A.K.A. Brands Holding Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company operates online fashion brands targeting Gen Z and Millennial customers, including Princess Polly, Petal & Pup, Culture Kings and mnml. Rebdolls was sold back to its founder in March 2023.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $136.0 million | $158.5 million | $256.5 million | $306.8 million |
| Gross profit / margin | $77.4 million / 57% | $87.4 million / 55% | $145.9 million / 57% | $171.6 million / 56% |
| Operating income (loss) | $(1.1) million | $(2.6) million | $(7.7) million | $0.8 million |
| Net income (loss) | $(5.0) million | $(4.2) million | $(14.6) million | $(2.7) million |
| Adjusted EBITDA / margin | $5.6 million / 4% | $5.9 million / 4% | $7.8 million / 3% | $16.5 million / 5% |
Q2 diluted loss per share was $0.04, versus $0.03 a year earlier; six-month diluted loss per share was $0.11, versus $0.02. Adjusted EBITDA is a non-GAAP measure.
- Revenue drivers: Q2 sales fell 14%, primarily as orders declined 11% and average order value fell 4% to $82. For the first half, sales fell 16%, with orders down 16% and average order value down 4% to $81. Management attributed the declines mainly to adverse macroeconomic conditions in Australia. On a constant-currency basis, Q2 sales declined 11%; first-half sales declined 14%.
- Margins and costs: Gross margin improved, supported by more full-price sales—particularly in the U.S.—and lower inbound air freight costs. Selling expense declined with lower sales and fulfillment efficiencies. Marketing and G&A declined in dollars but increased as a share of sales over the first half.
- Cash flow: First-half operating cash flow was $7.3 million, compared with cash use of $23.6 million in 2022; free cash flow was $3.7 million versus cash use of $29.4 million. Management attributed the improvement primarily to lower inventory from reduced buying and sales of aged inventory. Investing cash use was $3.7 million; financing cash use was $24.2 million, including debt repayments.
- Liquidity and debt: June 30 cash and cash equivalents were $25.9 million, plus $2.0 million restricted cash, versus $46.3 million and $2.1 million, respectively, at year-end. Reported debt carrying value was $120.0 million, including $7.0 million current; principal borrowings were approximately $121.3 million. The company repaid $21.1 million on its revolving facility during the first half. Its variable-rate facility carried an 8.33% all-in rate at June 30. The company reported compliance with debt covenants and said existing cash, operating cash flow and available borrowing capacity should meet anticipated needs for 12 months, while cautioning that assumptions could prove incorrect.
Material developments, outlook and risks
- Sales declined across the business amid inflationary pressure, weaker consumer spending, higher returns and a promotional environment. Active customers fell to 3.6 million from 3.9 million; orders and average order value also declined.
- Management cited reduced marketing efforts as a possible constraint on customer acquisition. It also noted risks from inventory management, shipping and supply disruptions, foreign exchange, and rising labor and procurement costs. No specific financial guidance was provided.
- The company recorded a $1.0 million pre-tax loss on the Rebdolls sale in Q1 and retained an 18% interest, which management determined had no value. The six-month period also included $0.7 million of severance expense and $0.5 million of sales-tax penalties in the Adjusted EBITDA reconciliation.
- On May 25, the board authorized up to $2.0 million of share repurchases. The company repurchased 673,839 shares for $0.3 million at an average $0.44 per share during Q2; approximately $1.7 million remained authorized at June 30.
- The NYSE notified the company in April that its 30-trading-day average share price was below the $1.00 minimum. It had six months from notice to regain compliance; a reverse split was identified as a possible remedy, subject to approvals. Failure to regain compliance could lead to delisting.
- Disclosure controls were deemed ineffective as of June 30 because two previously disclosed material weaknesses remained unremediated: insufficiently designed and documented controls across key processes, and inadequate segregation of duties. Management reported remediation work underway and said the financial statements fairly present the company’s position and results.
- Foreign-currency translation produced a $5.9 million first-half loss in accumulated other comprehensive loss. Management estimated that a 10% move in the Australian dollar could cause a $19.6 million translation fluctuation. A 100-basis-point interest-rate change was estimated to affect annual interest expense by approximately $1.2 million.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect, while acknowledging litigation uncertainty. It reported no material changes to previously disclosed risk factors other than the NYSE listing issue.
Important facts for investors to verify
- Whether sales, order volume, customer activity and average order value stabilize, particularly in Australia, and whether gross-margin gains can persist.
- Whether operating cash generation is sustainable after the inventory drawdown, and how cash needs, debt repayments and variable-rate interest affect liquidity.
- Progress in remediating the material weaknesses and the timing of effective control testing.
- Whether the company regains NYSE minimum-price compliance and whether any reverse split or delisting-related action occurs.
- The remaining capacity and future use of the share-repurchase authorization, alongside the company’s liquidity and capital requirements.