A.K.A. Brands Holding Corp. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 1, 2022. This is an annual report, not a standalone fourth-quarter filing. The company operates a portfolio of digitally native fashion brands, including Princess Polly, Petal & Pup, Rebdolls, Culture Kings and mnml. FY2021 includes Culture Kings from March 31 and mnml from October 14; FY2020 did not include either brand.
Financial and operating performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $562.2 million | $215.9 million |
| Gross profit / gross margin | $307.7 million / 55% | $126.4 million / 59% |
| Operating income / margin | $16.4 million / 3% | $22.1 million / 10% |
| Net income (loss) | $(6.1) million | $14.8 million |
| Adjusted EBITDA / margin | $62.4 million / 11% | $30.3 million / 14% |
| Cash from operating activities | $24.0 million | $21.7 million |
| Free cash flow | $16.2 million | $20.4 million |
Sales increased 160%, driven chiefly by 126% more orders, acquisitions and growth at Princess Polly in the U.S.; average order value rose 15%, from $75 to $86. Across the portfolio on a pro forma basis, the company reported 3.7 million active customers, 7.0 million orders and $87 average order value. Adjusted EBITDA and free cash flow are non-GAAP measures.
Fourth-quarter net sales were $182.4 million; gross margin was 55%, operating income was $5.3 million and net income was $23,000.
At year-end, cash and cash equivalents were $38.8 million, inventory was $115.8 million and current assets were $184.3 million against current liabilities of $108.0 million. Debt principal outstanding was $110.8 million (carrying value, net of issuance costs, was $108.8 million). The company had a $50 million revolving facility, undrawn at year-end. It reported compliance with debt covenants. Operating cash flow was positive, but investing cash outflow was $278.1 million, primarily reflecting acquisitions.
Material changes versus FY2020
- Gross margin fell 4 percentage points, to 55%, reflecting higher air freight, Culture Kings’ product mix and $15.9 million of acquisition inventory step-up amortization.
- Operating income declined despite substantial sales growth, as selling, marketing and general and administrative expenses increased. Marketing expense rose to $58.1 million from $17.9 million; G&A rose to $88.8 million from $28.1 million.
- The company recorded $21.6 million of total other expense, including $9.5 million interest expense and a $10.9 million loss on extinguishment of debt. The latter followed refinancing and included prepayment penalties and write-off of unamortized debt costs; it was a primary factor in the annual net loss.
- Culture Kings was acquired in March and mnml in October. The September IPO raised approximately $95.7 million net of underwriting discounts and offering costs; proceeds and new debt refinanced the earlier Culture Kings financing.
- Cash from operations increased, but free cash flow decreased as capital expenditures rose to $7.7 million from $1.3 million and inventory investment increased.
Outlook, risks and unusual items
No specific financial guidance or quantified forecast is provided. Management plans to grow brands organically, expand internationally, pursue acquisitions and invest in technology, infrastructure and fulfillment. It expected 2022 capital expenditures of approximately $18–20 million, including the Las Vegas Culture Kings store. Management believed cash, operating cash generation and borrowing availability would cover anticipated needs for at least 12 months, while cautioning that assumptions could prove incorrect.
Management cited uncertainty from COVID-19, consumer demand and fashion trends, inflation, freight costs and supply-chain disruption, particularly given sourcing concentration in China and significant Australian sales. Currency movements are also material: approximately 52% of 2021 sales came from outside the U.S. A hypothetical 100-basis-point interest-rate change was estimated to affect annual interest expense by about $1.0 million. The company reported no goodwill impairment and said pending ordinary-course legal matters were not expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
Controls: Disclosure controls and procedures were determined ineffective at December 31, 2021 because of material weaknesses. Management said weaknesses in control design/documentation and segregation of duties remained unremediated; the weakness involving accounting and reporting resources was considered remediated. The auditor gave an unqualified opinion on the financial statements but did not opine on internal-control effectiveness.
Important facts for investors to verify
- How much of reported sales and EBITDA growth reflects acquired businesses versus organic growth, and whether the acquired brands meet expected performance and integration targets.
- Whether gross margin recovers as acquisition inventory step-up costs roll off and freight pressures ease, and how shipping and marketing costs affect profitability.
- Inventory quality and working-capital needs, given year-end inventory of $115.8 million and management’s description of advance inventory purchasing.
- Debt servicing capacity, covenant headroom, variable-rate exposure and the effect of the $15 million revolver borrowing disclosed in January 2022.
- Progress and testing of remediation for the two remaining internal-control material weaknesses.
- Whether planned capital spending, the Las Vegas store and future acquisitions can be funded without materially weakening liquidity or increasing leverage or dilution.