Q3 2022 AKA Brands Holding Corp Earnings Call

November 10, 2022

Operator: Greetings, and welcome to the a.k.a. Brands Holding Corp. Q3 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like the opportunity to ask a question, please press star one on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Emily Schwartz. Thank you. Please go ahead.

Greetings and welcome to the 8-K eight brands holding Corp, third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation, if you'd like the opportunity to ask a question.

<unk>. Please press star one on your telephone keypad, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ms. Emily Schwartz. Thank you. Please go ahead.

Operator: It is now my pleasure to introduce your host, Ms. Emily Schwartz. Thank you. Please go ahead.

Emily Schwartz: Good afternoon. Thank you for joining a.k.a. Brands Q3 2022 Conference Call to discuss the results released this afternoon, which can be found on our website at ir.aka-brands.com. With me on the call 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 from those expressed. For a further discussion of risks related to our business, please see our filings with the SEC. Please note, we assume no obligation to update any such forward-looking statements. This call will contain Non-GAAP financial measures such as Adjusted EBITDA and Adjusted EBITDA margin.

Good afternoon. Thank you for joining AK brands third quarter 2022 conference call to discuss our results released this afternoon, which can be found on our website at IR got 8-K Dash brands Dot Com with me on the call today are Bill Ramsey, Chief Executive Officer, Ron <unk>, Chief Financial Officer before we get started I'd like to remind you of the Companys Safe Harbor language.

Emily Schwartz: Management may make forward-looking statements which refer to expectations, projections, and other characterizations of future events, including guidance and underlying assumptions. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed. For a further discussion of risks related to our business, please see our filings with the SEC. Please note, we assume no obligation to update any such forward-looking statements. This call will contain Non-GAAP financial measures such as Adjusted EBITDA and Adjusted EBITDA margin.

Management may make forward looking statements, which refer to expectations projections and other characterizations of future events, including guidance and underlying assumptions.

Forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed.

For further discussion of risks related to our business. Please see our filings with the SEC.

Please note we assume no obligation to update any such forward looking statements.

This call will contain non-GAAP financial measures, such as adjusted EBITDA and adjusted EBITDA margin reconcile.

Emily Schwartz: 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. With that, I'll turn the call over to Jill.

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 with that I'll turn the call over to Joe.

Jill Ramsey: Thank you, Emily, and thanks everyone for joining our call this afternoon. I'd like to start by congratulating the Culture Kings team on the grand opening of their first US store this past weekend, and appreciating all of our teams for their ongoing hard work, agility, and grit in what continues to be a dynamic and challenging macro environment. As we discussed last quarter, during this time of less predictable demand, we are focused on improving profitability while building great brands for the long term. Demand remains impacted by inflationary pressures on consumers, shifts in customer spending, and a competitive marketing landscape. Despite these headwinds, I'm pleased that the US region, our largest, had solid net sales growth of 8% in the quarter, on top of very strong 84% growth last year.

Thank you Emily and thanks, everyone for joining our call. This afternoon.

To start by congratulating the culture King's team on the Grand opening of their first U S store this past weekend.

And appreciating all of our teams for their ongoing hard work agility and grit and what continues to be a dynamic and challenging macro environment.

As we discussed last quarter. During this time of less predictable demand we are focused on improving profitability, while building great brands for the long term.

<unk> remained impacted by inflationary pressures on consumer shifts in customer spending and a competitive marketing landscape. Despite.

Despite these headwinds I'm pleased that the U S region, our largest had solid net sales growth of 8% in the quarter on top of very strong 84% growth last year.

Jill Ramsey: However, net sales overall decreased 4% to $156 million, or were flat when adjusted for foreign exchange impact. Australia declined 9% or -2% in constant currency. Like the US, Australia is experiencing macro effects from consumer inflationary pressure and a shift back to stores post-pandemic. Additionally, we were impacted by significant FX headwinds, which Ciaran will discuss further when he takes you through our financials and revised outlook. Thanks to the agility and swift work of our teams, we increased our gross margin rate 50 bps and improved EBITDA margin 220 bps on a sequential basis while continuing to make progress on our inventory position. We took a number of actions during the quarter, marketing spend reallocations, inventory optimization, and team and resource rightsizing.

However, net sales overall decreased 4% to $156 million or were flat when adjusted for foreign exchange impact.

Australia declined 9% or negative 2% in constant currency.

Like the U S. Australia is experiencing macro effects from consumer inflationary pressure any shifts back to stores post pandemic.

Additionally, we were impacted by significant FX headwinds, which <unk> will discuss further when he takes you through our financials and revised outlook.

Thanks to the agility and Swift work of our teams we increased our gross margin rate 50 beds and improved EBITDA margin 220 bps on a sequential basis.

While continuing to make progress on our inventory position we.

We took a number of actions during the quarter marketing spend reallocation inventory optimization and team and resource right sizing.

Jill Ramsey: We anticipate another challenging quarter, and we'll be prudent about identifying efficiencies in our operation and managing inventory while balancing our long-term focus on growth. a.k.a. Brands is the next generation of fashion, and our flexible asset-light model enables us to adapt quickly during dynamic market conditions. Our data-driven approach to merchandising combines test and repeat buying with short lead times and a high mix of exclusives. This allows us to efficiently manage our inventory and deliver strong gross margins while navigating shifts in consumer demand and supply chain dynamics. We have a modern approach to marketing, combining a social-first strategy with performance and in-house channels to attract and retain customers at low cost. Our ability to quickly shift spend across channels and geographies ensures we optimize our marketing yield during dynamic times.

We anticipate another challenging quarter, and we'll be prudent about identifying efficiencies in our operation and managing inventory well balancing our long term focus on growth.

A K a brand is the next generation of fashion and our flexible asset light model enables us to adapt quickly during dynamic market conditions.

Our data driven approach to merchandising combined test and repeat buying with short lead time and a high mix of exclusive this'll.

This allows us to efficiently manage our inventory and deliver strong gross margins, while navigating shifts in consumer demand and supply chain dynamics.

We have a modern approach to marketing combining our social first strategy with performance and in house channels to attract and retain customers at low cost.

And our ability to quickly shift spend across channels and geographies insurers, we optimize our marketing yield during dynamic times.

Jill Ramsey: We have a unique mix of talent, with veteran e-commerce leaders and operators who have experienced multiple economic cycles, combined with innovative next gen talent. Importantly, we continue to build our brand's awareness and expand our customer base, as evidenced by 23% growth in active customers compared to the same period last year, led by growth in the US. We are still in the early days of our US market awareness and have significant opportunity ahead of us. We made great progress on our growth initiatives this quarter, and I'm pleased to share some highlights. While I usually start with the women's brands, what I'm most excited to talk about today is the Culture Kings grand opening. Our first Culture Kings US flagship store opened on Saturday, 5 November, in the iconic Forum Shops at Caesars Las Vegas. It's an unrivaled retail experience unlike any store out there.

We have a unique mix of talent with veteran e-commerce leaders and operators, who have experienced multiple economic cycles combined with innovative next gen talent.

Importantly, we continue to build our brands awareness and expand our customer base as evidenced by 23% growth in active customers compared to the same period last year led by growth in the U S.

We are still in the early days of our U S market awareness and have significant opportunity ahead of us.

We made great progress on our growth initiatives this quarter and I'm pleased to share some highlights.

While I, usually start with the women's brands what I'm. Most excited to talk about today is the culture King's Grand opening.

Our first culture Kings U S flagship store opened on Saturday November 5th in the iconic form shopped at Caesars Las Vegas, It's an unrivaled retail experience. Unlike any store out there with 14000 square feet of selling space and Leds staircase, the largest hat wall in the world.

Jill Ramsey: With 14,000 sq ft of selling space, an LED staircase, the largest hat wall in the world, live in-store DJs spinning daily, a half basketball court, a bar, a secret room with rare and exclusive merchandise, an on-site customizer for sneakers and apparel, a recording studio, and more. In addition to some Vegas-only features, the flagship store includes the best of Culture Kings' signature in-store activities and games, including the legendary Sharpshooter Basketball Challenge, the Holy Grail, and one-of-a-kind giveaways that all adds the excitement and unforgettable atmosphere in store. Similar to Culture Kings' other stores, the US flagship serves as a powerful marketing engine and is a key accelerator of brand awareness in the US. Known for their experiential stores and unique retailtainment model, Culture Kings frequently hosts athletes, DJs, and music artists for in-store appearances.

Like in store D J spinning daily Ah Ha basketball Court, a bar, a secret room with rare and exclusive merchandise and onsite customize her for sneakers and apparel, a recording studio and more.

In addition to some Vegas only featured the flagship store includes the best of culture, King signature in store activities and games, including the legendary sharpshooter basketball challenge the Holy Grail arcade and one of a kind giveaways that all adds to the excitement and unforgettable atmosphere in store.

Similar to culture King's other stores the U S flagship serves as a powerful marketing engine and is a key accelerator of brand awareness in the U S.

Known for their experiential stores and unique retail Tainment model culture Kings frequently host athletes Djs and music artist for in store appearances.

Jill Ramsey: DJ Drama was spinning, Ferg stopped by, and a number of other streetwear influencers attended the opening. All of this creates great buzz, brand association, and awareness for Culture Kings. On top of the immersive experience, the flagship officially introduces the US consumer to Culture Kings' 18 exclusive in-house fashion brands, including Carré, Saint Morta, Goat Crew, and Loiter. These in-house design brands make up approximately half of the Culture Kings business today and are a key focus area for the US expansion. No one brings together the elements of streetwear lifestyle quite like Culture Kings. In addition to the popular in-house fashion brands, the store sells thousands of styles from 60 leading third-party brands, including sand gear, footwear, and hats. Online, the customer can find even more great selection.

D J drama with spinning FERC Shopify and a number of other street wear influencers attended the opening all of this creates great Buzz brand Association and awareness for cultural Kings.

On top of the immersive experience the flagship officially introduces the U S consumer to culture Kings 18 exclusive in house fashion brand, including car a Saint Maura go crew and loiter.

These in house design brands make up approximately half of the culture teams business today and are a key focus area for the U S expansion.

No one brings together the elements of street wear lifestyle quite like culture King.

In addition to the popular in house fashion brands. The store sells thousands of styles from 60, leading third party brands, including fan here footwear and hats.

And online the customer can find even more great selection, we're confident that culture kings will become the new authority and street wear and capture significant white space in the U S market.

Jill Ramsey: We're confident that Culture Kings will become the new authority in streetwear and capture significant white space in the US market. As Culture Kings expands in the US, they continue to build their brand, their penetration of exclusive products with an emphasis on the fast-growing printed tees and hoodies segment. As a reminder, our print-on-demand capability allows Culture Kings to quickly jump on trends and print licensed properties at attractive gross margins. This quarter, Culture Kings had a successful collaboration with Netflix, licensing their Stranger Things property, which exceeded expectations. They continue to ramp the print-on-demand and licensing business and will deliver 30 new collaborations, including Playboy, J.

As culture King expands in the U S. They continue to build their brands their penetration of exclusive products with an emphasis on the fast growing printed tees and hoodies segment.

As a reminder, our print on demand capability allows culture king to quickly jump on trends and print licensed properties at attractive gross margin.

This quarter cultural Kings had a successful collaboration with Netflix licensing there stranger things property, which exceeded expectation.

They continue to ramp the prints and licensing business and will deliver 30, new collaborations, including Playboy J code label Dream, Bill and a series of World exclusive UFC events and talent in the fourth quarter.

Jill Ramsey: Cole's label Dreamville, and a series of world exclusive UFC events and talent in Q4. While Culture Kings' current priority is US expansion, we're pleased that the Australian stores rebounded in Q3 with the return of live events and in-store activations. Turning to mnml, our streetwear brand specializing in denim and bottoms. I'm excited to share that the synergies between mnml and Culture Kings are coming to fruition. Mnml is now the fastest-growing brand on Culture Kings' website, and there is a dedicated section and wide range of mnml assortment at the Culture Kings store in Las Vegas. We were pleased with the performance of mnml during the opening weekend. It was both one of the top-performing brands overall and the best-selling brand in the bottoms category. We're also pleased with mnml's ability to quickly leverage shared learnings and resources from the a.k.a. platform.

While culture King's current priority is U S expansion, we're pleased that the Australia stores rebounded in the third quarter with the return of live events and in store activation.

Turning to minimal our street wear brand specializing in denim and bottoms.

I'm excited to share that the synergies between minimal in culture Kings are coming to fruition minimal is now the fastest growing brand and cultural King's Web site and there is a dedicated section and wide range of minimal assortment at the culture Kim store in Las Vegas.

We were pleased with the performance of minimal during the opening weekend. It was both one of the top performing brands overall and the best selling brand in the bottoms category.

We're also pleased with minimal ability to quickly leverage shared learnings and resources from the 8-K a platform.

Jill Ramsey: They're shifting their merchandising strategy to align with our proven test and repeat model, enabling them to drop more new styles on a faster production timeline. Turning to our women's brands. Princess Polly, our largest brand, continues to be a top fashion website for female teens, as ranked once again by the most recent Piper Sandler survey. While we have seen macro impacts on demand this fall in line with the broader market, I remain incredibly confident that we're still in the early innings of expanding this brand, and I'm bullish on its growth potential in the US and globally. Given that roughly 70% of Princess Polly's customers are students, a primary focus this quarter was the homecoming and back-to-school season. Their expanded homecoming collection, which featured new, more formal dresses along with existing favorites, exceeded expectations and gives them confidence to expand their formal wear offering.

They're shifting their merchandising strategy to align with our proven test and repeat model, enabling them to drop more new styles on a faster production timeline.

Turning to our women's brand Princess Polly our largest brands continues to be a top fashion website for female team as ranks once again by the most recent Piper Sandler survey.

While we have seen macro impacts on demand. This fall in line with the broader market I remain incredibly confident that we're still in the early innings of expanding this brand and then bullish on its growth potential in the U S and globally.

Given that roughly 70% of Prince with colleagues customers. Our students. Our primary focus this quarter was the home coming in back to school season.

There are expanded homecoming collection, which featured new more formal dresses along with existing favorites exceeded expectations and gives them confidence to expand their formal wear offering.

Jill Ramsey: Princess Polly also expanded their back-to-school assortment focused on casual apparel, which was further amplified on social media by Princess Polly's growing community of college ambassadors who serve as powerful micro-influencers. Princess Polly continues to make headway on their mission to make on-trend fashion sustainable and accessible. They've made great progress expanding their sustainable range made with lower impact materials, and will surpass their goal of converting 40% of their new styles to low impact fabric by the end of the year. They continue to transform their supply chain to support this and are committed to maintaining the same gross margins and accessible price points for customers. Princess Polly's extended size collection, Curve, also continues to gain traction and grew nearly 20% quarter over quarter while continuing to attract new customers.

Probably also expanded their back to school assortment focused on casual apparel, which was further amplified on social media by Princess Polly growing community College ambassadors, who serve as powerful micro influencers.

Princess Polly continues to make headway on their mission to make on trend fashion sustainable and accessible they've made great progress expanding their sustainable range made with lower impact materials, and we will surpass our goal of converting 40% of their new styles to low impact fabric by the end of the year.

They continue to transform their supply chain to support this and are committed to maintaining the same gross margin and accessible price points for customers.

Princess Polly extended size collection curve also continues to gain traction and grew nearly 20% quarter over quarter, while continuing to attract new customers.

Jill Ramsey: These initiatives strengthen their position with their Gen Z audience and create a competitive differentiation from other fashion players. As the digital marketing landscape continues to evolve rapidly with the rise of new channels, the popularity of new formats, and privacy updates, Princess Polly is agile and well-positioned to quickly react. They constantly test new social platforms, shift content, and reallocate marketing spend to wherever the customer goes. Growing on TikTok has been a huge priority for Princess Polly as their customers shift from engaging with still imagery to video content. They grew their TikTok followers by over 40% year over year and are expertly balancing influencer partnerships and paid ads on the platform. Princess Polly is doubling down where they see the highest return on spend and leaning into their in-house channels even further.

These initiatives strengthen their position with their gen Z audience and create a competitive differentiation from other fashion players.

As the digital marketing landscape continues to evolve rapidly with the rise of new channels. The popularity of new formats and privacy updates Princess Polly is agile and well positioned to quickly react to constantly test new social platforms shift content and reallocate marketing spend to wherever the customer.

It goes.

Growing on pick talk has been a huge priority for Princess Polly as their customer shifts from engaging with still imagery to video content.

They grew their tick tock followers by over 40% year over year, and our expertly balancing influencer partnerships and paid ads on the platform.

Christmas Poly is doubling down where they see the highest return on spend and leaning into their in house channels, even further subsea.

Jill Ramsey: Subsequent to quarter end, Princess Polly piloted a live video shopping event on their own website and drew thousands of viewers, exceeding expectations. We look forward to them launching Princess Polly Live, a video series that showcases a live shopping experience combined with authentic and interactive conversations between influencers and customers. This is an exciting initiative that they'll expand upon in the coming quarters and share learnings across our group of brands. Text message marketing, which is one of Princess Polly's highest returning channels, continues to be an outstanding marketing engine with over 1.5 million subscribers and growing. Through surveys, Princess Polly has learned that text is a top channel for customers to learn of new style drops, offers, and promotions. Petal & Pup also continues to scale in the US and was once again our fastest-growing brand this quarter.

Subsequent to quarter end Princess Polly piloted a live video shopping events on their own website and drew thousands of yours exceeding expectations.

We look forward to them launching Princess Polly lives a video series that showcases our lives shopping experience combined with authentic an interactive conversation between influencers and customers.

This is an exciting initiatives that will expand upon in the coming quarters and share learnings across our group of brands.

Text message marketing, which is one of Princess Poly's highest returning channels continues to be an outstanding marketing engine with over $1 5 million subscribers and growing.

Through surveys Princess Polly has learned the tax is a top channel for customers to learn of new style drops offers and promotions.

Pedal and pop also continues to scale in the U S and was once again, our fastest growing brand this quarter.

Jill Ramsey: They are leveraging the proven test and repeat merchandising strategy to quickly expand their assortment into accessories, jumpsuits, and matching sets, which now account for 10% of sales compared to 4% in Q3 last year, further diversifying their category mix. As they also follow the a.k.a. platform playbook, they're expanding their penetration of in-house designed exclusive items, which come at higher gross margins. Category expansion is a key area of growth as Petal & Pup bolsters their assortment in the US, and they recently launched a dropship program for underpenetrated categories such as jewelry, shoes, and accessories. This initiative allows us to easily expand offerings and test new categories with no inventory risk while still gaining rich consumer insights. Dropship items now account for 20% of sales in these categories, with plans to add highly seasonal categories to the site.

They are leveraging the proven test and repeat merchandising strategy to quickly expand their assortment into accessories jumpsuits and matching set.

Which now account for 10% of sales compared to 4% in the third quarter last year further diversifying their category mix.

As they also followed the AK platform playbook, they're expanding their penetration of in house designed exclusive items, which come at higher gross margin.

Category expansion is a key area of growth as pedal and popped bolsters their assortment in the U S and they recently launched a drop ship program for Underpenetrated categories, such as jewelry shoes and accessories.

This initiative allows us to easily expand offerings and test new categories with no inventory risk, while still gaining rich consumer insights draw.

Drop ship items now account for 20% of sales in these categories with plans to add highly seasonal categories to the site.

Jill Ramsey: Similar to Princess Polly, Petal & Pup is also evolving their marketing approach as the landscape rapidly changes. The brand piloted their first shoppable event in Nashville over 3 days in July. The event was an incredible brand awareness exercise. Approximately 100 influencers attended, garnering 10 million social media impressions, and 5,000 people passed through the event. Petal & Pup has a large and growing customer base in the South and the middle of the country, and the success of this initial test gives us confidence to roll out more shoppable events in key cities next year. Petal & Pup and Rebdolls are both doubling down on video content through Instagram and TikTok. Petal & Pup is seeing great traction on Instagram Reels, with some reels generating over 2 million views.

Similar to Princess Polly Pedaling pop is also evolving their marketing approach as the landscape rapidly changes the brand piloted the first shop of all event in Nashville over three days in July the event was an incredible brand awareness exercise.

Approximately 100, Influencers attended garnering 10 million social media impressions and 5000 people pass through the event.

Penguin talk to have a large and growing customer base in the south in the middle of the country and the success of this initial pass gives us confidence to rollout more shopper bowl events in key cities next year.

Pedal impulse and rubbed dolls are both doubling down on video content through Instagram and Tic Toc and put them on pump is seeing great traction on Instagram real with some real generating over 2 million views.

Jill Ramsey: Before I turn the call over to Ciaran, I want to emphasize that we're laser-focused on growing our current brands profitably. While we're still committed to our M&A strategy, given the state of the market and the macroeconomic environment, we have no plans to acquire any brands in 2022. However, we remain in active conversations with highly talented founders, and we'll continue to shop the world for the best brands, but we'll only transact when the time is right for our business and our shareholders. As we enter Q4, the macro environment remains dynamic and is rapidly changing. We are anticipating a highly promotional holiday season and a competitive marketing landscape. We will continue to pull all necessary levers to balance growth and profitability for the remainder of the year.

Before I turn the call over to Karen I want to emphasize that we're laser focused on growing our current brands profitably.

While we are still committed to our M&A strategy given the state of the market and the macroeconomic environment. We have no plans to acquire any brands in 2022. However, we remain in active conversations with highly talented founders and will continue to shop the world for the best brands, but we will only transact when the time is right for our business.

And our shareholders.

As we enter the fourth quarter, the macro environment remains dynamic and is rapidly changing.

We are anticipating a highly promotional holiday season, and a competitive marketing landscape.

We will continue to pull all necessary levers to balanced growth and profitability for the remainder of the year.

Jill Ramsey: We have an exciting quarter ahead with the opening of the Culture Kings US flagship, and our women's brands are well-positioned for the holiday season. While we anticipate the macroeconomic backdrop to remain fluid over the next few quarters, the strength of our brands and our flexible platform gives me full confidence that we'll deliver on our long-term goals. With that, I'll turn it over to Ciaran.

We have an exciting quarter ahead with the opening of the culture Kings U S flagship and our women's brands are well positioned for the holiday season.

While we anticipate the macroeconomic backdrop to remain fluid over the next few quarters the strength of our brands and our flexible platform gives me full confidence that we'll deliver on our long term goals.

With that I'll turn it over to Kieran.

Ciaran Long: Thank you, Jill, and good afternoon, everyone. We are pleased to report Q3 net sales above our expectations, along with improving profitability metrics and quarter end inventories, despite a dramatic macro backdrop and evolving consumer environment. For Q3, net sales declined 4% to $156 million, compared to $162 million last year. On a constant currency basis, net sales were flat. We continue to see solid active customer growth. On a trailing twelve-month basis, the number of active customers in Q3 increased 23% to 3.8 million. Total Q3 orders were flat to last year at 1.8 million, and the average order value of $85 was also flat to last year on a constant currency basis and down 4% on a reported basis.

Thank you Jim and good afternoon, everyone.

We are pleased to report third quarter net sales above our expectations, along with improving profitability metrics at quarter end inventories despite.

Despite a dramatic macro backdrop and evolving consumer environment.

For the third quarter net sales declined 4% to $156 million compared to $162 million last year.

On a constant currency basis net sales were flat.

We continue to see solid active customer growth on a trailing 12 month basis. The number of active customers in the third quarter increased 23% to $3 8 million.

Total third quarter orders were flat to last year at $1 8 million and the average order value of $85 was also flat to last year on a constant currency basis.

And down 4% on a reported basis.

Ciaran Long: We are encouraged by the stability of our average order value as it is a reliable indicator of the desirability of our brands and products. Now, I'll provide a few highlights from our three regions. In the US, Q3 net sales increased to $82 million, up 8% from Q3 last year, primarily driven by the addition of mnml, as well as Petal & Pup's growth, which continued to be our fastest-growing brand in the US. Australian net sales decreased 9% to $58 million and were down 2% on a constant currency basis. Australian sales were impacted by the macroeconomic environment, including inflationary pressures, as well as consumers returning to stores post-pandemic. Notably, in Q3, Culture Kings stores were the fastest growing area of the business in Australia.

We are encouraged by the stability of our average order value.

It is a reliable indicator of the desirability of our brands and products.

Now I'll provide a few highlights from our three regions.

In the U S.

Third quarter net sales increased to 82 million.

<unk>, 8% from the third quarter last year, primarily driven by the addition of minimal as well as Penguin pulse growth, which continues to be our fastest growing brand in the U S.

Australia net sales decreased 9% to $58 million and were down 2% on a constant currency basis.

Australia sales were impacted by the macroeconomic environment, including inflationary pressures as well as consumers returning to stores post pandemic.

Notably in the third quarter kosher King stores were the fastest growing area of the business in Australia.

Ciaran Long: Turning to the rest of the world, net sales of $16 million decreased 27% from Q3 in the prior year. Given the significant appreciation of the US dollar, we made a strategic decision to shift marketing dollars from the US and Europe to our main regions, the US and Australia, that have higher marketing returns. Additionally, our pricing model for markets outside of the US and Australia is tied to the US dollar, so when the dollar strengthens, our products become more expensive for customers in international regions. Moving to profitability. As Jill mentioned, we are pleased with the sequential improvements in profitability driven by the initiatives we highlighted last quarter. Reported gross margins were 55.7% compared to 53.2% last year in Q3.

Turning to the rest of world net sales of $16 million decreased 27% from the third quarter in the prior year.

Given the significant appreciation of the U S. Dollar we made a strategic decision to shift marketing dollars from U S and Europe to our main regions.

The U S and Australia that have higher marketing returns.

Additionally, our pricing models for markets outside of the U S and Australia is tied to the U S. Dollar so when the dollar strengthens our products become more expensive for customers in international regions.

Moving to profitability.

As Jim mentioned, we are pleased with the sequential improvements in profitability driven by the initiatives, we highlighted last quarter.

Reported gross margins were 55, 7% compared to 53, 2% last year in the third quarter.

Ciaran Long: The 250 basis point increase in gross margin was due to a $6 million fair value adjustment related to the Culture Kings acquisition, including the prior year. Excluding this impact, gross margins contracted 140 basis points due to increased promotional activity as we balanced capitalizing on demand and maximizing profitability. Sequentially, gross margin improved by 50 basis points over Q2. Selling expenses increased by 0.9 million to 41 million. As a percentage of revenue, selling expenses were 26.6% compared to 25.1% in Q3 2021. The 150 basis point deleverage was primarily due to increased costs for distribution and future store facilities.

The 250 basis point increase in gross margin was due to a $6 million fair value adjustment related to the coach comes acquisition included in the prior year.

Excluding this impact gross margins contracted 140 basis points due to increased promotional activity as we balance capitalizing on demand and maximizing profitability.

Sequentially gross margin improved by 50 basis points over Q2.

Selling expenses increased by <unk> 9 million to $41 million.

As a percentage of revenue selling expenses were 26, 6% compared to 25, 1% in the third.

Third quarter of 2021.

The 150 basis point deleverage was primarily due to increased costs for distribution and future store facilities.

Ciaran Long: While we saw 200 basis points sequential improvement over Q2, we expect 60 basis points of the improvement in selling expenses to continue and carry forward into Q4. Marketing expense increased by $1 million to $17 million. As a percent of revenues, marketing expenses were 10.6%, a 100 basis point increase compared to Q3 of 2021. This increase was primarily due to the inclusion of mnml, which is a higher rate of advertising spend as well as overall increases in marketing costs. We are actively working to improve marketing efficiencies by reallocating marketing investments to areas with higher returns. Based on these actions, we have seen a sequential improvement of 140 basis points in marketing as a percentage of sales compared to Q2.

While we saw a 200 basis points sequential improvement over Q2, we expect 60 basis points of the improvement in selling expenses to continue and carry forward into Q4.

Marketing expense increased by 1 million to $17 million.

As a percent of revenues marketing expenses were 10, 6%, a 100 basis point increase compared to the third quarter of 2021.

This increase was primarily due to the inclusion of minimal.

Which is a higher rate of advertising spend as well as overall increases in marketing costs.

We are actively working to improve marketing efficiencies by reallocating marketing investments to areas with higher returns.

Just on these actions we have seen a sequential improvement of 140 basis points in marketing as a percentage of sales compared to Q2.

Ciaran Long: G&A expenses were $26 million compared to $29 million in Q3 2021. G&A expenses were 16.8% of net sales compared to 17.9% of net sales in Q3 2021. The decrease was primarily due to a reduction in equity-based compensation, and other efficiency improvement initiatives. During the quarter, we took action to right-size our team structures to better align resources. These actions will reduce our G&A expenses by approximately $2 million on an annual basis going forward. For the quarter, adjusted EBITDA was $9 million versus $19 million in the prior year, or adjusted EBITDA margin of 5.9% compared to 11.9% in the prior year third quarter. On a sequential basis, we delivered improvements of 220 basis points over Q2 2022.

G&A expenses were $26 million compared to $29 million in the third quarter of 2021.

G&A expenses were 16, 8% of net sales compared to 17, 9% of net sales in the third quarter of 2021.

The decrease was primarily due to a reduction in equity based compensation and other efficiency improvement initiatives.

During the quarter, we took action to right size, our team structures to better align resources.

These actions will reduce our G&A expenses by approximately $2 million on an annual basis going forward.

For the quarter, adjusted EBITDA was $9 million versus $90 million in the prior year.

Our adjusted EBITDA margin of five 9% compared to 11, 9% in the prior year third quarter.

On a sequential basis, we delivered improvements of 220 basis points over Q2 2022.

Ciaran Long: Net loss was $0.1 million or $0.00 per share for Q3 2022, compared to a net loss of $9.9 million or $0.11 per share in Q3 2021. Our weighted average shares outstanding were approximately 128.7 million in Q3 2022. Turning to the balance sheet. We ended the quarter with $31 million in cash and cash equivalents and $130 million in debt. At the end of the quarter, we had total liquidity of approximately $56 million, including $25 million available on our credit facility. Subsequent to quarter end, we drew $15 million on our revolver as we entered into the holiday period.

Net loss was <unk> 1 million or zero cents per share for the third quarter 2022, compared to a net loss of $9 9 million or <unk> 11 per share in the third quarter of 2021.

Our weighted average shares outstanding were approximately $128 7 million in the third quarter of 2022.

Turning to the balance sheet, we ended the quarter with $31 million in cash and cash equivalents and 130 million deaths.

At the end of the quarter, we had total liquidity of approximately $56 million.

Including $25 million available on our credit facility.

Subsequent to quarter end, we drew $15 million on our revolver as we entered into the holiday period.

Ciaran Long: Inventory at the end of the quarter was $137 million, compared to $96 million at the end of Q3 2021. The increase in inventory was primarily associated with Culture Kings' new fulfillment center, our US store opening, and the addition of mnml. Compared to the end of Q2, we are flat on inventory on a constant currency basis. We did see a sequential decline in inventory for our women's brands that are more fully on our test and repeat model. Overall, we are comfortable with the composition and quality of our inventory, and we expect to see a sequential decline in inventory dollars at the end of year on a constant currency basis. We believe we're well positioned for fiscal 2023. Touching on cash flows.

Inventory at the end of the quarter was $137 million compared to $96 million at the end of the third quarter of 2021.

The increase in inventory was primarily associated with pleasure King's New fulfillment center.

Our U S store opening.

Additionally, minimal.

Compared to the end of the second quarter, we are flat on inventory on a constant currency basis.

We did see a sequential decline in the inventory for our women's brands that are more fully on our test and repeat model.

Overall, we are comfortable with the composition and quality of our inventory and we expect to see a sequential decline in inventory dollars.

End of year on a constant currency basis and.

And we believe we're well positioned for fiscal 2023.

Touching on cash flows.

Ciaran Long: In Q3, we generated $12 million of operating cash flow, marking the first quarter of positive cash flow generation in fiscal 2022. We also invested $8 million in CapEx tied to our new flagship Culture Kings store. We expect capital expenditures to be $20 million for the full year. Turning to our outlook. As we enter Q4, we are managing our business with a disciplined approach, controlling what we can control while driving efficiencies across our operations. As we did in Q3, in Q4, we plan on optimizing marketing investments and will continue taking actions to reduce costs on non-customer-facing activities. As a result of the significant incremental currency headwinds, the company has adjusted its expectations for Q4 net sales and EBITDA. We now expect Q4 net sales in the range of $158 to 165 million.

In the third quarter, we generated $12 million of operating cash flow, marking the first quarter of positive cash flow generation in fiscal 2022.

We also invested 8 million capex tied to a new flagship purchasing store.

We expect capital expenditures to be $20 million for the full year.

Turning to our outlook.

As we enter the fourth quarter, we are managing our business with a disciplined approach controlling what we can control while driving efficiencies across our operations.

As we did in Q3 and Q4, we plan and optimizing marketing investments and will continue taking actions to reduce costs, a non customer facing activities.

As a result of the significant incremental currency headwinds the company has adjusted its expectations for Q4 net sales and EBITDA.

We now expect Q4 net sales in the range of 158% to $165 million.

Ciaran Long: Our revised outlook contemplates FX to be an additional $10 million headwind year over year to our Q4 results, incremental to the $5 million headwind we projected when we released our results at the end of Q2. We are now expecting Q4 adjusted EBITDA of $11.2 to 13 million. This contemplates a $1.7 million headwind from the impacts of FX, offset by another $500 thousand of cost-saving initiatives. I'll also touch on a couple of points for modeling 2023. We are currently forecasting FX rates to remain at the current levels through fiscal 2023 and to have significant impact on our financial performance in FY 2023. Through the first nine months of 2022, our revenue would be $25 million lower if we had experienced the current exchange rates for that period.

Our revised outlook contemplates FX to be an additional $10 million headwind year over year to a Q4 results.

Incremental to the 5 million headwind, we projected when we released our results at the end of Q2.

We are now expecting Q4, adjusted EBITDA of 11 to 13 million. This contemplates a $1 7 million headwind from the impact of FX.

Offset by $500000 of cost saving initiatives.

I will also touch on a couple of points for modeling 2023.

We are currently forecasting FX rates to remain at the current levels to fiscal 2023 and to have significant impact on our financial performance in FY 'twenty three.

Through the first nine months of 2022, where revenue will be 25 million lower if we have experienced the current exchange rates for that period.

Ciaran Long: With this FX headwind, we expect our Q1 of 2023 will be our most challenging comparison for net sales due to our strong Q1 in 2022. We expect comps to become easier as we go through the remainder of FY 2023. We believe we have differentiated brands and a highly efficient business model that will support long-term growth and profitability. With that, I will turn the call over to the operator for Q&A.

With this FX headwinds, we expect our first quarter of 2023 will be our most challenging comparison for net sales due to a strong first quarter in 2022.

We expect comps to become easier as we go through the remainder of FY 'twenty three.

We believe we have differentiated brands and a highly efficient business model that will support long term growth and profitability.

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

Operator: Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you please limit yourself to one question and one follow-up. Again, that is star one to register a question at this time. The first question today is coming from Lorraine Hutchinson of Bank of America. Please go ahead.

Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.

Formation tone will indicate your line is in the question queue. You May press star two if she would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys, we do ask that you. Please limit yourself to one question and one follow up again that is star one to register a question at this time. The first question today is coming from Lorraine.

<unk> <unk> of Bank of America. Please go ahead.

Lorraine Hutchinson: Thank you. Good afternoon. I'm just curious if you're seeing any differences in customer behavior in the US versus Australia. More specifically, maybe how have customers reacted to the strategic price increases that you've added?

Thank you good afternoon.

I'm just curious if you're seeing any differences in customer behavior.

<unk> Australia.

And more specifically, maybe how have customers reacted to the surgical price increases.

Okay.

Jill Ramsey: Yeah. Hi, Lorraine. Look, we're seeing the demand pressure across our brands and across regions. The benefit of having a portfolio is you're really able to measure that and understand the macroeconomic impact, and we're certainly seeing that pressure. You know, I guess one distinction is over in Australia where we do have stores, we have seen that customer shift back into stores as we've reopened the Culture Kings stores and really gotten back into events and in-store activations, seeing nice growth there. Of course, they are lapping some closures from last year. Our focus really is the US market, where we have a lot of continued growth and runway ahead. Just very early days and excited about what's ahead, especially for Culture Kings with that store opening.

Yeah, Hi, Lorraine.

Look we're seeing the demand pressure across our brands and across regions.

The benefit of having a portfolio that you're really able to measure that and understand the macroeconomic impact and.

And we're certainly seeing that pressure.

And I guess, one distinction is over in Australia, where we do have stores, we have seen that customer shift back into stores as we've reopened the culture king stores and really gotten back into events and in store activation seeing nice growth. There of course, they are lapping some closures from last year.

Our focus really is the U S market, where we have a lot of continued growth and runway ahead and just very early days and excited about what's ahead, especially for culture teams with that store opening.

Jill Ramsey: On the price increases, we had made some price increases earlier back in Q3 and monitored that very closely. We did not see impact. We're able to get a nice 60 basis points increase in gross margin sequentially, quarter over quarter. We do not plan any additional price increases at this time, although we're of course constantly always able to optimize our pricing, given our high mix of exclusive and first party brands, and just very focused on profitability and controlling what we can control.

On the price increases we had made some price increases earlier back in Q3 and monitor that very closely did not see impact we're able to get a nice 60 bps increase in gross margin sequentially quarter over quarter, we do not plan any additional price increases at this time.

Though we are of course constantly I always able to optimize our pricing given our high mix of exclusive and first party brands and just very focused on profitability and.

Controlling what we can control.

Ciaran Long: Thank you.

Lorraine Hutchinson: Thank you.

Thank you.

Operator: Thank you. The next question is coming from Oliver Chen of Cowen. I'm sorry, Cowen. Please go ahead.

Thank you. The next question is coming from Oliver Chen of Cowen I'm, sorry, with Cowen. Please go ahead.

Oliver Chen: Hi, Jill and Ciaran. Regarding the promotional activity and the gross margin, what are you forecasting ahead for that, and what are you seeing in the environment there? It sounded like your inventories are under good control and have good freshness. A second follow-up, customer acquisition costs or different comments on the call regarding the marketing costs and the efficiencies you're seeing. Going forward, has that stabilized? Do you expect it to continue to be dynamic, as it's been, consideration for a lot of companies? Thanks.

Hi, Jill and Sharon.

Regarding the promotional activity in the gross margin what are you forecasting ahead for that and what are you seeing in the environment, there and it sounded like your inventories are under control and good freshness.

<unk> follow up customer acquisition cost or defer.

<unk> comments on the call regarding the marketing cost and the efficiencies you're seeing so going forward. How does that stabilize do you expect it to continue to be dynamic as it's been.

Consideration for a lot of companies. Thanks.

Jill Ramsey: Yeah. Thanks, Oliver. I'll comment on the promotions and gross margin ahead and let Ciaran jump in, and then we'll come back around to the CACs. First, we, of course, are anticipating a highly promotional environment for Q4. Of course, we're already starting to see that. It has pulled forward certainly this year versus last year, very different environment, very different inventory position for the whole market. We have certainly factored that into our outlook. You know, our brands are in quite a good inventory position from a composition and quality of our inventory. We feel good going into Q4 and have a very flexible, agile model where we can really adjust and pivot as needed in the quarter. Ciaran, anything to add on just how we forecasted that into the model?

Yes, Thanks Oliver.

I'll comment on the promotions and gross margin ahead, and let Ron jump in and then we'll come back around to the Capex.

First we of course are anticipating a highly promotional environment for Q4.

We're already starting to see that it has pulled forward certainly this year versus last year very different environment very different inventory position for the whole market.

We have certainly factored that into our outlook.

And our brands are in quite a good inventory position from a composition and quality of our inventory we feel good going into Q4 and have a very flexible agile model, where we can really adjust and pivot as needed in the quarter Ron anything to add on just how we forecasted that into the model, Yes I think.

Ciaran Long: Yeah. I think, you know, we assume Q4 will be a little bit lower than we experienced in Q3, just with the level of promotions. I think as we think about gross margin, you know, we are seeing improvements or reductions in the cost of air freight and bringing in product. I think that will kind of allow us to counteract any kind of increased promotional activity we've seen on top of that. So kind of feeling good about the gross margins that we've modeled in for Q4. As it relates to inventory, you know, we are really happy with the composition and the quality of the inventory that we have. As we mentioned, you know, we're flat on dollars in Q3 versus Q2.

We assume Q4 would be a little bit lower than we experienced in Q3 and just with the level of promotions I think as we think about gross margin.

We are seeing improvements or reductions in the cost of airfreight and bringing in product I think that will kind of allow us to counteract any kind of increased promotional activity. We've seen in top on top of that so it's kind of feeling good about the gross margins that we've modeled in for Q4.

And as it relates to inventory.

Sure.

We're really happy with the composition and the quality of the inventory that we have.

As we mentioned we're flat on dollars in Q3 versus Q4 versus Q2.

Ciaran Long: You know, down in units, I think within our women's brands, we are down in dollars. So really kind of shows the strength of that test and repeat model. I think on the men's brands, we still have some work to do, just they have more third party vendors, and kind of not able to adjust as quickly there. I think we'll see more of that in Q4 and as we go into next year. Overall, just very happy with the quality of the inventory.

Don in units I think within our women's brands.

We are done in dollars, so really kind of shows the strength of that test and repeat model I think on the managed funds. We still have some work to do just they have more third party.

Vendors.

Kind of not able to adjust as quickly there I think we'd see more of that in Q4 and as we go into next year, but overall, just very happy with the quality of the inventory.

Jill Ramsey: On your question about the CACs, we have seen CAC stabilize as we have lapsed the impacts of iOS. I will say there is a lot happening in the marketing landscape. There's a lot of major changes. The biggest one, of course, being the shift from imagery to video, which is driving that downstream platform impact, change as customers migrate away from Instagram and over to TikTok. Our brands have been out on TikTok for some time now, really testing and learning and tuning our efficiency there. Now we are seeing that as one of our highest returning channels for us and able to shift some of our spend there. As well, we do shift into in-house and focus on SMS, which is also incredibly efficient for us.

And on your question about the tax we have seen <unk> stabilized as we have lapsed the impact of iOS.

I will say there is a lot happening in the marketing landscape. There is a lot of major changes the biggest one of course being the shift from <unk> to video, which is driving that downstream platform impact change as customers migrate away from Instagram and over to tick tock.

Our brands have been out on Tech talk for some time, now really testing and learning and tuning our efficiency. There now we are seeing it that is one of our highest returning channels for us and able to shift some of our spend there as.

As well, we do shift into in house and focus on SMS, which is also incredibly efficient for us.

Jill Ramsey: For all these reasons, we have a very diversified marketing mix and ability to shift and adjust and very committed to our efficient 10% marketing spend and plan to hold, and that is factored into the outlook.

For all these reasons, we have a very diversified marketing mix and ability to shift and adjust and very committed to.

Our efficient, 10% marketing spend and plan to hold and that is factored into the to the outlook.

Oliver Chen: Thank you. Happy holidays. Best regards.

Thank you happy holidays best regards.

Ciaran Long: Thanks, Oliver.

Thanks Oliver.

Operator: Thank you. The next question is coming from Edward Yruma of Piper Sandler. Please go ahead.

Thank you. The next question is coming from Edward Your room of Piper Sandler. Please go ahead.

Edward Yruma: Hey, thanks so much for taking the questions. I guess first, could you just maybe refine a little bit? The guidance change for Q4, how much of it was strictly due to the FX versus how much is either trend you're seeing or conservatism? If you could maybe give us a little bit of insight back to Q3, kind of what did the trajectory performance look like in the quarter? If you can make any comments on the exit velocity, that would be great. Thank you.

Hey, thanks, so much for taking the questions I guess first.

Can you maybe refine a little bit so the guidance change for the fourth quarter, how much of it was strictly due to the FX versus how much is either trends youre seeing a conservatism and if you could maybe give us a little bit of insight back to the third quarter kind of what does the trajectory of performance looked like in the quarter and if you could make any comments on the exit velocity of that would be great. Thank you.

Ciaran Long: Sure. Yeah, as it relates to FX, Ed, I would say all of it in there is really related to that change of $10 million really is all related to FX. You know, when we gave Q2 guidance, we were modeling kind of, you know, US to AU Australian dollar rate at about the 0.7. You know, we kind of saw it all throughout October at about 0.63. It's obviously kind of it is moving every day at the moment, but we've kind of modeled that 0.63 through the rest of the year. Then, just as it relates to the trajectory in Q3, I would say it's kind of, you know, it was kind of stronger going through July and August.

Sure.

Yes, as it relates to FX.

I would say all of it in there is really related to the change of $10 million really is all related to FX.

We gave Q2 guidance, we were modeling kind of.

U S.

Australia dollars raise at about seven.

Seven.

We kind of sold ultra of October at above 63, it's obviously kind of it is moving everyday at the moment that we've kind of modeled that 63% through the through the rest of the year.

And then just as it relates to the trajectory in Q3, I would say it's kind of.

It was.

Kind of stronger going through July and August as we went through September it's certainly kind of delays in the mall and the quarter started to soften.

Ciaran Long: As we went through September, it certainly kind of started to soften late in the month, late in the quarter. Obviously, you know, we did see some FX impact, particularly high in that period as well, and that does impact our international customers. You know, as we've modeled out Q4, we're kind of taking that run rate that we've seen out of Q3 into Q4, and that's kind of what we're using to project those for the rest of the year.

Obviously, we did see some FX impact in particularly.

Particularly high in that period as well.

Does impact our international customers.

As we've modeled those two four we're kind of taking that run rate that we've seen out of Q3 into Q4, and that's kind of what we're using to protect those for the rest of the year.

Edward Yruma: Thank you.

Thank you.

Yeah.

Ciaran Long: Just on a note that the operation machine is broken, so if we could all just be patient for a minute or two, and we'll work through it.

Okay.

Note that the operation machine is broken so if we could all just be patient for a minute or two and we'll work through it.

Operator: Thank you for your patience. My apologies for that. Our next question is coming from Noah Zatzkin of KeyBanc Capital Markets. Please go ahead.

Thank you for your patience my apologies for that our next question is coming from Noah Satkin of Keybanc capital markets. Please go ahead.

Noah Zatzkin: Hi. Thanks for taking my questions. You know, just on the Culture Kings opening, if you could provide any color on just how you're thinking about the store opportunity there in the US over time, and just any color on the economics of the four walls, that would be really helpful. Thank you.

Hi, Thanks for taking my questions.

Just on the culture King's opening if.

If you could provide any color on just how youre thinking about the store opportunity there in the U S. Over time, just any color on the economics of the four walls that'd be really helpful. Thank you.

Jill Ramsey: Yeah. Hey, Noah, thanks for your question and thanks for coming out to see the grand opening. We are incredibly excited about the store. You know, just a huge congratulations and appreciation out to the founders, Simon and Tani. They have an incredible vision for these stores, really like nothing else out there. Feel very pleased with the early days. It's very, very early days. We just opened last weekend, but pleased with the out of the gates, feel that we really nailed the location, the format, the merch mix, and the marketing and content. You know, we will continue to look at other markets and opportunities. We'll take a real test and learn approach. You know, not necessarily all the stores are going to be that big.

Yeah, Hey, Noah Thanks for your question and thanks for coming out to see the Grand opening we are incredibly excited about the store.

And.

Just a huge huge congratulations and appreciation out to the founder Simon and Connie to have an incredible vision for these stores.

Really like nothing else out there feel very pleased with the early it's very very early days, we just opened last weekend, but pleased with the out of the gates.

Feel that we've really nailed the location the format the merch mix in the marketing and content.

We will continue to look at other markets and opportunities, we will take a real test and learn approach.

Not necessarily.

The stores are not all going to be that big that is certainly our large flagship model.

Jill Ramsey: That is certainly a large flagship model. Vegas is an incredible tourist location where you get just a ton of foot traffic, and we nailed that. Traffic is really back in Vegas. As we look to roll out to a broader market, we will look for other high tourist markets. It's a great way to scale your brand fast. You can reach a lot of unique customers that are changing quickly. Just really excited about the potential here, and we're just getting started, and, you know, it has incredible awareness element to grow and scale this brand in the US. I'll let Kieran jump in and comment on the four-wall economics.

And Vegas is an incredible tourist location, where you get just a ton of foot traffic and we nailed that traffic is really back in Vegas.

We look to rollout to a broader market, we will look for other high tourist markets. It's a great way to scale. Your brand fast you can reach a lot of unique customers that are changing quickly.

So just really excited about the potential here and we're just getting started and it has incredible awareness element.

To grow and scale this brand in the U S. I'll, let <unk> jump in and comment on the four wall economics.

Ciaran Long: Yeah. Hey, Noah. We're certainly expecting the store to be four-wall profitable. Obviously, it'll take a little bit of time to ramp up. You know, for us, kind of expecting payback on a, I would say, kind of between 4 and 5 years on just that four-wall basis, not counting obviously the kind of broad benefit we get from the store. You know, the store is about 13,500 sq ft of retail space. You know, rent's about $1.9 million on a GAAP basis. You know, you can kind of, I would say, AOV is a little bit higher usually than what you see online.

Yes.

We're certainly expecting the store to be four wall profitable, obviously, it will take a little bit of time to ramp up.

For us kind of expecting payback on a I would say kind of between four and five years on just a four wall basis, not counting obviously, the kind of the broad benefit we get from the store.

The stores about 30000, 35000 square feet of retail space.

Rents are at $1 9 million on a GAAP basis.

You can kind of I would say.

<unk> is a little bit higher usually then we see online.

Ciaran Long: You know, we feel the, you know, the economics will be very strong from an EBITDA perspective as well once the store kind of gets over that initial ramp.

And we feel.

The economics would be very strong from an EBITDA perspective, as well once we're sure kind of gets over that initial level.

Noah Zatzkin: Thank you.

Thank you.

Operator: Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.

Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead. Good afternoon, everyone. As you think about the regions. The U S and Australia, obviously, a moderation in the U S. But it seemed like the deceleration in Australia improved a little bit what are you seeing and how does it differ by brand.

Dana Telsey: Good afternoon, everyone. As you think about the regions, the US and Australia, obviously a moderation in the US, but it seemed like the deceleration in Australia improved a little bit. What are you seeing and how does it differ by brand, and how are you planning North America, the US going forward? Thank you.

How do you how are you planning North America. The U S. Go forward. Thank you.

Jill Ramsey: Yeah. I will say in general, we have seen a bit of that demand pressure across brands and across regions. In Australia, though, we uniquely have stores over in Australia and really saw that customer shifting back into stores, as we started back to events and in-store activation. That really helped improve the Culture Kings part of the business. It certainly helped offset some of the online demand pressure. You know, really we are focused on the US. We're most excited about the potential for these brands to keep scaling and growing in the US market. Culture Kings is just getting started, and it's a perfect time to be opening this store and leaning in, and really excited about what we're seeing ahead here.

Yeah.

I will say in general we have seen.

A bit of that demand pressure across brands and across regions.

And in Australia, though we uniquely have stores over in Australia, and really saw that customer shifting back into stores.

We started back to events and in store activation. So that really helped improve the culture kings part of the business certainly helped to offset some of the online demand pressure.

And really we are focused on the U S.

Most excited about the potential for these brands to keep scaling and growing in the U S market.

Cultural change is just getting started and it's a perfect time to be opening the store and leaning in.

And really excited about what we're seeing ahead here.

Dana Telsey: Just as the marketing spend, and Jill, you mentioned the reallocation of marketing. What are you doing on the marketing side and the reallocation, and what do you see as the spend as a result of that?

And then just as you as the.

The marketing spend and Jill you mentioned the reallocation of marketing what are you doing on the marketing side and the real allocation and what is the spend how does this what do you see as the spend as a result of that.

Jill Ramsey: Yeah. Well, between Q2 and Q3, we did make some adjustments in our marketing mix and reallocated into higher returning marketing channels, shifting more of our focus into in-house, like SMS text, where we see really great returns and efficiency, as well. Starting to shift more into TikTok, where we've also tuned the business to have a higher return, shifting out of rest of world. We had put some marketing spend into Europe, but we've shifted that out, and so we've made some regional adjustments, shifting more of that into the US. It's not an ideal time to push into Europe right now given the strength of the dollar. Ensuring that we are focused on profitability and getting our most efficient marketing return.

Yeah, well between Q2 and Q3, we did make some adjustments in our marketing mix and reallocated into higher returning marketing channels.

Shifting more of our focus in in house like SMS.

SMS tax, where we see really really great returns and efficiency as well shift starting to shift more into tech talk where we've also tuned the business to have a higher return shifting.

Shifting out of rest of World, We had put some marketing spend into Europe , but we shifted that out and so we've made some regional adjustments shifting more of that into the U S.

Not an ideal time to push into Europe , right now given the strength of the dollar.

So ensuring that we are focused on profitability and getting our most efficient marketing return.

Jill Ramsey: We are committed to that marketing spend at around 10% going forward, and that is all factored into the model.

So we are committed to that marketing spend at around 10% going forward and that is all factored into the model.

Dana Telsey: Thank you.

Thank you.

Operator: Thank you. The next question is coming from Youssef Squali of Truist Securities. Please go ahead.

Thank you. The next question is coming from Youssef Squali of <unk> Securities. Please go ahead.

Youssef Squali: All right, thank you very much. Hi, guys. So couple questions. The first is around just the Q4 guide and what's implied in terms of growth of the US business. Arguably, I think there's probably gonna be some deceleration just based on the numbers, but I'd love for you to maybe quantify that for us. Also, can you address the balance sheet liquidity? I know you've decided that 2022 you will not make any M&A. Just as you look at the business and the ongoing trends through 2023, kind of any idea how about one whether ultimately you have enough free cash flow generation to kind of get you to the other side of it without the need for capital? Yeah, maybe those two, and I have a quick follow-up.

Alright. Thank you very much hey, guys. So a couple of questions. The first is around just the Q4 guide and what's implied in terms of growth of the U S business.

Arguably I think there is probably going to be some deceleration just based on the numbers, but I'd love for you to maybe quantify that for US and then also can you address the balance sheet liquidity I know you decided.

The 2022, you will not make any M&A, but just as you look at the business.

And the ongoing trends through 2023 kind of.

Yeah.

About one whether ultimately you have a free cash flow generation.

To get you to the other side of it without the need for capital yes.

Yes, maybe those two and I have a quick follow up.

Ciaran Long: Sure. Yeah, I think as we think about, you know, the guidance for Q4, I think we do kind of expect, I would say, the same level of organic growth or organic little deceleration that we've seen in Q3, Youssef, if you adjust for mnml. In Q3, we had a full quarter of mnml. You know, this year or last year, we had mnml in there for 10 weeks of the 12-week period. There'd be a little bit of headwind from that. You know, I think as we unpack it, we are seeing certainly pressure from an AOV perspective is where we're seeing most of the pressure as we model that out. I think we might be a little bit kind of flat again in order volume.

Sure, Yes, I think as we think about <unk>.

The guidance for Q4, I think we do kind of expect the I would say the same level of organic growth or organically deceleration that we've seen in Q3, you said if you adjust for minimal so inside in Q3, we had a full quarter of minimal.

This year or last year, we had minimal in there for 10 weeks of the 12 week period, so there'll be a little bit of headwind from that and I think as we unpack. It we are seeing certainly pressure from an <unk> perspective is where we're seeing most of the pressure as we model that out I think we might be a little bit.

Flat again in order volume.

Ciaran Long: I think from an active customer perspective, I think there'll be, you know, low single digit growth. We are kind of dropping off some really big quarters where we acquired customers. If you think of Q2, Q3 last year, where the country was coming out, that will impact that. From a balance sheet perspective, I think it's really good for us to see in Q3 that we got back to operating, generating strong operating cash flow. You know, $12 million in the quarter was really good to see. You know, we did draw down some of the revolver. I think in particular, you know, early in Q3 or sorry, early in Q4, we had a couple of big payments.

And then I think from an active customer perspective, I think there will be low single digit growth. We are kind of dropping off some really big quarters, where we acquired customers. If you think of <unk>.

Q2, Q3 last year, where they are kind of the U S was coming out with but that will impact us and then from a from a balance sheet perspective, I think it's really good for us to see in Q3 that we go back to operate and generating strong operating cash flow $12 million in the quarter was really good to see.

We did draw down some of the revolver and I think in particular early in Q3 or sorry early in Q4, we have a couple of big payments, obviously the culture Kings.

Ciaran Long: You know, obviously the Culture Kings capital spend for the store. We also had some legacy payments for the mnml acquisition and for some old sales tax at Princess Polly. So there's kind of some one-off stuff there. I think, you know, we feel that we'll be positive cash flow again from an operating perspective in Q4 and back generating cash, and I think we'll continue to do that as we go forward into FY 2023. You know, I think we're still looking to do acquisitions. We're very committed first to, you know, to drive the organic growth and support the growth of the brands that we have. I think we'll kind of focus on that first.

Capital spend for the.

The store.

We also had some legacy payments for the minimal acquisition and for some old sales tax Princess Polly. So this kind of someone else, but there I think.

We feel that we will be positive cash flow gain and from an operating perspective in Q4 and back generating cash and I think we'll continue to do that as we go forward into FY 'twenty three.

I think we're still looking to do acquisitions, but very committed forced to to drive the organic growth and support the growth of the brands that we have I think we've kind of focus on that first.

Youssef Squali: Any earn-outs? Any big earn-outs next year that you have?

Any earn outs any bigger and also next year.

Ciaran Long: No earn outs at all.

Okay.

Youssef Squali: All right. Jill, you talked a number of times about SMS or text message marketing. Can you maybe expand on that? Is that relatively new channel for you? Seems like you're pretty excited about that. Maybe which channels are operating, you know, the best for you at this point and for which brands? Thank you.

Fair enough for them.

And then Joey.

You talked a number of times about SMS or text message marketing does it mean.

Have you expand on that.

That relatively new channel for you.

It seems like you're pretty excited about that maybe which channels are operating.

The best for you at this point.

Thank you.

Jill Ramsey: Yeah. SMS marketing or text, you know, where you collect the customer's cell phone and, you know, reach them via text is really replacing email as one of the most inefficient in-house channels. We've been able to really grow our subscriber base and our customers. We did a focus group recently, and the customer was very clear that was their favorite way to hear from us and learn about new product drops and new promotions. We've really seen that be a very effective way to quickly communicate out with the customer. It does tend to drive more repeat and returning customers. It's a great retention tool. For new customer acquisition, we're certainly still very focused on social media and our wide influencer program.

Yes, so SMS marketing were taxed.

Where you collect the customer cell phone and.

Reach them via taxes really replacing E mail as one of the most efficient in house channels.

Been able to really grow our subscriber base and our customers. We did focus groups recently and customer was very clear that with their favorite way to hear from us and learn about new product drops and new promotions. So we've really seen that be a very effective way to quickly communicate with the customer.

Sure.

It does tend to drive more repeat and returning customers, but it's so it's a great retention tool.

For new customer acquisition, we're certainly still very focused on social media and our wide.

Our wide Influencer program.

Jill Ramsey: We, you know, of course, go after a much broader, wider, network of smaller influencers and have grown that with college ambassadors and really scaled that out. Ultimately, our brands are very innovative and out ahead of a lot of others on the marketing front and constantly testing and learning and tuning, their marketing channels. The one I'm also really excited about is the live video. Live streaming shopping is certainly going to be a new platform for us, that we are leaning into and super excited about.

Of course go after a much broader wider network of smaller influencers and have grown that with college ambassadors and really scale that out.

But ultimately our brands are very innovative and out ahead of a lot of others on the marketing front and constantly testing and learning and tuning other marketing channels, but what Im also really excited about is the live video.

Live streaming shopping is certainly going to be a new platform for us that we are leaning into and super excited about.

Youssef Squali: Great. Thank you both.

Alright, Thank you both.

Okay.

Operator: Thank you. The next question is coming from Ike Boruchow of Wells Fargo. Please go ahead.

Thank you. The next question is coming from Ike <unk> of Wells Fargo. Please go ahead.

[Analyst] (Wells Fargo): Hey, guys. This is Jesse on for Ike. Thanks for taking my question here. I was just wondering there were some comments that included that women's inventory sounded down year over year right now, while men's remains a little elevated due to third party inventory. It sounds like liquidations are actually the inverse of what prior expectations were for men's to be clean now and women's by end of year. I'm just curious what happened there. Looking forward, if there are any differentiated dynamics to consider by gender heading into what's anticipated to be a heavy promotional holiday environment this year?

Jesse Sobelson: Hey, guys. This is Jesse on for Ike. Thanks for taking my question here. I was just wondering there were some comments that included that women's inventory sounded down year over year right now, while men's remains a little elevated due to third party inventory. It sounds like liquidations are actually the inverse of what prior expectations were for men's to be clean now and women's by end of year. I'm just curious what happened there. Looking forward, if there are any differentiated dynamics to consider by gender heading into what's anticipated to be a heavy promotional holiday environment this year?

Hey, guys. This is jesse on for Ike. Thanks for taking my question here I was just wondering there was some comments that included the womens inventory sounded down year over year right now while men's remains a little elevated due to third party inventory so it sounds like liquidations or actually the inverse.

What prior expectations were for rents to be clean now in women's by end of year I'm. Just curious what happened there and then looking forward. If there are any differentiation dynamics to consider by gender heading into what's anticipated to be a heavy promotional holiday environment. This year. Thank.

Jill Ramsey: Thank you.

Jesse Sobelson: Thank you.

Ciaran Long: Hey, Jesse, this is Ciaran. Let me just be super clear on the inventory. We haven't been doing any particular liquidations, I would say, because of the test and repeat model. The women's brands are just, you know, they're not buying out and committing to inventory, you know, they're doing that very short periods. They're able to adjust their inventory buys and their inventory dollars much quicker. That's why we saw in, you know, in Q3 where the inventory dollars are down versus Q2, right? They're sequentially down, and that was very much our women's brands that are on those tests and repeat models. They're still slightly up year over year, but much, you know, closer.

Thank you Hey, just the this year on.

Let me, let me just be Super clear the inventory. So we haven't been doing any particular liquidations I would say because of the test and repeat model. The women's brands are just they're not buying those in committing to inventory.

And they're doing that very short periods. So they are able to adjust their inventory buys and their inventory dollars much much quicker that's why we saw.

In Q3, where the inventory dollars are down versus Q2, right. So they are sequentially down and that was very much our women's brands that are on those tests and repeat models, they're still slightly up year over year, but much much.

Ciaran Long: The men's brands, because they're buying third-party from third-party vendors, you know, they're not able to adjust their inventory as quick. That's why it will take longer for us to, you know, adjust their inventory. I'd say, like I said, very happy with what we have and, you know, stays much more relevant for a longer period with men's inventory. Really like the composition that we have going into holiday. But the men's will take just a longer period, I would say, to adjust down the dollars.

Closer the men's brands.

They are buying third party.

From third party vendors.

They are not able to adjust their inventory as quick and so thats why it will take longer for us to.

Just their inventory I would say like I said, we're very happy with what we have.

Today is much more relevant for longer period remains inventory, so really like the composition that we have going into holiday.

But the men's will take just a longer period, I would say to adjust down the dollars.

Jill Ramsey: Yeah. I'd just add that the majority of our inventory is bought on that test and repeat model. All of our women's brands are buying on that, which really de-risks your inventory, and we are now expanding that over into our men's and streetwear businesses and adding more of our mix onto that short lead time buying. You know, eager to have even more control in inventory management as we expand upon that into next year.

Yes, I'd just add that the majority of our inventory is bought on that test and reheat model all of our women's brands are buying on that which really de risks your inventory and we are now expanding that over into our men's and street wear businesses and adding more of our mix onto that short lead times.

Buying so.

Eager to have even more control and inventory management as we expand upon that into into next year.

[Analyst] (Wells Fargo): All right. Cool. Thanks for elucidating that for investors.

Jesse Sobelson: All right. Cool. Thanks for elucidating that for investors.

Alright, thanks for.

Elucidating that for investors.

Operator: Thank you. The next question is coming from Michael Binetti of Credit Suisse. Please go ahead.

Okay.

Thank you. The next question is coming from Michael Binetti of Credit Suisse. Please go ahead.

[Analyst] (Credit Suisse): Hey, guys. This is Carson on for Michael. First off, congrats on a nice quarter, and thanks for taking our question here. We've heard some instances of consumers starting to trade down on lower price point categories and brands. Are you guys seeing that within your banners? And if so, how are you positioning inventory for the spring? And then another one, did we hear you correctly that you used the September exit rate for forecasting Q4? Did October perform in line with September, or was there a change in the trend there? Thanks.

Carson Paull: Hey, guys. This is Carson on for Michael. First off, congrats on a nice quarter, and thanks for taking our question here. We've heard some instances of consumers starting to trade down on lower price point categories and brands. Are you guys seeing that within your banners? And if so, how are you positioning inventory for the spring? And then another one, did we hear you correctly that you used the September exit rate for forecasting Q4? Did October perform in line with September, or was there a change in the trend there? Thanks.

Hey, guys. This is <unk> on for Michael first off congrats on a nice quarter and thanks for taking my question here, we've heard some instances of consumers starting to trade down on lower price point categories and brands are you guys seeing that within your banners and if so how are you positioning inventory for the spring and then another one did we hear you correctly that you.

Use the September exit rate for forecasting fourth quarter did October performed in line with September or was there a change in the trend there.

Jill Ramsey: Yeah. Hey, Carson. Thanks for your question. Look, we are seeing as we guided in August, you know, and anticipated a demand pressured back half. We are seeing that across the brands and regions. As far as, like, clear signals of trade down, I'd say we have seen a little bit of an uptick in our mix of markdown versus reg sales. So where we have put some things on markdown, we are seeing a little bit more of customer shifting into that. I think just reflecting, you know, that deal seeking mindset and the customer being a little bit more frugal with the macro backdrop. As far as how we trended out the business and the outlook, I'll let Ciaran comment on that.

Yeah, Hey, Carson Thanks for your question.

Look we are seeing as as we guided in August .

We anticipated a demand pressured back half, we are seeing that across the brands and regions.

As far as like.

Clear signals of trade down I would say, we have seen a little bit of an uptick in our mix of markdown versus Reg sale.

So where we have put some things on markdown, we are seeing a little bit more of a customer shifting into that I think just reflecting.

That deal seeking mindset and the costs were being a little bit more frugal with the with the macro backdrop.

As far as the.

How we trended out the business and the outlook I'll, let John comment on that yes, Hey, Carson, we been using the most recent trends rates of what we've been saying for October and the <unk>.

Ciaran Long: Yeah. Hey, hey, Carson. We been using the most recent trends, right? What we've been seeing for October and the first kind of 10 days of November is what we've used to model out Q4 from a sales perspective.

<unk> kind of 10 days of November is what we've used to model in Q4 from a sales perspective.

[Analyst] (Credit Suisse): Makes sense. Thanks.

Carson Paull: Makes sense. Thanks.

Makes sense. Thanks.

Operator: Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Thank you at this time I would like to turn the floor back over to management for any additional or closing comments.

Jill Ramsey: Yeah, just thank you all for joining. If you haven't had a chance yet to get out to Vegas and see the new store, we invite you to come check it out. It's not unlike anything you've ever seen. It's incredible. Thank you all.

Yes, just thank you all for joining and we if you haven't had a chance yet to get out to Vegas and see the new store, we invite you to come check it out it's not unlike anything you've ever seen its incredible so thank you all.

Operator: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.

Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or walk off the webcast at this time and enjoy the rest of your day.

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