A.K.A. Brands Holding Corp. — Q2 2022 Form 10-Q
Business and period. The company operates a portfolio of five digitally native fashion brands targeting Gen Z and Millennial consumers. This unaudited quarterly report covers the three and six months ended June 30, 2022. Six-month comparisons are affected by acquisitions: 2022 includes Culture Kings and mnml for the full period, while 2021 includes Culture Kings only from March 31 and excludes mnml.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $158.5m | $149.2m | $306.8m | $218.0m |
| Gross profit / margin | $87.4m / 55% | $81.4m / 55% | $171.6m / 56% | $122.0m / 56% |
| Operating income (loss) | $(2.6)m | $7.3m | $0.8m | $10.0m |
| Net income (loss) | $(4.2)m | $2.2m | $(2.7)m | $4.0m |
| Adjusted EBITDA | $5.9m | $19.4m | $16.5m | $27.8m |
| Adjusted EBITDA margin | 4% | 13% | 5% | 13% |
Revenue and operating trends. Q2 net sales grew 6%; orders increased 12%, partly offset by a 4% decline in average order value (AOV) to $85. For the first half, sales rose 41%, with orders up 48% and AOV down 2% to $84. Management attributed lower AOV to increased promotions and returns. Active customers were 3.9m versus 2.9m in the comparable periods. On a constant-currency basis, Q2 sales increased 11%; first-half sales increased 45%.
Gross margin was unchanged in both comparisons, but operating expenses rose faster than sales. Q2 selling, marketing and G&A expenses were 29%, 12% and 16% of sales, respectively, versus 27%, 10% and 13%. Higher marketing spend and weaker marketing-channel effectiveness, higher payroll and insurance costs, and a $1.3m fulfillment-provider transition charge contributed to expense pressure. Q2 also included a $1.2m foreign-exchange loss in other expense.
Cash flow and balance sheet. In the first half, operating cash flow was $(23.6)m versus $7.5m provided in 2021; free cash flow was $(29.4)m versus $4.1m. Management cited inventory accumulation, lower earnings and higher capital spending. Inventory increased to $143.9m from $115.8m at year-end, primarily to support Culture Kings’ U.S. growth. Capital expenditures were $5.8m.
At June 30, cash and cash equivalents were $29.1m (plus $1.7m restricted cash), compared with $38.8m at December 31, 2021. Debt was $131.2m, including $25.0m drawn on the revolver; debt net of cash and cash equivalents was approximately $102.1m. Current assets were $208.8m and current liabilities $108.9m. The company was in compliance with its debt covenants. It reported $5.6m of scheduled principal payments over the next 12 months and says available cash, operating cash flow and borrowing capacity should cover anticipated needs for at least 12 months, while cautioning liquidity assumptions may prove incorrect.
Six-month comprehensive loss was $27.3m, including a $24.6m currency-translation loss. No goodwill or intangible-asset impairment was recorded.
Outlook, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management describes inflation-driven consumer pressure, shifts in spending, a slower-than-expected Australian recovery, weaker marketing returns, promotional competition and higher returns as factors pressuring sales and profitability. COVID-related supplier and logistics disruptions have delayed shipments and increased use of more costly air freight. Further risks include inventory levels, shipping costs, foreign-exchange movements, consumer demand and customer acquisition and retention.
Variable-rate debt exposes the company to rate increases; management estimates a 100-basis-point rate change would alter annual interest expense by approximately $1.0m at June 30 borrowings. Legal matters arise in the ordinary course; management does not expect them to have a material effect, but notes litigation outcomes are uncertain.
Controls and reporting. Management concluded disclosure controls were not effective at June 30 because two previously identified material weaknesses in financial-reporting controls and segregation of duties remained unremediated. Remediation work is underway; management performed additional post-close procedures and stated the financial statements fairly present the reported results in all material respects.
Important facts for investors to verify
- Whether inventory growth converts into sales without further discounting, markdowns or cash-flow strain.
- Whether order growth, customer acquisition and retention can offset lower AOV and weaker marketing efficiency.
- How much reported growth reflects acquisitions versus organic and constant-currency performance.
- Progress in restoring positive operating cash flow and remediating the material control weaknesses.
- Debt covenant headroom, variable-rate exposure and liquidity if operating results or cash generation weaken.
- Foreign-exchange effects, particularly AUD movements, on earnings and reported equity.