive advantage. Our proven model gets trends to customers faster, while managing inventory risk and maintaining strong growth margins.

Second, our brands have an efficient approach to marketing that all starts with great content, amplified across a vast network of social media followers and influencers.

We combine this with performance marketing and highly efficient in-house channels, which leads to lower costs and higher flexibility.

Jill Ramsey: Third, our unique multi-brand platform and collaborative culture enables us to share ideas, innovation, vendors, and resources across our teams to drive both growth and efficiencies. Turning to our brand updates, I'll share some highlights from the quarter and what's ahead, starting with our women's brands. Princess Polly, our largest brand and contributor to growth on the quarter, continues to have tremendous opportunity in the US and rest of world. Princess Polly's mission is to make on-trend fashion sustainable and accessible, and they are quickly establishing as a leader at this. Earth Club, their line of sustainable fashion, gained further traction this quarter with sales up 30% quarter over quarter. They've made tremendous progress by rebuilding their supply chain to use sustainable materials on over 20% of their new styles and remain on track to reach their goal of 40% by year-end.

Third, our unique multi-brand platform and collaborative culture enables us to share ideas, innovation, vendors, and resources across our teams to drive both growth and efficiencies.

Turning to our brand updates, I'll share some highlights from the quarter and what's ahead, starting with our women's brand.

Princess Polly, our largest brand and contributor to growth on the quarter, continues to have tremendous opportunity in the U.S. and restive world.

Princess Polly's mission is to make on-trend fashion sustainable and accessible, and they are quickly establishing as a leader at this.

Earth Club, their line of sustainable fashion gained further traction this quarter with sales up 30% quarter over quarter. They've made tremendous progress by rebuilding the supply chain to use sustainable materials on over 20% of their new styles and remain on track to reach their goal of 40% by year-end.

Jill Ramsey: In addition to expanding their sustainable range, Princess Polly is proud to share that customers will soon be able to buy and sell pre-owned Princess Polly on their site through a strategic partnership. Standing by their quality and allowing customers to buy and sell second-hand is an incredible step that positions them to participate in the fast-growing recommerce space and the full circularity of fashion. With these initiatives, Princess Polly is bolstering their competitive differentiation and strengthening their brand position with their target demographic. Princess Polly also continues to see growth in their extended size collection, Curve, which launched in the fall. This quarter, sales were up 35% from the prior quarter across nearly 600 styles, and we are very pleased with the strong initial response, with 30% of customers returning after a first purchase. I'll share a quote from a customer.

In addition to expanding their sustainable range, Princess Polly is proud to share that customers will soon be able to buy and sell pre-owned Princess Polly on their site through a strategic partnership.

Standing by their quality and allowing customers to buy and sell secondhand is an incredible step that positions them to participate in the fast-growing re-commerce space and the full circularity of fashion.

With these initiatives, Princess Polly is bolstering their competitive differentiation and strengthening their brand position with their target demographic.

Princess Polly also continues to see growth in their extended size collection curve, which launched in the fall.

This quarter sales were up 35% from the prior quarter across nearly 600 styles.

We are very pleased with the strong initial response with 30% of customers returning after a first purchase.

Jill Ramsey: I cannot thank you enough for your inclusive sizing. I have always wanted to dress the same as my friends. You have no idea how much it means to fit in, not to mention the incredible quality. My self-esteem is so high right now. Thank you from the bottom of my heart." While Curve is a small proportion of sales today, we believe there is continued growth potential that will enable Princess Polly to reach a broader audience. As innovators in next-generation marketing, Princess Polly efficiently optimizes spend across over 20 channels, from social media to performance and in-house. They are a leader at micro-influencer marketing with a vast network of smaller audience influencers. Last fall, they took this to the next level, rolling out a college ambassador program that received 20,000 applications, and this quarter, another 3,000 students applied.

I'll share a quote from a customer.

I cannot thank you enough for your inclusive sizing. I have always wanted to dress the same as my friends.

You have no idea how much it means to fit in, not to mention the incredible quality.

My self-esteem is so high right now. Thank you from the bottom of my heart.

And while Curve is a small proportion of sales today, we believe there is continued growth potential that will enable Princess Polly to reach a broader audience.

Innovators at Next Generation Marketing, Princess Polly efficiently optimizes spend across over 20 channels, from social media to performance and in-house.

They are a leader at micro influencer marketing with a fast network of smaller audience influencers.

Last fall, they took this to the next level, rolling out a College Ambassador program that received 20,000 applications. And this quarter, another 3,000 students applied.

Jill Ramsey: Converting brand enthusiasts into ambassadors is a cost-effective and authentic way to reach new customers. Princess Polly is currently in full swing for the back-to-college season with their ambassador program and a robust campus cool marketing campaign activated across channels. One of Princess Polly's incredible strengths is their ability to pivot marketing wherever their customer goes. They were early on TikTok, testing and learning with content and strategies to increase efficiency. Now, as TikTok emerges as a dominant platform, they are seeing significant traffic, sales, and new customers, and it has become one of their fastest-growing and highest performing marketing channels. Princess Polly is also doubling down on in-house marketing, which drives repeat engagement and high efficiency. With nearly 1.3 million subscribers, SMS text marketing is one of their highest ROI channels, with potential for even higher conversion as they lean into personalization.

Converting brand enthusiasts into ambassadors is a cost effective and authentic way to reach new customers.

And Princess Polly is currently in full swing for the back to college season with her ambassador program and a robust campus cool marketing campaign activated across channels.

One of Princess Polly's incredible strengths is their ability to pivot marketing wherever their customer goes.

They were early on TikTok, testing and learning with content and strategies to increase efficiency.

Now, as TikTok emerges as a dominant platform, they are seeing significant traffic, sales, and new customers, and it has become one of their fastest growing and highest performing marketing channels.

Princess Polly is also doubling down on in-house marketing, which drives repeat engagement and high efficiency. With nearly 1.3 million subscribers, SMS text marketing is one of their highest ROI channels, with potential for even higher conversion as they lean into personalization.

Jill Ramsey: Princess Polly's loyalty program also continues to exceed expectations, with nearly 2 million members now who spend 130% more than non-members. Even more impressive is that top-tier members purchase at 3 times the rate of non-members. Princess Polly's ability to drive marketing efficiency is unparalleled. While we continue to face a dynamic landscape, their ability to shift between channels, combined with the strength of their influencer and in-house programs, will enable them to optimize spend in the back half and beyond. Furthermore, a powerful aspect of our model is to leverage these successes across our brands. Turning to Petal & Pup. This brand continues to be our fastest-growing, driving growth across the US, Australia, and rest of world. Petal & Pup's performance demonstrates the strength of our platform as they successfully leverage Princess Polly's strategies to drive their own growth.

Princess Polly's loyalty program also continues to exceed expectations, with nearly 2 million members now who spend 130% more than non-members.

Even more impressive is that top-tier members purchase at three times the rate of non-members.

Princess Polly's ability to drive marketing efficiency is unparalleled, and while we continue to face a dynamic landscape, their ability to shift between channels, combined with the strength of their influencer and in-house programs, will enable them to optimize spend in the back half and beyond.

Furthermore, a powerful aspect of our model is to leverage these successes across our brand.

Turning to Petal & Pup, this brand continues to be our fastest growing, driving growth across the US, Australia and rest of world.

Petal and Pups performance demonstrates the strength of our platform as they successfully leverage Princess Polly strategies to drive their own growth.

Jill Ramsey: From a merchandising perspective, Petal & Pup shares many vendors and uses the same test-and-repeat strategy as Princess Polly. In Q2, they were able to quickly read and react to trends like cutouts on dresses and the shift to two-piece sets and jumpsuits. Like Princess Polly, they are leaning into their dual hemisphere advantage to optimize inventory. For example, they reallocate on orders between Australia and US just before delivery based on up-to-the-minute sales data. In marketing this quarter, Petal & Pup successfully took learnings from Princess Polly to lean into advertising on streaming content platforms, targeting new customers with high-performing ads on relevant shows. Like Princess Polly, they're focused on growing in-house SMS text marketing. This quarter, they doubled the size of their customer file, and SMS became one of their fastest-growing and highest-returning channels.

From a merchandising perspective, Petal & Pop shares many vendors and uses the same test and repeat strategy as Princess Polly.

In Q2, they were able to quickly read and react to trends like cutouts on dresses and the shift to two-piece sets and jumpsuits.

And like Princess Polly, they are leaning into their dual hemisphere advantage to optimize inventory. For example, they reallocate on orders between Australia and the U.S. just before delivery based on up-to-the-minute sales data.

In marketing this quarter, Petal & Pup successfully took learnings from Princess Polly to lean into advertising on streaming content platforms, targeting new customers with high-performing ads on relevant shows. And like Princess Polly, they're focused on growing in-house SMS text marketing.

This quarter they doubled the size of their customer file and SMS became one of their fastest growing and highest returning channels.

Jill Ramsey: Rebdolls also continues to engage customers with their incredible content and leverage resources, learnings, and best practices from our group of brands. Moving to our streetwear brands. Renowned for their highly experiential stores that are closer to a Vegas nightclub, Culture Kings stores delivered strong growth in Q2 that has sustained into Q3. With the return to in-person events following COVID restrictions, we are thrilled by the high level of engagement, energy, and traffic back in our stores. Culture Kings hosted a number of high-impact events in Q2, including a press conference featuring famed boxers Kambosos and Haney leading up to their marquee fight. The event was promoted with visible branding, exclusive merchandise, and content that was amplified on social media. Additionally, Nick Scott of the Los Angeles Rams created a viral moment in stores when he arrived with the Vince Lombardi Trophy.

RevDolls also continues to engage customers with their incredible content and leverage resources, learnings, and best practices from our group of brands.

Moving to our streetwear brand.

Renowned for their highly experiential stores that are closer to a Vegas nightclub, Culture King stores delivered strong growth in Q2 that has sustained into Q3.

With the return to in-person events following COVID restrictions, we are thrilled by the high level of engagement, energy and traffic back in our stores.

Culture King hosted a number of high impact events in the second quarter, including a press conference featuring famed boxers, Kimbosos and Haney, leading up to their marquee fight.

The event was promoted with visible branding, exclusive merchandise, and content that was amplified on social media.

Additionally, Nick Scott of the LA Rams created a viral moment in stores when he arrived with the Vince Lombardi Trophy.

Jill Ramsey: This quarter, we are excited to host a continued lineup of world-class celebrities, such as Hall of Famer Shaq, who will be in our Melbourne and Sydney stores later this month. Recently, I had a chance to visit our stores in Auckland, Sydney, and Brisbane. They were buzzing with traffic and energy, and I am so excited for the launch of this incredible retail concept in the US. The flagship location in Las Vegas is on track to open this November with an exciting lineup of artists and athletes. The store will carry over 60 highly recognizable brands that are confirmed for launch. We are confident that Culture Kings' one-of-a-kind experiential store format will resonate with a US audience as it has in Australia and New Zealand, and we remain bullish on global potential for this incredible brand.

This quarter we are excited to host a continued line up of world class celebrities such as Hall of Famer Shaq who will be in our Belvern and Sydney stores later this month.

Recently, I had a chance to visit our stores in Auckland, Sydney, and Brisbane. They were buzzing with traffic and energy and I am so excited for the launch of this incredible retail concept in the US.

The flagship location in Las Vegas is on track to open this November with an exciting lineup of artists and athletes.

The store will carry over 60 highly recognizable brands that are confirmed for launch.

We are confident that Culture King's one-of-a-kind experiential store format will resonate with a US audience as it has in Australia and New Zealand, and we remain foolish on global potential for this incredible brand.

Jill Ramsey: World-famous for streetwear, Culture Kings offers a broad range of over 200 brands online, with a mix of highly sought-after third-party brands, SMUs, and exclusive private label. More than half their sales come from exclusive products, of which the fastest-growing segment is printed tees and hoodies. Since the acquisition of the print-on-demand facility in the fall, we've nearly doubled this business. With just-in-time production, the team can quickly jump on trends such as championship winners in sports or popular series in entertainment. This quarter, we launched over 24 successful licensed tee programs, including The Warriors, Stranger Things, and Avatar. With this demand-driven capability at Culture Kings, we get trends to customers faster, reduce inventory risk, and realize higher gross margins, and we are sharing this capability with our other brands.

World famous for street wear, Culture Kings offers a broad range of over 200 brands online with a mix of highly thought after third party brands, SMUs and exclusive private labels.

More than half their sales come from exclusive products, of which the fastest growing segment is printed tees and hoodies.

Since the acquisition of the print-on-demand facility in the fall, we've nearly doubled the business.

With just-in-time production, the team can quickly jump on trends such as championship winners in sports or popular series in entertainment.

This quarter we launched over 24 successful licensed T programs, including Warriors, Stranger Things, and Avatar.

With this demand-driven capability at Culture Kings, we get trends to customers faster, reduce inventory risk, and realize higher gross margins. And we are sharing this capability with our other brands.

Jill Ramsey: This quarter, mnml launched its first-ever vintage tee program, leveraging the print-on-demand capabilities at Culture Kings, and we are very pleased with the early results we're seeing. Mnml also launched assortment in Culture Kings stores and online with strong response, particularly in the US, and we are excited to continue unlocking the synergies between these two incredible streetwear brands. Turning to operations. This quarter, we successfully moved Culture Kings' US fulfillment to a shared distribution center with mnml on schedule and on budget. By shipping from a US-based DC, we have cut delivery times to customers and shipping expenses in half, an important part of our US rollout plans. Before turning the call to Ciaran, I'd like to welcome two new leaders to our talented team. In June, we announced the appointment of Jonathan Yuska to President of Culture Kings U.S.

This quarter, Minimal launched its first ever vintage tea program, leveraging the print-on-demand capabilities at Culture Kings. We are very pleased with the early results we're seeing.

Minimal also launched assortment in Culture King stores and online with strong response particularly in the US.

And we are excited to continue unlocking the synergies between these two incredible streetwear brands.

Turning to operations, this quarter we successfully moved Culture King's U.S. fulfillment to a shared distribution center with Minimal, on schedule and on budget.

By shipping from a US-based DC, we have cut delivery times to customers and shipping expenses in half, an important part of our US rollout plan.

Before turning the call to Teran, I'd like to welcome two new leaders to our talented team.

Jill Ramsey: Jonathan brings over 20 years of experience growing and leading divisions at global sports brands, including Adidas, Mitchell & Ness, Reebok, and Fila, and we look forward to his contributions as we scale in the US and globally. Kenneth White joined us in mid-June as VP, Head of Legal and Human Resources, bringing over 15 years of experience. He also possesses a uniquely relevant operational skill set with a proven track record of scaling a high-growth, digitally native streetwear brand, making him an even greater asset to our broader organization. Looking ahead, we anticipate macro challenges will continue through the remainder of the year and are focused on leveraging the flexibility of our model to deliver improved margin while balancing focus on longer-term growth. We are excited to see Culture Kings' expansion into the US with a new flagship store in Vegas.

In June we announced the appointment of Jonathan Yoska to President of Culture Kings US.

John brings over 20 years of experience growing and leading divisions at global sports brands including Odded off Mitchell and Ness Reebok and Fila.

And we look forward to his contributions as we scale in the US and globally.

Also, Kenneth White joined us in mid-June as VP Head of Legal and Human Resources, bringing over 15 years of experience.

He also possesses a uniquely relevant operational skill set with a proven track record of scaling a high-growth digitally native streetwear brand, making him an even greater asset to our broader organization.

Looking ahead, we anticipate macro challenges will continue through the remainder of the year and are focused on leveraging the flexibility of our model to deliver improved margin while balancing focus on longer-term growth.

Jill Ramsey: Princess Polly is well-positioned for the back-to-college season, and we will continue to leverage our successful playbook across our brands. Despite current headwinds, we remain confident in the growth potential of our differentiated brands. Our unique model positions us to achieve our vision to become the global leader in next-generation fashion. On my recent trip to Australia, I had a chance to spend time with our teams and was once again reminded why AKA truly is the future of fashion. More than anything, it's the incredible talent on our teams that inspires me every day with confidence, and I look forward to all that is ahead. With that, I'll turn it over to Ciaran.

We are excited to see Culture Kings expansion into the US with a new flagship store in Vegas.

Princess Polly is well positioned for the back to college season, and we will continue to leverage our successful playbook across our brand.

Despite current headwinds, we remain confident in the growth potential of our differentiated brands.

Our unique model positions us to achieve our vision to become the global leader in next generation fashion.

On my recent trip to Australia, I had a chance to spend time with our team and was once again reminded why AKA truly is the future of fashion.

More than anything, it's the incredible talent on our team that inspires me every day with confidence, and I look forward to all that is ahead. With that, I'll turn it over to Kiran.

Ciaran Long: Thank you, Jill, and good afternoon, everyone. As Jill mentioned, our priority as we manage our business through the remainder of the year will be to drive improved EBITDA margin performance. We have identified a number of opportunities to drive efficiencies and reduce costs, which I will speak to following my review of our Q2 financial results. I will then discuss our outlook for the remainder of the year. For Q2, net sales grew 6% to $158 million, compared to $149 million last year. On a constant currency basis, net sales would have increased 11%. We saw a year-over-year active customer growth of 34% to 3.9 million for the quarter. This represents an increase of 53,000 active customers since Q1.

Thank you, Jill, and good afternoon, everyone.

As Jill mentioned, our priorities when we manage our business through the remainder of the year would be to drive improved EBITDA margin performance.

We have identified a number of opportunities to drive efficiencies and reduce costs, which I will speak to following my review of our second quarter financial results.

I will then discuss our outlook for the remainder of the year.

For the second quarter, net sales grew 6% to 158 million compared to 149 million last year.

On a constant currency basis, net sales would have increased 11%.

We sell a year-over-year active customer growth of 34% to $3.9 million for the quarter.

Ciaran Long: The total number of orders increased 12% to 1.9 million compared to the prior year. Average order value of $85 was down 4% compared to last year, or 1% on a constant currency basis, primarily due to higher promotional activity and higher return rates. The healthy growth across both orders and active customers reflects our growing presence in the US in spite of macro headwinds with the growth of Princess Polly brands and the acquisition of Culture Kings and mnml. Now we will provide a few highlights from our three regions. In the US, Q2 net sales increased to $82 million, up 16% from the Q2 last year. Our largest brand, Princess Polly, continues to be the primary dollar driver of our growth in the US as we continue to build brand awareness.

This represents an increase of 53,000 to active customers since the first quarter.

The total number of orders increased 12% to 1.9 million compared to the prior year.

Average order value of $85 was down 4% compared to last year or 1% on a constant currency basis.

primarily due to higher promotional activity and higher return rates.

The healthy growth across both orders and active customers reflects our growing presence in the US, in spite of macro headwinds, with the growth of Princess Polly brand and the acquisition of culture.

and the acquisition of minimal.

Now, we will provide a few highlights from our three regions.

In the US, second quarter net sales increased to 82 million, up 16% from the second quarter last year.

Our largest brand, Princess Polly, continues to be the primary dollar driver of our growth in the US as we continue to build brand awareness.

Ciaran Long: Australian net sales decreased 5% to AUD 57 million, up 3% on a constant currency basis, reflecting the macro impacts we talked about earlier. Encouragingly, Culture Kings store comps were strong during the quarter as consumers shift to in-store shopping and the brand resumed holding events in their stores. Turning to the rest of world, net sales of $19.7 million increased 5% from Q2 in the prior year. We are encouraged by demand in New Zealand and the UK. Moving to profitability. Our gross profit for Q2 increased 7% to $87 million on a reported basis. Gross margin rate was 55.2% in Q2 of 2022 versus 54.6% in the same period last year.

Australian net sales decreased 5% to 57 million.

up 3% on a constant currency basis, reflecting the macro impacts we talked about earlier.

Encouragingly, Culture King store comps were strong during the quarter as consumers shifted to in-store shopping and the brand resumed holding events in their stores.

Turning to the rest of worlds, net sales of $19.7 million increased 5% from the second quarter in the prior year.

We are encouraged by demands in New Zealand and the UK.

Moving to profitability.

A gross profit for the second quarter increased 7% to $87 million on a reported basis.

Gross margin rate was 55.2% in the second quarter of 2022, versus 54.6% in the same period last year.

Ciaran Long: Adjusting Q2 2021 gross margins for a charge related to inventory acquired in the Culture Kings acquisition, gross margins declined by approximately 360 basis points. Higher freight costs accounted for about a half of this decline, with increased returns as well as heightened promotions making up the balance. Our quarterly return rate was 18.6%, an increase of 460 basis points from last year. While we continue to have best-in-class return rates, we saw increased rates across brands and regions. Selling expenses in the quarter were $45 million, compared to $40 million in the prior year. The increase in selling expenses during the quarter was due to an increase in order volume versus last year and $1.3 million of expenses related to moving to a new fulfillment center for Culture Kings and mnml.

Adjusting Q2 2021 gross margins for a charge related to inventory acquired in the Culture of the King's acquisition, gross margins declined by approximately 360 basis points.

Higher freight costs accounted for about a half of this decline with increased returns as well as heightened promotions making up the balance.

The quarterly return rate was 18.6%, an increase of 460 basis points to last year.

While we continue to have best-in-class return rates, we saw increased rates across brands and regions.

Selling expenses in the quarter were $45 million compared to $40 million in the prior year.

The increase in spending expenses during the quarter was due to an increase in order volume versus last year and 1.3 million of expenses related to moving to a new fulfillment center for culture can be minimal.

Ciaran Long: Marketing expense increased to $19 million from $15 million in the prior year. Of the increase, $1.8 million was due to the inclusion of mnml. As a percentage of sales, marketing expense was 12%, a 200 basis point increase compared to Q2 2021. This increase is due to reduced effectiveness of our marketing channels at driving traffic to our websites as we moved through the quarter. Our G&A expense of $26 million increased to $19 million in the prior year. The increase in G&A was primarily due to an increase in salaries and related benefits, and equity-based compensation expense related to increases in headcount across functions to support business growth, the inclusion of mnml, and additional insurance costs. For the quarter, adjusted EBITDA was $6 million versus $19 million in the prior year.

The marketing expense increased to $19 million from $15 million in the prior year.

Of the increase, 1.8 million was due to the inclusion of minimal.

As a percentage of sales, marketing expense was 12%, a 200 basis point increase compared to the second quarter of 2021.

This increase is due to reduced effectiveness of our marketing channels at driving traffic to our websites as we move through the quarter.

Our G&A expense of 26 million increased to 19 million in the prior year.

The increase in G&A was primarily due to an increase in salaries and related benefits and equity-based compensation expense related to increases in head comes across functions to support business growth.

the inclusion of minimal, and additional insurance costs.

For the quarter, adjusted EDA-DOW was $6 million versus $19 million in the prior year.

Ciaran Long: Our adjusted EBITDA margin of 3.7% compared to 13% in the prior year Q2. The decrease in adjusted EBITDA margin is primarily a result of gross margin pressures from increased returns, promotions, and increased marketing expenses. Our net loss for the quarter was $4.2 million, or $0.03 per share, compared to net income attributable to a.k.a. of $2.4 million, or $0.03 per share, in the prior year. Our weighted average shares outstanding were approximately 128.7 million in Q2 2022. Turning to the balance sheet, we ended the quarter with $29 million in cash and cash equivalents and $131 million in debt. At the end of the quarter, we had total liquidity of approximately $54 million, including $25 million available on our credit facility.

or adjusted EdaDawn margin of 3.7% compared to 13% in the prior year second quarter.

The decrease in adjusted EBITDA margin is primarily a result of gross margin pressures from increased returns, promotions and increased marketing expenses.

Our net loss for the quarter was $4.2 million, or $0.03 per share, compared to net income attributable to AKA of $2.4 million, or $0.03 per share in the prior year.

Our weighted average shares outstanding were approximately 128.7 million in the second quarter of 2022.

Turning to the balance sheet, we end the quarter with 29 million in cash and cash equivalent and 131 million in debt.

At the end of the quarter we had total liquidity of approximately 54 million, including 25 million available on our credit facility.

Ciaran Long: Inventory at the end of the quarter was $144 million compared to $100 million at the end of Q2 2021. The increase in inventory was associated with Culture Kings' new fulfillment center, the addition of mnml, and anticipated growth across our brands. Although the increase in inventory was largely expected, we did see an incremental increase due to the softness of sales late in the quarter. We are taking proactive measures to right-size inventory, including order cancellations, postponements, reallocating across our geo hemispheres, and we believe we can bring inventory back in line by year-end. Turning to our outlook. For the full year, we are lowering our full-year guidance to reflect our second quarter results as well as our tempered outlook for the remainder of the year as macro pressures continue to impact results.

Inventory at the end of the quarter was 144 million, compared to 100 million at the end of the second quarter of 2021.

The increase in inventory was associated with Culture King's new fulfillment center.

the addition of minimal, and anticipated growth across our brands.

Although the increase in inventory was largely expected, we did see an incremental increase due to the softness of sales late in the quarter.

We are taking proactive measures to right size inventory including order cancellations, postponements, and other

We are allocating across our geoharmispheres and we believe we can bring imagery back in line by year end.

Turning to our outlook.

For the full year, we are lowering our full year guidance to reflect our second quarter results as well as our temperate outlook for the remainder of the year as macro pressures continue to impact results.

Ciaran Long: We now expect revenue to be between $625 and 635 million, with adjusted EBITDA of $38 to 40 million. This reflects the growth rates in June, which we saw continue in July. We are expecting the July trend to continue through H2, including continued FX pressure, the promotional environment, and elevated returns. As such, we believe gross margin rates in H2 to be similar to Q2. As we discussed earlier, we are taking actions intended to deliver improved sequential margin performance as we continue to navigate economic headwinds. Our focus will be on optimizing marketing investments, maintaining disciplined inventory controls, and tightening expenses around non-customer facing initiatives. We are reallocating our marketing to platforms that deliver the highest ROI and leaning into internal channels such as email, SMS, and loyalty.

We now expect revenue to be between 625 and 1,000,000.

million and 635 million with adjusted EVA DA of 38 to 40 million.

This reflects the growth rates in June , which we saw continue in July .

We are expecting the July trend to continue through the back half of the year, including continued FX pressure, the promotional environment and elevated returns.

As such, we believe gross margin rate in the back asks to be similar to Q2.

As we discussed earlier, we are taking actions intended to deliver improved sequential margin performance as we continue to navigate economic headwinds.

Our focus would be on optimizing marketing investments.

maintaining discipline inventory controls, and tightening expenses around non-customer facing initiatives.

We are reallocating our marketing to platforms that deliver the highest ROI and leaning into internal channels such as email, SMS and loyalty.

Ciaran Long: We believe we have an opportunity to create greater efficiency given the flexibility and agility of our marketing approach. We continue to expect capital expenditure of between $18 to 20 million for the full year. For Q3, we expect net sales to be in the range of $150 to 153 million. Gross profit margin in Q3 will continue to be impacted by the promotional environment. We expect adjusted EBITDA to be in the range of $9 million to 9.2 million. For Q3, we expect interest expense to be approximately $2.2 million and weighted average diluted share count of 129 million. We believe the flexibility of our business will enable us to achieve our adjusted EBITDA expectations for H2 while executing on our growth strategies.

We believe we have an opportunity to create greater efficiency given the flexibility and agility of our marketing approach.

We continue to expect capital expenditure of between $18 to $20 million for the full year.

For the third quarter, we expect next sales to be in the range of 150 to 153 million.

Growth profit margin in the third quarter will continue to be impacted by the promotional environment.

We expect the adjusted EBITDA to be in the range of 9 million to 9.2 million.

For Q3, we expect interest expense to be approximately 2.2 million and weighted average diluted share counts of 129 million.

We believe the flexibility of our business will enable us to achieve our adjusted EBITDA expectations for the back half of the year while executing on our growth strategies.

Ciaran Long: I also want to echo Jill's comments that we believe we have differentiated brands and a highly efficient business model that will support long-term organic growth and profitability. With that, I will turn the call over to the operator for Q&A.

I also want to echo Jill's comments that we believe we have differentiated brands and a highly efficient business model that will support long term organic growth and profitability.

Operator: Thank you. We'll now be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please while we poll for questions. Our first question today is coming from Ed Yruma from Piper Sandler. Your line is now live.

With that, I will turn the call over to the operator for Q&A.

Thank you. We will now be conducting a question and answer session. If you would like to be placed in the question queue, please press star 1 on your telephone keypad. A 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 star 1. One moment please while we poll for questions.

Ed Yruma: Hey, good afternoon. Thanks for taking the questions. I guess two for me. First, obviously inventory balance is up. You guys indicated kind of some of the puts and takes, but I was wondering if you could talk about inventory quality, and kind of what we should think about from a timing perspective in terms of getting inventory growth more in line with sales growth. I guess just a bigger picture question. You know, I appreciate the flexibility in the model, the data you guys use. I guess, in hindsight what happened in the quarter, what adjustments can you make to the operating model, to prevent that from happening to that level going forward? Thank you.

Our first question today is coming from Ed Yuruma from Piper Sandler. Your line is now live.

Hey, good afternoon. Thanks for taking the questions. I guess two for me. First, obviously inventory balances up. You guys indicated kind of some of the puts and takes, but I was wondering if you could talk about inventory quality and kind of what we should think about from a timing perspective in terms of getting inventory growth more in line with sales growth. And then I guess just a bigger picture question. You know, I appreciate the flexibility of the model, the data you guys use. I guess just in hindsight what happened in the quarter.

What adjustments can you make to the operating model to prevent that from happening to that level going forward? Thank you.

Ciaran Long: Hey, thanks, Ed. I'll take the inventory. You know, I think we feel good about the quality of the inventory. You know, a lot of it obviously was coming in late in Q3. I think if you look at the increase in dollars versus kind of where we ended Q1, we were up about $20 million. I would have said kind of, you know, some of that was expected with the Culture Kings fulfillment center move and opening in the US. It's probably $10 or 15 million of inventory that kind of, you know, was due to the sales softness. I would say with the test and repeat model that we have on the women's brands, we would expect to be through kind of, you know, about half of that by fall.

I'll take the inventory. You know, I think we feel good about the quality of the inventory. You know, a lot of it obviously was coming in late in Q3. I think if you look at the increase in dollars versus kind of where we ended Q1, we were up about $20 million. I would have said kind of, you know, some of that was expected with the Culture Games Fulfillment Center move and opening in the US. But what I think shows is theHR chairmancoins are low Aurora users, a huge number of people

So the everyone in centralCROO has talked about financial on orders that they have. And then it'll take the men's, browns, culture kings, and minimal a little bit longer. That would probably be true.

Ciaran Long: Just with the flexibility of that model, they certainly have the levers to do that between cancellations and kind of, you know, just the open orders that they have. Then, you know, it'll take the men's brands, Culture Kings and mnml a little bit longer. That will probably be through end of year. You know, with just the third-party brands that they have less ability to, you know, cancel or change order quantities. It'll probably be through then.

Jill Ramsey: Hey, Ed, it's Jill. I'll take your second question. We certainly see that the lion's share of this is really macro impacts. One of the advantages of having a group of five brands is you can see across all of them, if there's a macro effect happening. We certainly saw in June, and it carried into July, a pretty rapid deceleration across the whole group and regions. We've also seen that consumer shift into stores where we have stores. We certainly see both of those things as impacted by macro and temporary. We remain really confident in the long haul. You know, obviously nearer term, we're making some real adjustments in the business through H2.

We certainly saw in June and it carried into July a pretty rapid deceleration across the whole group and regions. And we've also seen that consumer shift into stores where we have stores. So we certainly see both of those things as impacted by macro and temporary. We remain really confident in the long haul. And obviously, nearer term we are making some real adjustments in

Jill Ramsey: Ciaran just spoke to inventory adjustments that we're making where we can also reallocate orders between hemispheres. That's a unique advantage. We can do that very close in, reading up to the minute sales data and reallocate those orders. I'll talk about marketing because marketing expense is where we're able to make a lot of adjustments in our allocation to higher returning channels. We have already begun that. We started doing that immediately as we saw the business start to change. We've shifted into higher returning channels, like TikTok is actually now more efficient for us actually than Facebook, Instagram.

the business through the back half. Teran just spoke to inventory adjustments that we are making where we can also reallocate or on orders between hemispheres. That is a unique advantage. We can do that very, very close in, reading up to the minute sales data and reallocate those orders. But I will talk about marketing, because marketing expense is where we are able to make a lot of adjustments in our allocation to higher returning.

Jill Ramsey: We've also leaned harder into in-house and just getting out of unproductive marketing channels and, you know, able to also shift and reallocate marketing spend regionally where we see the highest return. We've already put those in motion and saw improvement as we went through July, so we have confidence that we can hit that rate that's modeled in for H2.

shift and reallocate marketing spend regionally where we see the highest return. We've already put those in motion and saw improvement as we went through July , so have confidence that we can hit that rate that's modeled in for the back half.

Ed Yruma: Thanks so much, guys.

Operator: Thank you. Our next question is coming from Ike Boruchow from Wells Fargo. Your line is now live.

Thanks so much guys.

Thank you. Our next question is coming from Ike Buruchel from Wells Fargo. The Line is now live.

Ike Boruchow: Hey, guys. I just wanted to kinda get some clarification. When I look at guidance in Q3 and implied for the rest of the year, it's looking like net sales growth looking maybe down mid-single digits. I know it's post currency and M&A. Can you just highlight what it is you guys are expecting from a currency headwind in the remainder of the year, and what assumptions were there? What's kind of expected from M&A as well, please?

Hey guys, I just wanted to kind of get some clarification when I look at guidance in 3Q and applied for the rest of the year. It's looking like it tells growth looking maybe down mid-single digits. I know it's post-currency and M&A. Can you just highlight what it is you guys are expecting from a currency headwind in the remainder of the year and what assumptions were there and then what's kind of expected from M&A as well please.

Ciaran Long: Yeah. Hi, Ike. We're not expecting anything from an M&A perspective, and there's nothing modeled in the guidance for M&A. From an FX perspective, we have 6% modeled in to the H2. You know, pretty close on what we've seen in July and in the June period, they're the big drivers.

Yeah, we're not expecting anything from an M&A perspective. There's nothing modeled in the guidance for M&A. From an FX perspective, we have 6% modeled in to the back half. We're pretty close on what we've seen in July and in the June period. They're the big drivers.

Ike Boruchow: Okay. Just to kinda clarify on the M&A question here. I think historically you're looking at maybe $20 million or so being contributed from mnml in the H2 of this year. Is that correct?

Okay, just to kind of clarify, I'm going to end question here. I think historically, you're looking at maybe 20 million or so being contributed from minimal in the second half of this year. Is that correct?

Ciaran Long: Yeah. Mnml contributed about $10 million a quarter. You know, we bought mnml in the second week. I think it closed the second week of October. You know, there'll be obviously a benefit for mnml, full benefit in Q3. In Q4, there'll only be two-week benefit from mnml.

Yes, so Minimal contributed about 10 million a quarter. We bought Minimal in the second week, I think it's the second week of October , so there will be obviously a benefit for Minimal, full benefit in Q3, in Q4, there will only be a two week benefit for Minimal.

Ike Boruchow: Okay, great. Cool. Thanks a lot, guys.

Operator: Thank you. Next question is coming from Lorraine Hutchinson from Bank of America. Your line is now live.

Okay, great. Cool. Thanks a lot guys.

Lorraine Hutchinson: Thanks. Good afternoon. I was just wondering if there were any call outs on your consumer areas of particular strength and weakness, be it by income, region, category.

Thank you. The next question is coming from Lorraine Hutchinson from Bank of America. Your line is now live. Look for me in the Asperger'sBIK audio box.

Thanks. Good afternoon. I was just wondering if there were any call outs on your consumer areas of particular strengths and weaknesses, be it by income, region, category.

Jill Ramsey: Hey, Lorraine. As I mentioned, we did see a broad change in sales growth across the group and regions. That said, I would say we did actually see more of an impact. We do have a little bit of a lower income customer at Rebdolls. So they've been more disproportionately impacted. And we've certainly seen that our stores have held really well throughout this period as the consumer has shifted back into stores. And, you know, we're still seeing really strong growth and momentum on Petal & Pup, you know, who's at an earlier phase in their growth cycle. But, you know, more broadly, we have seen this pretty much across the board, but little pockets here and there, definitely in line with or what you would expect with the macro environment.

Hey Lorraine, as I mentioned we did see a broad change in sales growth across the group and regions. That said, I would say we did actually see more of an impact. We do have a little bit of a lower income customer at Revdols, so they've been more disproportionately impacted and we've certainly seen that.

Our stores have held really well throughout this period as the consumer has shipped back into stores. And we're still seeing really, really strong growth and momentum on Peddle and Pop, who have had an earlier phase in their growth cycle. But more broadly, we have seen this pretty across the board, but little pockets here and there definitely in line with what you would expect with the macro environment. Thank you.

Lorraine Hutchinson: Thanks. Then just one follow-up on the gross margin. I think your guidance is for the same gross margin that you did in Q2 in H2. It seemed like some of these struggles occurred toward the end of the quarter. Can you just talk about the rationale or the building blocks you were using to get to that guidance?

Thanks. And then just one follow up on the gross margin. I think your guidance is for the same gross margin that you did in 2Q in the back half. It seemed like some of these struggles occurred toward the end of the quarter. So can you just talk about the rationale or the building blocks you were using to get to that guidance?

Ciaran Long: Sure. Yeah, Lorraine, we certainly saw, you know, the pressure on the gross margins, from sales and returns perspective, in that June period. I think as we think about H2, we feel that we can be a little bit less promotional than we were in that June period. We were probably a little bit over promotional, so some help there. You know, we think that kind of balances us out to be closer to kind of where we were overall gross margins in Q2. You know, for us, expecting that the return rates will continue that we've seen.

Sure. Yeah, Lorraine, we certainly saw the pressure and the gross margins from a sales and from a returns perspective in that June period. I think as we think about the back half, we feel that we can be a little bit less promotional than we were in that June period. We were probably a little bit over promotional, so some help there. And we think that kind of balance of this.

us out to be closer to kind of where we were overall gross margins in Q2. You know, for us expecting that the return rate will continue that we've seen, you know, some of that was driven by mix of women's brands doing a little bit better than men's brands, but we're expecting that to continue in the back half. You know, we are also taking some surgical price increases in some of the brands where we can, you know, but we do understand, look, that it is going to be a promotional environment in the back half.

Ciaran Long: You know, some of that was driven by mix of women's brands doing a little bit better than men's brands, but we're expecting that to continue in the H2. You know, we are also taking some surgical price increases in some of the brands where we can. You know, but we do understand, look, that it is gonna be a promotional environment in the H2, and so want to build that into our gross margin expectations.

Lorraine Hutchinson: Thank you.

Operator: Thank you. Next question is coming from Oliver Chen from Cowen. Your line is now live.

Oliver Chen: Hi, Jill and Ciaran. What's the nature of the kinds of promotions that you'll be seeking to take just to ensure that you maintain brand health? Also, it sounded like you're on track for seeing digital marketing efficiency. What you're seeing now, do you think it's a relatively stable environment, or do you still see some risk factors? Then I would just love color on why you think return rates had been more elevated than you had expected? Going forward, it sounds like you think that they're gonna follow a closer band. Thank you.

seeing digital marketing efficiency? Are you, what you're seeing now, do you think it's a relatively stable environment, or do you still see some risk factors? And then I would just love color on why do you think return rates had been more elevated than you had expected going forward...

It sounds like you think that they're going to follow a closer band. Thank you.

Jill Ramsey: Hey, Oliver. With regards to promotions in the H2, certainly, we are expecting a promotional H2. We will be much more surgical and targeted in that and not doing, you know, broad site-wide. You know, Ciaran mentioned it, but we are happy with the composition of our inventory. We just have a lot of it. I think we will. You know, the teams are very good at being more targeted and precise on that. On the opposite side as well, they are also very targeted on pricing increases to help balance that out. We have a lot of pricing power with our significant amount of exclusive merchandise.

Hey Oliver, with regards to promotions in the back half, certainly we are expecting a promotional back half. We will be much more surgical and targeted in that and not doing broad sitewides. Ciaran mentioned it, but we are happy with the composition of our inventory. We just have a lot of it, but I think the teams are very good at being more targeted and precise on that.

On the opposite side as well, they are also very targeted on pricing increases to help balance that out. We have a lot of pricing power with our significant amount of exclusive merchandise. And so I have high confidence that between those levers and the agility of the team, we can really balance out our gross margin targets as we've modeled out for the back half. With regard to digital marketing efficiencies, we have a lot of

Jill Ramsey: I have high confidence that between those levers and the agility of the team, we can really balance out our gross margin targets, as we've modeled out for the H2. With regard to digital marketing efficiencies, as I mentioned, the teams have really already been able to reallocate spend, shifting out of less performing marketing channels, more early stage marketing channels where we might have been testing and still tuning, and shift further into just highest returning. We already saw the improvement on that. You know, you're asking about the sort of stability of the marketing landscape. I'd say the marketing landscape is just incredibly dynamic, but our teams are also incredibly agile. We also are leaning hard into in-house email, SMS, our loyalty programs. These are all highly efficient.

As I mentioned, the teams have really already been able to reallocate spend, shifting out of less performing marketing channels, more early-stage marketing channels where we might have been testing and still tuning, and shift further into just highest returning. We already saw the improvement on that. You're asking about the sort of stability of the marketing landscape. I'd say the marketing landscape is just incredibly dynamic, but our teams are also incredibly agile.

Jill Ramsey: You know, I'm confident that sort of whatever comes our way, the team, you know, has a lot of agility and can navigate that. With regard to returns, we did see, you know, as the consumer shopping behavioral changes have changed, that's also sort of impacted their returns behaviors as well. We saw across the board a bit of an uptick in returns across the brands and regions. A little bit of that is also mix. You know, as our women's brands have outpaced our men's brands, those are at a higher return rate. Then even within women's, dresses is outpacing and growing faster than the other categories, and it's at a higher return rate. It is good to keep in mind, and as a reminder, we do have best-in-class returns.

We saw across the board a bit of an uptick in returns across the brands and regions. A little bit of that is also mixed. As our women's brands have outpaced our men's brands, those are at a higher return rate. And then even within women's, dresses is outpacing and growing faster than the other categories, and it's at a higher return rate. It is good to keep in mind, and as a reminder, we do have best in class returns.

Jill Ramsey: We are still operating well under 20%, which is, you know, unlike anyone else out there. The teams, you know, constantly are focused on how we can take that even lower. That said, we have modeled into the back half that slightly elevated return rate.

Oliver Chen: Okay. That's very helpful. Jill, on the product side, within product, which product has been working better? It sounds like dresses and going out. Which product has been working less well, if there's a way to characterize it?

Jill Ramsey: Yeah. Exactly. Dresses and going out just continues to be strong, as well, bottoms, denim, you know, anything reflecting, you know, the macro trends of the consumer getting back to work and back to going out. Also, as I mentioned in my earlier comments, our printed tee business is really performing well for us. We're very excited about this new capability we purchased in the fall. Culture Kings has doubled their printed tee and hoodie business just since the fall, and this is an incredibly agile capability for us, which allows us to, within days, jump on a trend and ramp up production as well as at a higher margin.

and which product has been working less well and that there's a way to characterize it.

Yeah, so exactly. Dresses and going out just continues to be strong as well. Bottoms, denim, anything reflecting the macro trends as the consumer is getting back to work and back to going out. Also, as I mentioned in my earlier comments, our printed T business is really performing well for us. We're very excited about this new capability. The company of?

we purchased in the fall. Culture Kings has doubled their printed tea and hoodie business just since the fall. And this is an incredibly agile capability for us which allows us to within days jump on a trend and ramp up production as well as at a higher margin. So we are super excited about that new capability. And we've already rolled it to minimal, and we will be rolling it to poly as well and realizing some margin improvement on their graphic teas.

Jill Ramsey: We're super excited about that new capability and, you know, we've already rolled it to mnml, and we will be rolling it to Princess Polly as well and realizing some margin improvement on their graphic tees, bringing that in-house. Those really are the areas that are kinda stand out for us on product.

Oliver Chen: Last question. You called out the consumer and gave us context a few times. Some of that's out of your control, and the consumer environment is quite fluid. With the health of the consumer, what do you think is happening with the consumer now, and how might that interplay with, you know, different risk factors if you see the consumer environment deteriorating from here?

risk factors that you see the consumer environment deteriorating from here.

Jill Ramsey: Well, look, I think, you know, we saw a change in trends that really was correlated in June and July when a lot of the macroeconomic indicators and headlines were coming out. I think you could probably do a nice correlated graph with the media headlines and our sales trajectory. And as you say, yes, a lot of that is outside of our control. I do think the other big shift that is happening, you know, customers are enjoying getting back out to stores. I get it. We were all, you know, home for a long time, and it's fun to get back to the mall. So certainly seeing that in our own brand portfolio, really nice, healthy traffic back at the Culture Kings stores. Actually was just over there in Australia and in Auckland.

Well look, I think we saw a change in trends that really was correlated in June and July when a lot of the macroeconomic indicators and headlines were coming out. I think you could probably do a nice correlated graph with the media headlines and our sales trajectory. And as you say, yes, a lot of that is outside of our control. I do think the other big shift that is happening, you know customers are enjoying getting back out to stores. I get it.

Jill Ramsey: Just incredible energy and traffic back in the stores, so fun to see. We're excited. Timing is just great for us to be launching that store in H2. Longer term, I am confident that there is a much bigger macro trend that is shifting to online that is really gonna be a nice tailwind for us and our long-term growth potential. We have unbelievably differentiated brands and a really unique model that's gonna allow us to weather this storm in the short term. I have every bit more confidence than ever, to be honest, actually, after you know, my trip over to Australia. I always come back pretty fired up, hanging out in the stores and hanging out with the team. Yep.

a much bigger macro trend that is shifting to online that is really going to be a nice tailwind for us and our long-term growth potential. We have unbelievably differentiated brands and a really unique model that's going to allow us to weather this storm in the short term. But I have more confidence than ever to be honest. Actually, after my trip over to Australia I always come back pretty fired up hanging out in stores and hanging out with the team. you

Oliver Chen: Thank you very much. Best regards.

Jill Ramsey: Thanks.

Operator: Thank you. Next question is coming from Dana Telsey from Telsey Advisory Group. Your line is now live.

Thank you very much, best regards. Thanks.

Dana Telsey: Good afternoon. As you think about the adjustments and guidance that were provided, as you think about some of the operational metrics with active customers, AOV, number of orders, what are you looking for in those metrics? Also, how are you thinking about the pace of growth in the US and Australia for the balance of the year? Thank you.

Thank you. Next question is coming from Dana Telsey from Telsey Advisory Group. Who's the

Good afternoon. As you think about the adjustments and guidance that were provided, as you think about some of the operational metrics of active customers, AOV, number of orders, what are you looking for in those metrics, and also how you're thinking about the pace of growth in the U.S. and Australia for the balance of the year. Thank you.

Ciaran Long: Thanks, Dana. Yeah, maybe to go through kind of each of them. I think, you know, as we've seen, the year-over-year active customer growth has continued to be really strong, and I think even to see good sequential growth quarter over quarter is, you know, a real nice bright spot in the business. I think we will, you know, as we think about it, continue to see the sequential active customer growth at about the same level we saw from Q1 into Q2 and kind of expecting that into Q3 and into Q4. You know, from an AOV perspective, I think, you know, we'll see AOVs on a percentage basis a little bit lower decline than we saw in Q2.

Thanks, Dana. Yeah, maybe to go through kind of each of them, I think, you know, as we've seen, the year-over-year active customer growth has continued to be really strong, and I think even the sequential growth quarter-over-quarter was, you know, a real nice bright spot in the business. I think we will, you know, as we think about it, continue to see the sequential active customer growth at about the same level we saw from Q1 into Q2 and kind of...

expecting that into Q3 and into Q4. You know, from an AOV perspective, I think we'll see AOVs on a percentage basis a little bit lower decline than we saw in Q2. Just, you know, I think that run rate that we saw in June will continue as we think about it into the back half of the year. And then, you know, that's obviously the driver then from a...

Ciaran Long: You know, I think that runways that we saw in June will continue as we think about it into the H2. You know, that's obviously the driver then from an order perspective. I think you'll see kind of you get orders, you know, fairly flat from a volume perspective with that change in AOV relative to the guidance that we've shared. I think as it relates to the different geographies, you know, we will, I think, see much the same growth rates that are kind of declined, growth rate and constant currency a little bit declined because of FX that we've seen in Australia through the H2.

I think you'll see you get orders fairly flat from a volume perspective with that change in AOV relative to the guidance that we've shared. I think as it relates to the different geographies, I think we will see much the same growth rate and constant currency a little bit decline because of FX that we've seen in Australia through the back half.

Ciaran Long: From a rest of world perspective, I think as we allocate marketing dollars to just some higher ROI channels, the growth there might moderate a little bit, although we do have some nice natural demand coming from some of those regions. I think then just, obviously, the balance of the revenue will fall into the US. We are kinda modeling a decline in the US in, you know, through the rest of the year. I think Q4 gets a little bit stronger, obviously, as we're kind of opening the Culture Kings store, which will be helpful for growth in the US.

through the rest of the year. I think Q4 gets a little bit stronger, obviously, as we're kind of opening the Culture Games store, which will be helpful for growth in the US.

Dana Telsey: Got it. Just to clarify, I just wanna make sure on the core return rate, which I think was around 18.6%, is that what you're expecting in Q3 and Q4 also? Or should there be a little bit of uptick in Q3 before settling in Q4?

And just to clarify, I just want to make sure on the poor return rate, which I think was around 18.6%, is that what you're expecting in Q3 and Q4 also, or should there be a little bit of uptick in Q3 before settling in Q4?...

Ciaran Long: I think it would be more around that rate, Dana, through Q3 and Q4. You know, kinda Q3 seasonally usually comes down a little bit for us. Even that kind of the July rate will moderate to what we saw in Q2.

I think it would be more around that way, Dana, through Q3 and Q4.

Q3 season usually comes down a little bit for us, so even that kind of did you lay rate will moderate to what we saw in Q2.

Dana Telsey: Thank you.

Operator: Thank you. Next question today is coming from Michael Binetti from Credit Suisse. Your line is now live.

Thank you.

Thank you. Next question today is coming from Michael Benetti from Credit Suisse. Your line is now live.

Michael Binetti: Hey, guys. Thanks for all the help here with the questions. Ciaran, I guess as I look at some of the details in the guidance as you've laid it out to us, the Q4 operating margin or EBITDA margin, I suppose, is above the Q1 when you had 24, call it 24% operating or 24% organic growth in the revenues, and you're calling for negative revenues in the Q4 and lower gross margins in the Q4 than Q1. I think I'm sneaking up on a question that it speaks a little bit to the flexibility of the other cost lines. Could you maybe tell us where you see the biggest year-over-year savings or sequential improvement in the cost lines below the cost of-

Hey guys, thanks for all the help here with the questions. Karen, I guess as I look at some of the details and the guidance as you've laid it out to us.

The fourth quarter operating margin or EBITDA margin I suppose is above the first quarter when you had

you know, 24, call it 24% operating, or 24% organic growth in the revenues.

and you're calling for negative revenues in the fourth quarter and lower gross margins in the fourth quarter and first quarter. So, I think I'm sneaking up on a question that it speaks a little bit to the flexibility of the other cost lines. Could you maybe tell us where

you know, you see the biggest year-over-year savings or sequential improvement in the cost lines below the cost of goods to help us understand the margin.

Ciaran Long: Sure.

Michael Binetti: goods to help us understand the margin? Thanks.

Ciaran Long: Yeah. So I think one, Michael, is that, you know, we are really pushing back to get to that kind of around the 10%, historic marketing rate that we've usually run at. You know, that's obviously kind of one big driver. You remember we were at 10.6% in Q1, the 12% in Q2. I think, you know, from what we're seeing in July, we can execute against that and plan to do that for the rest of the year. I think the other is, you know, selling expenses at the moment is a little bit higher than we would see in Q4. You know, there are, you know, at the moment, we've got some expenses in there for the Vegas, the rent on the Vegas property.

Thanks. Yes. So I think one, Michael, is that we are really pushing back to get to that kind of around the 10% historic marketing rate that we've usually run at. That's obviously kind of one big driver. You remember we were at 10.6 in Q1, the 12 in Q2. I think from what we're seeing in July , we can execute against that and plan to do that for the rest of the year. I think the other is selling expenses at the moment is…

Ciaran Long: Obviously, not having revenue from that. When that opens up, we'll see a little bit of leverage there. We usually see a little bit of leverage in Q4 in that line as well. I think it'll be pretty stable from Q2 into Q3 across selling expenses. Then from a G&A perspective, look, I think we're modeling in that we will have a small increase in dollars from Q2 into Q3 and Q4, a little bit like we saw from Q1 into Q2. You know, we are taking actions across all the lines on cost initiatives, but I think, you know, that's an area where there will still be a little bit of build, but, kind of on a rate basis, quite a bit of leverage will just come from that line.

And then from a G&A perspective, I think we're modeling in that we will have a small increase in dollars from Q2 into Q3 and Q4, a little bit like we saw from Q1 into Q2. We are taking actions across all the lines on cost initiatives, but I think that's an area where there will still be a little bit of build, but on a rate basis, quite a bit of leverage will just come from that line. Thank you.

Michael Binetti: Okay. That's a lot of flexibility. Okay. I guess we look out a little bit past this year and think about the bigger picture model and some of the conversations around the IPO and how you're thinking about the growth in the business. Maybe help us think about your early thoughts on how you plan inventory for spring. I guess you probably have some. You can probably look ahead to, like, recapturing some full price selling from the current levels here. I'm wondering, do you know, do you think there's a point in time where you wanna target getting back to positive growth via ordering units up?

Okay, that's a lot of flexibility. Okay, and then I guess as we look out a little bit past this year and think about the bigger picture model and some of the conversations around the IPO and how you're thinking about the growth in the business.

Maybe help us think about your early thoughts on how you plan inventory for spring. I guess you probably have some, you can probably look ahead to like recapturing some full price selling from the current levels here, but I'm wondering do you, you know, do you think there's a point in time where you want to target getting back to positive growth via ordering units up? Do you think it's safe for us to assume inventory units are going to be ordered up for the spring at this point or how should we think about that?

Michael Binetti: Do you think it's safe for us to assume inventory units are gonna be ordered up for the spring at this point, or how should we think about that?

Ciaran Long: Yeah, I think that's safe to assume, Michael. I think you know, what's really interesting as you go through you know, the ability of the different areas to change inventory on orders compositions. I think the strength of the brands that are fully on test and repeat, you know, it's you know, they can react quickly when there's a little bit too much inventory, but they can also chase really fast from a sales perspective. I think as we think about you know, Q1 into next year, we would certainly expect to see positive growth there.

Yeah, I think that's safe to assume Michael. I think what's really interesting as you go through the ability of the different areas to change inventory on orders, compositions, I think the strength of the brands that are fully on test and repeat, they can react quickly when they have a little bit too much inventory, but they can also chase really fast from a sales perspective. So I think as we think about Q1 into next year.

Ciaran Long: I think then just as we think with the Culture Kings store opening in the US in Q4, you know, for us, that's a big inflection point in kind of building on the brand awareness for the US. I think we're feeling pretty good about that as well.

So we would certainly expect to see positive growth there. And I think then just as we think with the Culture King store opening in the US in Q4, for us that's a big inflection point in kind of building on the brand awareness for the US. So we're feeling pretty good about that as well.

Michael Binetti: Okay, very helpful. Thanks a lot, guys.

Operator: Thank you. Next question is coming from Garrett Greenblatt from Jefferies. Your line is now live.

Okay, very helpful. Thanks a lot, guys. Thank you. Next question is coming from Garrett Greenblatt from Jefferies. Your line is now live.

Garrett Greenblatt: Hi. Thank you for taking my question. I'm just curious on your thoughts on acquisitions in the current environment. Does the current environment give you any pause to kind of push out plans maybe 6 to 12 months, maybe put a hold on international expansion outside of the US and Australia? Just kinda how you're thinking about acquisitions overall. Thank you.

Thank you for taking my question.

I'm just curious on your thoughts on acquisitions and current environment. Does the current environment give you any pause to kind of push out plans, maybe six to 12 months, maybe put a hold on national expansion outside of the US and Australia? Just kind of how you're thinking about acquisitions overall. Thank you. Okay.

Jill Ramsey: Hey, Garrett. I'll take that. Certainly right now, our focus and our priority always is to scaling the great group of brands we have today, the five in our portfolio, and with a focus on our largest brands and even more a focus on Culture Kings in the US. We are, you know, putting everything we got towards that. That said, M&A is a part of our strategy, and M&A is a long-term game. It's not something you can really start and stop. Those conversations sometimes take multiple years to really develop the leads and relationships. We still absolutely are active out there in discussion, and keeping that pipeline warm and open.

Yeah, hey Garrett. I'll take that. Certainly right now our focus and our priority always is to scaling the great group of brands we have today, the five in our portfolio, and with a focus on our largest brands and even more a focus on culture kings in the US. So we are putting everything we've got towards that. And that said, M&A is a part of our strategy, and M&A is a long-term game.

not something you can really start and stop. Those conversations sometimes take multiple years to really develop the leads and relationships. So we still absolutely are active out there in discussion and keeping that pipeline warm and open. That said, right now our focus is on scaling the brands we have and really also just making sure we have a very healthy balance sheet.

Jill Ramsey: That said, right now our focus is on scaling the brands we have and really also just making sure we have a very healthy balance sheet.

Garrett Greenblatt: Got it. Thank you.

Operator: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

Jill Ramsey: Yeah. I guess I would just add very confident with our agility to weather the storm here near term. Obviously, we anticipate continued H2 uncertainty, but I am confident in our model and our team's ability to do that. We are already seeing some of that progress near term in the margins, tracking and feeling good about that. Longer term, just very confident in our incredibly differentiated brands, and really can't wait to get this Culture Kings store opened up in the H2 and invite you all to come. Thanks, everyone.

Yeah, I guess I would just add, I'm very confident with our agility to weather the storm here near term. Obviously, we anticipate continued back half uncertainty, but I am confident in our model and our team's ability to do that. We are already seeing some of that progress near term in the margins tracking and feeling good about that. In longer term, just...

very confident in our incredibly differentiated brand, and really can't wait to get this Culture Kings store opened up in the back half and invite you all to come. So thanks, everyone.

Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Thank you for calling the conference center. Please hold for the next available conference specialist. Thank you for calling the conference center. Please hold for the next available conference specialist.

Q2 2022 AKA Brands Holding Corp Earnings Call

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