Greetings. Welcome to a.k.a. Brands Holding Corp. First Quarter 2023 Earnings Conference Call. [Operator Instructions] At this time, I’ll turn the conference over to Emily Schwartz.

Good afternoon. Thank you for joining a.k.a. Brands first quarter 2023 conference call to discuss the results released this afternoon, which can be found on our website at ir.aka-brands.com. With me on the call today is Ciaran Long, Interim Chief Executive Officer and Chief Financial Officer. Before we get started, I’d like to remind you of the company’s safe harbor language. Management may make forward-looking statements, which refer to expectations, projections and 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 from those expressed. 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 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. The call will also contain certain numbers presented on a pro forma basis, which includes the impact of Culture Kings as if we had owned it for all periods and comparable periods described. With that, I’ll turn the call over to Ciaran.

Thanks, Emily. Good afternoon, everyone, and thanks for joining the call today. Our first quarter results exceeded our expectations on both the top and bottom lines, driven by solid execution across the brands and our continued focus on managing the business prudently. We delivered net sales of $120 million compared to our original expectations of between 113 and $116 million. Importantly, we continue to balance growth and profit, and I’m proud that we delivered $2.2 million of adjusted EBITDA, which also exceeded our original expectations. We made great progress against our strategic initiatives in the quarter, and I’m also really proud of the efficiency improvements we made to our operations. A key highlight for the quarter was our diligent approach to managing our inventory. Notably, we ended the quarter with $112 million in inventory, which is down 11% since the end of December 2022 and down 7% from the same period last year. Another highlight was that we continued to reduce our debt levels. We paid off over $11 million of debt in the first quarter and paid off another $10 million subsequent to quarter end. This brings our current debt levels down to $122 million, down from $144 million from the end of fiscal 2022. We remain focused on strengthening our balance sheet and plan to continue to pay down our debt through the remainder of the year. I want to thank our teams for their hard work and execution to deliver a strong start to the year with first quarter performance that exceeded our expectations on both the top and bottom lines. We are laser-focused on growing awareness with Gen Z and millennial customers. On a trailing 12-month basis, we served 3.6 million customers, and we’re confident that there is great potential for our brands to gain market…

Thank you. [Operator Instructions] And our first question today is from the line of Oliver Chen with TD Cowen. Please proceed with your question.

This is Joanne for Oliver. Just curious, what gives you confidence about the second half rebound in terms of sales growth? And considering all regions in the U.S. and Australia, how that would sort of trend and then also if you can comment on the current promotional environment across regions and if you are sort of happy with your current inventory position as well? Thank you so much.

Okay. Thanks, Joanne. I think first, as we kind of think about the back half, I think really we’re happy that we kind of did a little bit better than we expected in Q1. And particularly happy to see the U.S. up 44% on a 2-year stack and really see – it’s good to see customers again really engaging with the brands. I think as we think about the back half, we’re very focused on just execution, balancing growth and profit and making progress on those growth initiatives that we’ve talked about. Our Q2 guidance and back half guidance, Q2 certainly contemplates what we’re seeing going on at the moment with customers. I think – I suppose looking forward to getting into the back half where comps ease for us slightly relative to last year. And then just on a regional basis, I think we continue to see that both region is quite different. We’re glad to know the U.S. is 60% of the overall business. And I think as we went through the quarter, we did see promotional activity there lessen somewhat, and that came as we got into more newness of inventory. And with that, we were able to spend more into marketing and saw more efficiency there. And so it’s just kind of good to see the progress there. I think we still did see conversion pressure in the U.S. I think the consumer is mindful of what they are spending. But look, we are seeing strength in kind of some relevant products. And so kind of looking for that progress to continue, I think in Australia, it’s obviously more challenging, and we see that in the results. I think the consumer there is pressured with inflation and interest rates and the kind of dramatic shift back to stores. We do see that we have fairly similar performance to the concept that we look in the region at in the region, but we’re not looking for the comps to change there anytime soon.

Got it. And just on the promotional environment, what are you seeing there? And how are you positioned with your inventory?

Yes. Thanks. It’s – for us, I think it’s really great to see that inventory is down 7% year-over-year and 11% in units and kind of really good progress there. And being able to do that and hold margins flat year-over-year, I think really is a testament to the power of the test and repeat model that we have. I think we still see promotions elevated – certainly elevated from where they were last year. I think they sequentially have eased since Q4, but we are expecting them to remain elevated as we head into – as we go through Q2. And that’s why I think we expect our margins to be pretty – our gross margin to be pretty flat year-over-year.

Got it. Thank you so much.

Our next question is from the line of Edward Yruma with Piper Sandler. Please proceed with your question.

Hey, good afternoon. Thanks for taking the question. And Jill, if you’re listening, best wishes and we’re pulling for you. I guess, first, we’ve had some companies report kind of a better trend kind of quarter-to-date or current 5 weeks with March having maybe seen a trough. I guess, I know you talked about some better response and newness, but I was wondering if you could kind of give a little bit of color on the intra-quarter cadence and exit trajectory? And then second, as you kind of explore some of these alternative channels for Princess Polly, if it’s wholesale, the store opening, I guess, kind of in the medium-term, what percent of sales do you think they will account for or are you still at this point really much in test? Thank you.

Thanks, Ed. Yes. So as we think about trends going through the quarter, I think certainly started the quarter, as we talked about on our last call, really that heightened promotional activity from that was there in Q4, continued in through the first half of the quarter. I think as we saw that easing, we were also making really good progress on just the newness of inventory, particularly across the women’s brands. And with that, we were able to spend into more marketing. We did see our comps get better as we spent into that additional marketing. And I think really coming from more traffic, we’re certainly seeing that conversion is still challenged as we go through the first kind of 4 months of the year. I would say, what we’re seeing in the first part of Q2 is pretty similar trends to what we saw towards the end of Q1. We haven’t seen a big change in trend over that kind of March, April into early May period. So that’s pretty consistent at the moment. And then as we think about these kind of omni initiatives, really, I think for us, we’re – look, we’re really happy that we are predominantly a direct-to-consumer business and a direct-to-consumer business that consistently and has always generated EBITDA, back now generating cash, which is great. And we are looking for that part of our business to be – continues to be our main focus and our main growth driver. Having said that, we do understand that it’s key to being a next-generation brand, it’s just being everywhere our customers are. And so we are looking to introduce our brands to just more and more customers, build brand awareness and ultimately increase the total addressable market for each of these brands, and that’s why we’re doing these omni tests. I think near-term we don’t have any set percentage, Ed, on kind of what we’re looking to get out of any of these channels. I would say, all of the brands are doing tests on different omnichannel opportunities and initiatives. In the last couple of months, we’re learning a lot. We’re continuing to learn. And I think we take those and obviously lean into our first Princess Polly store, which we’re looking forward to that opening in Q3, but we will continue to push on those initiatives as we go through the year.

Thank you.

The next question is from the line of Alice Xiao with Bank of America. Please proceed with you question.

Hi, thank you for taking my question. Can you please elaborate on just the gross margin puts and takes throughout the year? And just wanted to clarify, was that flat gross margin guidance for 2Q specifically? And then I just wanted to confirm that for the fiscal year, you’re still expecting about 100 basis points of improvement as we lap some of the freight costs and product mix impacts? Thank you.

Yes. Thanks, Alice. Maybe I’ll take those backwards. Yes, I think over the year, we’re expecting it to be about 100 basis points of improvement and we see that coming in the back half of the year. What we saw in Q1 is that we were flat year-over-year on gross margin. And look, we’re really pleased that we were able to do that while bringing down our inventory, as I talked about, and doing it in a time when it was a heightened promotional environment year-over-year. I think we’re expecting the same in Q2 that we would be flat in gross margins year-over-year. And for us, that’s the promotional environment that we’re seeing today will continue, but we will really lean in – continue to lean into that test and repeat model. And with that, continue to bring on product newness and we feel that will offset some of that promotional activity that we’re seeing. We are obviously starting to get the benefit of lower inbound freight costs as well. And that’s also helping as we kind of – as we take advantage of the newness.

That’s super helpful. Thank you. And then secondly, I was curious to hear more about the Target launch. You talked a bit about the PacSun. Just curious what percent of assortment are available on both wholesale partners? And throughout the year, are you planning to make more – larger percentage of the assortment available?

Sure, thanks, Alice. So Petal & Pup puts – are doing tests on target on their curated marketplace. We’re seeing some really nice results there. They have probably 60% of their assortment, which is obviously quite a bit smaller than Polly on target, and it went up in probably mid-February. We are seeing nice progress as we’ve kind of gone through the last 3 to 4 months with it. And we’re – as we learn kind of improving the experience that customers have there, adding reviews, adding size charts, just kind of basic block and tackling stuff. I think we are seeing that it is introducing new brands to different customers, and we are able to clearly see that. And we also see that different parts of the assortment is doing – has a different share and a different impact on target. So I think at this stage, learning some – a lot of nice things. We see a lot of opportunity there. We’re still very much in test mode, and we will update you again next quarter as we learn more.

Great to hear. Thank you.

[Operator Instructions] The next question is coming from the line of Dana Telsey with Telsey Group.

Hi, good afternoon. And also please extend our thoughts of getting well quickly to Jill. As you think about the active customer count, it looks like the active customer count from the fourth quarter to the first quarter changed to the negative. What did you see there? What did you see by brand? How did it differ? And then also in terms of the Petal & Pup and Princess Polly and Culture Kings, any difference in level of promotions by brand? And what you’re seeing or what you’re doing in the environment?

Thanks, Dana. Yes, on active customers, we saw a decline of about 5% year-over-year and sequentially from Q4. And just as a reminder, that’s a trailing 12-month number. And as we expected, I think pulling back by 25% on volume of marketing dollars in Q4 certainly impacted our active customer count. And we saw that as we kind of went through the Q1 as well. It was certainly more impacted early in the quarter. I think as we saw newness return into the brands, marketing effectiveness improves and we’re able to increase our marketing dollars, we did see the count improve. I would say, we’ve seen it more on repeat customers and the older cohorts coming back first. And I think some nice improvement there as we’ve gone through the year and starting to see them kind of return to the historic repeat rates that we have seen. We’re still down on new customer count. And I think that’s based on kind of what we’re seeing on tax and in the market, that’s very much understandable. I think we expect to be down on active customers probably as we go through Q2 and Q3 of this year and would expect to be back kind of positive in Q4. But look, I think that’s partly why we are looking at these other omnichannel initiatives as well. We want to get these brands, introduce them to – continue to introduce new customers to the brand, build awareness and ultimately increase that TAM. And then, Dana, on promotions – or sorry, just on active by brand, I would say, we pretty much saw the same percentage impact across the brands. So no huge difference on a – and that was on a regional basis as well as in the U.S. Although I would say, kind of Culture Kings in the U.S. is – did see positive active customer growth, and that’s really coming from us opening the store in Vegas in November and just that really is having a positive impact for us in the U.S. And then just promotions by region, really similar across the regions, I would say, just that heightened promotional activity was certainly there in the quarter, easing as we went through the quarter. I would say, we probably saw – we see customers reacting more to promotions in Australia than we see in the U.S. They are a little bit more sensitive to those.

Thank you. Just one follow-up, debt pay-downs, how are you thinking of debt pay-downs for the balance of the year?

Yes. Thanks, Dana. I’m glad to be talking about that we’re paying down the debt and that we paid down $21 million so far year-to-date. Look, we’re going to continue to manage the business prudently, strengthen the balance sheet and bringing down our inventory dollars sequentially and bringing down our debt dollars sequentially quarter-over-quarter as we go through the year is a focus for us and important for us. We don’t have any set number there, but we’re just going to keep making progress as we go through the year.

Thank you.

Our next question is from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Hello, everyone. This is Jesse Sobelson on for Ike. Can you just refresh us on the composition of the $120 million or so in current outstanding debt? And what covenants, if any, are associated with the trenches? Thank you.

Sure. Thanks, Jesse. Yes, so within that debt, I think it was €130 million at the end of the quarter. Within there, there is $30 million of revolver and we paid down an additional $10 million on that revolver post end of quarter. And then there is €104 million of term debt. Covenants are – we’ve got a 3.5x from a leverage perspective and about 1.25x from a fixed charge coverage with obviously some add-backs for one-off stuff. And we’re well within all of our debt compliance covenants and we are feeling good shape overall about the debt and we will look to continue to bring that down as we go through the year.

Great. Thank you very much.

Thank you. At this time, we’ve reached the end of the question and answer session. Now I’ll turn the call back over to Ciaran Long for closing remarks.

Thank you all for joining. We really appreciate your participation. Thank you for the well wishes for Jill. I know she is on the call listening today. We talk to her quite often. Yes, thank you. Good to hear from you all and thanks.

This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.