a.k.a. Brands Holding Corp. (AKA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the a.k.a. Brands Holding Corp. Third Quarter 2021 Earnings Conference Call. [Operator Instructions] At this time, I will turn the call over to Emily Goldberg, Head of Corporate Communications. Go ahead, Emily.

Good afternoon, everyone. Thank you for joining a.k.a. Brands Third Quarter Conference Call to discuss the results we released this afternoon, which can be found on our website at ir.akabrands.com. With me on the call are Jill Ramsey, Chief Executive Officer; and Ciaran Long, Chief Financial Officer. Before we get started, I would like to remind you of the company's safe harbor language. Management may make forward-looking statements, which refer to expectations, projections or other characterizations of future events, including guidance and underlying assumptions. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially than those expressed. For a further discussion of the risks related to our business, please see our filings with the SEC. Please note, we assume no obligation to update any such forward-looking statements. This call will contain non-GAAP financial measures, such as adjusted EBITDA and adjusted EBITDA margin. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website. Now I would like to turn the call over to Jill.

Good afternoon, everyone, and thanks for joining us. We're excited to be hosting our first earnings call as a public company and even more excited to discuss our strong third quarter performance. I'll begin with an overview of our results and highlights from our brands and then outline our growth strategies. Ciaran will then take you through the details of our financials and provide our full year outlook, and then we'll open it up for questions. I'm proud of the strong performance our brands delivered in the third quarter, demonstrating the power of our platform and the talent of our teams. We drove strong growth across our brands while navigating COVID-19 and global supply chain dynamics. For the third quarter, net sales grew by 155% to $161.8 million. And pro forma for the acquisition of Culture Kings, net sales increased 44% from the third quarter last year. And active customers grew 54% across our brands. Our brands achieved growth across all regions, particularly in the U.S., where net sales increased 84% on a pro forma basis, making the U.S. our largest market, and momentum has continued into the fourth quarter. As many of you know, Australia was in strict lockdown for most of the quarter due to a rise in COVID-19. Despite lockdowns, curfews and store closures, our Australian business grew 7% on top of very strong growth last year, further proving our agility, resiliency and the strength of our brands and teams. We are also encouraged by the vaccination rollout and reopening trends we see in Australia. 89% of their population has received at least 1 vaccine dose, and almost all lockdown restrictions have been lifted. All of our Culture King stores are now open, and traffic is rebounding while digital sales also continue to grow. Ciaran will provide more details on COVID-19 impacts in the region. Turning to Rest of World. On a pro forma basis, our brands grew 101%, largely driven by Culture Kings' expansion into New Zealand and growing demand for Princess Polly and Culture Kings in Europe and Asia. Over the past few months, we have discussed our mission and strategy with many of you, which is to accelerate the growth of direct-to-consumer fashion brands for the next generation. We have a compelling group of high-growth brands that customers love. Princess Polly, Culture Kings, Petal & Pup, Rebdolls and our most recent acquisition, mnml. All of them are digital first and masters at connection with customers on social media through a constant stream of great content and new fashion. At a.k.a., we accelerate the growth of our brands through our next-generation retail platform, providing expertise to achieve greater scale and profitability. We know we are better together. Across our brands, we share best practices, like data-driven merchandising and efficient social-led marketing as well as share vendors for cost leverage and synergies. And through our network of best-in-class third-party tech partners, we get early access to the latest digital capabilities and innovation. Our unique model positions us to achieve our vision to become the global leader in direct-to-consumer fashion for the next generation. Our strong performance demonstrates that our strategy is working. I'll share some highlights from our brands this quarter, beginning with Princess Polly, our largest and first brand on the platform. They have pioneered effective next-gen strategies such as test and repeat buying and micro influencer-led marketing, both of which we are sharing across our brands, creating powerful network effects. Princess Polly outperformed expectations this quarter across all regions, led by strong growth in the U.S. As the U.S. reopened and consumer fashion needs changed, Princess Polly quickly adjusted merchandise from stay-at-home wear to going out dresses and partywear. As a reminder, their test and repeat approach to buying gives them agility to react quickly to trends and get new fashion to customers in just 30 to 45 days. This quarter, they increased the number of new weekly styles introduced by 13% over the prior quarter, and they also expanded the penetration of exclusive merchandise, which drives higher gross margins. They also launched a sustainable fashion line, converting 5% of their assortment to products made from lower impact materials and saw strong customer response exceeding expectations. These merchandising strategies were supported by a marketing campaign celebrating the U.S. reopening and summer holidays. With 75% of their customers in either high school or college, Princess Polly continues to focus their marketing strategy on students. Their back-to-school campaign powered by influencers, produced strong week-over-week growth. They also rolled out a new university-based influencer program and received 20,000 ambassador applicants. We're pleased with Princess Polly's acceleration in the U.S. and confident about their continued growth ahead. Turning to Culture Kings, a leading Australian streetwear retailer with a cult-like following and unique blend of music, sports and fashion. We acquired Culture Kings in March of this year, doubling a.k.a. in size. While they are a digital-first retailer, Culture Kings is notably our only brand with stores. These highly experiential and innovative stores are like no other and set a new standard for the future of retail. Their stores serve as powerful marketing engines with the theatrical and celebrity event format that fuels type in demand and provides powerful content for their digital channels. While the stores have since reopened, notably 5 of 8 stores were closed for the majority of the third quarter due to COVID-19. The team quickly shifted marketing spend and inventory to focus on the digital business and the U.S. market. Both of which performed well. We're proud of how the team navigated the COVID-related challenges in Australia and the resulting third quarter growth they achieved. This quarter, Culture Kings opened their eighth and most innovative store yet in Auckland, New Zealand with record performance. On opening day, there was a 6-hour line to enter the store, demonstrating the power of the brand. But just 3 weeks after opening, the store was closed due to lockdowns. During this time, robust growth in New Zealand continued online and accelerated throughout the quarter. The success of Culture Kings' first market expansion outside of Australia further bolsters our confidence in our ability to expand this popular brand to other markets. Next, I'll touch on Petal & Pup and Rebdolls. We are very pleased with Petal & Pup's growth this quarter. It is now our fastest-growing brand and following the same growth curve as Princess Polly in the U.S. By leveraging best practices from Princess Polly, we have seen Petal & Pup's growth accelerate, which reinforces the strength of our platform. All of Petal & Pup's buying is data-driven and on the test and repeat model that Princess Polly develops. And Petal & Pup is now heavily leaning into the micro-influencer strategy also innovated by Princess Polly. In July, they launched U.S.-based distribution from a distribution center shared with Princess Polly. This improves the customer experience by reducing shipping time and also provided shared cost leverage and learnings. Petal & Pup excels in trendy, event-driven fashion, and we've seen a great rebound in dresses and occasion wear, which was the brand's fastest-growing category this quarter. As we continue to scale the brand in the U.S., we also appointed a new brand President, Victoria Perry, who is based in San Francisco. Victoria is a seasoned fashion and e-commerce executive, and we are confident that she will continue to accelerate the growth of the brand in the U.S. and globally. Rebdolls, which specializes in trendy fashion and extended sizes for ethnically diverse young women also delivered solid growth this quarter. They launched new collaborations with relevant influencers and increase their brand awareness and credibility through authentic and creative content focused on body positivity and size inclusivity. While small today, we are confident in Rebdolls' long-term potential as it caters to an attractive and underserved customer. Turning now to mnml, the newest brand to join our platform, which we acquired in October. Ciaran will touch more on the financial details surrounding the transaction, but I'll quickly share a few brand highlights and why it is such a good fit for our portfolio. mnml is a premier men's streetwear brand in the U.S., which bolsters our position in the space. A great strategic fit, mnml is a proven next-gen direct-to-consumer brand that has mastered modern men's fashion and provide sought-after trends at a premium quality and affordable price. They have a track record of high growth and profitability and employ a data-driven approach to merchandising and marketing. The brand has built a highly loyal following and have a long runway for growth and profitability in the U.S. and globally. We are confident that this already strong brand can accelerate further and benefit from a.k.a. platform synergies and complements Culture Kings particularly well. mnml excels in denim and bottoms, which perfectly complements Culture Kings' core categories in hats, hoodies, tees and sneakers. mnml is well established in the U.S., and we are also confident that we can successfully bring the brand to Australia. With his strong vision and leadership, Founder and CEO, Matt Fields, has assembled a highly talented team, and we're thrilled to welcome them to a.k.a. Brands. Looking forward to the fourth quarter and beyond, momentum in our brands continues to be strong, and we remain focused on growing our brands organically to drive profitable and sustainable long-term growth. Before turning to our growth strategies, I would like to comment briefly on our supply chain, a topic on everyone's mind. We experienced minimal disruption to our supply chain in the third quarter, and our inventory is well positioned for the holiday season in the fourth quarter. There are a couple of reasons we have fared better than many during the global supply chain disruption. First, as discussed, we do test and repeat buying for the majority of our inventory, which provides a rapid 30 to 45 days to market. To achieve this speed, we rely primarily on air freight, so we do not have a material amount of merchandise delayed at sea, like many others. While we've seen air freight costs increase, the pricing pressure is far less drastic than cost increases related to shifting from sea to air. Second, we have a diversified group of 271 suppliers across 14 countries with no single supplier making up more than 13% of our sales. And we only have 1 small supplier in Vietnam, so we were not materially impacted by the closure there, and we were able to quickly adjust. Additionally, by operating at scale in 2 hemispheres, we are uniquely able to manage inventory and marketing spend across 2 seasons and regions. This competitive advantage, combined with our flexible business model has allowed us to remain agile during different phases of the pandemic for nearly 2 years now. And we are well prepared for the reopening of Australia with the right assortment and strategies in place. Overall, we believe we are well positioned in the fourth quarter and beyond as we continue to navigate dynamic supply chain and COVID-19-related challenges. Next, I'll turn to our near- and long-term strategies to drive growth across our brands. Beginning with the U.S., our highest priority market right now, we are energized by the tremendous growth potential we see across our brands. Following the successful expansion of Princess Polly in the U.S., which now represents the majority of their sales, we have applied their U.S. growth learnings to Petal & Pup, and we are doing the same with Culture Kings as they scale their business here. We are on track to deliver on our expansion plans for Culture Kings. We have hired a head of U.S. to build out a team and plan to open a distribution center in the front half of next year in California. We are also working on plans to open a Culture Kings store next year and look forward to sharing more details on that soon. For all of our brands, as we continue to grow in the U.S., we have strategies in place to acquire new customers, deepen loyalty with our existing customers and expand our high-quality merchandise assortment. First, I'll touch on our customer initiatives. Our brands are masters at content creation, and we will continue to capitalize on our social media strength by growing our network of micro influencers, which is a highly efficient strategy for acquiring new customers. We're also leaning in on popular platforms like TikTok as we continue to follow customer traffic to new social media platforms as they evolve. We also see an opportunity to further drive customer retention and frequency of visits that will grow lifetime value such as loyalty programs. Princess Polly is lapping the 1-year anniversary of their loyalty program, which launched in October of 2020. While it's still early days, the program has exceeded expectations, and we've seen more than double the spend coming out of our loyalty members. We'll take the best practices from Princess Polly to roll out loyalty programs to our other brands. Next, I'll touch on our merchandising initiatives. As part of our model, our brands are constantly introducing new styles, designer collaborations and exclusive items, which keep customers engaged and frequently visiting as seen in our customer retention rates of 63% in 2020 across a.k.a. Brands. Additionally, we have opportunities for strategic assortment expansion. We're pleased to share that Princess Polly is launching extended sizing with their new curve collection in the fourth quarter, which we know will expand our audience and customer base. And building on the successful launch of their sustainable fashion assortment in the third quarter, Princess Polly plans to expand their sustainable offering in the fourth quarter with a goal to offer 20% of new styles made from renewable fabrics by the end of the year. And at Culture Kings, we are working to expand our print-on-demand graphic tee capabilities, which allow us to realtime react to customer trends and scale T-shirt print production to meet demand. While our near-term focus is in the U.S., longer term, we will also grow our brands internationally beyond the U.S. and Australia. As we've mentioned, we're seeing highly encouraging early demand signals for Princess Polly in the U.K. and Europe and for Culture Kings in the U.S. and Asia. We will continue to test and learn our way into new digitally savvy markets, by localizing the customer experience and tailoring marketing spend to expand awareness and grow our brands internationally over the next several years. And lastly, while organic growth is our top priority, we view M&A as incremental growth drivers for the future. We have a highly disciplined approach that has led to successful M&A deals. As a reminder, we're searching the world for the best high-growth, digital, direct-to-consumer and profitable brands to add to our portfolio. We believe we can augment our 20% annual long-term growth targets with 1 to 2 acquisitions per year. We will continue to be disciplined and very selective in our M&A strategy and only add brands that meaningfully enhance our portfolio. Before I pass it to Ciaran, I want to express my gratitude to all of our teams at a.k.a. and across our brands for delivering a great first quarter as a public company. Our IPO in September was a tremendous milestone, and we could not have done it without all of our teams and partners. The opportunity and runway ahead of us is significant, and we could not be more excited to execute our strategy for the quarters and years to come. I'm confident that a.k.a. Brands is the future of fashion, and we're just getting started. With that, I'll turn it over to Ciaran now to discuss our third quarter performance and our guidance in more detail.

Thank you, Jill, and good afternoon, everyone. Before I provide more details on our third quarter results and outlook for the remainder of the year, I would also like to take a moment to thank our employees for their dedication and commitment throughout the pandemic. Turning now to our third quarter performance. We are pleased to have delivered results ahead of our expectations despite the challenges presented by the COVID-related lockdowns in Australia. Our performance this quarter further demonstrates the strength of our business as well as our operating platform that we believe represents the future of retail. For the third quarter, net sales grew 155% to $162 million compared to $63 million last year. On a constant currency basis, net sales rose 156%. Adjusting for the inclusion of Culture Kings in the prior year, our pro forma net sales increased 44% or 42% in constant currency. Culture Kings net sales grew 29% as compared to the third quarter last year despite the disproportionate impact of COVID lockdowns in Australia. Pro forma average order value increased 6% to $89 compared to the prior year third quarter. In part, due to strategic price increases. The number of orders increased 37% to $1.8 million compared to the prior year, including Culture Kings. For the trailing 12 months, our pro forma active customers increased 56% year-over-year to $3.1 million. The growth across these performance -- key performance metrics reflects the continued momentum in our brands. Now I will provide a few highlights from our 3 regions on a pro forma basis, again, assuming Culture Kings was included in last year's results. Third quarter net sales in the U.S. increased to $76 million, up 84% from the prior year third quarter, now making it our largest market at 47% of net sales as compared to 37% last year. Princess Polly continues to be the primary driver of our growth in the U.S. as brand awareness and loyalty continue to build. Australia net sales of $64 million grew 7% from $60 million in the prior year. The softer top line growth was due to the impact of COVID-related lockdowns that were in place for the majority of the third quarter. Despite the lockdowns, we continue to outperform our internal expectations, demonstrating the strength of our brands in Australia. Turning to Rest of the World. Net sales of $21 million increased 101% from the third quarter in the prior year on a pro forma basis. The growth was primarily driven by the expansion of Culture Kings to New Zealand, further supporting the resonance of the brand outside of Australia in addition to the traction we're seeing in Princess Polly in Europe and the U.K. in particular. Moving to profitability. Our gross profit for the third quarter increased 124% to $86 million. Our gross margin rate was 53.2% as compared to 60.8% in the same period last year. The 760 basis point decline in gross margin rate was the result of an approximately $6 million or 370 basis points noncash purchase accounting charge associated with the Culture Kings acquisition. The balance of the decline was roughly split between higher air freight expense and the inclusion of Culture Kings, which carries a lower gross margin rate as compared to our other brands due to the lower mix of exclusive product. The gross margin decline was partially offset by the implementation of targeted price increases at Princess Polly and Petal & Pup. We continue to generate strong full price sell-through and best-in-class return rates due in part to our proven test and repeat strategy, an [ entire ] mix of exclusive product. Selling expenses in the quarter were $41 million compared to $16 million in the prior year. As a percentage of sales, selling expenses increased 30 basis points to 25.1% compared to 24.8% in the third quarter of 2020. This increase was driven by an expansion in the number of orders shipped and the inclusion of Culture Kings. Marketing expense increased to $15 million from $5 million. The increase in marketing dollars was driven primarily by the inclusion of Culture Kings, which increased its investment in advertising spend as the brand looks to scale in new geographies and tested new marketing opportunities. As a percentage of sales, marketing expense was 9.6% a 230-basis-point increase compared to the third quarter of 2020, which saw exceptional marketing efficiency. Our G&A expense of $29 million increased due primarily to an increase in salaries and related equity compensation associated with new talent, the inclusion of Culture Kings, additional professional fees and transaction costs. Excluding the $1.6 million of transaction costs and $4.9 million of noncash stock-based compensation expense related to the IPO, G&A expenses were $22 million. As a percent of sales, G&A was 17.9% of sales as compared to 11.5% in the same period last year. In addition to GAAP measures, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was $19 million versus $13 million in the prior year and $28 million on a pro forma basis. As a result -- as a percent of sales, our adjusted EBITDA margin of 11.5% compared to 20.4% in the prior year third quarter and $24.6 million on a pro forma basis. Our adjusted EBITDA margin exceeded our expectations largely due to the better-than-expected results in Australia. During the quarter, we had an income tax benefit of $4 million compared to an income tax expense of $3 million in the prior year. The income tax benefit was related to the loss on extinguishment of debt from the prepayment and termination of our prior debt as well as an increase in interest expense related to the prior debt. Our net loss attributable to a.k.a. for the quarter was $10 million or a loss of $0.11 per share compared to a net income attributable to a.k.a. of $7 million or $0.10 per share in the prior year. On an adjusted basis, our net income attributable to a.k.a. for the quarter was $3 million or $0.04 per share compared to $7 million or $0.10 per share in the prior year. Weighted average shares outstanding were approximately 88.4 million in the third quarter of 2021. Turning to the balance sheet. We ended the quarter with $54 million in cash and cash equivalents and $98 million in debt. As part of our IPO, we reduced our debt levels by approximately $70 million from $168 million of debt borrowed during the first half of 2021. At the end of the quarter, we had total liquidity of $104 million, including $50 million available on our credit facility. Inventory at the end of the quarter was $96 million compared to $33 million at the end of third quarter 2020. If we adjust for the $26.9 million in Culture Kings inventory in the prior year, our inventory levels would have increased 60% from the third quarter of last year. We are pleased with the level and composition of our inventory as we head into the important holiday season as we pull forward inventory deliveries to ensure we were able to meet demand. As Jill noted, subsequent to quarter end, we completed the acquisition of mnml for a total of $44.9 million. including cash of $27.6 million, $15 million of which came from our existing debt facilities and equity of $17.3 million or 2.1 million shares. The acquisition was immediately accretive, and we see an opportunity to fuel significant growth in 2022 and beyond as we leverage our platform. Additionally, mnml's growth rates as well as its gross margin and EBITDA rates are in line with our acquisition guidelines. Now I will share more details on our outlook for the full year. As Jill mentioned, the solid momentum in our third quarter and strong trends that have continued into the fourth quarter leave us excited for the remainder of the year. We are pleased with the performance we have achieved so far this year and expect the momentum to continue. Our guidance assumes no further COVID-related lockdowns for the remainder of the year. As of today, all 8 of our Culture Kings stores have reopened. While we are not anticipating any meaningful supply chain constraints due to product delays, our guidance assumes higher freight costs will pressure gross margins for the remainder of the year. While we recognize the industry-wide global supply chain challenges, we are closely monitoring the situation and feel confident in our supply chain network and inventory position as we head into holiday. As such, for the full year, we expect net sales to be in the range of $550 million to $560 million. Adjusted EBITDA is expected to be in the range of $60 million to $62 million. We expect the weighted average diluted share count of 93.2 million for the full year and 126 million for the fourth quarter. Capital expenditures are expected to be approximately $6 million for the full year. As we look beyond 2021, we are excited about the long-term opportunity across our brands, although we recognize we are lapping strong growth in both 2020 and 2021, and we expect supply chain challenges will persist into 2022. We are confident in our ability to deliver on our long-term growth targets, which include net sales growth of approximately 20% annually, excluding acquisitions, the addition of 1 to 2 acquisitions per year and long-term adjusted EBITDA margins in the mid-teens. In summary, we are excited about our performance this quarter and our outlook for the remainder of the year. We have confidence that our brand accelerator strategy as well as our asset-light and flexible operating model will continue to drive profitable growth and create long-term shareholder value. With those comments, I will turn the call back to the operator to open it up for questions.

[Operator Instructions] And our first question is coming from Randy Konik.

So I guess my first question is you talked about strong retention metrics, and it sounds like full price selling is staying pretty strong. So I just want to get a little bit more granular around repeat purchase behavior. A little bit more color on, and maybe if you can give us a little more color around full price selling, how -- what is that at? And how has that been changing? That would be super helpful. And then how do you think about merchandise margin opportunity going forward if retention metrics stay strong, full price selling gets even better? Where can these merchandise margins go from here? Just curious.

Thanks, Randy. I'll start with saying our retention rates are very high because we are very focused on selling high-quality, exclusive merchandise and offering a constant stream of newness that really keeps the customers engaged and coming back as reflected in our 63% repeat in 2020. As we've gone through 2021 and through the third quarter, we have seen retention stay high and actually even tick up a bit. And our full price sell-through has also remained high as we've talked about we see that our full price, our sell-through is a very high percentage of full price based on our test and repeat buying. We really know what customers want, which is ultimately leading to less markdowns and that higher full price sell-through. We don't actually disclose our brand level full price sell-through, but it has remained high, and it's part of what's contributed to our high AOV this quarter. Regarding kind of merchandise margins going forward, we are confident in our gross margin rate. We have -- competing on quality exclusive merchandise. We are -- we do have better pricing power and are able to selectively take some price increases, which we've done this quarter to offset some of the expense we've seen related to supply chain issues. So we're able to really balance that out and are very confident we can continue our current trend of our gross margin rate.

Our next question is coming from Ed Yruma.

I guess, first, on Australia, I know you guys posted some really strong results or 7% growth despite the lockdowns. I guess what's the embedded assumption for Australia in the fourth quarter? And then as a follow-up, very interesting acquisition in mnml. Help us understand maybe a little bit their supply chain, if you wouldn't mind? Is it different than your core brands? And how much is mnml expected to contribute for the 4Q number?

Yes. I think -- thanks, Ed. For Australia, we don't go specific guidance, I guess, around regions, but we would expect it to be back in the double-digit growth kind of range as we go into Q4. We see kind of strength coming out of Q3, and we would expect that to continue into Q4. For mnml, from the incremental impact on Q4, it's about $8 million to $10 million is what we would expect additionally, to add to the quarter.

And on mnml from a supply chain perspective, first, we're just thrilled to welcome this great brand to our portfolio. It really bolsters our position in men's streetwear and complements our culture teams business quite well. They are really strong in bottoms and denim and bring a new network of great suppliers in that space that we are excited about leveraging across our group of brands. Also from a fulfillment center and carrier partner level, we are evaluating and comparing rates and service levels with our current set of providers and with all the brands that we acquire over time, we can evaluate if we can get them into our best-in-class network of partners and get some synergy and leverage with our other operating partners. So we're evaluating that as we go.

Our next question is coming from Erinn Murphy.

Great. Congratulations on your first quarter out of the gate. I guess my first question is just around the fourth quarter momentum that you're seeing. Are you seeing that happen both in the United States as well as that Australia reopening trend you just referenced? And is it broad spread across the portfolio? And then my second question is around the performance of Culture Kings in the quarter. Can you talk about how exclusive brands versus third-party brands? And just how is your inventory availability right now for third-party brands within that banner?

Great. Thanks, Erinn, and thanks for your questions. First, on Q4, I'll comment on that. We are seeing some really nice momentum coming out of Q3 and continuing already as we head into Q4, the early read is strong. As Australia has really just come back online with the reopening over the past few weeks, we are really seeing business rebound. All of our stores now are open in Australia, and we've seen traffic really rebound to stores. As well, we've seen the online business continue to be really strong. So seeing great momentum in early reads already. We are very well prepared as we head into Q4 from an inventory standpoint as well as really strong merchandising and marketing plans, and very excited over in Culture Kings Australia to get back to some events in our stores. We have a great lineup of events. So just feeling -- going really good as we head into Q4. Also, I mean, I should call out to our teams are really agile and will adjust throughout the quarter. We have a marketing calendar plan for promotionality. But I think there's a lot of uncertainty around the promotional intensity this holiday, and we've left ourselves room to really be agile there. In terms of Culture Kings in the quarter. So Culture Kings was impacted by the Australia COVID lockdowns. 5 of 8 of their stores were closed for the majority of the quarter. They have all reopened now. And so we're just excited about what we're starting to see there as that business kind of comes back online and the reopening is occurring in Australia. You did ask the mix of third-party versus exclusive. The Culture Kings business, yes, as a reminder, is a mix across third-party and in-house brands. As we expand that brand into the U.S. We do see a higher mix of in-house brands in the penetration of their business, which we're really excited about and leaning into. As we bring this brand into the U.S., we are looking to lead with and certainly looking to grow the in-house penetration of that business. Those come at a higher gross margin and are also a real nice competitive moat for us and a real differentiator as we bring that brand into the U.S. market.

And then, Erinn, just from an inventory position for the third-party brands for Culture Kings, we're actually in a pretty good position with those vendors and really across all of the brands for Q4. We have pulled forward some inventory just to make sure we're able to meet demand, but we feel in a pretty good position heading into the holiday.

Okay. Our next question is coming from Youssef Squali.

So just 2 quick questions for me. Going back to just the performance in the quarter. Just considering the material outperformance, I was wondering if maybe double click on some of the things that actually surprised you between the time when you guys came out with the initial guidance and ultimately what transcended out of the quarter? And then second, as you look at your market efficiency during the quarter, was wondering if you can comment on any impact from ATT or Apple or the iOS 14.5 change on the effect of this on marketing channels and just kind of remind us again which channels are kind of performing best for you guys.

Yes. Thanks, Youssef. I'll comment first on what sort of -- I wouldn't say it would surprise us, but we were pleased to see the Australia business rebound faster than anticipated. Recall that in July, the lockdowns and curfews started occurring throughout Australia. And we did see a big drop-off in the business at that time, but then we really saw it start to build back up through the course of August and September and we were really pleased with the performance of the business. The fact that we delivered 7% growth in Australia in the quarter on top of last year's very strong growth while having 5 of 8 stores closed, we were really pleased with that performance. And the teams were able to really be agile and adjust across our multiple -- across 2 regions, we were able to pivot and adjust our marketing spend and inventory accordingly and really manage the business very agilely. So we were ultimately pleased and outperformed there. From a marketing efficiency standpoint and the impacts on iOS and IDFA, we've been less impacted there than anticipated. I think this is really thanks to our social-first approach in marketing. We really rely more on social media and influencers and our great content than we are relying on paid ads. That said, we do spend on paid as and have performance spend and had some -- a bit of impact on Facebook, but we were able to optimize our mix of marketing spend across platforms and really reallocate. But longer term, our best approach there is a strong offense on scaling our micro influencer strategy. So -- okay. All right. Thanks, Youssef.

And our next question is coming from Lorraine Hutchinson.

I was curious for an update on the brand awareness of Culture Kings in the U.S. And then if you could offer us any proof points or early indicators that the Princess Polly playbook for U.S. expansion is gaining some traction for Culture Kings.

Great. Lorraine, thanks so much for your questions. First, I'll talk about the Culture Kings brand awareness in the U.S. What excites us about Culture Kings. This is a really popular, scaled, awesome men's streetwear brand in Australia and very well known with strong unaided awareness in the 40s over in Australia while more in the single digits in the U.S. That said, their U.S. business is the fastest growing portion of their business, and we're seeing just tremendous growth on their U.S. online business. We are on track with our Culture Kings' expansion plans into the U.S. We have hired a head of U.S. and started to build out our team here. Our first hires are really focused on building out micro influencer strategy, really learned and adopted from Princess Polly. So as you asked about the playbook of Princess Polly and being able to adapt that, we are using that for Culture Kings to scale a similar social-led micro influencer strategy. And we will really grow that brand with a digital-first approach in the U.S. and looking to add -- open up their distribution center in the front half of next year as well their first flagship store in the back half of next year. Regarding the sort of proof points on the Princess Polly playbook, Princess Polly just continues to really gain share in the growth -- in the U.S. We've had tremendous growth in the U.S. and saw a really strong quarter with the reopening and a shift of the business really back into dresses. And they've been leaning in even harder on their social media influencer program. As with back-to-school, they did launch a college ambassador program and just saw incredible demand there with 20,000 sign-ups for that. So really continuing to get a lot of great learnings out of Princess Polly that we're then able to adapt and roll out across the group. We've done that adopting those over to Petal & Pup and really seeing that business also now take off in the U.S. Now it's our fastest growing business. So really, really pleased with what we're learning out of Princess Polly and being able to apply it elsewhere in the portfolio.

Our next question is coming from Oliver Chen.

We were curious about the promotional environment and also as you think about pricing more near and medium term and what you're seeing as we all face inflationary pressures, yet the demand profile remains very strong. And then second question, your technology and a.k.a.'s approach to technology is quite unique with that capital-light approach. What should investors be focused on in terms of what you're doing there in terms of some of your key partnerships and the biggest needle movers as you work with different partners across your portfolio?

Thanks, Oliver. I think just regarding kind of the promotional landscape as we look to Q4 this year, I think just to reiterate, we've seen really strong momentum coming out of Q3 that's already -- get a strong early read as we get into the quarter here. And we're very well positioned from an inventory standpoint and just have a really strong merchandising and marketing lineup. A lot of the conjecture is it will be a less promotional holiday, but we are prepared and ready and have room to be as promotional as needed to compete in the market this holiday. And we're quite agile and able to adjust and adapt as needed. So feeling really good there as we head into the big days. From a pricing perspective, sort of near and medium term, I think it's important to point out that we really compete on quality and exclusivity, not really price per se, which means that we actually have quite a bit of pricing power in our brand. And we have been able to actually increase prices selectively in our brands to offset some of the supply chain expense that we did see in the quarter. And with that, we have been able to still maintain our growth rates even while taking some of those prices up, just really kind of emphasizing that pricing power. So we are committed to maintaining our gross margin rates as we go -- going forward right where they are in mid-50s, and we will reevaluate pricing as needed ongoing. From a technology standpoint, as we've talked about, we do run an asset-light technology stack that's really leveraging Shopify and an ecosystem of partners. We are very pleased with our strategy. It keeps our costs low, our flexibility high and really gives us access to best-in-class and the latest technology capabilities. We are able to really constantly test and learn across our brands and across a network of partners and really get to and curate the best-in-class, the best of the best tech partners out there and then really share that across our brands. This also gives us -- this approach also gives us really strong group leverage. We've been able to go back now and renegotiate rates with some of our tech partners and really develop and lean into strategic relationships there that give us early access to features, making sure that we're first in line on innovation capabilities as well as being able to even influence their road maps. So we see this as just a real strategic capability that allows us to access the best innovation out there. But I think what we're really most excited about, honestly, is our data and analytics capabilities. If you think about it, we are really sitting on a gold mine of data and insights across our group of brands, across demographics and across geographies. And all of our brands are very strong at data-driven merchandising and harnessing analytics for their everyday decisions. But what we've just started to build out is really strong cross-brand analytics capabilities that are really going to take us forward. And we've made some good strides on that in Q3, but excited to continue to expand on that. So that's what people should be watching to -- watching and waiting to hear more from us about.

And Oliver, I'll just add on inflationary. We've had to do some small wage increases at our U.S. distribution center, but not a really big impact there on the quarter or kind of on the go forward. I guess the other place where we are seeing pricing pressure is obviously on the inbound air freight. We've seen a significant increase there year-over-year and even quarter-over-quarter. We do expect some more increases there in Q4, but we've built that into kind of our expectations, and we're kind of expecting those increases to continue into next year.

All right. Our next question is coming from Michael Binetti.

Congrats on a nice quarter. I just want to ask you maybe a couple of things on the model. And then I think the revenue guidance for fourth quarter looks like it's about 34% to 41%, a little bit of a deceleration from the pro forma number in 3Q. And then if we take out mnml, it's a little bit more of a deceleration. You talked about the lockdowns and reopenings and several parts of the business reaccelerating coming out of 3Q. So as we're trying to learn to think alongside you guys here and how you build the guidance, maybe would you help us with a couple of the inputs that you're thinking about for fourth quarter? And how much of the -- any kind of a deceleration, if I'm right, on the math there is just conservatism? Or it could be just related to tougher compares a year ago since we don't have a lot of history of the combined business. Any inputs there would help. And the same question on the EBITDA margins. Looks like you're planning to about 10% to 10.5% in the fourth quarter, a little lower than what we just saw in the third quarter. Again, I don't know much about the change over in seasonality from 3Q to 4Q. So any help there? And then finally, just certain maybe the AOV is mid-single digit that you had the 6% this quarter. I know we've talked about some price increases across the brands. Is that -- as you talk about the 20% long term, if we start thinking a little bit now about 2022 is mid-single-digit AOV a safe place to start or thinking for next year. Is that sustainable?

Yes. Thanks, Michael. And maybe I'll go to AOV first and kind of work backwards. I think we're pretty happy with the increase we saw in AOV year-over-year. It's up 6%, 3% on a constant currency basis. And it was nice to see it up really across all of the brands. In particular, that's coming from price increases and the Princess Polly and Petal & Pup put into effect. I think going forward, they will continue to be opportunistic and really look at the market and move prices as they see the ability. So I think as we think about kind of go forward and AOV, it's certainly kind of in that low single digits as we think about kind of in FY '22. And then as that kind of relates to our guidance and our expectations around Q4, we certainly see seasonality in AOV in -- from Q3 to Q4, so kind of we would expect it to decrease in Q4 versus Q3. And that's somewhat from the promotional nature of Q4, but also just the different mix of kind of categories across the brand. So we would kind of see it coming down from that perspective. And that's really, I would say, the bigger driver of our decelerating revenue in Q4. Also some little bit of conservatism. These are kind of new brands and somewhat newer brands to the U.S. when we think of Culture Kings. So we do want to be conservative there. And then really, as it relates to EBITDA and thinking about EBITDA in Q4, I would say, kind of 3 bigger drivers. One is just the seasonality, the AOV impacting our gross margins. We would expect those to come down in Q4 with the promotional nature of Q4 with a little bit of increase in selling expenses as it relates to surcharges with carriers. And then just the other driver is from the G&A perspective, we are bringing on more public company expenses in Q4 this year as it's really our first full quarter being public. So I think those D&O insurance and then other public company costs. They are the kind of the drivers that bring the decrease in EBITDA over Q3.

Our next question is coming from Ike Boruchow.

Congrats on your first conference call. I guess I'll just ask a couple follow-ups on mnml. I guess, Ciaran, I think you guys used a little bit of equity in the purchase this time. Can you remind me, is that something that you guys would normally do? Is that kind of new? And then how does that kind of fit into the future of these 1 or 2 deals annually going forward? And then I think you gave the 4Q revenue number 8 to 10. Should we just kind of assume that this business is around $30 million to $40 million in annualized run rate revenue? And then any kind of gross margin color on mnml as it kind of mix out into next year would be great.

Sure. Thanks, Ike. Yes, from the acquisition with -- part of the purchase price was about 2.1 million shares, about $17 million in order to -- both 35% of the -- or just under 35% of the overall purchase price. I think in our minds, it's kind of somewhere from 20% to that 35% is the range of equity that we would expect to do as part of our acquisitions and certainly talking to potential acquisitions out there. They are all very much interested in having equity in a.k.a. and kind of being part of the long-term upside that we see kind of across all of the brands and the overall business. And then from a revenue perspective, mnml, that is kind of their quarterly range is what we would expect. They're not a seasonal business. So they are in that kind of $30 million to $40 million range from a revenue perspective. And across the drivers, AOV, gross margins, very similar to the overall portfolio that we have, so no big changes there from a model perspective. I think as we think about EBITDA, we will invest more in them from a head count perspective in that first year just to support their growth, make sure that kind of -- we can bring them on to the platform. And so that will bring down their EBITDA rate on that first year, but it will come back very quickly.

Our next question comes from Dana Telsey.

Congratulations on the progress. You mentioned some of the new initiatives at Princess Polly, whether it's expanding the exclusive merchandise or introducing sustainable component to the mix there and also increasing the new weekly styles by 13%. How does this move going forward? Does it accelerate in terms of whether it's the new -- more new weekly styles going forward or extended sizing or sustainable? And do some of these initiatives hold for the other brands, whether it's Petal & Pup or Rebdolls?

Thanks, Dana. I'll take that. So on Princess Polly, yes, we have a high mix of exclusive already in Princess Polly, this brand really competes on quality and exclusives. And pleased to increase our penetration of exclusives this past quarter and really committed to continuing to increase that at Princess Polly and across all of our brands. They did roll out, as you mentioned, the sustainable line this quarter with their Earth Club line and saw a really strong customer response that exceeded expectations. So about 5% of their assortment is now coming from recyclable, renewable fabrics. And they are very committed to continuing to expand that and looking to get to 20% of all their new styles made sourced from recyclable or renewable fabric by the end of the quarter. And we are excited to take the learnings from Princess Polly of doing that and apply that to our other brands. They have been sourcing those fabrics at a mill and are able to use those fabrics across their supplier network. So they were not needing to go find new suppliers in order to do this. And they were also notably didn't need to incur any cost increases or price increase to the customer to offer this sustainable line. So we're really excited about what they're doing in that space. Princess Polly is really a leader inside our group of brands on sustainability, and we're going to learn a lot from their expansion plans there and apply that to the rest. They are also, as noted, introducing an extended sizing line with their curve collection this quarter in Q4 that will come out. We're really excited to learn from that and also similarly be able to apply that across the group of brands.

And we have a follow-up question from Oliver Chen.

Jill, I had a question more broadly about your M&A strategy and M&A platform. As you look to authenticity and also your experience on really pioneering, looking at new social platforms. What are you seeing in the marketplace? What should we know about what might be your key priorities? And how will you more broadly approach value creation within the platform?

Thanks, Oliver. So on M&A, well, first, I think it's important to note that our biggest priority focus on growing a.k.a. is focused on organic. We are really committed to scaling the group of brands that we have and in particular, really scaling them in the U.S. But we are, of course, acquisitive and looking to M&A to make future best. And our strategy is to really enhance our portfolio and continue to diversify our audiences, our fashion style aesthetics, our gender mix, our geographic mix. And ultimately, we're looking for just all-star brands, the best of the best, digital, direct-to-consumer, high-growth, profitable brands with great teams. And we do look for brands that can really complement our portfolio and are not necessarily competitive. And we think the 5 we've assembled so far are just a really great group of diversified balanced brands. We have a very disciplined approach to our M&A and a strong pipeline in the mix right now. And the IPO has really upped our visibility, which we're excited about. And so we have an opportunity to really be selective as we go. And we're also a bit of an acquirer of choice in that we have real e-commerce expertise and a real value-add proposition for the brands that they really resonates with the brands when we talk to them. So really excited about the potential and what we're seeing out there, and we're maintaining a strong pipeline of great brands that we're talking to. And we're looking, again, just as a reminder, probably 1 to 2 acquisitions a year.

I'm not showing any questions at this time. [Operator Instructions] There are no further questions.

Thanks, everyone. Really appreciate you joining. Thank you.

Thank you, Ladies and gentlemen, thank you for joining. You may now disconnect.