A.K.A. Brands Holding Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited. The company is an online fashion retailer and brand platform targeting Gen Z and Millennial customers. It completed its IPO on September 24, 2021; the comparable results also reflect a changed ownership structure following the IPO reorganization.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $161.8 million | $63.3 million | $379.8 million | $145.1 million |
| Gross margin | 53% | 61% | 55% | 58% |
| Operating income | $1.2 million | $10.9 million | $11.1 million | $14.3 million |
| Net income (loss) | $(10.1) million | $7.3 million | $(6.1) million | $9.5 million |
| Adjusted EBITDA | $18.5 million | $12.9 million | $46.3 million | $19.9 million |
| Adjusted EBITDA margin | 11% | 20% | 12% | 14% |
Net loss attributable to a.k.a. Brands was $9.9 million for Q3 and $6.0 million for the nine-month period. Diluted loss per share was $0.11 for Q3 and $0.07 for the nine months.
For the nine months, operating cash flow was $20.6 million, capital expenditures were $4.7 million, and free cash flow (a non-GAAP measure) was $15.9 million. Investing cash outflow was $251.8 million, primarily reflecting the Culture Kings acquisition and purchase of Petal & Pup minority interests. Financing cash inflow was $261.5 million, including IPO and debt proceeds.
At September 30, cash and cash equivalents were $54.4 million, restricted cash was $2.2 million, and inventory was $95.8 million. Debt carrying value was $98.2 million, including $5.0 million current debt; operating lease liabilities totaled $27.0 million. The company reported $176.6 million in current assets and $87.5 million in current liabilities.
Changes and significant transactions
- Sales increased 155% year over year in Q3 and 162% for the nine months. Management attributed growth to higher order volume, higher average order value, Princess Polly’s U.S. growth, and the Culture Kings acquisition. Culture Kings contributed $62.8 million of Q3 sales and $121.1 million since its March 31 acquisition; results are not directly comparable without considering this acquisition.
- Q3 average order value rose to $89 from $79; orders increased 128%. For the nine months, average order value rose to $87 from $74 and orders increased 120%.
- Gross margin declined by 8 percentage points in Q3 and 3 points for the nine months. The company cited higher air freight costs, Culture Kings’ lower mix of exclusive products, and $6.0 million of Q3 ($12.3 million year-to-date) inventory fair-value step-up expense from the acquisition. Management expected the step-up inventory to sell through in Q4 2021.
- Q3 other expense included a $10.9 million loss on extinguishment of debt. In September, the company repaid and terminated its prior acquisition-related facilities and Summit Partners notes, paying $4.5 million in prepayment penalties and writing off $6.4 million of unamortized debt issuance costs.
- The IPO raised approximately $95.5 million net. A new senior secured facility provides a $100 million term loan and $50 million revolver. The facility requires leverage and fixed-charge-coverage tests beginning in Q4 2021; the company said it was compliant with covenants at September 30. It drew $15 million on the revolver on October 13, 2021.
- After quarter-end, on October 14, the company acquired mnml for $44.9 million in total consideration, including cash and 2,057,695 shares. Purchase accounting was not finalized in the filing.
Outlook, risks and controls
No specific revenue or earnings guidance is provided. Management said cash, operating cash generation, and available borrowing capacity should meet anticipated needs for at least 12 months, while cautioning that its liquidity assumptions could prove incorrect. It expects public-company compliance costs to increase.
Management identified ongoing COVID-19 effects, supplier and shipping disruption, elevated air freight and input costs, inventory forecasting and markdown risk, changing fashion preferences, customer acquisition and retention, acquisition integration, foreign exchange exposure, and reliance on suppliers concentrated primarily in China as important risks. A 10% Australian-dollar exchange-rate movement could produce an estimated $42.4 million translation fluctuation in accumulated other comprehensive income or loss. Management did not believe inflation had materially affected results at the time of filing, but said it was monitoring cost pressures.
Disclosure controls and procedures were deemed ineffective at September 30 because of material weaknesses involving control design and documentation, segregation of duties, and accounting and SEC-reporting resources. Management said additional review procedures were performed and the statements fairly present results in all material respects; remediation remained in progress. Management did not expect ordinary-course legal proceedings to have a material effect, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- How much reported growth reflects acquired Culture Kings sales versus organic, comparable-brand growth.
- Whether freight and inventory-related costs continue to pressure gross margin after the Culture Kings inventory step-up is sold through.
- Working-capital needs and inventory quality, given inventory growth and the company’s advance purchasing model.
- Debt balances and covenant headroom after the October revolver draw, and the effect of floating interest rates.
- Progress in remediating material weaknesses and establishing effective public-company reporting controls.
- Final purchase accounting and the operating contribution of mnml, as well as integration outcomes for recent acquisitions.