Q3 2023 a.k.a. Brands Holding Corp Earnings Call
Greetings and welcome to the a T. A brands holding Corp, third quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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 Emily Schwartz. Thank you you may begin.
Good afternoon. Thank you for joining AK brands third quarter 2023 conference call to discuss the results release. This afternoon, which can be found on our website at IR Dot AK, a dash brands dotcom.
With me on the call capture on long interim Chief Executive Officer, and Chief Financial Officer.
Before we get started I'd like to remind you of the company's Safe Harbor language management may make forward looking statements, which refer to expectations projections or 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 restaurants, but that's please see our filings with the S E T.
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 EBITA margin.
Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in our release furnished to the RPC and available on our website with that I'll turn the call over to Charlie.
Thanks, Emily and good afternoon, everyone and thanks for joining our third quarter earnings call.
Before I discuss our key priorities and review our results I want to highlight some important takeaways from the quarter.
We delivered growth in the U S business.
Balance sheet and financial condition is strong.
We generated positive operating cash flow in the quarter.
Taking aggressive action to right size, our inventory position in Australia.
We have been in the market purchasing our shares which we believe offer tremendous long term value.
As laid out last quarter, we've been laser focused on three priorities for the back half of the year.
First chasing demand and building awareness through increased levels of newness and expanding our omni channel initiatives.
Second.
Improving our operations by reducing our inventory levels.
And third strengthening our balance sheet by paying down additional debt.
I'm pleased to announce that we've made progress against all three priorities and we'll continue to advance these initiatives throughout the remainder of the year.
As evidenced by our inline sales performance, we continue to chase customer demand.
Fashion newness is resonating well with our customers and we are increasing our total addressable market, particularly in the U S by introducing our brands to new channels and customers, including the opening of our first Princess Polly store in September.
We continued to strategically reduce our inventory, which is down 37 million year over year and down 21% since the beginning of the year.
And lastly, we paid off an additional 13 million a day in the third quarter.
Which brings us to a year to date debt reduction of 37 million or 26%.
I'm very proud of our progress against these initiatives and I want to thank the team for their hard work and commitment to our brands and customers.
Net sales for the second quarter were $141 million, which was in line with our expectations.
Net sales in the U S increased 2% compared to the third quarter last year and grew nearly 10% in a two year basis.
I'm proud of the progress, we're making in the U S. As the region represents our greatest opportunity for growth and brand expansion.
In fact, the U S now accounts for 60% of total sales.
Despite the growth in the U S. A quarter profitability was impacted by continued consumer macro headwinds in Australia, which led to a lower than expected third quarter adjusted EBITDA of $4 7 million.
As I mentioned in my opening comments, we're taking aggressive actions to improve our overall operations in the region, which I will provide more detail on shortly.
Importantly, the improvements we have made to our operating model enabled us to generate positive third quarter operating cash flow of $11 million.
Turning now to a discussion of our omni channel initiatives and our brand highlights were.
We are pleased with the success, we're seeing with increasing our brands total addressable markets through innovative merchandising and marketing initiatives as well as through our channel expansion initiatives.
As of today all of our brands are now active in at least three channels, including direct to consumer wholesale stores our marketplaces.
Princess Polly is once again ranked as a top 10 shopping website for female teens in the U S. According to Piper Sandler taking stock with teens survey that was released last month.
Further demonstrating the power and popularity of the brand among its core demo.
In an effort to accelerate brand awareness, we have officially opened the first Princess Polly store.
Early September at the Westfield Mall in century City Los Angeles.
The stores outperformed our expectations and we're very pleased with the overwhelming positive response from customers.
The store is approximately three and a half total square feet that features a new style is arriving weekly.
To give you more context on the financials. The current sales run rate for the store is tracking to 5 million in annual sales would have projected four wall margin contribution in excess of 20% paving the way for it to tremendous opportunity. He just scale of our physical store footprint.
Customers were very enthusiastic for the opening weekend with lines forming at four in the morning, it's hundreds of customers waited two experienced princess Polly in real life for the first time.
Complete with next generation digital displays in scramble moments and personalized product recommendations the store with strategically designed to engage shoppers, while also serving as a whole for content creation.
Additionally, bringing to life the sense of community and connection the Princess Polly his grown through social media the store with a whole special events, such as product launches meet and greets with Influencers and starting workshops.
We're excited about Theyre, all coming in store events, which recently kicked off yesterday the brand posted a U S C versus D. C. L. A block party at the store to drive college student traffic.
And next week. The show was also influenced your friends, giving event.
Importantly in addition to the profitable in store revenue generation, 30% of in store customers are new to the Princess Polly front.
We're also seeing the halo effect in our ecommerce business, while simultaneously gathering key customer shopping behavior insights.
Which will help us to further expand our reach.
The store opening solidifies Princess Polly a unique opportunity to take a strong digital brand physical.
And it's clear that further enhancing prints as part of these connections with customers through various touch points, we create long lasting brand affinity and loyalty.
Did that end I'm excited to announce the purchase poly its hard its first senior vice president of retail in the U S. So.
So every Davis, who recently joined from Lulu Lemon, where she was the VP of retail and most responsible for over 400 stores in the U S.
Sarah will spearhead Princess Polly store expansion plans.
Beginning with the addition of three to five stores in 2024 with upcoming stores in San Diego and Boston.
We also remain pleased with the success of purchase poly's, other omnichannel initiatives, including wholesaler marketplace expansion.
Christmas Party has a great relationship the Pac Sun, which as a reminder, with the brand's first wholesale partnership ever.
Additionally, prints as part of these testing wholesale agreements in Mexico, and Canada in the upcoming quarters.
As they look to increase Princess Polly internationally footprint.
[noise] pedal in pulp our women's brands targeting customers, aged 25 to 34 also continues to test different omnichannel growth opportunities, but there's no life on Macy's marketplace, adding to the brand's marketplace presents a target.
We're seeing strong assortment acceptance setting the stage for meaningful growth entering the holiday season and beyond.
In addition to enhancing patent in pulp spread awareness, our marketplace presence is enabling us to reach new customers.
In fact, 96% of customers, who purchased patent impulse products on the target or Macy's marketplace sites are new to file customers, which is a powerful omnichannel test proof point.
We are further expanding patent in pumps reached into two.
Two wholesale tests launching in the fourth quarter.
One way with Victoria Secrets, and then the other with Mexican retailer Liverpool.
As we think about the early success of our omni channel initiatives that our brands.
It gives me great confidence that we will increase our total addressable market and that our brands will resonate with new customers across multiple channels and formats.
Turning now to our street weapons.
Officially been one year since <unk> entered the U S with the anniversary of its store opening this past weekend.
The store has surpassed its annual revenue growth and first party brands comprised the majority of the revenue. This year further proving the relevance and demand for the international store brand is strong.
As countries games continues to grow an explosion in popularity in the U S. They are attracting top tier partners and marketing events.
We're excited about upcoming events at the store with Formula one in the U S C.
Beginning next week in partnership with Mclaren Racing and Michelin. This culture Kings will debut a week long activation to celebrate the Las Vegas Formula One Grand Prix.
Exclusive to culture change the brand will host the mercy of elements in store in line with the brand's retail tailwind ethos include.
Including an install replica of Mclaren racing car.
And the parents by Lando Norris.
Oh fishing Mclaren racing simulators.
Average formula one pieces, but limited edition Mclaren Mitchell Ness, and culture King's products that we launched last week.
We are equally pleased with the U S digital business this growth over the past year.
With active customer growth over 40% year over year.
In addition culture Kings is also picking up steam on celebrities athletes and influencers musicians.
J C, Rick Ross and Jay Baldwin have all been spotted wearing culture King's first party brands recently.
Lloyd her and karri.
We remain very bullish on the brand's long term growth potential.
Minimal or other street wear brands and a dominant player in denim and bottoms for men, aged 25 to 34 continues to be a top set of art culture came to Las Vegas, and there's no the top selling first party brand in the store.
The brand is highly sought after amongst athletes and celebrities with top NFL and NBA players purchasing I'm worrying minimal before and after the games.
And then the mill is also exploring omnichannel initiatives and its wholesale agreements with approximately 50 regional Street wear stores as it continues to build brand awareness across the country.
Before I give more detail on the P&L I want to provide an update on the environment in Australia.
As I alluded to earlier, we are facing continued macro pressure across our brands in Australia and New Zealand.
However, we are taking clear and decisive action in the region to set up our brands for a strong 2024.
Towards the end of the third quarter, we made several changes to the culture King's Australia operating model.
Under the leadership of West Boy, it's the cofounder and co CEO of Princess Polly we've appointed Ian Everest as the leader of culture teams in Australia.
Over the last few years and served as general manager of prints as part of the Australia and as the season merchandising and marketing professional.
Beginning in the third quarter in EM team began rapidly converting the culture teams merchandising model to test through that piece.
Which allows for speed and flexibility during dynamic consumer cycles.
He and his team have already started to transform the culture of lean supply chain and by the second half of next year. All of course your gains first party brands will be operating of the test and repeat shorter lead time merchandising cycle.
Additionally, as a result of the increased pressure on the consumer in the region towards the end of the third quarter, we began reducing the inventory of culture Kings, which is reflected in a lower gross margin and profitability for the quarter.
We will continue to work through the inventory of culture, King's Australia through the fourth quarter and into the first quarter of next year.
I'm confident that the transition to attest to repeat merchandising model and the reduction of inventory sits culture Kingsville for strong 2024 in Australia, and we're very confident in the brand's long term success.
Now I will give you more detail on the P&L before taking your questions.
For the third quarter net sales were $141 million and applying it to 10% compared to the third quarter last year, but a sequential improvement for the second quarter.
On a constant currency basis, net sales were down 8% compared to last year.
As I mentioned I'm proud that we delivered growth of 2% in the U S compared to the third quarter last year.
The Australia, New Zealand region declined 25% and the rest of the world grew by 5%.
Total orders for the quarter were 1.7 million are down 6% compared to the third quarter last year, which was predominantly impacted by lower demand in Australia, and New Zealand region, where orders were down 17%.
In the U S, where we see the largest opportunities to expand our reach we are pleased to see.
Order growth of 6% driven by higher traffic.
We saw a $3 6 million active customers in the third quarter.
On a regional basis active customers in the U S were down 4% and then Australia and New Zealand active customers were down 14%.
Our active customer count is calculated on a 12 month basis and as a reminder, we pulled back on marketing spend in the fourth quarter last year, which will impact our active customer growth into the second quarter of 2024.
Average order value of $81 decreased 5% compared to the third quarter last year are no ported basis.
That was 2% in constant currency.
Of course, it will be in local currency was down 8% in Australia, and New Zealand region, primarily due to our targeted promotions to clear through inventory.
Our third our third quarter return rate was 18%, which remains one of the lowest among our peers.
Moving to profitability.
Gross margin in the third quarter was 55, 4% compared to 55, 7% in the same period last year.
As mentioned the modest gross margin contraction was entirely due to the strategic discounting and culture Cleans, Australia as we successfully moved through inventory, which positions the brand to increase its product newness over the coming quarters.
The gross margin was also impacted by a higher return rate, partially offset by lower freight expenses.
To give you more perspective, the actions, we're taking our culture King's Australia negatively impacted our gross margins by approximately 105 basis points in the quarter.
Excluding the Australia region gross margins would've increased driven by improved full price selling and benefits from lower airfreight versus last year.
Selling expenses declined 12% to 36 million compared to 41 million in the third quarter of 2022.
Selling expenses were 26% of net sales down 60 basis points compared to the third quarter of last year.
Driven by operational efficiencies and distribution fulfillment and outbound shipping I'm pleased to report that we weren't well once again able to leverage selling expenses.
[noise] banker on the operational efficiencies, we have built into our business model, we remain highly nimble organization with the ability to appropriately flex our cost structure aligned with the demand environment.
Marketing expenses in the third quarter were $18 5 million compared to $16 5 million in the third quarter of 2023.
On a rate basis marketing expenses were 13, 1% of net sales compared to 10, 6% of net sales in the third quarter of 2023.
In the third quarter, we continued to ramp up our marketing spend in correlation with her newness to drive demand and we also experienced lower levels of effectiveness, particularly in the Australia region.
We are working hard to improve our marketing effectiveness over the coming quarters.
And as we further or omni channel expansion efforts, we anticipate achieving improved levels of effectiveness and a moderation in your marketing right.
General and administrative expenses declined by 6% to $24 6 million compared to $26 1 million in the third quarter of 2022.
On a rate basis G&A expenses were 17, 5% of net sales compared to 16.8% in let's say the third quarter of 2022.
The change in rate basis was primarily driven by lower sales volumes compared to the prior year.
As I've stated on prior calls our expense base is largely fixed and improvements in sales, we recorded nominal incremental G&A expenses supporting opportunity that he used to leverage this line in the future.
Adjusted EBITDA was $4 7 million compared to $9 2 million in the same period last year.
The adjusted EBITDA margin for the third quarter was 20 of 2023 with three 3% compared to five 9% in the same period last year.
But I want to reiterate that our adjusted EBITDA compared to our earlier expectations was entirely due to this too.
The strategic actions, we took in Australia to aggressively move through inventory, placing the region's inventory composition with a higher level of newness slated for next year.
For the third quarter of 2023, net loss was $70 million or $6 58 per share compared to a net loss of 100000 or one penny per share in the same period last year.
I also would like to remind everyone that effective September 29, we implemented the one for 12 reverse stock split which decreased our shares outstanding to approximately 11 million shares.
All references to our outstanding common stock including per share information have been retrospectively adjusted to reflect the reverse stock split.
Turning to the balance sheet.
As I mentioned I'm very pleased with the progress we've made strengthening our balance sheet, we've taken clear actions over the last several quarters to significantly reduce our debt and meaningfully improve our inventory levels and composition, while also benefiting our working capital.
We ended the quarter with $21 million of cash and cash equivalents.
We reduced our debt by 26% or $37 million from the beginning of fiscal year <unk>.
Ending the quarter at $107 million.
We had total liquidity of approximately 63 million at the end of the third quarter.
Moving to inventory.
I'm proud of the progress our teams across all of our brands have made on inventory levels, which at the end of the quarter totaled a 100 million compared to $136 9 million at the end of third quarter 2022.
Total inventory dollars were down 27% and units were down 15% compared to last year.
As I mentioned, we can we've continued macro pressure in Australia, we're taking aggressive actions to rightsize the culture change they've been trained in region.
For our other brands Princess Polly Petaline pulp and minimal we're confident in the overall inventory composition newness and quality across all regions.
We expect to see a continued decrease in inventory dollars and units through the end of the fiscal year.
In the third quarter, we generated $8 9 million of free cash flow, but 11 million of operating cash, which compared to 12 million during the third quarter of 2022.
For the first nine months of the year, we generated 18 million in operating cash.
Compared to an operating cash usage of $11 million in the comparable period of 2022.
I'm very pleased that our positive EBITDA, coupled with prudent working capital management enables us to have stable positive operating cash flow profile.
In the third quarter, we repurchased 406566 shares for a total cost of approximately $600000.
As of the end of the third quarter, we have approximately 1 million remaining in our share repurchase authorization.
Finally, I want to touch on the $68 5 million noncash goodwill impairment charge that you saw in our filings in.
In the quarter, we updated the valuations for our current businesses and macro trends and took an impairment charge to reflect this updated evaluation.
We remain encouraged by the performance in the U S and we expect the actions, we're taking in Australia to position us well for 2024.
We will continue to generate cash flow and we expect to pay down between 10 and $15 million more a day in the fourth quarter to further strengthen their balance sheets and set us up for a strong 2024.
In light of the macroeconomic conditions in the Australia region and the actions, we're taking to clear through inventory in the region.
We now expect to deliver between 550, and 555 million and net sales of between $13 five a $15 5 million in EBITDA for the year.
Lastly, I want to let you know that while Jim is doing really well. She has made the personal decision to step into a strategic advisory role effective immediately.
She will remain on <unk> board of directors and the board has begun a search for a chief Executive Officer.
Jim as a retail industry veteran and is champion AK brands over the past three and a half years.
We're immensely grateful for his leadership and our continued commitment to the company she has happened.
Before we take your questions I want to remind you that our priorities for the remainder of the year are clear we continues to reach new customers and expand our total addressable market to a direct to consumer initiatives and all the channel expansion.
We remain diligently focused on finding even more operational efficiencies by reducing our inventory and managing our expenses.
And we aim to further strengthen our balance sheet and pay down more debt in the fourth quarter.
I am confident that these actions we're taking in the remainder of the year set our brands up for a strong and successful 2024.
We remain committed to driving long term growth and profitability next year and beyond.
Now, we'll open it up for questions.
Thank you.
And gentlemen at this time and will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary.
It may be necessary to pick up your handset before pressing that starkey.
Our first question comes from the line of Edward <unk> with Piper Sandler.
Please proceed with your question.
Hey, guys. Thanks for taking my question and Joe Best of luck in the future I guess, just wanted click down a little bit on the poly store obviously good to hear it's off to a good start I guess.
Is this the start of a broader retail strategy I know you always have cultural kings do you foresee opening additional doors in either in either of those concepts and then as a follow up just wanted out or some of them are on Australia. I guess it is this basically end up kind of restructuring that business or do you think if volumes fall further, but there may need to be additional expense.
Action. Thank you.
Thanks, Ed.
Yeah, I think where we're really pleased with the with the opening of the Princess Polly store and and really all the omnichannel initiatives that we have going across all four brands are are in at least three channels at this point.
Princess Polly store is off to a great start and you know really solid run rate and we expect it to be over 20% from an EBITDA perspective, it's.
It's also great to see that 30% of the customers coming into the store or new to Princess Polly and and all of that gives US you know great a great feeling to kind of invest and continue investing in the kind of the long term with that brand.
And we're delighted that a couple of weeks ago, Sara joined US as head of retail for Princess Polly and brings her background for from Lulu Lemon and where she managed 400 stores in the U S and we feel with as you know and we will expand our retail footprint for Princess Polly next year, we're looking to do three to five.
Doors, and and we'll let you know as we kind of get more locations and update you as we go.
And you know specifically on culture Kings, I think and you know, we we feel really good with Ian and in ways in place. There now and you know they are bringing their expertise from Princess poly's and deep understanding of the test and repeat model into culture cadence you know we've seen across the other three brands the benefits from that test work.
Model and then it gets it's it's really core to us being back to growth in that 2% growth. We saw in the U S. In Q3, you know where they're already taken actions and I'm, making progress we feel we've seen more progress as we go through the first half of next year, but kind of expect that it would be the back half of next year before we see.
The full impact of that and but certainly believe look there's there's a there's still a you know a lot of value in that brand and long term growth in that brand and you know we're already seeing that in the U S.
Yeah.
Great. Thanks, so much.
Our next question comes from the line of Ike.
Birch wrong with Wells Fargo. Please proceed with your question.
Hi, This is giuliano.
Thank you everyone for the question a quick one here I was just wondering if maybe there is any additional commentary on the monthly sequential performance this past quarter and maybe theres any knock on what we've seen in 10 months.
Hum.
Holiday. Thank you.
Thanks Julianna.
Yeah, I would just add you know talk touch on I think we've seen continued improvements as we've improved the quality of the inventory across the brands you know I think with the test and repeat model at three of the brands and you know we really made progress on those you know in January those three brands got too.
<unk>, a situation where their inventory growth was lower than their stay in school and we've seen that continued as we've gone through the year and so we're just really happy to be back at growth in the U S and that 2% growth you know I think as we think about Q4, you know we feel like we've really and you know we've got great quality of inventory, we've got the right product.
We're set up for a strong holiday and.
We're just going to lean into and execute against that.
Great. Thank you so much.
Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Hi, Good afternoon, good afternoon, and best regards to gel.
You think about the gross margin can how do you on packet the discounting and in culture Kings, how how do you think that moves going forward. The high return rates in some of the offsets to that and then on the adjusted EBITDA side and the guidance that you provided as you think about this fourth.
What are how promotional do you need to be in the third quarter inventory down 21%, how you're thinking about inventory for the balance of the year. Thank you.
Sure. Thanks Dana.
Yeah, I think you know as.
As we head into the fourth quarter I, you know I would say we are clearly looking at the trends we've seen in the in the third quarter and you know really great to be back to growth in the U S with that 2% and seeing strength across all of our brands and with all of your omni channel initiatives that we have in place now in the U S.
And more coming internationally and again, Australia kind of expecting the same trends that we've seen and you know as I mentioned in my remarks, we invested about 105 basis points of gross margin with the actions we took to move through inventory our culture teams in Australia in Q3, I think as we head into Q4 and you know we saw.
Certainly feel it won't be as promotional as last year, you know with the B test and repeat model. We have the inventory at three of the brands is just really really strong, but we do we're modeling that will be down about 101 hundred basis points versus last year and for Q4. This year and that's really the big driver of that.
The change in guidance for us and as we think about Q4, you know I think you know really happy in the other areas of the P&L to see that their labor Gino and selling expenses, you know down year over year on G&A, certainly opened little bit these days in marketing like others, but I think as we continue to lean into the omni channel initiative.
As you know that we balance out over time.
Thank you.
Yeah.
Our next question comes from the line of actually Owens with Keybanc. Please proceed with your question.
Hi, Thanks for taking the question other lapping the opening of culture came in Vegas, but anything you can attribute the strength in the U S to it and then maybe any insights you've identified that you could implement luxury work your strategy in Australia.
Yeah. Thanks Ashley.
You know I think and.
Look I think it's great to see the brands are resonating with our customers and I think that's really a testament to having just great quality on trend product at an accessible price point and I think that's where we're just we've always maintained and we're going to continue to lean in I think you know as we look across the brands I think they're all just doing some.
Really great walk you see you know Princess Potty continues to be in the top 10 for paper signs as Teen survey you know we continue to see NBA NFL players and more every day wearing minimal product you have people like Victoria's secret looking to work with patent on pulp and you know and then you've got closer kings.
You know I think what they're doing with Mclaren at the moment is just a great example of how her.
Differentiated our brands are from a merchandise perspective, and also from a marketing perspective, and I think all of the brands are going to continue to lean into their differentiation and they're going to do that on the direct to consumer side and we're also really starting to see some of the early signs that what we're doing from an omnichannel perspective.
You know really has a big opportunity for these brands.
I think we see that with the growth in the U S. But also with the partners and better lifting too that we're working with no.
We're looking to work with I think you know, we're still a little bit behind from inactive customer perspective, and but you know it's it's great that we see that.
At marketplace between target and Macy's, 96% of those customers are new to pet food pulp you know, we see 30% as I said, if the customer is going to be enterprises. Just party stores are new to Princess Polly I think you know there's just there's a lot of opportunities for these brands and we're going to continue to lean in and execute against it.
I appreciate the color. Thanks.
As a reminder, ladies and gentlemen, it is.
Star one to ask a question.
We do have a follow up question from the line of Dana Telsey. Please proceed with your question.
Well I must have pressed incorrectly I apologize.
Well there are no further questions in the queue.
This conclude today's teleconference. Thank you for your participation.
May disconnect your lines at this time and have a wonderful day.