a.k.a. Brands Holding Corp. Q3 FY2025 earnings call

• Made progress on strategic priorities: opened Princess Polly's 11th store, expanded wholesale partnerships, refinanced debt. - Advanced supply chain optimization despite transitory supplier delays impacting in-stock levels and fashion newness. - Princess Polly had mid-single digit traffic growth in Q3, strong demand for denim, expanded digital marketing on TikTok. - Petal & Pup had solid direct-to-consumer performance, Fort Modern Romance collection exceeded last year's results, expanded wholesale and international presence. - Culture Kings and mnml showed improved gross margin and profitability, launched collections with Alpha Industries and Von Dutch. - Adopted AI across the platform for efficiency, innovation, and smarter decision-making. - Refinanced debt with favorable terms, extending maturity to 2028. - Inventory decreased 8.8% year-over-year to $96.7 million in Q3, improved in Q4.

Princess Polly: Represents roughly half of the portfolio. Opened 11th store in Q3, 12th store later, and first Australia store. Delivered mid-single digit traffic growth in Q3, denim had double-digit growth. Petal & Pup: Strong direct-to-consumer and wholesale performance, Fort Modern Romance collection exceeded last year's results, launched in 10 David Jones stores in Australia and on Armoire's rental platform. Culture Kings and mnml: Continued improvement in gross margin and profitability, Culture Kings launched collections with Alpha Industries and Von Dutch, upcoming collaborations with McLaren and One Piece 73Studio. Net sales for Q3 were $147.1 million, down 1.9% year-over-year. U.S. net sales declined 3.6% to $97 million due to supply chain disruptions, while Australia net sales increased 5.1% to $46 million.

• Now expects net sales for 2025 to be between $598 million to $602 million, growth in 4% to 5% range. - Adjusted EBITDA expected to be between $23 million to $23.5 million. - Anticipates gross margin for 2025 to be between 57.6% and 57.7%. - Fiscal 2025 stock-based compensation expected $8 million to $9 million, depreciation and amortization $19 million to $20 million, interest and other expense $20 million to $21 million, effective tax rate negative 10%, CapEx $16 million to $18 million, weighted average diluted share count ~10.8 million.

• Supply chain disruptions led to temporary in-stock level issues and softer-than-anticipated sales in Q3. - Macro environment factors could impact financial performance. - Inventory constraints in Q3 and early Q4 due to supply chain transition.

Q: First off for me, I just want to make sure I understand the sort of updated guidance. The let's call it $7 million or so that you guys came in below sort of the expectations in the third quarter compared to the revised full year guidance. So it sounds like there was maybe a couple of million or so that led into the fourth quarter, but where the business is at right now, that kind of headwind with the inventory that's now gone. That's where there's kind of that delta there.

A: Thanks for the question, Ryan. Yes. First of all, we're really pleased with that our inventory has gotten back to a good spot here in Q4, and we're seeing those positive comps come back in the quarter. What the guidance is for Q4 is sort of low single digits overall, and that's 10% on a 2-year stack. So we're feeling really good going into the holiday. As you mentioned, we did get caught up a bit in the beginning of the quarter with our inventory situation, but we're in a much better spot headed into the holiday, into the end of the year.

Q: So I wanted to start by asking about the store strategy and how it translates to margins. You're up to 12 now, almost doubling that into next year. So how should we be thinking about some of the gross margin gains in the medium term, just given the lower promo activity in person? And if you think some of these improvements you've seen are structural in nature as you continue to scale that brick-and-mortar store front?

A: Yes. Look, I think we're certainly really happy with the continued execution on the strategy and that being put our product in front of our customers wherever they are. I think seeing great performance from Princess Polly in stores ahead of sales plan, ahead of profitability, really great from a payback period. And as kind of we talked about in the script, certainly see a higher gross margin there, which is helping uplift from a Q3 perspective. And I think we're going to continue on that strategy of leaning into stores for Princess Polly and Culture Kings next year. I think Petal & Pup will be more focused on continuing expanding its wholesale presence. We'll certainly see that we've a lot of opportunity across the brands to continue on kind of increasing sales and profitability.

Q: Let's talk a little bit about the inventory levels. What should we be thinking as this kind of normalizes into Q4 about how inventory should be moving going forward?

A: Yes. Thanks, Eric. Yes, as we mentioned, inventory finished the quarter, finished Q3 down 9%, and we really saw the inventory levels improve into October and through Q4. We feel really well set up for the holiday and things are back to where they should be. By the end of the year, we see inventory about flat year-over-year, and that's relative to sort of mid-single-digit growth, and that's managing it sort of right where we want it, slightly below our sales growth.

Q: And how should we be thinking about the Australia, I guess, that's become an opportunity in that you're opening a Princess Polly store there, margins even before that -- I don't know about the margin, revenue even before that has started to go and this has kind of worked last year cleaning up in terms of inventory and getting the margins better there. How should we be thinking about that as a potential upside driver going forward?

A: Yes. Look, it's great to see 3 quarters in a row now of positive comps in Australia. I think, look, we've seen that across all of the brands. And I think particularly as we talked about the last couple of quarters, great progress from the Culture Kings team and the leadership there as they've moved the Culture Kings first-party brands on to a test and repeat model and certainly seeing outsized growth from that. And I think, as you said, really excited to open our first Princess Polly store in Australia in Bondi. I think looking for, I would say, that overall Australian market to continue to be a growth driver, but I think in that kind of mid-single digits is where we would expect it to be going forward. But certainly looking forward to the consistency of that and the kind of increased brand awareness and profit that will generate from us.

Q: Where do you expect now when the supply chain is finished in terms of the upgrades and the pieces here, what should be the level of China exposure? And how much more diversified will you be than you have been before?

A: Yes. Look, I'm really happy with the progress the teams have made over the last 12 months as we look to diversify the supply chain. We started this time last year looking for ways that we could diversify out of China. I think the teams have made phenomenal progress. We're now at a place where we have for key historic vendors that we've used for the last number of years and have diversified outside of China and are in multiple regions. We've also brought on new partners that are also in multiple regions. So I think, look, where we are today, we feel really good that we're kind of going forward and certainly from a long-term perspective, we have the ability to move volume across regions as we see different changes in the macro environment or the tariff environment and that all of the groups that we're now working with can meet our quality, pricing, and delivery time lines that we need. So I feel really good about the progress we've made over the last 12 months.

Q: As you think about some of the metrics can, basically AOV, I think it was down just under 4%. Given what's changing now with the sourcing structure, how do you see some of those metrics evolving, whether it's orders, active customers? What are you seeing? And how do you see it different by region?

A: Yes. Look, I think it's great to see continued positive growth in active customers, and we've been consistently doing that now for quite a while, continued growth in orders. I think AOV did come down a little bit in Q3, and we can very much see that that's impacted by just those short-term period that we were out of stocks with all the supply chain changes that we were making. But we also see that it's back to kind of positive growth in AOV in Q4. So I think that's stable that we expect it to be going forward. I think, look, as we sit here, we do see that there's just tremendous opportunity to continue on that strategy. And I feel like as we continue to roll out stores, and roll out wholesale opportunities, we probably -- we'll continue to see growth in all the metrics, which I think will just really kind of drive the overall growth of the business. So looking forward to executing on in Q4 and in 2026.

Q: And just when you commented that the fourth quarter to date sales, I think you mentioned up low single digits. How does it differ by region?

A: Yes. I think as we've gone through that period, right, we've seen pretty consistent growth in Australia. They are not impacted by any of the changes we've made from the sourcing perspective. So the growth there has been really consistent over the last 3 quarters and into Q4. I would say as we've gotten back into stock as we went through October in the U.S. region, we did see comps improving. And that's comp just really from that better in stock. The customer has been there all the time. We've seen the traffic. We've seen the demand. So feeling good now with the inventory levels we have, the quality of the inventory and looking forward to executing against a really strong holiday.