Greetings and welcome to the a.k.a. Brands Holding Corp. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 Emily Schwartz. Thank you. You may begin.

Good afternoon. Thank you for joining A.k.a. Brands third 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 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 third quarter earnings call. Before I discuss our key priorities and review our results, I want to highlight some important takeaways from the quarter. We delivered growth in the U.S. business. Our balance sheet and financial condition is strong. We generated positive operating cash flow in the quarter. We're taking aggressive action to right-size our inventory position in Australia, and we have been in the market purchasing our shares, which we believe offer tremendous long-term value. As laid out last quarter, we've been laser-focused on three priorities for the back half of the year. First, chasing demand and building awareness through increased levels of newness and expanding our omnichannel initiatives. Second, improving our operations by reducing our inventory levels. And third, strengthening our balance sheet by paying down additional debt. I'm pleased to announce that we've made progress against all three priorities and will continue to advance these initiatives throughout the remainder of the year. As evidenced by our in-line sales performance, we continue to chase customer demand. Fashion newness is resonating well with our customers, and we are increasing our total addressable market, particularly in the U.S., by introducing our brands to new channels and customers, including the opening of our first Princess Polly store in September. We continue to strategically reduce our inventory, which is down $37 million year-over-year and down 21% since the beginning of the year. And lastly, we paid off an additional $13 million of debt in the third quarter, which brings us to a year-to-date debt reduction of $37 million or 26%. I'm very proud of our progress against these initiatives, and I want to thank the team for their hard work and commitment to our brands and customers. Net sales for the second…

[Operator Instructions] Our first question comes from the line of Edward Yruma with Piper Sandler. Please proceed with your question.

Hey guys, thanks for taking my question. And Jill, best of luck in the future. I guess I just want to click down a little bit on the Princess Polly store. Obviously good to hear it's off to a good start. I guess, is this the start of a broader retail strategy? I know you always have Culture Kings. Do you foresee opening additional doors in either of those concepts? And then as a follow-up, I just wanted to understand a little bit more on Australia. I guess is this basically the end of kind of restructuring that business or do you think if volumes fall further, that there may need to be additional expense action? Thank you.

Thanks, Ed. Yeah, I think we're really pleased with the opening of the Princess Polly store and really all the omnichannel initiatives that we have going across all four brands are in at least three channels at this point. The Princess Polly store is off to a great start and really solid run rate and we expect it to be over 20% from an EBITDA perspective. Look, it's also great to see that 30% of the customers coming into the store are new to Princess Polly, and all of that gives us a great feeling to kind of invest and continue investing in the kind of the long-term of that brand. And we're delighted that a couple of weeks ago, Sarah joined us as Head of Retail for Princess Polly and brings her background from Lululemon where she managed 400 stores in the U.S. And we feel with that, we will expand our retail footprint for Princess Polly. Next year, we're looking to do three to five doors and we'll let you know as we kind of get more on locations and update you as we go. And specifically on Culture Kings, I think we feel really good with Ian and Wes in place there now and then bringing their expertise from Princess Polly and the deep understanding of the Tesla Repeat model into Culture Kings. We've seen across the other three brands, the benefits from that Tesla Repeat model and I think it's really core to us being back to growth and that 2% growth we saw in the U.S. in Q3. They are already taking actions and making progress. We feel we've seen more progress as we go through the first half of next year, but kind of expect that it would be the back half of next year before we see the full impact of that. But certainly believe there's still a lot of value in that brand and long-term growth in that brand, and we're already seeing that in the U.S.

Great. Thanks so much.

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

Hi, this is Juliana on for Ike. Thank you everyone for the question. A quick one here. I was just wondering if maybe there's any additional commentary on the monthly sequential performance this past quarter, and if maybe there's any notes on what we've seen in the current month and expectations for holiday. Thank you.

Thanks, Juliana. Yeah, I would just touch on – I think we've seen continued improvements as we've improved the quality of the inventory across the brands. I think with the test and repeat model at three of the brands, we really made progress on those. In January, those three brands got to a situation where their inventory growth was lower than their sales growth, and we've seen that continue as we've gone through the year. And so just really happy to be back at growth in the U.S. and that 2% growth. I think as we think about Q4, we feel like we've got great quality of inventory. We've got the right product. We feel we're set up for a strong holiday and are just going to lean into and execute against that.

Great. Thank you so much.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Hi. Good afternoon and best regards to Jill. As you think about the gross margin Ciaran, how do you unpack it? The discounting in Culture Kings, how do you think that moves going forward, the high return rates and some of the offsets to that? And then on the adjusted EBITDA side and the guidance that you provided, as you think about this fourth quarter, how promotional do you need to be with third quarter inventory down 21%? How are you thinking about inventory for the balance of the year? Thank you.

Sure. Thanks, Dana. I think as we head into the fourth quarter, I would say we are clearly looking at the trends we've seen in the third quarter. And really great to be back to growth in the U.S. with that 2% and seeing strength across all of the brands and with all of the omnichannel initiatives that we have in place now in the U.S. and more coming internationally. Again Australia, kind of expecting the same trends that we've seen. As I mentioned in my remarks, we invested about 105 basis points of gross margin with the actions we took to move through inventory at Culture Kings in Australia in Q3. I think as we head into Q4, we certainly feel it won't be as promotional as last year. With the test and repeat model we have, the inventory at three of the brands, it’s just really, really strong. But we do remodeling that will be down about 100 basis points versus last year for Q4 this year, and that's really the big driver of the changing guidance for us as we think about Q4. I think really happy in the other areas of the P&L to see that we're leveraging now on selling expenses down year-over-year and G&A. Certainly up a little bit these days in marketing like others, but I think as we continue to lean into the omnichannel initiatives, that will balance out over time.

Thank you.

Our next question comes from the line of Ashley Owens with KeyBanc. Please proceed with your question.

Hi. Thanks for taking the question. Overlapping the year opening of Culture Kings in Vegas, is there anything you attribute the strength in the U.S. to it? And then maybe any insights you've identified that you could implement as you look to rework your strategy in Australia? Thanks.

Yeah. Thanks, Ashley. I think it's great to see the brands resonating with our customers. I think that's really a testament to having just great quality on-trend product at an accessible price point. And I think that's where we have just – we’ve always leaned in and we're going to continue to lean in. I think, as we look across the brands, I think they are all just doing some really great work. You see Princess Polly continues to be in the top 10 for Piper Sanders team survey. We continue to see NBA, NFL players and more every day wearing minimal products. People like Victoria's Secret looking to work with Petal & Pup. And then you've got Culture Kings. I think what they are doing at McLaren at the moment is just a great example of how differentiated our brands are from a merchandise perspective and also from a marketing perspective. And I think all of the brands are going to continue to lean into their differentiation. They are going to do that on the direct-to-consumer side, and we're also really starting to see some of the early signs that what we're doing from an omnichannel perspective really has a big opportunity for these brands. I think we see that with the growth in the U.S., but also with the partners that we're working with now and that we're looking to work with. I think we're still a little bit behind from an active customer perspective, but it's great that we see that. At Marketplace, between Target and Macy's, 96% of those customers are new to Petal & Pup. We see 30%, as I said; of the customers coming into Princess Polly stores are new to Princess Polly. I think there’s just – there's a lot of opportunities for these brands and we're going to continue to lean in and execute against it.

I appreciate the color. Thanks.

[Operator Instructions] As a reminder, ladies and gentlemen, it is star one to ask a question. We do have a follow-up question from the line of Dana Telsey. Please proceed with your question.

Oh, I must have pressed incorrectly. I apologize.

Well, there are no further questions in the queue. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.