a.k.a. Brands Holding Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company operates online fashion brands serving primarily Gen Z and Millennial customers. Figures are in U.S. dollars; financial amounts are in millions unless otherwise noted. Per-share figures reflect the one-for-12 reverse stock split effective September 29, 2023.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $140.8 | $155.8 | $397.3 | $462.6 |
| Gross profit / margin | $78.0 / 55% | $86.9 / 56% | $223.8 / 56% | $258.5 / 56% |
| Operating income (loss) | $(70.3) | $2.7 | $(78.0) | $3.5 |
| Net income (loss) | $(70.4) | $(0.1) | $(85.0) | $(2.8) |
| Adjusted EBITDA | $4.7 | $9.2 | $12.5 | $25.8 |
| Net cash from (used in) operations | — | $18.0 | $(11.4) | |
| Free cash flow | — | $12.6 | $(25.4) |
Q3 sales declined 10%; the company attributed the decrease to 6% fewer orders and a 5% lower average order value ($81 versus $85). For the first nine months, sales fell 14%, reflecting 11% fewer orders and a 4% lower average order value ($81 versus $84). Management cited adverse economic conditions, particularly in Australia and New Zealand. On a constant-currency basis, sales declined 8% in Q3 and 12% for the nine-month period.
The $68.5 million Q3 goodwill impairment drove the reported operating and net losses. It was non-cash and related to Culture Kings and Petal & Pup; Culture Kings goodwill was fully impaired, while $10.6 million remained for Petal & Pup. Excluding specified items, Adjusted EBITDA was $4.7 million in Q3 and $12.5 million year to date, both down from the prior-year periods. The filing reports no formal financial guidance.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $20.7 million, restricted cash was $1.9 million, and current assets totaled $154.2 million against current liabilities of $88.1 million.
- Total debt, net of issuance costs, was $106.7 million: $100.0 million in term-loan principal and $6.9 million drawn on the revolver. The all-in borrowing rate was 8.68%; the company reported compliance with debt covenants. A 100-basis-point rate change was estimated to affect annual interest expense by approximately $1.1 million.
- The company repaid $33.1 million of revolver borrowings during the first nine months. On October 19, 2023, it drew a further $5.5 million at an initial 8.70% rate. Management said cash, operating cash generation and available borrowing capacity should meet anticipated needs for the next 12 months, while cautioning that liquidity assumptions could prove incorrect.
- Operating cash flow improved primarily because inventory declined with reduced purchasing and sales of aged inventory. Inventory was $100.0 million at quarter-end, down from $126.5 million at December 31, 2022. Investing outflows were $5.5 million and financing outflows were $38.2 million for the nine months.
Material developments, outlook and risks
- Macroeconomic pressure, inflation, higher interest rates, weak Australian demand, discounting and higher merchandise returns pressured sales and profitability. Q3 gross margin fell one percentage point, partly due to targeted Culture Kings Australia discounting and returns, partly offset by lower air freight costs.
- Marketing expense increased 12% in Q3 as the company reported reduced marketing effectiveness, particularly in Australia. Management also identified customer acquisition and retention, inventory management, supply-chain disruption, foreign exchange and consumer demand as important risks.
- Goodwill testing also found mnml’s estimated fair value exceeded carrying value by only 1.4%; a 2% increase in the selected discount rate, holding other assumptions constant, would result in impairment. Further impairment is possible if conditions worsen.
- Foreign currency translation reduced accumulated other comprehensive income by $12.4 million year to date. The company estimated a hypothetical 10% Australian-dollar exchange-rate movement could cause an approximately $11.1 million translation fluctuation.
- Disclosure controls and procedures were deemed ineffective as of September 30 because two previously identified material weaknesses in internal controls over financial reporting remained unremediated: insufficiently designed/documented controls and inadequate segregation of duties. Management reported remediation work underway and stated the financial statements fairly present the company’s results.
- The company completed a one-for-12 reverse stock split and regained NYSE minimum-price compliance on October 12, 2023. It cautioned that the split may not sustain share price or liquidity. Its $2.0 million repurchase authorization had approximately $1.1 million remaining at September 30.
- The Rebdolls reporting unit was sold back to its founder in March 2023; the company retained an 18% interest deemed to have no value and recorded a $1.0 million pretax loss.
- Management did not expect ordinary-course legal proceedings to have a material impact, while noting litigation outcomes remain uncertain. No new material risk-factor changes were reported apart from NYSE listing and reverse-split risks.
Important facts for investors to verify
- Whether sales, order volumes, average order value and returns stabilize, especially in Australia and New Zealand.
- Whether the company sustains positive operating cash flow without relying on continued inventory reductions, and how the October revolver draw affects liquidity and interest costs.
- Whether weaker forecasts lead to further goodwill impairment, particularly for mnml and Petal & Pup.
- Progress in remediating the two internal-control material weaknesses and maintaining NYSE listing compliance.
- Debt covenant headroom, variable-rate exposure and the company’s ability to meet scheduled principal payments and other liquidity needs.