Q3 2024 A.K.A. Brands Holding Corp Earnings Call
Gail: Thank you for standing by. My name is Gail, and I'll be your conference operator today. At this time, I would like to welcome everyone to the AKA Brands Holding Corp. 3rd Quarter 2024 Earnings Conference Call.
Speaker Change: With me on the call today is John long interim Chief Executive Officer, and Chief Financial Officer.
Speaker Change: Before we get started I'd like to remind you of the company's Safe Harbor language management may make forward looking statements, which will better expectations predictions another park designation of future events, including guidance and underlying assumptions.
Speaker Change: Forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed.
Speaker Change: For a further discussion of risks related to our business. Please see our filings with the SEC.
Speaker Change: Please note we assume no obligation to update any such forward looking statements.
Speaker Change: This call will contain non-GAAP financial measures, such as adjusted EBITDA and adjusted EBITDA margin.
Speaker Change: Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in our release furnished to the ICC and available on our website with that I'll turn the call over to Carol.
Carol: Thanks, Emily and good afternoon, everyone and thank you for joining us today to discuss our third quarter results.
Carol: I'm very pleased that we had another strong quarter.
Speaker Change: And your expectations on both the top and bottom lines.
Speaker Change: I want to take a moment to thank the teams for their continued commitment to building great next generation brands that customers love it.
Speaker Change: Our steadfast focus on executing our strategic initiatives and innovation continues to drive growth and profitability.
Speaker Change: Let me highlight some key achievements from the quarter.
Speaker Change: Our net sales growth surpassed expectations, reaching approximately $150 million at six 4% increase year over year.
Speaker Change: The momentum in the U S continues and we delivered net sales of 100 million a robust 19, 5% increase over the same period last year.
Speaker Change: Our strong topline performance marks our second consecutive quarter of overall growth and importantly, our fifth consecutive quarter of positive growth in the U S.
Speaker Change: We're seeing tremendous traction with customers, both new and existing.
Speaker Change: We achieved an impressive 14% growth interactive customer base year over year.
Speaker Change: We delivered gross margin of 58% our highest level achieved in the past three years.
Martin: Our strong gross margin underscores the strength and effectiveness of our test and repeat business Martin do.
Martin: The uniqueness of work portfolio brand strategy, and our ability to drive operational efficiency.
Martin: And I'm proud to announce that we delivered over 8 million in adjusted EBITDA, an impressive 75% increase compared to the same period last year, which was ahead of our expectations.
Martin: Based on the exceedingly strong customer response from headwind pulp on Nordstrom Dot Com Penguin pulp launched in over 40 Nordstroms in October.
Martin: Princess is probably also launched 20 Nordstrom stores in October.
Martin: Funding, our brands visibility and customer reach.
Martin: And lastly on the brick and mortar expansion front Princess Polly opened two new stores in the third quarter, one in San Diego and one in Scottsdale.
Martin: We're off to a fantastic start.
Martin: I'm also excited that last week, we announced the Princess Polly will be opening its first store in New York City.
Martin: The 8000 square foot two level store will be located in Soho and is expected to open in early 2025.
Martin: We continue to execute against our strategic operating framework that we laid out at the beginning of the year.
Martin: Which is anchored in three key priorities.
Martin: Priority number one is to retain existing and attract new customers.
Martin: As demonstrated by our 14% increase in active customer base.
Martin: Brands are attracting new customers, while also staying top of mind for existing customers.
Martin: Leveraging our test and repeat merchandising approach our brands are launching new styles weekly.
Martin: Which when combined with innovative brand marketing across a variety of platforms is resonating with existing and new customers across our brand portfolio.
Martin: Priority number two is showing up for our customers wherever they choose to shop.
Martin: While we're continuing to strengthen.
Martin: Online presence, we're also expanding into experiential stores wholesale and marketplaces.
Martin: I'll delve into brands specific strategy, shortly but I'm thrilled to report that we are seeing success across all distribution channels, which significantly expands our brand reach.
Martin: This multichannel growth underscores the unique position of leveraging our successful profitable direct to consumer brands and introducing them to new customers through new channels.
Martin: And it also reinforces the significant untapped potential for our brands in the U S market and globally.
Martin: And our third priority is streamlining our operations to deliver financial benefits.
Martin: Our strong third quarter performance demonstrates the power of our operating model.
Robust topline growth driving substantial EBITDA flow through and expansion compared to the prior year.
Martin: This success reflects our continued focus on operational efficiencies and showcases our ability to leverage the acre platform to deliver meaningful financial improvement.
Martin: No lets share some highlights from our brands before I dive deeper into the financials.
Martin: On the women's side, what Princess Polly our next generation trend, driven brand and packaging and pulp which targets a slightly older demographic continued to gain market share in the U S.
Martin: We're very pleased with the continued momentum and strong third quarter performance across both brands direct to consumer channels and omni channel initiatives.
Martin: Our women's brands fully operate on a data driven person repeat merchandising approach, which allowed them to introduce new styles weekly on their sites.
Martin: Providing customers with fresh high quality and exclusive styles.
Martin: In addition to Princess Polly strength in dresses.
Martin: New categories that Princess Polly launched earlier, this year, including Loungewear and activewear are resonating with customers expanding the brand's lifestyle reach.
Martin: And Brian nailed, both the merchandising and marketing execution for the back to school and homecoming seasons, which are especially important given that high school and college students comprised a significant portion of prints as part of its customer base.
Martin: <unk> also continues to grow direct to consumer channel.
Martin: And we're pleased that brand awareness continues to grow driving new customers to the brand.
Martin: In addition to the continued strength of Princess Poly's, and patents and direct to consumer businesses. Both brands are resonating with customers on every new charter with Andrew.
Martin: Princess Polly tested its first store last year in century city DLA and based on the success and popularity of the store. The brand opened two more stores in the third quarter in San Diego in Scottsdale.
Martin: And just last week Princess Polly opened its first store on the East Coast on Newbury Street in Boston.
Martin: Based on feedback from customers the new Princess Polly stores are slightly larger have more styles and additional fitting rooms to better showcase the brand and enhance the shopping experience.
Martin: I am pleased to report that to date all of the stores are performing ahead of plan and we're excited to open two more stores in California in the fourth quarter. This year.
Martin: As I mentioned last week, we announced the Princess Polly will open its first store in New York City on Broadway in Soho in the beginning of next year.
Martin: We're thrilled that tap into the New York market.
Martin: Princess is partly on the map and one of the largest cities and iconic streets in the world.
Martin: The 8000 square foot store expense to levels and will feature hundreds of the latest of Princess Polly styles.
And consistent with Princess Polly as other stores, the New York store will feature a hallmark experiential elements, including social media worthy installations, LCD displays streaming curated content and bespoke furniture pieces throughout creating a fully immersive princess Polly shopping experience.
Martin: In addition to our retail expansion efforts our women's brands have also made significant strides in expanding their wholesale presence.
And a major milestone we're thrilled to announce that based on the success of pet Limbach on Nordstrom Dot Com. The brand launched in 40, Nordstrom stores across the U S and <unk>.
Martin: This is probably also debuted in 'twenty Nordstrom stores in October as it continues to expand its brand awareness through select wholesale partnerships.
Martin: These strategic moves not only enhanced our brand visibility.
Martin: One lakh new channels for customers to discover these great brands and see and feel the product in real life.
Martin: This is pentland began testing omnichannel initiatives, we're seeing a double digit increase in pet within pumps website traffic.
Martin: And importantly, organic traffic is outpacing paid channels, which we attribute to an increase in the overall brand awareness.
Martin: Shifting to our street wear brands closer Kings, which is a premier Street wear destination continues to deliver growth in the U S.
Martin: As a reminder, <unk> unique strength lies in its blend of premium in house designed to private brands and curated third party partnerships, particularly in footwear and headwear to deliver a complete street wear offering.
Martin: This quarter I wanted to share some updates on the progress, we're making scaling culture gains in house brands.
Martin: Since late 2023, we've been transforming culture <unk> in house brands by adopting Princess Poly's proven data driven testing repeat strategy.
Martin: Moving away from traditional merchandising cycles.
Martin: Loiter, one of culture King flagships in house brands spearheaded this transition to test a repeat and the early results are impressive ROI.
Martin: <unk> achieved triple digit revenue growth with outpaced margin dollar growth in the third quarter compared to last year powered by fresh quick to market merchandise.
Martin: And we know that when we get the strength of our product rates and as new drops regularly we're able to market and showcase the brand in that much better.
Martin: Next week culture Kingdom Loiter, we'll be partnering with the WWE for a full scale activation at the first ever Las Vegas complex com.
Martin: Loiter and WWE will be collaborating on an exclusive capsule collection for the event.
And we will create an underground activation of conflicts con featuring a sharper boot boot.
Martin: Customization stations superstar, a wrestler appearances and more.
Martin: I'll provide more detail on the P&L before taking your questions.
Martin: For the third quarter as I mentioned net sales increased more than 6% to approximately $150 million compared to the same period last year.
Martin: Driven by strength in our U S business and.
Martin: In which net sales increased 19, 5% compared to the third quarter of last year.
Martin: As expected this was slightly offset by softer sales in Australia, and New Zealand, which contracted 12% compared to a highly promotional in the third quarter of 2023.
Martin: Total orders for the third quarter were $1, eight 4 million, increasing six 4% as compared to the third quarter last year.
Martin: As I mentioned, we're really pleased with our new customer acquisition and our strong retention.
Martin: Our trailing 12 month active customer count rose, 14% to approximately 405 million at the end of the third quarter.
Martin: Our third quarter average order value was $81, which was flat compared to the third quarter last year.
Martin: Turning now to profitability.
Martin: Gross margin expanded 260 basis points in the third quarter to 58% compared to 55, 4% in the same period last year, driven by strong product newness and full price selling.
Martin: As I mentioned earlier this was the strongest gross margin we delivered in over three years and I'm very proud of the team's continued hard work to achieve this milestone.
Martin: Selling expenses were $41 9 million compared to $36 7 million in the third quarter of 2023.
Martin: Selling expenses were 27, 9% of net sales compared to 26% in the same period last year.
Martin: Due primarily to the impact from growing marketplace initiatives and additional stores.
Martin: Marketing expenses in the quarter were $19 3 million compared to $18 5 million in the third quarter of 2023.
Martin: As a percentage of net sales <unk> marketing expenses leveraged 20 basis points to 12, 9% compared to 13, 1% in the third quarter of 2023.
Martin: General and administrative expenses were $27 8 million compared to $24 6 million in the third quarter of 2023.
Martin: As a percentage of net sales G&A expenses increased to 18, 6% from 17, 5% in the third quarter of last year.
Martin: Okay.
Martin: General and administrative costs deleverage year over year due to a 2 million dollar accrual in connection with the pending legal matter.
Martin: Please note that the legal accrual is reflected in G&A since it is a GAAP measure both excluded the non routine items from adjusted EBITDA or non-GAAP profitability measure.
Martin: We delivered adjusted EBITDA of $8 2 million compared to $4 7 million, representing a 75% increase from the same period last year ahead of expectations.
Martin: Adjusted EBITDA margin for the third quarter of 2024 increased 220 basis points to five 5% compared to three 3% in the same period last year.
Martin: Turning now to the balance sheet.
We ended the quarter with $23 1 million in cash and cash equivalents.
Martin: <unk> totaled $111 9 million at the end of the third quarter.
Martin: We ended the quarter with $106 million in inventory, an increase of 6% compared to a year ago.
Martin: We strategically increased our inventory to meet the demand across multiple channels from new store openings to expanded wholesale initiatives.
Martin: Additionally, as momentum continues to accelerate we're chasing into demand to position us well for the critical holiday season.
Martin: We're very confident with the freshness and quality of our inventory and feel we are well prepared as we enter the holiday season.
Martin: A quick update on our stock repurchase program in the third quarter, we repurchased 3380 shares for a total cost of approximately $83000.
Martin: As of the end of the quarter, we have approximately $1 6 million remaining in our share repurchase authorization.
Martin: Looking at ahead at the remainder of 2024, we're energized by the momentum across our brands and the growth opportunities across our portfolio that you've heard about this afternoon.
Martin: We are raising our full year outlook and anticipate delivering between $567 million to $572 million in net sales for the full year.
Martin: We also anticipate gross margins of approximately 57%.
Martin: We're anticipating selling expenses to be approximately 22.
Martin: 27% of net sales and marketing expenses of approximately 12, 5%.
Martin: We expect G&A expenses of approximately $100 million for the full year 2024.
Martin: For the year, we expect adjusted EBITDA of between 22, and 23 million weighted average diluted share count of $10 6 million capital expenditures of between $10 million to $12 million and an effective tax rate of a negative 4%.
Martin: In closing our performance this quarter has reinforced my conviction in our company.
Martin: Strategic growth initiatives, our ability to execute and the potential ahead.
Martin: We're really encouraged by the progress we have made over the last two years, which is driving strong top and bottom line growth and momentum.
Martin: Our more optimistic the inevitable future Vaca brands as we continue to grow our brands expand our market reach and tap into new segments of our total addressable market.
Martin: With our proven business model and our talented team is executing at the highest level of confidence in our ability to deliver exceptional value for our shareholders.
Martin: Thank you for your continued support and we look forward to updating you on our progress.
Martin: Now I will open up the call to your questions.
Speaker Change: Thank you the floor is now open for questions. If you have dialed in and I would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue.
Speaker Change: If you would like to withdraw your question simply press Star one again.
Speaker Change: If you are called upon to ask a question or listening via loudspeaker owner device. Please pick up your handset and ensure that your phone is not on mute when asking your questions.
Speaker Change: Just a moment will become piled the roster.
Speaker Change: Your first question comes from the line of Ashley <unk> of Keybanc. Your line is open.
Speaker Change: Hi, good afternoon, and thanks for taking our questions maybe just to start with the guide her four can you help us unpack some of the puts and takes here how we should be thinking about the balance between <unk> and ARPA growth and then just any color on current trends quarter to date.
Speaker Change: Hey, Thanks Ashley.
Speaker Change: Yes, I think as we head into Q4 I think we're certainly like I said in the call really energized by the performance we've seen over the last couple of quarters that were continued to be overall back to growth and I think really a standout for US is that is that 19, 5% growth in the U S. Coupled with gross margins up 260 basis.
Speaker Change: Points.
Speaker Change: Increasing EBITDA of 75% year over year to $8 million I think just really great performance.
Speaker Change: As we think about Q4, we feel really good about the composition and quality of the inventory as we head into the quarter.
Speaker Change: For us from a guide perspective expecting the same trends, we're seeing on the regional growth rates that we've seen though across kind of Q3 and Q2, we're expecting those to continue into Q4.
Speaker Change: As it relates to <unk> and.
Speaker Change: <unk> in orders I think.
Speaker Change: Yes.
Speaker Change: The increase in <unk> year over year, and probably more of the growth coming from order volume year over year.
Speaker Change: And I think thats kind of how we feel the business is performing and I'm feeling good as we head into the Q4 period.
Speaker Change: Okay got you that's super helpful.
Speaker Change: A follow up.
Speaker Change: As we think about additional marketplace and wholesale expansion going off patent packing, you're increasing some physical doors. There would you say you're open to continued expansion and increase the strategy you're assessing for any of your other brands in the portfolio. Thanks.
Speaker Change: Yes. Thanks, Ashley look I think we're really happy with the performance and the work all of the different brands are doing to test new.
Speaker Change: Omnichannel opportunities and certainly I think petaline pulp is one of the standouts the test that they did on.
Speaker Change: Nordstrom Dot com performed really well the co product on their February of this year.
Speaker Change: So really strong success and with that Nordstrom that have asked them to test in 40 doors in the Q4 period. So I think we're really looking forward to seeing the results there.
Speaker Change: And hopefully expanding on that great to see poly and also in in 2000 doors for Nordstrom.
Speaker Change: I think look we're open to like we said in our strategy.
Speaker Change: Putting our product in front of customers wherever they are and that's leaning into testing.
Speaker Change: Marketplace wholesale opportunities and also I think the what Princess Polly is doing in opening new stores.
Speaker Change: One store last year at <unk> six by the end of the year and I think just seeing really strong success, there and coming from just sales the EBITDA delivery, but also introducing the brand to new customers with over 30% of the customers in the stores are new to Princess Polly.
Speaker Change: Okay.
Speaker Change: Really appreciate the color there I'll pass it along.
Speaker Change: Your next question comes from the line of Dana Telsey of Telsey Group. Your line is open.
Dana Telsey: Hi, Good afternoon, as you think about the potential for tariffs coming forward going forward can you elaborate on what percentage of your goods are directly imported including how much comes from China and if there is a tariff how do you offset it whether it's changes in sourcing our pricing. Thank you.
Speaker Change: Thanks, Dana and looked at the majority of our product.
Speaker Change: Those come in from China.
Speaker Change: We're actively working with our manufacturing partners to reduce the exposure that we have there.
Speaker Change: That will take some time.
Speaker Change: And we are very fortunate with the test and repeat model that we have the brands or pretty much currently buying for Q1 next year.
Speaker Change: And also.
Speaker Change: Across petrol and pulp Princess Polly and minimal pretty much 100% of the product we have is exclusive to us.
Speaker Change: As we think about culture kings above 50% of it is exclusive to us. So we feel that if we need to take pricing actions. We can and look we're very focused on reducing or in concentration within China, we have a very.
Speaker Change: Nimble team of <unk>.
Speaker Change: Really strong performers and they're going to react and continue to adjust as we get clarity on any changes in the area.
Speaker Change: And can you just talk a little about on the wholesale channel.
Speaker Change: How is that doing what are you seeing in terms of growth there and how do you think of full price selling in the margins on that distribution channel. Thank you.
Speaker Change: Sure. Thanks, Dana Yeah, I think look we're really happy with the success that we've seen across the whole of the brands.
Speaker Change: These omni channel initiatives, and I think really coming.
Speaker Change: A nice part of that 19, 5% growth we saw in the U S. The expanding gross margins up 260 basis points and.
Speaker Change: Great delivery of EBITDA.
Speaker Change: At the moment all of the brands are performing well and in all of the channels that are in direct to consumer wholesale marketplace in stores and it's.
Speaker Change: It's really strong performance on full price selling I feel the the inventory.
Speaker Change: That we have on our own direct to consumer sites. In these channels is just performing really really well and we're continuing to chase into demand.
Speaker Change: Ross the brands and across the channels.
Speaker Change: Expecting that.
Speaker Change: To see that again with some nice strong Q4 performance like we've seen over the last couple of quarters.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Eric better of FCC Research. Your line is open.
Speaker Change: Good afternoon congratulations.
Speaker Change: Well I'll talk about the store so you anniversaried.
Speaker Change: Century city location in September.
Speaker Change: As kind of a learning experience from that and how you transport into the rest of the chain in the newer stores here.
Speaker Change: Yes, Thanks, Eric.
Speaker Change: I think we're really.
Speaker Change: We're really happy with the performance, we're seeing across all of the stores.
Speaker Change: We opened our first one in century city last year and and you know in Q3, we opened in Scottsdale, and San Diego and I would say over.
Speaker Change: Over the last couple of weeks, we opened in Boston I would say all of the new openings performing ahead of expectations from the from.
Speaker Change: All of our metrics I.
Speaker Change: I think what we're seeing is well I think first firstly people love the brand Princess Polly It just performs really really well and the fact that we can give them no debt in real life experience with the product where they can touch and feel it is really resonating with our customers and it's amazing the lines that they have for the.
Speaker Change: For the the the new openings of the store.
Speaker Change: <unk>, that's there and we are in the in the new openings. They are bigger than that the century city store century cities were 3800 square foot.
Speaker Change: The new stores are more around the 5000 square foot.
Speaker Change: And we're certainly seeing as we put more product in front of customers and more of that breadth of the range that they can see online they are reacting to it really really positively.
Speaker Change: We're also able to able to do more than just different categories.
Speaker Change: More accessories more on footwear and.
Speaker Change: And the other categories with that additional space. So I think we can see that look we can see the model is working really well customers are responding to us and we feel theres just a lot of opportunity for them.
Speaker Change: For Princess Polly to continue to put their customers put their products in front of more customers and broaden their omnichannel opportunities.
Speaker Change: On a year to California store is going to be open I guess in the next week or two to take full advantage of the holiday.
Speaker Change: We're working hard to get them open I think we just opened Boston last week. So the team are onto the next two and it'll be it'll be touch and go before they get them opened before Thanksgiving, but if not it will be it'll be really quickly afterwards.
Speaker Change: Okay, and a question about culture change.
Speaker Change: Test and repeat you mentioned.
Speaker Change: Ranjan.
Speaker Change: What percent of cultural things will work with the <unk> model.
Speaker Change: Should we be thinking about that and the opportunity for it going forward. Thank you.
Speaker Change: Yes, Thanks, Eric.
Speaker Change: Really happy with the firstly with the progress the team at <unk> are making and the team in the U S. The team in Australia.
Speaker Change: <unk> in the U S continues to do really well and we're making good progress on getting back to where we feel we should be in the Australia market.