(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements because of various factors, including those set forth in the sections captioned "Risk Factors" and "Forward-Looking Statements" and in other parts of this Quarterly Report on Form 10-Q. Our fiscal year ends on December 31. Overview Established in 2018, a.k.a. Brands is a brand accelerator of direct-to-consumer fashion brands for the next generation. Each brand in the a.k.a. portfolio is customer obsessed, curates quality exclusive merchandise, creates authentic and inspiring social content and targets a distinct Gen Z and Millennial audience. 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. We founded a.k.a. with a focus on Millennial and Gen Z audiences who primarily shop for fashion on social media. We have since built a portfolio of four high-growth digital brands with distinct fashion offerings and consumer followings: In July 2018, we acquired a controlling interest in Princess Polly, an Australian fashion brand focusing on fun, trendy dresses, tops, shoes and accessories with slim fit, body-confident and trendy fashion designs. The brand targets a female customer between the ages of 15 and 25. Princess Polly has successfully expanded in the U.S., growing U.S. sales by 161% in 2020 as compared to 2019. In August 2019, we acquired a controlling interest in Petal & Pup, an Australian fashion brand offering an assortment of trendy, flattering and feminine styles and dresses for special occasions. The brand targets female customers typically in their 20s or 30s, with more than half of customers in the 18-34-year-old age bracket. Since joining a.k.a., Petal & Pup has successfully expanded in the U.S., which was the brand's fastest growing market in 2020. In connection with the reorganization transactions and the IPO, Petal & Pup became our wholly-owned subsidiary. In December 2019, we acquired U.S.-based Rebdolls. The brand offers apparel with a full range of sizes from 0 to 32 and emphasizes size inclusivity. The typical customer is a diverse woman between the ages of 18 and 34. In March 2021, we acquired a controlling interest in Culture Kings, an Australia-based premium online retailer of streetwear apparel, footwear, headwear and accessories. The brand targets male consumers between the ages of 18 and 35 who are fashion conscious, highly social and digitally focused. In connection with the reorganization transactions and the IPO, Culture Kings became our wholly-owned subsidiary. Initial Public Offering In September 2021, we completed an initial public offering (the "IPO"), in which we issued and sold 10,000,000 shares of newly authorized common stock for $11.00 per share for net proceeds of $95.5 million, after deducting underwriting discounts and commissions of $6.6 million, and offering costs of $7.9 million. Table of Contents Key Operating and Financial Metrics Operating Metrics We use the following metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the near-term and longer-term performance of our business. The following table sets forth our key operating metrics for each period presented: Three Months Ended September 30, Nine Months Ended September 30, (in millions, other than dollar 2021 2020 amounts) 2021 2020 Active customers 3.1 1.3 3.1 1.3 Active customers across a.k.a. 3.1 2.0 3.1 2.0 Brands(1) Average order value $ 89 $ 79 $ 87 $ 74 Average order value across a.k.a. $ 89 $ 84 $ 89 $ 82 Brands(1) Number of orders 1.8 0.8 4.4 2.0 Number of orders across a.k.a. 1.8 1.3 4.9 3.2 Brands(1)
(1) Includes the impact of Culture Kings as if it had been acquired on January 1, 2020. Active Customers
Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Gross margin 53% 61 % 55% 58 % Net income (loss) (in thousands) $ (10,093) $ 7,294 $ (6,114) $ 9,508 Net income (loss) margin (6)% 12 % (2)% 7 % Adjusted EBITDA (in thousands) $ 18,548 $ 12,906 $ 46,302 $ 19,850 Adjusted EBITDA margin 11 % 20 % 12 % 14 % Net cash provided by operating $ 20,631 $ 8,972 activities (in thousands)
Adjusted EBITDA, Adjusted EBITDA Margin and free cash flow are non-GAAP measures. See "Non-GAAP Financial Measures" for information regarding our use of Adjusted EBITDA, Adjusted EBITDA margin and free cash flow and their reconciliation to net income, net income margin and net cash provided by operating activities, respectively. See also "Components of Our Results of Operations" for more information.
Three Months Ended September 30, Nine Months Ended September 30, In thousands 2021 2020 2021 2020 Net income (loss) $ (10,093) $ 7,294 $ (6,114) $ 9,508 Add (deduct): Total other expense, net 15,589 220 19,867 390 Provision for (benefit from) income tax (4,331) 3,375 (2,625) 4,399 Depreciation and amortization expense 4,235 1,602 11,336 4,719 Inventory step-up amortization expense 5,985 - 12,251 - Equity-based compensation expense 5,582 415 6,714 834 Transaction costs 1,581 - 4,873 - Adjusted EBITDA $ 18,548 $ 12,906 $ 46,302 $ 19,850 Net income (loss) margin (6) % 12 % (2) % 7 % Adjusted EBITDA margin 11 % 20 % 12 % 14 %
Free Cash Flow
Nine Months Ended September 30, 2021 2020 Net cash provided by operating activities $ 20,631 $ 8,972 Less: purchases of property and equipment (4,715) (1,003) Free cash flow $ 15,916 $ 7,969
Our free cash flow has fluctuated over time primarily as a result of timing of inventory purchases to support our rapid growth. While we have strong long-term relationships with our manufacturers, we usually pay for our inventory in advance. This supports our test and repeat buying model and helps with our ability to move new designs we receive from our suppliers into production and then into inventory in as few as 30-45 days. Our operating model requires a low level of capital expenditure.
Three Months Ended September 30, Nine Months Ended September 30, In thousands 2021 2020 2021 2020 Net sales $ 161,762 $ 63,336 $ 379,768 $ 145,135 Cost of sales 75,652 24,831 171,636 61,437 Gross profit 86,110 38,505 208,132 83,698 Operating expenses: Selling 40,582 15,707 98,859 39,735 Marketing 15,463 4,602 36,595 11,839 General and administrative 28,900 7,307 61,550 17,827 Total operating expenses 84,945 27,616 197,004 69,401 Income from operations 1,165 10,889 11,128 14,297 Other expense, net: Interest expense (4,104) (103) (8,320) (268) Loss on extinguishment of debt (10,924) - (10,924) - Other expense, net (561) (117) (623) (122) Total other expense, net (15,589) (220) (19,867) (390) Income (loss) before income taxes (14,424) 10,669 (8,739) 13,907 Benefit from (provision for) income taxes 4,331 (3,375) 2,625 (4,399) Net income (loss) (10,093) 7,294 (6,114) 9,508 Net loss (income) attributable to 199 (232) 123 (302) noncontrolling interests Net income (loss) attributable to a.k.a. $ (9,894) $ 7,062 $ (5,991) $ 9,206 Brands Holding Corp. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net sales 100 % 100 % 100 % 100 % Cost of sales 47 % 39 % 45 % 42 % Gross profit 53% 61% 55% 58% . . .
Nov 09, 2021
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