Q4 2022 a.k.a. Brands Holding Corp Earnings Call

Speaker 1: marketing spent and the fashion newness is back at our brands as we head into spring.

Speaker 1: I'm confident that with our levels of newness normalizing, we will also register a meaningful sequential improvement in our gross margin. Despite the challenging macro environment, I'm proud of the progress we made during the quarter strengthening the foundation of the business. The culture kings flagship store that opened in November is exceeding our expectations. And we're pleased with the halo effect the store is having on online sales. We also continue to make sequential improvements on our inventory, which is down 70 million over the last six months. And we have another quarter of positive cash flow in the fourth quarter. Subsequent quarter end, we also pay down 6 million of our revolver. While we can't control the macro environment, we can control how we drive the business forward. To that extent, I'm excited to talk about the new initiatives across our portfolio.

Speaker 1: that will drive growth, but more importantly, accelerate brand awareness for the long term.

Speaker 1: As we look to the future of fashion, we believe that core to building durable next generation brands is showing up everywhere our customers are.

Speaker 1: whether that's direct to consumer, through welfare partners, digital, mobile, or in stores.

Speaker 1: Our brands have already mastered building authentic relationships directly with customers and providing great experiences and we believe they will excel in other channels too.

Speaker 1: To that end, in 2023, we're piloting select wholesale partnerships, and we're also testing a Princess Polly store in Southern California in the back half of the year.

Speaker 1: We have an exciting year ahead filled with new tests and initiatives while simultaneously strengthening our balance sheet to feel profitable for the long term.

Speaker 1: So let me share some highlights from our brand initiatives.

Speaker 1: Starting with our women's brands, using robust data and analytics in combination with comprehensive survey work, it's clear that Princess Polly customers are creating more ways to experience the brand.

Speaker 1: As mentioned, we're very excited that Princess Polly is piloting a store in Southern California this year and we share more information on the store in the coming months.

Speaker 1: I'm also excited to announce that Princess Polly signed a wholesale agreement with Paxone to carry select, best selling styles online and in 15 stores.

Speaker 1: Paxon is a strong strategic fit for Princess Polly's first wholesale engagement because they are also a top 10 brand according to Piper Sanders' Taking Stock with Teens survey.

Speaker 1: They have a large footprint in prime locations nationwide, providing convenience for our existing customers to physically experience the quality of the Princess Polly brand in stores, as well as the opportunity to acquire new customers and promote brand awareness.

Speaker 1: The partnership launched today and a broader rollout will follow this summer.

Speaker 1: While we're looking forward to the new initiative to Princess Polly, the brand is also laser focused on the core strategy.

Speaker 1: On the merchandising front, Princess Polly's core product has been a bulk close for going out and hanging out. Princess Polly has simply just squ autonomous before her.

Speaker 1: but the brand is uniquely positioned to offer a full range of merchandise from formal dresses to vintage tees.

Speaker 1: To that end, they are expanding their formal wear offering for this year's prom season. And similar to Culture Kings, Princess Polly is also leveraging the print shop we acquired in 2021 to quickly print graphic keys.

Speaker 1: They're dropping 10 to 15 missiles per month.

Speaker 1: which is a mix of Princess Polly's branded merchandise and licensed properties.

Speaker 1: They recently launched the Betty Boo Licence Collection that exceeds expectations, and we're excited for an upcoming partnership with the NCAA.

Speaker 1: Leaders in next generation marketing, Princess Polly has mastered organically appearing on their customer screens and feeds no matter the channel.

Speaker 1: They continue to lean heavily into TikTok, growing their follower base nearly 40% in 2022.

Speaker 1: And it's now a top performing channel based in our way.

Speaker 1: They both define Tune, improve their TikTok influencer partner strategic partnerships.

Speaker 1: With recent successful collaborations with influencer Alex Earle, who garnered over 4 million views in her campaigns, and Melody Miles, a micro influencer who brought nearly 1,000 new customers to the brand. We're also excited that Princess Polly is bringing back its in-person events with the launch of their Spring Break activation in Miami next week.

Speaker 1: Touring around popular hotspots in a branded Jeep, the Princess Polly team will be giving out merch, gathering buyer-worthy social media content, and engaging with our customers.

Speaker 1: They are also hosting an exclusive party for influencers, college ambassadors and their top tier loyalty members to promote the brand and increase customer engagement.

Speaker 1: As I noted earlier, we view wholesale as a brand building activity and as seeds of growth for the back half of 2023, but mostly for 2024 and beyond.

Speaker 1: In addition to piloting our wholesale strategy for Princess Polly with Paxon,

Speaker 1: We're in active discussions with other wholesale partners within the US and internationally for all of our brands.

Speaker 1: We're also exploring Marketplace opportunities and Petalim Pub launched on Target Marketplace last month and is gaining traction.

Speaker 1: We'll be selective when choosing wholesale and marketplace partners to ensure a strong strategic fit and partners that will enhance our brand's awareness.

Speaker 1: Turning now to our streetway brands.

Speaker 1: As I mentioned earlier, we're bullish on Culture King's expansion in the US and I'm more confident than ever after seeing the initial success of the stores in Vegas.

Speaker 1: The storage exceeding expectations in revenue traffic and brand building activities.

Speaker 1: Equally as exciting is the impact the store is having on online sales since it opened in early November .

Speaker 1: They have seen great traction with inter-events.

Speaker 1: drawing artists.

Speaker 1: such as Asap Ferg and athletes such as Kirk Cousins and Marlon Humphrey from the NFL.

Speaker 1: And celebrities such as ludicrous and cascaded have all-shot the Vega store.

Speaker 1: They have a report marking calendar and events lined up this year both in the US and Australia.

Speaker 1: This past weekend, Culture Kings had an official partnership with Rolling Low, a big hip-hop festival in LA.

Speaker 1: where they had a branded stage and a basketball court and a merchandising call out.

Speaker 1: They also partnered with professional boxer Caleb Plant, who hosted a live streamed boxing session in the Vegas store this week and released an exclusive collaboration with Minimal.

Speaker 1: and Snoop Dogg DJ'd at the Melbourne Culture King store this past weekend.

Speaker 1: As a reminder,

Speaker 1: Unlike our women's brands, Coach King carries a mix of in-house designed fashion brands and third-party athletic, footwear and fine gear apparel brands.

Speaker 1: We've always seen strong demand for the exclusive in-house design product in the US which is now accelerated even further after the store opening.

Speaker 1: We're thrilled that seven of the top ten brands by sales in Vegas are in-house exclusive brands, including Minimal, which is now a top ten brand on the Culture Kings website and in the Vegas store.

Speaker 1: In addition to the success of the in-house brands, we're excited that the store has unlocked new partnerships with third-party brands like New Balance and Crocs, and more that will be available online and in stores in the coming months.

Speaker 1: I want to share that Simon and Tani Beard have stepped down from their day-to-day operating roles as co-CEOs of CultureKings to spend time with their family and pursue entrepreneurial adventures.

Speaker 1: Simon and Tawny have built an incredible brand over the last decade and have set the brand up for tremendous global success.

Speaker 1: They will transition to advisors to the company and Simon remains an active member of the AKA board of directors.

Speaker 1: I want to express my gratitude to Simon and Tawnee for their partnership through this transition and more importantly, their unwavering commitment to building the brand into the global success it is today.

Speaker 1: Adrian Gribbin, Culture King CFO , has been promoted to Chief Operating Officer and Joan Yoska, remains President of the US.

Speaker 1: We have confidence in this leadership team as they are industry veterans with tenured backbones in global street wear and retail.

Speaker 1: I also want to share the subsequent quarter end we saw webdolls back to the founder Griselle Paula.

Speaker 1: The brand saw tremendous growth under our ownership and we believe in its long-term success but we've determined that the brands of Red Dog Size does not experience the food potential of the AKA platform.

Speaker 1: I want to thank Rizel for her partnership over the past three years and we're excited to remain a minority shareholder in the brand.

Speaker 1: To conclude, I want to give you my perspective on 2023 and beyond.

Speaker 1: We anticipate that the macro-environment will remain dynamic and pressured in the coming year.

Speaker 1: But as you've heard today, we're evolving our model and our strategies to build high-quality, durable fashion brands for the long term.

Speaker 1: We're testing new ways to expand awareness and grow our customer base across the portfolio.

Speaker 1: our top line results and our margins. The combination of these factors resulted in four quarter sales that came in below expectations. The lower than planned sales combined with a lower gross margin deleveraged in the middle of the P&L. That said, we continued to make progress on strengthening our balance sheet in the four quarter. We delivered another quarter of positive operating cash flow. We registered sequential improvements on inventory, hitting our quarter in gold. We continue improvements ahead in 2023. We continued reducing our open shipping and fulfilling the costs.

Speaker 1: which laid the foundation for greater cost efficiencies this year. And as I mentioned, we remain disciplined on the promotional front, limiting the breadth and depth of our discounts, protecting our brands.

Speaker 1: Despite the challenging environment, I'm confident that we are well positioned for the upcoming year as we look to improve our operating model, and exit 2023 with growing brands and a much stronger balance sheet. Before I go through the results in more detail, let me spend a few minutes on the non-cash and prime and charge related to our acquisition of culture kings that you saw on our fighting. The 173.8 million charge relates to an updated valuation of the culture kings business and acquisition, which is a result of the adverse economic trends in the fourth quarter.

Speaker 1: including inflation and interest rates, as well as pressure of consumer demand. Discharge does not impact the cash position.

Speaker 1: their provenance or future operations. As mentioned, we are pleased with the performance of the Culture King store and the Halo effect in online sales and it gives us confidence in the future of the brand in the US.

Speaker 1: Now for a detailed discussion on our results.

Speaker 1: For the fourth quarter, net sales declined 80% to 149 million compared to 182 million last year.

Speaker 1: On a constant currency basis next sales were down 13% or 24 million

Speaker 1: Active customers on a training 12 month places was off 3%.

Speaker 1: Total four quarter orders were down 14% to last year at 1.9 million from lower marketing spend.

Speaker 1: And the average order value of $77 was down 8% on a reported basis and flat in constant currency due to a lower mix of full-price items.

Speaker 1: Now, I'll provide a few highlights from our three regions.

Speaker 1: Fewer new styles in our women's brands as we move through inventory in the back half, and our decision to pull back on marketing. Australian net sales decreased 21% to $61 million, or were down 12% on a constant currency basis. Australian net sales were impacted by similar macroeconomic environment trends in the US, including softer demand and inflationary pressures, as well as an exaggerated shift of customers returning to stores post-pandemic. Notably, in the fourth quarter, Culture King stores continued to be the fastest growing area.

Speaker 1: Moving to profitability.

Speaker 1: Reported gross margins in the 4252.8% versus 54.6% in the same period last year are a decline of 180 basis points.

Speaker 1: The increase was primarily due to fixed cost deleveraging their distribution centers given the lower volume of sales partially offset by improvements we've made on outbound shipping and label productivity. Importantly, we continue to make progress and this was the second quarter of sequential rate improvement in selling expenses. Selling expenses were $15.4 million compared to $21.5 million in the fourth quarter of the year, a 28% reduction.

Speaker 1: On a rate basis, marketing expenses were 10.3% of net sales, compared to 11.8% of net sales in the fourth quarter of 2021.

Speaker 1: The lower marketing expenses as a percent of sales was due to our strategic decision to pull back on spend as we balance both sales and profitability.

Speaker 1: As I mentioned, as we went through the quarter, we determined the return on incremental marketing spend was lower than prior levels given the heightened levels of promotion during the holiday season.

Speaker 1: As we go through Q1, we are seeing some reduction in promotion intensity and we're increasing our marketing expense with the expectation that we'll be around 12% of net sales for marketing expense in Q1.

Speaker 1: General and administrative expenses were $26.1 million compared to $27.3 million in the fourth quarter of 2021. On a rate basis, G&A expense were 17.5% of net sales compared to 14.9% of net sales in the fourth quarter of 2021.

Speaker 1: The increase in G&A expenses as a percent of net sales was primarily due to lower sales in the fourth quarter of 2022.

Speaker 1: Adjusted EBITDA was $6.1 million, or 4.1% of net sales, compared to $16.1 million, or 8.8% of net sales in the fourth quarter of 2021.

Speaker 1: Net loss as adjusted with $3.4 million, or $0.03 per share in the fourth quarter of 2022, compared to a net income. Net loss as adjusted with $3.4 million, or $0.03 per share in the fourth quarter of 2022,

Speaker 1: 4.3 million or 3 cents per share in the same period last year.

Speaker 1: Turning to the balance sheet, we ended the quarter with $46 million in cash and cash equivalents and $144 million in debt.

Speaker 1: At the end of the quarter, we had total liquidity of approximately $56 million.

Speaker 1: Inventory at the end of the quarter was 127 million compared to 116 million at the end of the fourth quarter of 2021.

Speaker 1: While we were up in inventory dollars year-over-year, inventory units are down 2% compared to last year.

Speaker 1: The increase in inventory year over year was primarily associated with Culture King's new fulfillment center.

Speaker 1: the US door opening, and higher air freight expense.

Speaker 1: Compared to the end of the third quarter, inventory decreased 10.4 million or 8% and has done 5% on a unit basis.

Speaker 1: And inventory is down 17 million since the second quarter of 2022.

Speaker 1: Overall, we are pleased with the sequential improvement in imagery in the back half of 2022 and we feel confident in the composition, newness and quality of our imagery.

Speaker 1: and expect to see continued sequential deploying in inventory dollars and units in fiscal 2023 on a constant currency basis.

Speaker 1: Touching on cash flow, in the fourth quarter we generated $11.1 million of operating cash flow, marking the second quarter of positive cash flow generation in fiscal 2022.

Speaker 1: In the back half of 2022, we generated $23 million of operating cash flow.

Speaker 1: Turning to our own link.

Speaker 1: As we look to 2023 and beyond, we want to continue to build these brands to meet their long term potential, which is why we are testing the Omni Channel initiatives that are laid out.

Speaker 1: While we're doing that, we're also going to strengthen our balance sheet so we can build optionality and reinvest in the business.

Speaker 1: We are anticipating another year of macroeconomic pressure on both the consumer side as well as the expense side and will continue to manage the business prudently.

Speaker 1: Overall for the year, we expect to deliver between 570 to 600 million in net sales.

Speaker 1: We're anticipating the first half of the year to be more challenging from a comp perspective due to our strong performance in the first half of last year when the consumer was excited to go back to festivals and travelling and we anticipate comps easing in the back half.

Speaker 1: Importantly, with an improved level of newness in our imagery mix,

Speaker 1: And if we see better performance in marketing channels, we have the potential to increase our marketing spend to drive top line sales and EBITDA dollars as the year progresses.

Speaker 1: Our new omnichannel initiatives, including the Princess Polly store and wholesale, represent small initial tests that will not have a material impact on our financial performance in 2023 and are baked into our guidance.

Speaker 1: Our focus on testing new channels of distribution in 2023 will set the stage for future expansion of our market reach and growth over time.

Speaker 1: For the year, we expect to see year-over-year improvements in growth, margin, rate of about 100 basis points.

Speaker 1: as we get past the elevated air freight rates that we saw in 2022. In selling expenses, we expect the overall rate for the year to be in line with the overall rate we experienced in 2022.

Speaker 1: You will see higher rates in the first half of the year due to lower sales volume compared to last year.

Speaker 1: In G&A, we anticipate limited dollar growth spend year over year when ensuring we are driving efficiencies across the business and supporting future growth opportunities.

Speaker 1: All of these factors taken together, we anticipate delivering 35 to 37 million of EBITDA for the year.

Speaker 1: We expect a tax rate of 30% and weighted average shares outstanding of approximately $130 million. I also want to call out the improvements that we're expecting in free cash flows and leverage we have in this area.

Speaker 1: Firstly, we expect capital expenditures to be in the range of $8-10 million this year, significantly down from last year's $20 million.

Speaker 1: Secondly, we expect to see continued improvements on inventory turns and lower inventory dollars as we go through this year.

Speaker 1: These two areas combined with improving EBITDA will allow us to reduce our debt, improve our leverage and strengthen our balance sheet.

Speaker 1: As mentioned, subsequent to quarter end, we paid off $6 million of debt and we expect to continue to pay down our debts as we go through 2023. Looking at the first quarter, we're anticipating net sales of $113 to $116 million.

Speaker 1: and EBITDA of 1.5 to 1.8 million.

Speaker 1: While we continue to manage our business through the current macro challenges, we remain confident in the long-term growth and successful brands and business model.

Speaker 1: While we continue to manage our business through the current macro challenges, we remain confident in the long-term growth and success of our brands and business model. Now we'll open it up for questions.

Speaker 2: Thank you.

Speaker 3: At this time we'll be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad. The confirmation tone will indicate your line is in the question queue.

Speaker 3: You may press star 2 if you would like to remove your question from the queue.

Speaker 3: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker 3: using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Speaker 3: Thank you, and our first question is from the line of Randi Konick with Jefferies. Please receive your questions.

Speaker 3: Hey, good afternoon, Ron, how are you? Just a quick note, Phil, hopefully everything is okay with her asking a better team. I just want to ask you a few questions on your person. What is your perspective on just the U.S. consumer relative to the U.S. consumer?

Speaker 3: I guess the Australian consumer maybe give us some perspective on how they feel, how they're different or the same. And then just on the related to that, just on the more down environment, more commercial environment, and sound like you think it will be better.

Speaker 1: I would say in the US, we did see trends, you know, as we went through the quarter, certainly get much more promotional and the promotional intensity increased significantly more than we had expected as we went through the quarter. I would say we actually saw that in both regions. Now, we have seen the promotional intensity in the US, you know, ease a little bit as we've kind of gone through the second half of Q1 and I think, you know, just that's happening as well a little bit in both regions. I think as we think about the consumer, you know, I think one of the advantages that we have is just the four brands, you know, in Australia.

Speaker 1: and with Culture King stores, we're seeing consistency in the consumer pressure, I guess, across the brands in Australia. We are seeing the stores doing well. The stores in Australia are the fastest growing area of the business in Australia. So I think people are back kind of going out, spending more on experiential.

Speaker 1: I talked a little bit about the trends. I think as we think about the year, we are expecting that to continue. And the promotion environment from a macro perspective, we obviously see that the consumer is challenged and we have baked that into the guidance.

Speaker 3: Okay, and then just the only other question I was looking at long term nature to kind of talk a little bit about. Early early seed. Of course, partnership and a couple of stores here and there. Do you think this change how you think about. For them to keep growing and this is a huge change up the market, how do we make this change? It's the northern part of California and so will the northern part of the country has been

Speaker 1: Sure, thanks Randy. I think first look as we look to the kind of long-term future of fashion, or interest in building long-term durable brands, and we really think we have the brands to do that. They are very early on in their life. I think at this point our brands have mastered that authentic relationship with customers online. They just do a great job of that, all of the brands. I think at this point we also see having the Culture King stores in Australia, the progress we are seeing, the success we are seeing with the Culture King store in the US, we do feel that we do want to be on the channel for a couple of years.

Speaker 1: as it relates to kind of gross margins marketing, I think we'll let these tests play out a little bit and we'll certainly actively share how they're doing with you guys and what we feel it will do to the long-term model.

Speaker 3: Thank you.

Speaker 3: Thank you. Our next question is from the line of Dana Telsey of Telsey Advisory Group. Please receive your questions. Thank you. Good afternoon and our best wishes for speedy recovery for Jill. As Shauna, if you think about

Speaker 4: business model and what it is. How big a percentage do you expect wholesale to get to? And when you think about Princess Polly and obviously Petal & Puff, what are you thinking about pricing as we move forward in 2023 where the promotions are full price? Are you seeing any cadence of new designs improve? And what have your customers told you?

Speaker 4: told you, any feedback from all the data with your customer, what they expect to spend, how they are spending their dollars, and how you are managing expenses during this time period. And then just lastly, what holes are you looking to fill within the management team now given the departure of the CultureKing founders and perhaps any other shifts there. Thank you.

Speaker 1: Sure, thanks Dana. You know I think as it relates to wholesale, look first I think we're really happy that we're starting more tests in the wholesale channel and in the stores channel. I think you know we are always going to be predominantly a direct consumer brand and have that kind of one-on-one relationship with our brand.

Speaker 1: I don't think we have any long-term targets of how big we want the wholesale channel to be our stores.

Speaker 1: As it relates to pricing, I think, and the consumer, I think what we have seen as we went through Q4 and early Q1, consumers continue to be interested in newness, but we did see them certainly buy more markdown products than we have seen in the past. So, we saw a lot of those customers spin out of the markets.

Speaker 1: AOV just down slightly on a constant currency basis. I would say AUR down a bit more, but the consumer was kind of putting more units in the basket kind of as they looked for that markdown. You know, for us I think as we think about the year, you know, kind of expecting that to continue and there will be changes there. I think, you know, there's just...

Speaker 1: and focus areas. And for us, a lot of those are, you know, continually beyond the initiatives, but also strengthening the balance sheet. I think we're going to look to, you know, make some nice improvements on inventory in the back half.

Speaker 1: cash flow, positive cash flow in the back half of the year, 24 million. I think we're going to want to do sequential improvements or reduction in inventory dollars using that to pay down debt, reduce leverage and just continue to straighten the balance sheet.

Speaker 1: And then as it relates to culture things, I think

Speaker 1: Simon and Tony, as well as building a great brand, they've also built a great team. And it's a team that's been able to execute across regions, open the store in Vegas. It's doing really well. We're really happy with it. We have Adrian there based in Australia, now elevated to the chief office.

Speaker 5: Our next question is from the line of Lorraine Hutchinson with Bank of America. Please receive a few questions.

Speaker 6: Hi, this is Alice Shao on for Lorraine Hutchinson. Thanks for taking your question and please send Jill our best.

Speaker 6: So two bigger picture questions, any changes to how you are thinking about the two acquisitions per year sort of business model? Like is the shift now towards focusing on collaborations and new channels maybe? And then also on the long-term goals of attaining low to mid-teens operating margins, what are updated expectations on the timeline to get to the next phase?

Speaker 1: We feel that they're very early in their life cycle and have just a huge amount of long-term growth. And I think kind of leveraging the authentic relationships that they have today is kind of the right time now to be pushing into wholesale and the omnichannel initiatives with them. I think with that, yeah, I would say kind of this year we'll be certainly focused on those initiatives. your D

Speaker 1: focus is number one.

Speaker 1: And then from a long-term EBITDA model, I absolutely believe we can be long-term in those ultimate teams. I think we're obviously going through a very disruptive period from a macro-environment perspective still going through it.

Speaker 1: I think, you know, when I look at the middle of the P&L and kind of what we can control, we certainly have the cost structure and the business model to get there. I think it'll just take a little bit of time to get, you know, sales volume up really to bring down that G&A percentage and leverage there.

Speaker 5: Thank you. Our next question is from the line of Edward Aruma with Piper Sandler. I'm pleased to see you with your question.

Speaker 7: Hey, thoughts on for Jill on speed recovery. Two quick ones for me. I guess first on Red Dolls, I know it wasn't that significant, but is this part of a broader kind of strategic rethink of the portfolio, or is this just really a one-off? And then second, as it relates to wholesale, if you do make a bigger push in there, is there investment required to build out the requisite team to service wholesale accounts?

Speaker 1: So what we saw is it was doing about 10 million and really just not at the size where it could get the full benefits of the AKA platform. And with that we just felt for the long-term success of the brand it was really better back with Grisel as the owner and running that brand.

Speaker 1: I would say a one-off, very much looking for the continued success of that brand.

Speaker 1: And then just from a wholesale perspective, at the AKA level, we do have people with expertise in wholesale, with a lot of expertise in wholesale, from a relationships deal structure, things like that. And with our flexible technology stack, it's easy for us to kind of...

Speaker 1: don't feel a need to have a big investment or kind of a difficult technology work through for us to scan holes in.

Speaker 5: Thank you. Thank you. The next question is from the line of Oliver Chen with Cowen. Please proceed with your company.

Speaker 7: Hi, this is Tom on for Oliver. In terms of quarter today trends, just curious if you could characterize consumer behavior in January and February relative to prior months. And then in terms of inventory composition and the decision to keep promotions flat relative to last year.

Speaker 1: As it relates to the consumer, I think maybe stepping back a little bit to frame up Q1 is kind of what we saw in Q4. And I think we saw that consumer in, I suppose, holding back a little bit in the first half of the quarter and then leaning in more in the second half of the quarter, but at a time when it was much more promotionally intense.

Speaker 1: and certainly by more markdown product than we had seen or experienced in the past. I think we saw that continue through January and into the early part of February . I think we've seen promotions slightly ease as we have gone through the quarter. I think we still expect it to be quite promotional as we go through the year.

Speaker 1: and certainly the first half, I feel there's still a lot of inventory out there.

Speaker 1: As it relates to our own inventory, I think we've made really nice progress in bringing down the inventory dollars as we've gone through the back half, so down $17 million at the end of the year versus June of last year.

Speaker 1: year over year we're up about 9% on inventory dollars, but we are down 2% on units. And so I think just to see those units down year over year is nice progress. We'll continue to make progress on inventory as we go through the year, and bring down the dollars on each quarter on a sequential basis.

Speaker 1: I think as we go through Q2, as we kind of finish Q2, I feel like we'll be really in check with kind of a balanced, you know, inventory growth versus sales growth. And really for us, I suppose stepping back from a philosophical perspective, we do want our inventory growth lower than our sales growth.

Speaker 1: And I think we should be back on that by Q2.

Speaker 7: Great, thank you. In terms of the CapEx outlook, could you provide some additional color on the nature of those investments? Then additionally on the expense management side, what additional opportunities lie ahead this year? Thanks. Sure. Yeah, CapEx, it's really a combination of some maintenance capital, I would say.

Speaker 8: half of the year.

Speaker 1: From an expense area, yeah, it's interesting. I was reflecting there, we talk a lot on this earnings call about the on the initiative and the progress we're making. I would say that there is the same level of work and intensity going across all areas of the business, right? Whether that's your employers or double developers, you know.

Speaker 1: product design and getting really great products, high quality for our customers, and also on just cost-saving initiatives across the different areas of the P&L, whether that's inside and fulfillment centers, optimizing shipping carriers, improving the balance of air freight and sea in all areas of the business. We have those. I think they're all...

Speaker 1: small initiatives that we all know kind of basis points out of pretty quickly. And, you know, we've seen, you know, you've seen nice bits of progress there in, you know, even in the Q4 P&L, right, that are selling expenses are down versus Q3 in a time where you have, you know, more surcharges from carriers and those extra charges, I think is kind of progress and kind of gives us confidence as we think about next year's P&L and the long term.

Speaker 1: had last year, maybe on the top and bottom lines, just so that we can put in perspective as we look at your 2023 guide. And then on the balance sheet, how much cash do you need to continue to run the business? Is it fair to assume that with all the initiatives that you have going on, the Q4, the Q1, the Q1, the Q3, the Q4, the Q4, the Q4, and the Q5, how much cash do you need to continue to run the business?

Speaker 1: kind of cash level is where you'll drop assuming inventory.

Speaker 7: efficiency continues and capex goes down etc. Just help us understand liquidity position and how do you look at the strengthening of the balance sheet throughout the year.

Speaker 1: efficiency continues and capex goes down, etc. Just help us understand liquidity position and how do you look at the strengthening of the balance sheet throughout the year. Sure. Thank you, Seth.

Speaker 1: On Red Dogs first, Red Dogs is doing about $10 million in revenue in net sales for us and kind of an immaterial amount of EBITDA with that. And so that's kind of as you think about FY 23, you can remove those numbers. And I know from a balance sheet perspective and liquidity, I think we...

Speaker 1: right of just $24 million from operating cash flow. I think as we go through this year, you know, we certainly have...

Speaker 1: So, you know, continue to make improvements to bring down our inventory dollars. You know, you can see units are coming down faster than the dollars, but we will make sequential improvements in Q1 and continue that throughout the year. And I think the other thing is we think about kind of when you kind of pencil us in against last year's cash flow, there were some one-off payments there from...

Speaker 1: big benefit for us as well as we think about the cash flow for next year. And so look, I would say they're the main drivers and levers that we have. And it's an area of focus for us, you know, with improving sales, improving EBITDA, and improving cash flow is really how we're looking to run this business.

Speaker 1: I guess related to that, so as we try to get to a free cash flow number for 2023, is it as simple as looking at EBITDA, taking out the CapEx, and is that a good proxy or do you expect working capital to be in that negative for you guys?

Speaker 1: Yeah, good question. I think in Q1 there will be a little bit of negative on the working capital use and that's really just kind of timing of some of the Q4 payables, right? I think after that we will be in positive operating cash flow generation each quarter. Great, that's helpful. Thanks, Kieran.

Speaker 5: Thank you. As a reminder, you may press star 1 if you'd like to ask a question at this time. Thank you.

Speaker 1: Thank you. At this time, I'm showing no additional questions. I'll turn the floor back to Ciaran Long for closing remarks. Thank you all for joining the call and thank you for your best wishes for Gill. I know she would love to be here. She's probably listening at home. I think there's a lot of great stuff going on in this business.

Speaker 5: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.