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

Boy, we really should have started the day with that video exciting, dynamic. And obviously, we should all be together in Orlando. I hear the weather is great down there right now. But thanks, everybody, for joining us today. I'm Ed Yruma, KeyBanc's Internet and e-commerce analyst. We're really excited to moderate this fireside chat with AK brands, which we think -- as you heard during our discussion, a unique combination of brand builders and real e-commerce experience. We think this business is highly dynamic, great growth brands. And from an analyst perspective, probably most importantly, great margins and cash generation. From the company, we're pleased to have Jill Ramsey, CEO; and Ciaran Long, CFO. Thanks very much for joining us today, guys.

Thanks, Ed. Great to be here.

So let's go ahead and start with some questions. And I think we have a little bit of a taste of it during your video, but clearly, the influencer strategy is a big component of your brands. That said, we're hearing more and more competitors talk about using influencers as well. So help us understand specifically the micro influencer environment? And then maybe longer term, you guys have done a great job on Instagram. What about other platforms like Snapchat or TikTok?

Yes. Great. So first, again, thanks so much for having us. I think when it comes to the micro influencer strategy, we were AKA in our brands. We were really pioneers of this, in particular, Princess Polly. We were very early in going after the micro influencer strategy to build customer awareness. And they've been really fine-tuning and perfecting that over about 10 years really. And it's a very successful way for us to build an authentic engaging relationship with customers. Micro influencers are really seen as more authentic. It's much more cost effective. And there's less reputational risk than some of the large celebrity influencers. Recently, for instance, Polly rolled out a college ambassadors program and was able to get 20,000 college students signing up for this. So we really see that the micro influencer program is just going to continue to evolve and iterate even from influencers on the platform into just like everyday college students. So we're super excited about how that program is evolving and we're really moving with the customer, where they -- wherever the customer eyeballs go from whichever platform, which today, that's really migrating over to TikTok. And we're continuing to see TikTok, the performance and the effectiveness of that platform just continue to evolve. So really excited about our micro influencer strategy evolving.

It seems like the first, second, third questions we got from investors this quarter really stress supply chain. Based on our checks that you guys navigated, a pretty challenging situation, very well. Can you talk a little bit from a higher level, really about supply chain? And maybe specifically, how you prevented this from becoming a bigger issue? And then I guess just stepping back a little bit, given all that we've been through, where are these areas of potential investment or retooling?

Yes. Thanks, Ed. I think, firstly, from a supply chain perspective, we work with a couple of hundred vendors over 14 countries, so quite diversified there. And then our approach to merchandising is using a test and look case data-driven model. And so with that, we're working with vendors that are actually very agile and kind of move pretty quickly with us. We're also, from a strategy perspective, predominantly on air freight. So we weren't caught up in the seaport issues that others have seen. And as we talked about in our Q3 earnings, we brought some inventory in early for Q4 to be ready there, and we did the same as we kind of think about Q1 this year. So I think the overall model that we have is quite flexible, and we can react quickly and move as we see changes within the overall supply chain. Within the U.S. here, we work with a 3PL as for our outbound operations. I think as we think about longer term, there's probably opportunities to bring more of that in-house, bring in more automation and kind of continue to evolve there and keep bringing improvements to that kind of selling line and then just the overall EBITDA.

What would the time line be in bringing some of that in-house? Is that in your near term?

I think we will -- we're continuing to look at it. I think we look at it more this year and start probably next year are seen after that.

Got it. During these crazy times, you guys recently acquired a pretty interesting business called Minimal. I guess just a lot of us were probably Googling minimal when you did it, but maybe for those that are in the audience, can you talk a little bit about the business, maybe give a quick overview. And then as you think about the Minimal brand, is this a different consumer than you already had? Or is this more wallet share of existing consumer?

Yes. So Minimal was our fifth brand acquisition that we completed earlier this year. We're super excited about this really cool brand out of L.A. It's a young man's streetwear brand that really ticks all the boxes for us. Just a great brand, high-growth, awesome talented team, and they play in the streetwear category and are very heavily penetrated in the U.S. So it's a really great complementary fit with our portfolio and in particular, has a lot of synergies with our Culture Kings brand that we acquired earlier -- back in March of last year. It's very complementary from a category perspective. Minimal is extremely good at bottoms and denim, which from a category perspective, really complements Culture Kings strength in hat wear, footwear and top hoodies and teachers. So we're super excited to offer. Ultimately, what will put Minimal on Culture Kings and offer it into Australia as well, there's a lot of co-marketing synergies that we see. So very excited about Minimal as a great complementary and strategic fit with our portfolio and just see a lot of growth in synergies in the streetwear space.

There's been a lot of discussion on whether we're in or in the early innings of the denim cycle. I guess did that entertain your thought. Was that part of your thought process? And then, I guess, as you think about broadening the portfolio at minimal, are there other areas where you see nice growth opportunities.

Yes, definitely. It's interesting. We've been talking the Minimal for quite some time. In fact, we even knew them before Culture Kings. Sometimes we develop these very lengthy relationships and stay close with the brand over some time. As the denim cycle evolved and was showing signals of strength, that only enhanced our strategic rationale as we looked at them. They are very good at denim and get us a nice network of denim suppliers that will be able to share and use across our portfolio. Of course, I think we're all excited about the denim trends emerging away -- finally away from the skinny bottom and now embracing all kinds of silhouettes. So we're excited. We're seeing a lot of strength in that category across our brands, and we'll be able to lean into Minimal's great supplier sources.

Kind of just stepping back, though, you guys have been very successful with M&A. It's a big component of your growth strategy. Can you talk a little bit about what you're seeing in the marketplace? And obviously, there's always this like magic point where the buyers and sellers' expectations kind of come together. What are you seeing right now? And then probably just for those investors that are joining us today that are less familiar with APA, what's your pitch to these potential targets? And why should you be the acquirer of choice?

Sure. I think, firstly, there's obviously kind of -- there's ample direct-to-consumer brands out there. We all see them in our feed. I think for us, we take a very disciplined approach to M&A. And so when we put those brands through our kind of funnel of expectations of high growth, profitability, a great brand that's really connected authentically with our audience, it brings down the pool quite a lot. I think we will continue to be disciplined. We haven't been the highest price bidder when we're out there talking to brands, and we don't expect to be or intend to be. If someone's looking for a financial trend, a purely financial transaction, that's probably we're not the right fit for them. We're really looking to bring on brands, good operating teams, enhance them and really grow the brands within the portfolio. We're looking for brands that are complementary from a category perspective, not in competition with what we have and really as well looking to collaborate across the portfolio of brands. That's really part of what we bring. Our background is very much operators. This is not like I said, financial transactions. And I think for that coming into a portfolio where you're going to work across all of these different founder teams with us to really, really grow your brand and allows us to be very selective with the brands that we bring into the portfolio and really complement what we have today.

Just maybe to hop back to the previous question, Joe, because I thought you had a really interesting comment about Minimal and the length of conversations. I guess how long does it take to build these relationships? Kind of how does -- do you have like kind of a whiteboard that helps you think about areas you're interested in? Like how does your process work to ensure that you have this nice, steady rhythm of small, medium and large M&A?

We have a really robust pipeline and are tracking literally thousands of brands and talking to hundreds and we do develop long-term relationships. I think that's part of what differentiates our investment strategy is we do really build and invested -- we take an invested stance as we get to know these brands and help them support them with some ideas along the way, which really, as Ciaran mentioned, we show up as operators, and they see that difference. We're not just there with a check bulk, but we can actually really help these founders and these young brands realize their maximum potential and their aspirations for the brand. We are looking to continue to diversify our portfolio and enhance it. So as we add new brands, we look to diversify our demographic footprint, our different fashion, our geographic footprint. So -- but we're also opportunistic because M&A is both a very disciplined strategic approach, but also being open and being opportunistic.

We do a lot of consumer survey work and channel checks, and I think one of the great things that we picked up really about the millennial and certainly the Gen Z consumer is they're taking to heart things like inclusivity and diversity. I guess, as you guys think about your brand portfolio in sensor your target customers, how do you address, I guess, some of these inherent challenges, but then also some of the growth opportunities that you think it drives...

I mean I would say our portfolio is just really naturally oriented to diversity and that we -- our strategy is to have a diverse range of demographic targets. If you look at our portfolio, it's diversified, of course, across age ranges, but it is also diversified ethnically as well. We have -- we're super excited about our smallest but one of our fastest-growing brands, Reddolls, it is an inclusive size range. Sexy for all sizing that we like to call it and focuses on a black female customer, 18 to 34. So one, our portfolio is sort of naturally oriented to diversity, but also the way that we market, as we go to market through micro-influencers, we're really building a natural authentic relationship. All of our content is very much reflective of our diverse audience customers. We also are really conscientious about body positivity and ensuring that we show the customer models that are unretouched. So Princess Polly, for example, doesn't do any retouching to their photography and we sort of embrace the customer and embrace the models as they are. So really authenticity and diversity are sort of naturally wired into our -- all of our brands and our portfolio, which I think is one of the things that really resonates with our customer and our target audience.

Relative to a lot of other retail peers and e-commerce players, international is a big component of your business. I know some of that is a byproduct of the Australian heritage of some of your brands. I guess, can you give us a quick update on the market, Australia specifically? And then as you look at your longer-term road map, are there other geographies that you might want to enter?

Yes. So unique about AKA brands. We really are globally very well diversified with a large-scale footprint in both Australia and the U.S. We are still seeing -- U.S. is really leading our growth right now, where we're able to take a lot of brands -- 3 of our high brands were born in Australia, very strong popular brands in Australia that we brought into the U.S. and are scaling, which is providing a lot of U.S. growth. But we still have quite a bit of growth in Australia, and we're excited about outside of Australia and the U.S., our Rest of World growth. Rest of World last year was 12% of our volume -- in 2020, excuse me. And as we reported in our Q3 earnings, Rest of World grew over 100%, which was really fueled by growth in New Zealand. We did open up a Culture Kings store in Auckland and saw a tremendous amount of market share gains in New Zealand, both online and offline. But we're also really excited about what we're seeing out of Europe and also out of Asia. So Princess Polly, we see strong demand signals in U.K., Europe and Canada, and we're already leaning into those markets and really improving the customer experience and starting to test and learn with marketing in those markets. And then Culture Kings, there's a lot of natural demand for streetwear out of Japan and Korea. So we're excited about expanding that great brand over in Asia as well.

I think one of the things we saw in your size real was really the excitement around some of the culture Kings stores. I know you have a store presence in Australia. I know you're talking about a U.S. store rollout. Can you talk about the broader store rollout for Culture Kings? And then maybe are there opportunities or physical stores elsewhere in the portfolio?

Yes. These Culture Kings stores are like nothing -- never I've never seen anything like it, and I've been in retail my whole career. Very experiential stores. Very much close to a Vegas nightclub style store. They really provide a great event space for Culture Kings to bring in big celebrity athletes and musicians and put on these great events, and they get a lot of content and then they're able to pipe that content out over their digital channels. So really see these as a next-generation format, highly experiential store. We are looking at our retail footprint strategy in obviously a very next-generation retail footprint, which is a much smaller retail footprint, very much a flagship approach. We will look to open up a flagship Culture Kings store in the back half of this year. in a highly tourist destination. But ultimately, in the long run, these are digital-first brands that we look to complement with a highly experiential store. At this time, no real plans for stores, for any of the other brands. Culture Kings is really the only brand today with stores. But over the long haul, we'll obviously evaluate that. And certainly, things like event -- pop-up store events. We've done a few of those with Princess Polly, and we'll look at some of that as well.

I think one of the questions we get most frequently from investors is about the level of integration of the business. What do you leave at the brand level and what do you centralize. And how do you think this broader organization helps your brands grow faster? And then maybe going back to one of the earlier questions, like what kind of integration do you think you'll have longer time?

So it's important to note that our brands do operate independently. We see this as really critical for them to maintain their cultural and brand identity and authenticity, also in allowing the brands to really operate independently. While we don't ever buy a brand with the intention of selling, it does provide that independence and that optionality if we ever wanted to sell a brand in the long haul. But really, our focus is to buy these brands and accelerate their growth. And the way we do that -- the simplest way to think about it is we help our brands with the business of fashion so they can stay really focused on the art of fashion or another way to think about it is back of house, front of house. So we really help them with a lot of the corporate functions like finance, IT, supply chain, legal, HR, really keeping our brands focused on what they're great at, which is marketing, merchandising, social media, creative, and we're not a shared services environment. We do have a team of expert resources at AKA to support the brands, but they do have their own teams and resources inside the brands. The other important thing to note about our business model is that we use a third-party asset-light approach to technology and supply chain. So we are leveraging Shopify and a network of best-in-class digital providers. which really helps us keep our costs low and our flexibility and our innovation is really high. And it also allows us to very quickly integrate a new brand. Where when we buy a new brand, we can immediately start to harness value and synergies and get growth out of that brand and help them. We're not looking -- there's not a long belabored integration process onto our platform. We can immediately get synergies and value day 1. We can get them on to some of our group rates. We do negotiate all rates as a group, so you can start to harness that immediately. So yes.

You guys used some of the IPO proceeds to lower debt. Can you talk about longer-term leverage levels? Do you want to use leverage when you do acquisitions? Or can you use free cash flow or cash on the balance sheet to fund them?

Sure. Yes. So historically, we've been at about 2x from a leverage perspective and just very kind of very disciplined when it comes to that. I think we'd be comfortable with it going a little bit higher than that, but we're not looking for this to be a highly leveraged business. The brands we have pretty much are all profitable, really strong free cash flows from those brands. So I think we will really lean into that cash flow to -- as well as taking out some additional debt as we look to expand the portfolio and do more M&A. But obviously, very much focused for us on just organic growth for the brands that we have and fueling that growth.

You guys have an increment amount of focus on this very tight age bracket or just even, I guess, apparel broadly, I know you have some footwear some hats and things like that within Culture Kings. I guess if you think long term, do you -- where do you want to broaden out the business, if at all? Do you want nonapparel? Would you want a broader age range? Kind of what are the areas of long-term growth that get you excited?

I'd first start with -- we are focused on fashion and fashion broadly, not really today looking to go outside that. But within fashion, there are some pockets that are interesting to us to lean into building out accessories, leaning into maybe specific categories like intimates or swim and a more overtly athletic category. Ultimately, we're looking to diversify both the customer base from a fashion style aesthetic, from a category or range. Fashion as a sector is enormous and allows a lot of room for us to continue to build a diversified portfolio within the broad fashion sector. So just really, ultimately, we look for great brands that have a ton of potential for growth and global scale.

I think we're just about out of time, but I want to ask one final question. In our interactions in my time doing diligence, I think one thing that's truly impressing is that you're not just acquirers, you're brand builders. So I guess, how do you help your brand teams ensure that these brands stay relevant and fresh, long term?

Well, ultimately, the portfolio approach really helps us ensure that we have longevity with our approach to fashion. But also, I'd say one of the biggest things is also talent and just ensuring a constant pipeline of great talent into these brands. That's one of the #1 way you really help support our brands is really helping them with that blueprint for building out their brand as well as accessing great talent to keep these young brands fresh. And ultimately, the way these brands by merchandise with a test and repeat buying approach really does ensure that we are staying relevant and on top of all of the trends and really plugged into what that young consumer is looking for.

Great. Well, with that, I think we're just about out of time. Hopefully, we get to see you soon in person. It sounds like you have an exciting store opening sometime this year, maybe you could get us all together and you can have that great experience that you highlighted in your size, but we think you guys just have tremendous growth in front of you. So thank you very much for joining us.

Thank you so much.