Greetings and welcome to a.k.a. Brands Holding Corp. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Emily Schwartz, Head of Investor Relations and Corporate Communications. Thank you, Ms. Schwartz. You may begin.

Good afternoon. Thank you for joining a.k.a. Brands' second 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 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 our earnings release furnished to the SEC and available on our website. With that, I'll turn the call over to Ciaran.

Thanks Emily. Good afternoon everyone and thanks for joining our call to discuss the second quarter. We continued to execute against our strategic initiatives and have made significant improvements in our operating efficiencies, which enabled us to deliver on our EBITDA and cash flow expectations for the quarter. We also continued to strengthen our balance sheet by way of strategically reducing our inventory and paying down our debt. And importantly, we are increasing our addressable market, particularly in the US by introducing our brand to new customers through our direct-to-consumer and omnichannel initiatives. Net sales for the second quarter were $136 million. The US delivered $80 million of net sales, which was in line with our expectations and represented a 12% increase on a two-year basis. The US continues to be our largest and most robust region and we remain keenly focused on expanding our brand's presence and increasing awareness in this market and we are very pleased with the ongoing progress. The in-line performance in the US was dampened by continued macro pressures and consumer challenges that we're facing in the Australia region. In addition to the macro environment, we have identified opportunities that we are aggressively addressing, which I'll provide further color on in a few minutes. Despite the softer than anticipated net sales in Australia, there are a lot of green shoots and highlights to take away from the quarter. I'm very pleased that we delivered $5.6 million of adjusted EBITDA and $10 million in operating cash flow, in line with expectations. Importantly, despite our net sales declined from the second quarter last year, we were able to deliver the same level of EBITDA, which is a testament to the discipline and incredible work the teams have done to build structural efficiencies across our operating model, while…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question comes from the line of Oliver Chen with TD Cowen. Please go ahead.

Hi, Ciaran. Thanks a lot. Regarding inventory, how would you contrast the inventory relative to sales as you think about Australia versus the U.S,.? And as we think about the Australia as well what factors could be within your control? It sounds like it's a dynamic cautious environment. And then second question on the gross margins. You had impressive full price selling, although we're in a pretty mixed consumer environment. Could you elaborate on how you achieve that? And what does the guidance assume going forward in terms of full price selling and promotion? Thanks a lot, Ciaran.

Thanks, Oliver. Yes, I think, it's really good to see the progress, we've made on inventory. It was certainly something we've been very focused on. We're down $37 million since Q2 last year. And I think look that's going to be a continued focus for us, as we go through the back half of the year. We do want to see inventory dollars come down sequentially. I think as we think about the composition of the inventory, I think, overall, we feel good about it. We feel good about the quantity of the inventory that we have. I think in Australia, I think, the women's brands are fully on test and repeat and with that able to adjust inventory really quickly. Culture Kings isn't there. And we still have work to do to get them on test and repeat. I think because of that we're seeing that their inventory and the newness isn't there like we have with the other brands. That is impacting their comps. And I think we're seeing that -- we're seeing that even more so for Culture Kings in Australia, where the comps there aren't as good as the brands that are fully on test and repeat. I think look we are aggressively taking actions in Australia, as we think about the -- as we look to the peer set there. We also see them negative comping, but we expect to be doing better. And so there's a lot that we're doing on newness in product, but also just operational efficiencies that we want to make. We are removing on productive SKUs. We expect that to help with gross margins, marketing productivity and just actions really across all the brands and all of the areas. Then as it relates to gross margins, yes, it's great to see gross margins up nearly 170 basis points year-over-year. And I think really that is a testament to the test and repeat model that we have now fully implemented at three of the brands and bringing newness -- well kind of that newness has allowed us to be better at full price selling. We do see the customers really reacting positively to that newness. As it relates to the back half of the year, we expect that we will be similar gross margins in Q3 to where we were in Q2. In Q4, we would expect them to be seasonally lower as we've kind of seen for the last number of years. We expect it to be more promotional in Q4, and for us that's all contemplated in our guidance.

Thank you. Best regards.

Thank you. Next question comes from the line of Edward Yruma with Piper Sandler. Please go ahead.

Hey, good afternoon. Thanks for taking the question. I guess, just first to follow-up on Oliver's question. Given the trends in Australia, are you able to kind of shift inventory around or at least some of the orders and buys and put them in the U.S. versus Australia? And then a broader question. You guys mentioned a litany of alternative distribution model test right the marketplace at Target stores and some select wholesale. I guess kind of what's the biggest needle mover in the medium-term? And what could the potential impact to the P&L be? Thank you.

Thanks Ed. Yes. As it relates to inventory, I think -- look, we do feel really good about the overall composition. We've made a lot of progress bringing it down across all the brands and all the regions. I think for us it's just not at the same pace at Culture Kings than we've been able to do on the other three brands. With it being men's and the streetwear sector that Culture Kings is in there's certainly a longer life there to the inventory and less of the fashion risk that we see on the other three brands. So overall, I think we feel good about it. As there is opportunities, we are moving the pacing of some of the inventory and putting it in the US rather than Australia. So I think we'll be good there overall. And then as it relates to the omnichannel opportunities, I think as we've talked about focused in three areas: wholesale, some marketplaces and then looking forward to opening our first store with Princess Polly in Q3. I think shorter term, obviously, I think the packs on progress is just really nice to see for Princess Polly going from a test in 15 doors to now being in 100 stores tomorrow, it's just really nice to see that over the last four or five months. I think as it relates to the kind of short, medium-term, those wholesale opportunities are probably more impactful. But look, we are -- we've had really good progress across all of the tests, right? We've learned a lot and we learned a lot that we can apply in each of the brands in those omnichannel opportunities. So we're just going to continue to lean into each of them across the brands. And I think overall it will certainly be beneficial both to the comp and to our EBITDA dollars.

Thank you.

Thank you. Next question comes from the line of Alice Xiao with Bank of America. Please go ahead.

Hi. Thanks for taking my question. Can you elaborate on the monthly cadence of performance in the quarter, and also how trends have been quarter-to-date, both generally and by region or by category? Anything you can share quarter-to-date. Thank you.

Sure, Alice. Yes, I think as we went through the quarter, we saw -- overall in the business we saw slight improvements as we went through Q2. I would say they were -- we saw more improvements in Q2 in the US and that really coming from obviously kind of lapping a tough June for us all last year but also just from some of the omnichannel initiatives we saw helpful as well. We saw pretty consistent pressure in the Australia region. And then as it relates to this quarter, what we're seeing in July is continued improvements in comps in the US and we expect to be -- and our guidance contemplates positive growth in the US in Q3 and Q4. We're seeing the same declines in Q3 quarter-to-date as we saw in Q2 for the Australia region.

Thank you.

Thank you. Next question comes from the line of Ike Boruchow with Wells Fargo. Please go ahead.

Hey, thanks. Hey Ciaran. A couple of quick questions I guess just to the point of the last question. In Australia, so are you baking in similar declines in the back half as you're seeing so like kind of roughly down 30 in the back half? And then you had made a comment in your prepared remarks around that macro pressure lasting even into the first half of next year. I guess, first question is what's embedded in the back half? And then, based on the pressure you're seeing in Australia, at what point do you believe is reasonable for the overall business to return to total top line growth?

Sure. Thanks, Ike. As we think about the back half, I think you'll see kind of from the guidance, we're expecting the same of nearly think about it first kind of same volume of dollars by region in Q3 that we saw in Q2. A small uplift on the top end of the guidance and that coming from the US region, rather than the Australia region. I think, we expect comps in Q4 -- obviously, in Q4 to be better in both regions. Now, look that's very much as well related to the actions we took in Q4 last year, where we pulled pretty hard back on newness of inventory across the brand, but also very much on the marketing dollar spend across the brands last year, right? So, in Q4 this year, we expect the marketing dollars up a little bit on a rate basis year-over-year, but from a volume perspective, it will be up in the high 20s year-over-year. So I think, with that level of marketing dollar increase, we would expect comps to be better in Q4 this year. And then I think, as we think about next year, I think certainly as we kind of get into -- I would say kind of for me like it's going to pass Q1 into Q2, I would expect us to be back positive comping in the overall business. We certainly see the US back to positive comping in Q3. And look, it continues to be a larger and larger part of our business. It's certainly the biggest opportunity for us from a growth perspective. We're very focused on this and seeing a lot of benefits from the omnichannel initiatives. And I think leaning into all of those can get us back to positive growth.

Got it. And I'm sorry, if I missed it, but I think I heard you say similar gross margin rate in the third quarter as that you saw in the second quarter. I don't -- sorry I might have missed that. I didn't think I heard you comment on the full year gross margin. You had said up 100 bps three months ago? I mean, I imagine it's higher right now. I missed that, or can you give some color on the full year gross margin?

Yes, sure. So, yes, I talked about kind of Q3 being similar to Q2. I think from an overall perspective, yes, we would expect to be kind of -- I think be up around 100 basis points as we think about the overall year. Obviously, we're kind of -- we've been running higher than that so far year-to-date. I think, I am expecting us to just have a little bit of room as we think about promotional activity in Q4 and particularly in the Australia region.

Okay. So just reiterating the up 100 bps that you had already given?

Yes.

All right. Thank you.

Thank you. [Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to Ciaran Long for closing comments.

Thanks, everybody. I appreciate your call and your questions and looking forward to talking to you soon.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.