a.k.a. Brands Holding Corp. Reports Third Quarter 2022 Financial Results

Culture Kings Reimagines In-Store Retail with Its First U.S. Flagship Store in Las Vegas

Active Customers¹ Increased 23% on an LTM Basis Compared to the Same Period Last Year

a.k.a. Brands Holding Corp. (NYSE: AKA), a brand accelerator of next generation fashion brands, today announced financial results for the third quarter ended September 30, 2022.

Results for the Third Quarter

• Net sales decreased 3.7% to $155.8 million, compared to $161.8 million in the third quarter of 2021; flat² in Constant Currency.
• Net loss was $(0.1) million or $0.00 per share, and (0.1%) of net sales in the third quarter of 2022, compared to net loss attributable to a.k.a. Brands Holding Corp. of $(9.9) million or $(0.11) per share. and (6.1%) of net sales in the third quarter of 2021.
• Adjusted EBITDA¹ was $9.2 million, or 5.9% of net sales, compared to $18.5 million, or 11.5% of net sales in the third quarter of 2021.

“Thanks to the hard work and agility of our teams, we delivered 8% growth in the U.S. and grew active customers¹ by 23% compared to last year. And, I am pleased that we sequentially stabilized and improved our profitability during the third quarter despite the challenging macro environment,” said Jill Ramsey, chief executive officer, a.k.a. Brands. “Our flexible and asset-light model enables us to quickly adapt during dynamic market conditions, and we remain laser focused on identifying efficiencies in our platform while balancing growth. During the quarter, we took a number of controllable actions, including marketing spend reallocation, inventory optimizations and resource rightsizing. As we look ahead, we anticipate another challenging quarter, but I’m confident that we have great brands, next-generation merchandising and marketing strategies and the necessary discipline to deliver long-term growth.”

Recent Business Highlights

• Princess Polly expanded their formal dress assortment with a new homecoming collection, which resonated well with customers.
• Culture Kings opened its first U.S. flagship store in Las Vegas on November 5, formally launching the brand in the U.S. with its revolutionary, immersive in-store experience.
• Petal & Pup piloted a three-day shoppable event in Nashville, which was attended by approximately 100 influencers and garnered 10 million social media impressions.
• mnml is the fastest growing brand on Culture Kings website and is leveraging the proven data driven merchandising strategy to drop new styles faster.

Third Quarter Financial Details

• Net sales decreased 3.7% to $155.8 million, compared to $161.8 million in the third quarter of 2021. The decrease was driven by a decrease in the average order value during the quarter, which was primarily due to changes in foreign currency rates. On a Constant Currency² basis, net sales were flat to last year.
• Gross margin was 55.7%, compared to 53.2% in the third quarter of 2021. The 250 basis point increase in gross margin rate was primarily driven by a detrimental $6.0 million fair value adjustment related to the Culture Kings acquisition included in the prior year, partially offset by increased promotional activity.
• Selling expenses were $41.5 million, compared to $40.6 million in the third quarter of 2021. Selling expenses were 26.6% of net sales compared to 25.1% of net sales in the third quarter of 2021. The increase was primarily due to the inclusion of mnml and increased costs for distribution and future store facilities, partially offset by increased strategic usage of lower-cost shipping vendors.
• Marketing expenses were $16.5 million, compared to $15.5 million in the third quarter of 2021. Marketing expenses were 10.6% of net sales compared to 9.6% of net sales in the third quarter of 2021. The increase was primarily driven by the inclusion of mnml, which operates with a higher rate of advertising spend.
• General and administrative (“G&A”) expenses were $26.1 million, compared to $28.9 million in the third quarter of 2021. G&A expenses were 16.8% of net sales compared to 17.9% of net sales in the third quarter of 2021. The decrease in G&A expenses during the quarter was primarily due to a reduction in equity-based compensation.
• Adjusted EBITDA¹ was $9.2 million, or 5.9% of net sales, compared to $18.5 million, or 11.5% of net sales in the third quarter of 2021. 

Balance Sheet and Cash Flow

• Cash and cash equivalents at the end of the third quarter totaled $31.1 million, compared to $38.8 million at the end of fiscal year 2021.
• Inventory at the end of the third quarter totaled $136.9 million, compared to $115.8 million at the end of fiscal year 2021. Inventory decreased $6.9 million, or 5%, from the end of the second quarter of 2022.
• Debt at the end of the third quarter totaled $129.9 million, compared to $108.8 million at the end of fiscal year 2021. The Company drew $25.0 million on its revolving credit facility in the first quarter of 2022. Additionally, the Company drew $15.0 million on its revolving credit facility in October 2022, which is not reflected in the September 30, 2022 balance sheet.
• Cash flow from operations for the nine months ended September 30, 2022 was $(11.4) million, compared to $20.6 million for the nine months ended September 30, 2021.

Outlook

As a result of the significant incremental currency headwinds, the Company has adjusted its expectations for the fourth quarter of 2022. The Company now expects:

• Net sales between $158 million and $165 million
• Adjusted EBITDA³ of between $11.2 million and $13.0 million
• Equity-based compensation of approximately $2.5 million
• Interest expense of approximately $2.6 million
• Weighted average diluted share count of 129 million

The above outlook is based on several assumptions, including but not limited to, foreign exchange rates remaining at the current levels and a continued promotional environment. See “Forward-Looking Statements” for additional information.

Conference Call

A conference call to discuss the Company’s third quarter results is scheduled for November 10, 2022, at 4:30 p.m. ET. Those who wish to participate in the call may do so by dialing (877) 858-5495 (or (201) 689-8853 for international callers). The conference call will also be webcast live at https://ir.aka-brands.com in the Events and Presentations section. A recording will be available shortly after the conclusion of the call. To access the replay, please dial (877) 660-6853 (or (201) 612-7415 for international callers), conference ID 13733529. An archive of the webcast will be available on a.k.a. Brands’ investor relations website.

Use of Non-GAAP Financial Measures and Other Operating Metrics

In addition to results determined in accordance with accounting principles generally accepted in the United States of America (GAAP), management utilizes certain non-GAAP performance measures such as net income, as adjusted, net income per share, as adjusted, Adjusted EBITDA, Adjusted EBITDA margin and pro forma net sales for purposes of evaluating ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP operating measures, when reviewed collectively with our GAAP financial information, provide useful supplemental information to investors in assessing our operating performance. See additional information at the end of this release regarding non-GAAP financial measures.

About a.k.a. Brands

a.k.a. Brands is a brand accelerator of next generation fashion brands. Each brand in the a.k.a. portfolio targets a distinct Gen Z and millennial audience, creates authentic and inspiring social content and offers quality exclusive merchandise. a.k.a. Brands leverages its next-generation retail platform to help each brand accelerate its growth, scale in new markets and enhance its profitability. Current brands in the a.k.a. Brands portfolio include Princess Polly, Culture Kings, mnml, Petal & Pup and Rebdolls.

Forward-Looking Statements

Certain statements made in this release are “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. When used in this press release, the words “estimates,” “projected,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “should,” “future,” “propose” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements.

These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside the Company’s control, that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements.

Important factors, among others, that may affect actual results or outcomes include the effects of geopolitical, economic and market conditions, including heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, the impact of the COVID-19 pandemic, challenges in the supply chain and any disruptions in European economies as a result of the conflict in Ukraine on our operations, customer demand and our supplier's ability to meet our needs; our ability to anticipate rapidly-changing consumer preferences in the apparel, footwear and accessories industries; our ability to acquire new customers, retain existing customers or maintain average order value levels; the effectiveness of our marketing and our level of customer traffic; merchandise return rates; our success in identifying brands to acquire, integrate and manage on our platform; our ability to expand into new markets; the global nature of our business; our use of social media platforms and influencer sponsorship initiatives, which could adversely affect our reputation or subject us to fines or other penalties; the inherent challenges in measuring certain of our key operating metrics, and the risk that real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business; the potential for tax liabilities that may increase the costs to our consumers; our ability to attract and retain highly qualified personnel; fluctuations in wage rates and the price, availability and quality of raw materials and finished goods, which could increase costs; interruptions in or increased costs of shipping and distribution, which could affect our ability to deliver our products to the market; and other risks and uncertainties set forth in the sections entitled “Risk Factors” and “Forward-Looking Statements” in the Company’s Annual Report on Form 10-K, dated March 1, 2022, filed with the Securities and Exchange Commission. a.k.a. Brands does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Active Customers

We view the number of active customers as a key indicator of our growth, the value proposition and consumer awareness of our brand, and their desire to purchase our products. In any particular period, we determine our number of active customers by counting the total number of unique customer accounts who have made at least one purchase in the preceding 12-month period, measured from the last date of such period.

Average Order Value

We define average order value (“AOV”) as net sales in a given period divided by the total orders placed in that period. AOV may fluctuate as we expand into new categories or geographies or as our assortment changes.

a.k.a. BRANDS HOLDING CORP.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(in thousands, except per share data)

(unaudited)

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA and Adjusted EBITDA margin are key performance measures that management uses to assess our operating performance. Because Adjusted EBITDA and Adjusted EBITDA margin facilitate internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes.

We also believe this information will be useful for investors to facilitate comparisons of our operating performance and better identify trends in our business. We expect Adjusted EBITDA margin to increase over the long-term as we continue to scale our business and achieve greater leverage in our operating expenses.

We calculate Adjusted EBITDA as net income (loss) adjusted to exclude: interest and other expense; provision for income taxes; depreciation and amortization expense; equity-based compensation expense; costs to establish or relocate distribution centers; transaction costs; costs related to severance from headcount reductions; and one-time or non-recurring items. Adjusted EBITDA is considered a non-GAAP financial measure under the SEC’s rules because it excludes certain amounts included in net income, the most directly comparable financial measure calculated in accordance with GAAP.

A reconciliation of non-GAAP Adjusted EBITDA to net loss for the three and nine months ended September 30, 2022 and 2021 is as follows:

Net Loss, As Adjusted and Net Loss Per Share, As Adjusted

Net loss, as adjusted and net loss per share, as adjusted are considered non-GAAP financial measures under the SEC’s rules because they exclude certain amounts included in net loss and net loss per share calculated in accordance with GAAP, the most directly comparable financial measures calculated in accordance with GAAP. Management believes that net loss, as adjusted and net loss per share, as adjusted are meaningful measures to share with investors because they better enable comparison of the performance with that of the comparable period. In addition, net loss, as adjusted and net loss per share, as adjusted afford investors a view of what management considers a.k.a.’s core earnings performance and the ability to make a more informed assessment of such core earnings performance with that of the prior year.

We have calculated net loss, as adjusted and net loss per share, as adjusted for the nine months ended September 30, 2022 by adjusting net loss and net loss per share for the inventory step-up amortization expense resulting from the acquisition of mnml.

There were no adjustments to net income (loss) or net income (loss) per share for any other periods or comparable periods otherwise shown herein. A reconciliation of non-GAAP net loss, as adjusted to net loss, as well as the resulting calculation of net loss per share, as adjusted for the six months ended September 30, 2022 are as follows:

Pro Forma Net Sales

Pro forma net sales is considered a non-GAAP financial measure under the SEC’s rules. We believe that pro forma net sales is useful information for investors as it provides a better understanding of sales performance, and relative changes therein, on a comparable basis. We calculate pro forma net sales as net sales including the historical net sales relating to the pre-acquisition periods of Culture Kings, assuming that the Company acquired Culture Kings at the beginning of the period presented. Pro forma net sales is not necessarily indicative of what the actual results would have been if the acquisition had in fact occurred on the date or for the periods indicated nor does it purport to project net sales for any future periods or as of any date. A reconciliation of non-GAAP pro forma net sales to net sales, which is the most directly comparable financial measure calculated in accordance with GAAP, for each quarter in 2021 and 2020, is as follows:

A reconciliation of non-GAAP pro forma net sales to net sales, disaggregated by geography, which is the most directly comparable financial measure calculated in accordance with GAAP, for the three months ended September 30, 2021 and 2020, is as follows:

<sup>____________________

1</sup> See additional information at the end of this release regarding key operating and financial metrics and non-GAAP financial measures.

² In order to provide a framework for assessing the performance of our underlying business, excluding the effects of foreign currency rate fluctuations, we compare the percent change in the results from one period to another period using a constant currency methodology wherein current and comparative prior period results for our operations reporting in currencies other than U.S. dollars are converted into U.S. dollars at constant exchange rates (i.e., the rates in effect on December 31, 2021, which was the last day of our prior fiscal year) rather than the actual exchange rates in effect during the respective periods.

³ The Company has not provided a quantitative reconciliation of its Adjusted EBITDA outlook to a GAAP net income outlook because it is unable, without making unreasonable efforts, to project certain reconciling items. These items include, but are not limited to, future equity-based compensation expense, income taxes, interest expense and transaction costs. These items are inherently variable and uncertain and depend on various factors, some of which are outside of the Company’s control or ability to predict. See additional information at the end of this release regarding non-GAAP financial measures.

⁴ Trailing twelve months.

⁵ Metrics “across a.k.a. Brands” assume we owned Culture Kings for all periods presented.

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