A.K.A. Brands Holding Corp. — Q3 2022 Form 10-Q
Business context and reporting period. The company operates an online fashion platform focused on Gen Z and Millennial customers, with five brands. This unaudited quarterly report covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $155.8 million | $161.8 million | $462.6 million | $379.8 million |
| Gross profit / margin | $86.9 million / 56% | $86.1 million / 53% | $258.5 million / 56% | $208.1 million / 55% |
| Operating income | $2.7 million | $1.2 million | $3.5 million | $11.1 million |
| Net loss | $0.1 million | $10.1 million | $2.8 million | $6.1 million |
| Adjusted EBITDA / margin | $9.2 million / 6% | $18.5 million / 11% | $25.8 million / 6% | $46.3 million / 12% |
For the nine months, operating cash flow was negative $11.4 million versus positive $20.6 million; free cash flow was negative $25.4 million versus positive $15.9 million. The company attributed the decline mainly to inventory build-up, payment timing and higher capital expenditures.
At September 30, cash and cash equivalents were $31.1 million, restricted cash was $1.9 million, and inventory was $136.9 million. Current assets were $200.4 million and current liabilities were $108.8 million. Debt carrying value was $129.9 million, including $25.0 million drawn on the revolving facility; the company reported covenant compliance. On October 4, it drew a further $15.0 million at an initial 6.50% rate. Operating lease liabilities totaled $41.1 million.
Material changes and management commentary
- Q3 sales declined 4% year over year, while management said sales and average order value would have been flat on a constant-currency basis. Lower average order value reflected currency movements and higher promotions.
- Nine-month sales rose 22%, driven principally by more orders, including the contribution of Culture Kings and mnml and growth in Princess Polly’s U.S. business. Average order value fell 3%, partly offsetting growth.
- Q3 gross margin increased to 56%, but the comparison benefited from a $6.0 million Culture Kings inventory fair-value charge in Q3 2021. Higher air freight costs and promotional activity weighed on current-period results.
- Nine-month operating income and Adjusted EBITDA fell despite sales growth, as selling, marketing and administrative expenses increased. Management cited less effective marketing, higher staffing and insurance costs, distribution expenses and store-related costs.
- Currency translation generated a $52.9 million loss in other comprehensive income for the nine months, contributing to accumulated other comprehensive loss of $64.0 million at quarter-end. Foreign-currency remeasurement also contributed $2.1 million of other expense for the nine months.
Outlook, risks, contingencies and unusual items
The filing provides no numerical earnings or sales guidance. Management said existing cash, expected operating cash generation and available borrowing capacity should meet anticipated cash needs for the next 12 months, while cautioning that liquidity assumptions could prove incorrect. The company also cited inflation, weaker consumer spending, promotional pressure, returns, supply-chain disruption, freight and input costs, marketing effectiveness, and currency and variable-rate debt exposure as risks.
Two previously identified material weaknesses in internal controls remained unremediated at September 30, 2022; management concluded disclosure controls were not effective. Management reported additional review procedures and said the financial statements fairly present the results in all material respects. The company reported no litigation expected to have a material adverse effect, while acknowledging the uncertainty of legal proceedings. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether inventory growth converts to sales and cash, given negative operating and free cash flow and the company’s stated inventory-related cash needs.
- Whether margins and Adjusted EBITDA recover as promotional activity, air freight costs and marketing efficiency evolve; Adjusted EBITDA is a non-GAAP measure.
- Debt and liquidity after the October 4 revolver draw, including variable interest costs, covenant headroom and required repayments.
- Progress in remediating the material weaknesses in financial reporting controls.
- The continuing effects of Australian-dollar movements on reported sales, earnings and equity.