a.k.a. Brands Holding Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company operates digitally native fashion brands targeting Gen Z and Millennial customers. Results include Culture Kings and mnml, acquired in 2021; this makes year-over-year comparisons less like-for-like. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $148.3 million | $68.8 million |
| Gross profit / margin | $84.2 million / 57% | $40.6 million / 59% |
| Operating income / margin | $3.3 million / 2% | $2.7 million / 4% |
| Net income attributable to a.k.a. Brands | $1.5 million; $0.01 diluted EPS | $1.5 million; $0.02 diluted EPS |
| Adjusted EBITDA / margin | $10.7 million / 7% | $8.3 million / 12% |
| Operating cash flow | $(14.9) million | $19.0 million |
| Free cash flow | $(17.5) million | $18.7 million |
Sales increased 116%, primarily from a 100% increase in orders, including acquired brands, and 6% higher average order value ($83 versus $78). Culture Kings and mnml contributed $59.5 million of Q1 2022 sales. On a constant-currency basis, sales growth was 121%.
Balance sheet and liquidity
- At March 31, 2022, cash and cash equivalents were $41.2 million; restricted cash was $2.5 million. Inventory was $120.6 million, up from $115.8 million at year-end.
- Total debt was $132.5 million, including $109.4 million of term-loan borrowings and $25.0 million drawn on the revolver, net of debt issuance costs. The current portion was $5.6 million. The company reported compliance with debt covenants.
- Management said cash, expected operating cash generation, and available borrowing capacity should meet anticipated needs for the next 12 months, while noting liquidity assumptions could prove incorrect. The credit agreement includes leverage and fixed-charge-coverage covenants and potential excess-cash-flow prepayments.
Material changes and cash flow drivers
- Gross margin declined two percentage points, primarily from higher air freight costs, Culture Kings’ lower mix of exclusive products, and $0.7 million of mnml inventory step-up amortization.
- Marketing expense rose to 11% of sales from 9%, reflecting acquired-brand spending and increased customer acquisition investment. Selling expense remained 27% of sales; general and administrative expense declined to 17% from 20%.
- Operating cash flow fell by $33.9 million year over year, chiefly due to inventory build and payment timing for payables and accruals. Management linked inventory growth to Culture Kings’ U.S. expansion. Capital spending was $2.6 million, including the Las Vegas store build-out.
- Investing cash outflow was $4.7 million, compared with $226.0 million in Q1 2021, when the Culture Kings acquisition occurred. Financing provided $22.3 million, including $25.0 million of revolver proceeds.
- Foreign-currency translation generated $14.4 million of other comprehensive income. The company reported no goodwill or intangible-asset impairment in the quarter.
Outlook, risks, and controls
The filing provides no specific financial guidance. Management cited continuing COVID-related supply-chain delays, increased use and cost of air freight, labor and materials pressures, shipping disruption, consumer-demand uncertainty, returns and inventory risks, foreign-exchange volatility, and variable interest rates. The company said these factors could pressure sales, costs, cash flows, and margins. It also stated that legal proceedings in the ordinary course were not expected to have a material adverse effect, while acknowledging litigation uncertainty.
Disclosure controls and procedures were judged ineffective as of March 31, 2022 because two previously identified material weaknesses remained unremediated: insufficiently designed, implemented, and documented financial-reporting controls, and inadequate segregation of duties in manual and IT-based processes. Management described remediation work underway but said effectiveness still required further implementation and testing.
Important facts for investors to verify
- How much reported sales growth reflects acquired brands versus organic growth, and whether customer and order trends persist.
- Whether gross-margin pressure from freight, product mix, and inventory accounting eases or continues.
- Inventory levels, working-capital movements, and the timing of supplier payments given negative operating and free cash flow.
- Debt, borrowing availability, covenant headroom, and exposure to floating interest rates and foreign currencies.
- Progress in remediating and testing the disclosed material weaknesses in internal controls.