A.K.A. Brands Holding Corp. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone Q4 filing; fourth-quarter figures are included below. The company operates Princess Polly, Petal & Pup, Culture Kings and mnml, primarily through e-commerce and direct-to-consumer channels.
Financial performance and key metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $546.3 million | $611.7 million | Down 11% |
| Gross profit / gross margin | $300.3 million / 55% | $337.2 million / 55% | Gross profit down 11%; margin flat |
| Operating loss | $83.4 million | $172.0 million | Improved, partly reflecting lower impairment |
| Net loss | $98.9 million | $176.7 million | Improved by $77.8 million |
| Adjusted EBITDA | $13.8 million; 3% margin | $31.9 million; 5% margin | Down 57% |
| Operating cash flow | $33.4 million | $(0.3) million | Improved by $33.7 million |
| Free cash flow | $27.5 million | $(20.1) million | Improved by $47.5 million |
Sales fell mainly as orders declined 8% and average order value decreased 2%, from $82 to $80. The company attributed weaker demand primarily to macroeconomic conditions in Australia and New Zealand. On a constant-currency basis, sales declined 9%. U.S. sales rose to $315.5 million from $313.0 million, while Australia/New Zealand sales fell to $202.8 million from $268.9 million; rest-of-world sales were $28.0 million.
Lower inbound air-freight costs helped preserve the 55% gross margin despite targeted discounting at Culture Kings Australia and higher merchandise returns. Marketing expense rose 3% to $68.9 million, or 13% of sales, reflecting reduced marketing effectiveness, particularly in Australia. Net interest expense increased to $11.2 million from $7.0 million, largely due to higher rates on variable-rate debt.
Fourth quarter: Net sales were $148.9 million versus $149.1 million in Q4 2022. Gross margin was 51% versus 53%; net loss was $13.9 million versus $173.9 million, the prior-year quarter including a $173.8 million goodwill impairment. Adjusted EBITDA was $1.3 million versus $6.1 million.
Financial position, debt and liquidity
- At December 31, 2023, cash and cash equivalents were $21.9 million, down from $46.3 million. Inventory declined to $91.0 million from $126.5 million.
- Debt was $93.4 million net of issuance costs ($94.5 million principal): $90.1 million long-term and $3.3 million current. No revolver balance was outstanding at year-end; the $50 million revolving facility remained available, subject to its terms.
- The term loan’s all-in interest rate was 8.47% at year-end. The company reported compliance with debt covenants and expected compliance beyond 12 months. It stated that cash, operating cash generation and available borrowing capacity should meet anticipated needs for the next 12 months.
- Subsequent to year-end, the company drew $9.5 million on January 30, 2024 and $7.0 million on February 12, 2024 under the revolver, at initial rates of 8.45% and 8.43%, respectively.
- Operating lease liabilities totaled $42.9 million; future minimum lease payments were $50.3 million, including $9.5 million due in 2024. Planned 2024 capital expenditures were approximately $10–$12 million.
Operating cash flow improved substantially, principally because inventory was reduced through lower purchasing and sales of aged inventory; lower earnings partially offset the benefit. Free cash flow is a company-defined non-GAAP measure and excludes capital expenditures only through the stated reconciliation.
Material changes, outlook and notable items
- Net sales, orders and average order value declined year over year; active customers were 3.7 million versus 3.8 million, and orders were 6.8 million versus 7.4 million. Returns were approximately 18.5% of sales.
- The company recorded a $68.5 million non-cash goodwill impairment in 2023 for Culture Kings and Petal & Pup, after lowering forecasts amid higher interest rates and weak Australian demand. Culture Kings goodwill was fully impaired; $11.3 million remained for Petal & Pup. The company reported no further impairment in its fourth-quarter annual test. mnml’s fair value exceeded carrying value by only 1.4% at the August test; a 2% increase in its selected discount rate would have resulted in impairment.
- In March 2023, the company sold Rebdolls back to its founder, recorded a $1.0 million pretax loss and retained an 18% economic interest with no further rights; the investment was assessed as having no value.
- In September 2023, the company completed a 1-for-12 reverse stock split to regain NYSE minimum-price compliance. It also repurchased $2.1 million of shares under its program during 2023.
- No formal numerical financial guidance is provided in the filing. Management plans to expand wholesale and marketplace activity, open three to five additional Princess Polly U.S. stores in 2024, broaden selected product ranges and invest in infrastructure and technology. The company expects its brands to remain primarily direct-to-consumer in 2024.
- Management cited inflation, elevated interest rates, promotional competition, weaker marketing returns, higher returns and labor, freight and sourcing costs as pressures that may continue to weigh on sales and margins. Further goodwill impairment is possible if forecasts, discount rates or market valuations deteriorate.
- Jill Ramsey ceased serving as CEO in November 2023; CFO Ciaran Long remained interim CEO as the Board searched for a permanent CEO.
- Two previously identified material weaknesses in internal control over financial reporting remained unremediated at year-end. Management concluded disclosure controls and internal control over financial reporting were not effective as of December 31, 2023. Management nevertheless concluded the consolidated financial statements fairly present the company’s financial position and results in conformity with GAAP, following additional procedures. The auditor gave an unqualified opinion on the financial statements but did not opine on internal-control effectiveness.
- Summit Partners beneficially owned approximately 57.6% of common stock as of March 5, 2024, giving it majority voting control. The company reported ordinary-course legal proceedings that management did not expect to have a material adverse effect; outcomes remain uncertain.
Key investor verification points
- Assess whether sales and customer demand can stabilize, particularly in Australia and New Zealand, and whether U.S. growth can offset weakness elsewhere.
- Monitor gross margin, return rates, discounting, marketing efficiency and the sustainability of cash generation as inventory purchasing normalizes.
- Review debt balances and borrowing needs after the post-year-end revolver draws, variable-rate interest costs, covenant headroom and planned capital spending.
- Track goodwill assumptions and impairment sensitivity, especially for Petal & Pup and mnml, and verify whether the 2024 store expansion delivers expected returns.
- Follow remediation and testing of the two material weaknesses, ERP implementation, and the appointment of a permanent CEO.
- Consider the company’s controlled-company status, Summit’s voting influence, reverse-split history and NYSE listing compliance when evaluating the common stock.