A.K.A. Brands Holding Corp. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. The company operates an online fashion brand portfolio serving primarily Gen Z and Millennial customers. In March 2023, it sold its Rebdolls reporting unit back to its founder.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $120.5 million | $148.3 million |
| Gross profit / margin | $68.5 million / 57% | $84.2 million / 57% |
| Operating income (loss) | $(6.6) million | $3.3 million |
| Net income (loss) | $(9.6) million; $(0.07) per share | $1.5 million; $0.01 per share |
| Adjusted EBITDA / margin | $2.2 million / 2% | $10.7 million / 7% |
| Operating cash flow | $(3.0) million | $(14.9) million |
| Free cash flow | $(4.8) million | $(17.5) million |
At March 31, cash and cash equivalents were $30.2 million, with an additional $2.0 million of restricted cash. Total debt was $132.4 million, including $30.0 million drawn on the revolving facility; the company was in compliance with debt covenants. Current and long-term operating lease liabilities totaled $43.0 million. The company reported total assets of $475.5 million and stockholders’ equity of $235.5 million.
Changes and drivers
- Sales fell 19% year over year. Orders declined 17% to 1.5 million and average order value fell 4% to $80; management said currency effects and higher promotions contributed to the AOV decline. On a constant-currency basis, sales declined 16% and AOV was flat.
- Active customers decreased to 3.6 million from 3.8 million. Gross margin held at 57%, but operating expenses rose to 62% of sales from 55%, contributing to the operating loss.
- Adjusted EBITDA fell to $2.2 million from $10.7 million. Management cited weaker marketing effectiveness and a more promotional environment; marketing expense decreased 6% in dollars but increased as a share of sales.
- Interest expense increased to $2.9 million from $1.3 million, primarily reflecting higher rates on variable-rate debt. Other expense included a $1.0 million loss on the Rebdolls sale.
- Operating cash use improved by $11.9 million year over year, primarily because of lower inventory purchases and sell-through of aged inventory. Inventory declined to $112.5 million from $126.5 million at year-end.
Outlook, risks and notable items
- Outlook: The filing provides no specific revenue, earnings or other numerical guidance. Management said available cash, operating cash generation and borrowing capacity were expected to meet anticipated needs for the next 12 months, while cautioning that liquidity assumptions could prove incorrect.
- Debt and subsequent events: The facility was amended effective April 4, 2023 to use Term SOFR; the reported all-in rate was 7.92%. The company repaid $10 million of revolving debt on May 8, after repaying $10 million during Q1. Variable rates and covenant requirements remain relevant liquidity risks.
- NYSE listing: On April 12, the company received notice that its 30-trading-day average share price was below the $1.00 minimum. It had six months to regain compliance and said a reverse stock split could be considered, subject to approvals.
- Controls: Management concluded disclosure controls were not effective as of March 31 because two previously identified material weaknesses in financial reporting controls and segregation of duties remained unremediated. Management stated the financial statements fairly present the company’s results; remediation and testing were ongoing.
- Operating risks: Management highlighted inflation, weaker consumer spending, rising rates, promotional competition, returns, marketing efficiency, inventory management, supply-chain disruption and foreign-exchange movements. A 100-basis-point rate change was estimated to affect annual interest expense by about $1.3 million; a 10% AUD exchange-rate change could cause about $7.5 million of translation fluctuation in accumulated other comprehensive loss.
- The company retained an 18% interest in Rebdolls after the sale but assigned it no value because recovery was considered remote. Management did not expect ordinary-course legal proceedings to have a material impact, while noting litigation outcomes remain uncertain.
Investor facts to verify
- Whether sales, customer activity and order trends stabilize, and whether promotional activity and returns continue to pressure profitability.
- Progress in restoring positive operating cash flow and managing inventory while maintaining adequate liquidity.
- Debt repayment, floating-rate interest costs, covenant compliance and borrowing availability.
- NYSE minimum-price compliance and any decision regarding a reverse stock split.
- Whether the company remediates and tests the two material weaknesses in internal controls.