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

Thank you. fiscal 2026 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Casey White, General Counsel. Please go ahead.

Good afternoon. Thank you for joining AKA Brands to discuss our second quarter 2026. Before we get started, I'd like to remind you of the company's safe harbor language. Management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including when we refer to expectations, projections, and other characterizations of future events, including guidance and underlying assumptions. Any forward-looking statement providing during this call, including projections for future performance, is based on management's expectations as of today. We undertake no obligation to update forward-looking statements except as required by applicable law. These statements are neither promises nor guarantees and are subject to known and unknown risks and uncertainties that could cause actual results, performance, or achievements to differ materially from those expressed or implied by the forward-looking statement. For a further discussion of 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 also 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 release furnished to the SEC and available on our website.

With that, I'll turn it over to Kieran. Good afternoon, and thank you for joining us to discuss our second quarter 2026 results. In the second quarter, we generated net sales of $160.1 million, essentially flat to the prior year, while driving adjusted EBITDA growth of 16% year-over-year to $8.7 million, further validating that the structural improvements we've made across the business are enabling strong profit flow-through. We delivered on our growth expectations in both the US and rest of world geographies with net sales of 2% and 51% respectively. The Australia and New Zealand region were the outlier, with net sales there contracted approximately 13%, pressured by a challenging macro backdrop and a tough prior year comparison from the clearance of non-go-forward goods. Importantly, Q3 to date momentum has accelerated in all regions, with overall net sales growth in the high single digits alongside healthy margins giving us continued confidence in our outlook for the second half of the year. We're seeing clear proof points of success across both our women's and men's businesses, reinforcing that our strategic initiatives are resonating with customers and positioning us well for long-term growth. As I highlighted on our Q1 call, AKA Brands is a fundamentally repositioned operating model anchored on profitability and durability. The second quarter results are a clear reflection of that transformation, with strong profit flow through, driving adjusted EBITDA growth in the mid-teens. performance this quarter was driven by the expanded distribution of our brands across stores, wholesaler marketplace, the strengthening of our operational foundation and continued financial discipline across the business. We're off to a solid start in Q3 and I remain confident that 2026 will serve as another meaningful proof point that our strategy is working and our business is on a stronger trajectory. Reiterating our strategy, we've continued building out our omnichannel model beyond our direct-to-consumer routes. Princess Polly now operates 13 US stores plus our first two Australian locations, with more openings planned in bulk markets this year. As we announced this morning, Country Kings is also expanding its store footprint in the U.S., with a signed lease for a new store in Puerto Rico and final negotiations for a major metropolitan opening later this year. At the same time, we are expanding our wholesale and marketplace partnerships, which are exceeding expectations, expanding brand awareness, attracting new customers, and creating incremental growth opportunities. Behind the scenes, we've laid the operational groundwork for this expansion. Inventory has been well managed, driving more full price sell through and improved inventory turns are giving us greater flexibility to invest in growth. That discipline has also enabled Culture Kings and Minimal to further evolve towards a test and repeat merchandising model, which has been a multi-year initiative that is now showing up clearly in our margin improvements. As I previously mentioned, we also completed a full overhaul of our sourcing network in 2025, diversifying across geographies and vendors. That gives us a more resilient supply chain, one built to support test and repeat and to handle the current trade environment as we keep growing. Together, these initiatives have strengthened our financial model. We ended the quarter with our strongest balance sheet since becoming a public company, reducing our inventory by 14% and our debt by 8% versus the prior year. and we ended the period with net leverage of 3.37 times. This provides us with increased financial flexibility to continue investing in both growth and profitability. Looking ahead, three priorities remain. Driving direct consumer growth through differentiated products and marketing, expanding expanding reach through retail, wholesale and marketplace, and continuing to sharpen our operating model. We're also scaling our AI investment, already seeing early gains in imagery, marketing efficiency, and inventory with more margin benefit expected over time. Turning now to our brand highlights. Princess Polly, our largest brand, delivered another strong quarter. The brand's expanding omnichannel presence continued to extend its reach beyond a successful direct-to-consumer model, driving growth across port new and returning customers with stores, wholesale and marketplace each making meaningful contributions. Princess Polly's 1,000-square-foot pop-up at The Grove in Los Angeles, which opened in May, far exceeded our expectations, and we're excited to have made The Grove a permanent location. Princess Polly is on track to open four additional stores in the US and one in Australia all by year-end. Looking ahead to 2027, we plan to open as many as 10 new Princess Polly stores with five leases already executed in major trade areas, including Charlotte, Boca Raton, Nashville, Burlington and Jacksonville. Longer term, we see the potential for a minimum of 100 Princess Polly stores in the US alone, from a current fleet of 13 stores. As I mentioned, our sales growth of more than 50% in the rest of world was another bright spot in the quarter. Our driver was the UK distribution center that launched in March, which is delivering the customer experience we envisioned. day delivery window is transforming conversion with momentum compounding week over week this This confirms for us the tremendous growth opportunity we have for Princess Polly in the UK and internationally, which we will look to capitalise on over the coming years. From a merchandising perspective, Princess Polly enters the back to school selling season with an evolved approach that builds on its test and repeat model. Beginning this month and informed by strong customer feedback, the brand expanded its offering with deeper buys in core seasonal styles across denim, sweats, and tops. This is designed to capitalize on peak selling throughout the season, both in stores and online. I want to be clear though, test and repeat remains the core of Princess Polly's assortment strategy. What we're doing is layering in evergreen programs, season after season, in the categories where customer demand has proven durable. Taking together these results underscore while global expansion of Princess Polly's addressable market remains a key strategic priority. Our smaller women's brand, Petal & Pop, continue to expand its wholesale and marketplace distribution in Q2. Nordstrom remains a productive partner with strong unit velocity and sell-through across dresses and casual styles in-store and online. Macy's was a notable Q2 call out and newly remains a strong growth partner. with Topps now the number one performing category on the platform, reinforcing the strength of our expanding separates offering. Petal & Pop continues to build distribution of its expanding lifestyle assortment by adding more specialty wholesale partners. During this quarter, it will take another important step, taking part in the specialty retail trade show Magic in Las Vegas, the largest wholesale trade show in the US. Looking ahead for Petal & Pup, we've intentionally pulled forward our product flow with fall launching in August and holiday in October, four to six weeks earlier than last year. This gives both our direct-to-consumer and wholesale partners a longer selling window heading into the back half. Petal & Pop is well positioned for the second half, and I'm confident in the white space runway and long-term trajectory of the brand. Turning now to our streetwear brands. Over the past several years, we've strengthened the foundation of the streetwear business. we're now applying the same omnichannel playbook that has driven success across our women's brands. We're expanding beyond direct-to-consumer through stores and wholesale, while continuing to execute our disciplined full-price test and repeat merchandising strategy. Customers are responding to improved product and a less promotional approach, driving strong sell-through. While sales were not at the level we expected for Culture Kings in Australia in the quarter, the business contributed meaningfully to the overall gross margin expansion. Culture King's experiential retail model, together with its portfolio of in-house brands that we have now transitioned to a test and repeat model, including Minimal, Loiter and Car Ray, provide a strong foundation as we expand across new channels. Minimal's recent performance has been among the strongest we've seen from the brand, with several key products achieving exceptional success in TikTok shop and Minimal now ranking as a top five brand in the men's category on the platform. Lloyder will lean further into collaborations with their recent WrestleMania partnership and the upcoming Sonic the Hedgehog collaboration, serving as great examples of how differentiated the Lloyder brand is. And finally in Q2, Carre launched their first global collaboration with Coca-Cola centered around the World Cup. And we're excited by Carre's product pipeline and future collaborations. The team's continued work expanding the in-house brand portfolio, curating third-party brands such as New Era, Adidas and Asics, and driving the strategic transition towards a more full-price test and repeat model sets the stage for meaningful, profitable growth ahead. Marketing remains a key strength for Culture Kings. Brand activations, creator partnerships, and exclusive collaborations continue to drive traffic, customer engagement, and cultural relevance, reinforcing the foundation for profitable growth. Our men's brands are known as solid footing to follow a similar path to our women's business. expanding reach through brick and mortar retail, wholesale partnerships and marketplaces. We're still early in this journey, but I'm confident that we're in a strong position to meaningfully grow our men's total addressable market. As I've mentioned, we signed a new Culture King store lease in Puerto Rico, and we're in the final negotiations for another opening in a major metropolitan market. We expect to have both new stores open in Q4 2026. These will be Culture King's first new US store opening since 2022 and mark an important milestone in the brand's next phase of growth. New stores will draw on the learnings from our highest performing Australia locations, as well as our highly productive and profitable Las Vegas flagship. In closing, our second quarter results reinforce that the operating model we've built is delivering. We post double-digit adjusted EBITDA growth, positive operating cash flow year-to-date, and our strongest balance sheet position since our IPO. The The work we've put into go-to-market strategy, sourcing, inventory and channel expansion, is translating directly into profit flow through. Q3 to date, trends have been strong and we continue to make progress building out our omni-channel models. well underway in women's, just beginning in men's. Taken together, that gives me real confidence in both the back half of the year and the long-term opportunity across our brand portfolio. I want to thank our teams for the continued hard work and commitment. Our results are a direct reflection on their dedication to our brands and our customers. Before I turn it over to Kevin, I want to take a moment to note a change to our board. Eileen Eskenazi has stepped down after many years of dedicated service, and on behalf of the entire company, I want to thank her for her contributions and counsel over time. I'm delighted to welcome Kerry Cassidy to the board. Kerry brings deep expertise in talent and organizational leadership, having served as Chief People Officer of Restoration Hardware and held senior leadership roles at Levi Strauss, Barclay, and other organizations. and First Data and currently serves on the board of Fulmer and and G.L. Mazzetta. As we scale our brand's portfolio, her perspective on leadership and organizational performance will be a real asset to this board.

We're excited to have her on board. With that, I'll turn it over to Kevin. Thanks, Kieron. For the second quarter, net sales and adjusted EBITDA were in line with our expectations, with adjusted EBITDA growing 16%, reflecting continued execution against our full-year plan. Let me walk you through the drivers. Net sales were 160.1 million for the second quarter compared to 160.5 million a year ago. On a constant currency basis, net sales declined 5.3%. By region, net sales in the US increased 2.1% to 110.7 million. Net sales in the rest of the world increased 50.5% to 9.6 million, driven in part by the opening of our new UK distribution center. In the Australia and New Zealand region, net sales declined 13% to 39.8 million, where we're seeing consumers under increased pressure from the macro environment. Total orders were 2.04 million, down 0.5% year over year. Trailing 12-month active customers, excluding wholesale, increased 4.4% to 4.31 million compared to 4.13 million a year ago. and average order value was $78, consistent with last year. Gross margin increased 360 basis points to 61.1%. Let me provide some additional detail on our Q2 gross margin. The reported 61.1% rate did not include any IEPA refunds. the 360 basis points of year-over-year expansion, approximately 240 basis points related to lower year-over-year tariffs. The remaining expansion of 120 basis points was driven largely by our streetwear brands, a direct result of higher full price selling, partially offset by higher air freight costs. Our outlook, which I'll cover in a moment, assumes a gross margin of approximately 59% for Q3 and reflects current tariff rates and elevated air freight costs. Moving to selling expenses. Selling expenses were $47.8 million compared to $45.4 million a year ago, which The increase was driven by higher in-store selling expenses as we continue to increase our retail footprint. As a percentage of net sales, selling expenses were 29.9% compared to 28.3% a year ago. Marketing expenses were $21.4 million compared to $19.9 million a year ago and 13.3% of net sales. General and administrative expenses were $27.5 million flat with a year ago. Adjusted EBITDA increased 16% to $8.7 million in the second quarter, our highest quarterly adjusted EBITDA since Q2 2022, driven primarily by higher gross margin. This compared to $7.5 million a year ago. Our adjusted EBITDA margin grew 80 basis points to 5.5%. Turning to the balance sheet, we ended the quarter with $21.1 million in cash and cash equivalents compared to $23.1 million a year ago. During the quarter, we received substantially all of the $25.8 million in expected IEPA tariff refunds, which is reflected in our operating cash flow. Total debt at the end of the quarter declined 8.1% to $99.9 million from $108.7 million a year ago, as we continue to focus on reducing our leverage and strengthening our balance sheet. net leverage declined to 3.37 times at the end of the quarter compared to 3.5 times a year ago. We ended the quarter in a healthy position with $79.9 million in inventory, down 13.6 from a year ago. Turning now to our outlook, we're pleased with our strong start to Q3 with net sales up high single digits and are confident in the strategic initiatives in place as we head into the back half of the year. We are reiterating our guidance for fiscal 2026. We continue to expect net sales to be between 625 to 635 million and adjusted EBITDA of between 30 to 32 million. For the third quarter, we expect net sales to be between 160 and 164 million. As I mentioned, we expect gross margin of approximately 59% and adjusted EBITDA of between $8 and $8.5 million in the third quarter. For modeling purposes, we expect to incur a one-time charge of approximately $3 million in Q3 related to a planned distribution center relocation that will be reported in selling expenses but excluded from adjusted EBITDA. For the full year, we anticipate fiscal 2026 stock-based compensation of approximately six and a half to 7 million, depreciation and amortization of expense of roughly 20 to 21 million, interest and other expense of approximately 16 to 18 million, an effective tax rate of negative 10%, CapEx between 18 to 20 million, million and weighted average diluted share count of approximately 11 million. In closing, we are pleased with our execution this quarter against our strategic plan. We believe we are well positioned to build on this momentum and continue delivering long-term value for our stockholders. With that, we'll open the call for questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hand before questions. Thank you. Our first question is from Ryan Myers with Lake Street.

Hey guys, thanks for taking my questions. Congrats on the strong quarter. Just thinking about the unchanged revenue guidance, obviously you guys are expecting to see some pretty significant momentum here in the second half of the year. I know you faced some easier compares from last year's second half. But just walk us through maybe what you're seeing in the business right now is demand picking up? Is it maybe a continuation of what you saw in the first half of the year, just so as we understand kind of the strength in the second half of the year?.

Yes, thanks, Ryan. I think it is great to see that we're no up high single digits as we go through Q3. I think look, it's somewhat the performance, I would say, certainly for US and rest of the world that we started seeing as we saw improving comms, and performance as we went through Q2. And look, with US is running up double digits, quarter to date, I think there's a combination of drivers there, right? I would say compared to this time last year, our inventory is just in a, a much better position and our inventory flows in a much better position. We certainly had a lot of challenges last year as we made such significant transition to our supply chain. We also have more wholesale partners, more marketplace, more distribution points. which continues to build there. And then look from a store perspective, we have seven more stores a year you know, as we can, we'll end Q3 than we had last year. So obviously some, some nice comp from there. And I think, look, one of the standouts of last quarter was that, you know, the performance that we saw in, in the rest of world group and, and, particularly kind of, you know, what we see happening from opening up that UK distribution centre with rest of world up over 50% in the quarter. So I think, look, there's a lot of There's a lot of strong momentum across the business. And I think, you know, great, like I said, to see us back at double-digit growth in the U.S. and high single digits overall.

Right, for sure. And then thinking longer term, you guys had said Princess Polly targeting at least 100 stores. So what are you seeing from the current store base in terms of productivity and paybacks that kind of gives you the confidence in that target longer term?.

Yes, I think, you know, with 13 doors open so far, so look, it was still early days on kind of the opportunity that we have. You know, we'll do another look to do another 10 at least next year and then certainly see kind of 100 potential in the US. And I think, look, what we're seeing at the moment is that, you know, the stores are introducing to new customers. They also have a nice halo effect for the online business. And we just see really, really strong productivity. We're modeling the mall to have a payback of two years or less. And I would say we're seeing kind of better performance than that across the fleet. And I think, look, we're still early days. I think how we are evolving our approach to assortment, being more evergreen, I think is particularly helpful for the stores. Excited to see how they perform now in the back to school season with more of that denim fleece and tops inside there, and just kind of really showing up in a strong way for their customers. So yes, I think we're just really excited about the opportunity.

Got it. No, that's great to hear. Thanks for taking my questions. Our next question is from Eric Better with SCC Research.

Good afternoon. Congratulations. Let's talk about Culture Kings. When we see the new stores coming to Puerto Rico in the metropolitan area, how can you compare and contrast that with what we're seeing, what the stores were in Vegas? and how you're looking upon kind of leveraging those.

Yes, I think, look, Eric, we are super excited, you know, that we will have another two stores open for Culture Kings in the US before the end of the year. as you said, one in Puerto Rico, one in another major metropolitan area. I think the stores that we will open will be more in that kind of 4.5 to 5.5, 6,000 square foot size. So certainly smaller than Vegas. From a size perspective, I think it won't have some of the really big features that Vegas has. But I think we'll take a lot of learnings from the new Brisbane store that we have in Australia, how well that's performing, and what we've learned from Vegas. I think it'll very much continue to be, I would say, headwear, footwear, core components of the store, also really leading with our own first-party brands. And I would say in particular, Minimal, Leuter, you know, St. Martha, American Trift continue to, you know, have really strong performance, you know, and I would say now kind of across the world as we bring in new products, you know, we're starting to see that. how it's a meaningful increase to the overall gross margin of the business. But we can also see on that newer product we're bringing in, in Australia and the US, it's growing double digits, even more growth from a gross margin dollar perspective. So I think it's going to be great to have some more doors open.