Greetings, and welcome to the a.k.a Brands Fourth Quarter and Fiscal 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. At this time, I would now like to turn the conference over to your host, Emily Schwartz.

Good afternoon. Thank you for joining a.k.a. Brands fourth quarter and fiscal 2023 conference call to discuss the results released this afternoon, which can be found on our website at ir.aka-brand.com. With me on the call 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, adjusted EBITDA margin, adjusted gross margin and free cash flow. 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 call. 2023 was a transformational year for a.k.a., and I want to thank our teams for their continued dedication to building next-generation fashion brands for the next generation of consumers. As a group, we stepped up to every challenge, created new opportunities, expanded our customer touch points and significantly strengthen our balance sheet. Before I go through the results, I want to share a few highlights from the year. We delivered U.S. net sales growth of 1% inclusive of 12% growth in the fourth quarter. We generated $33 million of operating cash flow. We reduced our year-end inventory by 28% compared to last year. We paid down approximately $50 million of debt, reducing our debt levels by 35%. We opened a Princess Polly store in Los Angeles, propelling the brand into physical retail for the first time. Culture Kings demand continued to accelerate in the U.S. and registered double-digit net sales growth for the year. And lastly, we tested and expanded a number of omni-channel initiatives across our brands, including wholesale engagements with Paxson, Victoria's Secret and Liverpool. And marketplace partnerships with Target and Macy's, which exceeded our expectations. Turning now to the fourth quarter. We delivered $149 million of net sales, which was flat to last year. As I mentioned, we were very pleased that the U.S. business grew 12% in the fourth quarter, which is a testament to the strength of our offering. As a reminder, our U.S. region is now our largest market and where we see the greatest potential moving forward. Despite the strength in the U.S., our total net sales came in slightly below expectations due to the ongoing headwinds in the Australia and New Zealand region and we delivered $1.3 million of adjusted EBITDA,…

[Operator Instructions] Our first question comes from the line of Youssef Squali with Truist Securities.

Starting with the weakness in Australia and New Zealand, can you maybe help us parse out what's macro and what's the maybe specific execution issues of the company and what you're doing there? And also related to that, what's baked into the guide or flat revenues for 2024 between U.S. growth and New Zealand and Australia and rest of the world? And then I have a follow-up.

As we think about the Australian market, I think overall, look, it was great to see that the U.S. market grew 12% in Q4. I think Australia down 12%, obviously getting better than what we saw in Q3, but still very much a pressured market there. As we look across our brands, we were down. And from a similar perspective across them, I would say, more pronounced that Culture Kings, where we're not fully on the test and repeat model that we have fully implemented at the other brands and is really helping that growth and driving a lot of that growth that we saw in the U.S. way and the team who came over from Princess Polly are working hard to implement that test and repeat model. We expect to see the first product come in from that kind of mid-Q2 and with that, we'd expect to see improvements in comps and improvements in gross margin as we go through the back half for Australia. As we think about the overall year next year, Youssef from an Australia perspective, we are modeling to be in that kind of negative mid-teens for the year. I think we're kind of expecting to be in negative mid-20s in Q1 and improving as we go through the year. And look, that's kind of somewhat based on what we see and knowing that the benefits of test or repeat will take some time to flow in the market.

And then on the debt management. Help us think through the path to the debt repayment, how much of it is coming due when and how much money do you need to actually continue to run the business? What's the minimum amount you need to run the business?

Look, I think we're really happy that we paid down $50 million of debt last year, down 35% and really that coming from just the strong cash flow, the operating cash flows we had of $33 million. And obviously, a big driver of that was the EBITDA we delivered but also just bringing down our inventory dollars by $35 million last year, it's really helpful. I think as we think about our debt, it becomes due in September, kind of Q3 2026, right? So it's still a ways out. And I think as we think about that, we expect to continue to make progress on paying down our debt, strengthening the balance sheet as we go through this year and next. And look, that's just going to come from the operating model that we have. We continue to generate EBITDA and expect to have strong cash flows from our EBITDA and also just continued improving our working capital management as we go through this year and next.

Our next question comes from the line of Ashley Owens with KeyBanc Capital Markets.

So you talked a little bit about the implementation of that customer fleet and Culture Kings and kind of how the gross margin shaping was returning to expansion around the same time frame in the back half of the year? Just curious if there's anything else that's pressuring the gross margin line, we should be aware of? And then just maybe in terms of how you're thinking about markdowns and promotions for the year?

As we think about FY '24, maybe we just kind of -- a lot of what informs that is, I would say, the progress we made on inventory last year. So it's been down $35 million, 28%, I would say, across Princess Polly, Petal & Pup and minimal. We feel really, really good about the composition, the quality of the inventory, the newness of the product we have, we can see that it's working well. I think as well, I'd just point out, right, the fact that we were able to bring on inventory at that level and then to be excluding the actions we took at Culture Kings to be up 90 basis points in gross margin in Q4. And it's just a testament to the strength of the model. So as we think of those FY '24, and I feel that we should expect to see those improving gross margins and as we go through the year, helped by the Culture King in being on test and repeat. But also we were -- we took a lot of pretty hard actions in Q3 and Q4 last year to move through that and progress inventory at Culture Kings. And that gives us confidence. I think there are other actions. The teams are working hard on getting the right mix of air freight to see and we think there's opportunities there. And also as we kind of -- we open up more of the omni-channel opportunities and these wholesale opportunities, I think there's an opportunity to be less promotional on our own site, which I think long term will all help gross margin and kind of get this -- the overall business back to the level of EBITDA production that we would expect.

[Operator Instructions] There are no further question at this time. I like to turn the call back to Ciaran Long for closing remarks.

Thank you all for joining our call. We're proud of the progress we're making across the business, across the brands, across all of the teams and it really is driven by individual team members. And I think it sets us up for a good 2024 and really shows the power of the operating model that we have and that these brands can go from strength to strength in the future.

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