A.K.A. Brands Holding Corp. — Q1 2024 Form 10-Q
Business and period: The company operates a portfolio of four fashion brands: Princess Polly, Petal & Pup, Culture Kings and mnml. This unaudited report covers the three months ended March 31, 2024; comparisons are with the same 2023 quarter unless noted.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $116.8 million | $120.5 million |
| Gross profit / margin | $65.7 million / 56% | $68.5 million / 57% |
| Operating loss | $6.1 million | $6.6 million |
| Net loss | $8.9 million | $9.6 million |
| Adjusted EBITDA / margin | $0.9 million / 1% | $2.2 million / 2% |
| Net cash used in operations | $7.7 million | $3.0 million |
| Free cash flow | $(8.4) million | $(4.8) million |
At March 31, cash and cash equivalents were $21.9 million, inventory was $91.5 million, and current assets exceeded current liabilities by $51.1 million. Debt carrying value was $103.6 million, including $94.0 million of term debt and $10.5 million drawn on the revolving facility, net of debt issuance costs. The all-in borrowing rate was 8.44%. The company reported compliance with its debt covenants. It had $1.3 million of letters of credit outstanding.
Changes and drivers
- Sales declined 3%; management attributed the decrease mainly to a 4% drop in average order value, from $80 to $77, associated primarily with adverse conditions in Australia and New Zealand. On a constant-currency basis, sales declined 1%.
- U.S. sales increased to $77.1 million from $72.6 million, while Australia/New Zealand sales fell to $33.5 million from $41.4 million.
- Gross margin fell one percentage point. Management cited targeted inventory actions at Culture Kings Australia and growth in wholesale and marketplace sales, which generally carry lower margins and higher return rates; lower inbound freight and duties partly offset these effects.
- General and administrative expense fell 12%, to $22.7 million, including lower sales-tax penalties and interest, professional fees, amortization and insurance costs. Marketing expense increased 1% despite lower sales.
- Operating cash use increased by $4.7 million year over year, primarily because of greater inventory purchases; the prior-year period benefited from reduced buying and sales of aged inventory. Financing provided $8.9 million, including net revolving-facility proceeds, compared with $11.4 million of net financing cash use in Q1 2023.
Outlook, risks and notable items
The filing provides no numerical revenue or earnings guidance. Management said existing cash, expected operating cash generation and available borrowing capacity should meet anticipated needs for the next 12 months, while warning that liquidity assumptions could prove incorrect. Management also expects covenant compliance beyond the next 12 months, subject to business performance, seasonality and interpretation of credit-agreement terms.
Management cited inflation, higher interest rates, consumer spending pressure, promotional competition, weaker marketing returns, returns, inventory management, foreign exchange and international supply-chain and geopolitical risks as potential pressures on sales, margins, cash flows and goodwill. The filing notes prior impairment of goodwill associated with Culture Kings and Petal & Pup and says future impairment charges are possible; no goodwill impairment was recorded in Q1 2024.
- Subsequent borrowing: On April 11, 2024, the company drew an additional $8.0 million on its revolving line at an initial 8.69% rate.
- Legal matter: In April 2024, the company received a cease-and-desist letter alleging copyright infringement and related claims. The matter had not proceeded to litigation; a possible loss was considered reasonably possible, but the amount or range could not be estimated.
- Share repurchases: During Q1, the company repurchased 106,153 shares under its program for $1.1 million, at an average $10.03 per share. Total purchases, including shares surrendered for employee tax obligations, were 113,959 shares.
- Financial reporting controls: Management concluded disclosure controls were ineffective as of March 31 because two previously disclosed material weaknesses remained unremediated: controls over financial reporting processes and segregation of duties. Management said the weaknesses had not caused a financial-statement misstatement and described ongoing remediation, including an ERP implementation.
Important facts for investors to verify
- Whether sales, average order value and gross margin stabilize, particularly in Australia and New Zealand, and how wholesale and marketplace growth affects margins and returns.
- Inventory levels, working-capital cash use and the company’s ability to generate operating cash after the Q1 outflow.
- Debt balances, variable-rate interest expense, covenant headroom and liquidity after the April $8.0 million draw.
- Progress testing and remediating the two material weaknesses in internal controls.
- Developments in the copyright allegation and any resulting loss exposure; the filing states the potential loss is not estimable.