Earnings Call Transcript - AKA Q1 2026

Operator, Operator

Greetings, and welcome to the AKA Brands Holding Corp. First Quarter and Fiscal '26 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Emily Schwartz, Vice President of Investor Relations. Please go ahead.

Emily Schwartz, Vice President, Investor Relations

Good afternoon. Thank you for joining AKA Brands. Our first quarter '26 results released this afternoon can be found on our website at ir.akabrands.com. With me on the call today are Ciaran Joseph Long, Chief Executive Officer; and Kevin J. Grant, Chief Financial Officer. Before we get started, I would like to remind you of the company's safe harbor language. Management may make forward-looking statements, 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. Adjusted gross margin and constant currency net sales 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 will turn the call over to Ciaran.

Ciaran Joseph Long, Chief Executive Officer

Good afternoon, and thank you for joining us to discuss our first quarter '26 results. We delivered a strong start to the year with net sales of $132.5 million, up 3%, and adjusted EBITDA of $5.1 million, ahead of expectations. More importantly, our results reflect significant gross margin year-over-year as the structural improvements we have made to the business begin to take hold. Gross margin, excluding one-time adjustments related to tariffs and strategic charges primarily related to legacy streetwear inventory, reached 59%, which expanded by 180 basis points year-over-year. The margin expansion was driven by improved inventory discipline, stronger full-price sell-through and the continued rollout of our test-and-repeat model. Importantly, the majority of that underlying gross margin expansion came from our streetwear brands. For several years, the Culture Kings transition has been a priority strategic initiative, moving to test-and-repeat, rebuilding the in-house brand portfolio, resetting inventory and elevating product quality. This quarter, that work translated into financial performance, with streetwear delivering meaningful gross margin improvement year-over-year. We view this as the single clearest proof point that the structural changes are working. Over the past three years, we have fundamentally repositioned AKA Brands to improve profitability and durability. We have expanded distribution of our brands across stores, wholesale and marketplaces. We have strengthened our operational foundation and we have instilled a greater level of financial discipline across the business. I believe we are now just starting to see the payoff of that work and 2026 will be a meaningful proof point in our trajectory. First, while we continue to grow our e-commerce presence, we have expanded beyond our historical direct-to-consumer roots into a diversified omnichannel model across retail, wholesale and marketplaces. Princess Polly now operates 13 stores across the U.S., and opened its first store in Australia at Bondi Beach in December, with more to come in both regions in 2026. We also launched with multiple wholesale partners in multiple countries and marketplace channels, which continue to exceed our expectations. These channels are now meaningful contributors and are expanding our total addressable market while improving brand visibility and customer acquisition. Second, we built the operational foundation and added team members in key functions to support this expansion, setting the stage for a scalable business model with strong profit flow-through. We have brought inventory down by approximately $45 million over three years, primarily in our streetwear business. This achievement has transformed the structure of our operating model, delivering healthier inventory turns, stronger full-price selling and the financial flexibility to invest aggressively in growth. This disciplined inventory approach has also enabled us to accelerate our transition to a test-and-repeat merchandising model across our streetwear brands. As I mentioned, moving Culture Kings and Minimal fully onto this model has been a multiyear effort and the results are increasingly evident. Our year-over-year gross margin improvements directly reflect a more focused assortment that customers are positively reacting to and better buying discipline. Third, we accomplished a comprehensive transformation of our sourcing network in 2025, diversifying our sourcing across multiple geographies and vendors. It was a remarkable amount of work to have accomplished in such a short period of time, and I am very grateful to the teams who delivered on the task. We now operate a sourcing network that is more resilient to the ongoing trade environment and positioned for our next phase of growth. Lastly, taken together, we have been able to strengthen our financial foundation, reducing our debt by 70% over the past three years, which positions us to accelerate our growth and profitability in the years ahead. Heading into the balance of the year, our focus remains on three priorities: attracting and retaining customers through exclusive, trend-driven product and innovative marketing across our direct-to-consumer channels; expanding brand awareness and our total addressable market through continued investment in physical retail and strategic wholesale partners; and continuing to streamline our operations and strengthen our financial foundation. As discussed last quarter, we are also increasing our investment in AI across the platform. AI applications are already improving product imagery, marketing efficiency and inventory optimization. While still early, we expect these initiatives to contribute meaningfully to margin expansion over time. Turning now to our brand highlights. Starting with Princess Polly, our largest brand, Princess Polly delivered strong performance in the quarter, driven by disciplined execution of its test-and-repeat model and consistent weekly newness, supporting strong full-price sell-through. Dresses continued to drive volume tied to key seasonal moments and swim was a standout category that continues to grow as we enter the second quarter. We are also seeing good traction in basics and knits, expanding share of wardrobe and supporting a more consistent demand across categories. Key seasonal events, including Valentine's Day, festival and graduation drove meaningful growth, with graduation delivering record performance across sales, inventory turns and margins. From a marketing standpoint, the team continued to scale its TikTok presence in the quarter, expanding paid investments and going live up to 100 hours per week. We are now leveraging thousands of affiliate and creator videos per month, and February and March were both record months on the platform. TikTok Shop also continues to drive new customer acquisition efficiently, and the team is scaling it with conviction heading into Q2. We are also seeing strong momentum in omnichannel expansion. We are excited to announce that Princess Polly will open a 1,000-square-foot pop-up at The Grove in Los Angeles, which will run from the end of this month through July. We have eight new U.S. store leases fully executed, with four expected to open by year end. I am really confident in the momentum of the retail expansion. The Bondi Beach store has also been very well received since opening in December, and the brand will open another Australian store at Pacific Fair slated to open in the back half of the year with more to come. Internationally, the UK distribution hub launched in March and is off to a strong start, with immediate sales acceleration driven by improved speed and customer experience, establishing a foundation for further growth in the back half and over the long term. Turning now to Petal & Pup. The brand continues to gain traction with its core customer, and the progress the team has made expanding the business across channels and geographies has been significant. Petal & Pup delivered solid performance in Q1, with event dressing remaining the highest growth category across all regions and channels, particularly for event dresses at accessible price points. Customers also continue to expand into additional product categories as Petal & Pup grows its separates offering, with tops and bottoms now representing a meaningfully higher share of the mix. Wholesale momentum continues to build, with strong performance at key partners and successful expansion into new accounts across both the U.S. and international markets. Nordstrom's performance remained strong through the quarter, with the brand well established in Nordstrom's trend section across dresses and casual styles. Von Maur launched in February with stores already chasing the top-performing styles following strong initial sell-through. Dillard's completed its first store test shipment in Q1, and will go live across nine locations in the second quarter. Petal & Pup also opened a new showroom in Los Angeles during Market Week and secured 30 new specialty accounts within the first month, ranging from independent boutiques to multi-location retailers. The breadth of distribution Petal & Pup is building gives me a lot of confidence in the brand's strength and trajectory. Turning now to our streetwear brands. Culture Kings continues to differentiate through its highly immersive retail experience and curated mix of in-house and third-party brands. A key focus has been strengthening the in-house brand portfolio, including Loiter, 73 Studio, Carre and Saint Morta, evolving the merchandising approach, relaunching priority brands and elevating product quality. That work is now delivering measurable results with full-price mix and gross margin both improving materially year-over-year. 73 Studio delivered a strong quarter anchored by launches across Marvel and Xbox, with the brand now established as one of the largest revenue contributors in the U.S. Loiter also delivered a strong quarter with the Marvel collection resonating well with customers and key styles already being reordered ahead of the upcoming Spider-Man and Avengers releases later this year. Minimal also continued its positive trajectory driven by disciplined execution of the test-and-repeat model and a more focused assortment. Brand activations and cultural partnerships remain an important driver of traffic and engagement. During the quarter, the team executed activations across NBA All-Star Weekend in Los Angeles, partnered with Williams Racing around the Formula 1 Melbourne Grand Prix, and recently launched a WWE collaboration tied to WrestleMania in Las Vegas. These initiatives continue to reinforce Culture Kings' positioning at the intersection of streetwear and culture. On the stores front, the relocated Brisbane store in Australia continues to demonstrate the potential of the refined store model. The store is now the strongest performing location in the Australia fleet, with gross margin, full-price mix and traffic all improving materially year-over-year. We are actively pursuing a second U.S. store location, using the learnings from the Brisbane store, and I look forward to updating you on the progress. Looking ahead, Culture Kings has a strong pipeline of collaborations and activations tied to global events including the World Cup, UFC and Formula 1, and the team remains focused on continuing to scale in-house brands, drive margin expansion, and further strengthen the overall model. In closing, the first quarter results and the progress across our brands demonstrate that this strategic work is translating into financial results, and I believe we are at a genuine inflection point in the trajectory of the business. The foundation is in place, the channels are scaling, and the brands are well positioned for growth ahead. I want to thank our teams for their continued hard work and commitment. Our recent performance is a direct reflection of their dedication to our brands and customers. With that, I will turn it over to Kevin.

Kevin J. Grant, Chief Financial Officer

Thanks, Ciaran. We are pleased with our solid start to the year, with first quarter net sales and EBITDA coming in ahead of our expectations. Before turning to results, I want to provide more context on the tariff adjustment. As reflected in our filings, we paid $25.8 million in IEEPA tariffs since their inception, with $18.6 million flowing through cost of goods sold and the remaining $7.2 million capitalized in inventory. Following the Supreme Court's decision to overturn the tariffs and our successful refund submission to U.S. Customs and Border Protection, we recognized the benefit of this adjustment as a receivable in our first quarter results. As part of the IEEPA reversal, we also recognized approximately $2 million of charges related to the reversal of duty drawback benefits and other anticipated charges. As of yesterday, we have already received approximately $6 million of the $25.8 million of expected IEEPA refunds. We also made a strategic decision to write off $12 million of legacy streetwear inventory as we finalized the transition to the test-and-repeat model. We view this as a one-time opportunity to reset the business and align inventory with our model, positioning us for improved margin returns going forward. For the first quarter, net sales increased 3% to $132.5 million, slightly ahead of our outlook, driven by a 3.2% increase in U.S. sales. We are also pleased with our performance in Australia, with sales increasing 3.8% to $36.9 million. Total orders were 1.7 million, up 4.2% year-over-year. Trailing 12-month active customers, excluding wholesale, increased 3.1% to 4.26 million compared to 4.13 million a year ago. Average order value was $77. Let me give more color on adjusted gross margin for the quarter. Starting from prior year gross margin of 57.2%, our underlying business delivered 180 basis points of expansion to 59%, which, as Ciaran mentioned, was driven by improved inventory discipline, stronger full-price sell-through and the continued rollout of test-and-repeat in our streetwear brands. From there, the IEEPA tariff recovery added approximately 140 basis points. The legacy streetwear inventory write-off was a 900-basis-point headwind and the duty drawback reversal and related charges were about 80 basis points of headwind. That bridges to reported gross margin of 63.1%. We believe the 59% underlying figure is the right number to anchor on for the run rate of the business. Selling expenses were $41 million, or 30.9% of net sales, compared to 29.7% a year ago, resulting from an increase in store selling expenses as we grow our retail footprint. Marketing expenses were $16.8 million, or 12.6% of net sales. General and administrative expenses were $30 million, or 22.7% of net sales; G&A increased year-over-year due to an increase in headcount to support our channel expansion strategy and technology investments. Our adjusted EBITDA increased to $5.1 million compared to $2.7 million a year ago, and our adjusted EBITDA margin grew 180 basis points to 3.9%. Turning to the balance sheet, we ended the quarter with $12.9 million in cash and cash equivalents. The year-over-year decline primarily reflects continued investment in retail expansion and working capital optimization. Total debt at the end of the quarter was $109.6 million, down from $119.9 million a year ago, reflecting continued progress in reducing our leverage and strengthening the financial foundation of the business. We ended the quarter with $67.7 million in inventory, down 28% from $94.4 million a year ago, reflecting the continued benefits of our disciplined buying approach and the inventory write-off. Turning now to our outlook. For fiscal '26, we continue to expect net sales to be between $625 million and $635 million and adjusted EBITDA between $30 million and $32 million. For the back half of the year, our outlook reflects tariff rates at the pre-Supreme Court ruling. For the second quarter, we expect net sales to be between $160 million and $164 million, reflecting a low single-digit growth rate. We expect adjusted EBITDA to be between $8.5 million and $9 million in the second quarter. To give you some more color for modeling purposes in the second quarter, we expect gross margin around 60%. For modeling purposes for the full year, we anticipate fiscal '26 stock-based compensation of approximately $6.5 million to $7 million; depreciation and amortization expense of roughly $20 million to $21 million; interest and other expense of approximately $16 million to $18 million; and an effective tax rate of negative 10%. Capital expenditures between $18 million and $20 million and weighted average diluted share count of approximately 11 million. In closing, our first quarter results demonstrate that structural changes we have made to the business are translating into improved profitability and earnings power. While the macro environment remains dynamic, we believe we are significantly better positioned today with a more flexible model, stronger margins and multiple growth levers to deliver sustainable long-term value. With that, we will open the call for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question is from Ryan Myers with Lake Street Capital Markets.

Ryan Myers, Analyst, Lake Street Capital Markets

Hey, guys. Thanks for taking my questions. First one for me: I just want to make sure I am understanding this correctly. Kevin, the commentary you just gave on gross margin for the second quarter, that 60%—I assume that is adjusted gross margin and there are none of the tariff or inventory-related impacts that we saw in the first quarter. If so, what are the main drivers of that roughly?

Kevin J. Grant, Chief Financial Officer

Thanks for the question, Ryan. To recap, for the first quarter, adjusted for all the one-time impacts of the IEEPA refund and the strategic inventory charge, it was a normalized 59% gross margin. That is the number we are trying to anchor on from a long-term perspective—that is where we think we can operate. For Q2, our guidance of 60% is a bit of a step up from that. It reflects the refund taking effect as well as the current 10% Section 301 tariffs that are still in place. It also reflects some headwinds we are seeing on inbound freight impacting margins as well. So that is essentially how you bridge from the 59% to the 60%. For the back half of the year, there are really no changes to what we previously discussed about gross margin, and as mentioned in the prepared comments, we are assuming those duty rates will return to the levels implied by the Supreme Court decision, which is what the administration has talked about.

Ryan Myers, Analyst, Lake Street Capital Markets

Okay, got it. And then just on the revenue side of the business—obviously performed well during the quarter and well enough to leave guidance unchanged. So I am just curious what you guys are seeing across your customer base and if you are seeing any impacts from the volatile macro environment the past couple months.

Ciaran Joseph Long, Chief Executive Officer

Ryan, we are seeing some pressure on the consumer in both the U.S. and Australia. But across the business, Princess Polly is having its best season from a graduation perspective that it has had. We are delighted that within a month of Petal & Pup opening their new showroom, they secured 30 new accounts from specialty retail. The progress we have made moving the streetwear businesses onto the test-and-repeat model is certainly driving the best product sell-through and customer reaction we have seen. We feel good about the progress over the last several years opening up new channels—stores, wholesale, marketplaces. So we feel positive as we head into Q2 and the rest of the year relative to guidance.

Ryan Myers, Analyst, Lake Street Capital Markets

Got it. Thanks for taking my questions.

Operator, Operator

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

Dana Telsey, Analyst, Telsey Advisory Group

Hi, good afternoon everyone and nice to see the progress. As you think about the rising cost of energy, where is it impacting your business? What have you seen and how are you projecting going forward? For the first quarter, did you see any difference between the beginning of the quarter and the end of the quarter in terms of conversion or traffic or sales? And then U.S. and Australia, how did both regions do in the first quarter? Lastly, for the Princess Polly stores—how much better than your plan are they opening up? Is there any similarity by region that helps you know what to look for in terms of stores now, size or anything like that? Thank you.

Ciaran Joseph Long, Chief Executive Officer

Thanks, Dana. On input costs, we are seeing a small impact on materials, which is a small percentage of the business. We are also seeing increased airfreight. Airfreight is core to the test-and-repeat model, and we will continue to use airfreight, but those costs are contemplated in our guidance. With the sourcing work over the last 18 months, we are able to navigate the environment. From pacing across the quarter, we saw a bit of softness late in March that continued into April, and we have seen improvements as we moved into May. Heading into the back half of the year, we feel our product is in a good position and the customer go-to-market is strong. From a regional perspective, we saw better growth in the U.S. compared to Australia; the Australian consumer has been a bit more pressured than the U.S. consumer, and we have seen a little pressure in April but recovered in May. From a store perspective, we are happy with Princess Polly store performance. They are all ahead of our payback periods, profitable, introducing new customers with a halo effect on our online business where we open stores. We have learned a lot on store size and regional merchandising differences and continue to refine our go-to-market for each location. There is still plenty of opportunity to keep executing and improving performance in that channel.

Dana Telsey, Analyst, Telsey Advisory Group

Thank you.

Operator, Operator

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

Ashley Owens, Analyst, KeyBanc Capital Markets

Hi, great. Thanks for taking our questions. To start on AOV briefly: it stepped down and seems consistent with what we're seeing across the broader apparel space. But as you look at Q2 so far, anything to highlight in terms of promotional intensity in the market? Have you changed your own approach to promotions at all over the past few months?

Kevin J. Grant, Chief Financial Officer

Thanks, Ashley. We saw AOV down a bit in the quarter, down 1%, which reflects some mix dynamics. More importantly, active customer growth was over 3% and orders grew over 4% in the quarter. That strong order and customer growth continued into Q2, and we are not seeing a significant ongoing impact on AOV. From a promotional perspective, our guide and gross margin outlook reflect the current market dynamics. We feel good that the 60% gross margin guide reflects current tariff rates in place as well as impacts from inbound freight. There have not been significant changes to the overall promotional environment that we would call out.

Ashley Owens, Analyst, KeyBanc Capital Markets

Got it. Then as a follow-up on TikTok and spending there: how does that compare to historical digital acquisition costs? As it continues to scale, how are you thinking about marketing spend more broadly?

Ciaran Joseph Long, Chief Executive Officer

TikTok has been an interesting channel for us and we are active across all four brands at different stages. That includes TikTok Live and TikTok Shop; Princess Polly is now doing about 100 hours a week on TikTok Live and Minimal is also ramping. From a reach perspective, it is introducing more new customers and, at the moment, a lot of transactions are staying within the TikTok platform—on Live or on Shop. We are working on how to bring customers back to our direct-to-consumer site. It is early, we are learning a lot, and we will continue to lean into the platform across the group.

Ashley Owens, Analyst, KeyBanc Capital Markets

Great, thank you.

Operator, Operator

Our next question is from Eric Beder with SCC Research.

Eric Beder, Analyst, SCC Research

Good afternoon. Congrats on a nice start to the year. Let's talk about wholesale a little bit. For Petal & Pup, what has been the ability to expand categories beyond the core dresses? What are you seeing and what are the opportunities going forward on the wholesale side to drive further beyond the dress business?

Ciaran Joseph Long, Chief Executive Officer

Thanks, Eric. The Petal & Pup team has done a great job leveraging the direct-to-consumer business and product to open wholesale channels. They are leading the group on this, not just at Nordstrom where they have been executing well, but also moving into Von Maur, Dillard's and the specialty side. We see tremendous opportunity. At Nordstrom, customers are buying a different mix compared to the Petal & Pup direct-to-consumer site; the Nordstrom customer is buying more tops and bottoms, which demonstrates category breadth opportunity as we expand into other wholesale accounts and further on direct-to-consumer. The team has done a great job and there is lots of opportunity to continue building that channel.

Eric Beder, Analyst, SCC Research

And when you look at Princess Polly and the wholesale side—what is the opportunity there? When you have a Princess Polly store and Nordstrom present in the same mall, does that make a difference in terms of performance?

Ciaran Joseph Long, Chief Executive Officer

Princess Polly has also been in Nordstrom for about 12 months and is executing very well in the trend section with meaningful floor presence and assortment breadth. We have multiple locations where Princess Polly stores are open in malls that also have Nordstrom, and that has worked well. Both presences introduce new customers and increase the overall reach of the brand. We are very early in the growth opportunities for these brands and our focus is getting our products in front of more customers wherever they shop.

Eric Beder, Analyst, SCC Research

How should we think about the opportunity with the new distribution center in the U.K.? I know Rest of World historically has been a smaller focus. Does this change your focus and is this an emerging growth opportunity going forward?

Ciaran Joseph Long, Chief Executive Officer

We have been fulfilling to the U.K., Europe and Rest of World from a distribution center in the LA area, which means longer lead times and checkout complications for customers. The U.K. DC opened in March for Princess Polly and is already showing a nice response—better conversion and repeat rates. We see the U.K., Europe and Rest of World as a growth opportunity and will lean into direct-to-consumer first for 2026, following a similar playbook as the U.S. over time.

Operator, Operator

Okay. Thank you. That is all the time we have for questions today. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.