a.k.a. Brands Holding Corp. (AKA) Q2 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to a.k.a. Brands Corporation's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Emily Schwartz. Thank you. You may begin.

Good afternoon. Thank you for joining a.k.a. Brands to discuss our second quarter 2025 results release this afternoon, which can be found on our website at ir.aka-brands.com. With me on the call today is Ciaran Long, Chief Executive Officer; and Kevin Grant, 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 language 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 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 the call over to Ciaran.

Good afternoon, everyone, and thanks for joining our call to discuss the second quarter. I want to begin by thanking the team for their exceptional execution and dedication in delivering another solid quarter of performance. We're pleased to report that the business maintained strong momentum, with net sales exceeding expectations. We also delivered on our profitability expectations, underscoring our ability to adapt and execute in this dynamic landscape. Now, let me share some highlights from the second quarter. We grew net sales approximately 9.5% on a constant currency basis to $160.5 million, marking our fifth consecutive quarter of growth. The U.S., which is our largest and fastest-growing region, delivered net sales growth of 14% in the quarter. The double-digit growth reflects the successful execution of our merchandising and marketing initiatives across our brand portfolio, which resonated with customers throughout the spring and early summer season. We're also pleased with the performance in the Australia region, with net sales flat to last year, which was ahead of our expectations and meaningful margin improvement as we lapped the heavy promotional activity in the second quarter of last year. We deepened our customer connections and increased our total addressable markets. Active customers grew 3% on a trailing 12- month basis, and our global orders increased by 7%. In addition to the strength in our direct-to-consumer channel, our omnichannel expansion plans remain on track and all new channels are exceeding expectations. Princess Polly successfully opened 3 stores in the second quarter, and we plan to open 8 to 10 more Princess Polly stores in 2026. We're also strengthening our wholesale partnerships to accelerate brand awareness, and we're particularly pleased with Princess Polly and Petal & Pup's Nordstrom's chain-wide debut, which gives us confidence in the tremendous global opportunities for our brands. And lastly, benefiting from the strong top line growth, expanding brand awareness and continued operating discipline, we delivered $7.5 million of adjusted EBITDA in line with our expectations. Before sharing our brand highlights, I want to first provide an update on our tariff mitigation efforts. As mentioned on our first quarter earnings call, we've taken a 3-pronged approach to tariffs, including vendor discounts, diversifying our supply chain and strategic price increases across our brands. Moving forward, in Q4 and beyond, we expect that our sourcing diversification and strategic price increases will offset the impact of the tariffs at the current levels. With regards to our supply chain, we've been working diligently over the past 9 months with a global manufacturing partner to diversify our sourcing and build long-term flexibility. The transition is on schedule, and we've already received products from our new vendors and are pleased with the lead times, quality and costs. Our redesigned sourcing ecosystem allows us to maintain the high product quality standards that both we and our customers expect, while also working with manufacturing partners that are fully equipped to support and enhance our test and repeat merchandising approach. Moving forward, our sourcing will be diversified across several countries, with sourcing from China, particularly focused on newness and our Australian business. I'm confident that we've established a supply chain that is flexible, more cost efficient and geographically diversified across multiple countries, providing us the ability to adapt our supply chain as future trade dynamics evolve. I'm also grateful to our teams who have worked tirelessly over the past 9 months to implement our updated sourcing structure, make it stronger and more resilient than ever. In addition to diversifying our supply chain, as mentioned, our brands implemented targeted and strategic price increases to offset the impact of tariffs. We're fortunate that almost all of the products are exclusive to us, allowing us to take pricing action if needed. We will continue to monitor price elasticity throughout the remainder of the year. As mentioned, in Q4 and beyond, we expect that our sourcing diversification and strategic price increase will offset the impact of tariffs at the current levels. I'm confident that our updated sourcing strategy, flexible business model and speed of execution positions us to emerge stronger than we were at the start of the year. Importantly, while we navigated the macro environment, we remain committed to building our brands for the long term, delivering high-quality fashion to our customers and balancing both growth and profitability. We remain laser-focused on our strategic growth drivers for the year. First, we will attract and retain customers on our direct-to-consumer channels through trend-driven exclusive merchandising and distinctive marketing strategies. Secondly, we will expand brand awareness through physical retail growth and select wholesale partnerships. And third, we remain committed to streamlining operations and strengthening our financial foundation to support long-term profitable growth. Now, turning to our brand highlights. Beginning with Princess Polly, our largest brand accounting for approximately half of our total revenue, Princess Polly is a leading fashion brand known for its trend forward, high-quality styles, authentic marketing and deep connections with the next generation of consumers. Its successful omnichannel strategy, which combines its established digital presence with an expanding retail footprint continues to fuel strong financial performance, enhance brand visibility and drive meaningful customer acquisition. Core to Princess Polly's successful merchandising strategy is its demand-driven test and repeat model, which enables the brand to frequently deliver new styles to its customers. This deeply resonates with Gen Z shoppers, particularly around key moments like prom and graduation, which fueled double-digit growth in the dress category year-over-year. In addition to its strong performance in dresses, Princess Polly is steadily expanding its presence in customers' closets through growing its matching sets, bottoms, denim and swim categories, which have seen strong growth year-over-year. Complementing its strong merchandising strategy, Princess Polly's marketing efforts fueled customer engagement and brand growth across multiple channels. On TikTok, the brand is seeing significant momentum, with a 60% year-over-year increase in TikTok Shop revenue and thousands of new customers. As early adopters of TikTok search ads in both the U.S. and Australia, the brand continues to lean into one of the most popular platforms for its customers. Beyond TikTok, Princess Polly stays in front of its customers through SMS marketing, influencer collaborations, new advertising channels such as Twitch and Netflix as well as in-person events. Looking ahead to the second half of the year, we're excited to launch an upcoming influencer collaboration with Model and Summer House Star Lexi Wood. In addition, Princess Polly is deepening its connections with the student community through immersive college campus stores, featuring exclusive giveaways, branded activations and interactive experiences, which will begin in Miami during the back-to-school season. We're also really proud that Princess Polly recently received its B Corp Certification, which formalizes the significant progress the brand has made on its ESG goals and reaffirms its commitment to making on-trend fashion more sustainable. Following a series of successful store openings in 2024 and early 2025, Princess Polly expanded its retail footprint in the second quarter with 3 new locations in Miami, Florida; Columbus, Ohio and Glendale, California, bringing the total store count to 10. The stores are outperforming expectations in both revenue and customer acquisition. Notably, approximately 30% of in-store shoppers are new to the Princess Polly brand, and we're seeing a halo effect on our surrounding digital business with each new store opening, highlighting the power of its omnichannel strategy. Princess Polly is on track to open 3 more stores by the end of the year in Long Island and Westchester, New York; and King of Prussia, Pennsylvania. Excitingly, the brand is also set to open its first store in Australia later this year in Bondi Beach. True to Princess Polly's test-and-learn approach, each new store opening provides an opportunity to refine key elements such as store size, inventory management and visual merchandising, with the potential to enhance store level financial performance as more stores are opened. Looking ahead to 2026, we plan to maintain our pace of store openings, with a goal of opening 8 to 10 new Princess Polly stores next year. We look forward to sharing more details on store locations in the coming quarters. Complementing Princess Polly's digital and retail store strategy, the brand is expanding its reach through select wholesale partnerships, including a growing relationship with Nordstrom. We remain very pleased with the results to date and are looking forward to fall and homecoming collections that will launch in stores in September, with marketing activations in select Nordstrom stores. Our other women's brand, Petal & Pup, also continues to resonate with its core 25- to 40-year-old female customer through a curated assortment of feminine fashion, everyday essentials and occasion styles at accessible price points. Key to Petal & Pup's brand is its Australian heritage, both in style and aesthetic, and the brand is strategically leveraging its dual hemisphere presence. Utilizing the test and repeat merchandising model, the brand first launched its styles in Australia a season ahead, allowing it to identify top performers and confidently scale winning pieces for the U.S. market with expanded colorways or prints. Customers are also responding enthusiastically to fresh trends, with strong full-price selling for new styles, reinforcing that when the product is on trend, demand follows. Dresses and matching sets continue to be category leaders for Petal & Pup, with these categories outperforming in both sales and product mix year-over-year. On the marketing front, Petal & Pup is driving brand awareness and engagement through a mix of immersive experiences and digital innovation. This quarter, the brand hosted 2 pop-up activations, one in Abbot Kinney in Venice, L.A. and another in Bondi, Sydney, each featuring branded flower carts and curated styles as they deepen customer connections. In parallel, Petal & Pup is actively testing new growth levers on a TikTok Shop, including promotion offers and creator affiliate programs to further expand reach and drive conversion across social commerce channels. We remain highly encouraged by Petal & Pup's strong performance at Nordstrom, following its full rollout across all locations this spring. The brand's high-quality trend-forward styles at accessible price points are filling a clear white space in the Nordstrom assortment and are resonating strongly with customers. In-store and online sales as well as product views on nordstrom.com consistently exceed expectations, with May and June delivering exceptionally strong results, supported by shop-in-shop experiences and coordinated marketing activations across Nordstrom doors. While dresses and event wear remain key strengths, we're also seeing strong demand for more casual styles, highlighting the brand's broader appeal and significant growth potential in the U.S. market beyond occasion-driven categories. Looking ahead, the teams are actively collaborating on the fall assortment, which will feature holiday dresses and knits. Beyond the strong financial upside, the Nordstrom partnership is also proving to be a powerful driver of brand awareness and reinforces our conviction in Petal & Pup's long- term potential. Turning to Culture Kings and mnml, our streetwear brands. We continue to be pleased with the improvement in our Australian business, fueled by our turnaround efforts over the last 2 years. We took deliberate actions, including strengthening the leadership team, shifting production to the test and repeat merchandising approach and improving the operations across both regions and the results are encouraging. What sets Culture Kings apart in the streetwear space is its portfolio of trend-leading in-house brands, including Loiter, mnml, Carré and Saint Morta, which consistently rank among the top best sellers. Following the transition to the test-and-repeat merchandising approach in Australia, we're seeing excellent results with in-house brands revenue growth of double digits in the second quarter of the year. In addition to the in-house brands, roughly half of Culture Kings' assortment comprises legacy and emerging third-party brands to complete the streetwear outfit. In close partnership with New Era, Culture Kings' weekly exclusive headwear drops continue to see significant growth over last year. I'm also excited to share that Culture Kings in the U.S. is launching a partnership with Adidas, with assortment building in the first quarter of 2026 in time for the World Cup hosted here in North America. Culture Kings brings the signature 'retailtainment' to life through high-energy events that feature live music, celebrity appearances and athletes hosted activations, making every brand interaction exciting and unique. In the second quarter, the brand partnered with WWE for a highly successful exclusive collection launch at its Las Vegas store, drawing over 1,000 customers for meet and greets with 5 WWE superstars. The event included a custom WWE cage installation and curated displays from the official WWE archive. This activation drove significant foot traffic and sales, sparked viral social media moments and delivered a truly memorable experience for fans and customers. In addition to its in-store events, Culture Kings continues to build brand awareness through high-impact activations at major music festivals in the second quarter, including Coachella, Stagecoach, EDC and Summer Smash. In closing, I'm proud of our second quarter results and the meaningful progress across our key initiatives. While the impact of tariff remains a short-term temporary headwind, it's also an opportunity to showcase the resilience of our brands and the strength of our business model. With our new sourcing structure in place, strong demand for our brands and the continued disciplined execution from our teams, I'm confident that we are well positioned to capture additional market share and drive growth and profitability over the near and long term. With that, I'll turn it over to Kevin to take you through the financials in more detail.

Thanks, Ciaran. We are pleased with our second quarter results in which sales growth came in higher than our expectations. For the second quarter, net sales increased 7.8% to $160.5 million and 9.5% on a constant currency basis compared to the same period last year. This was driven by continued strength in our U.S. business, which increased 13.7% to $108 million year-over-year. Sales in Australia were $45.7 million, flat to last year. In the second quarter of last year, we were particularly promotional at Culture Kings in Australia as we look to right-size its inventory. Given the actions we've taken over the past 2 years, along with the improving macroeconomic landscape in the region, we continue to see the Australia business stabilize and improve. Total orders for the second quarter were 2.05 million, increasing 6.8% as compared to the second quarter last year. Our brands continue to resonate as we acquire new customers and retain our existing customers. Our trailing 12-month active customer count rose to 4.13 million by the end of the second quarter, which is a 3% increase compared to a year ago. And our second quarter average order value was $78, consistent with the second quarter last year. Turning now to our profitability metrics. Gross margin declined 20 basis points in the second quarter to 57.5%, slightly ahead of expectations compared to 57.7% in the same period last year. We saw improvements in gross margin year-over-year, primarily due to more full-price selling. However, inventory that we received and sold in Q2 when the China tariff was at its most elevated rate, had a net 120 basis point transitory headwind on our gross margin. We'll continue to experience a similar impact in the third quarter as we sell through the remainder of that inventory. As Ciaran mentioned, moving forward, in Q4 and beyond, our sourcing diversification and strategic price increases will offset the tariffs at the current levels. Selling expenses were $45.4 million compared to $41.2 million in the second quarter of 2024. As a percentage of net sales, selling expenses were 28.3% compared to 27.7% a year ago. The year-over-year increase was primarily due to an increase in store selling expenses as we expanded our retail footprint. Additionally, as we managed through the extremely elevated tariff rates, we had some labor inefficiencies in our fulfillment centers as we stopped and restarted the timing of inventory receipts during the quarter. This disruption was temporary, and our fulfillment centers were back to operating at normal levels and efficiencies at the start of the third quarter. Marketing expenses in the quarter were $19.9 million compared to $18.3 million in the second quarter of 2024. As a percentage of net sales, marketing expenses were 12.4% compared to 12.3% in the second quarter of 2024, in line with our expectations. General and administrative expenses were $27.5 million compared to $25.9 million in the second quarter of 2024. As a percentage of net sales, G&A expenses decreased to 17.1% from 17.4% in the second quarter of last year. We delivered $7.5 million in adjusted EBITDA, in line with our expectations. This compares to $8 million in the same period last year. Adjusted EBITDA margin for the second quarter of 2025 declined 70 basis points to 4.7% compared to 5.4% in the same period last year, primarily as a result of the increased tariffs. Turning now to the balance sheet. We ended the quarter with $23.1 million in cash and cash equivalents compared to $25.5 million at the end of the second quarter of '24. Debt at the end of the quarter was $108.7 million compared to $106.9 million a year ago. We're especially pleased that we brought our leverage down to 3.5x compared to 5.5x in the second quarter of last year. We ended the quarter with $92.5 million in inventory, which is down 13% compared to a year ago, largely driven by healthier inventory levels at our streetwear brands as well as the impact of the elevated tariffs. A quick update on our stock buyback program. In the second quarter, we purchased approximately 12,000 shares for a total cost of approximately $110,000. As of the end of Q2, we have $1 million remaining in our share repurchase authorization. Turning now to our guidance. We're confident that demand for our brands is strong, and we're continuing to deliver on-trend fashion that our customers love while broadening our reach and acquiring new customers through omnichannel initiatives. For the full year, we're raising our top line outlook for net sales to be between $608 million to $612 million, representing growth in the 5% to 7% range, up from our previously expected outlook of growth in the 4% to 6% range. We're also raising our adjusted EBITDA outlook to be between $24.5 million to $27.5 million. Our outlook contemplates no changes to the tariff rates in place as of today, August 6. For the full-year 2025, we anticipate gross margin to be between 57% and 57.4%, with the other expense rates relatively in line with our prior outlook. For modeling purposes, we anticipate fiscal 2025 stock-based compensation of approximately $8 million to $10 million, depreciation and amortization expense of roughly $19 million to $21 million, interest and other expense of approximately $13 million to $15 million, an effective tax rate of negative 25%, CapEx between $14 million to $16 million, which includes the addition of Princess Polly's new store in Australia and weighted average diluted share count of approximately 10.8 million. Turning now to our third quarter outlook. While our sourcing diversification is underway and on schedule, contemplated in our third quarter outlook includes a temporary pullback on newness and promotions in July. We expect net sales to be between $154 million and $158 million. As mentioned, the tariffs will have a similar net 120 basis point impact on our gross margin in the third quarter as we continue to work through inventory brought in during the extremely elevated China tariff rates. And we expect gross margin in the range of 57.6% to 57.8%, which contemplates this net 120 basis point impact. We expect adjusted EBITDA to be between $7.3 million and $7.7 million. For modeling purposes for the third quarter, we anticipate stock-based compensation of approximately $2.3 million to $2.5 million, depreciation and amortization of $5.5 million to $6 million, interest and other expense of $3 million to $4 million, an effective tax rate of 0, CapEx between $4 million to $5 million and weighted average diluted shares of 10.9 million in the third quarter. In closing, we're incredibly proud of our team and how we are navigating the dynamic tariff environment. Our ability to quickly pivot our sourcing base while maintaining the integrity of our unique model and serving our customers was no small feat. I would like to thank our amazing team here for all of their hard work and dedication. As Ciaran mentioned, we are confident that a.k.a. Brands has emerged stronger and better positioned to deliver on our strategic priorities and generate long-term value for our shareholders. With that, we'll open it up for questions.

[Operator Instructions] Our first question comes from Randy Konik with Jefferies.

Ciaran, what would be really helpful to us is you're getting a lot of success with -- sounds like Nordstrom and some of these Princess Polly stores sound very exciting. Maybe it would be really kind of educational for us to kind of think through the long term. How do you think about the distribution model between DTC, e-com stores and wholesale? Just kind of give us your high-level thoughts there would be very helpful.

Yes. Thanks, Randy. Look, we're really pleased with how our strategy of taking these brands into omnichannel is working. I think in particular, the overall growth, fifth quarter in a row now of 9.5% and then that 14% in the U.S. and I think 36% on a 2-year stack is, I think, really showing what demand is there for these brands. Really good progress on how we're executing against the different channels. I think we're really seeing -- it's great that Princess Polly store is delivering sales, profits, building brand awareness. About 30% of the customers are new to the brands in the store. And then I think just how Princess Polly and Petal & Pup in particular, are executing in Nordstrom, really seeing just really positive reactions from customers in there. And I would say, reacting to a breadth of the categories of the product they have, probably broader than we see online. And I think, look, we feel we're just getting started here. We're going to continue to lean into these opportunities. I think there's a big opportunity for us to just continue to increase the TAM of these brands and continue to build on that brand awareness. I think we talked about we're going to open -- right now, we're planning for 8 to 10 new Princess Polly stores next year. And I think for us, very focused on just finding -- using our data, finding the right mall and the right location in the malls. And so we'd be very mindful there. And look, we're just going to continue to go after the opportunity here across all of the channels.

Great. That's super helpful. And then just how do we also think about long-term sourcing structure? How do you want to approach that across the entire business and any differences between -- for the brand specifically?

Yes. Thanks, Randy. Look, I think we've -- we were predominantly sourced out of China. Certainly, we started looking at diversification opportunities probably 9 months ago at this stage and hugely grateful to the work all of the team has done on diversifying us. We are now -- we've been rapidly moving out of China. We have partnered with a global company to do that. We've already gotten product from them. It's received in, shipped out to customers, so just have made huge progress over the last couple of months. And I think it sets us up in a space where we feel we have a much more robust supply chain that will help us scale. It's much more flexible. So if we see changes in the macro environment, we can react there. And look, it's also in a spot where the changes we've made, combined with the price increases that we took in May will allow us to offset the impact from the tariffs as they currently stand. And look, if there are other changes in the macro environment, we feel that we can -- with this partner, has flexibility across different regions and can move there. So, I feel really, really good with the progress we've made and a huge credit to all of the people and all the teams that have worked on that. So, I feel pretty good about how we're set up and that we can continue to execute on this test-and- repeat model, which really differentiates us.

Our next question comes from Ryan Meyers with Lake Street Capital.

First one for me. I just want to get a good understanding of the gross margin dynamics in the third quarter. Kevin, you had laid out kind of some detail on that, but I just want to make sure I fully understand it. So it sounds like the tariff impact will be prevalent in the third quarter, but you guys won't see the -- you won't see that offset quite as much from the product newness like you saw here in the second quarter. Largely, the Q2 gross margin for me came in actually higher than what I had expected. You saw a sequential increase there. But just any more commentary you can provide on where sort of the gross margins will shake out in the third quarter would be helpful.

Yes. Thanks, Ryan, for the question. Yes, we were really pleased with the gross margin performance in Q2, ahead of expectations, the 57.5% that you mentioned. And that did include a headwind of about 120 basis points impact, net of the actions that we took during the quarter, including the pricing that was implemented in May. And most of that was really coming from those elevated tariff rates from China during the month of April. And so what we've talked about is we'll see that similar 120 basis point headwind into Q3 as we sell through the rest of that inventory acquired at those elevated rates. Excluding the impact of the tariff, we saw some really strong gross margin expansion and a lot of that to do with the work that we've done at Culture Kings, transitioning into a test-and-repeat model and also just getting their inventory in the right position. We also pulled back a little bit on promotion during the quarter in Q2 as we manage through the tariff and the supply chain disruptions, and we expect to get back to our kind of normal promotional cadence in Q3. So the Q3 gross margin that you alluded to, a little bit of an expansion relative to Q2, about 20 basis points. And that just continues to represent the strong work that we've done in terms of Culture Kings and the lapping of the promotional activities that we did last year. And we feel really confident about that outlook and the guidance that we put out for the quarter and for the rest of the year.

Okay. Great. That's helpful. And then the only other question that I have is looking at the active customer number and then even the number of orders, both obviously up, which is nice to see. I mean, maybe kind of unpack how you guys are thinking about that and why you feel like you're able to really continue not only just the customer growth, new customers to the brand itself, but just increasing sort of the frequency and the number of products that those customers themselves are buying?

Yes. Thanks, Ryan. It is great to see the continued growth in active customers, and I think it has been really strong for a pretty consistent period of time. And look, I think that's really us executing well against the strategy that we have of continuing to engage and retain our existing customers through those direct-to-consumer channels, but also continuing to build new customers and brand awareness through leaning into our stores opportunities and the wholesale opportunities that we have across the brands. I think core to that is, obviously, that the kind of the test-and-repeat operating model that we have of continuing to have on-trend styles at accessible price points. I think that's the model that sets us apart. That's what we're going to continue to lean into and feel that we certainly have a lot more opportunity as we execute against the brands.

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

So first off, in your prepared remarks, you discussed the lead times as part of tariff mitigations, and I wanted to focus in on that. Relative to where we were prior to sourcing shifts, is the read-through here that it's a quicker turnaround now? And then given the customer nature of the merchandising strategy and the emphasis on newness, how do improved lead times create opportunity to introduce more frequent or broader newness within the assortment?

Yes. Thanks, Ashley. Look, really happy with the, as I said, kind of the progress that the teams have made on diversifying our supply chain and building more flexibility into that. I think, look, we spent a lot of time just for us evaluating and finding partners that could work in our model, right? And that's short lead time, but it's also working in a model where you're testing. So, starting with a small number of units for every new star we're bringing in, but quickly building on top of that as you see success. So, going from 100 or 200 units up to 1,000 and beyond and finding partners that can do that certainly takes time, particularly with the quality expectations that we have and the pricing expectations that we have. I feel we're in a really good spot now and can continue to scale with the partners that we have. I think for us, making sure lead times are short allows us just to be very much on trend from a fashion perspective. And being on trend, certainly for us, we feel leads to better customer engagement, conversion, more effective marketing, lower markdown risk and overall just better financial performance. So, that's just a key aspect of our sourcing strategy and is very important as we look forward.

Okay. Great. And just a follow-up. So with Australia and New Zealand, 2Q, just a challenge from a growth perspective due to the comparison, heavy promotions last year, so just any color you could provide as to expectations for the remainder of the year, if 2Q should be the low point of growth for that region as we move forward?

Yes. Thanks, Ashley, for the question. Yes, we're really pleased with that Q2 performance, a bit better than our expectations, flat for the quarter and on the heels of a nice growth in the quarter. Yes, we're definitely seeing a strong performance across all the brands. And we've mentioned Culture Kings and all the work that we've done to move them to test and repeat and get their inventory position in the right place. And we're certainly seeing the dividends of that coming through into the results. From a kind of a macro perspective, we're definitely seeing some improvement there and that's certainly coming to bear in the results as well. What I would say is that improving macro environment in Australia is giving us confidence. We've just talked about announcing the first Princess Polly store in Australia in Bondi in late Q4, and we're just going to continue to lean into that opportunity. And for the back half, I would say we expect to kind of see flat to slightly up in terms of sales growth.

Our next question comes from Jonna Kim with TD Cowen.

I would love to get additional color just around your inventory position, how you're feeling about it, especially ahead of the holiday season? And then also any color around traffic conversion and ticket from your brand? Any specific notable trends that you're seeing on that front would be helpful as well.

Yes. Thanks, Jonna. I would say, look, from an inventory perspective, I think a lot has gone through kind of changes there as we've kind of so rapidly changed our sourcing and made choices on pacing of bringing in new inventory and replenishment, particularly when the China tariffs were at such a high level during Q2. And we -- obviously, we kind of ended the quarter with inventory down 13%. You compare that to the sales up 9% and U.S. up 14%. I think we certainly felt like we came out of the quarter probably lighter than we wanted to be from an inventory perspective, working really hard to kind of get back at the in-stock level we want across the business, and that's going on at pace at the moment as we've kind of made such progress on moving our supply chain. We certainly feel by the end of the quarter, we'd be back to where we want to be and feel good that we will be where we need to be as we kind of head into holiday, and we'll continue to make progress as we go through the quarter. I think as it relates to the other KPIs in Q2, I would say, in general, we felt really good about the demand that we continue to see for the brands across all of the channels. Certainly, the traffic was there. Conversion was good. I think with the actions we took on pulling back in promotions and with the changes in pacing in inventory and not having the level of newness that we would have had in the past, we certainly saw some impact on the metrics. But overall, we feel really good about the demand that's there and the continued opportunity we have across the brands.

Our next question comes from Dana Telsey with Telsey Advisory Group.

As you saw the U.S. business basically holding steady at up nearly 14%, how much of that -- how does the breakdown occur there? What are you seeing on the wholesale side? What are you seeing on the retail store and online side? And as you move forward through the balance of the year, how are you thinking about price increases for the different channels, for the different brands? And then I have a follow-up.

Sure. Thanks, Dana. Look, I think we're really happy with the demand we saw for the brands in Q2 and the overall growth, like I said, up 9.5% and U.S. up 14%. And the consistency of that, I think, is great to see as well, particularly with all the actions we had to take during the quarter as we kind of manage through the macro environment. I think across the channels, we continue to see strength going through the quarter, really strong response to -- for the first time going chain-wide with Nordstrom for Petal & Pup and Princess Polly. It was great as well to see the marketing activations that the Petal & Pup team had with Nordstrom during the quarter and just how positive customer response was to that. On the Princess Polly stores, I think great performance. They're all kind of on track from a sales EBITDA perspective and kind of meeting our original kind of expectations there. I think continue to see great opportunity in that channel for the brand really with the new customer growth and I would say, just a kind of different customer set that we seem to be engaging with there. So, look, I feel really good about the back half of the year and that we have a lot of opportunities to execute against them.

And pricing, Ciaran, how do you think about pricing?

Yes. Yes. We took actions in -- I suppose our approach to tariffs really, Dana, kind of -- we kind of view it as a 3-pronged, right? Going back to vendors to get some discounts. We made some good progress there, got that done pretty quickly, also diversifying our supply chain and taking pricing actions. We looked at the opportunity in Q2 across the brands and across the U.S. business and saw that we did have some pricing opportunity. Look, we feel very fortunate that pretty much 100% of the product we have is exclusive to us. So looking -- we did feel we had the opportunity. In general, I would say we took it on the U.S., pretty much on the significant amount of our assortment kind of across the brands that ranged from kind of 5% to 8%. And that combined with the progress we've made on diversifying our supply chain will allow us to offset the impacts of the tariffs, and we'll get back to kind of more normalized gross margin in Q4 and beyond.

And then just lastly, on the wholesale portion of the business, do you go beyond Nordstrom? Is Bloomingdale's, Macy's, any of the other wholesale accounts or even specialty wholesale accounts an opportunity for you?

Yes. I think we certainly see that there's an opportunity there. I think -- and the Petal & Pup team, in particular, I would say, are building a really nice pipeline from a wholesale perspective. I think they're starting to talk to Stitch Fix. They're doing a little bit with Dillard's. And so I think they are really, I would say, great to see the progress in Nordstrom, great execution there, great response. And I think it's also showing for others that Petal & Pup in particular, is a brand that they should have. I think, look, for Princess Polly, I think between Nordstrom, their own direct-to-consumer business and just focusing on their store opportunity will be where that brand is at for a while.

Our next question is from Eric Beder with Small Cap Consumer Research.

I want to follow up on some questions here. So, I know you've only done basically about 10 stores with another 3 online. What has been the learning? And what are you incorporating in the newer stores to help drive even more, I guess, productivity and the ability to respond even quicker?

Yes. Thanks, Eric. Look, I think we're really pleased with the progress that the Princess Polly team has made on executing the stores. They opened their first one in September 2023. We now have 10 open and another 4 lined up actually for the rest of the year. And so really happy with that progress. I think we certainly see opportunities across merchandising and in combination -- within that, I would say, kind of what product we're putting in the stores and then just the visual merchandising in the stores. I think Polly's really established online direct-to-consumer business. The in-store, I suppose the constraints that in-store bring upon you are somewhat new to the team. We brought in some new members and with deeper experience on store merchandising, visual merchandising to help execute against that opportunity. And that's probably one of the big ones. I would also say, look, as we've gone through the journey over the last kind of 18 months, we have seen that we needed to increase the size of the stores. And as we've put a broader set of our assortment into the store, we're getting better conversion, right? Customers expect the breadth -- somewhat the breadth that they have online that we can represent that in stores. And so doing that is important for us and will be one area where we continue to execute against.

Okay. Just one more. So what is -- where are you in terms of -- and how should we think about the debt? I know that it gets due next year. It will go current in the next Q. How should we be thinking about that as both, I guess, an opportunity potentially to reset the company and provide more capital for growth?

Yes, Eric, thanks for the question. We're really proud of the results in the quarter. We've talked through that, including from a cash perspective, we generated $10 million of cash from operations year-to-date through Q2. We continue to bring the debt down, continue to bring leverage down. We're down about 2 turns year-over-year, and we continue to make progress on that front and it's a big priority for us, while at the same time, making the investments in the stores, that is a big priority for us. Yes, as you alluded to, the debt does come due in September of '26. And with our performance, our momentum and just how the brands are resonating, we feel like we have a lot of confidence about our ability to refinance the debt.

But not in the back half.

We have reached the end of the question-and-answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.